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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-Q
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[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JULY 31, 1998
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 0-22289
WHEREHOUSE ENTERTAINMENT, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C>
DELAWARE 95-4608339
(STATE OR OTHER JURISDICTION OF (IRS EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER)
19701 HAMILTON AVENUE, TORRANCE, CALIFORNIA 90502-1334
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
</TABLE>
(310) 538-2314
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Section 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. Yes [X] No [ ]
As of August 31, 1998, 10,744,829 shares of the registrant's common stock
were issued and outstanding and approximately 77,727 additional shares are
expected to be issued pursuant to the bankruptcy plan of reorganization
discussed in Item 1 below.
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INDEX
WHEREHOUSE ENTERTAINMENT, INC.
<TABLE>
<CAPTION>
PAGE
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<S> <C> <C>
FORWARD LOOKING STATEMENTS............................................ 3
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements........................................ 4
Condensed Balance Sheets -- July 31, 1998 (Unaudited) and
January 31, 1998............................................ 4
Condensed Statements of Income -- Three months ended July
31, 1998 and 1997 (Unaudited) and six months ended July 31,
1998 and 1997 (Unaudited)................................... 5
Condensed Statements of Cash Flows -- Six months ended July
31, 1998 and 1997 (Unaudited)............................... 6
Notes to Condensed Financial Statements..................... 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operation.................................... 9
PART II. OTHER INFORMATION
Item 1. Legal Proceedings........................................... 15
Item 2. Exhibits and Reports on Form 8-K............................ 15
SIGNATURES............................................................ 16
</TABLE>
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FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q includes certain statements that may be
deemed to be forward-looking statements within the meaning of the Private
Securities Litigation Reform Act of 1995. The sections of this report containing
such forward-looking statements include "Management's Discussion and Analysis of
Financial Condition and Results of Operation," under Item 2 of Part I below.
Statements in this Report which address activities, events or developments that
the registrant expects or anticipates will or may occur in the future, including
such things as the future issuance of shares, future capital expenditures
(including the amount and nature thereof), expansion and other developments and
technological trends of industry segments in which the registrant is active,
business strategies, growth of the registrant's and its competitor's business
and operations and other such matters are forward-looking statements. Although
the registrant believes the expectations expressed in such forward-looking
statements are based on reasonable assumptions within the bounds of its
knowledge of its business, a number of factors could cause actual results to
differ materially from those expressed in any forward-looking statements,
whether oral or written, made by or on behalf of the registrant.
The registrant's operations are subject to factors outside its control. Any
one, or a combination, of these factors could materially affect the results of
the registrant's operations. These factors include: (a) changes in levels of
competition from current competitors and potential new competition from both
retail stores and alternative methods or channels of distribution such as
electronic and telephone shopping services and mail order; (b) loss of a
significant vendor or prolonged disruption of product supply; (c) the presence
or absence of popular new releases and products in the product categories the
registrant represents; (d) changes in levels of consumer spending, especially
during seasonally significant periods; (e) changes in the Federal and state
income tax rules and regulations or interpretations of existing legislation; (f)
changes in the general economic conditions in the United States, and in
particular the eight major markets served by the registrant, including, but not
limited to consumer sentiment about the economy in general; (g) changes in
availability or terms of working capital financing from vendors and lending
institutions; (h) adverse results in significant litigation matters; and (i) the
ability to attract and retain key personnel. The foregoing should not be
construed as an exhaustive list of all factors which could cause actual results
to differ materially from those expressed in forward-looking statements made by
the registrant. Forward-looking statements made by or on behalf of the
registrant are based on a knowledge of its business and the environment in which
it operates, but because of the factors listed above, actual results may differ
from those anticipated results described in those forward-looking statements.
Consequently, all of the forward-looking statements made are qualified by these
cautionary statements and there can be no assurance that the actual results or
developments anticipated by the registrant will be realized or, even if
substantially realized, that they will have the expected consequences to or
effects on the registrant or its business or operations.
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PART 1. FINANCIAL INFORMATION
ITEM I. FINANCIAL STATEMENTS
WHEREHOUSE ENTERTAINMENT, INC.
CONDENSED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
JULY 31, JANUARY 31,
1998 1998
------------ ------------
(UNAUDITED)
<S> <C> <C>
Current Assets
Cash and cash equivalents................................. $ 46,838,000 $ 54,720,000
Receivables............................................... 927,000 1,296,000
Merchandise inventory..................................... 71,765,000 62,472,000
Other current assets...................................... 865,000 1,237,000
Rental inventory, net..................................... 3,171,000 4,278,000
Deferred taxes............................................ 1,799,000 1,799,000
------------ ------------
Total current assets.............................. 125,365,000 125,802,000
Equipment and improvements, net............................. 16,574,000 17,627,000
Reorganization value in excess of amounts allocable to
identifiable
assets, net............................................... 13,560,000 14,358,000
Deferred taxes.............................................. 3,017,000 2,952,000
Other assets................................................ 604,000 255,000
------------ ------------
Total assets...................................... $159,120,000 $160,994,000
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Accounts payable and accrued expenses..................... $ 54,859,000 $ 60,339,000
Current maturities of capital lease obligations and
long-term debt......................................... 194,000 193,000
------------ ------------
Total current liabilities......................... 55,053,000 60,532,000
------------ ------------
Capital lease obligations and long-term debt.............. 284,000 294,000
Notes payable............................................. 3,933,000 4,048,000
Other long-term liabilities............................... 4,949,000 4,648,000
Shareholders' equity
Common stock, $.01 par value, 24,000,000 authorized,
10,655,205 and 10,257,808 issued and outstanding at
July 31, 1998 and January 31, 1998, respectively....... 106,000 106,000
Additional paid-in capital................................ 89,377,000 89,377,000
Retained earnings......................................... 11,317,000 7,702,000
Notes receivable.......................................... (5,899,000) (5,713,000)
------------ ------------
Total shareholders' equity........................ 94,901,000 91,472,000
------------ ------------
Total liabilities and shareholders' equity........ $159,120,000 $160,994,000
============ ============
</TABLE>
See accompanying notes to Condensed Financial Statements.
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WHEREHOUSE ENTERTAINMENT, INC.
CONDENSED STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
------------------------- ---------------------------
JULY 31, JULY 31, JULY 31, JULY 31,
1998 1997 1998 1997
----------- ----------- ------------ ------------
<S> <C> <C> <C> <C>
Sales...................................... $66,087,000 $63,773,000 $127,361,000 $123,701,000
Rental revenue............................. 8,798,000 14,111,000 18,056,000 27,362,000
----------- ----------- ------------ ------------
74,885,000 77,884,000 145,417,000 151,063,000
Cost of sales.............................. 42,039,000 41,471,000 80,192,000 79,753,000
Costs of rentals, including amortization... 4,581,000 7,891,000 9,353,000 15,720,000
----------- ----------- ------------ ------------
46,620,000 49,362,000 89,545,000 95,473,000
Selling, general and administrative
expenses................................. 23,943,000 26,131,000 47,569,000 52,106,000
Depreciation and amortization.............. 1,649,000 1,617,000 3,292,000 3,233,000
----------- ----------- ------------ ------------
Income from operations..................... 2,673,000 774,000 5,011,000 251,000
Interest expense........................... 125,000 111,000 219,000 223,000
Interest income............................ (664,000) (349,000) (1,361,000) (538,000)
----------- ----------- ------------ ------------
Income before income taxes................. 3,212,000 1,012,000 6,153,000 566,000
----------- ----------- ------------ ------------
Provision for income taxes................. 1,324,000 424,000 2,538,000 265,000
----------- ----------- ------------ ------------
Net income................................. $ 1,888,000 $ 588,000 $ 3,615,000 $ 301,000
=========== =========== ============ ============
Basic net income per share................. $ 0.18 $ 0.06 $ 0.34 $ 0.03
=========== =========== ============ ============
Diluted net income per share............... $ 0.16 $ 0.05 $ 0.32 $ 0.03
=========== =========== ============ ============
Weighted average number of common shares
outstanding -- Basic..................... 10,651,188 10,311,109 10,637,844 10,284,458
=========== =========== ============ ============
Weighted average number of common shares
and common equivalent shares
outstanding -- Diluted................... 11,695,848 10,828,893 11,402,248 10,745,670
=========== =========== ============ ============
</TABLE>
See accompanying notes to Condensed Financial Statements.
5
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WHEREHOUSE ENTERTAINMENT, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
------------------------------
JULY 31, 1998 JULY 31, 1997
------------- -------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income................................................ $ 3,615,000 $ 301,000
Adjustments to reconcile net income to net cash provided
by (used in) operating activities:
Depreciation and amortization.......................... 3,292,000 3,233,000
Rental amortization, included in cost of rental........ 6,965,000 12,176,000
Book value of rental inventory dispositions, included
in cost of rental.................................... 1,054,000 2,291,000
Changes in operating assets and liabilities:
Receivables.......................................... 369,000 460,000
Prepaid inventory deposits........................... 0 4,486,000
Merchandise inventory................................ (9,293,000) 3,130,000
Other current assets................................. 372,000 852,000
Accounts payable, accrued expenses and other
liabilities....................................... (4,733,000) 10,513,000
Rental inventory purchases........................... (7,423,000) (12,668,000)
----------- ------------
Net cash (used in) provided by operating
activities...................................... (5,782,000) 24,774,000
INVESTING ACTIVITIES:
Acquisition of property, equipment and improvements....... (1,441,000) (1,727,000)
(Increase) decrease in other assets and intangibles....... (349,000) 62,000
----------- ------------
Net cash used in investing activities............. (1,790,000) (1,665,000)
FINANCING ACTIVITIES:
Interest on note receivable............................... (186,000) (185,000)
Principal payments on capital lease obligations and
long-term debt......................................... (124,000) (370,000)
----------- ------------
Net cash used in financing activities............. (310,000) (555,000)
----------- ------------
Net (decrease) increase in cash............................. (7,882,000) 22,554,000
Cash at beginning of the period............................. 54,720,000 6,178,000
----------- ------------
Cash at end of the period................................... $46,838,000 $ 28,732,000
=========== ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest............................................... $ 168,000 $ 60,000
Income taxes........................................... $ 7,709,000 $ 1,413,000
</TABLE>
See accompanying notes to Condensed Financial Statements.
6
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WHEREHOUSE ENTERTAINMENT, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying unaudited condensed financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the six-month period ended July 31, 1998
are not necessarily indicative of the results that may be expected for the year
ended January 31, 1999. Certain reclassifications of balances have been made to
the 1997 amounts to conform to the 1998 presentation. For further information,
refer to the financial statements and footnotes thereto included in the
Company's reports on Form 10-K for the year ended January 31, 1998.
2. REORGANIZATION UNDER CHAPTER 11
The Company's Plan of Reorganization, (the "Plan") was confirmed by an
order of the Bankruptcy Court entered on January 7, 1997. The effective date of
the Plan occurred on January 31, 1997 (the "Effective Date").
Since the Plan Effective Date, the Bankruptcy Court has retained
jurisdiction over certain claims and other matters relating to the Bankruptcy
estates of the Company's predecessor, but the Company has been and is free to
carry out its business without oversight by the Bankruptcy Court.
For a summary of the Plan of Reorganization, reference is made to the
Company's Annual Report on Form 10-K for the year ended January 31, 1998.
On January 31, 1997, the Company implemented the recommended accounting
principles for entities emerging from Chapter 11 set forth in the American
Institute of Certified Public Accountants Statement of Position 90-7 on
Financial Reporting by Entities in Reorganization under the Bankruptcy Code (SOP
90-7). This resulted in the use of fresh start reporting, since the
reorganization value, as defined, was less than the total of all post-petition
liabilities and pre-petition claims, and holders of voting shares immediately
before confirmation of the Plan received less than fifty percent of the voting
shares of the emerging entity. Under this concept, all assets and liabilities
were restated to reflect the reorganization value of the reorganized entity,
which approximated its fair value at the date of reorganization. In addition,
the accumulated deficit of the Company was eliminated and its capital structure
was recast in conformity with the Plan.
3. REVOLVING CREDIT FACILITY
Pursuant to the Plan, the Company entered into a loan and security
agreement with Congress Financial Corporation (Western) (the "Congress
Facility"), which provides a borrowing capacity of up to $30,000,000, with a
letter of credit subfacility of $10,000,000, subject to borrowing base
limitations based upon, among other things, the value of certain eligible
merchandise inventory. The Congress Facility prohibits the Company from
declaring or paying dividends on its classes of capital stock, including the
common stock, in excess of an aggregate of $6.0 million plus excess cash flow
(subject to certain tests set forth in the Congress Facility) and subject to
satisfying certain financial performance targets set forth in the Congress
Facility. As of July 31, 1998, there were no borrowings outstanding under the
Congress Facility, although $0.4 million of letters of credit were outstanding.
4. NET INCOME PER SHARE
During the fiscal year ended January 31, 1998, the Company adopted
Statement of Financial Accounting Standard No. 128 ("SFAS 128"), "Earnings Per
Share". In accordance with SFAS 128, primary earnings per
7
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WHEREHOUSE ENTERTAINMENT, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
share has been replaced with basic earnings per share, and fully diluted
earnings per share have been replaced with diluted earnings per share which
includes potentially dilutive securities such as outstanding options. Prior
periods have been presented to conform to SFAS 128. There is no established
trading market for the voting stock of the Company. The Company, in order to
arrive at an average market price for the diluted earnings per share
computation, obtains market data of stock transactions from an independent
stockbroker including the number of shares and the bid or asked price of the
shares during the period.
The weighted average number of common shares and common equivalent shares
include outstanding stock options granted on April 7, 1998 pursuant to the
Wherehouse Entertainment, Inc. 1998 Stock Incentive Plan (the "Stock Plan"),
which was approved by the Board of Directors subject to stockholder approval and
qualification of the offering by the California Commission of Corporations.
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WHEREHOUSE ENTERTAINMENT, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE FINANCIAL CONDITION AND
RESULTS OF OPERATION
INTRODUCTION
This discussion should be read in conjunction with the financial
statements, related notes and Management's Discussion and Analysis of Financial
Condition and Results of Operation contained in the Company's Report on Form
10-K for the year ended January 31, 1998.
RESULTS OF OPERATIONS
FOR THE QUARTERS ENDED JULY 31, 1998 AND JULY 31, 1997
Revenues
Net revenues were $74.9 million and $77.9 million for the quarters ended
July 31, 1998 and July 31, 1997, respectively. The decrease of $3.0 million, or
3.9%, results from an increase in merchandise sales of $2.3 million offset with
a decrease in rental revenue of $5.3 million. The company believes the decrease
in rental revenue is primarily attributable to an increasingly competitive
environment , and a reduction in the number of stores offering rental product.
A summary of total net merchandise sales and rental revenues, by product
category, is provided below:
NET MERCHANDISE SALES AND RENTAL REVENUES
BY MERCHANDISE CATEGORY
(DOLLAR AMOUNTS IN MILLIONS)
<TABLE>
<CAPTION>
QUARTER ENDED
JULY 31,
--------------
1998 1997
----- -----
<S> <C> <C>
Net Merchandise Sales:
Music..................................................... $57.4 $55.8
Other, principally sales of new video cassettes, video
game software and hardware, general merchandise and
ticket commissions..................................... 8.7 8.0
----- -----
Total merchandise sales........................... 66.1 63.8
Rental Revenue
Video cassette and other rental revenues.................. 8.8 14.1
----- -----
Total revenues.................................... $74.9 $77.9
===== =====
</TABLE>
The sale of pre-recorded music, new video cassettes, digital versatile
disks ("DVD's"), video game software and hardware and general merchandise
continue to represent the largest portion of the Company's revenues. For the
quarter ended July 31, 1998, net merchandise sales represented 88.3% of
aggregate revenues, an increase of 6.4% from 81.9% for the quarter ended July
31, 1997. Net merchandise sales were $66.1 million versus $63.8 million for the
quarters ended July 31, 1998 and July 31, 1997, respectively, representing an
overall increase of 3.6%. On a same-store basis, net merchandise sales increased
by 7.8% during the quarter ended July 31, 1998, as compared to the quarter ended
July 31, 1997. Management believes that the increase of 7.8% for same store net
merchandise sales was largely the result of an improved product offering and the
favorable impact of competitor's store closures.
Rental revenue includes the rental of video cassettes, DVD's, video games
and game players, and audio cassette books, and sales of previously viewed video
cassettes and previously played video games. As of July 31, 1998, approximately
133 of the Company's stores offered rental products with approximately 50 of the
stores offering DVD's for rental. Rental revenue was $8.8 million versus $14.1
million during the quarters ended July 31, 1998 and July 31, 1997, respectively,
representing a decrease of $5.3 million or 37.6%. On a same-store basis, rental
revenue decreased approximately 31.4% as compared to the prior year. The Company
9
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believes that the decrease in same-store rental revenue was primarily
attributable to an increasingly competitive environment.
Cost of Revenues
Costs of sales increased $0.5 million to $42.0 million for the quarter
ended July 31, 1998 versus $41.5 million for the quarter ended July 31, 1997. As
a percentage of net merchandise sales, costs of sales decreased 1.4% to 63.6%
during the quarter ended July 31, 1998 versus 65.0% during the quarter ended
July 31, 1997. The 1.4% decrease in costs of sales as a percentage of net
merchandise sales was principally due to lower obsolescence and other costs of
sales resulting from improved inventory efficiencies
Costs of rental, including amortization, decreased to $4.6 million during
the quarter ended July 31, 1998, a decrease of $3.3 million or 41.8%, versus
$7.9 million during the quarter ended July 31, 1997. As a percentage of rental
revenue, costs of rentals decreased to 52.1% during the quarter ended July 31,
1998 versus 55.9% during the quarter ended July 31, 1997, representing a
decrease of 3.8%, primarily the result of decreased purchases of video rental
product. Specifically, during the quarter ended July 31, 1998 in response to the
decline in rental revenues, the reduction in the number of stores offering
rentals, and an increase in revenue sharing programs, the Company decreased its
purchases of video rental product by $3.1 million or 49% versus the same quarter
of the prior year.
Operating Expenses
Selling, general and administrative expenses, were $23.9 million versus
$26.1 million for the quarters ended July 31, 1998 and 1997, respectively, a
decrease of $2.2 million or 8.4%. As a percentage of net revenues, selling,
general and administrative expenses, were 32.0% during the quarter ended July
31, 1998 versus 33.6% during the quarter ended July 31, 1997, representing a
decrease of 1.6%. The 1.6% decrease was principally due to reductions in payroll
and other store and corporate expenses.
Income From Operations
Income from operations for the quarter ended July 31, 1998 was $2.7 million
as compared to $0.8 million for the quarter ended July 31, 1997, an improvement
of $1.9 million. The improvement in income from operations was primarily the
result of lower costs of sales, lower cost of rental revenue, and lower SG&A
expenses which resulted from the successful implementation of various expense
reduction initiatives. During the quarter ended July 31, 1998 the company closed
one store and opened one store. As of July 31, 1998 the Company operated 220
stores in seven states.
EBITDA
EBITDA represents income from operations, plus depreciation and
amortization. It is management's belief that due to the combined format of
rental product and sale merchandise, a more appropriate calculation of EBITDA
(hereafter referred to as Adjusted EBITDA) should include the net difference
between rental amortization plus the book value of rental dispositions, versus
rental inventory purchased during the period. The Company has included certain
information concerning Adjusted EBITDA because management believes it would be
useful information for certain investors and analysts to analyze operating
performance and to determine the Company's ability to service debt. Adjusted
EBITDA for the quarter ended July 31, 1998, is $4.9 million versus $2.7 million
for the quarter ended July 31, 1997. Adjusted EBITDA excludes the non-cash
impact of rent expense accrued to recognize minimum rents in a straight-line
basis over the term of the lease. Adjusted EBITDA for the quarter ended July 31,
1997, includes a non-recurring cash benefit of $0.4 million resulting from the
impact of one-time credits received from landlord concessions. The method of
calculating Adjusted EBITDA set forth above may be different from calculations
of EBITDA employed by other companies and, accordingly may not be directly
comparable to such other computations. Adjusted EBITDA should not be viewed as a
substitute for Generally Accepted Accounting Principles (GAAP) measurements such
as net income or cash flow from operations. Rather it is presented as
supplementary information.
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Income Taxes
The Company recorded a tax provision of $1.3 million for the quarter ended
July 31, 1998, versus a tax provision of $0.4 million for the quarter ended July
31, 1997. The provision represents an effective tax rate of 41.3%, which the
Company estimates will be its effective tax rate for the year ended January 31,
1999.
The Company is currently under audit by the California Franchise Tax Board
("FTB") for tax years ended January 31, 1992, 1993 and 1994. The Company
believes that it has made adequate provision in the financial statements for
this audit.
FOR THE SIX MONTHS ENDED JULY 31, 1998 AND JULY 31, 1997
Revenues
Net revenues were $145.4 million and $151.1 million for the six months
ended July 31, 1998 and 1997, respectively. The decrease of $5.7 million, or
3.8% in total revenue results from an increase in merchandise sales of $3.6
million offset by a decrease in rental revenue of $9.3 million. The Company
believes that the decrease in rental revenue was primarily attributable to an
increasingly competitive environment and a reduction in the number of stores
offering rental product. A summary of total net merchandise sales and rental
revenues, by product category, is provided below:
NET MERCHANDISE SALES AND RENTAL REVENUES
BY MERCHANDISE CATEGORY
(DOLLAR AMOUNTS IN MILLIONS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JULY 31,
----------------
1998 1997
------ ------
<S> <C> <C>
Net Merchandise Sales:
Music..................................................... $111.2 $107.6
Other, principally sales of new video cassettes, video
game software and hardware, general merchandise and
ticket commissions..................................... 16.1 16.1
------ ------
Total merchandise sales........................... 127.3 123.7
Rental Revenue
Video cassette and other rental revenue................... 18.1 27.4
------ ------
Total revenues.................................... $145.4 $151.1
====== ======
</TABLE>
The sale of pre-recorded music, new video cassettes, DVD's, video game
software and hardware and general merchandise continue to represent the largest
portion of the Company's revenues. For the six months ended July 31, 1998, net
merchandise sales represented 87.6% of aggregate revenues, an increase of 5.7%
from 81.9% during the six months ending July 31, 1997. Net merchandise sales
were $127.3 million versus $123.7 million for the six months ended July 31, 1998
and July 31, 1997, respectively, representing an overall increase of 2.9%. On a
same-store basis, net merchandise sales increased by 6.9% during the six months
ended July 31, 1998, as compared to the six months ended July 31, 1997.
Management believes that the increase of 6.9% was largely the result of an
improved product offering and the favorable impact of competitor's store
closures.
Rental revenue includes the rental of video cassettes, DVD's, video games
and game players, and audio cassette books, and sales of previously viewed video
cassettes and previously played video games. As of July 31, 1998 approximately
133 of the Company's stores offered rental products. Rental revenue was $18.1
million versus $27.4 million during the six months ended July 31, 1998 and July
31, 1997, respectively, representing a decrease of $9.3 million or 33.9%. On a
same-store basis rental revenue decreased approximately 28.1% as compared to the
prior year. The Company believes that the decrease in same-store rental revenue
was primarily attributable to an increasingly competitive environment.
11
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Cost of Revenues
Cost of sales increased $0.4 million to $80.2 million for the six months
ended July 31, 1998 versus $79.8 million for the six months ended July 31, 1997,
representing an increase of 0.5%. As a percentage of net merchandise sales,
costs of sales decreased 1.5% to 63.0% during the six months ended July 31, 1998
versus 64.5% during the six months ended July 31, 1997. The 1.5% decrease in
cost of sales as a percentage of net merchandise sales was principally due to
lower obsolescence and other costs of sales resulting from improved inventory
efficiencies.
Cost of rentals, including amortization, decreased to $9.4 million during
the six months ended July 31, 1998, a decrease of $6.3 million or 40.1%, versus
$15.7 million during the six months ended July 31, 1997. As a percentage of
rental revenue, cost of rentals decreased to 51.8% during the six months ended
July 31, 1998 versus 57.5% during the six months ended July 31, 1997,
representing a decrease of 5.7%, primarily the result of decreased purchases of
video rental product. Specifically, during the six months ended July 31, 1998 in
response to the decline in rental revenues, the reduction in the number of
stores offering rentals, and an increase in revenue sharing programs, the
Company decreased its purchases of video rental product by $5.2 million or 41.4%
versus the same six months of the prior year.
Operating Expenses
Selling, general and administrative expenses, were $47.6 million versus
$52.1 million for the six months ended July 31, 1998 and July 31, 1997,
respectively, a decrease of $4.5 million or 8.6%. As a percentage of net
revenues, selling, general and administrative expenses, were 32.7% during the
six months ended July 31, 1998 versus 34.5% during the six months ended July 31,
1997, representing a decrease of 1.8%. The 1.8% decrease was principally due to
reductions in payroll and other store and corporate expenses.
Income From Operations
Income from operations for the six months ended July 31, 1998 was $5.0
million as compared to $0.3 million for July 31, 1997, an improvement of $4.7
million. The improvement in income from operations was primarily the result of
lower cost of sales, lower cost of rental revenue, and lowered SG&A expenses
which resulted from the successful implementation of expense reduction
initiatives. During the period ended July 31, 1998 the Company closed four
stores and opened one new store. As of July 31, 1998 the Company operated 220
stores in seven states.
EBITDA
EBITDA represents income from operations, plus depreciation and
amortization. It is management's belief that due to the combined format of
rental product and sale merchandise, a more appropriate calculation of EBITDA
(hereafter referred to as Adjusted EBITDA) should include the net difference
between rental amortization plus the book value of rental dispositions, versus
rental inventory purchased during the period. The Company has included certain
information concerning Adjusted EBITDA because management believes it would be
useful information for certain investors and analysts to analyze operating
performance and to determine the Company's ability to service debt. Adjusted
EBITDA for the period ended July 31, 1998, was $9.2 million versus $5.9 million
for the period ended July 31,1997. Adjusted EBITDA excludes the non-cash impact
of rent expense accrued to recognize minimum rents in a straight-line basis over
the term of the lease. Adjusted EBITDA for the period ended July 31, 1997,
includes a non-recurring cash benefit of $1.3 million resulting from the impact
of one-time credits received from landlord concessions. The method of
calculating Adjusted EBITDA set forth above may be different from calculations
of EBITDA employed by other companies and, accordingly may not be directly
comparable to such other computations. Adjusted EBITDA should not be viewed as a
substitute for Generally Accepted Accounting Principles (GAAP) measurements such
as net income or cash flow from operations. Rather it is presented as
supplementary information.
12
<PAGE> 13
Income Taxes
The Company recorded a tax provision of $2.5 million for the six months
ended July 31, 1998 versus a tax provision of $0.3 for the period ended July 31,
1997. The tax provision represents an effective tax rate of 41.3%, which the
Company estimates will be its effective tax rate for the year ended January 31,
1999.
LIQUIDITY AND CAPITAL RESOURCES
During the six months ended July 31, 1998, the Company's net cash used in
operating activities was $5.8 million as compared to $24.8 million that was
provided by operations for the corresponding six months of the prior fiscal
year, primarily due to an increase in inventory, and a decrease in accounts
payables.
Cash used in investing activities was $1.8 million for the six months ended
July 31, 1998 as compared to $1.7 million for the six months ended July 31,
1997.
Cash used in financing activities was $0.3 million for the six months ended
July 31, 1998 as compared to $0.6 for the six months ended July 31, 1997.
The Company believes that the current borrowing facility (see Note 3 under
Notes to Condensed Financial Statements) is adequate to support existing
operations for the remainder of the current fiscal year.
The Company expects to make additional payments to creditors, professionals
and others of up to $3.2 million through the end of the fiscal year under the
Plan of Reorganization.
As of July 31, 1998 the Company had signed ten new lease commitments to
open new stores during the next twelve months.
SEASONALITY
The Company's business is seasonal, and revenues and operating income are
highest during the fourth quarter. Bank borrowings have historically been
highest in October and November due to the building of inventory for the holiday
season.
The Company believes that, except for changes in the minimum wage mandated
by the Federal government, inflation has not had a material effect on its
operations and its internal and external sources of liquidity and working
capital.
IMPACT OF THE YEAR 2000
The Year 2000 issue is the result of computer programs being written using
two digits rather than four to define the applicable year. Any of the Company's
computer programs that have time-sensitive software may recognize a date having
the last two digits of "00", as the year 1900, rather than the year 2000. This
could result in a system failure or miscalculations causing a disruption of
operations, including among other things, a temporary inability to process
transactions, issue purchase orders, or engage in similar normal business
activities.
The Company is planning to replace its financial and merchandising system
software and related hardware during 1999 as part of its business strategy. As a
contingency plan, in the event the new systems are not completed on schedule,
the Company is in the process of finalizing a remediation plan for its existing
financial and merchandising systems which would be performed by a third party
software developer, and which would address the Year 2000 deficiencies in such
systems. The Company has substantially completed remediation of its store
point-of-sale software, and has prepared a plan to remediate the point-of-sale
system hardware during 1999.
Formal communications have been established with the Company's vendors on
their millennium compliance plans. The Company will continue to address the
readiness of its suppliers in these areas.
13
<PAGE> 14
Based on information available at this time, the Company estimates that the
cost associated with Year 2000 remediation will be between $2.5 million and $3.0
million. This estimate is subject to further revision based on facts and
circumstances encountered during the project.
The Company anticipates completion of its new system conversion and system
remediation, where required, prior to any anticipated impact on its operating
systems. There can be no assurance that the modifications made to the Company's
systems will be adequate to avoid operational problems related to Year 2000
issues. Likewise, there can be no assurance that the systems of other companies
on which the Company's systems rely, will be timely converted, and would not
have a material adverse effect on the Company's systems.
SUBSEQUENT EVENT
On August 10, 1998, the Company entered into agreements with Viacom
International, Inc. to acquire certain subsidiaries of Viacom (the "Blockbuster
Music Subsidiaries") for $115.0 million, subject to adjustment. The agreements
involve 378 Blockbuster Music stores in 33 states and are subject to customary
closing conditions, including governmental regulatory approvals. It is expected
the transaction will be closed in October 1998. The Company is currently in
negotiations with lenders to secure permanent financing for the acquisition. The
Company has signed a back up financing agreement with Cerberus Partners, L.P.
14
<PAGE> 15
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is a party to various other claims, legal actions and
complaints arising in the ordinary course of its business. In the opinion of
management, all such matters are without merit or involve such amounts that
unfavorable disposition will not have a material impact on the financial
position and results of operations of the Company.
ITEM 2. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<S> <C>
2 Stock Purchase Agreement, dated August 10, 1998, between
Viacom International, Inc. and the Company
27.0 Financial Data Schedule
</TABLE>
(b) Current Reports on Form 8-K
None.
15
<PAGE> 16
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
WHEREHOUSE ENTERTAINMENT, INC.
<TABLE>
<S> <C>
Date: September 14, 1998 /s/ ANTONIO C. ALVAREZ II
--------------------------------------------------------
Antonio C. Alvarez, II
Chairman of the Board and Chief
Executive Officer, and Director
(Principal Executive Officer)
Date: September 14, 1998 /s/ ROBERT S. KELLEHER
--------------------------------------------------------
Robert S. Kelleher
Senior Vice President and
Chief Financial Officer
(Principal Financial and Accounting Officer)
</TABLE>
16
<PAGE> 17
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
WHEREHOUSE ENTERTAINMENT, INC.
<TABLE>
<S> <C>
Date: September 14, 1998 /s/ ANTONIO C. ALVAREZ, II
--------------------------------------------------------
Antonio C. Alvarez, II
Chairman of the Board and Chief
Executive Officer, and Director
(Principal Executive Officer)
Date: September 14, 1998 /s/ ROBERT S. KELLEHER
--------------------------------------------------------
Robert S. Kelleher
Senior Vice President and
Chief Financial Officer
(Principal Financial and Accounting Officer)
</TABLE>
17
<PAGE> 1
EXHIBIT 2
STOCK PURCHASE AGREEMENT
dated as of August 10, 1998
between
VIACOM INTERNATIONAL INC.
and
WHEREHOUSE ENTERTAINMENT, INC.
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
ARTICLE I DEFINITIONS..................................................... 1
1.01. Certain Defined Terms............................................. 1
1.02. Other Defined Terms............................................... 7
1.03. Terms Generally................................................... 9
ARTICLE II PURCHASE AND SALE.............................................. 9
2.01. Purchase and Sale................................................. 9
2.02. Purchase Price; Allocation of Purchase Price...................... 9
2.03. Closing........................................................... 10
2.04. Closing Deliveries by the Seller.................................. 10
2.05. Closing Deliveries by the Purchaser............................... 10
2.06. Determination of the Purchase Price; Purchase Price Adjustment.... 11
2.07. Payments and Computations......................................... 12
ARTICLE III REPRESENTATIONS AND WARRANTIES OF THE SELLER.................. 12
3.01. Incorporation and Authority of the Seller......................... 12
3.02. Incorporation and Qualification of the Acquired Subsidiaries...... 13
3.03. Capital Stock of the Acquired Subsidiaries........................ 13
3.04. No Conflict....................................................... 13
3.05. Consents and Approvals............................................ 14
3.06. Financial Information............................................. 14
3.07. Absence of Certain Changes or Events.............................. 15
3.08. Absence of Litigation............................................. 16
3.09. Compliance with Laws.............................................. 16
3.10. Governmental Licenses and Permits................................. 17
3.11. The Assets........................................................ 17
3.12. Real Property..................................................... 17
3.13. Employee Benefits Matters......................................... 18
3.14. Taxes............................................................. 19
3.15. Environmental Matters............................................. 20
3.16. Material Contracts................................................ 20
3.17. Brokers........................................................... 21
3.18. EXCLUSIVITY OF REPRESENTATIONS.................................... 21
3.19. No Undisclosed Liabilities........................................ 22
3.20. Bank Accounts, Powers, etc. ...................................... 22
3.21. Certain Disclosures............................................... 22
ARTICLE IV REPRESENTATIONS AND WARRANTIES OF THE PURCHASER................ 25
4.01. Incorporation and Authority of the Purchaser...................... 25
4.02. No Conflict....................................................... 25
4.03. Consents and Approvals............................................ 25
4.04. Absence of Litigation............................................. 26
4.05. Securities Matters................................................ 26
4.06. Brokers........................................................... 26
4.07. Financial Ability................................................. 26
4.08. EXCLUSIVITY OF REPRESENTATIONS.................................... 26
</TABLE>
<PAGE> 3
<TABLE>
<S> <C>
ARTICLE V ADDITIONAL AGREEMENTS.......................................... 27
5.01. Conduct of Business Prior to the Closing....................... 27
5.02. Access to Information.......................................... 29
5.03. Confidentiality................................................ 30
5.04. Regulatory and Other Authorizations; Consents.................. 30
5.05. Intercompany Accounts.......................................... 31
5.06. Insurance...................................................... 31
5.07. Blockbuster Gift Cards......................................... 31
5.08. Leased Properties.............................................. 33
5.09. Defaulted Leases............................................... 34
5.10. Amendment of Real Property Leases.............................. 35
5.11. Certain Services and Benefits Provided by Affiliates........... 35
5.12. Further Action................................................. 35
5.13. Letters of Credit and Guarantees............................... 36
5.14. Sale of Real Property by the Purchaser......................... 37
5.15. Excluded Assets................................................ 37
5.16. Financing...................................................... 37
5.17. Intentionally Omitted.......................................... 37
5.18. Additional Assets.............................................. 37
5.19. No Solicitation................................................ 38
5.20. Expiring Real Property Lease Purchase Price Adjustment......... 38
5.21. Anniversary Lease Purchase Price Adjustment.................... 39
5.22. Secondary Store Purchase Price Adjustment...................... 41
5.23. Treatment of Inventory......................................... 41
ARTICLE VI EMPLOYEE MATTERS.............................................. 41
6.01. Employees...................................................... 41
6.02. Retirement Plans............................................... 42
6.03. Indemnity...................................................... 43
6.04. No Third Party Beneficiaries................................... 44
ARTICLE VII TAX MATTERS.................................................. 44
7.01. Tax Indemnities................................................ 44
7.02. Refunds and Tax Benefits....................................... 45
7.03. Contests....................................................... 46
7.04. Preparation of Tax Returns..................................... 47
7.05. Section 338(H)(10) Election and Allocations.................... 47
7.06. Cooperation and Exchange of Information........................ 48
7.07. Conveyance Taxes............................................... 48
7.08. Miscellaneous.................................................. 48
ARTICLE VIII CONDITIONS TO CLOSING....................................... 49
8.01. Conditions to Obligations of the Seller........................ 49
8.02. Conditions to Obligations of the Purchaser..................... 50
ARTICLE IX TERMINATION, AMENDMENT AND WAIVER............................. 50
9.01. Termination.................................................... 50
9.02. Effect of Termination.......................................... 51
ARTICLE X INDEMNIFICATION..................................................51
10.01. Indemnification by the Purchaser............................... 51
10.02. Indemnification by the Seller.................................. 52
10.03. Notification of Claims......................................... 53
</TABLE>
<PAGE> 4
<TABLE>
<S> <C>
10.04. Exclusive Remedies............................................. 54
ARTICLE XI GENERAL PROVISIONS............................................ 54
11.01. Survival....................................................... 54
11.02. Expenses....................................................... 55
11.03. Notices........................................................ 55
11.04. Public Announcements........................................... 55
11.05. Headings....................................................... 55
11.06. Severability................................................... 55
11.07. Entire Agreement............................................... 56
11.08. Assignment..................................................... 56
11.09. No Third Party Beneficiaries................................... 56
11.10. Amendment...................................................... 56
11.11. Sections and Schedules......................................... 56
11.12. Governing Law.................................................. 56
11.13. Counterparts................................................... 56
11.14. No Presumption................................................. 58
</TABLE>
<PAGE> 5
DISCLOSURE SCHEDULE
SECTIONS
1.1 Included Intellectual Property
1.2 Excluded Leaseholds
3.03 Certificate of Incorporation and By-Laws
3.04 Conflicts
3.06 Financial Statements/Exceptions to GAAP
3.07 Certain Changes or Events
3.08 Litigation
3.09 Compliance with Laws
3.12(a) Real Property
3.12(c) Assigned Hypothecated or Subleased Real Property
3.12(d) Notices of Real Property Violations
3.12(f) Exceptions to Utilities
3.12(g) Real Property Consents and Approvals
3.13(a) Viacom Plans
3.16(a) Material Contracts
3.16(b) Additional Material Contracts
3.16(c) Exceptions to Material Contracts
3.19 Liabilities or Contingencies
3.20 Bank Accounts
3.21(a) Store Financial Information
3.21(c) Leases Expiring in Calendar 1998
3.21(d) Leases Which Have Become Unavailable Since May 12, 1998
3.21(e) Transferred Business Employees
3.21(f) Comparative Income Statements for April YTD 1997 vs. April YTD
1998
3.21(g)(i) Letter from the IRS dated February 8, 1998
3.21(g)(ii) Letter from the IRS dated January 22, 1998
3.21(g)(iii) Termination of Credit Card Agreement
3.21(g)(iv) Responses to Certain Questions Regarding Music Information System
3.21(g)(v) Financial Information Used by Management in Day-to-Day Operations
3.21(g)(vi) Information Regarding Music Information System
3.21(g)(vii) Responses Regarding Inventory, Costs of Goods Sold and Freight,
Other Fees
3.21(g)(viii) Retail Cost of Goods Sold Calculation
3.21(g)(ix) Capitalized Leases
3.21(g)(x) Responses to Certain Data Room Questions
3.21(g)(xi) Hourly Rates and Annual Salaries
3.21(g)(xii) Vendor Penalty Percentage
3.21(g)(xiii) Other Financial Information Used by Management in Day-to-Day
Operations
5.02 Audited Financial Statements
5.06 Bonds, Securities, Indemnifications
5.13 Guarantees/Letters of Credit
5.19(a) Purchaser Employees
5.19(b) Blockbuster/Viacom Employees
5.22 Secondary Store Buyout
6.01(a) Employees
<PAGE> 6
EXHIBITS
- --------
1.01(a) Transition License Agreement
1.01(b) Transition Services Agreement
<PAGE> 7
STOCK PURCHASE AGREEMENT, dated as of August 10, 1998, between VIACOM
INTERNATIONAL INC., a Delaware corporation (the "Seller") and WHEREHOUSE
ENTERTAINMENT, INC., a Delaware corporation (the "Purchaser").
WITNESSETH:
WHEREAS, the Seller wishes to sell to the Purchaser, and the Purchaser
wishes to purchase from the Seller, the Holding Subsidiary Shares (as such term
is hereinafter defined), upon the terms and subject to the conditions set forth
herein; and
WHEREAS, in connection with such sale, the Seller is willing to provide
certain transition services and license certain intellectual property to the
Purchaser, upon the terms of the Transition Services Agreement and the
Transition License Agreement referred to herein.
NOW, THEREFORE, the parties hereto hereby agree as follows:
ARTICLE I
DEFINITIONS
SECTION 1.01 Certain Defined Terms. As used in this Agreement, the
following terms shall have the following meanings:
"Accounts Receivable" means, with respect to the Music Subsidiaries,
any and all accounts receivable, notes and other amounts receivable from third
parties, together with any unpaid financing charges accrued thereon, but
excluding any intercompany receivable forgiven or otherwise settled pursuant to
Section 5.05.
"Action" means any claim, action, suit, arbitration, inquiry,
proceeding or investigation by or before any Governmental Authority or
arbitrator.
"Acquired Subsidiaries" means, collectively, the Holding Subsidiaries
and the Music Subsidiaries.
"Affiliate" means, with respect to any specified Person, any other
Person who or which, directly or indirectly through one or more intermediaries,
Controls, is Controlled by or is under common Control with such specified
Person, except that for the purpose of Section 5.19, with respect to the Seller,
Affiliate shall be limited to Viacom and its direct and indirect subsidiaries.
"Agreement" means this Stock Purchase Agreement, including the
Disclosure Schedule and all amendments hereto made in accordance with Section
11.10.
<PAGE> 8
2
"Ancillary Agreements" means the Transition Services Agreement and the
Transition License Agreement.
"Assets" means the assets, properties and rights of every type and
description, real, personal and mixed, tangible and intangible, located within
the U.S. that are owned, leased or licensed by the Seller or any of its
Affiliates and used or held for use primarily in the conduct of the Business
other than the Excluded Assets. The Assets include the NT-based ordering system,
the Excel spreadsheet used for bank reconciliations and the AS400-based
advertising management system, in each such case as used in the Business.
"Base Price" means $114,500,000.00 (ONE HUNDRED FOURTEEN MILLION FIVE
HUNDRED THOUSAND DOLLARS).
"Blockbuster Plans" means the Blockbuster Entertainment Group and
Subsidiaries Group Health Plan (Medical and Dental).
"Business" means the domestic pre-recorded music retail business
(including related accessories) as currently conducted by the Seller through its
Affiliates within the Blockbuster Entertainment Group, but excluding (i) the
Excluded Assets, (ii) that portion of such business as is now or hereafter
conducted by the Blockbuster video business (including the Blockbuster
distribution center and all Blockbuster video stores, whether owned by an
Affiliate of Viacom or a franchisee) and (iii) any music-related business
conducted by any Affiliate of the Seller not within the Blockbuster
Entertainment Group (including the Viacom Company Store or any Nickelodeon
store).
"Business Day" means any day that is not a Saturday, a Sunday or other
day on which banks are required or authorized by Law to be closed in the City of
New York.
"Cash" means the aggregate of all cash and cash equivalents (including
all negotiable instruments, marketable securities and cash and cash equivalents
maintained in accounts with banks, brokerage firms or other financial
institutions) owned by any Acquired Subsidiaries as of the close of business on
the Closing Date.
"Closing Working Capital" means, for the Music Subsidiaries, on a
combined basis, as of 11:59 p.m. on the day immediately preceding the Closing
Date, (a) the sum of (i) Cash and equivalents, (ii) Accounts Receivable, less
allowance, (iii) security deposits and prepaid assets, whether classified as
current or long-term, and (iv) merchandise inventories, minus (b) Payables and
Expenses (without giving effect to costs associated with replacing any Excluded
Assets), in each case as of such date, calculated in the same manner and using
the same policies and methods, as the corresponding line items on the Reference
Balance Sheet; provided, however, in computing (or estimating) inventory for
purposes of calculating Closing Working Capital, it shall be assumed that
inventory is based on a physical audit (which in the case of an estimate
includes a reasonable estimate of any shrink reserve from gross inventory) and
the only reserve amount in respect of such inventory shall be for incentives
but, if available, the results of an actual physical inventory
<PAGE> 9
3
shall be used together with the reserve for incentives. Solely by way of
clarification, the Reference Balance Sheet and Closing Working Capital exclude
the Excluded Assets.
"Closing Working Capital Adjustment Amount" means the Estimated
Closing Working Capital less ($173,300,000) ONE HUNDRED SEVENTY-THREE MILLION
THREE HUNDRED THOUSAND DOLLARS.
"Code" means the Internal Revenue Code of 1986, as amended.
"Control" means, as to any Person, the power to direct or cause the
direction of the management and policies of such Person, whether through the
ownership of voting securities, by contract or otherwise. The term "Controlled"
shall have a correlative meaning.
"Disclosure Schedule" means the Disclosure Schedule delivered by the
Seller to the Purchaser on the date hereof.
"Environmental Law" means any Law relating to pollution or protection
of the environment, including the use, handling, transportation, treatment,
storage, generation, manufacture, processing, labeling, disposal, release or
discharge of Hazardous Materials.
"Environmental Permit" means any permit, approval, identification
number, license and other authorization required under or issued pursuant to any
Environmental Law.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended.
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"Excluded Assets" means (a) the Excluded Intellectual Property, any
goodwill associated therewith and any items of tangible property bearing such
Excluded Intellectual Property, (b) the Viacom Company-wide Contracts, (c) all
video rental tapes, (d) Blockbuster gift cards ("Blockbuster Gift Cards"),
certificates and coupons (collectively with Blockbuster Gift Cards, the
"Blockbuster Gift Certificates"), (e) any equity interest owned beneficially or
of record by the Holding Subsidiaries other than the Music Subsidiary Shares,
(f) any interest owned beneficially or of record by a Music Subsidiary in a
limited liability company which exclusively holds Excluded Assets, (g) the
Excluded Leaseholds, (h) the Excluded Employees, (i) the VIP and the VPP, (j)
all books and records relating to (i) employee matters for which the Seller or
its Affiliates are retaining liability hereunder or (ii) any Excluded Asset, (k)
all assets used in connection with the services to be provided under the
Ancillary Agreements and (l) all other assets not used in the Business.
"Excluded Employees" means all employees employed by the Acquired
Subsidiaries or any Affiliate of either of the Acquired Subsidiaries, other than
(a) those set forth in Section 6.01(a) of the Disclosure Schedule and (b) all
store level personnel, field level personnel or the five corporate level
personnel employed by the Acquired Subsidiaries.
<PAGE> 10
4
"Excluded Intellectual Property" means all (a) United States,
international, and foreign patents, patent applications and statutory invention
registrations, including reissues, divisions, continuations, continuations in
part, extensions and reexaminations thereof, all rights therein provided by
international treaties or conventions, and all improvements thereto, (b)
trademarks, service marks, trade dress, logos, trade names, corporate names, and
other source identifiers, whether or not registered, including all common law
rights, and registrations and applications for registration thereof, all rights
therein provided by international treaties or conventions, and all reissues,
extensions and renewals of any of the foregoing, (c) copyrightable works,
copyrights, whether or not registered, and registrations and applications for
registration thereof, and all rights therein provided by international treaties
or conventions, and (d) confidential and proprietary information, including
trade secrets, in each of clauses (a) through (d) owned or used by any Music
Subsidiary or any Affiliate of any Music Subsidiary; provided, however, Excluded
Intellectual Property shall not include the intellectual property set forth in
Section 1.1 of the Disclosure Schedule.
"Excluded Leaseholds" means the leaseholds (together with the related
leasehold improvements and any assets (other than inventory, furniture, fixtures
and equipment) residing therein) set forth in Section 1.2 of the Disclosure
Schedule.
"Final WC Statement" means the determination of the Closing Working
Capital that is final and binding on the parties, either through agreement of
the parties or through the action of the Independent Accounting Firm in the
manner set forth in Section 2.06.
"GAAP" means generally accepted accounting principles as applied in the
United States.
"Governmental Authority" means any United States federal, state or
local governmental, regulatory or administrative authority, agency or commission
or any court, tribunal, or judicial or arbitral body.
"Governmental Order" means any order, writ, judgment, injunction,
decree, stipulation, determination or award entered by or with any Governmental
Authority or arbitrator.
"Hazardous Materials" means (a) petroleum, petroleum products, by
products or breakdown products, radioactive materials, friable asbestos,
polychlorinated biphenyls, and (b) any chemical, material or substance defined
or regulated as toxic or as a hazardous substance, pollutant, contaminant or
waste under any Environmental Law.
"Holding Subsidiaries" means (a) Blockbuster Music Holding Corporation,
a Delaware corporation and (b) Blockbuster SC Holding Corporation, a Delaware
corporation, as their corporate names may be changed prior to the Closing.
"Holding Subsidiary Shares" means the issued and outstanding shares of
capital stock of the Holding Subsidiaries.
<PAGE> 11
5
"HSR Act" means the Hart-Scott-Rodino Antitrust Improvements Act of
1976, as amended, and the rules and regulations thereunder.
"Independent Accounting Firm" means (a) an independent certified public
accounting firm in the United States of national recognition mutually acceptable
to the Seller and the Purchaser or (b) if the Seller and the Purchaser are
unable to agree upon such a firm, then each party shall select one such firm and
those two firms shall select a third firm, in which event "Independent
Accounting Firm" shall mean such third firm.
"Interest Rate" means an interest rate per annum equal to the average
of the rate per annum for 30-day Eurodollar deposits which appears on page 3750
(or a successor page thereto) of the Dow Jones Telerate Screen at 11:00 A.M.
(London time) on each day during the period for which interest is to be paid.
"IRS" means the Internal Revenue Service.
"Knowledge of the Purchaser" or "Purchaser's Knowledge" means the
actual knowledge of Antonio Alvarez, Chief Executive Officer and Chairman, Mark
Alvarez, Vice President Latin Merchandising, Robert Kelleher, Senior Vice
President and Chief Financial Officer, Medhi Mahdavi, Vice President,
Controller, Ron Angelo, Vice President, MIS, John Gilmour, Vice President,
Logistics, Kevin Milligan, Vice President, Music Buyer, Tony Caputo, Vice
President, Human Resources of the Purchaser, in each case without specific
investigation.
"Knowledge of the Seller" or "Seller's Knowledge" means the actual
knowledge of (i) the senior executive management of the Acquired Subsidiaries,
(ii) John Antioco, Chairman and CEO, Lynn Lyall, Executive Vice President and
Chief Financial Officer, Steven M. Pantelick, Vice President, Planning, Lane
Hamm, Director of Finance, Mark Gilman, Executive Vice President, Real Estate,
Anthony Carvalho, Controller, Mark Nadolny, Vice President of Finance,
Merchandising and Distribution and Bob Wasilewski, Director Real Estate, in each
case, of Blockbuster Entertainment Group, and (iii) Robert Bakish, Senior Vice
President, Planning, Development and Technology of Viacom, in each case without
specific investigation.
"Law" means any federal, state, local law, ordinance, regulation, rule,
code, order, other requirement or rule of law.
"Lien" means any mortgage, deed of trust, pledge, hypothecation,
security interest, encumbrance, claim, lien or charge of any kind.
"Material Adverse Effect" means a material adverse effect on the
results of operations, assets or condition (financial or otherwise) of the
Business, in all cases taken as a whole; provided; however, that any material
adverse effect arising out of or resulting from (a) an event or series of events
or circumstances affecting the retail music industry generally in the United
States, (b) the United States economy or (c) the entering into of this Agreement
or the consummation of transactions contemplated hereby or the announcement
hereof, shall not, in the case of any of clauses (a), (b) or (c) constitute a
Material Adverse Effect.
<PAGE> 12
6
"Music Subsidiaries" means (a) Blockbuster Music Retail, Inc., a
Delaware corporation, (b) Show Industries, Inc., a California corporation, and
(c) Blockbuster SC Music Corporation, a Delaware corporation, as their corporate
names may be changed prior to Closing.
"Music Subsidiary Shares" means the issued and outstanding shares of
capital stock of the Music Subsidiaries.
"Payables and Expenses" means, with respect to the Music Subsidiaries,
all current accounts payable and accrued liabilities.
"Permitted Liens" means the following Liens: (a) Liens for Taxes,
assessments or other governmental charges or levies not yet due or payable; (b)
statutory Liens of landlords and Liens of carriers, warehousemen, mechanic,
material and other Liens imposed by Law and on a basis consistent with past
practice for amounts not yet due; (c) Liens incurred or deposits made in the
ordinary course of the Business and on a basis consistent with past practice in
connection with worker's compensation, unemployment insurance or other types of
social security; (d) Liens not created by the Seller or any Music Subsidiary
which affect the underlying fee interest of any Real Property; and (e) Liens
incurred in the ordinary course of the Business and on a basis consistent with
past practice securing obligations or liabilities which do not materially
interfere with the conduct of the Business and do not exceed, alone or in the
aggregate, $500,000.
"Person" means any natural person, general or limited partnership,
corporation, limited liability company, firm, association or other legal entity.
"Purchase Price" means the sum of the Base Price (i) increased by
amounts paid pursuant to Section 2.02(c) and (ii) increased by the Closing
Working Capital Adjustment Amount if positive, or decreased thereby if negative,
in each case as such aggregate amount may be adjusted after the Closing pursuant
to Section 2.06, 5.20, 5.21 or 5.22 hereof.
"Real Property Lease" means each of the leases or subleases, as
amended, of any Real Property at which the Business is conducted as set forth in
Section 3.12(a) of the Disclosure Schedule.
"Securities Act" means the Securities Act of 1933, as amended.
"Shares" means, collectively, the Holding Subsidiary Shares and the
Music Subsidiary Shares.
"Subsidiary" of any Person means any corporation, partnership, joint
venture, limited liability company, trust or estate of which (or in which) more
than 50% of (a) the issued and outstanding capital stock having ordinary voting
power to elect a majority of the board of directors of such corporation
(irrespective of whether at the time capital stock of any other class or classes
of such corporation shall or might have voting power upon the occurrence of any
contingency), (b) the interest in the capital or profits of such partnership,
joint venture or limited
<PAGE> 13
7
liability company or (c) the beneficial interest in such trust or estate is at
the time directly or indirectly owned or controlled by such Person, by such
Person and one or more of its other Subsidiaries or by one or more of such
Person's other Subsidiaries.
"Tax" or "Taxes" means all income, excise, gross receipts, ad valorem,
sales, use, employment, franchise, profits, gains, property, transfer, use,
payroll, intangibles or other taxes, fees, stamp taxes, duties, charges, levies
or assessments of any kind whatsoever (whether payable directly or by
withholding), together with any interest and any penalties, additions to tax or
additional amounts imposed by any Tax authority with respect thereto.
"Tax Returns" means all returns and reports (including elections,
declarations, disclosures, schedules, estimates and information returns)
required to be supplied to a Tax authority relating to Taxes.
"Transition License Agreement" means the Transition License Agreement
between the Purchaser and the Seller in the form attached hereto as Exhibit
1.01(a).
"Transition Services Agreement" means the Transition Services Agreement
between the Purchaser and the Seller in the form attached hereto as Exhibit
1.01(b).
"Viacom" means Viacom Inc., a Delaware corporation.
"Viacom Company-wide Contracts" means contracts to which Viacom, the
Seller or any of their Affiliates (other than the Music Subsidiaries), is a
party and by the terms of which, the benefits thereunder are also available to
the Music Subsidiaries (e.g., contracts with overnight couriers, airlines,
copier and messenger services).
SECTION 1.02. Other Defined Terms. The following terms have the
meanings defined for such terms in the Sections set forth below:
<TABLE>
<CAPTION>
Term Section
- ---- -------
<S> <C>
Additional Assets 5.18(a)
Allocations 7.05(b)
Anniversary Adjustment Statement 5.21(b)
Anniversary Notice 5.21(c)
Anniversary Purchase Price Adjustment 5.21(a)
Anniversary Purchase Price Adjustment Date 5.21(a)
Approvals 5.08(b)
Blockbuster Gift Cards Definition of Excluded Assets
Blockbuster Gift Certificates Definition of Excluded Assets
Blockbuster Store 5.07(c)
Business Employees 3.13(a)
CIBC 4.06
Closing 2.03
Closing Date 2.03
</TABLE>
<PAGE> 14
8
<TABLE>
<S> <C>
COBRA 6.02(c)
Confidentiality Agreement 5.03
Contest 7.03(b)
Defaulted Lease 5.09
Election 7.05(a)
Estimated Closing Working Capital 2.06(a)
Financial Statements 3.06(a)
Former Business Employees 3.13(a)
Forms 7.05(a)
Guaranteed Leases 5.09
Guarantees 5.13(b)
Indemnified Party 10.03(a)
Indemnifying Party 10.03(a)
Initial WC Statement 2.06(b)
License Period 5.07(a)
Licenses 3.10
Losses 10.01(a)
MADSP 7.05(b)
Management 3.21(a)
Material Contracts 3.16(a),3.16(b)
Multiemployer Plan 3.13(b)
Multiple Employer Plan 3.13(b)
Nontransferable Leases 3.12(a)
Notice of Disagreement 2.06(c)
Post-Closing Date Tax Benefit 7.02(b)
PriceWaterhouse 5.02(b)
Purchase Price Notice 2.06(a)
Purchaser Preamble
Purchaser Indemnified Parties 10.02(a)
Purchaser's Cards 5.07(a)
Purchaser Store 5.07(a)
Purchaser's DC Plan 6.02(b)
Real Property 3.12(a)
Reference Balance Sheet 3.06(a)
Secondary Store 5.22
Seller Preamble
Seller Indemnified Parties 10.01(a)
Seller LOCs 5.13(a)
Store Financial Information 3.21(a)
Tail 5.07(c)
Transferee 5.14
Viacom ERISA Plan 3.13(a)
Viacom Plans 3.13(a)
VIP 3.13(a)
</TABLE>
<PAGE> 15
9
VPP 3.13(a)
WP&Co. 3.17
SECTION 1.03. Terms Generally. (a) Words in the singular shall be held
to include the plural and vice versa and words of one gender shall be held to
include the other gender as the context requires, (b) the term "hereof,"
"herein," and "herewith" and words of similar import shall, unless otherwise
stated, be construed to refer to this Agreement and not to any particular
provision of this Agreement and Article, Section, paragraph, clause, Exhibit and
Schedule references are to the Articles, Sections, paragraphs, clause, Exhibits
and Schedules to this Agreement unless otherwise specified, (c) the word
"including" and words of similar import when used in this Agreement shall mean
"including, without limitation," unless otherwise specified, (d) the word "or"
shall not be exclusive, and (e) provisions shall apply, when appropriate, to
successive events and transactions.
ARTICLE II
PURCHASE AND SALE
SECTION 2.01. Purchase and Sale. On the terms and subject to the
conditions set forth in this Agreement, at the Closing, the Seller shall sell,
convey, assign, transfer and deliver to the Purchaser, and the Purchaser shall
purchase, acquire and accept from the Seller, all of the Seller's right, title
and interest in and to the Holding Subsidiary Shares.
SECTION 2.02. Purchase Price; Allocation of Purchase Price. (a) The
Purchaser shall pay the Purchase Price in cash to the Seller at the Closing, as
provided in Section 2.05(a); provided, however, that the portion of the Purchase
Price to be paid pursuant to Section 2.02(c) shall be paid in accordance with
such Section. The Purchase Price shall be subject to adjustment after the
Closing as set forth in Section 2.06 hereof.
(b) The Seller and the Purchaser agree that the Purchase Price shall be
allocated among the Shares and the Assets as set forth in Section 7.05. The
Purchaser and the Seller shall each report the federal, state and local income
and other tax consequences of the transactions contemplated by this Agreement in
a manner consistent with the Allocations. The Purchaser and the Seller further
covenant and agree not to take a position that is inconsistent with the
Allocations on any Tax Return or otherwise.
(c) Promptly following the date hereof, Seller will establish an
incentive bonus program structured to incentivize employees of Seller
performing Seller's obligations under the Transition Services Agreement. As
soon as practicable thereafter, the Seller shall send a communication to such
employees generally to the effect that Seller has established such bonus program
and that although Seller will be determining the recipients and amounts of any
such incentive bonuses, it will do so in consultation with Purchaser.
<PAGE> 16
10
The Purchaser will promptly, and in no event later than 2 Business Days
after receipt of notice from the Seller, reimburse the Seller up to $500,000 in
the aggregate for incentive bonuses that the Seller actually pays to such
employees. Although Seller will consult with the Purchaser concerning the
recipients and amounts of incentive bonuses to be reimbursed by the Purchaser
hereunder, Seller shall have absolute discretion as to the payment, amount and
recipients of any incentive bonuses, including the non-payment of any such
bonuses. Seller shall be responsible for all withholding and other taxes
associated with the payment of such bonuses, but any reasonable legal (whether
in-house or third party) costs incurred in connection with the establishment of
such bonus program, including in connection with any filings under applicable
laws (other than in respect of income or withholding taxes) shall be borne by
Purchaser.
SECTION 2.03. Closing. Subject to the terms and conditions of this
Agreement, the sale and purchase of the Holding Subsidiary Shares contemplated
hereby shall take place at a Closing (the "Closing") to be held at 10:00 a.m.,
New York City time, on October 26, 1998 but in no event earlier than (a) the
expiration or termination of the applicable waiting periods under the HSR Act
and (b) the satisfaction or waiver of the conditions to the obligations of the
parties set forth in Section 8.01 and Section 8.02, at the offices of the
Seller, 1515 Broadway, New York, New York, or at such other time or on such
other date or at such other place as the Seller and the Purchaser may mutually
agree upon in writing (the day on which the Closing takes place being the
"Closing Date"). The Closing shall be deemed effective as of 12:01 a.m. on the
Closing Date.
SECTION 2.04. Closing Deliveries by the Seller. At the Closing, the
Seller shall deliver or cause to be delivered to the Purchaser:
(a) stock certificates evidencing all of the Shares, duly endorsed in
blank or accompanied by stock powers duly executed in blank;
(b) any required stock transfer tax stamps;
(c) a receipt for the Purchase Price;and
(d) the Ancillary Agreements required to be delivered pursuant to
Section 8.02(e).
SECTION 2.05. Closing Deliveries by the Purchaser. At the Closing, the
Purchaser shall deliver to the Seller:
(a) the Purchase Price (exclusive of a post-Closing adjustment, if any,
provided for in Section 2.06 and any payment provided for in Section 2.02(c)),
as specified in the Purchase Price Notice, by wire transfer in immediately
available funds, to an account or accounts designated at least two (2) Business
Days prior to the Closing Date by the Seller in a written notice to the
Purchaser; and
(b) the Ancillary Agreements required to be delivered pursuant to
Section 8.01(e).
<PAGE> 17
11
SECTION 2.06. Determination of the Purchase Price; Purchase Price
Adjustment.
(a) Not less than three (3) Business Days prior to the Closing Date,
the Seller shall deliver a notice (the "Purchase Price Notice") to the Purchaser
which sets forth (i) the Seller's good faith estimate of Closing Working Capital
(the "Estimated Closing Working Capital") and (ii) based thereon, the
calculation of the Purchase Price. The calculation of the Purchase Price set
forth in the Purchase Price Notice shall be binding on the Purchaser and the
Seller absent manifest error.
(b) Within sixty (60) days after the Closing Date, the Seller shall
prepare and deliver (by same day or next day delivery) to the Purchaser a
statement setting forth its determination of the Closing Working Capital (the
"Initial WC Statement"), which statement shall set forth in reasonable detail
the basis for such determinations. During the one hundred twenty (120) days
after the Closing Date, the Purchaser and its representatives will be permitted
to review, in the Seller's offices, the Seller's working papers relating to the
Initial WC Statement as well as all of the books and records relating to the
operations and finances of the Business with respect to the period up to and
including the Closing Date, and the Seller shall make reasonably available in
the Seller's offices the individuals responsible for the preparation of the
Initial WC Statement in order to respond to the reasonable inquiries of the
Purchaser.
(c) The Purchaser shall notify the Seller in writing (the "Notice of
Disagreement") within one hundred twenty (120) days after the Closing Date if
the Purchaser disagrees with the Seller's calculation of the Closing Working
Capital, which Notice of Disagreement shall set forth in reasonable detail the
basis for such dispute and the U.S. dollar amounts involved and the Purchaser's
good faith estimate of the Closing Working Capital. If no Notice of Disagreement
is received by the Seller within such one hundred twenty day period, then the
Initial WC Statement shall be deemed to have been accepted by the Purchaser,
shall become final and binding upon the parties and shall be the Final WC
Statement.
(d) During the twenty (20) Business Days immediately following the
delivery of a Notice of Disagreement, the Seller and the Purchaser shall seek in
good faith to resolve any differences which they may have with respect to any
matter specified in the Notice of Disagreement. If at the end of such twenty
Business Day period the Seller and the Purchaser have been unable to agree upon
a Final WC Statement, the Seller and the Purchaser shall submit to the
Independent Accounting Firm for review and resolution any and all matters which
remain in dispute with respect to the Notice of Disagreement. The Independent
Accounting Firm shall use commercially practicable efforts to make a final
determination, binding on the parties hereto, of Closing Working Capital, and
such final determination shall be the Final WC Statement. The cost of the
Independent Accounting Firm's review and determination shall be paid by the
party which has determined an amount of Closing Working Capital that is the
greatest amount different from the amount on the Final WC Statement. During the
twenty Business Day review by the Independent Accounting Firm, the Purchaser and
the Seller will each make available to the Independent Accounting Firm
interviews with such individuals and such information, books and
<PAGE> 18
12
records as may be reasonably required by the Independent Accounting Firm to make
its final determination.
(e) (i) If Closing Working Capital (as set forth in the Final WC
Statement) exceeds Estimated Closing Working Capital, then the Purchaser shall
pay to the Seller an amount equal to such excess or (ii) if Estimated Closing
Working Capital exceeds Closing Working Capital (as set forth in the Final WC
Statement), then the Seller shall pay to the Purchaser an amount equal to such
excess, in either case within five (5) Business Days after the Final WC
Statement becomes final and binding on the parties hereto and, in either case,
together with interest thereon from the Closing Date until the date of payment
at the Interest Rate. If Closing Working Capital (as set forth in the Final WC
Statement) is equal to Estimated Closing Working Capital, then neither the
Purchaser nor the Seller shall owe any amount to the other party pursuant to
this Section 2.06.
(f) The Purchaser agrees that following the Closing through the date
that payment, if any, is made pursuant to Section 2.06(e), it will not take any
actions with respect to any accounting books, records, policy or procedure on
which the Initial WC Statement or the Final WC Statement is to be based that are
inconsistent with past practices of the Seller or that would make it impossible
or impracticable to calculate Closing Working Capital in the manner and
utilizing the methods required hereby.
SECTION 2.07. Payments and Computations. Each party shall make each
payment due to the other party hereunder as soon as practicable on the day when
due in U.S. dollars by wire transfer in immediately available funds. All
computations of interest shall be made by the party entitled to receive payment
on the basis of a year of 360 days, in each case for the actual number of days
(including the first day, but excluding the last day) occurring in the period
for which such interest is payable. Whenever any payment hereunder shall be
stated to be due on a day other than a Business Day, such payment shall be made
on the next succeeding Business Day, and such extension of time shall in such
case be included in the computation of payment of interest.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF THE SELLER
The Seller represents and warrants to the Purchaser as follows:
SECTION 3.01. Incorporation and Authority of the Seller. The Seller is
a corporation duly incorporated, validly existing and in good standing under the
laws of its jurisdiction of incorporation and has all necessary corporate power
and authority to enter into this Agreement and the Ancillary Agreements, to
carry out its obligations hereunder and thereunder and to consummate the
transactions contemplated hereby and thereby. The execution and delivery of this
Agreement and the Ancillary Agreements by the Seller, the performance by the
Seller of its obligations hereunder and thereunder and the consummation by the
Seller of the transactions contemplated hereby and thereby have been duly
authorized by all requisite corporate action on the part of the Seller. This
Agreement has been, and upon execution and delivery of the Ancillary Agreements,
the Ancillary Agreements will be, duly executed and delivered by the Seller, and
<PAGE> 19
13
(assuming due authorization, execution and delivery by the Purchaser) this
Agreement constitutes, and upon execution and delivery thereof the Ancillary
Agreements will constitute, legal, valid and binding obligations of the Seller,
enforceable against the Seller in accordance with their respective terms,
subject to the effect of any applicable bankruptcy, reorganization, insolvency,
moratorium, fraudulent conveyance or similar laws affecting creditors' rights
generally and subject, as to enforceability, to the effect of general principles
of equity (regardless of whether such enforceability is considered in a
proceeding in equity or at law).
SECTION 3.02. Incorporation and Qualification of the Acquired
Subsidiaries. Each of the Acquired Subsidiaries is a corporation duly
incorporated, validly existing and in good standing under the laws of its
jurisdiction of incorporation and has the corporate power and authority to own,
operate or lease its respective assets. Each Acquired Subsidiary is duly
qualified as a corporation to do business, and is in good standing, in each
jurisdiction where the character of its properties owned, operated or leased or
the nature of its activities makes such qualification necessary, except for
where the failure to be so qualified would not have a Material Adverse Effect.
SECTION 3.03. Capital Stock of the Acquired Subsidiaries. The Holding
Subsidiary Shares constitute all the authorized, issued and outstanding shares
of capital stock of each of the Holding Subsidiaries. The Music Subsidiary
Shares constitute all of the authorized, issued and outstanding shares of
capital stock of each of the Music Subsidiaries. All of the Shares have been
duly authorized and validly issued and are fully paid and nonassessable and were
not issued in violation of any pre-emptive rights. There are no options,
warrants or rights of conversion or other rights, agreements, arrangements or
commitments relating to the capital stock of any of the Acquired Subsidiaries
obligating such Acquired Subsidiary to issue or sell any of its shares of
capital stock. The Seller owns the Holding Subsidiary Shares and the Holding
Subsidiaries collectively own the Music Subsidiary Shares, in each case, free
and clear of all Liens except for Liens arising out of, under or in connection
with this Agreement or created by or through the Purchaser or any of its
Affiliates. At the Closing, upon receipt by the Seller of the Purchase Price
and the other deliveries to be made by the Purchaser pursuant to Section 2.05,
the Seller shall transfer to the Purchaser all of the Seller's right, title and
interest in and to the Shares free and clear of all Liens except for Liens
arising pursuant to this Agreement or through the Purchaser. There are no voting
trusts, stockholder agreements, proxies or other agreements in effect with
respect to the voting or transfer of the Shares. At the Closing, the Holding
Subsidiaries will not hold any assets other than the Music Subsidiary Shares.
Attached hereto as Section 3.03 of the Disclosure Schedule is the Certificate of
Incorporation and By-laws of each Acquired Subsidiary as amended through the
date hereof.
SECTION 3.04. No Conflict. Assuming all consents, approvals,
authorizations and other actions described in Section 3.05 have been obtained,
and except as may result from any facts or circumstances relating to the
Purchaser or any Affiliate of the Purchaser or as described in Section 3.04 of
the Disclosure Schedule or as otherwise provided in this Article III, the
execution, delivery and performance of this Agreement and the Ancillary
Agreements by the Seller does not and will not (a) violate or conflict with the
Certificate of Incorporation, other constitutive documents or By-laws of the
Seller or any Acquired Subsidiary, (b) conflict with or violate any
<PAGE> 20
14
Law or Governmental Order applicable to the Seller or any Acquired Subsidiary,
except as would not have a Material Adverse Effect or (c) result in any breach
of, or constitute a default (or event which with the giving of notice or lapse
of time, or both, would become a default) under, or give to any Person any
rights of termination, amendment, acceleration or cancellation of, or result in
the creation of any Lien on any of the Shares or on any of the Assets pursuant
to, any note, bond, mortgage, indenture, contract, agreement, lease, license,
permit, franchise or other instrument to which the Seller or any Acquired
Subsidiary is a party or by which any of the Shares or the Assets are bound or
affected, except for purposes of this subclause (c) for (i) Liens created by or
through the Purchaser or any of its Affiliates, (ii) for breaches, defaults,
rights of termination, amendment, acceleration or cancellation that would not,
individually or in the aggregate, be material to the Business taken as a whole,
(iii) Permitted Liens, or (iv) under or pursuant to any Real Property Lease, it
being understood that Real Property Leases are not addressed by this Section
3.04 but are addressed by Section 3.12.
SECTION 3.05. Consents and Approvals. The execution and delivery of
this Agreement and each Ancillary Agreement by the Seller does not, and the
performance of this Agreement and each Ancillary Agreement by the Seller will
not require any consent, approval, authorization or other action by, or filing
with or notification to, any Governmental Authority, except (a) the notification
requirements of the HSR Act, (b) where failure to obtain such consent, approval,
authorization or action, or to make such filing or notification, would not
prevent or materially impair the ability of the Seller to consummate the sale of
the Shares to the Purchaser as contemplated by this Agreement and would not have
a Material Adverse Effect and (c) as may be necessary as a result of any facts
or circumstances relating solely to the Purchaser or its Affiliates.
SECTION 3.06. Financial Information. (a) The unaudited special purpose
statement of assets and liabilities of the Business at March 31, 1998 (the
"Reference Balance Sheet" (which excludes the Excluded Assets)) and the related
unaudited statement of operations for the three-month period then ended and the
unaudited special purpose statement of assets and liabilities of the Business at
December 31, 1997 and the related unaudited statement of operations for the
year then ended (collectively, the "Financial Statements"), copies of which are
set forth in Section 3.06 of the Disclosure Schedule, have been based upon the
information contained in the Music Subsidiaries' books and records, present
fairly in all material respects the financial condition and results of
operations of the Business at such dates, or for the periods covered thereby
and, except as set forth in Section 3.06 of the Disclosure Schedule, have been
prepared in accordance with GAAP, consistently applied with past practice.
Furthermore, the Reference Balance Sheet has been adjusted to reflect the
results of the March 1998 store physical inventory and was prepared on a
consistent basis with the unaudited financial statements for the fiscal year
ended December 31, 1997.
(b) At July 26, 1998, the preliminary month-end accounting close for
the Business reported that the returns inventory related to the Business was
approximately $44.0 million, and the total in-transit inventory was less than
$1.0 million.
The Reference Balance Sheet includes merchandise inventory in the
amount of approximately $235.5 million, of which approximately $8.7 million
(offset by reserves and credit
<PAGE> 21
15
balances of approximately $3.9 million) of inventory from closed stores was
included in "music inventory at stores" and approximately $5.9 million of
inventory was included as "inventory in transit" from stores to the distribution
center. Subsequent to March 31, 1998, to Seller's knowledge, both such
approximate $8.7 million and $5.9 million moved to returns inventory as a result
of normal inventory flow.
SECTION 3.07. Absence of Certain Changes or Events. Since the date of
the Reference Balance Sheet, except as disclosed in Section 3.07 of the
Disclosure Schedule or as contemplated by this Agreement, the Business has been
conducted in the ordinary course and consistent with past practice and there has
not occurred any event or circumstance which has had or is reasonably likely to
have a Material Adverse Effect. Since the date of the Reference Balance Sheet,
except (a) as disclosed in Section 3.07 of the Disclosure Schedule and (b)
except as contemplated by this Agreement, there has not occurred with respect to
the Business:
(i) any establishment, or any increase of any bonus,
insurance, severance, deferred compensation, pension, retirement,
profit sharing, stock option (including the granting of stock options,
stock appreciation rights, performance awards or restricted stock
awards), stock purchase or other employee benefit plan, or other
material increase in the compensation payable to or to become payable
to any officers or key employees of the Business by any Acquired
Subsidiary, except in any case described above (A) for payments or
obligations for which the Seller remains liable, (B) with respect to
Excluded Employees, (C) increases in compensation made in the ordinary
course of business consistent with past practice, or (D) as may be
required by Law or applicable employment agreement;
(ii) except as set forth in Section 3.07 of the Disclosure
Schedule, the entering into of any employment or severance agreement
with any of the Business Employees that is not terminable at will by
the applicable Acquired Subsidiary without payment or penalty (other
than customary severance determined in accordance with policies
applicable generally to the employees of the Acquired Subsidiaries);
(iii) except (A) in the ordinary course of business (including
lease renewals or extensions) or (B) for dividends, distributions or
transfers of Cash, Excluded Assets or Nontransferable Leases by the
Acquired Subsidiaries to the Seller or an Affiliate of the Seller, any
sale, assignment, transfer, lease or other disposition (other than
lease expirations) of any of the Assets having a value, alone or in the
aggregate, exceeding $250,000;
(iv) (A) any acquisition of (by merger, consolidation,
acquisition of stock or assets or otherwise) any corporation,
partnership or other business organization or division thereof, or (B)
any incurrence of any indebtedness for borrowed money (other than to
the Seller) or issuance of any debt securities or assumption, grant,
guarantee or endorsement, or other accommodation by which any Acquired
Subsidiary is responsible for, the obligations of any Person, or the
making of any loans, advances or distributions of
<PAGE> 22
16
cash (other than by the Acquired Subsidiaries to the Seller or one of
its Affiliates pursuant to clause (iv) above);
(v) any material change in any method of accounting or
accounting practice used by any Acquired Subsidiary;
(vi) any issuance or sale of any additional shares of the
capital stock of, or other equity interests in, any Acquired Subsidiary
or any Subsidiary thereof or securities convertible into or exchangeable
for such shares or equity interests, or any issuance or grant of any
options, any issuance or sale of warrants, calls, subscription rights or
other rights of any kind to acquire additional shares of such capital
stock, such other equity interests, or such securities;
(vii) any material amendment or modification of any Real
Property Lease;
(viii) other than in the ordinary course of business, any
transaction or agreement with any Affiliate of the Seller (other than
another Acquired Subsidiary); or
(ix) except for purchase of supplies and inventory and capital
expenditures made in the ordinary course of business and consistent with
past practice, any purchase or acquisition of any asset, property,
business or Person, or any investment (other than short-term investments
in Cash) in any Person, in excess of $250,000 individually and $500,000
in the aggregate.
SECTION 3.08. Absence of Litigation. Except as set forth in Section 3.08
of the Disclosure Schedule, there are no Actions pending or, to the Knowledge of
the Seller threatened against the Seller or any Acquired Subsidiary, or to which
any of the Shares or Assets are subject, that would have a Material Adverse
Effect or would prevent or materially impair the ability of the Seller to
consummate the sale of the Shares to the Purchaser as contemplated by this
Agreement.
SECTION 3.09. Compliance with Laws. No Acquired Subsidiary is in
violation of any Laws and Governmental Orders applicable to the Business, the
Shares or any Asset, or by which any of them is bound, except (a) as set forth
in Section 3.09 of the Disclosure Schedule and (b) for violations the existence
of which would not have a Material Adverse Effect. This Section 3.09 shall not
be deemed to govern and no representation under this Section 3.09 is made with
respect to the matters contemplated under Sections 3.13, 3.14 and 3.15.
SECTION 3.10. Governmental Licenses and Permits. One or more of the
Acquired Subsidiaries holds all governmental qualifications, registrations,
filings, privileges, franchises, licenses, permits, approvals or authorizations
(collectively, the "Licenses") necessary for the operation of the Business as
currently operated by the Music Subsidiaries, other than those where the failure
to hold or obtain such Licenses would not materially and adversely affect the
operation of the Business taken as a whole. The Licenses (a) are valid and in
full force and effect and, other than as a result of facts or circumstances
relating to the Purchaser or its Affiliates, will remain so immediately
following consummation of the transactions contemplated by this Agreement and
(b)
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17
to the Knowledge of the Seller, no suspension, cancellation or termination of
any such Licenses threatened in writing, except, with respect to either
subclause (a) or (b), as would not result in a Material Adverse Effect.
SECTION 3.11. The Assets. The Assets include all of the assets,
properties and rights of every type and description, real, personal and mixed,
tangible and intangible, that are owned, leased or licensed by the Seller or any
Affiliate of the Seller and are used or held for use primarily in the conduct of
and are material to the Business as of the date hereof. Except (a) for the
Excluded Assets and (b) as provided for in the Ancillary Agreements, or would be
provided for therein but for the Purchaser's election to exclude certain
services from the Ancillary Agreements, the Assets constitute all of the assets
necessary and used to conduct the Business in all material respects as conducted
on the date of this Agreement. The Acquired Subsidiaries have good and
marketable title to all of the Assets (other than with respect to Real Property,
which is covered in Section 3.12) free and clear of all Liens, except Permitted
Liens. The Assets taken as a whole are, in all material respects, in a
reasonable state of maintenance and repair, have been maintained, repaired and
replaced and are not defective (ordinary wear and tear excepted). The
pre-recorded retail music business conducted under the trade name "Blockbuster
Music" is operated within the Blockbuster Entertainment Group.
SECTION 3.12. Real Property. (a) Each leasehold interest in real
property held by any Music Subsidiary and used in or held for use in the
Business (the "Real Property") is set forth in Section 3.12(a) of the Disclosure
Schedule. The Real Property is leased free and clear of all Liens, except (i)
Permitted Liens, and (ii) Liens created by or through the Purchaser or any of
its Affiliates. Each Real Property Lease is valid and binding and in full force
and effect and neither the Seller nor any Music Subsidiary is in material
default under any Real Property Lease nor, to the Knowledge of the Seller is any
other party thereto in material default thereunder, nor to the Knowledge of the
Seller has any event occurred which through the passing of time or giving of
notice or both would constitute a material default thereunder, except in each
such case for defaults that would not result in a termination of the Real
Property Lease to which such default relates. The Seller represents and warrants
that no more than 5% of the Real Property Leases marked with an asterisk on
Schedule 3.12(a) of the Disclosure Schedule may require consent in connection
with the Purchaser's acquisition of the Shares hereunder (the "Nontransferable
Leases").
(b) Neither the Seller nor any Acquired Subsidiary has received any
written notice specifically identifying any material proposed special
assessments, or any proposed changes in property tax or land use laws affecting
the Real Property that, alone or in the aggregate with all such proposals could
reasonably be expected to have a Material Adverse Effect.
(c) Within three Business Days from the date of this Agreement, the
Seller shall deliver to the Purchaser at the offices of its counsel, O'Melveny &
Myers LLP, in New York City a true and complete copy of each Real Property
Lease, together with all amendments and modifications thereto. The Real Property
Leases constitute the entire agreement to which the Seller or any Acquired
Subsidiary is a party with respect to the Real Property which is demised
pursuant thereto except for such other agreements that are not material to such
Real Property
<PAGE> 24
18
Lease. Except as set forth in Section 3.12(c) of the Disclosure Schedule, the
Seller has not sublet, assigned or hypothecated the Real Property.
(d) Except as set forth in Section 3.12(d) of the Disclosure Schedule,
neither the Seller nor any Acquired Subsidiary has received written notice of
non-compliance with any restriction encumbering any Real Property, nor has the
Seller or any Acquired Subsidiary received written notice of any zoning
violations affecting any Real Property that would, alone or in the aggregate
with all such other notices, result in a Material Adverse Effect.
(e) Except as set forth in Section 3.08 of the Disclosure Schedule,
there is no pending or, to the Knowledge of the Seller, threatened Action that
would materially interfere with the quiet enjoyment of any Real Property.
(f) Except as set forth in Section 3.12(f) of the Disclosure Schedule,
to the Knowledge of the Seller, all water, sewer, gas, electric, telephone, and
drainage facilities and all other utilities for the present use and operation of
the Real Property are adequate to service the Real Property and are in good
operating condition, except as would not result in a Material Adverse Effect.
(g) Except as described in Section 3.12(g) of the Disclosure Schedule or
as otherwise provided in this Article III, the execution, delivery and
performance of this Agreement and the Ancillary Agreements by the Seller does
not and will not result in the creation of any Lien on any Real Property Lease,
except (i) for Liens created by or through the Purchaser or any of its
Affiliates, or (ii) Permitted Liens that do not prevent or materially impair the
ability of the Seller to consummate the sale of the Shares to the Purchaser as
contemplated by this Agreement.
SECTION 3.13. Employee Benefits Matters. (a) Section 3.13(a) of the
Disclosure Schedule contains a true and complete list of all "employee benefit
plans" (within the meaning of Section 3(3) of ERISA, hereafter the "Viacom ERISA
Plans") and all bonus, stock option, stock purchase, restricted stock,
incentive, deferred compensation, supplemental retirement, severance or other
benefit plans, programs or arrangements (collectively, the "Viacom Plans") and
all employment, termination, severance or other contracts or agreements with
respect to which Viacom, the Seller or any Acquired Subsidiary has any
obligation and which are maintained, contributed to or sponsored by Viacom, the
Seller or any Acquired Subsidiary for the benefit of (i) any current employee of
any Acquired Subsidiary or any Affiliate thereof who is employed in the
Business, other than Excluded Employees (collectively, the "Business Employees")
or (ii) any former employee of any Acquired Subsidiary who was previously
employed in the Business, other than Excluded Employees (collectively, the
"Former Business Employees"), other than plans, programs, arrangements,
contracts or agreements for which no benefits are payable to Business Employees
after the Closing Date. Each Viacom ERISA Plan is in writing and the Seller has
previously made available to the Purchaser a true and complete copy of each
Viacom ERISA Plan and the most recently received IRS determination letter for
each of the Viacom Pension Plan (the "VPP") and the Viacom Investment Plan (the
"VIP").
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19
(b) None of the Viacom ERISA Plans (i) is a "multiemployer plan", within
the meaning of Section 3(37) or 4001(a)(3) of ERISA (a "Multiemployer Plan"), or
a "single-employer plan", within the meaning of Section 4001(a)(15) of ERISA,
for which the Seller or any Acquired Subsidiary could incur liability under
Section 4063 or 4064 of ERISA (a "Multiple Employer Plan"), or (ii) provides or
promises to provide life insurance benefits.
(c) Neither the Seller nor any Acquired Subsidiary is a party to any
collective bargaining or other labor union contract applicable to any Business
Employees nor, to the Knowledge of the Seller, are there any labor union
organizing efforts with respect to the Business Employees. As of the date
hereof, there is, to the Knowledge of the Seller, no material labor strike,
slowdown or work stoppage against the Seller or any Acquired Subsidiary pending
or, to the Knowledge of the Seller, threatened, which may interfere with the
business activities of the Business, except where such strike, slowdown or work
stoppage would not have a Material Adverse Effect.
(d) With respect to each Viacom ERISA Plan, neither the Seller nor any
Acquired Subsidiary is currently liable for any material tax arising under
Section 4971, 4972, 4975, 4979, 4980 or 4980B of the Code. The Seller and the
Acquired Subsidiaries have not incurred any material liability under, arising
out of or by operation of Title IV of ERISA (other than liability for premiums
to the Pension Benefit Guaranty Corporation arising in the ordinary course),
including any liability in connection with (i) the termination or reorganization
of any employee pension benefit plan subject to Title IV of ERISA or (ii) the
withdrawal from any Multiemployer Plan or Multiple Employer Plan.
(e) All employee benefit plans that have been operated by Show
Industries, Inc., have been operated substantially in compliance with ERISA.
None of the Acquired Subsidiaries has any liability or obligation with respect
to any terminated employee benefit plan.
SECTION 3.14. Taxes. (a) Each Acquired Subsidiary has timely filed or
been included in, or will timely file or be included in, all material Tax
Returns required to be filed by or in which it is to be included with respect to
Taxes for any period ending before the Closing Date, (b) all Taxes shown to be
payable on such Tax Returns have been paid or will be paid, except to the extent
the same are being contested in good faith, and (c) no deficiency for any
material amount of Tax has been asserted or assessed by a Tax authority against
any of the Acquired Subsidiaries and is still outstanding.
SECTION 3.15. Environmental Matters. To the Seller's Knowledge (a) the
Acquired Subsidiaries are in material compliance with all applicable
Environmental Laws and have obtained and are in material compliance with all
Environmental Permits to the extent required under any Real Property Lease and
(b) there are no Hazardous Materials on, present at or under any Real Property
in violation of applicable Law.
SECTION 3.16. Material Contracts. (a) Section 3.16(a) of the Disclosure
Schedule lists as exists on the date hereof each of the following contracts and
agreements (other than the Real Property Leases which are listed in Section
3.12(a) of the Disclosure Schedule) to which any
<PAGE> 26
20
Acquired Subsidiary is a party and pursuant to which such Acquired Subsidiary is
likely to pay or receive consideration of more than (i) $200,000 in the
aggregate during the calendar year ending December 31, 1998 or (ii) $500,000 in
the aggregate over the remaining term of such contract (such contracts being
"Material Contracts") other than in respect of any Excluded Assets:
(A) each contract and agreement for the purchase of inventory
(other than purchase orders) other materials or personal property with
any supplier or for the furnishing of services to the Business or any
Acquired Subsidiary which cannot be cancelled by the applicable Business
or such Acquired Subsidiary without penalty or further payment or
without more than ninety (90) days' notice prior to delivery of such
inventory, other materials or personal property;
(B) each contract and agreement for the sale of inventory or
other personal property or for the furnishing of services by the
Business or any Acquired Subsidiary which cannot be cancelled by the
applicable Business or such Acquired Subsidiary without penalty or
further payment or without more than ninety (90) days' notice;
(C) all contracts and agreements that provide for a guaranty by
any Acquired Subsidiary; and
(D) other than in connection with the Excluded Assets or
pursuant to the Ancillary Agreements, all contracts and agreements that
contain a right owing from or an obligation owing to any Affiliate of
the Seller (other than the Acquired Subsidiaries).
(b) Section 3.16(b) of the Disclosure Schedule lists each of the
following contracts and agreements to which any Acquired Subsidiary is a party
(such contracts also being "Material Contracts") other than to the extent
directly relating to any Excluded Assets:
(i) all contracts and agreements relating to indebtedness for
borrowed money (other than in respect of intercompany accounts with
Affiliates of the Business or any Acquired Subsidiary that are cancelled
pursuant to Section 5.05);
(ii) all contracts and agreements that limit or purport to limit
the ability of any Acquired Subsidiary to compete in any line of
business or with any Person or in any geographic area or during any
period of time following the date hereof;
(iii) all contracts and agreements that contain a right of first
refusal in respect of the Business or any of its material Assets or
securities;
(iv) all contracts and agreements that constitute an employment
contract or collective bargaining agreement or provide for severance
benefits to any officer, director or employee in excess of that offered
to all employees generally;
(v) all contracts and agreements with any Governmental Authority
to which any Acquired Subsidiary is a party; and
<PAGE> 27
21
(vi) any other contract that is material to the operation of the
Business, taken as a whole and not otherwise disclosed pursuant to
Section 3.16(a).
The Seller has made available to the Purchaser true and complete copies of all
Material Contracts.
(c) Except as disclosed in Section 3.16(c) of the Disclosure Schedule,
to the Knowledge of the Seller, each Material Contract: (i) is valid and binding
on the Acquired Subsidiary which is a party thereto and is in full force and
effect; and (ii) upon consummation of the transactions contemplated by this
Agreement, shall continue in full force and effect without penalty. Except as
would not have a Material Adverse Effect, neither the Seller nor any Acquired
Subsidiary nor to the Seller's Knowledge any other party thereto is in breach
of, or default under, any Material Contract, and no event which would (with the
passage of time, notice or both) constitute a breach or default under any
Material Contract by any Acquired Subsidiary (or, to the Knowledge of the
Seller, any other party or obligor with respect thereto), has occurred or as a
result of this Agreement or its performance will occur.
SECTION 3.17. Brokers. Except for Wasserstein Perella & Co., Inc.,
("WP&Co."), no broker, finder or investment banker is entitled to any brokerage,
finder's or other fee or commission in connection with the transactions
contemplated by this Agreement and the Ancillary Agreements based upon
arrangements made by or on behalf of the Seller or Viacom. Viacom is solely
responsible for the fees and expenses of WP&Co.
SECTION 3.18. EXCLUSIVITY OF REPRESENTATIONS. (a) THE REPRESENTATIONS
AND WARRANTIES MADE BY THE SELLER IN THIS AGREEMENT ARE IN LIEU OF AND ARE
EXCLUSIVE OF ALL OTHER REPRESENTATIONS AND WARRANTIES, INCLUDING ANY IMPLIED
WARRANTIES. THE SELLER HEREBY DISCLAIMS ANY SUCH OTHER OR IMPLIED
REPRESENTATIONS OR WARRANTIES, NOTWITHSTANDING THE DELIVERY OR DISCLOSURE TO THE
PURCHASER OR ITS OFFICERS, DIRECTORS, EMPLOYEES, AGENTS OR REPRESENTATIVES OF
ANY DOCUMENTATION OR OTHER INFORMATION (INCLUDING ANY FINANCIAL PROJECTIONS OR
OTHER SUPPLEMENTAL DATA).
(b) The Purchaser acknowledges that (i) the representations and
warranties contained in Sections 3.13, 3.14 and 3.15 are the only
representations and warranties being made with respect to compliance with or
liability under ERISA, Tax Laws and Environmental Laws, respectively, or with
respect to any employee benefit, Tax or environmental, health or safety matter
related in any way to the Real Property or to this Agreement or its subject
matter and (ii) no other representation contained in this Agreement shall apply
to any such matters and no other representation or warranty, express or implied,
is being made with respect thereto. Nothing in this Section 3.18(b) is intended
to limit the scope of the terms of Section 3.19, Section 7.01, or Section
10.02(a)(v).
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SECTION 3.19. No Undisclosed Liabilities. Except as would not have a
Material Adverse Effect, there are no liabilities or obligations of the Acquired
Subsidiaries that would be required to be shown on a balance sheet prepared in
accordance with GAAP (or the notes thereto in the case of a year end balance
sheet), other than liabilities (a) reflected or reserved against on the
Reference Balance Sheet or the notes to the December 31, 1997 balance sheet, (b)
incurred in the ordinary course of business since the date of the Reference
Balance Sheet or (c) disclosed in the Disclosure Schedule.
SECTION 3.20. Bank Accounts, Powers, etc. Section 3.20 of the Disclosure
Schedule lists each bank account or other comparable account maintained by any
Acquired Subsidiary or any store included in the Business and being acquired by
virtue of the Purchaser's acquisition of the Shares.
SECTION 3.21. Certain Disclosures. (a) The unaudited financial
information attached as Section 3.21(a) of the Disclosure Schedule the "Store
Financial Information" has been derived from the books and records of the
Seller, has been prepared on a basis consistent with that used by management of
the Business ("Management") in its day-to-day operation of the Business at the
time of preparation (which basis differs from that used in preparation of the
Financial Statements) and fairly reflects in all material respects certain
operating results used by Management in its day-to-day operation of the
Business. In computing "Gross Margin" costs of goods sold are calculated using
the methodology set forth in Disclosure Schedule 3.21(g)(viii). The column
labeled "EBITDA" set forth in the Store Financial Information equals "Gross
Margin" less "Compensation" less "Occupancy" less "G&A".
(b) The list of store zip codes attached in Section 3.12(a) of the
Disclosure Schedule is accurate and complete.
(c) The list of Real Property Leases which expire in calendar year 1998
(indicating the expiration date, June 1998 rent, street location and zip code of
the leasehold) attached as Section 3.21(c) of the Disclosure Schedule is
accurate and complete.
(d) Section 3.21(d) of the Disclosure Schedule lists all stores that
were included in the Purchaser's bid letter to the Seller dated May 12, 1998
that have been disposed of prior to the date hereof.
(e) Since April 9, 1998, except as set forth in Section 3.21(e) of the
Disclosure Schedule, neither the Seller nor any of its Affiliates has
transferred any Business Employee in the position of store manager, district
manager, regional manager or corporate music staff from any Music Subsidiary to
any other Affiliate.
(f) The unaudited financial statements attached as Section 3.21(f) of
the Disclosure Schedule (i) have been derived from the books and records of the
Seller, (ii) have been presented in accordance with the internal accounting
policies of the Seller used in the preparation of Management reports (which
policies differ from those used in the preparation of the Financial Statements),
and (iii) accurately and fairly reflect in all material respects certain
information used
<PAGE> 29
23
by Management in its day-to-day operation of the Business and Management has no
reason to believe that, for purposes of inclusion in the Management reports,
such statements are inaccurate in any material respect.
(g) (i) The letter attached as Section 3.21(g)(i) of the Disclosure
Schedule is (A) a correct copy of a letter dated February 8, 1998 from
the IRS to Viacom Inc. relating to "Plan Number: 003", (B) is in full
force and effect and (C) has not been superceded, rescinded or revoked
by the Internal Revenue Service.
(ii) The letter attached as Section 3.21(g)(ii) of the
Disclosure Schedule is (A) a correct copy of a letter dated January 22,
1998 from the IRS to Viacom Inc. relating to "Plan Number: 002", (B) is
in full force and effect and (C) has not been superceded, rescinded or
revoked by the Internal Revenue Service.
(iii) The Agreement attached as Section 3.21(g)(iii) of the
Disclosure Schedule is (A) a correct copy of the Termination of Credit
Card Program Agreement, Settlement and Release Agreement dated August 7,
1997, (B) is in full force and effect and (C) has not been amended nor
terminated.
(iv) At the time initially provided to the Purchaser, the
information attached as Section 3.21(g)(iv) of the Disclosure Schedule
is accurate, true and complete in all material respects with respect to
the matters referred to or questions responded to therein.
(v) The unaudited information attached as Section 3.21(g)(v) of
the Disclosure Schedule (i) has been derived from the books and records
of the Seller, (ii) has been presented in accordance with the internal
accounting policies of the Seller used in the preparation of Management
reports (which policies differ from those used in the preparation of the
Financial Statements), and (iii) accurately and fairly reflects in all
material respects certain information used by Management in its
day-to-day operation of the Business and Management has no reason to
believe that, for purposes of inclusion in the Management reports, such
numbers are inaccurate in any material respect.
(vi) At the time initially provided to the Purchaser, the
information attached as Section 3.21(g)(vi) of the Disclosure Schedule
is accurate and true with respect to the matters referred to therein.
(vii) The responses contained in the document attached as
Section 3.21(g)(vii) of the Disclosure Schedule are accurate, true and
complete in all material respects with respect to the inquiries made
therein.
(viii) The information attached as Section 3.21(g)(viii) of the
Disclosure Schedule is an accurate description of the Blockbuster
Entertainment Group Music Segment Retail methodology used in computing
cost of goods sold.
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(ix) The information attached as Section 3.21(g)(ix) of the
Disclosure Schedule is an accurate and complete list of the stores
characterized as capitalized leases in the Financial Statements.
(x) At the time initially provided to the Purchaser, the
responses contained in the document attached as Section 3.21(g)(x) of
the Disclosure Schedule are accurate, complete in all material respects
and true with respect to the inquiries made therein.
(xi) The information attached as Section 3.21(g)(xi) of the
Disclosure Schedule is, as of the date indicated thereon, an accurate
and true list of the hourly rates and annual salaries with respect to
the positions in the Business referred to therein.
(xii) At the time initially provided to the Purchaser, the
information attached as Section 3.21(g)(xii) of the Disclosure Schedule
is an accurate and true list of penalty percentage by vendor.
(xiii) The unaudited information attached as Section 3.21
(g)(xiii) of the Disclosure Schedule (i) has been derived from the books
and records of the Seller, (ii) has been presented in accordance with
the internal accounting policies of the Seller used in the preparation
of Management reports (which policies differ from those used in the
preparation of the Financial Statements), and (iii) accurately and
fairly reflects in all material respects certain information used by
Management in its day-to-day operation of the Business and Management
has no reason to believe that, for purposes of inclusion in the
Management reports, such numbers are inaccurate in any material respect.
The Purchaser understands and acknowledges that Section 3.06 is the
Seller's sole representation with respect to a financial presentation of the
results of operation and financial condition of the Business for any period or
at any time and that the financial data referred to in this Section 3.21 is not
intended to be such a presentation of the Business or any portion thereof and is
intended solely to provide the Purchaser with accurate information used by
Management in its day-to-day operation of the Business.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF THE PURCHASER
The Purchaser represents and warrants to the Seller as follows:
SECTION 4.01. Incorporation and Authority of the Purchaser. The
Purchaser is a corporation duly incorporated, validly existing and in good
standing under the laws of Delaware and has all necessary corporate power and
authority to enter into this Agreement and the Ancillary Agreements, to carry
out its obligations hereunder and thereunder and to consummate the transactions
contemplated hereby and thereby. The execution and delivery of this Agreement
and the Ancillary Agreements by the Purchaser, the performance by the Purchaser
of its
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obligations hereunder and thereunder and the consummation by the Purchaser of
the transactions contemplated hereby and thereby have been duly authorized by
all requisite corporate action on the part of the Purchaser. This Agreement has
been, and upon execution and delivery of the Ancillary Agreements, the Ancillary
Agreements will be, duly executed and delivered by the Purchaser, and (assuming
due authorization, execution and delivery by the Seller) this Agreement
constitutes, and upon execution and delivery thereof, the Ancillary Agreements
will constitute, legal, valid and binding obligations of the Purchaser
enforceable against the Purchaser in accordance with their respective terms,
subject to the effect of any applicable bankruptcy, reorganization, insolvency,
moratorium, fraudulent conveyance or similar laws affecting creditors' rights
generally and subject, as to enforceability, to the effect of general principles
of equity (regardless of whether such enforceability is considered in a
proceeding in equity or at law).
SECTION 4.02. No Conflict. The execution, delivery and performance of
this Agreement and the Ancillary Agreements by the Purchaser do not and will not
(a) violate or conflict with the Certificate of Incorporation, other
constitutive documents or By-laws (or other similar applicable documents) of the
Purchaser, (b) conflict with or violate any Law or Governmental Order applicable
to the Purchaser or (c) result in any breach of, or constitute a default (or
event which with the giving of notice or lapse of time, or both, would become a
default) under, or give to any Person any rights of termination, amendment,
acceleration or cancellation of, or result in the creation of any Lien on any of
the assets or properties of the Purchaser pursuant to, any note, bond, mortgage,
indenture, contract, agreement, lease, license, permit, franchise or other
instrument relating to such assets or properties to which the Purchaser or any
of its Subsidiaries is a party or by which any of such assets or properties is
bound or affected, except as would not prevent or materially impair the ability
of the Purchaser to consummate the purchase of the Shares from the Seller as
contemplated by this Agreement.
SECTION 4.03. Consents and Approvals. The execution and delivery of this
Agreement and each Ancillary Agreement by the Purchaser does not, and the
performance of this Agreement and each Ancillary Agreement by the Purchaser will
not, require any consent, approval, authorization or other action by, or filing
with or notification to, any Governmental Authority, except (a) as described in
a writing delivered to the Seller by the Purchaser on the date hereof, (b) the
notification requirements of the HSR Act, (c) where failure to obtain such
consent, approval, authorization or action, or to make such filing or
notification, would not prevent or materially impair the ability of the
Purchaser to consummate the purchase of the Shares from the Seller as
contemplated by this Agreement and (d) as may be necessary as a result of any
facts or circumstances relating solely to Viacom or its Affiliates.
SECTION 4.04. Absence of Litigation. No Action is pending or, to the
best Knowledge of the Purchaser threatened before any Governmental Authority
which seeks to delay or prevent the consummation of the transactions
contemplated hereby or which would materially impair the ability of the
Purchaser to consummate the purchase of the Shares from the Seller as
contemplated by this Agreement.
SECTION 4.05. Securities Matters. The Purchaser understands that the
offering and sale of the Shares hereunder is intended to be exempt from the
registration requirements of the
<PAGE> 32
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Securities Act pursuant to Section 4(2) thereof. The Shares are being acquired
by the Purchaser for its own account and without a view to the public
distribution of the Shares or any interest therein. The Purchaser has sufficient
knowledge and experience in financial and business matters so as to be capable
of evaluating the merits and risks of its investment in the Shares, and the
Purchaser is capable of bearing the economic risks of such investment, including
a complete loss of its investment in the Shares. In evaluating the suitability
of an investment in the Shares, the Purchaser has relied solely upon the
representations, warranties, covenants and agreements made by the Seller herein
and the Purchaser has not relied upon any other representations or other
information (whether oral or written and including any projections or
supplemental data) made or supplied by or on behalf of the Seller or any
Affiliate, employee, agent or other representative of the Seller. The Purchaser
understands and agrees that it may not sell or dispose of any of the Shares
other than pursuant to a registered offering or in a transaction exempt from the
registration requirements of the Securities Act.
SECTION 4.06. Brokers. Other than CIBC Oppenheimer Corp. ("CIBC"), no
broker, finder or investment banker is entitled to any brokerage, finder's or
other fee or commission in connection with the transactions contemplated by this
Agreement and the Ancillary Agreements based upon arrangements made by or on
behalf of the Purchaser. The fees and expenses of CIBC are the sole
responsibility of the Purchaser.
SECTION 4.07. Financial Ability. The Purchaser has access on
commercially reasonable terms to financing (including private or public equity
or debt, including high yield) sufficient to enable it to consummate the
transactions contemplated by this Agreement.
SECTION 4.08. EXCLUSIVITY OF REPRESENTATIONS. THE REPRESENTATIONS AND
WARRANTIES MADE BY THE PURCHASER IN THIS AGREEMENT ARE IN LIEU OF AND ARE
EXCLUSIVE OF ALL OTHER REPRESENTATIONS AND WARRANTIES, INCLUDING ANY IMPLIED
WARRANTIES. THE PURCHASER HEREBY DISCLAIMS ANY SUCH OTHER OR IMPLIED
REPRESENTATIONS OR WARRANTIES, NOTWITHSTANDING THE DELIVERY OR DISCLOSURE TO THE
SELLER OR ITS OFFICERS, DIRECTORS, EMPLOYEES, AGENTS OR REPRESENTATIVES OF ANY
DOCUMENTATION OR OTHER INFORMATION.
ARTICLE V
ADDITIONAL AGREEMENTS
SECTION 5.01. Conduct of Business Prior to the Closing. (a) Unless the
Purchaser otherwise agrees and except as otherwise set forth herein or in the
Disclosure Schedule, between the date of this Agreement and the Closing, the
Seller and each Acquired Subsidiary will (i) conduct the Business only in the
ordinary course and (ii) use commercially reasonable efforts to keep available
to the Purchaser the services of the key employees of the Business (except for
retirements in the ordinary course); provided, that the Seller shall not be
required to implement
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27
any stay incentive program or otherwise increase any Business Employee's
compensation in order to retain such Business Employee.
(b) Except as expressly provided in this Agreement or the Disclosure
Schedule, between the date of this Agreement and the Closing, no Acquired
Subsidiary will do or agree to do any of the following without the prior written
consent of the Purchaser (which consent shall not be unreasonably withheld or
delayed):
(i) except in the ordinary course of business, grant any Lien,
other than a Permitted Lien, on any Asset;
(ii) establish or materially increase any bonus, insurance,
severance, deferred compensation, pension, retirement, profit sharing,
stock option (including the granting of stock options, stock
appreciation rights, performance awards or restricted stock awards),
stock purchase or other employee benefit plan, or otherwise materially
increase the compensation payable to or to become payable to any
officers or key employees of any Business by any Acquired Subsidiary,
except in any case described above, (A) for payments or obligations for
which the Seller remains liable, (B) with respect to Excluded Employees,
(C) increases in compensation made in the ordinary course of business
consistent with past practice, or (D) as may be required by law or
applicable employment agreement;
(iii) except in the ordinary course of business, enter into any
employment or severance agreement with any of the Business Employees
that is not terminable at will by the applicable Acquired Subsidiary
without payment or penalty (other than customary severance determined in
accordance with policies applicable generally to the employees of the
Acquired Subsidiaries);
(iv) except (A) in the ordinary course of business (including
lease renewals or extensions) or (B) for dividends, distributions or
transfers of Cash, Excluded Assets or Nontransferable Leases by the
Acquired Subsidiaries to the Seller or an Affiliate of the Seller or any
transfer or sale of Excluded Assets to any third party, sell, assign,
transfer, lease or otherwise dispose of any of the Assets having an
aggregate value exceeding $250,000; provided, however, that in no event
shall the Seller transfer funds from an account of an Acquired
Subsidiary such that such account has insufficient collected funds to
cover all outstanding items;
(v) (A) acquire (by merger, consolidation, acquisition of stock
or assets or otherwise) any corporation, partnership or other business
organization or division thereof, or (B) incur any indebtedness for
borrowed money (other than to the Seller) or issue any debt securities
or assume, grant, guarantee or endorse, or otherwise as an accommodation
become responsible for, the obligations of any Person, or make any
loans, advances or distributions of cash (other than by the Acquired
Subsidiaries to the Seller or one of its Affiliates pursuant to clause
(iv) above);
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(vi) except in accordance with Law or changes required by GAAP,
materially change any method of accounting or accounting practice used
by any Acquired Subsidiary (other than with respect to Excluded Assets);
(vii) issue or sell any additional shares of the capital stock
of, or other equity interests in, any Acquired Subsidiary or securities
convertible into or exchangeable for such shares or equity interests, or
issue or grant any options, warrants, calls, subscription rights or
other rights of any kind to acquire additional shares of such capital
stock, such other equity interests, or such securities;
(viii) except as permitted elsewhere in this Article V amend,
modify, extend or enter into any Material Contract;
(ix) except as permitted elsewhere in this Article V amend,
modify, extend or enter into any Real Property Lease;
(x) other than in the ordinary course of business, enter into
any transaction or agreement with any affiliate of the Seller (other
than an Acquired Subsidiary);
(xi) except for purchase of supplies and inventory and capital
expenditures made in the ordinary course of business and consistent with
past practice, purchase or acquire any asset, property, business or
Person, or make any investment (other than short-term investments in
Cash) in any Person, in excess of $250,000 individually and $500,000 in
the aggregate;
(xii) engage in a going-out-of-business or store liquidation
sale at any store included in the Business (other than ordinary course
mark-downs of inventory);
(xiii) amend the Certificate of Incorporation, other
constitutive documents or By-laws of any Acquired Subsidiary;
(xiv) except as set forth in Section 3.21(e) of the Disclosure
Schedule, transfer any employee in the position of store manager,
district manager, regional staff or corporate music staff from any
Acquired Subsidiary to any other Affiliate; or
(xv) receive from the Seller or any of its Affiliates a transfer
of a material amount of inventory, other than transfers of prerecorded
music made in the ordinary course of business as directed by the Senior
Buyers of the Music Subsidiaries and as contemplated by Section 5.23.
Notwithstanding anything contained in this paragraph (b), in the event that any
Real Property Lease shall, between the date hereof and the Closing Date, by its
terms expire, the Seller shall conduct negotiations concerning a possible
extension of such Real Property Lease as the Seller deems appropriate, and the
Real Property Lease shall be treated pursuant to Section 5.20 or 5.21 of this
Agreement, as appropriate.
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SECTION 5.02. Access to Information; Audited Financial Statements. (a)
From the date hereof until the Closing (upon reasonable notice to and approval
of the Seller, which shall not be unreasonably withheld) during normal business
hours with the purpose that an uninterrupted and efficient transfer of the
Business may be accomplished, the Seller shall, and shall cause the officers,
directors, employees, auditors and agents of each Acquired Subsidiary to (i)
afford the officers, employees and authorized agents and representatives
(including prospective lenders) of the Purchaser reasonable access to the
offices, properties, books and records of each Acquired Subsidiary and (ii)
furnish to the officers, employees and authorized agents and representatives of
the Purchaser such additional financial and operating data and other information
regarding the Business and the Assets as the Purchaser may from time to time
reasonably request; provided, however, that such investigation shall not
unreasonably interfere with any of the businesses or operations of the Seller or
any Affiliate of the Seller, including the Acquired Subsidiaries and the
Business. In addition, between the date hereof and the Closing, the Seller shall
make available to the Purchaser upon reasonable times and notice, the officers
and employees of the Business in order to facilitate the Purchaser's proper
conduct of the Business after the Closing and communications with its
workforce.
(b) Attached hereto as Section 5.02 of the Disclosure Schedule are the
audited carve-out balance sheets of Blockbuster Music (which is not the Business
and as defined in the notes to the audited Carve-out balance sheet) at December
31, 1997 and 1996, together with the related statements of income and cash
flows for the periods then ended, accompanied by the report of PriceWaterhouse
Coopers LLP ("PriceWaterhouse"), the independent public accountants to the
Seller. The Seller shall use commercially reasonable efforts (but in no event
shall the Seller be required to pay any fees or other payments) to cause
PriceWaterhouse to consent to the inclusion of its report in any financing
materials created by the Purchaser or any filings made by the Purchaser pursuant
to the Exchange Act or Securities Act; provided, however, there shall be no
requirement on the Seller to make such request in any circumstance where the
Seller reasonably believes such financing materials or filings are inaccurate,
contain a material omission or misstatement or otherwise fail to be in
accordance with applicable Laws. The Seller shall, and shall cause its officers,
employees and representatives to, provide reasonable access to the Purchaser and
the Purchaser's independent auditors to the working papers of PriceWaterhouse
relating to the audited financial statements referred to in this Section 5.02.
Under no circumstances shall the Seller or any such officer, employee or
representative have any liability whatsoever (other than as expressly provided
in this Agreement) to the Purchaser, the Purchaser's independent auditors or
otherwise to any Person or Governmental Authority, including under the
Securities Act or the Exchange Act in connection with such financial statements
or the preparation or use thereof and the Purchaser shall indemnify and hold the
Seller and each such Person harmless against any and all such liability. The
Seller shall pay all expenses in connection with the Seller's and
PriceWaterhouse's preparation of such financial statements.
SECTION 5.03. Confidentiality. The terms of the letter agreement dated
as of February 20, 1998 (the "Confidentiality Agreement") between Viacom and the
Purchaser are hereby incorporated herein by reference and shall continue in full
force and effect until the Closing, at which time such Confidentiality Agreement
and the obligations of the Purchaser under this
<PAGE> 36
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Section 5.03 shall terminate; provided, however, that the Confidentiality
Agreement shall terminate only in respect of that portion of the Evaluation
Material (as defined in the Confidentiality Agreement) exclusively relating to
the transactions contemplated by this Agreement. If this Agreement is, for any
reason, terminated prior to the Closing, the Confidentiality Agreement shall
nonetheless continue in full force and effect; and provided, further, that
paragraph 2 of the Confidentiality Agreement shall terminate upon the execution
and delivery of this Agreement. The Purchaser may disclose the Evaluation
Material to prospective lenders.
SECTION 5.04. Regulatory and Other Authorizations; Consents. (a) The
Purchaser shall use its reasonable best efforts promptly to obtain all
authorizations, consents, orders and approvals of all federal, state and local
regulatory bodies and officials that may be or become necessary for its
execution and delivery of, and the performance of its obligations pursuant to,
this Agreement and the Ancillary Agreements and the Seller will cooperate with
the Purchaser in promptly seeking to obtain all such authorizations, consents,
orders and approvals; it being understood that neither the Purchaser nor the
Seller shall be required to pay any fees or other payments (other than normal
filing fees) to any such regulatory bodies or officials in order to obtain any
such authorization, consent, order or approval. Neither the Purchaser nor the
Seller will take any action that would have the effect of delaying, impairing or
impeding the receipt of any required approvals.
(b) Each party hereto agrees to make an appropriate filing of a
Notification and Report Form pursuant to the HSR Act with respect to the
transactions contemplated hereby within ten (10) Business Days after the date
hereof and to supply promptly any additional information and documentary
material that may be requested pursuant to the HSR Act. The Purchaser agrees to
use commercially reasonable efforts to take any and all reasonable steps
necessary to avoid or eliminate each and every impediment under any antitrust
law that is asserted by any governmental antitrust authority or any other party.
Each party shall bear one-half of the filing fees associated with the HSR
filings.
(c) Each party hereto agrees to use its commercially reasonable efforts
in obtaining any other consents and approvals which may be required in
connection with the transactions contemplated by this Agreement and the
Ancillary Agreements; provided, however, that neither the Purchaser nor the
Seller shall be required to compensate any third party to obtain any such
consent or approval.
SECTION 5.05. Intercompany Accounts. On the Closing Date, the Seller
will contribute, or cause to be contributed, to the capital of the Acquired
Subsidiaries all amounts for borrowed money then owing from the Acquired
Subsidiaries to the Seller and the Seller's Affiliates, together with the
amounts of any accounts receivable or other payables owing from the Acquired
Subsidiaries to the Seller or any of the Seller's Affiliates less all amounts
for borrowed money, accounts payable or other accrued liabilities then owing
from the Seller and its Affiliates to the Acquired Subsidiaries and such debts
and accounts shall be cancelled; provided, however, that intercompany accounts
for trade payables and receivables shall not be cancelled to the extent they
relate to the purchase or return of inventory and supplies by the Acquired
Subsidiaries without
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31
any charge for handling, storage or any distribution services performed by the
Seller or any of its Affiliates. No amounts shall be reflected on the Initial WC
Statement or the Final WC Statement in respect of any debts for borrowed money
owing between the Acquired Subsidiaries, on the one hand, and the Seller and the
Seller's Affiliates, on the other. During the period before the tenth (10th)
Business Day prior to the Closing Date, the Seller shall not transfer from the
stores included in the Business any material amount of video rentals inventory
to be retained by the Seller.
SECTION 5.06. Insurance. Effective 12:01 a.m. on the Closing Date, each
Acquired Subsidiary shall cease to be insured by the Seller's or its Affiliates'
insurance policies. Following the Closing Date, the Seller shall retain
liability for self-insured workers' compensation claims with respect to the
Acquired Subsidiaries and the Business to the extent such claims relate to any
event occurring prior to the Closing Date. The Purchaser shall fully indemnify
the Seller and its Affiliates with respect to any liability, claim, damage or
expense of any kind whatsoever arising out of or relating to any workers'
compensation claim to the extent such claims relate to any event occurring on or
after the Closing Date. The Purchaser shall cooperate with the Seller and its
Affiliates in order to obtain the return or release of bonds or securities or
indemnifications given by the Seller or any of its Affiliates (and listed in
Section 5.06 of the Disclosure Schedule) to any state in connection with
workers' compensation self-insurance or utilities with respect to the Business
and the Acquired Subsidiaries; and, in order to effectuate such return or
release, the Purchaser shall, to the extent required by any state, post its own
bonds, letters of credit, indemnifications or other securities in substitution
therefor.
SECTION 5.07. Blockbuster Gift Cards.
(a) During the time period that, pursuant to the Transition License
Agreement, the Purchaser or an Acquired Subsidiary is permitted to and actually
does operate a particular store listed on Section 3.12(a) of the Disclosure
Schedule (each a "Purchaser Store") under the name "Blockbuster Music," (as to
any particular Purchaser Store, the "License Period"), the Acquired Subsidiaries
may sell Blockbuster Gift Cards in such Purchaser Stores in accordance with this
Section 5.07. Promptly following the date hereof, the Seller shall cause to be
ordered, and as soon as practicable following the Closing Date provided, to the
Purchaser Blockbuster Gift Cards ("Purchaser's Cards"), in such denominations
and with such design and graphics as the Seller customarily provides to its
franchisees (or the franchisees of its Affiliates) in an aggregate amount not to
exceed $25 million. The Purchaser shall pay all actual third party costs
associated with the production, delivery, use and tracking of Purchaser's Cards
on an as-incurred basis. The Purchaser shall implement commercially reasonable
and appropriate security measures to protect against loss or theft of such
Purchaser's Cards. After the removal of the Blockbuster Music name from any
store, but no later than the expiration of the time period specified in the
Transition License Agreement for any Purchaser Store, the Purchaser shall return
to the Seller or a designee specified by the Seller any Purchaser's Cards unsold
at such Purchaser Store. The Purchaser shall be responsible for all shrink
associated with the Purchaser's Cards provided to the Purchaser pursuant to this
Section 5.07.
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(b) Promptly and in all events within ten (10) Business Days after the
removal of the Blockbuster Music name from any Purchaser Store, the Purchaser
shall return or shall cause to be returned to the Seller or a designee specified
by the Seller at such location as the Seller shall designate any Purchaser's
Cards unsold at such Purchaser Store.
(c) For the License Period plus six (6) months (the "Tail") for any
Purchaser Store, the Acquired Subsidiaries shall redeem Blockbuster Gift Cards.
(d) At the end of each month of the License Period and Tail for any
particular Purchaser Store, the Seller, through its relationship with the third
party processor of gift cards, Value Link, shall prepare reports detailing (i)
redemptions at stores owned or franchised by the Seller or its Affiliates and
operating under the Blockbuster name (each a "Blockbuster Store") of
Purchaser's Cards and (ii) redemptions at Purchaser Stores of Blockbuster Gift
Cards other than Purchaser's Cards. Such redemptions shall be netted against
each other and an appropriate payment made within two (2) Business Days after
receipt of such report. Payment by either party to a Governmental Authority of
any escheat obligation related to a Blockbuster Gift Card sold by that party,
its Affiliates or franchisees will be treated as a redemption by the party
making such escheat payment. Each of Purchaser and Seller shall be solely liable
under escheat and other applicable Laws for funds collected by it for sales of
Blockbuster Gift Cards and each shall hold the other harmless and indemnify the
other for any and all Losses the other may incur, suffer or be subject to
arising out of, from, or in connection with such funds and such sales.
(e) At the end of the last License Period, Purchaser shall return to the
Seller, or a designee specified by the Seller at such location as the Seller
shall designate, all unsold Purchaser's Cards. Promptly following the end of the
last Tail and in all events within ten (10) days thereof, Purchaser shall
establish an irrevocable letter of credit with a national banking institution
reasonably acceptable to the Seller, in favor of the Seller on terms reasonably
acceptable to the Seller and in an amount equal to eighty percent (80%) of (i)
the total face amount of all Purchaser's Cards delivered to the Purchaser by the
Seller less (ii) the face amount of all (A) Purchaser's Cards redeemed and
reflected in monthly reports and (B) Purchaser's Cards returned to the Seller
pursuant to this Section 5.07. The amount of such letter of credit shall be
established every six months and the letter of credit will be released when its
required amount is $250,000 or less.
(f) Until December 31, 1999, neither the Purchaser nor any Affiliate of
the Purchaser shall process gift cards using Value Link or any software or other
electronic systems that are currently utilized by Blockbuster Entertainment
Group and its Affiliates in connection with processing Blockbuster Gift Cards at
any store at which the Purchaser, any of its Affiliates, or the Acquired
Subsidiaries rent video tape; provided, however, nothing herein shall prevent
the Purchaser or its Affiliates from using any similar software or other
electronic system of any other Person.
(g) It is specifically understood and agreed that any breach of Section
5.07(f) by the Purchaser will result in irreparable injury to the Seller, its
Affiliates, or its franchisees, that the remedy at law alone will be an
inadequate remedy for such breach and that, in addition to any
<PAGE> 39
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other remedy for such breach, the Seller shall be entitled to seek to enforce
the specific performance of Section 5.07(f) by the Purchaser or its Affiliate
through both temporary and permanent injunctive relief, without the necessity of
proving actual damages, but without limitation of their rights to recover such
damages.
SECTION 5.08. Leased Properties. (a) The Seller shall use its
commercially reasonable efforts, and the Purchaser shall use its commercially
reasonable efforts to cooperate fully with the Seller to obtain promptly from
the appropriate landlords any consents the Seller reasonably determines to be
required to be obtained as a result of the transactions contemplated by this
Agreement. The Purchaser hereby acknowledges that, in some cases, the Seller may
elect to send notices to various landlords, rather than requests for consents,
which notices will describe the transaction contemplated by this Agreement, and
some of which may seek the "acknowledgment" of a particular landlord to the
transfer of a particular lease.
(b) Neither the Seller nor the Purchaser shall be required to pay
consideration or grant any rights, guarantee or concession to any third party to
obtain any of the consents, releases, acknowledgements or approvals
("Approvals") described in this Section 5.08.
(c) Anything in this Agreement to the contrary notwithstanding, this
Agreement shall not constitute an agreement to transfer any contract, lease or
permit or any claim, right or benefit arising thereunder or resulting therefrom
if an attempted transfer thereof, without the consent of a third party thereto,
would constitute a breach or other contravention thereof, be ineffective with
respect to any party thereto or in any way adversely affect the rights of the
Purchaser or the Seller thereunder.
(d) If, on the Closing Date, any consent which is required to be
obtained with respect to such Nontransferable Leases is not obtained, the
Seller, together with the Purchaser's full cooperation, shall continue to use
all commercially reasonable efforts to obtain such Approval. Each
Nontransferable Lease shall be transferred by the relevant Music Subsidiary to
the Seller or an Affiliate of the Seller, and the Business to which such
Nontransferable Leases relates shall be held for the Purchaser's benefit and
shall be managed and operated by the Seller or its Affiliates for the
Purchaser's account in the manner hereinafter provided, with all gains, income,
losses, Taxes or other items generated thereby to be for the Purchaser's
account. Notwithstanding the foregoing, if any Nontransferable Lease cannot be
managed and operated by the Seller or its Affiliates in the manner hereinafter
provided (such that the Purchaser does not receive an economic benefit or loss,
as the case may be, in respect of the business conducted at such Nontransferable
Lease, that is substantially equivalent to the ownership thereof), then (i) the
Seller shall pay the Purchaser an amount equal to the Purchase Price multiplied
by a fraction, the numerator of which is the revenues of the Business conducted
at the location of such Nontransferable Lease during the prior four consecutive
fiscal quarter period and the denominator of which is the total revenues of the
Business during the prior four consecutive fiscal quarter period and (ii) the
Seller shall have no obligations whatsoever, hereunder or otherwise to the
Purchaser in respect of such Nontransferable Lease, which shall remain the
property of the Seller; provided, however, the Seller shall not make any
payments to the Purchaser pursuant to subclause (i) of this sentence with
respect to any Secondary Store. The Purchaser shall indemnify, defend
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and hold the Seller and its Affiliates harmless from and against all Losses
incurred or asserted as a result of the Seller's or any Affiliate's post-Closing
implementation of the written instructions and policies of the Purchaser
relating to the holding of such Nontransferable Leases and the lawful management
and operation of the business related thereto, including the amount of any Taxes
imposed upon or incurred by the Seller or any Affiliate as a result thereof
(other than as may arise out of Seller's gross negligence). Subject to
applicable Law, the Seller shall, and shall cause its respective Affiliates to,
in respect to any such Nontransferable Leases and the business related thereto,
use all commercially reasonable efforts to follow and implement the reasonable
written instructions and policies of the Purchaser relating to the holding of
such Nontransferable Leases and the management and operation of the business
related thereto; provided, however, that the Seller and its Affiliates shall not
be required to finance the operations of any such business directly or
indirectly. Unless otherwise requested in writing by the Purchaser, the Seller
shall, and shall cause its respective Affiliates to, in respect of any such
Nontransferable Leases, (i) use all commercially reasonable efforts to maintain
such Nontransferable Leases, (ii) follow the written instructions of the
Purchaser relating to extensions pursuant to existing options in such
Nontransferable Leases or cancellation of such Nontransferable Leases and (iii)
forward original or copies of all written communications between the Seller or
its respective Affiliates and the landlord of any such Nontransferable Leases.
Upon receipt of all Approvals relating to any Nontransferable Leases, such
Nontransferable Leases shall be transferred by the Seller or an Affiliate of the
Seller to the relevant Music Subsidiary, the Seller shall have no further
obligations in respect of the Real Property covered by such Nontransferable
Leases and any renewal of such Nontransferable Leases shall be the
responsibility of the Purchaser and shall in no way impose any continuing or
additional obligations upon the Seller.
(e) Subject to the Seller's following the Purchaser's written
instructions described in 5.08(d) above, all post-Closing obligations of the
Seller under Nontransferable Leases governed by Section 5.08(d) shall be
undertaken at the Purchaser's expense.
SECTION 5.09. Defaulted Leases. In the event that the Purchaser fails to
pay rent under any Real Property Lease (a "Defaulted Lease") acquired by the
Seller to the Purchaser in connection with the transactions contemplated hereby
for which the Seller or any of its Affiliates remains liable as a guarantor (the
"Guaranteed Leases"), the Purchaser hereby agrees that it will apply all
revenues derived from the business conducted at the Real Property subject to
such Defaulted Lease to the payment of such rent.
SECTION 5.10. Amendment of Real Property Leases. The Purchaser shall
not, without the Seller's prior written consent, extend the term (other than
through the exercise of any option existing in any Guaranteed Lease on the date
of this Agreement) of any Guaranteed Lease under which the Seller or any of its
Affiliates remains liable as guarantor. The Seller shall have no obligation to
consent to or agree to remain liable under any Guaranteed Lease should the
Purchaser amend or modify any such Guaranteed Lease in a manner which would
materially increase or expand (monetarily or otherwise) the Seller's or any of
its Affiliates' potential liability or obligation under any Real Property Lease.
Notwithstanding the immediately preceding sentence, the Seller shall give its
consent to any such amendment or modification of a Real
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Property Lease upon delivery to it by the Purchaser of collateral or an
unconditional letter of credit, bond or guarantee of a Person who is, in the
Seller's sole judgment, creditworthy.
SECTION 5.11. Certain Services and Benefits Provided by Affiliates. The
Purchaser acknowledges that the Business currently receives from the Seller and
its Affiliates certain administrative and corporate services and benefits,
including: warehousing; computer and information processing services; finance,
accounting and payroll services; safety and engineering services; treasury
services (including banking, insurance, administration, taxation and internal
audit); general administrative services; executive and management services;
legal services; and human resources services. Subject to the Transition Services
Agreement, the Purchaser further acknowledges that all such services and
benefits shall cease, and any agreement in respect thereof shall terminate with
respect to each Acquired Subsidiary as of the Closing Date.
SECTION 5.12. Further Action. (a) For a period of thirty-six (36) months
from and after the Closing Date each of the parties hereto shall execute and
deliver such documents and other papers and take such further actions as may be
reasonably required to carry out the provisions of this Agreement and the
Ancillary Agreements and give effect to the transactions contemplated hereby and
thereby. Without limiting the foregoing, from and after the Closing Date, (i)
the Seller shall do all things reasonably necessary, proper or advisable under
the applicable Laws to put the Purchaser in effective possession, ownership and
control of the Assets and the Purchaser shall cooperate with the Seller for that
purpose and (ii) the Purchaser shall do all things reasonably necessary, proper
or advisable under applicable Laws to put the Seller in effective possession,
ownership and control of assets not included within the Assets and the Seller
shall cooperate with the Purchaser for that purpose. All cash and other
remittances, mail and other communications relating to the Assets or the
Business received by the Seller or postmarked at any time on or after the date
hereof shall be promptly turned over to the Purchaser by the Seller. All cash
and other remittances, mail and other communications relating to any business of
the Seller not included within the Business being purchased by the Purchaser
hereunder that are received by the Purchaser shall be promptly turned over to
the Seller by the Purchaser.
(b) The Seller shall deliver to the Purchaser as of the Closing Date all
books and records of the Acquired Subsidiaries, other than Tax Returns and as
may relate to the Excluded Assets. Notwithstanding the preceding sentence, the
Seller shall make available to the Purchaser Tax Returns of the Acquired
Subsidiaries to the extent such Tax Returns are for an Acquired Subsidiary on a
stand-alone basis. In no event will the Seller provide any combined or
consolidated Tax Return that includes an Acquired Subsidiary. The Seller shall
have the right to retain copies of all books and records of the Acquired
Subsidiaries relating to periods ending on or prior to the Closing Date. For a
period consistent with the Purchaser's normal document retention practices and
policies, the Purchaser shall maintain all books and records of the Acquired
Subsidiaries relating to periods ending on or prior to the Closing Date and
shall make them, and any individuals responsible for the maintenance of such
books and records, available to the Seller as reasonably requested at the
Purchaser's place of business. If at any time after the Closing, the Seller
requires a copy of any such book or record, it shall have the right to promptly
obtain a copy thereof (at the Seller's cost) from the Purchaser.
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SECTION 5.13. Letters of Credit and Guarantees. (a) The Purchaser agrees
to use its reasonable efforts to: (i) arrange for substitute letters of credit,
to replace (A) the letters of credit set forth in Section 5.13 of the Disclosure
Schedule entered into by or on behalf of the Seller or any Affiliate of the
Seller and outstanding as of the date of this Agreement in respect of or on
behalf of any Acquired Subsidiary or the Business and (B) any letters of credit
entered into by or on behalf of the Seller or any Affiliate of the Seller in
respect of or on behalf of any Acquired Subsidiary or the Business in the
ordinary course of business consistent with past practice on or after the date
of this Agreement and prior to the Closing Date (together, the "Seller LOCs");
or (ii) assume all obligations under each Seller LOC and obtain from the
creditor thereunder a full release of the Seller and its Affiliates; it being
understood that the Purchaser shall not be required to pay any fees or other
payments in order to obtain such release. The Purchaser further agrees that to
the extent the beneficiary under any Seller LOC refuses to accept any such
substitute letter of credit proffered by the Purchaser, the Purchaser shall
indemnify and hold harmless the Seller for any and all costs or expenses
incurred under or in connection with all such Seller LOCs, including the
Seller's expenses in maintaining such Seller LOCs whether or not any such Seller
LOC is drawn upon, and shall in any event promptly reimburse the Seller to the
extent any Seller LOC is called upon and the Seller makes any payment
thereunder.
(b) The Purchaser agrees to offer its guarantee in substitute of the
guarantees (the "Guarantees") entered into by or on behalf of the Seller or any
Affiliate of the Seller in respect of or on behalf of any Acquired Subsidiary or
the Business. The Purchaser shall prepare in consultation with the Seller a form
letter to be sent to the landlords that are the beneficiaries of the Guarantees
set forth in Section 5.13 of the Disclosure Schedule stating that the Purchaser
is offering its credit as guarantor in place of that of the Seller; it being
understood that the Purchaser shall not be required to pay any fees or other
payments or agree to any lease modifications in order to obtain such release.
SECTION 5.14. Sale of Real Property by the Purchaser. For a period of
twenty (20) years and as long as the Seller or any of its Affiliates remains
liable for $100 million or more under one or more Guaranteed Leases, the
Purchaser shall not sell, assign or transfer all or substantially all of any
such Guaranteed Lease to a Person (the "Transferee") other than to (a) an
adequately capitalized Affiliate of the Purchaser or (b) a Transferee having a
net worth at least equal to that of the Purchaser immediately prior to the
Closing Date (provided, however, that the Purchaser shall continue to remain
liable under all Real Property Leases that the Seller or any of its Affiliates
remains liable under; and, provided, further that nothing herein shall prohibit
any sublease on which Purchaser remains liable). In connection with any sale,
assignment or transfer of any Guaranteed Lease, the Purchaser shall not obtain a
release from any Guaranteed Lease unless the Seller and any of its Affiliates
shall also be released from such Guaranteed Lease to the same extent, such
release to be in writing and in form and effect satisfactory to the Seller. In
addition, the Purchaser shall provide the Seller with copies of any and all
notices of default or noncompliance received by the Purchaser.
SECTION 5.15. Excluded Assets. Prior to the Closing Date, the Seller, at
its expense, shall cause the Excluded Assets (other than those Excluded Assets
being used in the Business pursuant to the Ancillary Agreements) to be
transferred from the Acquired Subsidiaries.
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Following the Closing, the Purchaser shall return to the Seller or designee
specified by the Seller, at the Seller's expense, any Excluded Assets not
transferred from the Acquired Subsidiaries at the time of Closing.
SECTION 5.16. Financing. The representation set forth in Section 4.08 shall
remain accurate from the date hereof through the Closing Date.
SECTION 5.17. Intentionally Omitted.
SECTION 5.18. Additional Assets. (a) Within one hundred eighty (180) days
following the Closing Date, the Purchaser may, at its expense, take possession
of any items of furniture, fixtures and equipment which comprise the Assets,
which are located at any Excluded Leasehold, except such Assets (i) that are
being used or planned for use by any third party subtenant at such Excluded
Leasehold or (ii) that the landlord of such Excluded Leasehold has any rights
therein at the end of the leasehold term relating to such Excluded Leasehold
(the "Additional Assets"). Upon reasonable prior written notice to the Seller,
the Purchaser shall be afforded access to such Excluded Leaseholds in order to
remove any such Additional Assets, other than Excluded Leaseholds that are
being occupied by third party subtenants. Following the date hereof the Seller
shall give the Purchaser written notice in the event any Excluded Leasehold is
being sublet, terminated or otherwise disposed of, specifying the location of
such Excluded Leasehold. The Purchaser may, within ten (10) Business Days from
the receipt of such notice, remove any Additional Assets located at such
Excluded Leasehold and shall thereafter forfeit any rights to any Additional
Assets located at such Excluded Leasehold.
(b) The Purchaser shall take any Additional Asset on an "as is/where is"
basis, and acknowledges that the Seller makes no representation nor warranty
whatsoever with respect to any Additional Asset.
(c) The Purchaser shall indemnify and hold harmless the Seller and its
Affiliates from and against any Losses arising out of or relating to the removal
of any Additional Assets, including without limitation, any cost, expenses or
liabilities which the Seller or any of its Affiliates may incur in connection
with the restoration of any Excluded Leasehold required due to the removal of
any Additional Assets by the Purchaser.
SECTION 5.19. No Solicitation. The Seller and its Affiliates shall, for a
period of one year from the Closing Date, not solicit or recommend the
individuals listed on Section 5.19(a) of the Disclosure Schedule. Generalized
searches for employees by the use of help wanted advertisements or the
engagement of search firms to engage in searches that are not targeted or
focused on the employees of any of the Acquired Subsidiaries or the Purchaser
shall not constitute a solicitation or recommendation prohibited by this
Section 5.19. It is agreed that paragraph 11 of the Confidentiality Agreement
between the Seller and the Purchaser dated February 20, 1998 is hereby amended
such that the second sentence of such paragraph shall apply only to those
individuals identified on Section 5.19(b) of the Disclosure Schedule and the
restrictions set forth in such sentence shall survive until the first
anniversary of the Closing Date.
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SECTION 5.20. Expiring Real Property Lease Purchase Price Adjustment. With
respect to Real Property Leases (other than Secondary Stores) that terminate by
their terms on or prior to the Closing Date, the Purchaser acknowledges that the
Seller is and, between the date hereof and Closing Date shall be, negotiating
renewal agreements for such Real Property Leases. The Purchaser hereby agrees
that upon the conclusion of the Seller's negotiation of proposed definitive
documentation for each such renewal, the Seller shall deliver to the Purchaser a
copy thereof. Within five (5) Business Days of receipt by a party designated by
the Purchaser, which designee may be changed in writing pursuant to the notice
provisions herein from time to time, the Purchaser shall notify the Seller in
writing to either execute or not execute such lease renewal agreement. If the
Purchaser shall fail to respond in writing within such five (5) Business Day
period, the Purchaser shall be deemed to have accepted the lease renewal
agreement and to have authorized the Seller to execute the same. If the
Purchaser shall direct the Seller not to execute the lease renewal agreement, or
in the event a renewal agreement cannot be reached with respect to any Real
Property Lease, such Real Property Lease shall be allowed to expire on its terms
and the Purchase Price shall be decreased by an amount equal to the Purchase
Price multiplied by a fraction, the numerator of which is the revenues of the
Business conducted at the location of such expired Real Property Lease during
the twelve (12) month period ending on the last day of the last full month
immediately preceding the date of such expiration and the denominator of which
is the total revenues of the Business during such twelve month period. The
provisions of this Section 5.20 shall not apply to any Secondary Store.
SECTION 5.21. Anniversary Lease Purchase Price Adjustment. (a) If (i) on
the Closing Date any Real Property Lease other than those listed on Schedule
3.21(c) of the Disclosure Schedule is a month-to-month lease and (ii) at the
end of the first anniversary of the Closing Date (the "Anniversary Purchase
Price Adjustment Date"), the Purchaser or any of its Affiliates is no longer the
occupant of all or a substantial portion of the premises underlying such Real
Property Lease then the Purchaser shall be entitled to a reduction in the
Purchase Price (the "Anniversary Purchase Price Adjustment") as follows:
(A) if, during the period from the Closing Date until the Anniversary
Purchase Price Adjustment Date, the Purchaser or any of its Affiliates had been
the occupant of all or a substantial portion of such leased premises for a
period of three months or less, then the Purchaser shall be entitled to an
Anniversary Purchase Price Adjustment equal to the product of:
(x) The Purchase Price and
(y) a fraction, the numerator of which is the revenues of the Business
conducted at such premises during the twelve (12) month period ending
on the last day of the last full month immediately preceding the date
of termination of such Real Property Lease, and the denominator of
which is the total revenues of the Business during such twelve (12)
month period; or
(B) if, during the period from the Closing Date until the Anniversary
Purchase Price Adjustment Date, the Purchaser or any of its Affiliates had been
the occupant of all or a
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substantial portion of such premises for more than three months, then the
Purchaser shall be entitled to an Anniversary Purchase Price Adjustment equal to
the product of:
(x) a fraction, the numerator of which equals 12 less the number
of months (or portion thereof) which the Purchaser or any of its
Affiliates occupied such premises following the Closing Date and the
denominator of which is 12; and
(y) the product of (1) Purchase Price and (2) a fraction, the
numerator of which is the revenues of the Business conducted at such
premises during the twelve (12) month period ending on the last day of
the last full month immediately preceding the date of termination of
such Real Property Lease and the denominator of which is the total
revenues of the Business during such twelve (12) month period.
(b) On the Anniversary Purchase Price Adjustment Date, the Purchaser shall
deliver to the Seller a statement, executed by a duly authorized officer of the
Purchaser, setting forth in detail the Purchaser's good faith calculation of the
Anniversary Purchase Price Adjustment. During the sixty (60) Business Days
immediately following receipt of the Purchaser's statement (the "Anniversary
Adjustment Statement"), the Seller and its representatives will be permitted to
review, in the Purchaser's offices, the Purchaser's books and records and
working papers relating to the Anniversary Adjustment Statement, and the
Purchaser shall make reasonably available in the Purchaser's offices the
individuals responsible for the preparation of the Anniversary Statement in
order to respond to the reasonable inquiries of the Seller; provided, however
there shall be no Anniversary Purchase Price Adjustment in the event the
Purchaser enters into a lease in the same or an approximate location with the
same landlord.
(c) The Seller shall notify the Purchaser in writing within such sixty (60)
Business Day period if the Seller disagrees with the Purchaser's calculation of
the Anniversary Purchase Price Adjustment (the "Anniversary Notice"), which
Anniversary Notice shall set forth in reasonable detail the basis for such
dispute. If no Anniversary Notice is received by the Purchaser within such sixty
(60) Business Day period, the Anniversary Adjustment Statement shall be deemed
to have been accepted by the Seller, and shall become final and binding upon the
parties.
(d) During the twenty (20) Business Days immediately following the delivery
of the Anniversary Notice, the Seller and the Purchaser shall seek in good faith
to resolve any differences which they may have with respect to any matter
specified in the Anniversary Notice. If at the end of such twenty Business Day
period the Seller and the Purchaser have been unable to agree on the Anniversary
Purchase Price Adjustment, the Seller and the Purchaser shall submit to the
Independent Accounting Firm for review and resolution any and all matters which
remain in dispute with respect to the Anniversary Notice. The Independent
Accounting Firm shall use commercially practicable efforts to make a final
determination, binding on the parties hereto, of the Anniversary Purchase Price
Adjustment, and such final determination shall be the Anniversary Purchase Price
Adjustment. The cost of the Independent Accounting Firm's review and
determination shall be paid by the party which has proposed an amount of
Anniversary Purchase Price Adjustment that is the greatest amount different from
the final determined amount. During such twenty (20) Business Day review by the
Independent Accounting Firm, the Purchaser shall
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make available to the Independent Accounting Firm interviews with such
individuals and such information, books and records as may be reasonably
required by the Independent Accounting Firm to make its final determination.
(e) The Seller shall pay to the Purchaser within five (5) Business Days
after the Anniversary Purchase Price Adjustment becomes final and binding on
the parties hereto, together with interest thereon calculated separately for
each Real Property Lease from the later of (i) the date such Real Property Lease
was terminated or (ii) the date the Purchaser ceased to occupy the leased
premises which is the subject of each such Real Property Lease until the date of
payment at the Interest Rate.
(f) The Purchaser agrees that following the Closing Date through the date
that payment is made pursuant to Section 5.21, it will not take any actions
with respect to any books or records on which the Anniversary Purchase Price
Adjustment is made or that would make it impossible or impracticable to
calculate the Anniversary Purchase Price Adjustment in the manner and utilizing
the methods required hereby. With respect to payments and computations made
pursuant to Section 5.21, the provisions of Section 2.07 hereof shall apply.
(g) The provisions of this Section 5.21 shall not apply to any Secondary
Store.
SECTION 5.22. Secondary Store Purchase Price Adjustment. From the date
hereof until the Closing Date, if for any reason a Real Property Lease on
Schedule 3.12(a) not identified with an asterisk (such Real Property Lease, a
"Secondary Store") shall expire or shall be terminated, then the Purchase Price
shall be increased by the amount set forth on Schedule 5.22 for each such
Secondary Store.
SECTION 5.23. Treatment of Inventory. Prior to Closing Date the Seller
shall (a) process requested in stock music inventory from its distribution
center to the stores in the ordinary course and consistent with past practices
and (b) use its commercially reasonable best efforts to deliver substantially
all of its returnable music inventory at its distribution center to the vendor
or to a third party processor with instructions to process such returnable music
inventory to the vendors. In addition, prior to the Closing, returnable
inventory located in stores shall be pulled in the ordinary course (considering
reasonable seasonal selling expectations) and substantially processed to a third
party processor with instructions to process same to the vendors. From one week
after the date hereof and for so long as inventory of the Acquired Subsidiaries
is located at Seller's distribution center, no returnable inventory of the
Acquired Subsidiaries will be commingled with assets of entities other than the
Acquired Subsidiaries. The Seller shall, and shall cause its officers, employees
and representatives to, cooperate with the reasonable requests of the Purchaser,
at the Purchaser's expense, in the planning and execution of a physical
inventory to be conducted on or after the Closing Date by the Purchaser. During
the period prior to Closing, the Seller shall cause the management employees
responsible for placing orders for inventory for the Business to consult with
the Purchaser concerning the inventory to be ordered between the execution of
this Agreement and the Closing.
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ARTICLE VI
EMPLOYEE MATTERS
SECTION 6.01. Employees. (a) Set forth in Section 6.01(a) of the Disclosure
Schedule is a true and complete list showing the names and current annual salary
rates of all of the Business Employees as of the date hereof, which includes for
each such Person the amounts paid or payable as a base salary and lists any
other compensation arrangements for Business Employees for 1998, including
bonuses or other compensation arrangements.
(b) The Purchaser shall immediately after the Closing cause the Acquired
Subsidiaries to continue to employ all of the Business Employees as of the
Closing Date who are employed, (including Business Employees on leave of absence
but excluding Business Employees on long-term disability) at the Music
Subsidiaries on the Closing Date at rates of compensation which are no less than
their rates of compensation prior to the Closing Date. The Seller shall, prior
to the Closing, transfer to itself (or one of its Affiliates) and shall,
immediately after the Closing, employ all employees of the Acquired Subsidiaries
who are not Business Employees.
(c) For the one-year period commencing on the Closing Date, the Purchaser
agrees to provide (or cause the Acquired Subsidiaries to provide) the Business
Employees with health, welfare and other employment benefits that in the
aggregate are substantially equivalent, and no less favorable in value than,
those provided to similarly situated employees of the Purchaser. Anything in
this Agreement to the contrary notwithstanding (including this Section 6.01),
the Purchaser and the Acquired Subsidiaries shall have the right to terminate
any Business Employee at any time at its sole discretion.
(d) The Seller or one of its Affiliates shall retain responsibility under
the Blockbuster Plans for all amounts payable by reason of, or in connection
with, any and all medical, dental and disability claims made by the Business
Employees after the Closing Date, to the extent such claims relate to events
which occurred prior to the Closing Date. Following and including the Closing
Date, the Purchaser shall be responsible for all other such benefit claims made
by the Business Employees whether under the Purchaser's medical, dental or
disability plans or otherwise.
(e) To the extent that service is relevant for eligibility and vesting
(and, solely for purposes of calculating entitlement to vacation and sick days,
benefit accrual) under any employee benefit plan, program or arrangement
established or maintained by the Purchaser or any of its Subsidiaries for the
benefit of the Business Employees, such plan, program or arrangement shall
credit such Business Employees for service prior to the Closing Date with the
Seller or any Affiliate or predecessor thereof. In addition, the Purchaser
shall, to the extent permitted by applicable Law, waive any pre-existing
conditions and recognize, for purposes of annual deductible and out-of-pocket
limits under its medical and dental plans, deductible and out-of-pocket expenses
paid by the Business Employees and their respective dependents under the
Seller's medical and dental plans in the calendar year in which the Closing
occurs.
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(f) The Seller shall take reasonable steps to transfer all Business
Employees employed by an entity other than an Acquired Subsidiary so that on the
Closing Date all the Business Employees shall be employed by an Acquired
Subsidiary.
SECTION 6.02. Retirement Plans. (a) It is agreed by both parties that the
Seller, Viacom or one of its Affiliates will continue to maintain all plans
providing retirement benefits for the Business Employees, with all benefit
accruals of such the Business Employees under such plans ceasing as of the
Closing Date. In particular, the VPP shall retain all liability for pension and
other benefits accrued by Business Employees based on pensionable service and
compensation prior to the Closing Date and neither the Purchaser nor any
Acquired Subsidiary shall have any responsibility with respect thereto. The
Purchaser shall cooperate with the Seller to provide such current information
regarding the Business Employees on an ongoing basis as may be necessary to
facilitate determinations of distribution eligibility of, and payments of
benefits to, the Business Employees under the VPP or any other plan which
continues to be maintained by the Seller or its Affiliates.
(b) As soon as practicable after the Closing, the Seller shall prepare and
deliver to the Purchaser a schedule listing the Business Employees who were
participants in the VIP prior to the Closing Date. The Purchaser agrees that it
shall designate a defined contribution plan (the "Purchaser's DC Plan") that
will accept a "direct rollover", within the meaning of Section 401(a)(31) of
the Code, of the account balances of the Business Employees participating in the
VIP, including any loan obligation that a Business Employee may have in his or
her account in the VIP. To the extent that a Business Employee transfers a loan
obligation to the Purchaser's DC Plan, the Purchaser's DC Plan shall continue to
accept repayments of such loan amounts and shall otherwise administer such
loans in accordance with their terms and ERISA until such loan amounts are
repaid or are foreclosed upon. Notwithstanding any other provision of this
Agreement, no Business Employee who rolls over his or her account into the
Purchaser's DC Plan shall have any rights to participate in or be entitled to
benefits under the Purchaser's DC Plan to an extent greater than the rights of
any employee of the Purchaser or of an affiliate of the Purchaser under the
terms of the Purchaser's DC Plan prior to the Closing Date, except as provided
in Section 6.01(e) and except that loans transferred from the VIP to the
Purchaser's DC Plan shall continue to have the terms such loans had prior to the
Closing Date. Neither the Purchaser, an affiliate of the Purchaser, nor any
Acquired Subsidiary shall have any obligation to make any matching contributions
with respect to any Business Employee, except as provided under the Purchaser's
DC Plan, on or after the Closing Date.
(c) The Purchaser shall provide, or cause an Acquired Subsidiary to
provide, continuation health care coverage to all Business Employees and their
qualified beneficiaries who incur a qualifying event on and after the Closing
Date in accordance with the continuation health care coverage requirements of
Section 4980B of the Code and Title I, Subtitle B, Part 6 of ERISA ("COBRA").
SECTION 6.03. Indemnity. Anything in this Agreement to the contrary
notwithstanding (including Section 10.01), the Purchaser hereby agrees from and
after the Closing to indemnify the Seller and its Affiliates against and hold
the Seller and its Affiliates harmless from any and all
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claims, losses, damages, expenses, obligations and liabilities (including costs
of collection, reasonable attorneys' fees and other costs of defense) arising
out of or otherwise in respect of (a) any claim made by any Business Employee
against the Seller or any of its Affiliates for any severance or termination
benefits related to any severance or termination on or after the Closing Date
pursuant to any Seller, Viacom or any Affiliate plan, (b) any suit or claim of
violation brought against the Seller or any of its Affiliates under the Workers
Adjustment and Retraining Notification Act for any actions taken by the
Purchaser or its Subsidiaries on or after the Closing Date with respect to any
facility, site of employment or operating unit, (c) any claim for payments of
benefits by Business Employees, or their respective beneficiaries under any plan
which the Purchaser continues to maintain on or after the Closing Date or with
respect to any benefit arrangement that the Purchaser has agreed hereunder to
maintain for such individuals (or in which the Purchaser has agreed hereunder to
permit such individuals to participate), to the extent arising from an event
occurring or circumstance existing on or after the Closing Date (d) any claim of
employment discrimination by the Purchaser, including discrimination in the
Purchaser's hiring or termination of any employees and (e) any claim of wrongful
discharge of any Business Employee (including constructive discharge) to the
extent arising from a discharge on or after the Closing Date. The Seller hereby
agrees to indemnify the Purchaser and its Affiliates and hold the Purchaser and
its Affiliates harmless from any and all claims, losses, damages, expenses,
obligations and liabilities (including costs of collection, reasonable
attorneys' fees and other costs of defense) arising out of or otherwise in
respect of any employee benefit plans sponsored or maintained by Viacom or its
Affiliates except to the extent that a plan is assumed by the Purchaser.
SECTION 6.04. No Third-Party Beneficiaries. Nothing in this Article VI or
elsewhere in this Agreement shall be deemed to make any Business Employees or
Former Business Employees third-party beneficiaries of this Agreement.
ARTICLE VII
TAX MATTERS
SECTION 7.01. Tax Indemnities. (a) From and after the Closing Date, the
Seller shall be responsible for, shall pay or cause to be paid, and shall
indemnify and hold harmless the Purchaser and the Acquired Subsidiaries against
all Taxes (i) imposed on the Seller or any member of an affiliated group with
which the Seller files a consolidated or combined income Tax Return (other than
the Acquired Subsidiaries) with respect to any Tax period that ends on or before
the Closing Date or includes the Closing Date and (ii) imposed on the Acquired
Subsidiaries with respect to any Tax period or portion thereof that ends on or
before the Closing Date, in excess of the amount reserved for Taxes in the
Financial Statements; provided, however, that no indemnity shall be provided
under this Agreement for any Tax resulting from any transaction of the Acquired
Subsidiaries occurring on the Closing Date but after the Closing that is not in
the ordinary course of business other than any Tax incurred as a result of the
Election.
(b) From and after the Closing Date, the Purchaser and the Acquired
Subsidiaries shall, jointly and severally, be responsible for, shall pay or
cause to be paid, and shall indemnify
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and hold harmless the Seller and its Affiliates against all Taxes imposed on or
with respect to the Acquired Subsidiaries that are not subject to
indemnification pursuant to paragraph (a) of this Section 7.01, including Taxes
resulting from any transaction of the Acquired Subsidiaries occurring on the
Closing Date, but after the Closing, that is not in the ordinary course of
business other than any Tax incurred as a result of any Election.
(c) Payment by the indemnitor of any amount due to the indemnitee under
this Section 7.01 shall be made within ten (10) days following written notice by
the indemnitee that payment of such amounts to the appropriate Tax authority is
due by the indemnitee, provided that the indemnitor shall not be required to
make any payment earlier than five (5) days before it is due to the appropriate
Tax authority. If the Seller receives an assessment or other notice of Tax due
with respect to the Acquired Subsidiaries for any period ending on or before the
Closing Date for which the Seller is not responsible, in whole or in part,
pursuant to Section 7.01(a) because all or a part of such Tax does not exceed
the amount reserved for Taxes in the Financial Statements, and the Seller or any
of its Affiliates pay such Tax, then the Purchaser or an Acquired Subsidiary
shall pay to the Seller, in accordance with the first sentence of this Section
7.01(c), the amount of such Tax for which the Seller is not responsible. In
the case of a Tax that is contested in accordance with the provisions of Section
7.03, payment of the Tax to the appropriate Tax authority will not be considered
to be due earlier than the date a final determination to such effect is made by
such Tax authority or a court.
(d) For purposes of this Agreement, in the case of any Tax that is imposed
on a periodic basis and is payable for a period that begins before the Closing
Date and ends after the Closing Date, the portion of such Taxes payable for the
period ending on the Closing Date shall be (i) in the case of any Tax other than
a Tax based upon or measured by income, the amount of such Tax for the entire
period multiplied by a fraction, the numerator of which is the number of days in
the period ending on the Closing Date and the denominator of which is the number
of days in the entire period and (ii) in the case of any Tax based upon or
measured by income, the amount which would be payable if the taxable year ended
on the Closing Date. Any credit shall be prorated based upon the fraction
employed in clause (i) of the preceding sentence. In the case of any Tax based
upon or measured by capital (including net worth or long-term debt) or
intangibles, any amount thereof required to be allocated under this Section
7.01(d) shall be computed by reference to the level of such items on the Closing
Date.
SECTION 7.02. Refunds and Tax Benefits. (a) The Seller shall be entitled to
any refund or credit of Taxes (including any interest paid or credited with
respect thereto), and the Purchaser shall promptly pay to the Seller any such
refund or credit of Taxes (including any interest paid or credited with respect
thereto) received by the Purchaser or any Acquired Subsidiary (i) relating to
Tax periods or portions thereof ending on or before the Closing Date or (ii)
attributable to an amount for which the Seller is responsible under Section
7.01(a) hereof. The Purchaser shall, if the Seller so requests and at the
Seller's expense, cause an Acquired Subsidiary to file for and obtain any refund
determined by the Seller to be due to the Seller. The Purchaser shall permit the
Seller to control (at the Seller's expense) the prosecution of any such refund
claimed, and shall cause an Acquired Subsidiary to authorize by appropriate
power of attorney such Persons as the Seller shall designate to represent such
Acquired Subsidiary with respect to such refund claimed.
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In the event that any refund or credit of Taxes for which a payment has been
made pursuant to this Section 7.02(a) is subsequently reduced or disallowed, the
Seller shall indemnify and hold harmless the Music Subsidiaries for any Tax
liability, including interest and penalties, assessed by reason of the reduction
or disallowance.
(b) If the Seller or any of its Affiliates (or an Acquired Subsidiary on or
prior to the Closing Date) makes any payment, including a payment of additional
Taxes (either directly to a Tax authority or pursuant to Section 7.01(a)) and,
as result of the payment or adjustment giving rise to such payment, the
Purchaser obtains a deduction, credit or other Tax benefit with respect to a Tax
period after the Closing Date (a "Post-Closing Date Tax Benefit"), the Purchaser
shall pay the Seller an amount equal to the Tax savings resulting from such
Post-Closing Date Tax Benefit to the extent the Seller is not able to otherwise
reduce an amount payable to the Purchaser pursuant to Section 7.01(a). The
amount of any such Tax savings for any Tax period shall be the amount of the
reduction in Taxes reflected on any Tax Return for such Tax period as compared
to the Taxes that would have been reflected on such Tax Return in the absence of
such Post-Closing Tax Benefit. Any Post-Closing Date Tax Benefit not resulting
in actual Tax savings for the Tax period to which it relates or for any earlier
Tax period shall be carried forward to succeeding Tax periods until utilized to
the extent permitted by law. All payments to the Seller pursuant to this Section
7.02(b) shall be made within thirty (30) days after the filing of the applicable
Tax Return for the Tax period in which a Post-Closing Date Tax Benefit results
in a reduction in the Taxes paid by the Purchaser.
(c) The Purchaser agrees that it will not carry back to any Tax period
ending on or before the Closing Date any net operating loss or other Tax
attribute which arose in a Tax period beginning after the Closing Date if such
net operating loss or Tax attribute would be carried back to a consolidated,
combined or unitary Tax Return that includes the Seller or any of its
Affiliates.
SECTION 7.03. Contests. (a) After the Closing, the Purchaser shall promptly
notify the Seller in writing of any demand or claim received by the Purchaser or
an Acquired Subsidiary from any Tax authority or other party with respect to
Taxes for which the Seller is liable pursuant to Section 7.01. Such notice
shall contain factual information (to the extent known) describing the asserted
Tax liability in reasonable detail and shall include copies of any notice or
other document received from any Tax authority in respect of any such asserted
Tax liability. If the Purchaser fails to give the Seller prompt notice of an
asserted Tax liability as required by this Section 7.03, then (i) if the Seller
is precluded by the failure to give prompt notice from contesting the asserted
tax liability in both the administrative and judicial forums, then the
Purchaser shall have sole responsibility for such Tax liability or (ii) if the
Seller is not so precluded from contesting but such failure to give prompt
notice results in a detriment to the Seller, then any amount which the Seller is
otherwise required to pay the Purchaser pursuant to Section 7.01 with respect to
such liability shall be reduced by the amount of such detriment.
(b) The Seller may elect to direct, through counsel of its own choosing and
at its own expense, any audit, claim for refund and administrative or judicial
proceeding involving any asserted liability with respect to which indemnity may
be sought under Section 7.01 (any such audit, claim for refund or proceeding
relating to an asserted Tax liability is referred to herein as a
<PAGE> 52
46
"Contest"). If the Seller elects to direct a Contest, it shall within thirty
(30) calendar days of receipt of the notice of asserted Tax liability notify the
Purchaser of its intent to do so, and the Purchaser shall cooperate and shall
cause an Acquired Subsidiary or any of its successors to cooperate, at the
expense of the Seller, in each phase of such Contest. If the Seller elects not
to direct the Contest, fails to notify the Purchaser of its election as herein
provided or contests its obligation to indemnify under Section 7.01, the
Purchaser or an Acquired Subsidiary may pay, compromise or contest, at its own
expense, such asserted liability. However, in such case, neither the Purchaser
nor any Acquired Subsidiary may settle or compromise any asserted liability over
the objection of the Seller; provided, however, that consent to settlement or
compromise shall not be unreasonably withheld. In any event, the Seller may
participate, at its own expense, in the Contest. If the Seller chooses to direct
the Contest, the Purchaser shall promptly empower and shall cause an Acquired
Subsidiary or any of its successors promptly to empower (by power of attorney
and such other documentation as may be appropriate) such representatives of the
Seller as it may designate to represent the Purchaser, an Acquired Subsidiary or
any of their successors in the Contest insofar as the Contest involves an
asserted Tax liability for which the Seller would be liable under Section
7.01(a).
SECTION 7.04. Preparation of Tax Returns. The Seller or its designee
shall prepare and file U.S. federal, state and local income and franchise Tax
Returns relating to the Acquired Subsidiaries for any Tax period ending on or
prior to the Closing Date and which are required to be filed after the Closing
Date. With respect to any Tax Returns for which the Seller or its designee has
filing responsibility pursuant to the preceding sentence, the Acquired
Subsidiaries will be included in the consolidated, combined or unitary Tax
Returns which include the Seller on a basis consistent with prior tax years
unless a different treatment is required by an intervening change in Law. The
parties agree that if an Acquired Subsidiary is permitted, but not required,
under applicable state or local income or franchise Tax Laws to treat the
Closing Date as the last day of a Tax period, they will treat the Tax period as
ending on the Closing Date. The Seller or its designee shall prepare and file
all other Tax Returns for any period ending on or prior to the Closing Date to
the extent the Seller or Viacom previously was responsible for the preparation
and filing of such Tax Returns for the immediately preceding Tax period. The
Purchaser shall prepare and timely file or cause an Acquired Subsidiary to
prepare and timely file all Tax Returns for which the Seller is not responsible
pursuant to this Section 7.04. The Purchaser will deliver to the Seller a
complete and accurate copy of each Tax Return required to be filed by the
Purchaser or an Acquired Subsidiary under this Section 7.04 for Tax periods that
include the Closing Date, and any amendment to such Tax Return, within ten (10)
days of the date such Tax Return is filed with the appropriate Tax authority.
SECTION 7.05. Section 338(h)(10) Election and Allocations. (a) The
Seller and the Purchaser shall jointly make the election provided for by Section
338(h)(10) of the Code and any corresponding elections under state, local or tax
law (the "Election") with respect to the Shares. The Seller and the Purchaser
shall provide to the other all necessary information to permit the Election to
be made. The Seller and the Purchaser shall, as promptly as practicable
following the Closing Date, take all actions necessary and appropriate to effect
and preserve a timely Election including filing IRS Form 8023 and other such
forms, returns, elections, schedules, attachments, and other documents as may be
required. The forms relating to the Election, Form 8594, if
<PAGE> 53
47
required, and any equivalent forms for state and local Tax purposes shall be
referred to as the "Forms."
(b) The Seller and the Purchaser, in good faith, shall agree upon the
allocation of the Purchase Price among the Shares. In connection with the
Election, the Seller and the Purchaser, in good faith, shall determine (i) the
amount of the modified aggregate deemed sales price ("MADSP") of the Shares
(within the meaning of Treas. Reg. Section 1.338(h)(10)-1(f)) and (ii) the
proper allocations of the MADSP among the Assets in accordance with Treas. Reg.
Section 1.338(h)(10)-1(f). The allocations referred to in the two preceding
sentences are referred to herein as the "Allocations." The Seller will calculate
the gain or loss, if any, in a manner consistent with the Allocations and will
not take any position inconsistent with the Allocations in any Tax Return or
otherwise. The Purchaser will allocate the Purchase Price consistently with the
Allocations and will not take any position inconsistent with the Allocations in
any Tax Return or otherwise.
(c) The Seller and the Purchaser agree that the Forms shall be filed with
the appropriate Tax authorities not earlier than sixty (60) days before the
latest date for the filing thereof. At least one hundred twenty (120) days prior
to the latest date for the filing of each Form, the Seller shall prepare and
submit to the Purchaser a draft of each Form. No party hereto shall file any
Form unless it shall have obtained the consent of the other party hereto, which
consent shall not be unreasonably withheld. On or prior to the 30th day after
the Purchaser's receipt of a draft Form, the Purchaser shall deliver to the
Seller either (i) its consent to such filing or (ii) a written notice specifying
in reasonable detail all disputed items and the basis therefor. If the Purchaser
and the Seller have been unable to resolve their differences within thirty (30)
days after the Seller's receipt of the Purchaser's written notice of disputed
items, any remaining disputed issues shall be submitted to an Independent
Accounting Firm to resolve in a final binding manner after hearing the views of
both parties. The fees and expenses of the Independent Accounting Firm shall be
shared equally between the Seller and the Purchaser.
SECTION 7.06. Cooperation and Exchange of Information. The Seller, the
Purchaser, and the Acquired Subsidiaries will provide each other with such
cooperation and information as any of them reasonably may request of another in
filing any Tax Return, amended Tax Return or claim for refund, determining a
liability for Taxes or a right to a refund of Taxes or participating in or
conducting any audit or other proceeding in respect of Taxes. Each such party
shall make its employees available on a mutually convenient basis to provide
explanations of any documents or information provided hereunder. Each such party
will retain all Tax Returns, schedules and work papers and all material records
or other documents relating to Tax matters of the Acquired Subsidiaries for
their Tax period first ending after the Closing Date and for all prior Tax
periods until the expiration of the statute of limitations of the Tax periods to
which such Tax Returns and other documents relate, without regard to extensions
except to the extent notified by another party in writing of such extensions for
the respective Tax periods. Any information obtained under this Section 7.06
shall be kept confidential, except as may be otherwise necessary in connection
with the filing of Tax Returns or claims for refund or in conducting an audit or
other proceeding.
<PAGE> 54
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SECTION 7.07. Conveyance Taxes. The Purchaser agrees to assume liability
for and to pay all sales, transfer, stamp (other than as provided in Section
2.04), real property transfer or gains and similar Taxes incurred as a result
of the transactions contemplated hereby. In addition, the Purchaser agrees to
indemnify the Seller and its Affiliates for any and all liabilities, losses,
damages, claims, costs, expenses, interest, awards, judgments and penalties
(including attorneys' and consultants' fees and expenses) incurred by the Seller
and its Affiliates arising out of the Purchaser's failure to make timely or full
payments of such Taxes.
SECTION 7.08. Miscellaneous. (a) The parties agree to treat all payments
made under Article X and the Sections and Articles listed in Section 10.04 as
adjustments to the Purchase Price for Tax purposes.
(b) Except as expressly provided otherwise and except for the
representations contained in Section 3.15 of this Agreement, this Article VII
shall be the sole provision governing Tax matters and indemnities therefor under
this Agreement.
(c) All tax-related agreements and understandings between any Acquired
Subsidiary and the Seller or any of the Seller's Affiliates shall terminate and
be of no further force and effect, immediately prior to the Closing Date. For
purposes of this Article VII, all references to the Purchaser or the Seller
includes successors thereto.
ARTICLE VIII
CONDITIONS TO CLOSING
SECTION 8.01. Conditions to Obligations of the Seller. The obligation of
the Seller to consummate the transactions contemplated by this Agreement shall
be subject to the fulfillment or waiver, at or prior to the Closing, of each of
the following conditions:
(a) Representations and Warranties; Covenants. (i) The representations and
warranties of the Purchaser contained in Article IV that are (A) qualified as to
materiality shall be true and correct and (B) not qualified as to materiality
shall be true and correct in all material respects, in each case as of the
Closing, other than representations and warranties made as of another date,
which representations and warranties shall have been true and correct, or true
and correct in all material respects, as the case may be, as of such date; (ii)
the covenants contained in this Agreement to be complied with by the Purchaser
before the Closing shall have been complied with in all material respects except
that the Purchaser shall have complied in all respects with its obligations
under Article II hereof; and (iii) the Seller shall have received a certificate
of the Purchaser to such effect signed by a duly authorized officer thereof;
(b) HSR Act. Any waiting period (and any extension thereof) under the HSR
Act applicable to the purchase of the Shares contemplated hereby shall have
expired or shall have been terminated;
<PAGE> 55
49
(c) No Governmental Order. There shall be no Governmental Order in
existence which expressly prohibits the transactions contemplated by this
Agreement;
(d) Resolutions. The Seller shall have received a true and complete copy,
certified by the Secretary or an Assistant Secretary of the Purchaser, of the
resolutions duly and validly adopted by the Board of Directors of the Purchaser
evidencing its authorization of the execution and delivery of this Agreement and
the Ancillary Agreements to which it is a party and the consummation of the
transactions contemplated hereby and thereby; and
(e) Ancillary Agreements. The Purchaser shall have executed and delivered
to the Seller the Ancillary Agreements to which it or any of its Affiliates is a
party.
SECTION 8.02. Conditions to Obligations of the Purchaser. The obligations
of the Purchaser to consummate the transactions contemplated by this Agreement
shall be subject to the fulfillment or waiver, at or prior to the Closing, of
each of the following conditions:
(a) Representations and Warranties; Covenants. (i) The representations and
warranties of the Seller contained in Article III that are (A) qualified as to
materiality shall be true and correct and (B) not qualified as to materiality
shall be true and correct in all material respects, in each case as of the
Closing, other than representations and warranties made as of another date,
which representations and warranties shall have been true and correct, or true
and correct in all material respects, as the case may be, as of such date; (ii)
the covenants contained in this Agreement to be complied with by the Seller
before the Closing shall have been complied with in all material respects except
that the Seller shall have complied in all respects with its obligations under
Article II hereof; and (iii) the Purchaser shall have received at the Closing a
certificate of the Seller to such effect signed by a duly authorized officer
thereof;
(b) HSR Act. Any waiting period (and any extension thereof) under the HSR
Act applicable to the purchase of the Shares contemplated hereby shall have
expired or shall have been terminated;
(c) No Governmental Order. There shall be no Governmental Order in
existence which expressly prohibits the transactions contemplated by this
Agreement;
(d) Resolutions. The Purchaser shall have received a true and complete
copy, certified by the Secretary or an Assistant Secretary of the Seller, of the
resolutions duly and validly adopted by the Board of Directors of the Seller
evidencing its authorization of the execution and delivery of this Agreement and
the Ancillary Agreements to which it is a party and the consummation of the
transactions contemplated hereby and thereby;
(e) Ancillary Agreements. The Seller shall have executed and delivered, or
cause to be executed and delivered, to the Purchaser the Ancillary Agreements to
which it or any of its Affiliates is a party; and
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(f) The Seller shall have complied in all material respects with its
pre-Closing obligations under the Transition Services Agreement.
ARTICLE IX
TERMINATION, AMENDMENT AND WAIVER
SECTION 9.01. Termination. This Agreement may be terminated at any time
prior to the Closing (except as limited as to time in paragraph (d) below):
(a) by the mutual written consent of the Seller and the Purchaser;
(b) by either party, if the Closing shall not have occurred prior to
November 15, 1998; provided, however, that the right to terminate this Agreement
under this Section 9.01(b) shall not be available to any party whose failure to
fulfill any obligation under this Agreement shall have been the cause of, or
shall have resulted in, the failure of the Closing to occur prior to such date;
(c) by the Seller in the event a condition set forth in Section 8.01
becomes incapable of being fulfilled;
(d) by the Purchaser in the event a condition set forth in Section 8.02
becomes incapable of being fulfilled; or
(e) by either party in the event of the issuance of a final, nonappealable
Governmental Order restraining or prohibiting the transactions contemplated
herein.
SECTION 9.02. Effect of Termination. In the event of the termination of
this Agreement as provided in Section 9.01, this Agreement shall forthwith
become void and there shall be no liability on the part of any party hereto,
except as set forth in Section 5.03 and Section 11.02; provided, however, that
nothing herein shall relieve (i) the Purchaser from liability for its failure to
perform the covenant set forth in Section 5.16 or (ii) either the Seller or the
Purchaser from any willful breach of this Agreement or willful failure to
perform hereunder.
SECTION 9.03. Waiver. At any time prior to the Closing, any party may (a)
extend the time for the performance of any of the obligations or other acts of
any other party hereto, (b) waive any inaccuracies in the representations and
warranties contained herein or in any document delivered pursuant hereto or (c)
waive compliance with any of the agreements or conditions contained herein. Any
such extension or waiver shall be valid only if set forth in an instrument in
writing signed by the party to be bound thereby.
ARTICLE X
INDEMNIFICATION
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SECTION 10.01. Indemnification by the Purchaser. (a) Subject to Section
11.01, and except as otherwise contemplated by Sections 5.02(b), 5.06, 5.08,
5.13, 6.03 or 7.01, the Purchaser shall indemnify and hold the Seller, its
Affiliates and their respective employees, officers and directors, other than a
Business Employee (collectively, the "Seller Indemnified Parties") harmless from
and against, and agrees to promptly defend any Seller Indemnified Party from and
reimburse any Seller Indemnified Party for, any and all losses, damages, costs,
expenses, liabilities, obligations and claims of any kind (including any Action
brought by any Governmental Authority or Person and including reasonable
attorneys' fees and other legal costs and expenses reasonably incurred, but
excluding consequential or punitive damages) (collectively, "Losses"), which
such Seller Indemnified Party may at any time suffer or incur, or become subject
to, as a result or in connection with:
(i) the inaccuracy of any representations and warranties made by
the Purchaser in this Agreement;
(ii) any failure by the Purchaser to perform any of its covenants
or agreements under this Agreement; or
(iii) any claim or cause of action by any party arising on or
after the Closing Date against any Seller Indemnified Party with
respect to the operations of the Acquired Subsidiaries, the Business
or the Assets, including any default by the Purchaser or any
Transferee under any Guaranteed Lease for which the Seller or any
Affiliate of the Seller remains liable, whether as guarantor or
otherwise, except for any claims with respect to which the Seller is
obligated to indemnify the Purchaser Indemnified Parties under Section
10.02 hereof.
(b) The amounts for which the Purchaser shall be liable under Section
10.01(a) shall be net of (i) any insurance payable to the Seller Indemnified
Parties from their own insurance policies in connection with the facts giving
rise to the right of indemnification and (ii) the estimated present value of any
Tax benefits received by or accruing to the Seller Indemnified Parties.
(c) Notwithstanding any other provision to the contrary, the Purchaser
shall not be required to indemnify and hold harmless any Seller Indemnified
Party pursuant to subclauses (i) or (ii) of Section 10.01(a) unless the Seller
has notified the Purchaser in writing in accordance with Section 10.03(a) of a
pending or threatened claim with respect to such matters within the applicable
survival period set forth in Section 11.01.
SECTION 10.02. Indemnification by the Seller. (a) Subject to Section 11.01
hereof, and except as otherwise contemplated by Section 6.03 or 7.01, the Seller
shall indemnify and hold the Purchaser, its Affiliates and their respective
employees, officers and directors (collectively, the "Purchaser Indemnified
Parties") harmless from and against, and agrees to promptly defend any Purchaser
Indemnified Party from and reimburse any Purchaser Indemnified Party for, any
and all
<PAGE> 58
52
Losses that such Purchaser Indemnified Party may at any time suffer or incur, or
become subject to, as a result or in connection with:
(i) the inaccuracy of any representations and warranties made by
the Seller in this Agreement;
(ii) any failure by the Seller to perform any of its covenants or
agreements under this Agreement;
(iii) the ownership of the Excluded Assets;
(iv) except as provided by Section 5.07, any liability or other
obligation arising from the Blockbuster Gift Certificates; or
(v) except (A) to the extent reserved against in the Reference
Balance Sheet or as calculated in the Closing Working Capital, (B) for
obligations of the Purchaser hereunder or (C) any contractual
obligations of any Acquired Subsidiary required to be performed on or
after the Closing, any Loss to the extent it both (x) directly relates
to ownership of the Shares, ownership of any of the Assets or the
operation of the Business and (y) results from or arises out of events
occurring before the Closing Date.
(b) The amounts for which the Seller shall be liable under Section 10.02(a)
shall be net of (i) any insurance payable to the Purchaser Indemnified Parties
from their own insurance policies in connection with the facts giving rise to
the right of indemnification and (ii) any deduction, credit or the estimated
present value of any other Tax benefits received by or accruing to the Purchaser
Indemnified Parties.
(c) Notwithstanding any other provision to the contrary, the Seller shall
not be required to indemnify and hold harmless any Purchaser Indemnified Party
(i) pursuant to Section 10.02(a) unless with respect to any claim, the
Purchaser has notified the Seller in writing in accordance with Section 10.03(a)
of a pending or threatened claim with respect to such matters within the
applicable survival period set forth in Section 11.01 and (ii) pursuant to
Sections 10.02(a)(i) and (v) until the aggregate amount of the Purchaser
Indemnified Parties' Losses exceeds $1,000,000 after which the Seller shall be
obligated for all Losses of the Purchaser Indemnified Parties in excess of such
amount; provided, however, that the cumulative indemnification obligation of the
Seller under this Article X in respect of Section 10.02(a) shall in no event
exceed the Purchase Price.
SECTION 10.03. Notification of Claims. (a) A party which may be entitled to
be indemnified pursuant to Section 10.01 or 10.02 (the "Indemnified Party")
shall promptly notify the party liable for such indemnification (the
"Indemnifying Party") in writing of any pending or threatened claim or demand
which the Indemnified Party has determined has given or could give rise to a
right of indemnification under this Agreement; provided, however, that the
failure to provide such notice shall not release the Indemnifying Party from any
of its obligations under Article X except to the extent the Indemnifying Party
is materially prejudiced by such failure.
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53
Subject to the Indemnifying Party's right to defend in good faith third party
claims as hereinafter provided, the Indemnifying Party shall satisfy its
obligations under this Article X within thirty (30) days after the receipt of
written notice thereof from the Indemnified Party.
(b) If the Indemnified Party shall notify the Indemnifying Party of any
claim or demand pursuant to Section 10.03(a), and if such claim or demand
relates to a claim or demand asserted by a third party against the Indemnified
Party which the Indemnifying Party acknowledges is a claim or demand for which
it must indemnify or hold harmless the Indemnified Party under Section 10.01 or
10.02, the Indemnifying Party shall have the right to employ counsel reasonably
acceptable to the Indemnified Party to defend any such claim or demand asserted
against the Indemnified Party. The Indemnified Party shall have the right to
participate in the defense of any such claim or demand at its own expense. The
Indemnifying Party shall notify the Indemnified Party in writing, as promptly as
possible (but in any case before the due date for the answer or response to a
claim) after the date of the notice of claim given by the Indemnified Party to
the Indemnifying Party under Section 10.03(a) of its election to defend in good
faith any such third party claim or demand. So long as the Indemnifying Party is
defending in good faith any such claim or demand asserted by a third party
against the Indemnified Party, the Indemnified Party shall not settle or
compromise such claim or demand. The Indemnified Party shall make available to
the Indemnifying Party or its agents all records and other material in the
Indemnified Party's possession reasonably required by it for its use in
defending any third party claim or demand. Whether or not the Indemnifying Party
elects to defend any such claim or demand, the Indemnified Party shall have no
obligations to do so. The Indemnifying Party shall not settle or compromise any
such claim or demand, unless the Indemnified Party is given a full and complete
release of any and all liability by all relevant parties relating thereto.
SECTION 10.04. Exclusive Remedies. Except for performance of the
obligations set forth in Article II, the remedies provided for in Section 5.07
or 5.09 and the indemnification obligations specified in Sections 5.02(b), 5.06,
5.08, 5.13, 6.03, 7.01 and 10.04, the Seller and the Purchaser acknowledge and
agree that the indemnification provisions of Sections 10.01 and 10.02 shall be
the sole and exclusive remedies of the Seller and the Purchaser, respectively,
for any breach of the representations or warranties herein or nonperformance of
any covenants and agreements herein of the other party.
ARTICLE XI
GENERAL PROVISIONS
SECTION 11.01. Survival. The representations, warranties, covenants and
agreements of the Seller and the Purchaser contained in or made pursuant to this
Agreement and the Ancillary Agreements or in any certificate furnished pursuant
hereto shall terminate at the Closing, except that (a) the representations and
warranties made in Article III and Article IV and the covenants and agreements
made in Sections 5.01 and 5.19 shall survive in full force and effect until the
date that is twelve (12) months after the Closing Date, except that the
representations and warranties set forth in Section 3.03 shall survive
indefinitely, and the representations and warranties set forth
<PAGE> 60
54
in Sections 3.14 and 3.15 shall survive until expiration of the applicable
statute of limitations, (b) the covenants and agreements made in Sections
5.02(b), 5.03, 5.06, 5.07, 5.09, 5.10, 5.12, 5.13, 5.14, 5.15, 5.18 and the
third sentence of Section 5.23 and in Article VI, Article VII, Article X and
Article XI of this Agreement shall survive in full force and effect
indefinitely, (c) the covenants and agreements contained in (i) Section 5.08
shall survive with respect to any Real Property Lease until the expiration of
the current lease term thereunder and (ii) Section 5.17 shall survive until the
calculation of the Final WC Statement and (d) each of Sections 2.06, 5.20, 5.21
and 5.22 shall survive until any adjustment to the Purchase Price contemplated
thereby has become final and binding in accordance with the terms thereof.
SECTION 11.02. Expenses. Except as may be otherwise specified herein, all
costs and expenses, including fees and disbursements of counsel, financial
advisors and accountants, incurred in connection with this Agreement and the
transactions contemplated hereby shall be paid by the party incurring such costs
and expenses, whether or not the Closing shall have occurred.
SECTION 11.03. Notices. All notices, requests, claims, demands and other
communications hereunder shall be in writing and shall be given or made (and
shall be deemed to have been duly given or made upon receipt) by delivery in
person, by overnight courier service, by cable, by facsimile, by telegram, by
telex or by registered or certified mail (postage prepaid, return receipt
requested) to the respective parties at the following addresses (or at such
other address for a party as shall be specified in a notice given in accordance
with this Section 11.03):
(a) if to the Seller:
c/o Viacom International Inc.
1515 Broadway
New York, NY 10036
Attention: Deputy General Counsel
Telecopier: (212) 258-6099
(b) if to the Purchaser:
Wherehouse Entertainment, Inc.
19701 Hamilton Avenue
Torrance, CA 90502
Attention: Chief Executive Officer
Telecopier: (310) 329-8420
SECTION 11.04. Public Announcements. Except as may be required by Law or
stock exchange rules, no party to this Agreement shall make any public
announcements in respect of this Agreement or the transactions contemplated
hereby or otherwise communicate with any news media without prior notification
to the other party, and the parties shall cooperate as to the timing and
contents of any such announcement.
<PAGE> 61
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SECTION 11.05. Headings. The headings contained in this Agreement are for
reference purposes only and shall not affect in any way the meaning or
interpretation of this Agreement.
SECTION 11.06. Severability. If any term or other provision of this
Agreement is invalid, illegal or incapable of being enforced by any Law or
public policy, all other conditions and provisions of this Agreement shall
nevertheless remain in full force and effect so long as the economic or legal
substance of the transactions contemplated hereby is not affected in any manner
adverse to any party. Upon such determination that any term or other provision
is invalid, illegal or incapable of being enforced, the parties hereto shall
negotiate in good faith to modify this Agreement so as to effect the original
intent of the parties as closely as possible in a mutually acceptable manner in
order that the transactions contemplated hereby be consummated as originally
contemplated to the greatest extent possible.
SECTION 11.07. Entire Agreement. This Agreement constitutes the entire
agreement of the parties hereto with respect to the subject matter hereof and
supersedes all prior agreements and undertakings, both written and oral, other
than the Confidentiality Agreement, between the Seller and the Purchaser with
respect to the subject matter hereof and except as otherwise expressly provided
herein.
SECTION 11.08. Assignment. This Agreement shall not be assigned by
operation of Law or otherwise; provided, however, the Seller may assign its
obligations hereunder to any direct or indirect subsidiary of Viacom. Any
assignment in violation of this Section 11.08 shall be void ab inito.
SECTION 11.09. No Third-Party Beneficiaries. Except as provided in Article
X, this Agreement is for the sole benefit of the parties hereto and their
permitted assigns and nothing herein, express or implied, is intended to or
shall confer upon any other Person or entity any legal or equitable right,
benefit or remedy of any nature whatsoever under or by reason of this Agreement.
SECTION 11.10. Amendment. This Agreement may not be amended or modified
except by an instrument in writing signed by the Seller and the Purchaser.
SECTION 11.11. Sections and Schedules. Any disclosure with respect to a
Section or Schedule of this Agreement shall be deemed to be disclosure for all
other Sections and Schedules of this Agreement.
SECTION 11.12. Governing Law. This Agreement shall be governed by, and
construed in accordance with, the Laws of the State of New York excluding (to
the greatest extent permissible by law) any rule of law that would cause the
application of the laws of any jurisdiction other than the State of New York.
All actions and proceedings arising out of or relating to this Agreement shall
be heard and determined in a New York state or federal court sitting in the City
of New York, and the parties hereto hereby irrevocable submit to the exclusive
jurisdiction of such courts in any such action or proceeding and irrevocably
waive the defense of an inconvenient forum to the maintenance of any such action
or proceeding.
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SECTION 11.13. Counterparts. This Agreement may be executed in one or more
counterparts, and by the different parties hereto in separate counterparts, each
of which when executed shall be deemed to be an original but all of which taken
together shall constitute one and the same agreement. Delivery of an executed
counterpart of a signature page to this Agreement by telecopier shall be
effective as delivery of a manually executed counterpart of this Agreement.
<PAGE> 63
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SECTION 11.14. No Presumption. This Agreement shall be construed without
regard to any presumption or rule requiring construction or interpretation
against the party drafting or causing any instrument to be drafted.
IN WITNESS WHEREOF, the Seller and the Purchaser have caused this Agreement
to be executed as of the date first written above by their respective officers
thereunto duly authorized.
VIACOM INTERNATIONAL INC.
By /s/ PHILIPPE P. DAUMAN
----------------------------------
Name: Philippe P. Dauman
Title: Executive Vice President
WHEREHOUSE ENTERTAINMENT, INC.
By
----------------------------------
Name: Antonio C. Alvarez, II
Title: Chief Executive Officer
and Chairman
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