<PAGE>
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-------------
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
Date of Report (Date of earliest event reported):
July 26, 1999
-------------
VIDEO CITY, INC.
(Exact name of registrant as specified in its charter)
Delaware 0-14023 95-3897052
(State or other jurisdiction (Commission File Number) (I.R.S. Employer
of incorporation or Identification Number)
organization)
370 Amapola Avenue, Suite 208 90501
Torrance, California (Zip Code)
(Address of principal executive offices)
(310) 533-3900
(Registrant's telephone number, including area code)
Not Applicable
(Former name or former address, if changed since last report)
================================================================================
<PAGE>
Item 2. Acquisition or Disposition of Assets
On July 26, 1999, Video City, Inc. (the "Company") sold the assets of 45 of
its Videoland retail video stores located in the states of Washington and Oregon
to Blockbuster Inc. The Company expects to sell the assets of four additional
Videoland stores to Blockbuster on or before August 30, 1999, subject to certain
third party approvals. The aggregate purchase price for the sale of the 49
stores is approximately $16 million in cash, subject to certain post closing
adjustments.
Item 5. Other Events
On August 1, 1999, the Company and West Coast Entertainment Corporation
("West Coast") entered into an Agreement and Plan of Merger (the "Merger
Agreement"), pursuant to which a wholly-owned subsidiary of the Company will
merge with and into West Coast such that West Coast will become a wholly-owned
subsidiary of the Company (the "Merger"). Pursuant to the Merger Agreement,
upon the effectiveness of the Merger, each outstanding share of Common Stock of
West Coast will be converted into the right to receive (i) a number of shares of
Common Stock of the Company, as is calculated pursuant to the Common Stock
Exchange Ratio (as defined in the Merger Agreement), subject to a maximum of
.333 shares and a minimum of .250 shares, and (ii) 0.05 shares of Series F
Convertible Redeemable Preferred Stock, having a liquidation preference of
$25.00, of the Company.
The consummation of the Merger is subject to certain terms and conditions
set forth in the Merger Agreement, including the satisfactory completion by
Video City and West Coast of their respective due diligence investigations, the
obtaining or arranging of financing, the approval by the stockholders of the
Company and West Coast, certain regulatory approvals and the approval by
creditors and other third parties.
On August 3, 1999, the Company issued a press release announcing the
execution of the Merger Agreement.
The foregoing description of the Merger, the Merger Agreement and the press
release is qualified in its entirety by reference to the Merger Agreement and
the press release, copies of which are filed herein as exhibits, and which are
incorporated herein by this reference.
Safe Harbor Statement under the Private Securities Litigation Reform Act of
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1995.
- ----
This Current Report contains forward-looking statements within the meaning
of the "safe harbor" provisions of the Private Securities Litigation Reform Act
of 1995, such as statements of the Company's plans, objectives, expectations and
intentions, that involve risks and uncertainties that could cause actual results
to differ materially from those discussed in such forward-looking statements.
Factors that could cause or contribute to such differences include, but are not
limited to, those discussed in the section entitled "Special Considerations" as
set forth in the Ckompany's Annual Report on Form 10-K for the fiscal year ended
January 31, 1999.
<PAGE>
Item 7. Financial Statements, Pro Forma Financial Information and Exhibits
(b) Pro Forma Financial Information.
Disposition of Assets
On July 26, 1999, Video City, Inc. (the "Company") sold the assets of 45 of its
Videoland retail video stores located in the states of Washington and Oregon to
Blockbuster Inc. The Company expects to sell the assets of four additional
Videoland stores to Blockbuster on or before August 30, 1999, subject to certain
third party approvals. The aggregate purchase price for the sale of the 49
stores is approximately $16 million in cash, subject to certain post closing
adjustments.
Basis of Presentation
The accompanying unaudited pro forma condensed, consolidated financial
statements illustrate the effect of the sale of 49 stores on the Company's
financial position and results of operations.
The unaudited pro forma condensed consolidated balance sheet as of April 30,
1999 is based on the historical balance sheet of Video City as of April 30,
1999. The unaudited pro forma condensed consolidated balance sheet assumes the
sale of the 49 stores to Blockbuster, Inc. took place on April 30, 1999.
The unaudited pro forma condensed consolidated statement of operations for the
year ended January 31, 1999 is based on the historical statements of operations
of Video City, Inc. as of January 31, 1999 and the three months ended April 30,
1999 assumes the sale of the 49 stores to Blockbuster, Inc. took place on
February 1, 1998.
The unaudited pro forma condensed consolidated financial statements may not be
indicative of the actual result of the disposition and there can be no assurance
that the foregoing results will be obtained. The unaudited pro forma condensed
consolidated statements of operations may not be indicative of the actual
results which would have been obtained if the transaction had occurred on
February 1, 1998.
The accompanying unaudited pro forma condensed consolidated financial statements
should be read in conjunction with the historical financial statements of Video
City, Inc.
<PAGE>
Video City, Inc.
Pro Forma Condensed Consolidated Balance Sheet (Unaudited)
April 30, 1999
<TABLE>
<CAPTION>
Pro-forma
Video 49 stores Adjustments
City sold (Note A) Pro-forma
----- --------- ----------- ---------
<S> <C> <C> <C> <C>
Assets
Current Assets
Cash $ 85,211 $13,862,000 $(13,912,000) (1) $ 35,211
Account receivables 3,499,623 1,393,000 4,892,623
Notes receivable 86,703 - 86,703
Merchandise inventories 3,908,093 (712,134) 3,195,959
Other 170,097 170,097
---------------------------------------------------- -----------
Total current assets 7,749,727 14,542,866 (13,912,000) 8,380,593
Videocassette rental inventory, net 24,364,804 (7,560,735) 16,804,069
Property and equipment, net 6,160,947 (578,276) 5,582,671
Goodwill 8,321,923 (2,512,158) 5,809,765
Deferred tax asset 1,236,020 1,236,020
Other assets 1,968,170 1,968,170
----------- ----------- ------------ -----------
Total Assets $49,801,591 $ 3,891,697 $(13,912,000) $39,781,288
=========== =========== ============ ===========
</TABLE>
See notes to pro forma condensed consolidated financial statements (unaudited)
<PAGE>
Video City, Inc.
Pro Forma Condensed Consolidated Balance Sheet (Unaudited)
April 30, 1999
<TABLE>
<CAPTION>
Pro-forma
Video 49 Stores Adjustments
City sold (Note A) Pro-forma
----- --------- ----------- ---------
<S> <C> <C> <C> <C>
Liabilities and Stockholders' Deficit
Current Liabilities
Accounts payable $12,481,195 $ 1,982,304 $14,463,499
Accrued expenses 1,919,603 1,919,603
Current portion of long-term debt 3,795,664 3,795,664
----------- ----------- ------------ -----------
Total current liabilities 18,196,462 1,982,304 - 20,178,766
Senior secured revolving credit facility 23,243,514 (13,912,000) (1) 9,331,514
Long term debt, less current portion 1,508,319 1,508,319
Other liabilities 589,791 - 589,791
----------- ----------- ------------ -----------
Total Liabilities 43,538,086 1,982,304 (13,912,000) 31,608,390
Preferred stock 5,015,192 15,055,371
Common stock 138,856 3,157,706
Additional paid-in capital 9,901,323 11,191,748
Accumulated deficit (8,791,866) 1,909,393 1,290,425
----------- ----------- ------------ -----------
Total Stockholders' Equity (Deficit) 6,263,505 1,909,393 - 8,172,898
Total Liabilities and Stockholders' Equity $49,801,591 $ 3,891,697 $(13,912,000) $39,781,288
(Deficit) =========== =========== ============ ===========
</TABLE>
See notes to pro forma condensed consolidated financial statements (unaudited)
<PAGE>
VIDEO CITY, INC.
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS (UNAUDITED)
FOR THE YEAR ENDED JANUARY 31, 1999
<TABLE>
<CAPTION>
(4) Pro-forma
Video 49 stores Adjustements Pro Forma
City, Inc. sold (Note B) Balance
---------- --------- ------------ ---------
<S> <C> <C> <C> <C> <C>
Revenue
Rental revenue and product sales 23,828,501 2,116,009 21,712,492
Management fee income 607,733 607,733
----------- ---------- ---------- -----------
Total Revenue $24,436,234 2,116,009 - 22,320,225
Operating Costs and Expense:
Store operating expenses 13,675,372 939,324 12,736,048
Amortization of videocassette rental inventory 2,541,934 791,580 1,750,354
Cost of product sales 3,301,185 287,038 3,014,147
Cost of leased product 1,394,409 1,394,409
General and administrative expenses 4,785,890 4,785,890
----------- ---------- ---------- -----------
Total Operating Costs and Expenses 25,698,790 2,017,941 - 23,680,849
Loss from operations (1,262,556) 98,068 - (1,360,624)
Other (income) expense
Interest expense 1,563,348 (136,306) (2) 1,427,042
Other (income) expense (221,081) (221,081)
----------- ---------- ---------- -----------
Loss before income taxes (2,604,823) 98,068 136,306 (2,566,585)
Income tax expense (benefit) (2,615,957) 36,285 50,433 (2,529,239)
----------- ---------- ---------- -----------
Net income $ 11,134 $ 61,783 $ 85,873 $ (37,347) (1)
----------- ---------- ---------- -----------
Earnings Per Share:
Basic $ 0.00 $ 0.00
Diluted $ 0.00 $ 0.00
Weighted Average Number of Common Shares Outstanding
Basic 12,091,467 12,091,467
Diluted 12,866,562 12,866,562
</TABLE>
<PAGE>
VIDEO CITY, INC.
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS (UNAUDITED)
FOR THE THREE MONTHS ENDED APRIL 30, 1999
<TABLE>
<CAPTION>
(4) Pro-forma
Video 49 stores Adjustements Pro Forma
City, Inc. sold (Note C) Balance
---------- --------- ------------ ---------
<S> <C> <C> <C> <C>
Revenue
Rental revenue and product sales $13,305,070 4,974,474 8,330,596
Management fee income - -
----------- ---------- ---------- -----------
Total Revenue 13,305,070 4,974,474 - 8,330,596
Operating Costs and Expense:
Store operating expenses 7,903,827 2,692,906 5,210,921
Amortization of videocassette rental inventory 1,772,490 575,191 1,197,299
Cost of product sales 1,960,315 770,239 1,190,076
Cost of leased product 499,784 195,915 303,869
General and administrative expenses 2,080,551 2,080,551
----------- ---------- ---------- -----------
Total Operating Costs and Expenses 14,216,967 4,234,251 - 9,982,716
Loss from operations (911,897) 740,223 - (1,652,120)
Other (income) expense
Interest expense 588,727 (356,801) (3) 231,926
Other (income) expense (23,318) (23,318)
----------- ---------- ---------- -----------
Loss before income taxes (1,477,306) 740,223 2,266,194 (1,860,728)
Income tax expense (benefit) (546,603) 273,882 132,016 (688,469)
----------- ---------- ---------- -----------
Net income $ (930,703) $ 466,340 $ 224,785 $(1,172,259) (1)
----------- ---------- ---------- -----------
Earnings Per Share:
Basic $(0.07) $0.09
Diluted $(0.07) $0.09
Weighted Average Number of Common Shares Outstanding
Basic 13,639,587 13,639,587
Diluted 13,639,587 13,639,587
</TABLE>
<PAGE>
VIDEO CITY, INC.
NOTES TO PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
A. Pro Forma Adjustments - Pro Forma Condensed Consolidated Balance Sheet
The adjustments to the pro forma condensed consolidated balance sheet are as
follows:
(1) To record the receipt of $13,912,000 for the sale of the 49 stores and
the payment toward the existing revolving credit facility.
B. Pro Forma Adjustments - Pro Forma Condensed Consolidated Statement of
Operations for the years ended January 31, 1999 and April 30, 1999.
The adjustments to the pro forma condensed consolidated balance sheet are as
follows:
(1) The pro forma condensed consolidated statement of operations for the
periods presented does not reflect the anticipated gain on sale of
approximately $1,900,000.
(2) To reduce interest expense by $136,303 due to reduced borrowings on the
Revolving line of credit.
(3) To reduce interest expense by $356,801 due to reduced borrowings on the
Revolving line of credit.
(4) To reflect the results of operations for the 49 store sold to
Blockbuster for the periods presented.
(c) Exhibits.
2.1 Agreement and Plan of Merger, dated as of August 1, 1999, by and
among Video City, Inc., Keystone Merger Corp. and West Coast
Entertainment Corporation.
99.1 Press Release, dated August 3, 1999, issued by Video City, Inc.
<PAGE>
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 hereunto duly authorized.
VIDEO CITY, INC.
By: /S/ ROBERT Y. LEE
-----------------
Robert Y. Lee
Chief Executive Officer
Dated: August 9, 1999
<PAGE>
EXHIBIT INDEX
Exhibit
Number Description
------ -----------
2.1 Agreement and Plan of Merger, dated as of August 1, 1999, by
and among Video City, Inc., Keystone Merger Corp. and West
Coast Entertainment Corporation
99.1 Press Release, dated August 3, 1999, issued by Video City, Inc.
<PAGE>
EXHIBIT 2.1
AGREEMENT AND PLAN OF MERGER
among
Video City, Inc.
Keystone Merger Corp.
and
West Coast Entertainment Corporation
August 1, 1999
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
ARTICLE I
THE MERGER 1
Section 1.01 Effective Time of the Merger 1
Section 1.02 Closing 1
Section 1.03 Effects of the Merger 2
Section 1.04 Directors and Officers 2
ARTICLE II
CONVERSION OF SECURITIES 2
Section 2.01 Conversion of Capital Stock 2
Section 2.02 Exchange of Certificates 5
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF SELLER 9
Section 3.01 Organization of Seller 9
Section 3.02 Seller Capital Structure 10
Section 3.03 Authority; No Conflict; Required Filings and Consents 11
Section 3.04 SEC Filings; Financial Statements 12
Section 3.05 No Undisclosed Liabilities 12
Section 3.06 Absence of Certain Changes or Events 13
Section 3.07 Taxes 13
Section 3.08 Properties 15
Section 3.09 Intellectual Property 15
Section 3.10 Agreements, Contracts and Commitments 16
Section 3.11 Litigation 16
Section 3.12 Environmental Matters 16
Section 3.13 Employee Benefit Plans 17
Section 3.14 Compliance With Laws 18
Section 3.15 Accounting and Tax Matters 19
Section 3.16 Registration Statement; Proxy Statement/Prospectus 19
Section 3.17 Labor Matters 19
Section 3.18 Insurance 20
Section 3.19 No Existing Discussions 20
Section 3.20 Section 203 of the DGCL Not Applicable 20
Section 3.21 Inventory and Equipment 20
Section 3.22 Year 2000 20
</TABLE>
ii
<PAGE>
<TABLE>
<S> <C>
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF BUYER AND SUB 21
Section 4.01 Organization of Buyer and Sub 21
Section 4.02 Buyer Capital Structure 22
Section 4.03 Authority; No Conflict; Required Filings and Consents 23
Section 4.04 SEC Filings; Financial Statements 24
Section 4.05 Absence of Certain Changes or Events 24
Section 4.06 Litigation 25
Section 4.07 Compliance With Laws 25
Section 4.08 Registration Statement; Proxy Statement/Prospectus 25
Section 4.09 Interim Operations of Sub 25
ARTICLE V
CONDUCT OF BUSINESS 26
Section 5.01 Covenants of Seller 26
Section 5.02 Covenants of Buyer 28
Section 5.03 Cooperation 29
Section 5.04 Confidentiality 30
ARTICLE VI
ADDITIONAL AGREEMENTS 31
Section 6.01 No Solicitation 31
Section 6.02 Proxy Statement/Prospectus; Registration Statement 33
Section 6.03 Certificate of Designation 34
Section 6.04 Access to Information 34
Section 6.05 Stockholders Meetings 35
Section 6.06 Legal Conditions to Merger 36
Section 6.07 Public Disclosure 36
Section 6.08 Tax-Free Reorganization 37
Section 6.09 Stock Listing 37
Section 6.10 Brokers or Finders 37
Section 6.11 Indemnification 37
Section 6.12 Financing Commitment 38
Section 6.13 Board Representation 38
ARTICLE VII
CONDITIONS TO MERGER 38
Section 7.01 Conditions to Each Party's Obligation To Effect the Merger 38
Section 7.02 Additional Conditions to Obligations of Buyer and Sub 40
Section 7.03 Additional Conditions to Obligations of Seller 42
</TABLE>
iii
<PAGE>
<TABLE>
<S> <C>
ARTICLE VIII
TERMINATION AND AMENDMENT 43
Section 8.01 Termination 43
Section 8.02 Effect of Termination 45
Section 8.03 Fees and Expenses 45
Section 8.04 Amendment 47
Section 8.05 Extension; Waiver 47
ARTICLE IX
MISCELLANEOUS 47
Section 9.01 Nonsurvival of Representations, Warranties and Agreements 47
Section 9.02 Notices 47
Section 9.03 Interpretation 48
Section 9.04 Counterparts 48
Section 9.05 Entire Agreement; No Third Party Beneficiaries 49
Section 9.06 Governing Law 49
Section 9.07 Jurisdiction 49
Section 9.08 Assignment 49
Section 9.09 Severability 49
Section 9.10. WAIVER OF JURY TRIAL 50
</TABLE>
Exhibit A - Series F Preferred Stock Terms
Exhibit B - Form of Consulting Agreements
Exhibit C - Form of Non-Competition Agreements
iv
<PAGE>
TABLES OF DEFINED TERMS
<TABLE>
<CAPTION>
Cross Reference
Terms in Agreement
- ----- ---------------
<S> <C>
Acquisition Proposal Section 6.01(a)
Acquisition Transaction Section 6.01(a)
Agreement Preamble
Agreement of Merger Section 1.01
Bankruptcy and Equity Exception Section 3.03(a)
Blue Sky Section 7.02(d)
Buyer Balance Sheet Section 4.04(b)
Buyer Common Stock Section 2.01(b)
Buyer Disclosure Schedule Article IV
Buyer Material Adverse Effect Section 4.01
Buyer Material Contracts Section 4.10
Buyer Meeting Section 3.16
Buyer Preferred Stock Section 2.01(b)
Buyer SEC Reports Section 4.04(a)
Buyer Stock Plans Section 4.02(a)
Buyer Termination Fee Section 8.03(f)
Buyer Voting Proposal Section 6.05(b)
Certificates Section 2.02(b)
Charter Proposal Section 6.05(b)
Closing Section 1.02
Closing Date Section 1.02
Code Preamble
Common Exchange Ratio Section 2.01(c)
Confidentiality Agreement Section 5.04
Confidential Information Section 5.04(b)
Constituent Corporations Section 1.03
Dissenting Holder Section 2.01(g)
Dissenting Shares Section 2.01(g)
Exchange Ratios Section 2.01(c)
</TABLE>
v
<PAGE>
<TABLE>
<S> <C>
Effective Time Section 1.01
Environmental Law Section 3.12(c)
ERISA Section 3.13(a)
ERISA Affiliate Section 3.13(a)
Exchange Act Section 3.03(c)
Exchange Agent Section 2.02(a)
Financing Commitment Section 6.12
Exchange Fund Section 2.02(a)
Governmental Entity Section 3.03(c)
Hazardous Substance Section 3.12(c)
HSR Act Section 3.03(c)
Indemnified Parties Section 6.14(a)
International Development Agreements Section 7.01(j)
IRS Section 3.07(b)
Joint Proxy Statement Section 3.16
Material Leases Section 3.08
Merger Preamble
Order Section 6.06(b)
Outside Date Section 8.01(b)
Preferred Exchange Ratio Section 2.01(c)
Registration Statement Section 3.16
Rule 145 Section 6.10
SEC Section 3.03(c)
Securities Act Section 3.03(c)
Seller Balance Sheet Section 3.04(b)
Seller Common Stock Section 2.01(b)
Seller Disclosure Schedule Article III
Seller Employee Plans Section (a)
Seller Material Adverse Effect Section 3.01
Seller Material Contract Section 3.10
Seller Meeting Section 3.16
Seller Nominee Section 6.13
</TABLE>
vi
<PAGE>
<TABLE>
<S> <C>
Seller Section 3.02(b)
Seller SEC Reports Section 3.04(a)
Seller Stock Plans Section 3.02(a)
Seller Termination Fee Section 8.03(f)
Seller Voting Proposal Section 6.05(a)
Subsidiary Section 3.01
Superior Proposal Section 6.01(a)
Surviving Corporation Section 1.03(a)
Tax Section 3.07(a)
Taxes Section 3.07(a)
Third Party Section 8.03(g)
</TABLE>
vii
<PAGE>
AGREEMENT AND PLAN OF MERGER
----------------------------
AGREEMENT AND PLAN OF MERGER (the "Agreement"), dated as of August 1, 1999,
by and among Video City, Inc., a Delaware corporation ("Buyer"), Keystone Merger
Corp., a Delaware corporation and a direct, wholly-owned subsidiary of Buyer
("Sub"), and West Coast Entertainment Corporation, a Delaware corporation
("Seller").
WHEREAS, the Boards of Directors of Buyer and Seller deem it advisable and
in the best interests of each corporation and its respective stockholders that
Buyer and Seller combine in order to advance the long-term business interests of
Buyer and Seller;
WHEREAS, the combination of Buyer and Seller shall be effected by the terms
of this Agreement through a merger of Sub into Seller, as a result of which the
stockholders of Seller will become stockholders of Buyer (the "Merger"); and
WHEREAS, for Federal income tax purposes, it is intended that the Merger
shall qualify as a reorganization within the meaning of Section 368(a) of the
Internal Revenue Code of 1986, as amended (the "Code").
NOW, THEREFORE, in consideration of the foregoing and the respective
representations, warranties, covenants and agreements set forth below, the
parties agree as follows:
ARTICLE I
THE MERGER
Section 1.01 Effective Time of the Merger. Subject to the provisions of
----------------------------
this Agreement, a certificate of merger in such form as is required by the
relevant provisions of the Delaware General Corporation Law ("DGCL") (the
"Certificate of Merger") shall be duly executed and acknowledged by the
Surviving Corporation (as defined in Section 1.03) and thereafter delivered to
the Secretary of State of the State of Delaware for filing, as soon as
practicable on the Closing Date (as defined in Section 1.02). The Merger shall
become effective upon the filing of the Certificate of Merger with the Secretary
of State of the State of Delaware (the "Effective Time").
Section 1.02 Closing. The closing of the Merger (the "Closing") will
-------
take place at 10:00 a.m., California time, on a date to be specified by Buyer
and Seller (the "Closing Date"), which shall be no later than the second
business day after satisfaction or waiver of the conditions set forth in Article
VII, at the offices of Latham & Watkins, 650 Town Center Drive, Costa Mesa,
California, unless another date, place or time is agreed to in writing by Buyer
and Seller.
Section 1.03 Effects of the Merger. At the Effective Time (i) the
---------------------
separate existence of Sub shall cease and Sub shall be merged with and into
Seller (Sub and
1
<PAGE>
Seller are sometimes referred to below as the "Constituent Corporations" and
Seller following the Merger is sometimes referred to below as the "Surviving
Corporation"), (ii) the Certificate of Incorporation of Seller shall be amended
so that Article 4 of such Certificate of Incorporation reads in its entirety as
follows: "The total number of shares of all classes of stock which the
Corporation shall have authority to issue is 1,000, all of which shall consist
of Common Stock, $.01 par value per share," and, as so amended, such Certificate
of Incorporation shall be the Certificate of Incorporation of the Surviving
Corporation, and (iii) the Bylaws of Sub as in effect immediately prior to the
Effective Time shall be the Bylaws of the Surviving Corporation. The Merger
shall have the effects set forth in Section 259 of the DGCL.
Section 1.04 Directors and Officers. The directors and officers of Sub
----------------------
immediately prior to the Effective Time shall be the initial directors and
officers of the Surviving Corporation, each to hold office in accordance with
the Certificate of Incorporation and Bylaws of the Surviving Corporation.
ARTICLE II
CONVERSION OF SECURITIES
Section 2.01 Conversion of Capital Stock. As of the Effective Time, by
---------------------------
virtue of the Merger and without any action on the part of the holder of any
shares of Seller Common Stock or capital stock of Sub:
(a) Capital Stock of Sub. Each issued and outstanding share of the capital
--------------------
stock of Sub shall be converted into and become one fully paid and nonassessable
share of Common Stock of the Surviving Corporation.
(b) Cancellation of Treasury Stock and Buyer-Owned Stock. All shares of
----------------------------------------------------
common stock $.01 par value per share, of Seller ("Seller Common Stock") that
are owned by Seller as treasury stock and any shares of Seller Common Stock
owned by Buyer, Sub or any other wholly-owned Subsidiary (as defined in Section
3.01) of Buyer shall be cancelled and retired and shall cease to exist and no
stock of Buyer or other consideration shall be delivered in exchange therefor.
All shares of Common Stock, $.01 par value per share, of Buyer ("Buyer Common
Stock") owned by Seller shall be unaffected by the Merger.
(c) Exchange Ratio for Seller Common Stock. Subject to Section 2.02, each
--------------------------------------
issued and outstanding share of Seller Common Stock (other than shares to be
cancelled in accordance with Section 2.01(b)), shall be converted into the right
to receive (i) a number of shares of Buyer Common Stock as is calculated in
accordance with subsection (d) below (the "Common Exchange Ratio"), and (ii)
0.05 shares of the Series F Preferred Stock, $.01 par value per share and
liquidation preference of $25.00 per share, plus accrued but unpaid dividends,
of the Buyer (the "Buyer Preferred Stock" and, together with the Buyer Common
Stock, the "Buyer Capital Stock"), having the rights and preferences set forth
in a Certificate of Designation (the "Certificate of
2
<PAGE>
Designation") substantially on the terms attached hereto as Exhibit A and
---------
satisfactory to Buyer and Seller (the "Preferred Exchange Ratio" and, together
with the Common Exchange Ratio, the "Exchange Ratios"). All such shares of
Seller Common Stock, when so converted, shall no longer be outstanding and shall
automatically be cancelled and retired and shall cease to exist, and each holder
of a certificate representing any such shares shall cease to have any rights
with respect thereto, except the right to receive the shares of Buyer Capital
Stock and any cash in lieu of fractional shares of Buyer Capital Stock to be
issued or paid in consideration therefor upon the surrender of such certificate
in accordance with Section 2.02, without interest.
(d) Calculation of Common Exchange Ratio. The Common Exchange Ratio shall
------------------------------------
be calculated as follows:
(i) If the Base Price (as defined below) is greater than
or equal to $2.25 but less than or equal to $2.75, the Common
Exchange Ratio shall be equal to the quotient obtained by
dividing $.75 by the Base Price;
(ii) If the Base Price is less than $2.25, the Common
Exchange Ratio shall be equal to .333;
(iii) If the Base Price is greater than $2.75 but less than
$6.00, the Common Exchange Ratio shall be equal to .2727;
(iv) If the Base Price is $6.00 or greater, the Common
Exchange Ratio shall be .25.
"Base Price" shall be defined as the average of the last prices per share at
which shares of Buyer Common Stock traded on the Nasdaq over the counter
bulletin board for the period of 20 trading days ending on the third trading day
preceding the Closing Date; provided that in calculating such average only
trading days on which the Buyer Common Stock actually traded shall be included.
(e) Adjustments to Exchange Ratio. The Common Exchange Ratio shall be
-----------------------------
adjusted to reflect fully the effect of any stock split, reverse split, stock
dividend (including any dividend or distribution of securities convertible into
Buyer Common Stock or Seller Common Stock), reorganization, recapitalization or
other like change with respect to Buyer Common Stock or Seller Common Stock
occurring after the date hereof and prior to the Effective Time.
The Preferred Exchange Ratio shall be adjusted to reflect fully the effect
of any stock split, reverse split, stock dividend (including any dividend or
distribution of securities convertible into Buyer Preferred Stock or Seller
Common Stock), reorganization, recapitalization or other like change with
respect to Buyer Preferred Stock or Seller Common Stock occurring after the date
hereof and prior to the Effective Time.
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Notwithstanding the foregoing, no adjustment to the Common Exchange Ratio
or Preferred Exchange Ratio shall be made as a result of regularly scheduled
dividends or distributions payable with respect to preferred stock of Buyer
outstanding as of the date hereof or issuances of Buyer Common Stock or
preferred stock of Buyer in connection with acquisitions pending or contemplated
by Buyer as of the date hereof.
(f) Dissenters' Appraisal Rights. Any Dissenting Holder (as defined below)
----------------------------
(i) who files with Seller an objection to the Merger in writing before the
approval of this Agreement by the stockholders of Seller and who states in such
objection that he intends to demand payment for his shares of Seller Common
Stock if the Merger is concluded and (ii) whose shares of Seller Common Stock
are not voted in favor of the Merger shall be entitled to demand payment for his
shares of Seller Common Stock and an appraisal of the value thereof, subject to
and in accordance with the provisions of Section 262 of the DGCL.
(g) Dissenting Shares. No conversion under Section 2.01 hereof shall be
-----------------
made with respect to the shares of Seller Common Stock held by a Dissenting
Holder (such shares being referred to herein as "Dissenting Shares"); provided,
however, (i) each Dissenting Share outstanding immediately prior to the
Effective Time and held by a Dissenting Holder who shall, at or prior to the
Effective Time, withdraw his demand for appraisal or lose his right of
appraisal, in either case pursuant to the applicable provisions of the DGCL,
shall be deemed to be converted, as of the Effective Time, into Buyer Capital
Stock issuable with respect to such Dissenting Share in accordance with the
terms of Section 2.01 hereof and any cash in lieu of fractional shares of Buyer
Capital Stock and (ii) each Dissenting Share outstanding immediately prior to
the Effective Time and held by a Dissenting Holder who shall, after the
Effective Time, withdraw his demand for appraisal or lose his right of appraisal
in either case pursuant to the applicable provisions of the DGCL, shall be
deemed to be converted, as of the Effective Time, into Buyer Capital Stock and
any cash in lieu of fractional shares of Buyer Capital Stock. For purposes of
this Agreement, the term "Dissenting Holder" shall mean a holder of shares of
Seller Common Stock who has demanded appraisal rights in compliance with the
applicable provisions of the DGCL concerning the right of such holder to dissent
from the Merger and demand appraisal of such holder's shares of Seller Common
Stock.
Section 2.02 Exchange of Certificates. The procedures for exchanging
------------------------
outstanding shares of Seller Common Stock for Buyer Capital Stock pursuant to
the Merger are as follows:
(a) Exchange Agent. As of the Effective Time, Buyer shall deposit with a
--------------
bank or trust company designated by Buyer and Seller (the "Exchange Agent"), for
the benefit of the holders of shares of Seller Common Stock, for exchange in
accordance with this Section 2.02, through the Exchange Agent, (i) certificates
representing the shares of Buyer Capital Stock (such shares of Buyer Capital
Stock, together with any dividends or distributions with respect thereto, being
hereinafter referred to as the "Exchange Fund") issuable pursuant to Section
2.01 in exchange for outstanding shares
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of Seller Common Stock, (ii) cash in an amount sufficient to make payments
required pursuant to Section 2.02(e), and (iii) any dividends or distributions
to which holders of Certificates (as defined below) may be entitled pursuant to
Section 2.02(c)
(b) Exchange Procedures. As soon as reasonably practicable after the
-------------------
Effective Time, the Exchange Agent shall mail to each holder of record of a
certificate or certificates which immediately prior to the Effective Time
represented outstanding shares of Seller Common Stock (the "Certificates") whose
shares were converted pursuant to Section 2.01 into the right to receive shares
of Buyer Capital Stock (i) a letter of transmittal in customary form (which
shall specify that delivery shall be effected, and risk of loss and title to the
Certificates shall pass, only upon delivery of the Certificates to the Exchange
Agent and shall be in such form and have such other provisions as Buyer and
Seller may reasonably specify) and (ii) instructions for effecting the surrender
of the Certificates in exchange for certificates representing shares of Buyer
Capital Stock (plus cash in lieu of fractional shares, if any, of Buyer Common
Stock and any dividends or distributions as provided below). Upon surrender of
a Certificate for cancellation to the Exchange Agent or to such other agent or
agents as may be appointed by Buyer, together with such letter of transmittal,
duly executed, the holder of such Certificate shall be entitled to receive in
exchange therefor a certificate representing that number of whole shares of
Buyer Capital Stock which such holder has the right to receive pursuant to the
provisions of this Article II plus cash in lieu of fractional shares pursuant to
Section 2.02(e) and any dividends or distributions pursuant to Section 2.02(c),
and the Certificate so surrendered shall immediately be cancelled. In the event
of a transfer of ownership of Seller Common Stock which is not registered in the
transfer records of Seller, a certificate representing the proper number of
shares of Buyer Capital Stock plus cash in lieu of fractional shares pursuant to
Section 2.02(e) and any dividends or distributions pursuant to Section 2.02(c)
may be issued to a transferee if the Certificate representing such Seller Common
Stock is presented to the Exchange Agent, accompanied by all documents required
to evidence and effect such transfer and by evidence that any applicable stock
transfer taxes have been paid. Until surrendered as contemplated by this
Section 2.02, each Certificate shall be deemed at any time after the Effective
Time to represent only the right to receive upon such surrender the certificate
representing shares of Buyer Capital Stock plus cash in lieu of fractional
shares pursuant to Section 2.02(e) and any dividends or distributions pursuant
to Section 2.02(c) as contemplated by this Section 2.02.
(c) Distributions with Respect to Unexchanged Shares. No dividends or
------------------------------------------------
other distributions declared or made after the Effective Time with respect to
Buyer Capital Stock with a record date after the Effective Time shall be paid to
the holder of any unsurrendered Certificate with respect to the shares of Buyer
Capital Stock represented thereby and no cash payment in lieu of fractional
shares shall be paid to any such holder pursuant to subsection (e) below until
the holder of record of such Certificate shall surrender such Certificate.
Subject to the effect of applicable laws, following surrender of any such
Certificate, there shall be paid to the record holder of the certificates
representing whole shares of Buyer Capital Stock issued in exchange therefor,
without interest, (i) at the time of such surrender, the amount of any cash
5
<PAGE>
payable in lieu of a fractional share of Buyer Capital Stock to which such
holder is entitled pursuant to subsection (e) below and the amount of dividends
or other distributions with a record date after the Effective Time previously
paid with respect to such whole shares of Buyer Capital Stock, and (ii) at the
appropriate payment date, the amount of dividends or other distributions with a
record date after the Effective Time but prior to surrender and a payment date
subsequent to surrender payable with respect to such whole shares of Buyer
Capital Stock.
(d) No Further Ownership Rights in Seller Common Stock. All shares of
--------------------------------------------------
Buyer Capital Stock issued upon the surrender for exchange of Certificates in
accordance with the terms hereof (including any cash or other distributions paid
pursuant to subsection (c) or (e) of this Section 2.02) shall be deemed to have
been issued in full satisfaction of all rights pertaining to such shares of
Seller Common Stock, subject, however, to the Surviving Corporation's obligation
to pay any dividends or make any other distributions with a record date prior to
the Effective Time which may have been declared or made by Seller on such shares
of Seller Common Stock in accordance with the terms of this Agreement (to the
extent permitted under Section 5.01) prior to the date hereof and which remain
unpaid at the Effective Time, and from and after the Effective Time there shall
be no further registration of transfers on the stock transfer books of the
Surviving Corporation of the shares of Seller Common Stock which were
outstanding immediately prior to the Effective Time. If, after the Effective
Time, Certificates are presented to the Surviving Corporation for any reason,
they shall be cancelled and exchanged as provided in this Section 2.02.
(e) No Fractional Shares. No certificate or scrip representing fractional
--------------------
shares of Buyer Capital Stock shall be issued upon the surrender for exchange of
Certificates, and such fractional share interests will not entitle the owner
thereof to vote or to any other rights of a stockholder of Buyer.
Notwithstanding any other provision of this Agreement, each holder of shares of
Seller Common Stock exchanged pursuant to the Merger who would otherwise have
been entitled to receive a fraction of a share of Buyer Common Stock and/or
Buyer Preferred Stock (after taking into account all Certificates delivered by
such holder) shall receive, in lieu thereof, with respect to Buyer Common Stock,
cash (without interest) in an amount equal to such fractional part of a share of
Buyer Common Stock multiplied by the average of the last reported sales prices
of Buyer Common Stock, as reported on the Nasdaq over the counter bulletin
board), on each of the 20 trading days ending on the third trading day preceding
the Closing Date; provided that in calculating such average only trading days on
which the Buyer Common Stock traded shall be included and, with respect to Buyer
Preferred Stock, cash (without interest) in an amount equal to such fractional
part of a share multiplied by $25.00.
(f) Termination of Exchange Fund. Any portion of the Exchange Fund which
----------------------------
remains undistributed to the stockholders of Seller for 180 days after the
Effective Time shall be delivered to Buyer, upon demand, and any stockholders of
Seller who have not previously complied with this Section 2.02 shall thereafter
look only to Buyer for payment of their claim for Buyer Capital Stock, any cash
in lieu of fractional shares of
6
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Buyer Capital Stock and any dividends or distributions with respect to Buyer
Capital Stock.
(g) No Liability. To the extent permitted by applicable law, neither Buyer
------------
nor Seller shall be liable to any holder of shares of Seller Common Stock or
Buyer Capital Stock, as the case may be, for such shares (or dividends or
distributions with respect thereto) properly delivered to a public official
pursuant to any applicable abandoned property, escheat or similar law.
(h) Withholding Rights. Each of Buyer and the Surviving Corporation shall
------------------
be entitled to deduct and withhold from the consideration otherwise payable
pursuant to this Agreement to any holder of shares of Seller Common Stock such
amounts as it is required to deduct and withhold with respect to the making of
such payment under the Code, or any provision of state, local or foreign tax
law. To the extent that amounts are so withheld by Surviving Corporation or
Buyer, as the case may be, such withheld amounts shall be treated for all
purposes of this Agreement as having been paid to the holder of the shares of
Seller Common Stock in respect of which such deduction and withholding was made
by Surviving Corporation or Buyer, as the case may be.
(i) Lost Certificates. If any Certificate shall have been lost, stolen or
-----------------
destroyed, upon the making of an affidavit of that fact by the person claiming
such Certificate to be lost, stolen or destroyed and, if required by the
Surviving Corporation or the Buyer, the posting by such person of a bond in such
reasonable amount as the Surviving Corporation or the Buyer may direct as
indemnity against any claim that may be made against it with respect to such
Certificate, the Exchange Agent will issue in exchange for such lost, stolen or
destroyed Certificate the shares of Buyer Capital Stock and any cash in lieu of
fractional shares, and unpaid dividends and distributions on shares of Buyer
Capital Stock deliverable in respect thereof pursuant to this Agreement.
(j) Options and Warrants.
--------------------
(i) As of the Effective Time, all options to purchase Seller Common
Stock issued by Seller pursuant to its stock option plans or otherwise
("Options") and warrants to purchase Seller Common Stock ("Warrants"), whether
vested or unvested, shall be assumed by Buyer. Immediately after the Effective
Time, each Option or Warrant outstanding immediately prior to the Effective Time
shall be deemed to constitute an option or warrant to acquire, on the same terms
and conditions as were applicable under such Option or Warrant at the Effective
Time, such number of shares of Buyer Common Stock and Buyer Preferred Stock as
is equal to the number of shares of Seller Common Stock subject to the
unexercised portion of such Option or Warrant multiplied by the Common Exchange
Ratio and the Preferred Exchange Ratio, respectively (with any fraction
resulting from such multiplication to be rounded down to the nearest whole
number). The exercise price per share of each such assumed Option or Warrant
shall be equal to the exercise price of such Option or Warrant immediately prior
to the Effective Time divided by the Common Exchange Ratio, rounded up to the
nearest whole cent. The term, exercisability, vesting schedule, status as an
incentive
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<PAGE>
stock option under Section 422 of the Internal Revenue Code of 1986 (as amended,
the Code), if applicable, and all of the other terms of the Options shall
otherwise remain unchanged to the extent permitted by law.
(ii) As soon as practicable after the Effective Time, Buyer or the
Surviving Corporation shall deliver to the holders of Options and Warrants
appropriate notices setting forth such holders' rights pursuant to such Options
and Warrants, as amended by this Section, and the agreements evidencing such
Options and Warrants shall continue in effect on the same terms and conditions
(subject to the amendments provided for in this Section).
(iii) Buyer shall take all corporate action necessary to reserve for
issuance a sufficient number of shares of Buyer Capital Stock for delivery upon
exercise of the Options and Warrants assumed in accordance with this Section.
As soon as practicable after the Effective Time, Buyer shall file a Registration
Statement on Form S-8 (or any successor form) under the Securities Act of 1933,
as amended (the Securities Act) with respect to all shares of Buyer Capital
Stock subject to Options that may be registered on a Form S-8, and shall use its
best efforts to maintain the effectiveness of such Registration Statement for so
long as such Options remain outstanding.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF SELLER
Seller represents and warrants to Buyer and Sub that the statements
contained in this Article III are true and correct, except as set forth herein
or in the disclosure schedule to be delivered by Seller to Buyer on or before
the date which is ten (10) days after the date of this Agreement (the "Seller
Disclosure Schedule"). The Seller Disclosure Schedule shall be arranged in
paragraphs corresponding to the numbered and lettered paragraphs contained in
this Article III and the disclosure in any paragraph shall qualify other
paragraphs in this Article III only to the extent that it is reasonably apparent
from a reading of such disclosure that it also qualifies or applies to such
other paragraphs.
Section 3.01 Organization of Seller. Each of Seller and its Subsidiaries
----------------------
(as defined below) is a corporation duly organized, validly existing and in good
standing under the laws of the jurisdiction of its incorporation, has all
requisite corporate power to own, lease and operate its property and to carry on
its business as now being conducted and as proposed to be conducted, and is duly
qualified to do business and is in good standing as a foreign corporation in
each jurisdiction in which the failure to be so qualified would have a change or
effect (i) that is materially adverse to the business, assets, properties,
results of operations, condition (financial or otherwise) or prospects of Seller
and its Subsidiaries taken as a whole; (ii) that will prevent or materially
impair or materially delay the ability of the parties hereto to consummate the
Merger; or (iii) that would materially impair the ability of Buyer to own all of
the equity of Seller, or to
8
<PAGE>
operate its or any of its Subsidiaries' businesses (a "Seller Material Adverse
Effect"); provided, however, that for purposes of this Agreement, any adverse
change in the stock price of Seller in and of itself, as quoted on the Nasdaq
over the counter bulletin board, shall not be taken into account in determining
whether there has been or would be a "Seller Material Adverse Effect" on or with
respect to Seller and its Subsidiaries, taken as a whole. Except as set forth in
the Seller SEC Reports (as defined in Section 3.04) filed prior to the date
hereof, neither Seller nor any of its Subsidiaries directly or indirectly owns
any equity or similar interest in, or any interest convertible into or
exchangeable or exercisable for, any corporation, partnership, joint venture or
other business association or entity. As used in this Agreement, the word
"Subsidiary" means, with respect to Seller, any corporation or other
organization, whether incorporated or unincorporated, of which (i) Seller or any
other Subsidiary of Seller is a general partner or (ii) at least a majority of
the securities or other interests having by their terms (x) ordinary voting
power to elect a majority of the Board of Directors or others performing similar
functions with respect to such corporation or other organization or (y) a
majority of the economic interest in such corporation or other organization is
directly or indirectly owned or controlled by such party or by any one or more
of its Subsidiaries, or by such party and one or more of its Subsidiaries and,
with respect to Buyer, those entities listed on Buyer Disclosure Schedule 4.01.
All of Seller's Subsidiaries are listed on Schedule 3.01. Except as set forth on
Schedule 3.01, all of the Seller's Subsidiaries are wholly-owned by Seller.
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<PAGE>
Section 3.02 Seller Capital Structure.
------------------------
(a) The authorized capital stock of Seller consists of 25,000,000 shares of
Common Stock ("Seller Common Stock") and 2,000,000 shares of preferred stock,
$.01 par value per share ("Seller Preferred Stock"). As of the date hereof,
(i) 14,084,704 shares of Seller Common Stock were issued and outstanding, all of
which are validly issued, fully paid and nonassessable, (ii) no shares of Seller
Common Stock were held in the treasury of Seller or by Subsidiaries of Seller
and (iii) no shares of Seller Preferred Stock were issued or outstanding. The
Seller Disclosure Schedule shows the number of shares of Seller Common Stock
reserved for future issuance pursuant to stock options granted and outstanding
as of the date hereof and the plans under which such options were granted
(collectively, the "Seller Stock Plans"). As of the date hereof, all shares of
Seller Common Stock subject to issuance as specified above are duly authorized
and, upon issuance on the terms and conditions specified in the instruments
pursuant to which they are issuable, shall be validly issued, fully paid and
nonassessable. As of the date hereof, there are no obligations, contingent or
otherwise, of Seller or any of its Subsidiaries to repurchase, redeem or
otherwise acquire any shares of Seller Common Stock or the capital stock of any
Subsidiary or to provide funds to or make any material investment (in the form
of a loan, capital contribution or otherwise) in any such Subsidiary or any
other entity other than guarantees of bank obligations of Subsidiaries entered
into in the ordinary course of business. As of the date hereof, all of the
outstanding shares of capital stock of each of Seller's Subsidiaries are duly
authorized, validly issued, fully paid and nonassessable and all such shares are
owned by Seller or another Subsidiary of Seller free and clear of all security
interests, liens, claims, pledges, agreements, limitations in Seller's voting
rights, charges or other encumbrances of any nature.
(b) As of the date hereof, except for Options and Warrants listed on
Schedule 3.02(b), as set forth in this Section 3.02 or as reserved for future
grants of options under the Seller Stock Plans, there are no equity securities
of any class of Seller or any of its Subsidiaries, or any security exchangeable
into or exercisable for such equity securities, issued, reserved for issuance or
outstanding, and, as of the date hereof, there are no options, warrants, equity
securities, calls, rights, commitments or agreements of any character to which
Seller or any of its Subsidiaries is a party or by which it is bound obligating
Seller or any of its Subsidiaries to issue, deliver or sell, or cause to be
issued, delivered or sold, additional shares of capital stock of Seller or any
of its Subsidiaries or obligating Seller or any of its Subsidiaries to grant,
extend, accelerate the vesting of, otherwise modify or amend or enter into any
such option, warrant, equity security, call, right, commitment or agreement. As
of the date hereof, there are no voting trusts, proxies or other voting
agreements or understandings to which Seller is a party or of which Seller is
aware with respect to the shares of capital stock of Seller.
10
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Section 3.03 Authority; No Conflict; Required Filings and Consents.
-----------------------------------------------------
(a) Seller has all requisite corporate power and authority to enter into
this Agreement and to consummate the transactions contemplated by this
Agreement. The execution and delivery of this Agreement and the consummation of
the transactions contemplated by this Agreement by Seller have been duly
authorized by all necessary corporate action on the part of Seller, subject only
to the approval of the Merger by Seller's stockholders under the DGCL. The
affirmative vote of the holders of a majority of the shares of Seller Common
Stock outstanding on the record date for the Seller Meeting is the only vote by
Seller's stockholders required to approve the Merger. This Agreement has been
duly executed and delivered by Seller and constitutes the valid and binding
obligation of Seller, enforceable in accordance with its terms, subject to
bankruptcy, insolvency, fraudulent transfer, reorganization, moratorium and
similar laws of general applicability relating to or affecting creditors' rights
and to general equity principles (the "Bankruptcy and Equity Exception").
(b) Except as set forth on Schedule 3.03(b), the execution and delivery of
this Agreement by Seller does not, and the consummation of the transactions
contemplated by this Agreement will not, (i) conflict with, or result in any
violation or breach of, any provision of the Certificate of Incorporation or
Bylaws of Seller, (ii) result in any violation or breach of, or constitute (with
or without notice or lapse of time, or both) a default (or give rise to a right
of termination, cancellation, acceleration of any obligation to put any
securities back to Seller or any of its Subsidiaries or any other rights
activated by any "change of control" or similar concept or loss of any material
benefit) under, or require a consent or waiver under, any of the terms,
conditions or provisions of any note, bond, mortgage, indenture, lease, contract
or other agreement, instrument or obligation to which Seller or any of its
Subsidiaries is a party or by which any of them or any of their properties or
assets may be bound, or (iii) conflict with or violate any permit, concession,
franchise, license, judgment, order, decree, statute, law, ordinance, rule or
regulation applicable to Seller or any of its Subsidiaries or any of its or
their properties or assets.
11
<PAGE>
(c) No consent, approval, order or authorization of, or registration,
declaration or filing with, any court, administrative agency or commission or
other governmental authority or instrumentality ("Governmental Entity") is
required by or with respect to Seller or any of its Subsidiaries in connection
with the execution and delivery of this Agreement or the consummation of the
transactions contemplated hereby, except for (i) the filing of the pre-merger
notification report under the Hart-Scott-Rodino Antitrust Improvements Act of
1976, as amended, ("HSR Act"), (ii) the filing of the Certificate of Merger with
the Delaware Secretary of State, (iii) the filing of the Joint Proxy Statement
(as defined in Section 3.16 below) with the Securities and Exchange Commission
(the "SEC") in accordance with the Securities Exchange Act of 1934, as amended
(the "Exchange Act"), (iv) such consents, approvals, orders, authorizations,
registrations, declarations and filings as may be required under applicable
state securities laws and (v) such other consents, authorizations, filings,
approvals and registrations which, if not obtained or made, would not be
reasonably likely to have a Seller Material Adverse Effect.
Section 3.04 SEC Filings; Financial Statements.
---------------------------------
(a) Seller has filed and made available to Buyer all forms, reports and
documents required to be filed by Seller with the SEC since May 14, 1996
(collectively, the "Seller SEC Reports"). The Seller SEC Reports (i) at the
time filed, complied in all material respects with the applicable requirements
of the Securities Act of 1933, as amended (the "Securities Act"), and the
Exchange Act, as the case may be, and (ii) did not at the time they were filed
(or if amended or superseded by a filing prior to the date of this Agreement,
then on the date of such filing) contain any untrue statement of a material fact
or omit to state a material fact required to be stated in such Seller SEC
Reports or necessary in order to make the statements in such Seller SEC Reports,
in the light of the circumstances under which they were made, not misleading.
None of Seller's Subsidiaries is required to file any forms, reports or other
documents with the SEC.
(b) Each of the consolidated financial statements (including, in each case,
any related notes) contained in the Seller SEC Reports complied as to form in
all material respects with the applicable published rules and regulations of the
SEC with respect thereto, was prepared in accordance with generally accepted
accounting principles applied on a consistent basis throughout the periods
involved (except as may be indicated in the notes to such financial statements
or, in the case of unaudited statements, as permitted by Form 10-Q of the SEC)
and fairly presented the consolidated financial position of Seller and its
Subsidiaries as of the dates and the consolidated results of its operations and
cash flows for the periods indicated, except that the unaudited interim
financial statements were or are subject to normal and recurring year-end
adjustments which were not and are not expected to be material in amount. The
unaudited balance sheet of Seller as of May 2, 1999 is referred to herein as the
"Seller Balance Sheet."
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Section 3.05 No Undisclosed Liabilities. Except as set forth on Schedule
--------------------------
3.05, as disclosed in the Seller SEC Reports filed prior to the date hereof, or
as otherwise made available in a writing by Seller to Buyer specifying this
Section 3.05, and except for normal or recurring liabilities incurred since May
2, 1999 in the ordinary course of business consistent with past practices,
Seller and its Subsidiaries do not have any liabilities, either accrued,
contingent or otherwise (whether or not required to be reflected in financial
statements in accordance with generally accepted accounting principles), and
whether due or to become due, which individually or in the aggregate exceed
$250,000 or are reasonably likely to have a Seller Material Adverse Effect.
Section 3.06 Absence of Certain Changes or Events. Except as disclosed
------------------------------------
in the Seller SEC Reports filed prior to the date hereof, since the date of the
Seller Balance Sheet, Seller and its Subsidiaries have conducted their
businesses only in the ordinary course and in a manner consistent with past
practice and, since such date, there has not been (i) any change in the
financial condition, results of operations, business or properties of Seller and
its Subsidiaries, taken as a whole that, individually or in the aggregate, has
had, or is reasonably likely to have, a Seller Material Adverse Effect; (ii) any
damage, destruction or loss (whether or not covered by insurance), individually
or in the aggregate, with respect to Seller or any of its Subsidiaries having a
Seller Material Adverse Effect; (iii) any material change by Seller in its
accounting methods not required pursuant to generally accepted accounting
principles, principles or practices to which Buyer has not previously consented
in writing; (iv) any revaluation by Seller of any of its assets, individually or
in the aggregate, having a Seller Material Adverse Effect; or (v) any other
action or event that would have required the consent of Buyer pursuant to
Section 5.01 of this Agreement had such action or event occurred after the date
of this Agreement.
Section 3.07 Taxes.
-----
(a) For the purposes of this Agreement, a "Tax" or, collectively, "Taxes,"
means any and all federal, state, local and foreign taxes, assessments and other
governmental charges, duties, levies, fees, impositions and liabilities,
including taxes based upon or measured by gross receipts, income, profits,
sales, net worth, use and occupation, and value added, ad valorem, transfer,
gains, franchise, withholding, payroll, recapture, employment-related, excise,
unemployment insurance, social security, utility, business license, occupation,
business organization, stamp, severance, escheat, environmental and real and
personal property taxes, together with all interest, penalties and additions
imposed with respect to such amounts and any obligations under any agreements or
arrangements with any other person with respect to such amounts and including
any liability for taxes of a predecessor entity; a "Tax Authority" or "Taxing
Authority" shall mean any domestic, foreign, federal, national, state, county or
municipal or other local government, any subdivision, agency, commission or
authority thereof, or any quasi-governmental body exercising any taxing
authority or any other authority exercising Tax regulatory authority, and "Tax
Return" shall mean all returns, declarations, reports, claims for refund or
information returns or statements, including
13
<PAGE>
any schedule or attachment thereto, and including any amendment thereof filed or
to be filed with any Tax Authority.
(b) Seller and each of its Subsidiaries have or will have prior to the
Closing Date (i) timely filed with the proper Tax Authorities all Tax Returns
and reports required to be filed by them prior to the Closing Date (taking into
account valid extensions) which Tax Returns are complete, correct and accurate
in all respects, (ii) paid all Taxes due and payable, and (iii) paid all Taxes
for which a notice of assessment or collection has been received (other than
amounts being contested in good faith by appropriate proceedings), except in the
case of clause (i), (ii) or (iii) for any such filings, payments or accruals
which would not individually or in the aggregate, have a Seller Material Adverse
Effect. The accruals and reserves for Taxes (including deferred taxes)
reflected in the balance sheet of Seller and its Subsidiaries as of May 2, 1999
included in Seller's Quarterly Report on Form 10-Q for the quarter ended May 2,
1999 are in all material respects adequate to cover all Taxes of Seller and each
of its Subsidiaries, as applicable, required by be accrued through the date
thereof (including interest and penalties, if any, thereon and Taxes being
contested) in accordance with generally accepted accounting principles applied
on a consistent basis and Seller's and each of its Subsidiaries' past practices.
No Taxing Authority has asserted any claim for Taxes, or to the knowledge of the
officers or tax compliance employees of Seller, is threatening to assert any
claims for Taxes. Seller and each of its Subsidiaries have withheld or
collected and paid over to the appropriate governmental authorities (or are
properly holding for such payment) all Taxes required by law to be withheld or
collected. There are no liens for Taxes upon the assets of Seller or any of its
Subsidiaries (other than liens for Taxes that are not yet due and payable). No
extension of a statute of limitations relating to Taxes is in effect with
respect to Seller or any of its Subsidiaries.
(c) Seller and each of its subsidiaries have never been members of an
affiliated group of corporations within the meaning of Section 1504 of the Code,
with the exception of the common group for which Seller is the common parent nor
has Seller or any of its Subsidiaries, or any predecessor or affiliate of any of
them, become liable (whether by contract, as transferee or successor, by law or
otherwise) for the Taxes of any other person or entity under Treasury Regulation
Section 1.1502-6 or any similar provision of state, local or foreign law; and
are not parties to or bound by any Tax indemnity, Tax sharing or Tax allocation
agreement (whether written or unwritten) which includes a party other than
Seller nor does Seller owe any amount under any such agreement.
(d) Neither Seller nor any of its Subsidiaries has made, requested or
agreed to make, nor is any of them required to make, any adjustment under
Section 481(a) of the Code by reason of a change in accounting method or
otherwise for any taxable year. Neither Seller nor any of its Subsidiaries has
made any elections, and is not required, to treat any of its assets as owned by
another person or as tax-exempt bond financed property or tax-exempt use
property within the meaning of Section 168 of the Code or under any comparable
state or local income Tax or other Tax provision. Neither Seller nor any of its
Subsidiaries is a "consenting corporation" within the
14
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meaning of Section 341(f) of the Code, and none of the assets of Seller or the
Subsidiaries are subject to an election under Section 341(f) of the Code.
(e) Neither Seller nor any of its Subsidiaries has been a United States
real property holding corporation within the meaning of Section 897(c)(2) of the
Code during the applicable period specified in Section 897(c)(1)(A)(ii) of the
Code.
(f) Neither Seller nor any of its Subsidiaries has made any payments, is
obligated to make any payments, or is a party to any agreement , contract,
arrangement or plan that has resulted or would result, separately or in the
aggregate, in the payment of any amount as to which a deduction may be denied
under Section 162(m) of the Code or that could obligate it to make any payments
that will be an "excess parachute payment" under Section 280G of the Code.
Section 3.08 Properties. Schedule 3.08 sets forth a true and complete
----------
list of all real property leased by Seller or its Subsidiaries (collectively
"Material Lease(s)") and the location of the premises. Schedule 3.08 identifies
all Material Leases under which Seller is in default. Seller does not own any
real property.
Section 3.09 Intellectual Property.
---------------------
(a) Seller and its Subsidiaries own, or are licensed or otherwise possess
legally enforceable rights to use, all patents, trademarks, trade names, service
marks and copyrights, any applications for and registrations of such patents,
trademarks, trade names, service marks and copyrights, and all processes,
formulae, methods, schematics, technology, know-how, computer software programs
or applications and tangible or intangible proprietary information or material
that are necessary to conduct the business of Seller and its Subsidiaries as
currently conducted, or planned to be conducted, the absence of which,
individually or in the aggregate, would be reasonably likely to have a Seller
Material Adverse Effect (the "Seller Intellectual Property Rights").
(b) The execution and delivery of this Agreement and consummation of the
Merger will not result in the breach of, or create on behalf of any third party
the right to terminate or modify or trigger any additional payments by Seller or
any Subsidiary under, any license, sublicense or other agreement relating to the
Seller's Intellectual Property Rights, or any material licenses, sublicenses and
other agreements as to which Seller or any of its Subsidiaries is a party and
pursuant to which Seller or any of its Subsidiaries is authorized to use any
third party patents, trademarks, copyrights or trade secrets ("Seller Third
Party Intellectual Property Rights"), the breach, creation or trigger of which,
individually or in the aggregate, would be reasonably likely to have a Seller
Material Adverse Effect.
(c) All patents, registered trademarks, service marks and copyrights which
are held by Seller or any of its Subsidiaries the loss or invalidity of which,
individually or in the aggregate, would cause a Seller Material Adverse Effect,
are valid and subsisting. Seller (i) has not been sued in any suit, action or
proceeding, or received in writing any
15
<PAGE>
claim or notice, which involves a claim of infringement of any patents,
trademarks, service marks, copyrights or violation of any trade secret or other
proprietary right of any third party; and (ii) has no knowledge that the
manufacturing, marketing, licensing or sale of its products infringes any
patent, trademark, service mark, copyright, trade secret or other proprietary
right of any third party, which infringement in the cases of clause (i) and
(ii), individually or in the aggregate, would reasonably be expected to have a
Seller Material Adverse Effect.
Section 3.10 Agreements, Contracts and Commitments. Schedule 3.10 sets
-------------------------------------
forth a true and complete list of all material contracts to which the Seller or
its Subsidiaries is a party (collectively, "Seller Material Contracts").
Neither Seller nor any of its Subsidiaries has breached, or received in writing
any claim or notice that it has breached, any of the terms or conditions of any
Seller Material Contract in such a manner as, individually or in the aggregate,
are reasonably likely to have a Seller Material Adverse Effect. Each Seller
Material Contract that has not expired by its terms is in full force and effect.
Section 3.11 Litigation. Except as described in the Seller SEC Reports
----------
filed prior to the date hereof, there is no action, suit or proceeding, claim,
arbitration or investigation against Seller pending or as to which Seller has
received any written notice of assertion.
Section 3.12 Environmental Matters.
---------------------
(a) Except as disclosed in the Seller SEC Reports filed prior to the date
hereof, to the knowledge of the Seller (except for clauses (v), (vi) and (vii)
below, which shall not be qualified as to knowledge), (i) Seller and its
Subsidiaries have complied with all applicable Environmental Laws (as defined in
Section 3.12(b)); (ii) the properties currently owned or operated by Seller and
its Subsidiaries (including soils, groundwater, surface water, buildings or
other structures) are not contaminated with any Hazardous Substances (as defined
in Section 3.12(c)); (iii) the properties formerly owned or operated by Seller
or any of its Subsidiaries were not contaminated with Hazardous Substances
during the period of ownership or operation by Seller or any of its
Subsidiaries; (iv) neither Seller nor its Subsidiaries are subject to liability
for any Hazardous Substance disposal or contamination on any third party
property; (v) neither Seller nor any of its Subsidiaries have released any
Hazardous Substance; (vi) neither Seller nor any of its Subsidiaries has
received any notice, demand, letter, claim or request for information alleging
that Seller or any of its Subsidiaries may be in violation of or liable under
any Environmental Law; (vii) neither Seller nor any of its Subsidiaries is
subject to any orders, decrees, injunctions or other arrangements with any
Governmental Entity or is subject to any indemnity or other agreement with any
third party relating to liability under any Environmental Law or relating to
Hazardous Substances; (viii) there are no circumstances or conditions involving
Seller or any of its Subsidiaries that could reasonably be expected to result in
any claims, liability, investigations, costs or restrictions on the ownership,
use or transfer of any property of
16
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Seller pursuant to any Environmental Law, and (ix) there are no underground
tanks located on the properties formerly or currently owned by Seller or any of
its Subsidies.
(b) As used herein, the term "Environmental Law" means any federal, state,
local or foreign law, regulation, order, decree, permit, authorization, opinion,
common law or agency requirement relating to: (A) the protection, investigation
or restoration of the environment, health and safety, or natural resources, (B)
the handling, use, presence, disposal, release or threatened release of any
Hazardous Substance or (C) noise, wetlands, pollution, contamination or any
injury or threat of injury to persons or property.
(c) As used herein, the term "Hazardous Substance" means any substance that
is: (A) listed, classified or regulated pursuant to any Environmental Law; (B)
any petroleum product or by-product, asbestos-containing material, lead-
containing paint or plumbing, polychlorinated biphenyls, radioactive materials
or radon; or (C) any other substance which is the subject of regulatory action
by any Governmental Entity pursuant to any Environmental Law.
Section 3.13 Employee Benefit Plans.
----------------------
(a) All accrued obligations of Seller and each of its Subsidiaries
applicable to its employees, whether arising by operation of law, by contract,
by past custom or otherwise, for payments by Seller or such of its Subsidiaries
to trusts or other funds or to any governmental agency, with respect to
unemployment compensation benefits, social security benefits or any other
benefits for its employees with respect to the employment of said employees
through the date hereof have been paid or adequate accruals therefor have been
made on, as applicable, the books and records of Seller or such of its
Subsidiaries and the Seller SEC Reports.
(b) Except as disclosed on Schedule 3.13, as of the date hereof:
(1) Neither Seller nor any entity that is a member of a group of which
Seller is a member and which is under common control with Seller, within
the meaning of the regulations promulgated under Section 414 of the Code
(an "ERISA Affiliate") maintains or has any obligations to contribute to,
or has in effect or has committed to adopt, any employee pension benefit
plan within the meaning of Section 3(2) of ERISA ("Pension Plan") or any
employee welfare benefit plan within the meaning of Section 3(1) of ERISA
("Welfare Plan") (the Pension Plans and the Welfare Plans are collectively
referred to herein as the "ERISA Plans");
(2) Each ERISA Plan conforms in all material respects to all applicable
laws and orders, including ERISA and the applicable provisions of the Code.
All notices, reports, returns, applications and disclosures have been
timely made which are required to be made to the Internal Revenue Service,
the U.S.
17
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Department of Labor, the Pension Benefit Guaranty Corporation, any
participants in the ERISA Plans, any trustee, or any insurer with respect
to the ERISA Plans;
(3) Seller and its ERISA Affiliates have made or provided for (with
fully-funded reserves) all contributions heretofore required to have been
made under all of the ERISA Plans, and will, by the Closing, have made or
provided for (with fully-funded reserves) all contributions required to be
made on or before the Closing under all such plans; and
(4) The transaction contemplated by this Agreement will not result in
liability for severance or termination pay or result in increased employee
benefits becoming payable to any employees of Seller.
(c) True, correct and complete copies of the following documents, with
respect to each of the ERISA Plans, have been delivered to Buyer:
(1) Each ERISA Plan document, employment contract, policy, procedure
or other governing instrument relating to an ERISA Plan, including all
amendments, supplements, collective bargaining agreements, letters,
memoranda, understandings and any other document reasonably necessary to
reflect the terms and conditions of each ERISA Plan.
(2) The most recent summary plan description of each ERISA Plan for
which a summary plan description is required under ERISA, and summaries of
material modification thereto.
(3) All instruments under which the assets of any ERISA Plan are held
or managed and benefits provided, including, but not limited to, insurance
contracts, trust agreements, custodial contracts and investment management
agreements.
(d) All Pension Plans shall be terminated by Seller prior to the Closing
Date.
Section 3.14 Compliance With Laws. Except as set forth on Schedule 3.14,
--------------------
Seller has not received any notices of violation with respect to, and, to its
knowledge, Seller has complied with, and is not in violation of, any federal,
state or local statute, law or regulation with respect to the conduct of its
business, or the ownership or operation of its business.
Section 3.15 Accounting and Tax Matters. To its knowledge, after
--------------------------
consulting with its independent auditors and tax counsel, neither Seller nor any
of its Affiliates (as defined in Section 6.10) has taken or agreed to take any
action which would prevent the Merger from constituting a transaction qualifying
as a reorganization under 368(a) of the Code.
18
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Section 3.16 Registration Statement; Proxy Statement/Prospectus. The
--------------------------------------------------
information to be supplied by Seller for inclusion in the registration statement
on Form S-4 pursuant to which shares of Buyer Capital Stock issued in the Merger
will be registered under the Securities Act (the "Registration Statement"),
shall not at the time the Registration Statement is declared effective by the
SEC contain any untrue statement of a material fact or omit to state any
material fact required to be stated in the Registration Statement or necessary
in order to make the statements in the Registration Statement, in light of the
circumstances under which they were made, not misleading. The information to be
supplied by Seller for inclusion in the joint proxy statement/prospectus to be
sent to the stockholders of Buyer and Seller in connection with the meeting of
Seller's stockholders to consider this Agreement and the Merger (the "Seller
Meeting") and in connection with the meeting of Buyer's stockholders (the "Buyer
Meeting") to consider the issuance of shares of Buyer Capital Stock pursuant to
the Merger (the "Joint Proxy Statement") shall not, on the date the Joint Proxy
Statement is first mailed to stockholders of Seller or Buyer, at the time of the
Seller Stockholders' Meeting and the Buyer Stockholders' Meeting or at the
Effective Time, contain any statement which, at such time and in light of the
circumstances under which it shall be made, is false or misleading with respect
to any material fact, or omit to state any material fact necessary in order to
make the statements made in the Joint Proxy Statement not false or misleading;
or omit to state any material fact necessary to correct any statement in any
earlier communication with respect to the solicitation of proxies for the Seller
Meeting or the Buyer Meeting which has become false or misleading. If at any
time prior to the Effective Time any event relating to Seller or any of its
Affiliates, officers or directors should be discovered by Seller which should be
set forth in an amendment to the Registration Statement or a supplement to the
Joint Proxy Statement, Seller shall promptly inform Buyer.
Section 3.17 Labor Matters. Neither Seller nor any of its Subsidiaries
-------------
is a party to or otherwise bound by any collective bargaining agreement,
contract or other agreement or understanding with a labor union or labor
organization, nor, as of the date hereof, is Seller or any of its Subsidiaries
the subject of any material proceeding asserting that Seller or any of its
Subsidiaries has committed an unfair labor practice or is seeking to compel it
to bargain with any labor union or labor organization nor, as of the date of
this Agreement, is there pending or, to the knowledge of the executive officers
of Seller, threatened, any material labor strike, dispute, walkout, work
stoppage, slow-down or lockout involving Seller or any of its Subsidiaries.
Section 3.18 Insurance. All material fire and casualty, general
---------
liability, business interruption, product liability, and sprinkler and water
damage insurance policies maintained by Seller or any of its Subsidiaries are
with reputable insurance carriers, provide full and adequate coverage for all
normal risks incident to the business of Seller and its Subsidiaries and their
respective properties and assets, and are in character and amount at least
equivalent to that carried by persons engaged in similar businesses and subject
to the same or similar perils or hazards, except for any such failures to
maintain insurance policies that, individually or in the aggregate, are not
reasonably likely to have a Seller Material Adverse Effect.
19
<PAGE>
Section 3.19 No Existing Discussions. As of the date hereof, Seller has
-----------------------
ceased all discussions or negotiations with any other party with respect to any
proposed, potential or contemplated Acquisition Proposal (as defined in Section
6.01).
Section 3.20 Section 203 of the DGCL Not Applicable. The Board of
--------------------------------------
Directors of Seller has taken all actions so that the restrictions contained in
Section 203 of the DGCL applicable to a "business combination" (as defined in
Section 203) will not apply to the execution, delivery or performance of this
Agreement or the consummation of the Merger or the other transactions
contemplated by this Agreement.
Section 3.21 Inventory and Equipment. As of the date hereof, the rental
-----------------------
and sale inventory of Seller consists of at least 2,600,000 units of pre-
recorded video cassettes, video discs and video games. The inventory of Seller
reflected on the Seller Balance Sheet, as well as other inventory items acquired
since the date of the Seller Balance Sheet that are now the property of Seller
will be usable and salable or rentable in the ordinary course of business of
Seller. Seller's furniture, fixtures, signs, computer hardware and software,
equipment and other personal property are suitable for the uses in which they
are currently employed, are in good operating condition and are free from any
defects, except for ordinary wear and tear and such minor defects as do not
interfere with the conduct of the Seller's business.
Section 3.22 Year 2000. Except as disclosed on Schedule 3.22 hereto, to
---------
Seller's knowledge, all information technology used by Seller or any of its
Subsidiaries in the administration and operation of its business accurately
processes or will process date and time data (including, but not limited to
calculating, comparing and sequencing) from, into and between the years 1999 and
2000 and the twentieth century and the twenty-first century, including leap year
calculations, and neither performance nor functionality of such technology will
be affected by dates prior to, during or after the year 2000, provided that such
information technology receives properly formatted date data from all hardware
and software with which it interacts. Seller and its Subsidiaries have made
reasonable inquiries of their vendors regarding the performance and
functionality of the information technology of such vendors with respect to the
processing of date and time data as described in the first sentence of this
Section 3.22. Neither Seller nor any of its Subsidiaries has received any
information indicating that the performance or functionality of the information
technology of such vendors will be affected by dates prior to, during or after
the year 2000.
20
<PAGE>
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF BUYER AND SUB
Buyer and Sub represent and warrant to Seller that the statements contained
in this Article IV are true and correct, except as set forth herein or in the
disclosure schedule to be delivered by Buyer to Seller on or before the date
which is ten (10) days after the date of this Agreement (the "Buyer Disclosure
Schedule"). The Buyer Disclosure Schedule shall be arranged in paragraphs
corresponding to the numbered and lettered paragraphs contained in this Article
IV and the disclosure in any paragraph shall qualify other paragraphs in this
Article IV only to the extent that it is reasonably apparent from a reading of
such disclosure that it also qualifies or applies to such other paragraphs.
Section 4.01 Organization of Buyer and Sub. Each of Buyer and Sub and
-----------------------------
Buyer's other Subsidiaries is a corporation duly organized, validly existing and
in good standing under the laws of the jurisdiction of its incorporation, has
all requisite corporate power to own, lease and operate its property and to
carry on its business as now being conducted and as proposed to be conducted,
and is duly qualified to do business and is in good standing as a foreign
corporation in each jurisdiction in which the failure to be so qualified would
have a change or effect (i) that is materially adverse to the business, assets,
properties, results of operations, condition (financial or otherwise) or
prospects of Buyer and its Subsidiaries taken as a whole; (ii) that will prevent
or materially impair or materially delay the ability of Buyer to own all of the
equity of Seller, or to operate its or any of its Subsidiaries' businesses (a
"Buyer Material Adverse Effect"); provided, however, that for purposes of this
Agreement, any adverse change in the stock price of Buyer in and of itself, as
quoted on the Nasdaq "over the counter" bulletin board, shall not be taken into
account in determining whether there has been or would be an "Buyer Material
Adverse Effect" on or with respect to Buyer and its Subsidiaries, taken as a
whole. Except as set forth in the Buyer SEC Reports (as defined in Section
4.04) filed prior to the date hereof, neither Buyer nor any of its Subsidiaries
directly or indirectly owns any equity or similar interest in, or any interest
convertible into or exchangeable or exercisable for, any corporation,
partnership, joint venture or other business association or entity.
21
<PAGE>
Section 4.02 Buyer Capital Structure.
-----------------------
(a) The authorized capital stock of Buyer consists of (i) 30,000,000 shares
of Common Stock, $.01 par value ("Buyer Common Stock"), and (ii) 2,000,000
shares of Preferred Stock, $.01 par value. As of the date hereof, there were
outstanding 14,177,495 shares of Buyer Common Stock, 7,750 shares of Series AA
Convertible Redeemable Preferred Stock, 76,000 shares of Series B Convertible
Redeemable Preferred Stock, 700 shares of Series C Convertible Redeemable
Preferred Stock, 2,000 shares of Series D Convertible Redeemable Preferred Stock
and 1,800 shares of Series E Convertible Preferred Stock were issued and
outstanding. The Buyer Disclosure Schedule shows the number of shares of Buyer
Common Stock reserved for future issuance pursuant to stock options granted and
outstanding as of the date hereof and the plans under which such options were
granted (collectively, the "Buyer Stock Plans"). All shares of Buyer Common
Stock subject to issuance as specified above are duly authorized and, upon
issuance on the terms and conditions specified in the instruments pursuant to
which they are issuable, shall be validly issued, fully paid and nonassessable.
There are no obligations, contingent or otherwise, of Buyer or any of its
Subsidiaries to repurchase, redeem or otherwise acquire any shares of Buyer
Common Stock or the capital stock of any Subsidiary or to provide funds to or
make any material investment (in the form of a loan, capital contribution or
otherwise) in any such Subsidiary or any other entity other than guarantees of
bank obligations of Subsidiaries entered into in the ordinary course of
business. All of the outstanding shares of capital stock of each of Buyer'
Subsidiaries are duly authorized, validly issued, fully paid and nonassessable
and all such shares (other than directors' qualifying shares and similar shares
in the case of foreign Subsidiaries) are owned by Buyer or another Subsidiary of
Buyer free and clear of all security interests, liens, claims, pledges,
agreements, limitations in Buyer' voting rights, charges or other encumbrances
of any nature.
(b) Except as set forth in this Section 4.02 or as reserved for future
grants of options under the Buyer Stock Plans, there are no equity securities of
any class of Buyer, or any security exchangeable into or exercisable for such
equity securities, issued, reserved for issuance or outstanding. There are no
options, warrants, equity securities, calls, rights, commitments or agreements
of any character to which Buyer or any of its Subsidiaries is a party or by
which it is bound obligating Buyer or any of its Subsidiaries to issue, deliver
or sell, or cause to be issued, delivered or sold, additional shares of capital
stock of Buyer or any of its Subsidiaries or obligating Buyer or any of its
Subsidiaries to grant, extend, accelerate the vesting of or enter into any such
option, warrant, equity security, call, right, commitment or agreement. There
are no voting trusts, proxies or other voting agreements or understandings with
respect to the shares of capital stock of Buyer to which the Buyer is a party.
22
<PAGE>
Section 4.03 Authority; No Conflict; Required Filings and Consents.
-----------------------------------------------------
(a) Each of Buyer and the Sub has all requisite corporate power and
authority to enter into this Agreement and to consummate the transactions
contemplated by this Agreement. The execution and delivery of this Agreement
and the consummation of the transactions contemplated by this Agreement have
been duly authorized by all necessary corporate action on the part of each of
Buyer and Sub (including the approval of the Merger by Buyer as the sole
stockholder of Sub), subject only to the approval of the Buyer Voting Proposal
and the Charter Proposal (as defined in Section 6.05) by Buyer' stockholders.
This Agreement and has been duly executed and delivered by each of Buyer and Sub
and constitutes the valid and binding obligation of each of Buyer and Sub,
enforceable in accordance with their terms, subject to the Bankruptcy and Equity
Exception.
(b) Except as set forth on Schedule 4.03(b), the execution and delivery of
this Agreement by each of Buyer and Sub does not, and the consummation of the
transactions contemplated by this Agreement will not, (i) conflict with, or
result in any violation or breach of, any provision of the Certificate of
Incorporation or Bylaws of Buyer or Sub, (ii) result in any violation or breach
of, or constitute (with or without notice or lapse of time, or both) a default
(or give rise to a right of termination, cancellation or acceleration of any
obligation or loss of any material benefit) under, or require a consent or
waiver under, any of the terms, conditions or provisions of any note, bond,
mortgage, indenture, lease, contract or other agreement, instrument or
obligation to which Buyer or any of its Subsidiaries is a party or by which any
of them or any of their properties or assets may be bound, or (iii) conflict
with or violate any permit, concession, franchise, license, judgment, order,
decree, statute, law, ordinance, rule or regulation applicable to Buyer or any
of its Subsidiaries or any of its or their properties or assets.
(c) No consent, approval, order or authorization of, or registration,
declaration or filing with, any Governmental Entity is required by or with
respect to Buyer or any of its Subsidiaries in connection with the execution and
delivery of this Agreement or the consummation of the transactions contemplated
hereby or thereby, except for (i) the filing of the pre-merger notification
report under the HSR Act, (ii) the filing of the Registration Statement with the
SEC in accordance with the Securities Act, (iii) the filing of the Certificate
of Merger with the Delaware Secretary of State, (iv) the filing of the Joint
Proxy Statement with the SEC in accordance with the Exchange Act, (v) such
consents, approvals, orders, authorizations, registrations, declarations and
filings as may be required under applicable state securities laws and the laws
of any foreign country, (vi) the approval by the Nasdaq National Market of the
listing of the shares of Buyer Common Stock to be issued in the transactions
contemplated by this Agreement, and (vii) such other consents, authorizations,
filings, approvals and registrations which, if not obtained or made, would not
be reasonably likely to have a Buyer Material Adverse Effect.
Section 4.04 SEC Filings; Financial Statements.
---------------------------------
23
<PAGE>
(a) Buyer has filed and made available to Seller all forms, reports and
documents required to be filed by Buyer with the SEC since January 8, 1997
(collectively, the "Buyer SEC Reports"). The Buyer SEC Reports (i) at the time
filed, complied in all material respects with the applicable requirements of the
Securities Act and the Exchange Act, as the case may be, and (ii) did not at the
time they were filed (or if amended or superseded by a filing prior to the date
of this Agreement, then on the date of such filing) contain any untrue statement
of a material fact or omit to state a material fact required to be stated in
such Buyer SEC Reports or necessary in order to make the statements in such
Buyer SEC Reports, in the light of the circumstances under which they were made,
not misleading. None of Buyer' Subsidiaries is required to file any forms,
reports or other documents with the SEC.
(b) Each of the consolidated financial statements (including, in each case,
any related notes) contained in the Buyer SEC Reports complied as to form in all
material respects with the applicable published rules and regulations of the SEC
with respect thereto, was prepared in accordance with generally accepted
accounting principles applied on a consistent basis throughout the periods
involved (except as may be indicated in the notes to such financial statements
or, in the case of unaudited statements, as permitted by Form 10-Q of the SEC)
and fairly presented the consolidated financial position of Buyer and its
Subsidiaries as of the dates and the consolidated results of its operations and
cash flows for the periods indicated, except that the unaudited interim
financial statements were or are subject to normal and recurring year-end
adjustments which were not or are not expected to be material in amount. The
unaudited balance sheet of Buyer as of April 30, 1999 is referred to herein as
the "Buyer Balance Sheet."
Section 4.05 Absence of Certain Changes or Events. Except as disclosed
------------------------------------
in the Buyer SEC Reports filed prior to the date hereof, since the date of the
Buyer Balance Sheet, Buyer and its Subsidiaries have conducted their businesses
only in the ordinary course and in a manner consistent with past practice and,
since such date, there has not been (i) any change in the financial condition,
results of operations, business or properties of Buyer and its Subsidiaries,
taken as a whole, that, individually or in the aggregate, has had, or is
reasonably likely to have, a Buyer Material Adverse Effect; (ii) any damage,
destruction or loss (whether or not covered by insurance) with respect to Buyer
or any of its Subsidiaries having, individually or in the aggregate, a Buyer
Material Adverse Effect; (iii) any material change by Buyer in its accounting
methods not required pursuant to generally accepted accounting principles,
principles or practices to which Seller has not previously consented in writing;
(iv) any revaluation by Buyer of any of its assets having, individually or in
the aggregate, a Buyer Material Adverse Effect; or (v) any other action or event
that would have required the consent of Seller pursuant to Section 5.02 of this
Agreement had such action or event occurred after the date of this Agreement.
Section 4.06 Litigation. Except as described in the Buyer SEC Reports
----------
filed prior to the date hereof, there is no action, suit or proceeding, claim,
arbitration or
24
<PAGE>
investigation against Buyer pending or as to which Buyer has received any
written notice of assertion.
Section 4.07 Compliance With Laws. To its knowledge, Buyer has complied
--------------------
with, is not in violation of, and has not received any notices of violation with
respect to, any federal, state or local statute, law or regulation with respect
to the conduct of its business, or the ownership or operation of its business.
Section 4.08 Registration Statement; Proxy Statement/Prospectus. The
--------------------------------------------------
information in the Registration Statement (except for information supplied by
Seller for inclusion in the Registration Statement, as to which Buyer makes no
representation) shall not at the time the Registration Statement is declared
effective by the SEC contain any untrue statement of a material fact or omit to
state any material fact required to be stated in the Registration Statement or
necessary in order to make the statements in the Registration Statement, in
light of the circumstances under which they were made, not misleading. The
information (except for information to be supplied by Seller for inclusion in
the Joint Proxy Statement, as to which Buyer makes no representation) in the
Joint Proxy Statement shall not, on the date the Joint Proxy Statement is first
mailed to stockholders of Buyer or Seller, at the time of the Buyer Meeting and
the Seller Meeting or at the Effective Time, contain any statement which, at
such time and in light of the circumstances under which it shall be made, is
false or misleading with respect to any material fact, or omit to state any
material fact necessary in order to make the statements made in the Joint Proxy
Statement not false or misleading; or omit to state any material fact necessary
to correct any statement in any earlier communication with respect to the
solicitation of proxies for the Buyer Meeting or the Seller Meeting which has
become false or misleading. If at any time prior to the Effective Time any
event relating to Buyer or any of its Affiliates, officers or directors should
be discovered by Buyer which should be set forth in an amendment to the
Registration Statement or a supplement to the Joint Proxy Statement, Buyer shall
promptly inform Seller.
Section 4.09 Interim Operations of Sub. Sub will be formed prior to the
-------------------------
Merger and Buyer will cause Sub to execute a counterpart to this Agreement at
such time. Sub will be formed solely for the purpose of engaging in the
transactions contemplated by this Agreement, will engage in no other business
activities and will conduct its operations only as contemplated by this
Agreement. All representations and warranties concerning Sub herein shall be
deemed to have been given only when Sub is formed.
ARTICLE V
CONDUCT OF BUSINESS
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Section 5.01 Covenants of Seller. During the period from the date of
-------------------
this Agreement and continuing until the earlier of the termination of this
Agreement or the Effective Time, Seller agrees as to itself and its respective
Subsidiaries (except to the extent that Buyer shall otherwise consent in
writing), to carry on its business in the usual, regular and ordinary course in
substantially the same manner as previously conducted, and, to the extent
consistent with such business, use commercially reasonable efforts consistent
with past practices and policies to preserve intact its present business
organization, keep available the services of its present officers and key
employees and preserve its relationships with customers, suppliers,
distributors, and others having business dealings with it. From the date hereof
through the Closing Date (or the earlier termination of this Agreement in
accordance with its terms), Seller shall, and shall cause each of its
Subsidiaries to, duly and timely file all tax returns required to be filed with
governmental authorities, and duly observe and conform to in all material
respects all applicable laws and orders. Except as expressly contemplated by
this Agreement or set forth in the Seller Disclosure Schedule, Seller shall not
(and shall not permit any of its respective Subsidiaries to), without the
written consent of Buyer:
(a) Accelerate, amend or change the period of exercisability of
outstanding options or restricted stock granted under any employee stock plan of
such party or authorize cash payments in exchange for any options granted under
any of such plans except as required by the terms of such plans or any related
agreements in effect as of the date of this Agreement;
(b) Declare or pay any dividends on or make any other distributions
(whether in cash, stock or property) in respect of any of its capital stock, or
split, combine or reclassify any of its capital stock or issue or authorize the
issuance of any other securities in respect of, in lieu of or in substitution
for shares of its capital stock, or purchase or otherwise acquire, directly or
indirectly, any shares of its capital stock except from former employees,
directors and consultants in accordance with agreements providing for the
repurchase of shares in connection with any termination of service to such
party;
(c) Issue, deliver or sell, or authorize or propose the issuance, delivery
or sale of, any shares of its capital stock or securities convertible into
shares of its capital stock, or subscriptions, rights, warrants or options to
acquire, or other agreements or commitments of any character obligating it to
issue any such shares or other convertible securities, other than (i) the grant
of options to employees, which options represent in the aggregate the right to
acquire no more than 300,000 shares (net of cancellations) of Seller Common
Stock, or (ii) the issuance of shares of Seller Common Stock pursuant to the
exercise of options outstanding on the date of this Agreement or granted
pursuant to the foregoing clause;
(d) Acquire or agree to acquire by merging or consolidating with, or by
purchasing a substantial equity interest in or substantial portion of the assets
of, or by any other manner, any business or any corporation, partnership or
other business
26
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organization or division, or otherwise acquire or agree to acquire any assets
(other than inventory and other items in the ordinary course of business);
(e) Sell, lease, license or otherwise dispose of any of its material
properties or assets, except for sales of inventory in the ordinary course of
business and consistent with past practice;
(f) Except in connection with the forgiveness of certain loans to
management in an amount not to exceed $400,000, (i) increase or agree to
increase the compensation payable or to become payable to its officers or
employees, except for increases in salary or wages of employees (other than
officers) in accordance with past practices, (ii) grant any additional severance
or termination pay to, or enter into any employment or severance agreements
with, any employees or officers, (iii) enter into any collective bargaining
agreement, (iv) establish, adopt, enter into or amend any bonus, profit sharing,
thrift, compensation, stock option, restricted stock, pension, retirement,
deferred compensation, employment, termination or severance or other plan,
trust, fund, policy or arrangement for the benefit of any directors, officers or
employees;
(g) Amend or propose to amend its charter or bylaws, except as
contemplated by this Agreement;
(h) Incur any indebtedness for borrowed money other than pursuant to
credit agreements in effect as of the date hereof and in compliance with Section
7.02(g); or
(i) Except in the ordinary course of business or in connection with the
settlement of disputes with respect to leased property, enter into, renew,
modify, amend or terminate any Seller Material Contract or waive, release or
assign any material rights or claims;
(j) Make any material Tax election, or grant any extensions or waiver of a
statute of limitation with respect to material Taxes, settle or compromise any
claim or liability for material Taxes or amend any material Tax Return;
(k) Change its methods of accounting as in effect at April 30, 1999 except
as required by generally accepted accounting principles;
(l) Make or commit to make any capital expenditures that exceed $1,000,000
in the aggregate;
(m) Except as required pursuant to commitments existing on the date hereof
or made without violation of this Section 5.01, make any cash disbursement
exceeding $1,000,000 for any single item or related series of items excluding
disbursements with respect to Inventory;
27
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(n) Invest funds in debt securities or other instruments maturing more
than 90 days after the date of investment;
(o) Adopt or implement any stockholder rights plan that could have the
effect of impeding or restricting the consummation of the transactions
contemplated hereby;
(p) Willingly allow or permit any of Seller's insurance policies to be
suspended, impaired or canceled;
(q) Fail to maintain any assets in substantially their current state of
repair, excepting normal wear and tear or fail to replace consistent with
Seller's past practice inoperable, worn-out or obsolete or destroyed assets;
(r) Make any new loans or advances to any partnership, firm corporation,
officer, director or affiliate, or, except for expense incurred in the ordinary
course of business, any individual who is not an officer, director or affiliate;
(s) Fail to comply with any material respect with all laws applicable to
it;
(t) Except as contemplated by clause (f) above, enter into, renew, modify,
or revise any agreement or transaction with any of its affiliates; or
(u) Intentionally do any other act which would cause any representation or
warranty of Seller in this Agreement to be or become untrue in any material
respect;
(v) Enter into any agreement, arrangement or understanding or otherwise
become obligated, to do any action prohibited hereunder; or
(w) Take, or agree in writing or otherwise to take, any of the actions
described in Sections (a) through (v) above.
Section 5.02 Covenants of Buyer. During the period from the date of this
------------------
Agreement and continuing until the earlier of the termination of this Agreement
or the Effective Time, Buyer agrees as to itself and its respective Subsidiaries
(except to the extent that Seller shall otherwise consent in writing), to carry
on its business in the usual, regular and ordinary course in substantially the
same manner as previously conducted, and, to the extent consistent with such
business, use commercially reasonable efforts consistent with past practices and
policies to preserve intact is present business organization, keep available the
services of its present officers and key employees and preserve its
relationships with customers, suppliers, distributors, and others having
business dealings with it. Except as expressly contemplated by this Agreement,
Buyer shall not (and shall not permit any of its respective Subsidiaries to),
without the written consent of Seller:
(a) Declare or pay any dividends on or make any other distributions, other
than regularly scheduled dividends or distributions payable with respect to
preferred
28
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stock of Buyer outstanding as of the date of this agreement (whether in cash,
stock or property) in respect of any of its capital stock, or split, combine or
reclassify any of its capital stock or issue or authorize the issuance of any
other securities in respect of, in lieu of or in substitution for shares of its
capital stock, or purchase or otherwise acquire, directly or indirectly, any
shares of its capital stock, except from former employees, directors and
consultants in accordance with agreements providing for the repurchase of shares
in connection with any termination of service by such party or in connection
with acquisitions pending or contemplated by Buyer as of the date hereof,
provided, however, that Buyer shall not issue any shares of its Common Stock in
- -------- -------
connection with any such acquisition at a price per share less
than $2.25;
(b) Amend or propose to amend its charter or bylaws, except as
contemplated by this Agreement; or
(c) Take, or agree in writing or otherwise to take, any of the actions
described in Sections (a) and (b).
Section 5.03 Cooperation. Subject to compliance with applicable law,
-----------
from the date hereof until the Effective Time, each of Buyer and Seller shall
make its officers available to confer on a regular and frequent basis with one
or more representatives of the other party to report on the general status of
ongoing operations and shall promptly provide the other party or its counsel
with copies of all filings made by such party with any Governmental Entity in
connection with this Agreement, the Merger and the transactions contemplated
hereby and thereby (including any filing required under the HSR Act, the cost of
which shall be borne by Buyer, provided that if, for any reason, the Merger does
-------- ----
not occur, Seller will reimburse Buyer for one-half of the filing fee associated
therewith). Each of Buyer and Seller shall promptly notify the other in writing
of, and will use all commercially reasonable efforts to cure before the Closing
Date, any event, transaction or circumstance, as soon as practicable after it
becomes known to such party, that causes or will cause any covenant of Buyer or
Seller under this Agreement to be breached or that renders or will render untrue
any representation or warranty of Buyer or Seller contained in this Agreement.
No notice given pursuant to this paragraph shall have any effect on the
representations, warranties, covenants or agreements contained in this Agreement
for purposes of determining satisfaction of any condition contained herein.
Section 5.04 Confidentiality.
---------------
(a) No Disclosure. The parties acknowledge that the transaction described
-------------
herein is of a confidential nature and shall not be disclosed except to
Representatives and Affiliates, or as required by law, until such time as the
parties make a public announcement regarding the transaction as provided in
Section 6.07.
(b) Preservation of Confidentiality. In connection with the negotiation
-------------------------------
of this Agreement, the preparation for the consummation of the transactions
contemplated hereby, and the performance of obligations hereunder, each of the
parties hereto
29
<PAGE>
acknowledges that it will have access to confidential information relating to
the other party, including technical, manufacturing or marketing information,
ideas, methods, developments, inventions, improvements, business plans, trade
secrets, scientific or statistical data, diagrams, drawings, specifications or
other proprietary information relating thereto, together with all analyses,
compilations, studies or other documents, records or data prepared by Seller or
Buyer or their respective Representatives which contain or otherwise reflect or
are generated from such information ("Confidential Information"). The term
"Confidential Information" does not include information received by a party in
connection with the transactions contemplated hereby which (i) is or becomes
generally available to the public other than as a result of a disclosure by such
party or its Representatives, (ii) was within such party's possession prior to
its being furnished to such party by or on behalf of the other party in
connection with the transactions contemplated hereby, provided that the source
of such information was not known by the receiving party to be bound by a
confidentiality agreement with or other contractual, legal or fiduciary
obligation of confidentiality to the other party or any other Person with
respect to such information or (iii) becomes available to such party on a
nonconfidential basis from a source other than the other party or any of its
Representatives, provided that such source is not bound by a confidentiality to
the other party or any other Person with respect to such information.
(c) Each party shall treat all Confidential Information of the other party
as confidential, preserve the confidentiality thereof and not disclose any
Confidential Information, except to its Representatives and Affiliates who need
to know such Confidential Information in connection with the transactions
contemplated hereby. Each party shall use all reasonable efforts to cause its
Representatives and Affiliates to treat all Confidential Information of the
other party as confidential, preserve the confidentiality thereof and not
disclose any Confidential Information of the other party. Each party shall be
responsible for any breach of this Agreement by any of its Representatives and
Affiliates. If, however, Confidential Information is disclosed, the disclosing
party shall immediately notify the other party in writing and take all
reasonable steps required to prevent further disclosure.
(d) Until the Closing or the termination of this Agreement, all
Confidential Information shall remain the property of the party who originally
possessed such information. In the event of the termination of this Agreement
for any reason whatsoever, each party shall, and shall cause its Representatives
to, return to the other party all Confidential Information (including all
copies, summaries and extracts thereof) furnished to such party by such other
party in connection with the transactions contemplated hereby.
(e) If either party or any of its Representatives or Affiliates is
requested or required (by oral questions, interrogatories, requests for
information or documents in legal proceedings, subpoena, civil investigative
demand or other similar process) or is required by operation of law to disclose
any Confidential Information of the other party, such party shall provide the
other party with prompt written notice of such request or requirement, which
notice shall, if practicable, be at least 48 hours prior to making such
30
<PAGE>
disclosure, so that the other party may seek a protective order or other
appropriate remedy and/or waive compliance with the provisions of this
Agreement, If, in the absence of a protective order or other remedy or the
receipt of such a waiver, either party or any of its Representatives are
nonetheless, in the opinion of counsel, legally compelled to disclose
Confidential Information of the other party, then such party may disclose that
portion of the Confidential Information which such counsel advises is legally
required to be disclosed, provided that such party uses its reasonable efforts
to preserve the confidentiality of the Confidential Information, whereupon such
disclosure shall not constitute a breach of this Agreement.
(f) This Agreement shall supersede the confidentiality agreement dated as
of December 31, 1998 between Buyer and Seller and such confidentiality agreement
is hereby deemed terminated.
ARTICLE VI
ADDITIONAL AGREEMENTS
Section 6.01 No Solicitation.
---------------
(a) From and after the date of this Agreement until the earlier of the
Effective Time or termination of this Agreement pursuant to its terms, Seller
shall not, directly or indirectly, through any officer, director, employee,
financial advisor, representative or agent of such party (i) solicit, initiate,
or encourage (including, but not limited to, by way of furnishing information)
or take any other action to facilitate any inquiries or proposals that
constitute, or could reasonably be expected to lead to a proposal or offer for a
merger, consolidation, business combination, sale of assets (other than the sale
of Seller's products or used equipment in the ordinary course of business), sale
of shares of capital stock (including without limitation by way of a tender
offer but excluding sales pursuant to existing employee and director stock
plans) or similar transaction involving Seller or any of its Subsidiaries, other
than the transactions contemplated by this Agreement (any of the foregoing
transactions being referred to in this Agreement as an "Acquisition Transaction"
and any of the foregoing inquiries or proposals being referred to in this
Agreement as an "Acquisition Proposal"), (ii) engage in negotiations or
discussions concerning, or provide any non-public information to any person or
entity, or group of persons or entities, relating to, any Acquisition Proposal,
or (iii) agree to or recommend any Acquisition Proposal; provided, however, that
-------- -------
nothing contained in this Agreement shall prevent Seller or its Board of
Directors, from (A) furnishing non-public information to, or entering into
discussions or negotiations with, any person or entity in connection with an
unsolicited bona fide written Acquisition Proposal by such person or entity or
agreeing to (with the terms of any such agreement being subject to termination
of this Agreement in accordance with Article VIII) or recommending an
unsolicited bona fide written Acquisition Proposal to the stockholders of
Seller, if and only to the extent that (1) such Person has made a written
proposal to Seller's Board of Directors to consummate a fully-financed
Acquisition, (2) the Board of Directors of Seller believes in
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good faith (after consultation with its financial advisor) that such Acquisition
Proposal is reasonably capable of being completed on the terms proposed and
would, if consummated, result in a transaction that would provide greater value
than the transaction contemplated by this Agreement (any such more favorable
Acquisition Proposal being referred to in this Agreement as a "Superior
Proposal") and Seller's Board of Directors determines reasonably and in good
faith after consultation with outside legal counsel that failure to take such
action would be inconsistent with its fiduciary duties to Seller's stockholders
under applicable law and (3) prior to furnishing such non-public information to,
or entering into discussions or negotiations with, such person or entity, such
Board of Directors receives from such person or entity an executed
confidentiality agreement with terms no less favorable to such party than those
contained in Section 5.04 hereof; or (B) complying with Rule 14d-9 and 14e-2
promulgated under the Exchange Act with regard to an Acquisition Proposal or
making any disclosure to Seller's stockholders if, in the reasonable good faith
judgment of Seller's Board of Directors, after consultation with outside legal
counsel, failure to make such disclosure would be inconsistent with its
fiduciary duties to Seller's stockholders under applicable law. Seller agrees
not to release any person from, or waive any provision of, any standstill
agreement to which it is a party or any confidentiality agreement between it and
another person who has made, or who may reasonably be considered likely to make,
an Acquisition Proposal, unless the failure to take such action would, in the
reasonable good faith judgement of Seller's Board of Directors, after
consultation with outside legal counsel, failure to make such disclosure would
be inconsistent with its fiduciary duties to Seller's stockholders under
applicable law.
(b) Seller shall notify Buyer as promptly as practicable after receipt by
Seller (or its advisors) of any Acquisition Proposal or any request for
nonpublic information in connection with an Acquisition Proposal or for access
to the properties, books or records of Seller by any person or entity that
informs Seller that it is considering making, or has made, an Acquisition
Proposal. Such notice shall be made orally and in writing and shall indicate in
reasonable detail the identity of the offeror and the terms and conditions of
such proposal, inquiry or contact. Seller shall continue to keep Buyer
informed, on a current basis, of the status of any such discussions or
negotiations and all material terms being discussed or negotiated, which shall
include, without limitation, any change to the proposed price and terms and form
of payment.
Neither the Board of Directors of Seller nor any committee thereof shall
withdraw or modify, or propose to withdraw or modify, in a manner adverse to
Buyer the approval or recommendation by the Board of Directors of Seller of this
Agreement or the Merger unless, following the receipt of a Superior Proposal,
failing to withdraw or modify such approval or recommendation in the reasonable
good faith judgement of Seller's Board of Directors, after consultation with
outside legal counsel, would be inconsistent with its fiduciary duties to the
Seller's stockholder's under applicable law; provided, however, that, Seller's
Board of Directors shall submit this Agreement to Seller's stockholders for
approval, whether or not Seller's Board of Directors at any time subsequent to
the date hereof determines that this Agreement is no longer advisable or
recommends that the stockholders of Seller reject it or otherwise modifies or
withdraws its recommendation.
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Unless Seller's Board of Directors has withdrawn its recommendation of this
Agreement in compliance herewith, Seller shall use all lawful efforts to solicit
from stockholders of Seller proxies in favor of the approval and adoption of
this Agreement and the Merger and to secure the vote or consent of stockholders
required by the DGCL and its certificate of incorporation and bylaws to approve
and adopt this Agreement and the Merger.
Section 6.02 Proxy Statement/Prospectus; Registration Statement.
--------------------------------------------------
(a) As promptly as practical after the execution of this Agreement, Buyer
and Seller shall prepare and file with the SEC the Joint Proxy Statement, and
Buyer shall prepare and file with the SEC the Registration Statement, in which
the Joint Proxy Statement will be included as a prospectus, provided that Buyer
may delay the filing of the Registration Statement until approval of the Joint
Proxy Statement by the SEC. Buyer and Seller shall use all reasonable efforts
to cause the Registration Statement to become effective as soon after such
filing as practicable. Each of Buyer and Seller will respond to any comments of
the SEC and will use its respective commercially reasonable efforts to have the
Joint Proxy Statement cleared by the SEC and the Registration Statement declared
effective under the Securities Act as promptly as practicable after such filings
and will cause the Joint Proxy Statement and the prospectus contained within the
Registration Statement to be mailed to its stockholders at the earliest
practicable time after both the Joint Proxy Statement is cleared by the SEC and
the Registration Statement is declared effective under the Securities Act. Each
of Buyer and Seller will notify the other promptly upon the receipt of any
comments from the SEC or its staff or any other government officials and of any
request by the SEC or its staff or any other government officials for amendments
or supplements to the Registration Statement, the Joint Proxy Statement or any
filing pursuant to Section 6.02(b) or for additional information and will supply
the other with copies of all correspondence between such party or any of its
representatives, on the one hand, and the SEC, or its staff or any other
government officials, on the other hand, with respect to the Registration
Statement, the Joint Proxy Statement, the Merger or any filing pursuant to
Section 6.02(b). Each of Buyer and Seller will cause all documents that it is
responsible for filing with the SEC or other regulatory authorities under this
Section 6.02 to comply in all material respects with all applicable requirements
of law and the rules and regulations promulgated thereunder. Whenever any event
occurs which is required to be set forth in an amendment or supplement to the
Joint Proxy Statement, the Registration Statement or any filing pursuant to
Section 6.02(b), Buyer or Seller, as the case may be, will promptly inform the
other of such occurrence and cooperate in filing with the SEC or its staff or
any other government officials, and/or mailing to stockholders of Buyer and/or
Seller, such amendment or supplement.
(b) Buyer and Seller shall make all necessary filings with respect to the
Merger under the Securities Act, the Exchange Act, applicable state blue sky
laws and the rules and regulations thereunder.
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Section 6.03 Certificate of Designation. Prior to the Closing, the Buyer
--------------------------
shall file the Certificate of Designation with the Secretary of State of the
State of Delaware.
Section 6.04 Access to Information. Upon reasonable notice, Seller and
---------------------
Buyer shall each (and shall cause each of their respective Subsidiaries to)
afford to the officers, employees, accountants, counsel and other
representatives of the other, reasonable access, during normal business hours
during the period prior to the Effective Time, to all its properties, books,
contracts, commitments and records and, during such period, each of Seller and
Buyer shall (and shall cause each of their respective Subsidiaries to) furnish
promptly to the other (a) a copy of each report, schedule, registration
statement and other document filed or received by it during such period pursuant
to the requirements of federal securities laws and (b) all other information
concerning its business, properties and personnel as such other party may
reasonably request. Unless otherwise required by law, the parties will hold any
such information which is nonpublic in confidence in accordance with Section
5.04 hereof. No information or knowledge obtained in any investigation pursuant
to this Section 6.04 or otherwise shall affect or be deemed to modify any
representation or warranty contained in this Agreement or the conditions to the
obligations of the parties to consummate the Merger.
Section 6.05 Stockholders Meetings.
---------------------
(a) The Seller, acting through its Board of Directors, shall, subject to
and according to applicable law and its Certificate of Incorporation and Bylaws,
promptly and duly call, give notice of, convene and hold as soon as practicable
to ensure obtaining requisite stockholder approval following the date on which
the Registration Statement becomes effective the Seller Meeting for the purpose
of voting to approve and adopt this Agreement and the Merger (the "Seller Voting
Proposal"). The Board of Directors of the Seller shall, subject to the
fiduciary duties of the Board of Directors of Seller under applicable law as
advised by outside counsel, (i) recommend approval and adoption of the Seller
Voting Proposal by the stockholders of the Seller and include in the Joint Proxy
Statement such recommendation and (ii) take all reasonable and lawful action to
solicit and obtain such approval; provided, however, that in the context of an
Acquisition Proposal the Board of Directors of Seller may withdraw such
recommendation (and be relieved of its duty to solicit approval of Seller's
shareholders but not be relieved of its obligations to call and hold the Seller
Shareholder Meeting for the purposes of voting to approve and adopt the Seller
Voting Proposal) if (but only if) (i) the Board of Directors of Seller has
received a Superior Proposal and (ii) such Board of Directors upon advice of its
outside legal counsel determines that it is required, in order to comply with
its fiduciary duties under applicable law, to recommend such Superior Proposal
to the stockholders of Seller. The Seller stockholder vote required for the
approval of the Seller Voting Proposal shall be a majority of the outstanding
shares of Seller Common stock on the record date for the Seller Meeting.
(b) Buyer, acting through its Board of Directors, shall, subject to and in
accordance with applicable law and its Certificate of Incorporation and Bylaws,
promptly
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and duly call, give notice of, convene and hold as soon as practicable to ensure
obtaining requisite stockholder approval following the date on which the
Registration Statement becomes effective, the Buyer Meeting for the purpose of
voting (i) to amend its Certificate of Incorporation to increase its authorized
Capital Stock in connection with the transactions contemplated hereby (the
"Charter Proposal"), (ii) to approve the issuance of the shares of Buyer Capital
Stock to be issued in the Merger (the "Buyer Voting Proposal") and (iii) to
elect the Seller Nominee (as defined in Section 6.13 below) to the Board of
Directors of Buyer. The Board of Directors of Buyer shall, subject to the
fiduciary duties of the Board of Directors of Buyer under applicable law as
advised by outside counsel, (i) recommend approval of the Charter Proposal, the
Buyer Voting Proposal and the election of the Seller Nominee and include in the
Joint Proxy Statement such recommendation and (ii) take all reasonable and
lawful action to solicit and obtain such approval. The Buyer stockholder vote
required for approval of the Buyer Voting Proposal shall be a majority of the
shares of Buyer Common Stock present or represented at the Buyer Meeting at
which a quorum is present.
Section 6.06 Legal Conditions to Merger.
--------------------------
(a) Subject to the terms hereof, Seller and Buyer shall use their
respective commercially reasonable efforts to (i) take, or cause to be taken,
all appropriate action, and do, or cause to be done, all things necessary and
proper under applicable law to consummate and make effective the transactions
contemplated hereby as promptly as practicable, (ii) obtain from any
Governmental Entity or any other third party any consents, licenses, permits,
waivers, approvals, authorizations, or orders required to be obtained or made by
Seller or Buyer or any of their Subsidiaries in connection with the
authorization, execution and delivery of this Agreement and the consummation of
the transactions contemplated hereby including, without limitation, the Merger,
(iii) as promptly as practicable, make all necessary filings, and thereafter
make any other required submissions, with respect to this Agreement and the
Merger required under (A) the Securities Act and the Exchange Act, and any other
applicable federal or state securities laws, (B) the HSR Act and any related
governmental request thereunder, and (C) any other applicable law and (iv)
execute or deliver any additional instruments necessary to consummate the
transactions contemplated by, and to fully carry out the purposes of, this
Agreement. Seller and Buyer shall cooperate with each other in connection with
the making of all such filings, including providing copies of all such documents
to the non-filing party and its advisors prior to filing and, if requested, to
accept all reasonable additions, deletions or changes suggested in connection
therewith. Seller and Buyer shall use their respective commercially reasonable
efforts to furnish to each other all information required for any application or
other filing to be made pursuant to the rules and regulations of any applicable
law (including all information required to be included in the Joint Proxy
Statement and the Registration Statement) in connection with the transactions
contemplated by this Agreement.
(b) Each of Seller and Buyer shall give (or shall cause their respective
Subsidiaries to give) any notices to third parties, and use, and cause their
respective Subsidiaries to use, their commercially reasonable efforts to obtain
any third party
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consents related to or required in connection with the Merger that are (A)
necessary to consummate the transactions contemplated hereby, (B) disclosed or
required to be disclosed in the Seller Disclosure Schedule or the Buyer
Disclosure Schedule, as the case may be, or (C) required to prevent a Seller
Material Adverse Effect or a Buyer Material Adverse Effect from occurring prior
to or after the Effective Time.
Section 6.07 Public Disclosure. Buyer and Seller shall use commercially
-----------------
reasonable efforts to consult with each other before issuing any press release
or otherwise making any public statement with respect to the Merger or this
Agreement and shall not issue any such press release or make any such public
statement prior to using such efforts, except as may be required by law.
Section 6.08 Tax-Free Reorganization. Buyer and Seller shall each use
-----------------------
its best efforts to cause the Merger to qualify and be treated as a
reorganization within the meaning of Section 368(a) of the Code. The parties
hereto hereby adopt this Agreement as a plan of reorganization.
Section 6.09 Stock Listing. Buyer shall use commercially reasonable
-------------
efforts to cause the shares of Buyer Preferred Stock to be issued in the Merger
to be listed on the Nasdaq National Market, the American Stock Exchange, the
Nasdaq Small Cap Market, or the Pacific, Chicago, Boston or Philadelphia Stock
Exchange, subject to official notice of issuance, on or prior to the Closing
Date (the "Listing").
Section 6.10 Brokers or Finders. Each of Buyer and Seller represents,
------------------
as to itself, its Subsidiaries and its Affiliates, that no agent, broker,
investment banker, financial advisor or other firm or person is or will be
entitled to any broker's or finder's fee or any other commission or similar fee
in connection with any of the transactions contemplated by this Agreement except
Slusser Associates, Inc., whose fees and expenses will be paid by Seller in
accordance with Seller's agreement with such firm (a copy of which has been
delivered by Seller to Buyer prior to the date of this Agreement), and The Value
Group, L.L.C., Janney Montgomery Scott, Inc. and R.W. Presspridge & Company,
Inc., whose fees and expenses will be paid by Buyer in accordance with Buyer'
agreement with such firm.
Section 6.11 Indemnification.
---------------
(a) From and after the Effective Time, Buyer agrees that it will, and will
cause the Surviving Corporation to, indemnify and hold harmless each present and
former director and officer of Seller (the "Indemnified Parties"), against any
costs or expenses (including attorneys' fees), judgments, fines, losses, claims,
damages, liabilities or amounts paid in settlement incurred in connection with
any claim, action, suit, proceeding or investigation, whether civil, criminal,
administrative or investigative, arising out of such person's status as an
officer or director of Seller and pertaining to matters existing or occurring
at or prior to the Effective Time, whether asserted or claimed prior to, at or
after the Effective Time, to the fullest extent permitted under Delaware law
(and Buyer and the Surviving Corporation shall also advance expenses
36
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as incurred to the fullest extent permitted under applicable law, provided the
Indemnified Party to whom expenses are advanced provides an undertaking to repay
such advances if it is ultimately determined pursuant to a final judgment of a
court of competent jurisdiction that such Indemnified Party is not entitled to
indemnification).
(b) For a period of six years after the Effective Time, Buyer shall cause
the Surviving Corporation to maintain (to the extent available in the market) in
effect a directors' and officers' liability insurance policy covering those
persons who are currently covered by Seller's directors' and officers' liability
insurance policy (a copy of which has been heretofore delivered to Buyer) with
coverage in amount and scope at least as favorable to such persons as Seller's
existing coverage; provided, that in no event shall Buyer or the Surviving
--------
Corporation be required to expend in excess of 200% the annual premium currently
paid by Seller for such coverage.
(c) For a period of six years after the Effective Time, Buyer shall not
take any action, and shall cause the Surviving Corporation not to take any
action, to amend the provisions of the Certificate of Incorporation or bylaws of
the Surviving Corporation relating to indemnification of officers and directors.
(d) The provisions of this Section 6.11 are intended to be an addition to
the rights otherwise available to the current officers and directors of Seller
by law, charter, statute, bylaw or agreement, and shall operate for the benefit
of, and shall be enforceable by, each of the Indemnified Parties, their heirs
and their representatives.
Section 6.12 Financing Commitment. Buyer shall use commercially
--------------------
reasonable efforts to obtain a commitment for the financing necessary to
perform all of its obligations under this Agreement and all agreements
contemplated hereby or necessary thereto (the "Financing Commitment").
Section 6.13 Board Representation. Seller shall be entitled to designate
--------------------
an individual, reasonably acceptable to Buyer, to stand for election to the
Board of Directors of Buyer (the "Seller Nominee"). Buyer shall use reasonable
efforts to cause its Board of Directors to nominate the Seller Nominee to stand
for election to the Board of Directors of Buyer at the Buyer Meeting and at each
meeting of the stockholders of Buyer held thereafter at which directors are to
be elected until the fifth anniversary of the Closing Date.
37
<PAGE>
ARTICLE VII
CONDITIONS TO MERGER
Section 7.01 Conditions to Each Party's Obligation To Effect the Merger.
----------------------------------------------------------
The respective obligations of each party to this Agreement to effect the Merger
shall be subject to the satisfaction prior to the Closing Date of the following
conditions:
(a) Stockholder Approval. The Seller Voting Proposal shall have been
--------------------
approved and adopted by the affirmative vote of the holders of a majority of the
shares of Seller Common Stock outstanding on the record date for the Seller
Meeting and the Charter Proposal shall have been approved by the affirmative
vote of the holders of a majority of the shares of Buyer Common Stock
outstanding on the record date for the Buyer Meeting.
(b) HSR Act. The waiting period applicable to the consummation of the
-------
Merger under the HSR Act shall have expired or been terminated.
(c) Approvals. Other than the filing provided for by Section 1.02, all
---------
authorizations, consents, orders or approvals of, or declarations or filings
with, or expirations of waiting periods imposed by, any Governmental Entity, the
failure of which to file, obtain or occur is reasonably likely to have a Buyer
Material Adverse Effect or Seller Material Adverse Effect shall have been filed,
been obtained or occurred.
(d) Registration Statement. The Registration Statement shall have become
----------------------
effective under the Securities Act and shall not be the subject of any stop
order or proceedings seeking a stop order.
(e) No Injunctions. No Governmental Entity (including any federal, state
--------------
or court) of competent jurisdiction shall have enacted, issued, promulgated,
enforced or entered any order, executive order, stay, decree, judgment or
injunction (each an "Order) or statute, rule, regulation which is in effect and
which has the effect of making the Merger illegal or otherwise prohibiting
consummation of the Merger.
(f) Tax Opinion. Seller shall have received a written opinion of Hale and
-----------
Dorr LLP to the effect that (i) the Merger will constitute a reorganization
within the meaning of Section 368(a) of the Code, (ii) Seller, Sub and Buyer
will each be "party to a reorganization" within the meaning of Section 368(b) of
the Code, and (iii) holders of Seller Common Stock should not recognize gain or
loss for United States federal income tax purposes upon the exchange of their
Seller Common Stock solely for Buyer Common Stock and Buyer Preferred Stock in
the Merger. Such opinion may rely on representation letters from the Buyer, Sub
and Seller, which are substantially in the forms heretofore provided by Seller's
counsel to Buyer's counsel or otherwise customary for a transaction of this
type, and which includes a representation of the
38
<PAGE>
Buyer that it has no present plan or intention to cause the redemption of the
Buyer Preferred Stock pursuant to its terms.
(g) Opinion of Financial Advisor. The financial advisor of Seller,
----------------------------
Slusser Associates, Inc., shall have delivered to Seller, no later than August
18, 1999, an opinion dated on or about the date of this Agreement to the effect,
as of such date, that the terms of the transactions contemplated by this
Agreement, taken as a whole, are fair to the holders of Seller Common Stock from
a financial point of view.
(h) Certificate of Designation. The text of the Certificate of
--------------------------
Designation shall have been agreed to by Buyer and Seller by August 18, 1999.
(i) Consulting and Non-Competition Agreements. The Buyer and each of T.
-----------------------------------------
Kyle Standley, Ralph W. Standley III and Richard G. Kelly, as the case may be,
shall have executed and delivered to the other party thereto Consulting
Agreements substantially in the form attached hereto as Exhibit B and Non-
---------
Competition Agreements substantially in the form attached hereto as Exhibit C.
---------
The compensation to be paid to T. Kyle Standley, Ralph W. Standley III and
Richard G. Kelly under such agreements shall be as determined to be fair and
reasonable by a third party expert selected by Seller and approved by Buyer,
which approval shall not be unreasonably withheld.
(j) Certain Agreements. Buyer, T. Kyle Standley and Ralph W. Standley III
------------------
will execute and deliver a five-year international development agreement and a
ten-year international non-competition agreement on terms to be negotiated in
good faith by such parties (the "International Development Agreements"). The
compensation to be paid to T. Kyle Standley and Ralph W. Standley III under the
International Development Agreements shall be as determined to be fair and
reasonable by a compensation consultant selected by Seller and approved by
Buyer, which approval shall not be unreasonably withheld.
Section 7.02 Additional Conditions to Obligations of Buyer and Sub . The
-----------------------------------------------------
obligations of Buyer and Sub to effect the Merger are subject to the
satisfaction of each of the following conditions, any of which may be waived in
writing exclusively by Buyer and Sub:
(a) Representations and Warranties. The representations and warranties of
------------------------------
Seller set forth in this Agreement shall be true and correct as of the date of
this Agreement and (except to the extent such representations and warranties
speak as of an earlier date) as of the Closing Date as though made on and as of
the Closing Date, except for, (i) changes contemplated by this Agreement and
(ii) where the failures to be true and correct, individually or in the
aggregate, have not had and are not reasonably likely to have a Seller Material
Adverse Effect or a Buyer Material Adverse Effect; and Buyer shall have received
a certificate signed on behalf of Seller by the chief executive officer and the
chief financial officer of Seller to such effect.
(b) Performance of Obligations of Seller. Seller shall have performed in
------------------------------------
all material respects all obligations required to be performed by it under this
Agreement at
39
<PAGE>
or prior to the Closing Date; and Buyer shall have received at the Closing a
certificate signed on behalf of Seller by the chief executive officer and the
chief financial officer of Seller to such effect.
(c) Due Diligence. The satisfactory completion, as determined by Buyer,
-------------
of Buyer's due diligence regarding Seller and Seller's Subsidiaries may be
asserted as a basis to terminate this Agreement at Buyer's sole and unfettered
discretion at any time prior to 5:00 p.m., California time, on August 22, 1999;
provided that Buyer may not assert the failure of this condition after such time
and date; provided further that Buyer shall have no obligation to disclose its
basis for asserting the failure of this condition.
(d) Disclosure Schedules. Buyer's satisfaction with the Seller Disclosure
--------------------
Schedules may be asserted as a basis to terminate this Agreement at Buyer's sole
and unfettered discretion at any time prior to 5:00 p.m., California time, on
August 18, 1999; provided that Buyer may not assert the failure of this
condition after such time and date unless the Seller Disclosure Schedules were
delivered after July 30, 1999, in which case such date shall be extended by the
number of days after July 30, 1999 that the Seller Disclosure Schedules were
delivered.
(e) No Material Adverse Effect. Since May 2, 1999, there shall not have
--------------------------
occurred any Seller Material Adverse Effect and Buyer shall have received at the
Closing a certificate signed on behalf of Seller by the chief executive officer
and the chief financial officer of Seller to such effect.
(f) Financing. Buyer shall have obtained or arranged for financing in an
---------
amount sufficient to consummate the transactions contemplated by this agreement
and on terms acceptable to Buyer in its sole discretion.
(g) Limitation on Indebtedness. In no event shall the aggregate of all
--------------------------
notes payable, loans payable, accounts payable and other indebtedness of Seller
immediately prior to the Effective Time, exceed $100,000,000 and Buyer shall
have received at the Closing a certificate signed on behalf of Seller by the
chief executive officer and the chief financial offer of Seller to such effect.
(h) Inventory. Notwithstanding any other provision in this Agreement, the
---------
total number of pre-recorded video cassettes, video discs and video games as
part of Seller's rental and sale inventory at the Closing shall be no less than
2,600,000 units, and Buyer and shall have received at the Closing a certificate
signed on behalf of Seller by the chief executive officer and the chief
financial offer to Seller to such effect.
(i) Consents. All consents and approvals listed on Schedule 3.03(b) shall
--------
have been obtained, except such as would not, individually or in the aggregate,
have a Seller Material Adverse Effect.
(j) Buyer Voting Proposal. The Buyer Voting Proposal shall have been
---------------------
approved by the affirmative vote of the holders of a majority of the Shares of
Buyer
40
<PAGE>
Common Stock present or represented at the Buyer Meeting at which a quorum is
present.
(k) Fairness Opinion. No later than August 18, 1999, Buyer shall have
----------------
received a written opinion of its financial advisor, Janney Montgomery Scott
Inc., to the effect that, as of the date of such opinion, that the terms of the
transactions contemplated by this Agreement, taken as a whole, are fair to the
holders of Buyer's stockholders from a financial point of view.
(l) No Litigation. No suit, action, investigation, inquiry or other
-------------
proceeding (derivative or otherwise) by any Governmental Entity or other person
or entity shall have been instituted or threatened which (i) questions the
validity or legality of the transactions contemplated by this Agreement or (ii)
otherwise relates to the transactions contemplated by this Agreement and would
be reasonably likely to have a Seller Material Adverse Effect.
(m) Voting Agreements. No later than August 18, 1999, T. Kyle Standley,
-----------------
Trent Standley, Ralph W. Standley III and their respective affiliates who held,
beneficially or of record, capital stock of Seller, shall have entered into
agreements, on terms to be negotiated in good faith and customary in
transactions such as that contemplated by this Agreement, requiring them to vote
all such stock in favor of the Seller Voting Proposal (as defined above).
(n) Dissenters' Rights. Any Dissenting Shares (as defined in Section
------------------
2.01) shall not exceed 5% of the shares of Seller Common Stock issued and
outstanding immediately prior to the Effective Time.
Section 7.03 Additional Conditions to Obligations of Seller . The
----------------------------------------------
obligation of Seller to effect the Merger is subject to the satisfaction of each
of the following conditions, any of which may be waived, in writing, exclusively
by Seller:
(a) Representations and Warranties. The representations and warranties
------------------------------
of Buyer and Sub set forth in this Agreement shall be true and correct as of the
date of this Agreement and (except to the extent such representations speak as
of an earlier date) as of the Closing Date as though made on and as of the
Closing Date, except for, (i) changes contemplated by this Agreement and (ii)
where the failures to be true and correct, individually or in the aggregate,
have not had and are not reasonably likely to have a Buyer Material Adverse
Effect or a material adverse effect upon the consummation of the transactions
contemplated hereby; and Seller shall have received at the Closing a certificate
signed on behalf of Buyer by the chief executive officer and the chief financial
officer of Buyer to such effect.
(b) Performance of Obligations of Buyer and Sub. Buyer and Sub shall
-------------------------------------------
have performed in all material respects all obligations required to be performed
by them under this Agreement at or prior to the Closing Date, and Seller shall
have received at
41
<PAGE>
the Closing a certificate signed on behalf of Buyer by the chief executive
officer and the chief financial officer of Buyer to such effect.
(c) Certificate of Designation. The Certificate of Designation shall
--------------------------
have been filed with the Secretary of State of the State of Delaware.
(d) Satisfaction of Indebtedness. Buyer shall have entered into an
----------------------------
agreement with PNC Bank, N.A. ("Agent"), as agent for the several lenders to
Seller (the "Lenders"), providing for the satisfaction of Seller's indebtedness
to the Lenders.
(e) Due Diligence. The satisfactory completion, as determined by
-------------
Seller, of Seller's due diligence regarding Buyer may be asserted as a basis to
terminate this Agreement at Seller's sole and unfettered discretion at any time
prior to 5:00 p.m., California time, on August 22, 1999; provided that Seller
may not assert the failure of this condition after such time and date; and
provided further that Seller shall have no obligation to disclose its basis for
asserting the failure of this condition.
(f) Disclosure Schedules. Seller's satisfaction with the Buyers
--------------------
Disclosure Schedules may be asserted as a basis to terminate this Agreement at
Seller's sole and unfettered discretion at any time prior to 5:00 p.m.,
California time, on August 18, 1999; provided that Seller may not assert the
failure of this condition after such time and date unless the Buyer Disclosure
Schedules were delivered after July 30, 1999, in which case such date shall be
extended by the number of days after July 30, 1999 that the Buyer Disclosure
Schedules were delivered.
(g) Voting Agreements. No later than August 18, 1999, persons who hold,
-----------------
beneficially, or have the power to vote at least 40% of the outstanding capital
stock of Buyer shall have entered into agreements, on terms to be negotiated in
good faith and customary in transactions such as that contemplated by this
Agreement, requiring them to vote all such stock in favor of the Buyer Voting
Proposal and the Seller Nominee.
ARTICLE VIII
TERMINATION AND AMENDMENT
Section 8.01 Termination. This Agreement may be terminated at any time
-----------
prior to the Effective Time (with respect to Sections 8.01(b) through 8.01(g),
by written notice by the terminating party to the other party), whether before
or after approval of the matters presented in connection with the Merger by the
stockholders of Seller or Buyer:
(a) by mutual written consent of Buyer and Seller; or
(b) by either Buyer or Seller if the Merger shall not have been
consummated by December 31, 1999 (the "Outside Date") (provided that the right
to terminate this Agreement under this Section 8.01(b) shall not be available to
any party whose failure
42
<PAGE>
to fulfill any obligation under this Agreement has been the cause of or resulted
in the failure of the Merger to occur on or before such date); or
(c) by either Buyer or Seller if a Governmental Entity of competent
jurisdiction shall have issued a nonappealable final order, decree or ruling or
taken any other nonappealable final action, in each case having the effect of
permanently restraining, enjoining or otherwise prohibiting the Merger; or
(d) by Buyer or Seller if (x) at the Seller Meeting (including any
adjournment or postponement), the requisite vote of the stockholders of Seller
in favor of the Seller Voting Proposal shall not have been obtained; or if (y)
at the Buyer Meeting (including any adjournment or postponement), the requisite
vote of the stockholders of Buyer in favor of the Charter Proposal shall not
have been obtained (provided that the right to terminate this Agreement under
this Section 8.01(d) shall not be available to any party seeking termination who
at the time is in breach of or has failed to fulfill its obligations under this
Agreement); or
(e) by Buyer, if (i) the Board of Directors of Seller shall have
withdrawn or modified its recommendation of the Seller Voting Proposal; (ii)
after the receipt by Seller of an Acquisition Proposal, Buyer requests in
writing that the Board of Directors of Seller reconfirm its recommendation of
this Agreement or the Merger and the Board of Directors of Seller fails to do so
within 10 business days after its receipt of Buyer' request; (iii) the Board of
Directors of Seller shall have recommended to the stockholders of Seller an
Acquisition Proposal; (iv) a tender offer or exchange offer for 15% or more of
the outstanding shares of Seller Common Stock is commenced (other than by Buyer
or an Affiliate of Buyer) and the Board of Directors of Seller does not
recommend that the stockholders of Seller not tender their shares in such tender
or exchange offer; or (v) for any reason Seller fails to call and hold the
Seller Meeting by the Outside Date; or
(f) by Seller, if (i) the Board of Directors of Buyer shall have
withdrawn or modified its recommendation of the Buyer Voting Proposal; or (ii)
for any reason Buyer fails to call and hold the Buyer Meeting by the Outside
Date;
(g) by Buyer or Seller, if there has been a breach of any
representation, warranty, covenant or agreement on the part of the other party
set forth in this Agreement, which breach (i) causes the conditions set forth in
Section 7.02(a) or (b) (in the case of termination by Buyer) or 7.03(a) or (b)
(in the case of termination by Seller) not to be satisfied, and (ii) shall not
have been cured within 30 days following receipt by the breaching party of
written notice of such breach from the other party; or
(h) by Seller, if the condition set forth in Section 7.03(g) shall not
have been satisfied.
(i) by Buyer, if the condition set forth in Section 7.02(m) shall not
have been satisfied.
43
<PAGE>
Section 8.02 Effect of Termination. In the event of termination of this
---------------------
Agreement as provided in Section 8.01, this Agreement shall immediately become
void and there shall be no liability or obligation on the part of Buyer, Seller,
Sub or their respective officers, directors, stockholders or Affiliates, except
as set forth in Sections 5.04, 6.10, 8.03 and Article IX; provided that any such
termination shall not limit liability for any willful breach of this Agreement
and the provisions of Sections 5.04, 6.10, 8.03 and Article IX of this
Agreement.
Section 8.03 Fees and Expenses.
-----------------
(a) Except as set forth in this Section 8.03, each party shall be
responsible for its own fees and expenses incurred in connection with this
Agreement and the transactions contemplated hereby.
(b) In the event that Buyer, after receiving a Financing Commitment,
shall fail to perform its obligations hereunder by December 31, 1999 for any
reason other than the failure of the conditions set forth in Section 7.01 or
7.02, Buyer shall, in no event later than the earlier of December 31, 1999 or
two days after any such failure to perform, pay Seller the Buyer Termination Fee
by wire transfer of same day funds to a bank account designated by Seller, which
amount shall be liquidated damages for Buyer's breach of this Agreement.
(c) In the event that:
(i) any Person shall have made an Acquisition Proposal to the
Seller or to its stockholders and thereafter this Agreement
is terminated (A) by either party pursuant to Section 8.01(b)
or (B) by either party pursuant to Section 8.01(d) as a
result of the required approval of the Seller's stockholders
having not be obtained; or
(ii) this Agreement is terminated by Buyer pursuant to Section
8.01(g) or 8.01(e),
then, in any such case, Seller shall in no event later than two days after such
termination pay Buyer the Seller Termination Fee by wire transfer of same day
funds to a bank account designated by Buyer.
(d) In the event that this Agreement is terminated (i) by Buyer
pursuant to Section 8.01(b) as a result of Seller's breach of any of Seller's
representations, warranties, covenants or agreements set forth in this Agreement
or Section 8.01(e) or (ii) by either party pursuant to Section 8.01(d) as a
result of the required approval of Seller's stockholders having not been
obtained (provided for purpose of this clause (ii) only that the requisite
approval of Buyer's stockholders has been obtained), then, after any such
termination, Seller shall reimburse Buyer, promptly after being requested to do
so by Buyer, for all out-of-pocket costs and expenses (up to a maximum of
$750,000) actually incurred by Buyer in connection with this Agreement and the
transactions
44
<PAGE>
contemplated hereby, including, without limitation, fees and expenses of
accountants, attorneys, financial advisors, commercial banks, experts and
consultants.
(e) In the event that this Agreement is terminated (i) by Seller
pursuant to Section 8.01(b) as a result of Buyer's breach of any of Buyer's
representations, warranties, covenants or agreements set forth in this Agreement
or Section 8.01(f) or (ii) by either party pursuant to Section 8.01(d) as a
result of the required approval of Buyer's stockholders having not been obtained
(provided for purpose of this clause (ii) only that the requisite approval of
Seller's stockholders has been obtained), then, after any such termination,
Buyer shall reimburse Seller, promptly after being requested to do so by Buyer,
for all out-of-pocket costs and expenses (up to a maximum of $750,000) actually
incurred by Seller in connection with this Agreement and the transactions
contemplated hereby, including, without limitation, fees and expenses of
accountants, attorneys, financial advisors, commercial banks, experts and
consultants.
(f) As used in this Agreement "Buyer Termination Fee" shall be an amount
equal to $10,000,000 and "Seller Termination Fee" shall be an amount equal to
$3,000,000, if this Agreement is terminated prior to Buyers receipt of a
Financing Commitment and $4,000,000 if this Agreement is terminated thereafter.
(g) Notwithstanding any provision herein to the contrary, irrespective
of which party first gives notice of termination, no party to this Agreement
determined to be in breach of this Agreement shall be entitled to collect any
payment under this Article VIII.
The parties acknowledge that the agreements contained in this Section 8.03
are an integral part of the transactions contemplated in this Agreement, and
that, without these agreements, the parties would not enter into this Agreement;
accordingly, if Seller fails to promptly pay the Seller Termination Fee or the
fees and expenses of Buyer or if the Buyer fails to pay the Buyer Termination
Fee or the fees and expenses of Seller, each as required by this Section 8.03,
and in order to obtain such payment the non-defaulting party commences a suit
which results in a judgment against the defaulting party for any amount of the
fees and expenses set forth in this Section 8.03, the defaulting party shall pay
to the non-defaulting party its costs and expenses i(including attorney's fees)
in connection with such suit together with interest on such amount in respect of
the period from the date such amount became due until the date such amount is
paid at the prime rate of The Chase Manhattan Bank in effect from time to time
during such period.
Section 8.04 Amendment. This Agreement may be amended by the parties
---------
hereto, by action taken or authorized by their respective Boards of Directors,
at any time before or after approval of the matters presented in connection with
the Merger by the stockholders of Seller or of Buyer, but, after any such
approval, no amendment shall be made which by law requires further approval by
such stockholders without such further approval. This Agreement may not be
amended except by an instrument in writing signed on behalf of each of the
parties hereto.
45
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Section 8.05 Extension; Waiver. At any time prior to the Effective Time,
-----------------
the parties hereto, by action taken or authorized by their respective Boards of
Directors, may, to the extent legally allowed, (i) extend the time for the
performance of any of the obligations or other acts of the other parties hereto,
(ii) waive any inaccuracies in the representations and warranties contained
herein or in any document delivered pursuant hereto and (iii) waive compliance
with any of the agreements or conditions contained herein. Any agreement on the
part of a party hereto to any such extension or waiver shall be valid only if
set forth in a written instrument signed on behalf of such party.
ARTICLE IX
MISCELLANEOUS
Section 9.01 Nonsurvival of Representations, Warranties and Agreements.
---------------------------------------------------------
None of the representations, warranties and agreements in this Agreement or in
any instrument delivered pursuant to this Agreement shall survive the Effective
Time, except for the agreements contained in Articles I and II, Sections 1.04,
2.01, 2.02, 5.04, 6.10, 6.11 and Article IX.
Section 9.02 Notices. All notices and other communications hereunder
-------
shall be in writing and shall be deemed given if delivered personally,
telecopied (which is confirmed) or mailed by registered or certified mail
(return receipt requested) to the parties at the following addresses (or at such
other address for a party as shall be specified by like notice):
(a) if to Buyer or Sub, to:
Video City Inc.
370 Amapola Avenue, Suite 208
Torrance, CA 90501
Attention: Chief Executive Officer
with a copy to:
Latham & Watkins
650 Town Center Drive, 20th Floor
Costa Mesa, CA 92626
Attention: William J. Cernius, Esq.
Telecopy: (714) 755-8290
(b) if to Seller, to:
West Coast Entertainment Corporation
One Summit Square, Suite 200
46
<PAGE>
Route 413 & Double Woods Road
Langhorne, PA 19047
with a copy to:
Hale and Dorr LLP
60 State Street
Boston, MA 02109
Attn: John H. Chory, Esq.
Telecopy: (617) 526-5000
Section 9.03 Interpretation. When a reference is made in this Agreement
--------------
to Sections, such reference shall be to a Section of this Agreement unless
otherwise indicated. The table of contents and headings contained in this
Agreement are for reference purposes only and shall not affect in any way the
meaning or interpretation of this Agreement. The phrases "the date of this
Agreement", "the date hereof," and terms of similar import, unless the context
otherwise requires, shall be deemed to refer to August 1, 1999. The words
"include," "includes" and "including" when used herein shall be deemed in each
case to be following by the words "without limitation." The table of contents
and headings contained in this Agreement are for reference purposes only and
shall not affect in any way the meaning or interpretation of this Agreement. For
purposes of this Agreement the term "knowledge" means with respect to a party
hereto, with respect to any matter in question, that any of the Chairman, Chief
Executive Officer, Chief Financial Officer, any Vice President or Controller of
such party, has actual knowledge of such matter.
Section 9.04 Counterparts. This Agreement may be executed in two or more
------------
counterparts, all of which shall be considered one and the same agreement and
shall become effective when two or more counterparts have been signed by each of
the parties and delivered to the other parties, it being understood that all
parties need not sign the same counterpart.
Section 9.05 Entire Agreement; No Third Party Beneficiaries. This
----------------------------------------------
Agreement (including the documents and the instruments referred to herein) (a)
constitute the entire agreement and supersedes all prior agreements and
understandings, both written and oral, among the parties with respect to the
subject matter hereof, and (b) except as provided in Section 6.11 are not
intended to confer upon any person other than the parties hereto any rights or
remedies hereunder. Each party hereto agrees that, except for the
representations and warranties contained in this Agreement, neither Seller nor
Buyer makes any other representations or warranties, and each hereby disclaims
any other representations and warranties made by itself or any of its officers,
directors, employees, agents, financial and legal advisors or other
representatives, with respect to the execution and delivery of this Agreement or
the transactions contemplated hereby, notwithstanding the delivery or disclosure
to the other or the other's representatives of any documentation or other
information with respect to any one or more of the foregoing.
47
<PAGE>
Section 9.06 Governing Law. This Agreement shall be governed and
-------------
construed in accordance with the laws of the State of Delaware without regard to
any applicable conflicts of law.
Section 9.07 Jurisdiction. Each of the parties hereto (i) consents to
------------
submit itself to the personal jurisdiction of any Federal court located in the
State of Delaware or any Delaware state court in the event any dispute arises
out of this Agreement or any of the transactions contemplated by this Agreement,
(ii) agrees that it will not attempt to deny or defeat such personal
jurisdiction by motion or other request for leave from any such court, and (iii)
agrees that it will not bring any action relating to this Agreement or any of
the transactions contemplated by this agreement in any court other than a
Federal court sitting in the State of Delaware or a Delaware state court.
Section 9.08 Assignment. Neither this Agreement nor any of the rights,
----------
interests or obligations hereunder shall be assigned by any of the parties
hereto (whether by operation of law or otherwise) without the prior written
consent of the other parties. Subject to the preceding sentence, this Agreement
will be binding upon, inure to the benefit of and be enforceable by the parties
and their respective successors and assigns.
Section 9.09 Severability. In the event that any provision of this
------------
Agreement or the application thereof, becomes or is declared by a court of
competent jurisdiction to be illegal, void or unenforceable, the remainder of
this Agreement will continue in full force and effect and the application of
such provision to other persons or circumstances will be interpreted so as
reasonably to effect the intent of the parties hereto. The parties further agree
to replace such void or unenforceable provision of this Agreement with a valid
and enforceable provision that will achieve, to the extent possible, the
economic, business and other purposes of such void or unenforceable provision.
Section 9.10. WAIVER OF JURY TRIAL. EACH OF BUYER, SELLER AND SUB
--------------------
HEREBY IRREVOCABLY WAIVES ALL RIGHT TO TRIAL BY JURY IN ANY ACTION, PROCEEDING
OR COUNTERCLAIM (WHETHER BASED ON CONTRACT, TORT OR OTHERWISE) ARISING OUT OF OR
RELATING TO THIS AGREEMENT OR THE ACTIONS OF BUYER, SELLER OR SUB IN THE
NEGOTIATION, ADMINISTRATION, PERFORMANCE AND ENFORCEMENT HEREOF.
48
<PAGE>
IN WITNESS WHEREOF, Buyer, Sub and Seller have caused this Agreement to be
signed by their respective officers thereunto duly authorized as of the date
first written above.
VIDEO CITY, INC.
By: /s/ Robert Y. Lee
------------------------------------
Robert Y. Lee
Title: Chairman/Chief Executive Officer
--------------------------------
KEYSTONE MERGER CORP.
By: /s/ Robert Y. Lee
------------------------------------
Robert Y. Lee
Title: President
--------------------------------
WEST COAST ENTERTAINMENT CORPORATION
By: /s/ Richard G. Kelly
------------------------------------
Richard G. Kelly
Title: Chief Financial Officer
--------------------------------
49
<PAGE>
EXHIBIT A
---------
Terms of Series F Preferred Stock
---------------------------------
Issuer................... Video City, Inc.
Issue.................... 704,235 Shares of Series F Convertible Redeemable
Preferred Stock
Stated Value............. $17,605,875, or $25 per share
Liquidation Preference... Mandatory redemption at stated value plus accrued
but unpaid dividends (to be paid either in cash or
in Common Stock of the Issuer at the Issuer's
election) in the event of a liquidation,
dissolution, merger, consolidation or sale of
substantially all assets
Dividends............... 5%, or $1.25 per share, payable quarterly at the
issuer's election in (a) cash or (b) registered
shares of the issuer's common stock valued as of
the issuance date in the same manner as the Base
Price is calculated as of the Closing Date in
Section 2.01(d) of the Agreement and Plan of
Merger or (c) additional shares of Series F
Preferred Stock valued at its stated value
Optional Redemption..... At any time at the issuer's election for an amount
equal to the liquidation preference payable, at
the issuer's election, in cash or in registered
shares of the issuer's common stock valued as of
the issuance date in the same manner as the Base
Price is calculated as of the Closing Date in
Section 2.01(d) of the Agreement and Plan of
Merger
Ranking................. Junior to all existing and future issuances of
preferred stock
Voting Rights........... One vote per share
Conversion.............. Convertible at the election of the holder into
Common Stock at a conversion price of $14.00 per
share
50
<PAGE>
EXHIBIT B
---------
CONSULTING AGREEMENT
--------------------
THIS CONSULTING AGREEMENT (the "Agreement"), made this ____ day of
_________, 1999 is entered into by Video City, Inc., a Delaware corporation
having a principal place of business at _________________________________ (the
"Company"), and ________________, residing at _____________________________ (the
"Consultant").
INTRODUCTION
------------
The Company, West Coast Entertainment Corporation ("West Coast") and
Keystone Acquisition Corp., a wholly-owned subsidiary of the Company, have
entered into an Agreement and Plan of Merger as of the date hereof (the "Merger
Agreement"). The Consultant has served as the ___________________ of West
Coast. The Company desires to retain the services of the Consultant, and the
Consultant desires to perform certain services for the Company, in each case
relating to transitional matters following the Merger (as defined in the Merger
Agreement). In consideration of the mutual covenants and promises contained
herein and other good and valuable consideration, the receipt and sufficiency of
which is hereby acknowledged by the parties hereto, the parties agree as
follows:
1. Services. During the Consultation Period (as defined below), the
--------
Consultant agrees to perform such consulting, advisory and related services to
and for the Company as may be reasonably requested from time to time by the
Company (consistent with Consultant's obligations under any other agreement
between Consultant and the Company) in order to assist the Company in an orderly
transition of control over the day to day operations and management of West
Coast after the Merger.
2. Term. This Agreement shall commence on the date hereof and shall
----
continue for a period of 120 days after such date (such period, as it may be
extended, being referred to as the "Consultation Period"), unless sooner
terminated in accordance with the provisions of Section 4. After the expiration
of the Consultation Period, the Consultant shall continue to be available to
provide such services to the the Company as the Consultant and the Company may
mutually agree.
3. Compensation.
------------
3.1 Consulting Fees. The Company shall pay to the Consultant a
---------------
consulting fee of $____________. Such fee shall be paid as follows: __________
___________________________________________. Such fee shall be non-refundable.
3.2 Reimbursement of Expenses. The Company shall reimburse the
-------------------------
Consultant for all reasonable and necessary expenses incurred or paid by the
Consultant in connection with, or related to, the performance of his services
under this Agreement. The Consultant shall submit to the Company itemized
monthly statements, in a form satisfactory to the Company, of such expenses
incurred in the previous month. The Company shall pay to the Consultant amounts
shown on each such statement within 30 days after receipt thereof.
<PAGE>
Notwithstanding the foregoing, the Consultant shall not incur total expenses in
excess of $500 per month without the prior written approval of the Company.
3.3 Benefits. The Consultant shall not be entitled to any benefits,
--------
coverages or privileges, including, without limitation, social security,
unemployment, medical or pension payments, made available to employees of the
Company.
4. Termination. The Company may terminate the Consultation Period,
-----------
effective immediately upon receipt of written notice, if the Consultant breaches
or threatens to breach any provision of this Agreement.
5. Cooperation. The Consultant shall use his best efforts in the
-----------
performance of his obligations under this Agreement. The Company shall provide
such access to its information and property as may be reasonably required in
order to permit the Consultant to perform his obligations hereunder. The
Consultant shall cooperate with the Company's personnel, shall not interfere
with the conduct of the Company's business and shall observe all rules,
regulations and security requirements of the Company concerning the safety of
persons and property.
6. Inventions and Proprietary Information.
--------------------------------------
6.1 Inventions.
----------
(1) All inventions, discoveries, computer programs, data,
technology, designs, innovations and improvements (whether or not patentable and
whether or not copyrightable) ("Inventions") related to the business of the
Company which are made, conceived, reduced to practice, created, written,
designed or developed by the Consultant, solely or jointly with others and
whether during normal business hours or otherwise, during the Consultation
Period or thereafter if resulting or directly derived from Proprietary
Information (as defined below), shall be the sole property of the Company. The
Consultant hereby assigns to the Company all Inventions and any and all related
patents, copyrights, trademarks, trade names, and other industrial and
intellectual property rights and applications therefor, in the United States and
elsewhere and appoints any officer of the Company as his duly authorized
attorney to execute, file, prosecute and protect the same before any government
agency, court or authority. Upon the request of the Company and at the Company's
expense, the Consultant shall execute such further assignments, documents and
other instruments as may be necessary or desirable to fully and completely
assign all Inventions to the Company and to assist the Company in applying for,
obtaining and enforcing patents or copyrights or other rights in the United
States and in any foreign country with respect to any Invention. The Consultant
also hereby waives all claims to moral rights in any Inventions.
(2) The Consultant shall promptly disclose to the Company all
Inventions and will maintain adequate and current written records (in the form
of notes, sketches, drawings and as may be specified by the Company) to document
the conception and/or first actual reduction to practice of any Invention. Such
written records shall be available to and remain the sole property of the
Company at all times.
6.2 Proprietary Information.
-----------------------
-2-
<PAGE>
(1) The Consultant acknowledges that his relationship with the
Company is one of high trust and confidence and that in the course of his
service to the Company he will have access to and contact with Proprietary
Information. The Consultant agrees that he will not, during the Consultation
Period or at any time thereafter, disclose to others, or use for his benefit or
the benefit of others, any Proprietary Information or Invention.
(2) For purposes of this Agreement, Proprietary Information shall
mean, by way of illustration and not limitation, all information (whether or not
patentable and whether or not copyrightable) owned, possessed or used by the
Company, including, without limitation, any Invention, formula, vendor
information, customer information, apparatus, equipment, trade secret, process,
research, report, technical data, know-how, computer program, software, software
documentation, hardware design, technology, marketing or business plan,
forecast, unpublished financial statement, budget, license, price, cost and
employee list that is communicated to, learned of, developed or otherwise
acquired by the Consultant in the course of his service as a consultant to the
Company.
(3) The Consultant's obligations under this Section 6.2 shall
not apply to any information that (i) is or becomes known to the general public
under circumstances involving no breach by the Consultant or others of the terms
of this Section 6.2, (ii) is generally disclosed to third parties by the Company
without restriction on such third parties, or (iii) is approved for release by
written authorization of the Board of Directors of the Company.
(4) Upon termination of this Agreement or at any other time upon
request by the Company, the Consultant shall promptly deliver to the Company all
records, files, memoranda, notes, designs, data, reports, price lists, customer
lists, drawings, plans, computer programs, software, software documentation,
sketches, laboratory and research notebooks and other documents (and all copies
or reproductions of such materials) relating to the business of the Company.
(5) The Consultant represents that his retention as a consultant
with the Company and his performance under this Agreement does not, and shall
not, breach any agreement that obligates him to keep in confidence any trade
secrets or confidential or proprietary information of his or of any other party
or to refrain from competing, directly or indirectly, with the business of any
other party. The Consultant shall not disclose to the Company any trade secrets
or confidential or proprietary information of any other party.
(6) The Consultant acknowledges that the Company from time to
time may have agreements with other persons or with the United States
Government, or agencies thereof, that impose obligations or restrictions on the
Company regarding inventions made during the course of work under such
agreements or regarding the confidential nature of such work. The Consultant
agrees to be bound by all such obligations and restrictions that are known to
him and to take all action necessary to discharge the obligations of the Company
under such agreements.
6.3 Remedies. The Consultant acknowledges that any breach of the
--------
provisions of this Section 6 shall result in serious and irreparable injury to
the Company for
-3-
<PAGE>
which the Company cannot be adequately compensated by monetary damages alone.
The Consultant agrees, therefore, that, in addition to any other remedy it may
have, the Company shall be entitled to enforce the specific performance of this
Agreement by the Consultant and to seek both temporary and permanent injunctive
relief (to the extent permitted by law) without the necessity of proving actual
damages.
7. Independent Contractor Status. The Consultant shall perform all
-----------------------------
services under this Agreement as an "independent contractor" and not as an
employee or agent of the Company. The Consultant is not authorized to assume or
create any obligation or responsibility, express or implied, on behalf of, or in
the name of, the Company or to bind the Company in any manner.
8. Notices. All notices required or permitted under this Agreement shall
-------
be in writing and shall be deemed effective upon personal delivery or upon
deposit in the United States Post Office, by registered or certified mail,
postage prepaid, addressed to the other party at the addresses set forth above
or at such other address or addresses as either party shall designate to the
other in accordance with this Section 8.
9. Pronouns. Whenever the context may require, any pronouns used in this
--------
Agreement shall include the corresponding masculine, feminine or neuter forms,
and the singular forms of nouns and pronouns shall include the plural, and vice
versa.
10. Entire Agreement. This Agreement constitutes the entire agreement
----------------
between the parties and supersedes all prior agreements and understandings,
whether written or oral, relating to the subject matter of this Agreement.
11. Amendment. This Agreement may be amended or modified only by a
---------
written instrument executed by both the Company and the Consultant.
12. Governing Law. This Agreement shall be construed, interpreted and
-------------
enforced in accordance with the laws of the State of Delaware.
13. Successors and Assigns. This Agreement shall be binding upon, and
----------------------
inure to the benefit of, both parties and their respective successors and
assigns, including any corporation with which, or into which, the Company may be
merged or which may succeed to its assets or business, provided, however, that
the obligations of the Consultant are personal and shall not be assigned by him.
14. Miscellaneous.
-------------
14.1 No delay or omission by the Company in exercising any right under
this Agreement shall operate as a waiver of that or any other right. A waiver or
consent given by the Company on any one occasion shall be effective only in that
instance and shall not be construed as a bar or waiver of any right on any other
occasion.
14.2 The captions of the sections of this Agreement are for
convenience of reference only and in no way define, limit or affect the scope or
substance of any section of this Agreement.
-4-
<PAGE>
14.3 In the event that any provision of this Agreement shall be
invalid, illegal or otherwise unenforceable, the validity, legality and
enforceability of the remaining provisions shall in no way be affected or
impaired thereby.
[the remainder of this page intentionally left blank]
-5-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the day and year set forth above.
VIDEO CITY, INC.
By:____________________________
Title:_________________________
CONSULTANT
_______________________________
[NAME]
-6-
<PAGE>
EXHIBIT C
---------
NON-COMPETITION AGREEMENT
-------------------------
This Agreement is made this ________ day of ____, 1999 between Video City,
Inc., a Delaware corporation (hereinafter referred to collectively with its
subsidiaries as the "Company"), and _________________ (the "Principal"), and is
made in connection with the Company's acquisition of West Coast Entertainment
Corporation, a Delaware corporation ("West Coast"), as of the date hereof.
WHEREAS, the Principal has served as the _________________ of West Coast;
WHEREAS, the Company has entered into that certain Agreement and Plan of
Merger, dated July 29, 1999, by and among West Coast, the Company and Keystone
Acquisition Corp., a wholly owned subsidiary of the Company (the "Merger
Agreement");
WHEREAS, the Company desires to protect the value of its investment in
acquiring West Coast pursuant to the terms of the Merger Agreement by securing
the Principal's agreement to undertake certain obligations and to refrain from
certain activities; and
WHEREAS, the Principal agrees to undertake certain obligations and to
refrain from certain activities for the Company's benefit.
NOW, THEREFORE, for good and valuable consideration and in consideration of
the amounts to be paid to the Principal by the Company pursuant to Section 2 of
this Agreement and the obligations that the Principal hereby agrees to undertake
for the benefit of the Company, the Principal and Company each agree as follows:
1. Non-Competition.
---------------
(a) For the five (5) year period commencing on the date hereof
through and including the fifth anniversary of the date hereof, the Principal
will not directly or indirectly, engage in any business or enterprise (whether
as owner, partner, officer, director, employee, investor, lender or otherwise,
except as the holder of not more than 1% of the outstanding stock of a company
or as a holder of shares of the Company) involved in the retail sale or rental
of pre-recorded movies and electronic games (the "Business") anywhere in the
Territory (as defined below). In addition, the Principal will not influence or
attempt to influence any person who has been, is or will become a contracting
party with West Coast or the Company to terminate or amend any written or oral
agreement with West Coast or the Company.
(b) For purposes of this Agreement, the "Territory" shall mean all
counties within the United States.
2. Consideration.
-------------
(a) In consideration of the obligations the Principal agrees to
undertake in this
<PAGE>
Agreement, the Company shall pay to the Principal $_____________, to be paid as
follows: _______________________________________________________.
(b) The amounts payable by the Company to the Principal pursuant to
Section 2(a) shall become immediately due and payable without notice or demand
upon any default in the payment of any amount due to the Principal under this or
any other agreement or instrument between the Company and the Principal when
such amount is due.
(c) All payments by the Company pursuant to this Agreement shall be
made without set-off or counterclaim and be free and clear and without any
deduction or withholding for any taxes or fees of any nature whatever, unless
the obligation to make such deduction or withholding is imposed by law. The
Company shall hold the Principal harmless from all liabilities with respect to
or resulting from any delay or omission to make such deduction or withholding
required by law.
(d) The Company shall pay on demand all costs of collection,
including reasonable attorneys' fees, incurred by the Principal in enforcing the
obligations of the Company under this Section 2.
3. Miscellaneous.
-------------
(a) Extension. If the Principal violates the provisions of Section
---------
1, the Principal shall continue to be bound by the restrictions set forth in
Section 1 until a period of five (5) years has expired without any violation of
such provisions.
(b) No Employment Contract. The Principal acknowledges that this
----------------------
Agreement does not constitute a contract of employment.
(c) Interpretation. If any restriction set forth in Section 1 is
--------------
found by any court of competent jurisdiction to be unenforceable because it
extends for too long a period of time or over too great a range of activities or
in too broad a geographic area, it shall be interpreted to extend only over the
maximum period of time, range of activities or geographic area as to which it
may be enforceable.
(d) Severability. The invalidity or unenforceability of any
------------
provision of this Agreement shall not affect the validity or enforceability of
any other provision of this Agreement.
(e) Waiver of Rights. No delay or omission by the Company in
----------------
exercising any right under this Agreement will operate as a waiver of that or
any other right. A waiver or consent given by the Company on any one occasion
is effective only in that instance and will not be construed as a bar to or
waiver of any right on any other occasion.
(f) Equitable Remedies. The restrictions contained in this Agreement
------------------
are necessary for the protection of the business and goodwill of the Company and
are considered by
2
<PAGE>
the Principal to be reasonable for such purpose. The Principal agrees that any
breach of this Agreement is likely to cause the Company substantial and
irrevocable damage and therefore, in the event of any such breach, the Principal
agrees that the Company, in addition to such other remedies which may be
available, shall be entitled to specific performance, injunctive and other
equitable relief.
(g) Governing Law. This Agreement shall be governed by and construed
-------------
in accordance with the laws of the State of Delaware.
[Remainder of this page intentionally left blank.]
3
<PAGE>
THE PRINCIPAL ACKNOWLEDGES THAT HE HAS CAREFULLY READ THIS AGREEMENT AND
UNDERSTANDS AND AGREES TO ALL OF THE PROVISIONS IN THIS AGREEMENT.
VIDEO CITY, INC.
Date: ______________________, 1999 By:____________________________
PRINCIPAL:
[NAME]
Date:_______________________ _______________________________
(Signature)
4
<PAGE>
EXHIBIT 99.1
VIDEO CITY TO ACQUIRE WEST COAST ENTERTAINMENT IN LARGEST VIDEO
Business Wire
August 3 1999 8:21 AM ET
Retail Acquisition Since 1994 Viacom/Blockbuster; Video City to Become 5th
Largest Video Retailer in America
Business and Entertainment Editors
TORRANCE, Calif.-(BUSINESS WIRE)-Aug. 3, 1999-Video City, Inc. (OTC BB:VDCT)
announced today that it has signed a definitive agreement to acquire West Coast
Entertainment Corporation (OTC BB:WCEC).
Terms of the transaction call for each West Coast Entertainment shareholder to
receive .333 shares of Video City Common Stock (subject to adjustments under
certain conditions) and .05 shares of Video City Series F Preferred Stock ($25
stated value) for each share of West Coast Entertainment common stock.
Robert Y. Lee, Chairman and CEO of Video City added, "This accretive acquisition
will give Video City the critical mass at the store front level, a profitable
franchising operation, and a solid Internet site, all of which strengthen our
position toward becoming a leading vertically integrated entertainment company."
Kyle Standley, President and CEO of West Coast Entertainment Corporation said
"We are delighted that our shareholders will have the opportunity to
participate in the future growth of Video City. We share Video City's enthusiasm
for the future of the combined company and strongly support their business plan
for the development of a vertical entertainment company."
"Both strategically, in terms of geographic locations, and operationally, in
terms of gaining significant and immediate operating efficiencies, this
acquisition will give us tremendous opportunities to increase shareholder
value," added Richard Gibson, former Nike (NYSE:NKE) and Warner Bros (NYSE:TWX}
executive, who will continue in his role as President and COO for Video City.
The transaction is slated to close by the end of 1999, at which time Mr.
Standley is expected to enter into an arrangement to provide consulting and
business development services for Video City. The transaction is subject to
various closing conditions including satisfactory completion of due diligence
investigations, financing, regulatory approval, fairness and tax opinions,
stockholder approval, and approval of creditors and other third parties.
Janney Montgomery Scott, Inc., R.W. Pressprich & Company, Inc. and The Value
Group, LLC are serving as financial advisors to Video City; Slusser Associates,
Inc. is serving as financial advisor to West Coast Entertainment in this
transaction.
Video City owns and operates 92 video stores in 12 states. It has grown
substantially from 18 stores in the past year and a half and is one of the
nation's fastest growing entertainment companies. West Coast operates 244
company owned stores and 126 franchise stores.
This release contains forward-looking statements within the meaning of the "safe
harbor" provisions of the Private Securities Litigation Reform Act of 1995, such
as statements of the Company's plans, activities, expectations and intentions,
that involve risks and uncertainties that could cause actual results to differ
materially from those discussed in such forward looking statements. Factors that
could cause or contribute to such differences include, but are not limited to:
the ability to make future acquisitions; the demand for video tapes, both rental
and sales, which may be affected by seasonal factors, weather, the level of home
viewing; competition from other retailers; the Company's ability to manage and
staff its growth; and other factors disclosed under the caption "Special
Considerations" in the Company's Annual Report on Form 10-K for the fiscal year
ended January 31, 1999.
