AGREEMENT AND PLAN OF MERGER

 

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                                                                     EXHIBIT 2.1

 

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                          AGREEMENT AND PLAN OF MERGER

 

                          dated as of February 5, 2004

 

                                      among

 

                                  GENESCO INC.,

 

                              HWC MERGER SUB, INC.

 

                                       and

 

                              HAT WORLD CORPORATION

 

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                                                      INDS01 RKIXMILLER 644669v7

 

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         THIS AGREEMENT AND PLAN OF MERGER (together with the Schedules and

Exhibits hereto, this "AGREEMENT"), dated as of February 5, 2004, is among HWC

MERGER SUB, INC., a Delaware corporation ("NEWCO"), GENESCO INC., a Tennessee

corporation ("PARENT"), and HAT WORLD CORPORATION, a Delaware corporation (the

"COMPANY") (each sometimes referred to herein as a "PARTY" and collectively

sometimes referred to herein as the "PARTIES").

 

                                    RECITALS

 

         A.        The Board of Directors of each of the Company and Newco

believes that it is in the best interests of each company and their respective

stockholders that the Company and Newco combine into a single company through

the statutory merger of Newco with and into the Company (the "MERGER") and, in

furtherance thereof, along with Parent as the sole stockholder of Newco, have

approved the Merger.

 

         B.        Pursuant to the Merger, among other things, the outstanding

shares of Company Stock and any unexercised options to purchase Company Stock

will be converted into the right to receive the Merger Consideration as

determined herein.

 

         C.        Concurrently with the execution and delivery of this

Agreement, and as a condition and inducement to the willingness of Parent and

Newco to enter into this Agreement, each of Anderson Hat World, LLC, Robert J.

Dennis, James G. Harris, Scott A. Molander, J. Glenn Campbell, Kenneth J.

Kocher, Bluestem Capital Partners I, LLC, Bluestem Capital Partners II, LP,

Bluestem Capital Partners III, LP and Hworld Investments, L.L.C. (collectively,

the "CONTROLLING STOCKHOLDERS") has executed and delivered to Parent an

irrevocable proxy dated the date hereof (the "PROXIES") pursuant to which such

holders have agreed, among other things, to vote all his, her or its shares of

Company Stock in favor of the Merger.

 

         D.        The Company, Parent and Newco desire to make certain

representations and warranties and other agreements in connection with the

Merger.

 

         E.        Certain capitalized terms used herein as defined terms are

defined in Schedule 1 attached hereto. Additionally, Schedule 1 references the

sections of this Agreement in which other capitalized terms that are used as

defined terms are defined.

 

                                   AGREEMENTS

 

         In consideration of the premises and the mutual representations,

warranties, covenants and agreements contained herein, and for other good and

valuable consideration the receipt and sufficiency of which are hereby

acknowledged, and intending to be legally bound hereby, the parties hereby agree

as follows:

 

ARTICLE 1. THE MERGER

 

                           SECTION 1.1 THE MERGER. At the Effective Time and on

                  the terms and subject to the conditions of this Agreement,

                  Newco shall be merged with and into the Company, at which time

                  the separate corporate existence of Newco shall cease and the

                  Company shall continue as the surviving corporation after the

                  Merger. The Company as the surviving corporation after the

                  Merger is hereinafter sometimes

 

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                  referred to as the "SURVIVING CORPORATION". The Surviving

                  Corporation shall continue to be governed by the laws of the

                  State of Delaware.

 

                           SECTION 1.2 EFFECTIVE TIME AND CLOSING. On the second

                  Business Day after the satisfaction or waiver of all of the

                   conditions to the obligations of the parties to consummate the

                  transactions contemplated hereby set forth in Article 5 (other

                  than conditions with respect to actions to be taken at the

                  Closing), the parties shall cause the Merger and other

                  transactions contemplated hereby to be consummated by (a)

                  executing and delivering to one another such agreements,

                  instruments, certificates and documents required by each of

                  them under this Agreement in order to satisfy their respective

                  obligations and conditions precedent to be satisfied by them,

                  and (b) by filing a Certificate of Merger with the Secretary

                   of State of the State of Delaware, in such form as required

                  by, and executed in accordance with the relevant provisions

                  of, Section 251(c) of the Delaware General Corporation Law

                  (the "DGCL") (the time of such filing with the Secretary of

                  the State of Delaware, or such other later time as the parties

                  mutually agree and set forth in the Certificate of Merger,

                  being the "EFFECTIVE TIME"). The consummation of the

                  transactions contemplated hereby (the "CLOSING") shall take

                  place at 10:00 a.m. at the offices of the Company's counsel,

                  Barnes & Thornburg, in Indianapolis, Indiana on the date

                  provided above, unless another date is agreed to in writing by

                  the parties (the "CLOSING DATE").

 

                           SECTION 1.3 EFFECT OF THE MERGER. At the Effective

                  Time, the effect of the Merger shall be as provided under the

                  DGCL and this Agreement. Without limiting the generality of

                  the foregoing, at the Effective Time all the property, rights,

                  privileges, powers and franchises of the Company and Newco

                  shall vest in the Surviving Corporation, and all debts,

                  liabilities and duties of the Company and Newco shall become

                  the debts, liabilities and duties of the Surviving

                   Corporation.

 

                           SECTION 1.4 CERTIFICATE OF INCORPORATION; BY-LAWS.

 

                  (a)       Unless otherwise determined by Parent prior to the

         Effective Time, at the Effective Time the Certificate of Incorporation

          of Newco as in effect immediately prior to the Effective Time shall be

         the Certificate of Incorporation of the Surviving Corporation until

         thereafter amended as provided by Law and such Certificate of

         Incorporation.

 

                   (b)       Unless otherwise determined by Parent prior to the

         Effective Time, the by-laws of Newco as in effect immediately prior to

         the Effective Time shall be the by-laws of the Surviving Corporation

         until thereafter amended.

 

                           SECTION 1.5 DIRECTORS AND OFFICERS. The directors and

                  committees of the Board of Directors (including the

                  composition thereof) of Newco immediately prior to the

                  Effective Time shall be the initial directors and committees

                  of the Board of Directors of the Surviving Corporation, each

                  to hold office in accordance with the Certificate of

                  Incorporation and by-laws of the Surviving Corporation, and

                  the officers of Newco immediately prior to the Effective Time

                  shall be the initial

 

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                   officers of the Surviving Corporation, in each case to hold

                  office until their respective successors are duly elected or

                  appointed and qualified.

 

                           SECTION 1.6 WARRANTS AND OPTIONS; EFFECT OF THE

                  MERGER ON THE CAPITAL STOCK OF THE COMPANY.

 

                  (a)       Prior to or concurrently with the Closing, as

         provided in this Section and in Section 4.7, all warrants, options or

         other rights to acquire Company Stock, other than conversion rights

         under outstanding preferred shares of Company Stock, shall be either

         exercised or cancelled, or, in the case of unexercised options under

         the Option Plan or otherwise, other property shall be substituted for

         the Common Stock issuable upon the exercise thereof as set forth in the

         following sentence. In that regard, prior to the Closing, the Company

         will take appropriate action to elect to substitute the right to

          receive the per share Merger Consideration payable to holders of Common

         Stock, instead of the right to purchase shares of Common Stock, with

         respect to all outstanding options to purchase Common Stock granted

         under the Company's 2001 Stock Option Plan (the "OPTION PLAN") that

         have not been exercised prior to the taking of the Company's actions in

         that regard and may by agreement effect that same result with respect

         to options issued and held outside the Option Plan (in either case, the

         unexercised options as to which the per share Merger Consideration is

         substituted for the right to purchase shares of Common Stock are the

         "SUBSTITUTED OPTIONS"). Each Substituted Option will be cashed out

         rather than exercised, and the holder thereof (an "OPTION HOLDER") will

         not be obligated to pay the exercise price thereunder upon exercise

         (but may defer payment of the exercise price thereof), and upon

         submission of a Request for Payment pursuant to Section 1.10 will be

         entitled to receive the per share Merger Consideration payable to

         holders of Common Stock (excluding Dissenting Shares) as to that number

         of shares potentially acquirable under the Substituted Option (the

         "SUBSTITUTED OPTION SHARES") minus the exercise price otherwise payable

         under such Substituted Options and less any applicable tax

         withholdings. Accordingly, holders of Substituted Options will not be

         entitled to receive certificates for shares of Common Stock under those

         options but instead will be entitled after the Effective Time to share

         in the Merger Consideration with respect to each of the Substituted

          Option Shares as to which their Substituted Options have been

         exercised, net of the exercise price of such options and applicable tax

         withholdings. The Company will provide to Parent and Newco in

         accordance with Section 1.9 a current list as of the Closing of all

         Option Holders and, as to each Option Holder, the number of Substituted

         Option Shares represented by his or her Substituted Options and the

         applicable exercise price with respect thereto.

 

                  (b)       At the Effective Time (a) each share of Company Stock

         (other than Dissenting Shares and treasury or other shares held by the

         Company) and each Substituted Option Share will be converted into the

         right to receive, payable upon surrender of the certificates formerly

         representing shares of Company Stock by the holders thereof in the

         manner provided in Section 1.10 and, with respect to Substituted Option

         Shares, upon the submission of a Request for Payment by the Option

         Holder with respect thereto in accordance with Section 1.10, that

         portion of the Merger Consideration payable by Parent (through the

         Paying Agent and, as applicable, through the Stockholder Committee, the

         Working Capital Escrow Agent and the Indemnification Escrow Agent),

 

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         without interest, to the holders thereof at the times and in the

         amounts determined pursuant to Sections 1.8, 1.9 and 1.10 hereof, (b)

         any treasury shares or other shares held by the Company or any of its

         Subsidiaries will be canceled and (c) notwithstanding anything in this

         Agreement to the contrary, no Dissenting Shares will be deemed to be

         converted into and to represent the right to receive cash as

         contemplated by this Agreement (including Sections 1.8 and 1.9) and the

         holders of Dissenting Shares, if any, will be entitled to payment,

         solely from the Surviving Corporation, of the appraised value of such

         Dissenting Shares to the extent permitted by and in accordance with the

         provisions of Section 262 of the DGCL; provided, however, that (i) if

         any holder of Dissenting Shares, under the circumstances permitted by

         the DGCL, subsequently delivers a written withdrawal of his or her

         demand for appraisal of such Dissenting Shares, (ii) if any holder

          fails to establish his or her entitlement to rights to payment as

         provided in such Section 262, or (iii) if neither any holder of

         Dissenting Shares nor the Surviving Corporation has filed a petition

         demanding a determination of the value of all Dissenting Shares within

         the time provided in such Section 262, such holder will forfeit such

         right to payment for such Dissenting Shares pursuant to such Section

         262 and, as of the later of the Effective Time or the occurrence of

         such event, such holder's certificate formerly representing shares of

         Company Stock shall automatically be converted into and represent only

         the right to receive that portion of the Merger Consideration payable

         by Parent (through the Paying Agent and, as applicable, through the

         Stockholder Committee, the Working Capital Escrow Agent and the

         Indemnification Escrow Agent) at the times and in the amounts

         determined by Sections 1.8, 1.9 and 1.10 hereof, without any interest

         thereon, upon surrender of the certificates formerly representing such

         shares of Company Stock.

 

                           SECTION 1.7 EFFECT OF THE MERGER ON THE CAPITAL STOCK

                   OF NEWCO. Each share of common stock of Newco issued and

                  outstanding immediately prior to the Effective Time shall, at

                  the Effective Time, be converted into one validly issued,

                  fully paid and non-assessable share of common stock of the

                  Surviving Corporation. Each stock certificate of Newco

                  evidencing ownership of any such shares shall continue to

                  evidence ownership of such shares of capital stock of the

                  Surviving Corporation.

 

                           SECTION 1.8 MERGER CONSIDERATION.

 

                  (a)       AMOUNT PAYABLE. Subject to the adjustments to be made

         pursuant to Section 1.9 with respect to any Dissenting Shares, the

         aggregate consideration payable to the holders of Company Stock and

         Substituted Options in connection with the Merger is the sum of (i) One

         Hundred Sixty-Five Million Dollars ($165,000,000), plus (ii) the

         amount, if any, by which Closing Cash exceeds Closing Debt, minus (iii)

         the amount, if any, by which Closing Debt exceeds Closing Cash, plus or

         minus, as applicable, (iv) the net effect of the estimated and final

         working capital adjustments described in Sections 1.8(b) and 1.8(c),

         and plus (v) Three Million Dollars ($3,000,000) with respect to the

         Stock Option Benefits (the "MERGER CONSIDERATION"). The Merger

         Consideration will be paid by Parent (and Parent will receive refunds

         of overpayments, if applicable) as follows:

 

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                           (i)       the sum of Six Million Dollars ($6,000,000)

                   will be paid by Parent at Closing to the Working Capital

                  Escrow Agent, to be received, held and disbursed pursuant to

                  the terms of the Working Capital Escrow Agreement, with any

                  balance thereof remaining upon the termination of the Working

                  Capital Escrow Agreement to be distributed pursuant to the

                  terms thereof and Sections 1.8, 1.9 and 1.10 to the former

                  holders of Company Stock (excluding Dissenting Shares) and to

                  Option Holders who have surrendered their Certificates or

                  submitted a Request for Payment pursuant to Section 1.10;

 

                           (ii)      the sum of Fifteen Million Dollars

                   ($15,000,000.00) will be paid by Parent at Closing to the

                  Indemnification Escrow Agent to be received, held and

                  disbursed pursuant to the terms of the Indemnification Escrow

                  Agreement, with any balance thereof remaining upon the

                  termination of the Indemnification Escrow Agreement to be

                  distributed pursuant to the terms thereof and Sections 1.8,

                  1.9 and 1.10 to the former holders of Company Stock (excluding

                  Dissenting Shares) and to Option Holders who have surrendered

                  their Certificates or submitted a Request for Payment pursuant

                  to Section 1.10;

 

                           (iii)     the sum of One Million Dollars ($1,000,000)

                  will be paid by Parent at Closing to the Stockholder Committee

                  (as the agent of the former holders of Company Stock

                  (excluding Dissenting Shares) and the Option Holders who have

                  surrendered their Certificates or submitted a Request for

                  Payment pursuant to Section 1.10) to be received, held and

                  disbursed pursuant to the authority of such agent described in

                   Exhibit C hereto;

 

                           (iv)      the sum of One Hundred Forty-Three Million

                  Dollars ($143,000,000) (the "BASE CLOSING CASH") plus (A) the

                  amount, if any, by which Closing Cash exceeds Closing Debt,

                  minus (B) the amount, if any, by which Closing Debt exceeds

                  Closing Cash, plus (C) the Estimated Working Capital Excess

                  determined pursuant to Section 1.8(b), or minus (D) the

                   Estimated Working Capital Deficiency determined pursuant to

                  Section 1.8(b), as applicable, and plus (E) Three Million

                  Dollars ($3,000,000) with respect to the Stock Option Benefits

                  (the "CLOSING MERGER CONSIDERATION"), will be paid by Parent

                  at Closing as follows: (x) an amount equal to the Stock Option

                  Withholding will be paid by Parent to the Company or retained

                  by Parent for timely payment by the Company or Parent, as

                  applicable (and Parent shall cause the Company to make such

                  payment if Parent does not make it), of the Stock Option

                  Withholding to the appropriate taxing authorities on behalf of

                  the Persons from whom such amounts are withheld (provided,

                  that the Company shall cooperate with Parent prior to the

                  Closing to assist Parent in making or causing to be made such

                  payment on the Closing Date), (y) the aggregate exercise price

                  for all Substituted Option Shares will be retained by Parent

                  and/or paid by Parent to the Surviving Corporation, as Parent

                  shall elect, and (z) the balance thereof will be paid by

                  Parent to the Paying Agent for payment to the former holders

                  of Company Stock (excluding Dissenting Shares) and to the

                  Option Holders upon surrender of their Certificates or

                  submission of a Request for Payment pursuant to Section 1.10;

                  and

 

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                           (v)       any Final Working Capital Excess determined

                  pursuant to Section 1.8(c) will be paid by Parent to the

                  Paying Agent within ten (10) Business Days after the amount

                  thereof has been determined for distribution to the former

                   holders of Company Stock (excluding Dissenting Shares) and to

                  the Option Holders who have surrendered their Certificates or

                  submitted a Request for Payment pursuant to Section 1.10.

 

                  (b)       ESTIMATED WORKING CAPITAL ADJUSTMENT. At least five

         Business Days prior to the Closing Date, the Company shall deliver to

         Parent in writing its good faith estimate of the Closing Working

         Capital, which shall include the accounts set forth on Exhibit G hereto

         (the "ESTIMATED CLOSING WORKING CAPITAL"). The Company shall make

         available to Parent all work papers and other books and records

         utilized in calculating the Estimated Closing Working Capital and shall

         use its reasonable efforts to make available to Parent the appropriate

         personnel involved in the preparation of such estimate. The amount, if

         any, by which the Estimated Closing Working Capital is less than the

          applicable Target Closing Working Capital is the "ESTIMATED WORKING

         CAPITAL DEFICIENCY", and the amount, if any, by which the Estimated

         Closing Working Capital is greater than the Target Closing Working

         Capital is the "ESTIMATED WORKING CAPITAL EXCESS". The amount

         determined under this Section 1.8(b) shall be added or subtracted, as

         applicable, to the Base Closing Cash in order to determine the cash

         amount payable by Parent at Closing under Section 1.8(a), clause (iv).

 

                  (c)       POST-CLOSING WORKING CAPITAL ADJUSTMENT; OTHER

         ADJUSTMENTS. As promptly as practicable, but in no event later than

         sixty (60) days after the Closing Date, the Stockholder Committee shall

          notify Parent in writing of its final determination of the Company's

         actual (rather than estimated) Closing Working Capital and of any

         disagreement with the amounts used by the parties at Closing as the

         Company's Closing Cash and Closing Debt (which notification is the

         "COMMITTEE'S REPORT"), which determination shall set forth in

         reasonable detail the Stockholder Committee's calculation of Closing

         Working Capital and, if applicable, Closing Cash and/or Closing Debt.

         The Committee's Report shall also set forth, and explain in reasonable

         detail, any differences between the Stockholder Committee's calculation

         of Closing Working Capital and the Estimated Closing Working Capital. A

         copy of all work papers and other books and records utilized in the

         preparation of the Committee's Report shall be made available to Parent

         at such time. Parent will notify the Stockholder Committee in writing

         (the "WORKING CAPITAL DISPUTE NOTICE"), within the later of (i) thirty

         (30) days after receiving the Committee's Report and (ii) sixty (60)

         days following the Closing Date, if Parent disagrees with the

         Stockholder Committee's calculation of the Closing Working Capital as

         set forth in the Committee's Report and/or if Parent disagrees with the

         accuracy of the Closing Cash or Closing Debt amounts used at Closing to

         calculate the Merger Consideration, which notice shall set forth in

         reasonable detail the basis for such disagreement(s), the amounts

         involved and Parent's calculation of the Closing Working Capital or, if

         applicable, Closing Cash and/or Closing Debt. If no Working Capital

          Dispute Notice is received by the Stockholder Committee within such

         period, the Stockholder Committee's calculation of Closing Working

         Capital as set forth in the Committee's Report and the amounts of

         Closing Cash and Closing Debt used at the Closing to calculate the

         Merger Consideration shall be final and binding upon the parties

 

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         hereto. The Stockholder Committee and Parent will give each other and

         their representatives reasonable access during normal business hours to

         the personnel, books and records of the Surviving Corporation to assist

         the Stockholder Committee in the preparation of the Committee's Report

         and to assist Parent in the preparation of any Working Capital Dispute

         Notice.

 

                  (d)       Upon receipt by the Stockholder Committee of a

         Working Capital Dispute Notice, the Stockholder Committee and Parent

         shall negotiate in good faith to resolve any disagreement with respect

         to Closing Working Capital, Closing Cash and/or Closing Debt set forth

         in the Working Capital Dispute Notice. To the extent Parent and the

         Stockholder Committee are unable to agree with respect to all such

         matters within thirty (30) days after receipt by the Stockholder

         Committee of the Working Capital Dispute Notice, Parent and the

         Stockholder Committee shall promptly submit the unresolved issues as to

         the proper amount of the Closing Working Capital, Closing Cash and/or

         Closing Debt for a binding determination to a nationally recognized

         accounting firm that is mutually acceptable to the Stockholder

         Committee and Parent. Such accounting firm may consider only items

         disputed by the Working Capital Dispute Notice and matters affected

         thereby, and its determination of the Final Closing Working Capital

         shall not be more than the Closing Working Capital set forth in

         Committee's Report or less than the Closing Working Capital set forth

         in the Working Capital Dispute Notice. The amount of the Closing

         Working Capital plus or minus, as applicable, any appropriate

         adjustments on account of changes to Closing Cash and/or Closing Debt,

         as agreed upon by the Stockholder Committee and Parent, as deemed

         agreed upon pursuant to the next-to-last sentence of Section 1.8(c), or

         as determined by such accounting firm in accordance herewith, shall be

         the "FINAL CLOSING WORKING CAPITAL". The fees and expenses of such

         accounting firm shall be paid by the party (either the Stockholder

         Committee or Parent) whose latest written offer or position as to an

         acceptable amount for the Closing Working Capital at the time the issue

         is submitted to such accounting firm is furthest away from the Final

         Closing Working Capital as determined by such accounting firm.

 

                  (e)       If the Final Closing Working Capital is greater than

         the Estimated Closing Working Capital, the amount equal to the

         difference between the two (the "FINAL WORKING CAPITAL EXCESS") shall

         be paid by Parent to the Paying Agent within ten (10) Business Days

         after the determination of such amount for distribution to the former

         holders of Company Stock (excluding Dissenting Shares) and to the

         Option Holders who have surrendered their Certificates or submitted a

         Request for Payment pursuant to Section 1.10. If the Final Closing

         Working Capital is less than the Estimated Closing Working Capital, the

         amount equal to the difference between the two (the "FINAL WORKING

         CAPITAL DEFICIENCY") shall be paid by the Working Capital Escrow Agent

         (and by the Indemnification Escrow Agent from the funds held by such

         agent under Indemnification Escrow if and to the extent the funds held

         by the Working Capital Escrow Agent are not sufficient) on behalf of

         the former holders of Company Stock and Substituted Options to Parent

         within ten (10) Business Days after the amount of the Final Working

         Capital Deficiency has been determined.

 

                  (f)       Notwithstanding anything in this Agreement to the

         contrary, the computation of Estimated Closing Working Capital, Target

         Closing Working Capital,

 

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         Closing Working Capital and Final Closing Working Capital shall not

         include or reflect the impact of any change to the balance sheet

         resulting from any Tax deduction or other Tax benefit to which the

         Company may be entitled as a result of the exercise by any optionee of

         any option to purchase Common Stock or as a result of the realization

         of any other benefits with respect to which the optionee is entitled

         pursuant to the Option Plan, in either case after December 31, 2003

         (collectively, the "STOCK OPTION BENEFITS"). (This Section is not

         intended to limit the Company's ability to reflect the non-Tax impact

         of the exercise of the options and issuance of shares of Common Stock

         pursuant thereto on its balance sheet.)

 

                  (g)       As contemplated by Section 1.9(f), Parent shall

         timely pay or shall cause the Surviving Corporation to timely pay on

         behalf of the Persons as to whom the Company has tax withholding

         obligations any applicable withholding taxes payable with respect to

         the exercise by any optionee of any option to purchase Common Stock or

         the realization of any other benefit to which the optionee is entitled

         pursuant to the Option Plan or with respect to options to purchase

         Common Stock outside the Option Plan (the "STOCK OPTION WITHHOLDING")

         and shall deduct the amount of the Stock Option Withholding from the

         Closing Merger Consideration payable to the Paying Agent pursuant to

         Section 1.8(a)(iv).

 

                           SECTION 1.9 ALLOCATION AND PAYMENT OF MERGER

                   CONSIDERATION.

 

                  (a)       At the Closing the Company will provide to Parent a

         document prepared by the Company and signed by the Chief Financial

         Officer of the Company (the "MERGER CONSIDERATION PAYMENT ALLOCATION")

         that will list all holders of Company Securities as of the Closing

         (names and addresses), that will reflect the type and number of shares

         of Company Securities held by each of them, and that will reflect, as

         determined pursuant to the Company's Certificate of Incorporation, this

         Agreement and applicable law, the amount and/or proportion, on a per

         share basis, of each component of the Merger Consideration payable or

         potentially payable to each holder of Company Securities (excluding

         Dissenting Shares but including, without limitation, Substituted Option

         Shares) by Parent, the Paying Agent, the Working Capital Escrow Agent

         and the Indemnification Escrow Agent. The provisions of this Section

         1.9 will be followed in preparing the Merger Consideration Payment

         Allocation.

 

                  (b)       (i) If any former holder of Company Stock delivers a

         written demand for appraisal pursuant to Section 262 of the DGCL, an

         amount allocable to the shares of Company Stock held by such holder and

         deposited pursuant to the Working Capital Escrow Agreement or the

         Indemnification Escrow Agreement or deposited with the Stockholder

          Committee or with the Paying Agent (each a "Disbursement Account")

         shall be segregated and held separate pending a determination with

         respect to whether such holder is entitled to rights to payment

         pursuant to Section 262 of the DGCL. If such holder's rights to payment

         pursuant to Section 262 of the DGCL has been forfeited pursuant to

         Section 1.6(b) of this Agreement, such funds shall no longer be

         segregated and shall be disbursed in accordance with the terms of

         Sections 1.6, 1.8 and 1.9. If it is determined that such holder is

         entitled to rights to payment as provided in Section 262 of the DGCL or

         if no such determination has been made at the time all nonsegregated

 

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         amounts in the applicable Disbursement Account have been or are being

         disbursed, the amounts allocable to such holder's Dissenting Shares

         shall be disbursed to the Company.

 

                  (ii) The amount of funds deposited into a Disbursement Account

         allocable to such a holder's shares shall be an amount equal to (A) the

         amount of funds deposited in such Disbursement Account (less any

         amounts payable from such Disbursement Account to Parent or the

         Surviving Corporation or other third parties and, in the case of funds

         deposited with the Paying Agent, the $1,000,001 preference amount

         payable to holders of Series A Preferred Stock and plus, in the case of

         the Disbursement Account with the Paying Agent, the amount of the

         exercise price for any Substituted Option and any Stock Option

         Withholding withheld therefrom by Parent or paid to Parent, the Company

         or the Surviving Corporation) divided by (B) the number of shares of

         Common Stock of the Company as of the Closing Date viewing all Company

         Securities on an as-converted, as-exercised basis (and including, for

         this purpose, all Substituted Option Shares, shares underlying

         Substituted Options and Dissenting Shares, but excluding any treasury

         shares or shares otherwise held by the Company).

 

                  (c)       The holders of the Company's Series A Preferred Stock

         outstanding as of the Closing as a group will be entitled to receive

         $5.27082 per share, or an aggregate total of One Million One Dollars

         ($1,000,001), of the Merger Consideration as a preferential amount

         payable to such holders under the terms of the Series A Preferred Stock

         as set forth in the Company's Certificate of Incorporation.

 

                  (d)       The balance of the Merger Consideration, after

          adjustment on account of Dissenting Shares (if any) and after

         subtracting the $1,000,001 preference amount payable to the holders of

         Series A Preferred Stock, will be payable prorata (subject to Section

         1.9(e) and 1.9(f)) according to their respective shares of Common Stock

         (or deemed ownership of Common Stock) to the holders of Company

         Securities as of the Closing other than Dissenting Shares, viewing all

         Company Securities on an as-exercised and as-converted basis; provided,

         however, that if the Series B-1 Liquidation Preference (as defined in

         the Company's Certificate of Incorporation) is greater than the per

         share Merger Consideration payable to the holders thereof such holders

         shall instead be entitled to receive an amount equal to the Series B-1

         Liquidation Preference for each share of Common Stock into which such

         holder's Series B-1 Preferred Stock is convertible, and if the Series

         B-2 Liquidation Preference (as defined in the Company's Certificate of

         Incorporation) is greater than the per share Merger Consideration

         payable to the holders thereof such holders shall instead be entitled

         to receive an amount equal to the Series B-2 Liquidation Preference for

         each share of Common Stock into which such holder's Series B-2

         Preferred Stock is convertible, and the amounts payable to the other

         holders of Company Securities pursuant to this Section 1.9(d) will be

         reduced accordingly. Such payment will occur at the various times and

         from the various sources (such as the Paying Agent and the escrow

         agents referred to herein) as described in this Agreement.

 

                   (e)       Under the Option Plan, participants who exercise

         options in anticipation of the Merger have the right to defer payment

         of the exercise price for their shares of Common Stock so acquired

         until the consummation of the Merger. The Company may grant similar

         rights to the holders of options that have been issued outside the

         Option

 

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         Plan. With respect to any such participants or option holders who have

         exercised options but who have not paid the exercise price in full for

         any of their shares of Common Stock acquired from the Company, the

         Paying Agent shall, as provided on the Merger Consideration Payment

         Allocation (but only to the extent such amounts were not withheld by

         Parent from its payments to the Paying Agent), pay directly to the

         Company out of sums otherwise payable to such Persons the unpaid

          exercise price payable by them to the Company with respect to their

         shares of Common Stock and shall pay to each such Person only the net

         remaining amount payable to such Person after deducting amounts paid to

         the Company on behalf of such Person pursuant to this Section 1.9. With

         respect to the holders of Substituted Options, the amount payable to

         the holders of Substituted Option Shares shall also be only the net

         amount payable to such Persons after deducting the exercise price that

         would otherwise be payable by them with respect to their Substituted

         Option Shares.

 

                  (f)       The Company will have tax withholding obligations

         with respect to certain of its employees or former employees who

         exercise stock options or whose options are cashed out without being

         exercised. If, prior to the Closing, the Company has not effected such

         tax withholdings with respect to option holders who have exercised

         options or who will be receiving Merger Consideration with respect to

         Substituted Option Shares, the taxes required to be withheld from each

         of said Persons will be deducted from the Merger Consideration

         otherwise payable to them, and will be paid (or caused to be paid) by

         Parent or the Surviving Corporation to the appropriate taxing

         authorities as withheld taxes on their behalf as provided in this

         Agreement, and they will be entitled to receive the amounts of Merger

         Consideration otherwise payable to them hereunder after deducting any

         such withheld tax amounts.

 

                           SECTION 1.10 PAYMENT AND SURRENDER OF CERTIFICATES.

 

                  (a)       Simultaneous with the Effective Time, Parent will

         furnish to SunTrust Bank, N.A. (the "PAYING AGENT") sufficient funds

         for the payment of the Closing Merger Consideration, and Parent will

         cause the Paying Agent to mail or otherwise provide (i) a letter of

         transmittal (with instructions for its use) in the form attached hereto

         as Exhibit D to each record holder of outstanding Company Stock (other

         than Dissenting Shares) as of the Closing, and (ii) a Request for

         Payment of Merger Consideration in the form attached hereto as Exhibit

         E (a "REQUEST FOR PAYMENT") to each holder of Substituted Options as of

         the Closing, for each holder to use in surrendering against payment of

          the Closing Merger Consideration the certificates which represented

         his, her or its shares of Company Stock other than Dissenting Shares

         and/or in requesting payment of the per share amount of the Closing

         Merger Consideration with respect to Substituted Option Shares held by

         such holder.

 

                  (b)       Upon surrender to the Paying Agent of the

         certificates representing shares of Company Stock (the "CERTIFICATES")

         other than Dissenting Shares, or upon submitting to the Paying Agent a

         signed Request for Payment with respect to Substituted Option Shares

         and to certain other participants under the Option Plan who have

         previously exercised options, the Certificates so surrendered shall

         forthwith be cancelled and payment of the Closing Merger Consideration

         will be made by the Paying Agent (and any

 

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         other portion of the Merger Consideration not then payable will be paid

         as contemplated hereby) to the holders of surrendered Certificates and

         to the Option Holders who submit a Request for Payment with respect to

         each Substituted Option Share designated therein in accordance with the

         terms of this Agreement, or to the Company in payment of the unpaid

         exercise price payable upon the exercise of options under the Option

         Plan and/or applicable tax withholdings in connection therewith, in the

         amounts determined under Section 1.9. Until so surrendered, each

         outstanding Certificate or right thereto shall be deemed, from and

         after the Effective Time, to represent solely the right to receive upon

         such surrender payment of the Merger Consideration, without interest,

         at the times and in the amounts determined pursuant to this Article 1.

 

                  (c)       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 satisfactory

         to Parent and complying with any other reasonable requirements imposed

         by Parent, Parent will cause to be paid in exchange for such lost,

         stolen or destroyed Certificate the Closing Merger Consideration (and

         as applicable all other sums included in the Merger Consideration as

         such sums become payable to holders of Company Stock other than

         Dissenting Shares) for each share represented thereby; provided,

         however, that Parent may not require the owner of such lost, stolen or

         destroyed Certificate to give Parent a bond or other financial

          instrument or collateral but may require a written indemnity against

         any claim that may be made against Parent with respect to the

         Certificate alleged to have been lost, stolen or destroyed.

 

                           SECTION 1.11 NO FURTHER OWNERSHIP RIGHTS IN COMPANY

                  STOCK. All payments of the Merger Consideration made upon

                  surrender of Certificates for Company Stock in accordance with

                  the terms hereof shall be deemed to have been made in full

                  satisfaction of all rights pertaining to such shares of

                  Company Stock, and there shall be no further registration of

                  transfers on the records of the Surviving Corporation of

                   shares of Company Stock which were outstanding as of the

                  Closing. If, after the Closing, Certificates are presented to

                  the Surviving Corporation for any reason, they shall be

                  canceled and exchanged as provided in this Article 1.

 

                           SECTION 1.12 STOCKHOLDER COMMITTEE. There is hereby

                  created and established a committee of two (2) persons

                  appointed by holders of Company Stock who were stockholders of

                  the Company prior to the Effective Time (the "STOCKHOLDER

                  COMMITTEE"), one member of which shall be appointed (and may

                  be removed and replaced) by HWorld Investments, LLC, a

                  Delaware limited liability company, and one member of which

                  shall be appointed (and may be removed and replaced) by

                  Bluestem Capital Company, LLC. The Stockholder Committee shall

                  have the power and authority to act for all purposes under

                  this Agreement on behalf of all of the former stockholders of

                  the Company who as of the Closing held shares of Company Stock

                  (other than Dissenting Shares) and all Option Holders. The

                  initial members of the Stockholder Committee, who shall be

                  members thereof until they are replaced as provided herein,

                  are F. Barron Fletcher, III and Steve Kirby. Written notice of

                   a replacement of a member of the Stockholder Committee shall

                  be given by the Person entitled to appoint such member to

                  Parent and to the other Person entitled to appoint a member of

                  the Stockholder Committee. Each former

 

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                  stockholder of the Company and Option Holder shall be deemed

                  at the Effective Time to have irrevocably appointed the

                  Stockholder Committee, and each of the members thereof, as

                  his, her or its attorney-in-fact and agent to act for such

                  stockholder or Option Holder within the scope of the authority

                  given to the Stockholder Committee as described in Exhibit C

                  attached hereto and made a part hereof, including, without

                  limitation, the authority to receive, invest, spend and

                  distribute the portion of the Merger Consideration payable to

                  the Stockholder Committee pursuant to Section 1.8(a), clause

                  (iii). Parent and Newco shall be entitled to rely on the

                  written instructions of the Stockholder Committee and shall be

                  protected from any liability of any kind for actions taken in

                  reliance upon such written instructions.

 

                           SECTION 1.13 EBITDA LOSS ADJUSTMENT.

 

                   (a)       As used herein:

 

                           (i)       "LEASE CONSENT COST" means any amount the

                  Company or any of its Subsidiaries pays or agrees to pay in

                  order to obtain a Lease Consent from a landlord under a Lease

                  other than an Excluded Lease, either prior to the Closing or

                  at any time after the Closing prior to the end of the 210th

                  day following the Closing Date (whether such amount is paid or

                   payable by the Company or any of its Subsidiaries at, prior to

                  or after the Closing). If such amount is a one time payment,

                  the Lease Consent Cost shall be the amount of such payment. If

                  such amount is more than one payment (such as increased rent),

                  the Lease Consent Cost shall be the sum of such payments

                  becoming payable during the remaining term of the Lease and,

                  if applicable, any renewal or extension periods available to

                  the tenant as a matter of right without a renegotiation of the

                  rent or other terms applicable under the Lease;

 

                           (ii)      "OTHER LEASE INCREASE COST" means any amount

                  the Company or any of its Subsidiaries is required to pay or

                  otherwise agrees to pay under any Lease as a result of the

                  occurrence of the Merger that (i) would not have been owed had

                   the Merger not occurred and (ii) is not a Lease Consent Cost.

                  If such amount is a one time payment, the Other Lease Increase

                  Cost shall be the amount of such payment. If such amount is

                  more than one payment (such as increased rent), the Other

                  Lease Increase Cost shall be the sum of such payments becoming

                  payable during the remaining term of the Lease and, if

                  applicable, any renewal or extension periods available to the

                  tenant as a matter of right without a renegotiation of the

                  rent or other terms applicable under the Lease; and

 

                           (iii)     "LOST LEASE COST" means 3.5 times the Store

                   EBITDA reflected on Exhibit H hereto with respect to any

                  Leases that (i) are terminable by the landlord thereunder as a

                  result of the Merger and (ii) are in fact so terminated by

                  such landlord not later than 210 days after the Closing Date.

 

                  (b)       If any Lease Consent Cost or Other Lease Increase

         Cost is paid or accrued (but as to the amount accrued only to the

         extent included as a current liability in Closing

 

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         Working Capital) by the Company or any of its Subsidiaries at or prior

         to the Closing, there shall be added as an asset of the Company for

         purposes of calculating Closing Working Capital (and to Estimated

         Closing Working Capital to the extent known) an amount equal to the

         lesser of (i) the aggregate amount of such Lease Consent Costs and

         Other Lease Increase Costs paid or accrued (but as to the amount

         accrued only to the extent included as a current liability in Closing

         Working Capital) and (ii) the Excess EBITDA Amount. If the aggregate

         amount of the Lease Consent Costs and Other Lease Increase Costs paid

         or accrued by the Company or any of its Subsidiaries at or prior to the

         Closing is less than the amount of the Excess EBITDA Amount, the

         difference shall be referred to as the "Unused Excess EBITDA Amount."

         If the aggregate amount of the Lease Consent Costs and Other Lease

         Increase Costs paid or accrued by the Company or any of its

         Subsidiaries at or prior to the Closing is more than the amount of the

         Excess EBITDA Amount, the difference shall be referred to as the "Price

         Reduction Amount." If the Price Reduction Amount is more than $5

         million, Parent shall further increase the Closing Working Capital by

         such excess paid or accrued by the Company (but as to the amount

         accrued only to the extent included as a current liability in Closing

         Working Capital) and shall pay such amount to the Paying Agent at the

         time the Closing Merger Consideration is paid or, to the extent not

         then known, at the time the Final Closing Working Capital is

         determined.

 

                  (c)       If any Lease Consent Cost or Other Lease Increase

         Cost is not paid or accrued by the Company or any of its Subsidiaries

          at or prior to the Closing or if there is any Lost Lease Cost, Parent

         shall be entitled to reimbursement from the funds held by the

         Indemnification Escrow Agent under the Indemnification Escrow Agreement

         an amount equal to the amount by which the sum of such Lease Consent

         Costs, Other Lease Increase Costs and Lost Lease Costs exceeds any

         Unused Excess EBITDA Amount; provided, however, that the amount Parent

         may so receive shall not exceed $5 million minus the Price Reduction

         Amount. The procedures set forth in Section 6.4(a) shall apply to a

         claim for reimbursement under this Section as if it were a claim for

         indemnification to which Section 6.4(a) is applicable. (The Deductible

         limitation in Section 6.2(b) is not applicable to any such claim for

         reimbursement under this Section.)

 

                  (d)       The amount of any Lease Consent Cost or Other Lease

         Increase Cost shall be determined on a "cash on cash" basis.

 

                           SECTION 1.14 LEASE CONSENTS.

 

                  (a)       With respect to Leases other than Excluded Leases,

         the provisions of this Section shall be applicable in connection with

         the efforts of the parties to obtain Lease Consents.

 

                  (b)       Prior to the Closing the Company may obtain Lease

         Consents on such economic terms as the Company shall approve under the

         provisions of this Section and without the approval or consent of

         Parent or Newco so long as the aggregate Lease Consent Cost and Other

         Lease Increase Cost (the "AGGREGATE PRE-CLOSING CONSENT COSTS") with

         respect to those Leases as to which the Company has obtained Lease

          Consents does not exceed the Excess EBITDA Amount. If the Aggregate

         Pre-Closing

 

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         Consent Costs equal or exceed (or would exceed if increased as a result

         of a proposed Lease Consent) the Excess EBITDA Amount, then the Company

         shall not incur any additional Aggregate Pre-Closing Consent Costs to

         obtain additional Lease Consents without the advance written consent of

          Parent, which consent will not be unreasonably withheld, conditioned or

         delayed by Parent. If Parent has not disapproved in writing the form

         and/or terms of any proposed Lease Consent within ten (10) days

         following written notice thereof, Parent shall be deemed to have

         consented in writing to the form and terms thereof. In addition,

         anything to the contrary herein notwithstanding, in no event shall the

         Company or any of its Subsidiaries agree to any non-economic terms or

         conditions in connection with any Lease Consents without the prior

         written consent of Parent, which consent shall not be unreasonably

         withheld, conditioned or delayed by Parent.

 

                  (c)       After the Closing and prior to the end of the 210th

         day following the Closing Date Parent and the Surviving Corporation may

         incur or agree to incur Lease Consent Costs and Other Lease Increase

         Costs in connection with obtaining Lease Consents only with the advance

         written approval of the Stockholder Committee (which approval shall not

         be unreasonably withheld, conditioned or delayed by the Stockholder

         Committee) and the costs so incurred shall be subject to the provisions

         of Section 1.13. If the Stockholder Committee has not disapproved in

         writing such costs within ten (10) days following written notice

         thereof, the Stockholder Committee shall be deemed to have consented in

          writing to such costs. Any such costs incurred or agreed to be incurred

         by Parent or the Surviving Corporation without the written approval of

         the Stockholder Committee shall be at the expense of Parent or the

         Surviving Corporation and shall not be subject to the provisions of

         Section 1.13.

 

                  (d)       In connection with obtaining Lease Consents as to

         which the advance consent or approval of the other party as to the

         terms thereof is not required under this Section, each of the Company,

         the Surviving Corporation and Parent shall exercise reasonable business

         judgment in good faith with a view toward minimizing, to the extent

         reasonably practicable, the costs to be borne by the other party (which

         after the Closing is meant to refer to the Persons entitled to share in

         the Merger Consideration being held by the Indemnification Escrow

         Agent) under Section 1.13.

 

                  (e)        Any damages allegedly resulting from a breach of the

         covenant made in Section 1.14(d) shall be considered an indemnification

         claim against the allegedly breaching party subject to the provisions

         of Article 6.

 

                   (f)       Each of the Company and Parent shall, during the

         period of time that they are obtaining Lease Consents subject to the

         provisions of this Section and Section 1.13, furnish a weekly report to

         the other party (which will be the Stockholder Committee after the

         Closing) as to the Lease Consents obtained since the prior weekly

         report and the terms agreed to in connection therewith, and shall

         otherwise furnish the other party from time to time with all other

         information reasonably requested concerning the efforts made to obtain

         Lease Consents.

 

ARTICLE 2. REPRESENTATIONS AND WARRANTIES OF THE COMPANY

 

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         The Company hereby represents and warrants to Newco and Parent that:

 

                           SECTION 2.1 ORGANIZATION. The Company (i) is a

                  corporation duly incorporated, validly existing and in good

                  standing under the Laws of the State of Delaware, (ii) has all

                  requisite corporate power and authority to own, lease and

                  operate its assets and conduct its business as they are now

                  being operated and conducted, and (iii) is in good standing

                  and is duly qualified to transact business in each

                  jurisdiction in which the ownership or use of its assets or

                  the conduct of its business requires it to be so qualified

                  except where the lack of such qualifications reasonably would

                  not be expected to have a Material Adverse Effect. Except as

                  set forth in Section 2.4, the Company has no Subsidiaries or

                   equity investments in any other Person. The only U.S. states

                  in which neither the Company nor Hat World, Inc. is qualified

                  to transact business as a domestic or foreign corporation are

                  North Dakota, Montana, Idaho, Wyoming, Vermont and Utah.

 

                           SECTION 2.2 AUTHORIZATION. Except for the approvals

                  of the stockholders of the Company contemplated by Section 4.8

                  hereof, the Company has all requisite corporate power and

                  authority to execute and deliver this Agreement and all

                  agreements, instruments or documents contemplated herby and to

                  perform its obligations hereunder and thereunder, and to

                  consummate the transactions contemplated hereby and thereby.

                  The execution and delivery of this Agreement by the Company

                  and, subject only to the requisite approval of this Agreement

                  by the stockholders of the Company, the performance by the

                  Company of its obligations hereunder and the consummation of

                  the Merger and the other transactions provided for herein have

                  been duly and validly authorized by all necessary corporate

                  action on the part of the Company. This Agreement has been

                  duly executed and delivered by the Company and constitutes the

                  valid and legally binding obligation of the Company,

                  enforceable against the Company in accordance with its terms

                  and conditions except as enforceability may be limited by

                  applicable bankruptcy, insolvency, reorganization, moratorium

                   or other Laws relating to or affecting the rights and remedies

                  of creditors generally and to general principles of equity

                  (regardless of whether in equity or at law). Except for the

                  filing of a Certificate of Merger with the Secretary of State

                  of the State of Delaware (as contemplated by Section 1.2

                  hereof) and any required actions under the Hart-Scott-Rodino

                  Act, and except for any consents or approvals required under

                  Contracts with any Governmental Authority (all of which are

                  set forth on Schedule 2.2), and except where the failure to

                  give notice, to file, or to obtain any authorization, consent

                  or approval, reasonably would not be expected to have a

                  Material Adverse Effect, the Company need not give any notice

                  to, make any filing with, or obtain any authorization,

                  consent, or approval of any Government Authority in order to

                  consummate the transactions contemplated by this Agreement.

                  The affirmative vote of the shares of capital stock of the

                  Company owned by the Controlling Stockholders and subject to

                  the Proxies will be sufficient to approve the Merger in

                  accordance with the requirements of the DGCL and the Company's

                  Certificate of Incorporation and bylaws. The Proxies are

                  legal, valid and effective under the DGCL and the Certificate

                  of Incorporation and Bylaws of the Company.

 

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                            SECTION 2.3 NONCONTRAVENTION. Except as otherwise

                  provided in Schedule 2.3 hereto, and except for such matters

                  arising solely as a result of the consummation or anticipated

                  consummation of the Merger with respect to the Leases, the

                  execution, delivery and performance by the Company of this

                  Agreement and the other instruments and documents contemplated

                  hereby to be executed and delivered by the Company, and the

                  consummation by the Company of the transactions contemplated

                  hereby and thereby, do not and will not (i) violate or

                  conflict with or result in the breach of any provision of the

                  Certificate of Incorporation or by-laws of the Company, (ii)

                  whether after the giving of notice or lapse of time or both,

                  violate or conflict with any provision of, constitute a breach

                   of or default under, or result in the (or create in any Person

                  a right of) modification, cancellation, termination or

                  acceleration of any obligation under, or require any notice

                  under, or result in the imposition or creation of any

                  Encumbrances upon the Company or its assets pursuant to, (a)

                  any agreement or contract by which the Company or any of its

                  Subsidiaries or its or their assets is bound or (b) any

                  statute, law, rule or regulation applicable to the Company or

                  any Subsidiary, except where the violation, conflict, breach,

                  default, acceleration, termination, modification,

                  cancellation, failure to give notice or Encumbrance reasonably

                  could not be expected to have a Material Adverse Effect, or

                  (iii) violate or conflict with any Legal Requirement

                  applicable to or binding on the Company or its Subsidiaries or

                  its or their assets except where such violation reasonably

                  could not be expected to have a Material Adverse Effect.

 

                           SECTION 2.4 SUBSIDIARIES. The Company has two

                  directly and wholly-owned Subsidiaries, Hat World, Inc.

                  ("HWI") and HatWorld.com, Inc. ("HW.COM"). HWI has one

                  wholly-owned subsidiary, Hat Zone Franchising, L.L.C.

                  ("FRANCHISING"). HWI (i) is a corporation duly incorporated,

                  validly existing and in good standing under the laws of the

                  State of Minnesota, (ii) has all requisite corporate power and

                  authority to own, lease and operate its assets and conduct its

                  business as they are now being operated and conducted, and

                  (iii) is in good standing and is duly qualified to transact

                  business in each jurisdiction in which the ownership or use of

                  its assets or the conduct of its business requires it to be so

                  qualified except where the lack of such qualification

                  reasonably would not be expected to have a material adverse

                   effect on HWI. HW.com (i) is a corporation duly incorporated,

                  validly existing and in good standing under the laws of the

                  State of South Dakota, (ii) has all requisite corporate power

                  and authority to own, lease and operate its assets and conduct

                  its business as they are now being operated and conducted, and

                  (iii) is in good standing and is duly qualified to transact

                  business in each jurisdiction in which the ownership or use of

                  its assets or the conduct of its business requires it to be so

                  qualified except where the lack of such qualification

                  reasonably would not be expected to have a material adverse

                  effect on HW.com. Franchising (i) is a limited liability

                  company duly organized, validly existing and in good standing

                  under the laws of the State of Missouri, (ii) has all

                  requisite power and authority to own, lease and operate its

                  assets and conduct its business as they are now being operated

                  and conducted, and (iii) is in good standing and is duly

                  qualified to transact business in each jurisdiction in which

                  the ownership or use of its assets or the conduct of its

                  business requires it to be so qualified except where

 

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                  the lack of such qualification reasonably would not be

                  expected to have a material adverse effect on Franchising.

 

                           SECTION 2.5 CAPITALIZATION. As of the date of this

                   Agreement the authorized capital stock of the Company consists

                  of (a) 10,000,000 shares of Common Stock of which, 3,373,446

                  shares are issued and outstanding, (b) 189,724 shares of

                  Series A Preferred Stock of which, 189,724 shares are issued

                  and outstanding, and (c) 222,780 shares of Series B Preferred

                  Stock of which, 222,780 shares are issued and outstanding. As

                  of the date of this Agreement the holders of Common Stock,

                  Series A Preferred Stock, Series B Preferred Stock and

                  warrants to purchase Common Stock and the Option Holders, each

                  as set forth on Schedule 2.5 (collectively, the

                   "STOCKHOLDERS"), are the record and beneficial owners and

                  holders of the Company Stock, free and clear of any

                  Encumbrances thereto. As of the date of this Agreement (a) the

                  issued and outstanding Series A Preferred Stock is, in the

                  aggregate, convertible to 195,894 shares of Common Stock, and

                  (b) the issued and outstanding Series B Preferred Stock is, in

                  the aggregate, convertible to 2,227,800 shares of Common

                  Stock. All outstanding shares of capital stock of the Company

                  have been duly authorized and validly issued and are fully

                  paid and non-assessable and free of preemptive rights. As of

                  the date of this Agreement, the Company has outstanding

                  options that were granted to its employees, directors and

                  consultants to purchase shares of Common Stock that are held

                  by, and that are exercisable for the number of shares and at

                  the exercise prices, as disclosed in Schedule 2.5 hereto.

                  Additionally, the Company has outstanding certain warrants to

                  purchase shares of Common Stock that are, as of the date of

                  this Agreement, held by and exercisable for the number of

                  shares as disclosed in Schedule 2.5. All issued and

                  outstanding shares of capital stock or other ownership

                   interest in HWI, HW.com and Franchising are owned, directly or

                  indirectly, by the Company. Except as set forth in this

                  Section 2.5 and in Schedule 2.5, as of the date of this

                  Agreement there are no outstanding (i) shares of capital stock

                  or other securities of the Company or any of its Subsidiaries,

                  (ii) securities of the Company or any of its Subsidiaries

                  convertible into or exchangeable for shares of capital stock

                  or other securities of the Company or any of its Subsidiaries,

                  or (iii) options or other rights to acquire from the Company

                  or any of its Subsidiaries any capital stock or other

                  securities of the Company or any of its Subsidiaries (the

                  items in clauses (i), (ii) and (iii) being referred to

                  collectively as the "COMPANY SECURITIES"), and there are no

                  outstanding obligations of the Company or any of its

                  Subsidiaries, actual or contingent, to issue, transfer, sell

                  or deliver or to repurchase, redeem or otherwise acquire any

                  Company Securities. Except as disclosed on Schedule 2.5

                  hereto, there are no voting trusts or other agreements or

                  understandings to which the Company or any Stockholder is a

                  party with respect to the voting of capital stock of the

                   Company, other than the Proxies. At the Closing the Company

                  will furnish to Parent, pursuant to Section 1.9, the Merger

                  Consideration Payment Allocation which will contain a list of

                  all holders of Company Securities and the type and amount of

                  Company Securities held by each of them, as of the Closing,

                  which information thereon will be true, accurate and complete

                  as of the Closing.

 

                            SECTION 2.6 FINANCIAL STATEMENTS; CONTROLS; NO

                  UNDISCLOSED LIABILITY.

 

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                  (a)       The Company has furnished Parent and Newco true and

         complete copies of (i) audited consolidated balance sheets of the

         Company and its Subsidiaries as of December 31, 2000, December 31,

         2001, January 31, 2002, December 31, 2002 and January 31, 2003 and the

          related audited consolidated statements of income and cash flows for

         the Company and its Subsidiaries for the twelve (12) month periods then

         ended, together with an opinion thereon by the Company's independent

         auditors (the "AUDITED FINANCIAL STATEMENTS"), and (ii) an unaudited

         interim consolidated balance sheet for the Company and its Subsidiaries

         as of December 31, 2003, and the related unaudited consolidated

         statement of income for the eleven month period then ended which is

         attached hereto as Schedule 2.6 (together with the Audited Financial

         Statements, the "FINANCIAL STATEMENTS"). The Financial Statements have

         been prepared in accordance with GAAP, applied consistently with prior

         periods, and present fairly in all material respects the consolidated

         financial position and consolidated results of operations of the

         Company and its Subsidiaries as of the dates and for the periods

         indicated; provided however, that the unaudited interim financial

         statements are subject to normal year-end adjustments and lack

         footnotes and other presentation items (which, if presented, would not

         differ materially from those included in the Audited Financial

         Statements).

 

                  (b)       The Company and its Subsidiaries maintain accurate

         books and records reflecting their assets and liabilities and maintain

         proper and adequate internal accounting controls which provide

         assurance that (i) transactions are executed with management's

         authorization; (ii) transactions are recorded as necessary to permit

         preparation of the consolidated financial statements of the Company and

         to maintain accountability for the Company's assets; (iii) access to

         the Company's and the Subsidiaries' assets is permitted only in

         accordance with management's authorization; (iv) the reporting of the

         Company's and its Subsidiaries' assets is compared with existing assets

         at regular intervals; and (v) accounts, notes and other receivables are

         recorded accurately, and proper and adequate procedures are implemented

         to effect the collection thereof on a current and timely basis.

 

                  (c)       Except as and to the extent of the amounts

         specifically reflected or reserved against in the most recent balance

         sheet included in the Financial Statements or disclosed in the notes

         thereto, the Company does not have any liabilities or obligations of

         any nature, whether absolute, accrued, contingent or otherwise and

         whether due or to become due (including, without limitation,

         liabilities for taxes and interest, penalties and other charges payable

         with respect thereto), that are required in accordance with GAAP to be

         disclosed in the Financial Statements, other than liabilities incurred

         since such date in the ordinary course of business.

 

                           SECTION 2.7 LITIGATION. Except as disclosed in

                  Schedule 2.7 hereto, there is no Action pending, or to the

                  Knowledge of the Company threatened, against the Company or

                   any of its Subsidiaries, before or by any court or other

                  Government Authority. The matters listed on Schedule 2.7 could

                  not reasonably be expected to result in a Material Adverse

                  Effect. There is no judgment, decree, injunction, rule or

                  order of any court or governmental body specifically

                  applicable to the Company or any Subsidiary. To the Knowledge

                  of the Company neither the Company nor any Subsidiary is

                  subject to any judgment, decree, injunction, rule or order of

                  any court or governmental body of general applicability, that

                  in any such case (i) would

 

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                  require a change in the manner in which the Company or any

                  Subsidiary presently conducts its business and (ii) which

                  change could reasonably be expected to have a Material Adverse

                  Effect. There is not pending against the Company or any of its

                  Subsidiaries any Action (i) seeking to restrain or prohibit

                  the consummation of the transactions contemplated by this

                  Agreement, or (ii) seeking to prohibit or limit the ownership

                  or operation by the Surviving Corporation of any portion of

                  the assets or business of the Company or its Subsidiaries.

 

                            SECTION 2.8 COMPLIANCE WITH LAWS; PERMITS; CONSENTS.

 

                  (a)       Except as disclosed in Schedule 2.8, the Company and

         its Subsidiaries are in compliance with all applicable Laws, except for

         such non-compliance as reasonably could not be expected to have a

         Material Adverse Effect.

 

                  (b)       The Company and its Subsidiaries own, or have full

         rights under, all licenses, permits and authorizations of any

         Government Authority which are necessary for the conduct of their

         business as currently conducted, except for any such licenses, permits,

         consents and authorizations that, if not so held, reasonably could not

         be expected to result in a Material Adverse Effect. Each of the

         foregoing is in full force and effect, and the Company and its

         Subsidiaries are in compliance with all of their obligations with

         respect thereto, with such exceptions as reasonably would not be

         expected to have a Material Adverse Effect.

 

                           SECTION 2.9 TITLE TO ASSETS. The Company and its

                  Subsidiaries have good title to, or valid and existing leases

                  or licenses for, all of the assets used by them or required

                  for use in their business operations or included in the most

                  recent Financial Statements (unless disposed of since the date

                  of the most recent Financial Statements), free and clear of

                  all Encumbrances except for (i) liens for Taxes, assessments

                  and other governmental charges which are not due and payable

                  or which may hereafter be paid without penalty, (ii) the title

                   and other interests of lessors under capital or operating

                  leases or of licensors under licenses or royalty agreements,

                  (iii) Encumbrances listed in Schedule 2.9, (iv) liens of

                  mechanics, materialmen and similar liens (provided that for

                  any of such liens that exist on the Closing Date, the

                  liability therefor will be accrued as a current liability in

                  the calculation of Closing Working Capital), and (v) such

                  minor imperfections in title as do not detract in any material

                  respect from the value or utility of the subject property in

                  the conduct of business (collectively, the "PERMITTED

                   ENCUMBRANCES").

 

                           SECTION 2.10 INTELLECTUAL PROPERTY. Schedule 2.10

                  sets forth a correct and complete list of (i) all patents,

                  trademarks, trade names and registered copyrights owned by the

                  Company or any of the Subsidiaries (collectively, the

                  "PROPRIETARY INTELLECTUAL PROPERTY") and (ii) all material

                  patents, trademarks, trade names, copyrights, technology and

                   processes used by the Company and the Subsidiaries in their

                  respective businesses which are used pursuant to a license or

                  other right granted by a third party pursuant to a written

                  agreement signed by the Company or any of the Subsidiaries

                  (collectively, the "LICENSED INTELLECTUAL PROPERTY", and

 

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                  together with the Proprietary Intellectual Property herein

                  referred to as "INTELLECTUAL PROPERTY"). The Company and each

                  Subsidiary owns all Proprietary Intellectual Property, and the

                  consummation of the transactions contemplated hereby will not

                  alter or impair any such rights. To the Knowledge of the

                  Company, the Company and each Subsidiary has the right to use

                  pursuant to valid and effective agreements, all Licensed

                   Intellectual Property, and the consummation of the

                  transactions contemplated hereby will not alter or impair any

                  such rights. No claims are pending or, to the Knowledge of the

                  Company, threatened against the Company or any Subsidiary by

                  any person with respect to the use of any Intellectual

                  Property or challenging or questioning the validity or

                  effectiveness of any license or agreement relating to the

                  same. The current use by the Company and each Subsidiary of

                  the Proprietary Intellectual Property does not infringe on the

                  rights of any person, except for such infringements which in

                   the aggregate could not reasonably be expected to have a

                  Material Adverse Effect upon the Company's ownership or use of

                  such Proprietary Intellectual Property. To the Knowledge of

                  the Company, the current use by the Company and each

                  Subsidiary of the Licensed Intellectual Property does not

                  infringe on the rights of any Person, except for such

                  infringements which in the aggregate could not reasonably be

                  expected to have a Material Adverse Effect on the Company's

                  use of such Licensed Intellectual Property. There are no

                  pending claims or charges brought by the Company or any

                  Subsidiaries against any person with respect to the use of any

                  material Intellectual Property or the enforcement of any of

                  the Company's or any Subsidiaries' rights relating to the

                  material Intellectual Property.

 

                           SECTION 2.11 LABOR; EMPLOYEE BENEFITS.

 

                  (a)       Each of the Company and the Subsidiaries is in

         compliance in all material respects with all applicable federal and

         state Laws respecting employment and employment practices, terms and

         conditions of employment, wages and hours, and is not engaged in any

         material unfair labor or unlawful employment practice. In the past five

         (5) years, no material wage and hour claims have been brought against

         the Company or any Subsidiary by any Person and, to the Knowledge of

         the Company, there does not exist any basis for the assertion against

         the Company or any of its Subsidiaries of any material claim with

         respect to wages and hours. Except as set forth in Schedule 2.11 there

         is no: (a) unlawful employment practice discrimination charge that is

         pending before the Equal Employment Opportunity Commission (the "EEOC")

         or EEOC recognized state "referral agency" or, to the Knowledge of the

         Company, threatened, against or involving or affecting the Company or

         any of the Subsidiaries; (b) unfair labor practice charge or complaint

         against the Company or any of the Subsidiaries pending before the

         National Labor Relations Board (the "NLRB") or, to the Knowledge of the

         Company, threatened, against or involving or affecting the Company or

         any of the Subsidiaries; (c) and there has not been in the past three

         years, any organized labor strike, dispute, slowdown or stoppage

         actually pending or, to the Knowledge of the Company, threatened

         against or involving or affecting the Company or any of the

         Subsidiaries; (d) collective bargaining agreement that is binding on

         the Company or any of the Subsidiaries; or (e) material labor or

         employment-related grievance. To the Knowledge of the Company, no union

         organizational efforts are presently being made involving any

 

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         of the Company's or any of the Subsidiaries' employees and, to the

         Knowledge of the Company, for the past five (5) years, none have been

         made. No union or other collective bargaining unit has been certified

         or recognized by the Company as representing any of the Company's or

         any of the Subsidiaries' employees during the past five years. To the

         Knowledge of the Company, during the past five years, no union or

         collective bargaining unit has sought such certification or

         recognition, and, to the Knowledge of the Company, no union or

         collective bargaining unit is seeking or currently contemplating

         seeking any such certification or recognition, and no written notice of

         any such attempt or contemplation has been received by the Company

         during such period.

 

                  (b)        Schedule 2.11 sets forth a complete and correct list

         of each employment, bonus, deferred compensation, pension, stock

         option, stock appreciation right, profit-sharing or retirement plan,

         arrangement or practice, each medical, vacation, retiree medical,

         severance pay plan, and each other similar agreement or fringe benefit

         plan, arrangement or practice, of the Company, whether legally binding

         or not, including each "employee benefit plan" within the meaning of

         Section 3(3) of ERISA, that is sponsored or maintained by the Company

         or any of its Subsidiaries, or to which the Company or any of its

         Subsidiaries contributes or is required to contribute on behalf of

         current or former Employees, directors or consultants of the Company or

         any of its Subsidiaries or their beneficiaries or dependents ("BENEFIT

         PLANS").

 

                  (c)       The Company has delivered to Parent complete and

         correct copies, with respect to each Benefit Plan, of the plan

         documents including any related trust, insurance contract or fund and

         any amendments (or a written description of any unwritten plan), any

         current summary plan description, and the three most recent Form 5500

         annual reports.

 

                  (d)       The Company has received no written notice of any,

         and to the Knowledge of the Company, there is currently no, audit or

         investigation by any Government Authority or any claim (other than

         routine claims for benefits in the ordinary course), action, suit or

         proceeding against or involving any Benefit Plan and, to the Knowledge

         of the Company, no such audit, investigation, claim, action, s