AGREEMENT AND PLAN OF MERGER BY AND AMONG GUITAR CENTER STORES, INC., GCSI ACQUISITION CORP., MUSIC & ARTS CENTER, INC.Agreement and Plan of Merger |
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Exhibit 10.2
AGREEMENT AND PLAN OF MERGER
BY AND AMONG
GUITAR CENTER STORES, INC.,
GCSI ACQUISITION CORP.,
MUSIC & ARTS CENTER, INC.
AND
THE STOCKHOLDERS OF MUSIC & ARTS CENTER, INC.
DATED AS OF FEBRUARY 8, 2005
TABLE OF CONTENTS
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This AGREEMENT AND PLAN OF MERGER , dated as of February 8, 2005 (this “ Agreement ”), is by and among Guitar Center Stores, Inc., a Delaware corporation (“ Parent ”), GCSI Acquisition Corp., a Maryland corporation and a wholly owned Subsidiary of Parent (“ Merger Sub ”), Music & Arts Center, Inc., a Maryland corporation (the “ Company ”), and the holders of the outstanding common stock of the Company, each of whom is listed on Annex I hereto (the “ Stockholders ”).
Recitals
A. The respective Boards of Directors of Parent, Merger Sub and the Company have approved and declared advisable the merger of Merger Sub with and into the Company (the “ Merger ”) upon the terms and subject to the conditions of this Agreement and in accordance with the General Corporation Law of the State of Maryland (the “ MGCL ”).
B. The respective Boards of Directors of Parent and the Company have determined that the Merger is in furtherance of and consistent with their respective business strategies and is in the best interest of their respective stockholders.
C. Parent has approved this Agreement and the Merger as the sole stockholder of Merger Sub, and the Stockholders have approved this Agreement and the Merger.
Agreement
NOW, THEREFORE, in consideration of the foregoing and the respective representations, warranties, covenants and agreements set forth in this Agreement and intending to be legally bound hereby, the Parties hereto agree as follows:
For purposes of this Agreement:
“ Acquisition Proposal ” means any offer or proposal concerning any (A) merger, consolidation, business combination, or similar transaction involving the Company or any Company Subsidiary, (B) sale, lease or other disposition directly or indirectly by merger, consolidation, business combination, share exchange, joint venture, or otherwise of assets of the Company or any Company Subsidiary representing 10% or more of the consolidated assets of the Company and the Company Subsidiaries, (C) issuance, sale, or other disposition of (including by way of merger, consolidation, business combination, share exchange, joint venture, or any similar transaction) securities (or options, rights or warrants to purchase, or securities convertible into or exchangeable for such securities) representing 10% or more of the voting power of the Company or (D) transaction in which any Person shall acquire Beneficial Ownership, or the right to acquire Beneficial Ownership or any Group shall have been formed which beneficially owns or has the right to acquire Beneficial Ownership of 10% or more of the outstanding voting capital stock of the Company or (E) any combination of the foregoing (other than the Merger).
“ Action ” means any action, order, writ, injunction, judgment or decree outstanding or claim, suit, litigation, proceeding, investigation or dispute.
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“ Adjusted Pre-Tax Net Income ” means the Company’s consolidated income before income taxes for the fiscal year ended January 31, 2005 as reflected in the Company’s audited financial statements, adjusted for amounts related to professional fees and deal and acquisition expenses, including swap fees, outside of the ordinary course of business to the extent that such professional fees and deal and acquisition expenses, including swap fees, exceed Five Hundred Seventy-Five Thousand Dollars ($575,000).
“ Affiliate ” means a Person that directly or indirectly, through one or more intermediaries, Controls, is Controlled by, or is under common Control with, the first-mentioned Person;
“ Ancillary Agreements ” means the Employment Agreement, the Severance Agreements, the Non-Compete Agreements and the Escrow Agreement, in each case in substantially the forms attached to this Agreement.
“ Beneficial Ownership ” (and related terms such as “ Beneficially Owned ” or “ Beneficial Owner ”) has the meaning set forth in Rule 13d-3 under the Exchange Act.
“ Business Day ” means any day other than a Saturday or Sunday or a legal holiday on which banks in Los Angeles, California or New York, New York are closed.
“ Carveout Plan ” means the Nonqualified Excess Plan of the Company.
“ Carveout Plan Termination Payment ” means the aggregate amount, determined as of immediately prior to the Effective Time, that must be paid to the participants in the Carveout Plan to terminate their interest therein, including any payroll Taxes payable by the Company in connection with such termination.
“ Cause ” shall, in connection with the termination of Kenneth M. O’Brien’s employment with the Company, have the meaning set forth in the Employment Agreement.
“ Code ” means the Internal Revenue Code of 1986, as amended.
“ Company Material Adverse Effect ” means any material adverse effect on or material adverse change with respect to (A) the business, operations, assets, liabilities, condition (financial or otherwise), results of operations or prospects of the Company and the Company Subsidiaries, taken as a whole, or (B) the right or ability of the Company to consummate any of the transactions contemplated by this Agreement without material delay.
“ Company’s Knowledge ” means the actual knowledge of Kenneth M. O’Brien, Phillip C. O’Brien, Christopher Tuel, Allan Greenberg or Mariletta Reazin after reasonable inquiry of responsible personnel and reasonable investigation of issues raised in response to such inquiries.
“ contracts ” means any of the agreements, contracts, leases, powers of attorney, notes, loans, evidence of indebtedness, purchase orders, letters of credit, settlement agreements, franchise agreements, undertakings, covenants not to compete, employment agreements,
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licenses, instruments, obligations, commitments, understandings, policies, purchase and sales orders, quotations and other executory commitments to which any company is a party or to which any of the assets of the companies are subject, whether oral or written, express or implied.
“ Control ” (including the terms “Controlled by” and “under common Control with”) means the possession, directly or indirectly or as trustee or executor, of the power to direct or cause the direction of the management or policies of a Person, whether through the ownership of stock or as trustee or executor, by contract or credit arrangement or otherwise.
“ Damages ” shall mean any damage, claim, loss, cost, Tax, liability or expense, including, without limitation, court costs and expenses of investigation, reasonable attorneys’ fees and costs, diminution of value, consequential damages, response action, removal action or remedial action, but shall exclude any punitive damages.
“ Employment Agreement ” means the Employment Agreement, dated the date of the Effective Time, by and between the Company and Kenneth M. O’Brien, in substantially the form attached to this Agreement.
“ Encumbrance ” means any claim, lien, pledge, option, charge, easement, Tax assessment, security interest, deed of trust, mortgage, right-of-way, encroachment, building or use restriction, conditional sales agreement, encumbrance or other right of third parties, whether voluntarily incurred or arising by operation of law, and includes any agreement to give any of the foregoing in the future, and any contingent sale or other title retention agreement or lease in the nature thereof.
“ Environmental Laws ” means any federal, state, local or foreign statute, law, ordinance, regulation, rule, code, treaty, writ or order and any enforceable judicial or administrative interpretation thereof, including any judicial or administrative order, consent decree, judgment, stipulation, injunction, permit, authorization, policy, opinion, or agency requirement, in each case having the force and effect of law, relating to the pollution, protection, investigation or restoration of the environment, health and safety as affected by the environment or natural resources, including, without limitation, those relating to the use, handling, presence, transportation, treatment, storage, disposal, release, threatened release or discharge of Hazardous Materials or noise, odor, wetlands, pollution or contamination.
“ Environmental Permits ” means any permit, approval, identification number, license and other authorization required under any applicable Environmental Law.
“ Equity Interest ” means any share, capital stock, partnership, member or similar interest in any entity, and any option, warrant, right or security (including debt securities) convertible, exchangeable or exercisable therefor.
“ Escrow Amount ” means $7,000,000.
“ Escrowed Funds ” means, as of any date of determination, the amount remaining in the escrow account established pursuant to the Escrow Agreement (including any interest
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earned on such remaining amount) less any amounts distributed or paid from such account as provided herein or in the Escrow Agreement.
“ Exchange ” means the Nasdaq National Market.
“ Exchange Act ” means Securities Exchange Act of 1934, as amended, and the rules and regulations promulgated thereunder.
“ Expenses ” includes all reasonable out-of-pocket expenses (including, without limitation, all fees and expenses of counsel, accountants, investment bankers, experts and consultants to a Party and its Affiliates) incurred by a Party or on its behalf in connection with or related to the authorization, preparation, negotiation, execution and performance of this Agreement and the transactions contemplated hereby, provided that Expenses shall not include expenses incurred in the ordinary course of business ( i.e. , expenses that would have been incurred whether or not such Party entered into this Agreement and the transactions contemplated hereby).
“ Facilities ” means any property owned, leased or operated by the Company.
“ Facility Leases ” means the real property leases for the Facilities, all of which are set forth in Section 4.22.3 of the Company Disclosure Schedule.
“ GAAP ” means generally accepted accounting principles as applied in the United States and consistently applied by the Company to its financial statements.
“ Governmental Entity ” means domestic or foreign governmental, administrative, judicial or regulatory authority.
“ Group ” is defined as in the Exchange Act, except where the context otherwise requires.
“ Hazardous Materials ” means (A) any petroleum, petroleum products, byproducts or breakdown products, radioactive materials, asbestos-containing materials or polychlorinated biphenyls or (B) any chemical, material or other substance defined or regulated as toxic or hazardous or as a pollutant or contaminant or waste under any applicable Environmental Law.
“ HSR Act ” means the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, and the rules and regulations thereunder.
“ Indebtedness ” means the Company’s obligation for borrowed money under the Promissory Note, dated October 5, 2004, by and between the Company and Bank of America, N.A.
“ Intellectual Property ” means all intellectual property or other proprietary rights of every kind, foreign or domestic, including all patents, patent applications, inventions (whether or not patentable), processes, products, technologies, discoveries, copyrightable and copyrighted works, apparatus, trade secrets, trademarks, trademark registrations and applications, domain
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names, service marks, service mark registrations and applications, trade names, trade secrets, know-how, trade dress, copyright registrations, customer lists, confidential marketing and customer information, licenses, confidential technical information, software, and all documentation thereof.
“ Inventory ” means all merchandise owned by the Company or any Company Subsidiary and intended for resale, lease or rental in connection with the conduct of the business of the Company or any Company Subsidiary.
“ Investors Agreement ” means the Investors Agreement, dated June 30, 1998, by and among the Company and the other Persons listed on the signature pages thereto.
“ IRS ” means the United States Internal Revenue Service.
“ Law ” means foreign or domestic law, statute, code, ordinance, rule, regulation, order, judgment, writ, stipulation, award, injunction, decree or arbitration award or finding.
“ Management Bonus ” means bonuses, aggregating the Management Bonus Amount, that may be paid prior to the Effective Time to designated employees of the Company as specified in Section 7.1.6 of the Company Disclosure Schedule.
“ Management Bonus Adjustment ” means Two Million Nine Hundred Sixty-Two Thousand Three Hundred Forty Dollars ($2,962,340), which represents 53.09% of the Tax Adjusted Management Bonus Amount, provided that the entire Management Bonus Amount is paid prior to the Effective Time. In the event that less than the entire Management Bonus Amount is paid prior to the Effective Time, the Management Bonus Adjustment shall be proportionately adjusted.
“ Management Bonus Amount ” means Five Million Five Hundred Thousand Dollars ($5,500,000).
“ Non-Compete Agreement ” means the Agreement Not to Compete, dated the date of the Effective Time, by and between Parent and each of Kenneth M. O’Brien, Phillip C. O’Brien, Christopher Tuel and Allan Greenberg, in substantially the form attached to this Agreement.
“ Parent Material Adverse Effect ” means any material adverse effect on or material adverse change with respect to (A) the business, operations, assets, liabilities, condition (financial or otherwise), results of operations or prospects of Parent and its Subsidiaries and Affiliates, taken as a whole, or (B) the right or ability of Parent or Merger Sub to consummate any of the transactions contemplated by this Agreement without material delay.
“ Party ” means any party to this Agreement.
“ Permitted Encumbrances ” means (A) statutory liens of landlords, liens of carriers, warehouse persons, mechanics and material persons incurred in the ordinary course of business for sums (1) not yet due and payable or (2) being contested in good faith if, in either
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case, an adequate reserve shall have been made therefor in such Person’s financial statements, (B) liens incurred or deposits made in connection with workers’ compensation, unemployment insurance and other similar types of social security programs or to secure the performance of tenders, statutory obligations, surety and appeal bonds, bids, leases, government contracts, performance and return of money bonds and similar obligations, in each case in the ordinary course of business consistent with past practice, (C) easements, rights-of-way, restrictions and other similar charges or encumbrances, in each case which do not interfere with the ordinary conduct of business by the Company and do not materially detract from the value of the property upon which such encumbrance exists and (D) liens securing Taxes, assessments and governmental charges not yet due and payable.
“ Person ” means an individual, corporation, limited liability company, partnership, association, trust, unincorporated organization, other legal entity or Group.
“ Reasonable Justification ” shall, in connection with the termination of Kenneth M. O’Brien’s employment with the Company, have the meaning set forth in the Employment Agreement.
“ Related Party ” means (A) any officer, director or stockholder of the Company, and any officer, director, partner, manager, associate or relative of such officers, directors and stockholders, (B) any Person in which the Company or any Stockholder or any Affiliate, associate or relative of any such Person has any direct or indirect interest and (C) any direct or indirect trustee or beneficiary of any Stockholder.
“ Rental Contract ” means any contract, to which the Company or any Company Subsidiary is a party pertaining to the rental or lease of one or more items of Inventory.
“ Severance Agreements ” means the Severance Agreements, dated the date of the Effective Time, by and between the Company and each of Christopher Tuel and Allan Greenberg, in substantially the form attached to this Agreement.
“ Straddle Period ” means any taxable period that begins before the Effective Time and ends after the Effective Time.
“ Stockholder Representative ” means the Person appointed to serve as such pursuant to Section 3.8.1, who shall initially be Kenneth M. O’Brien.
“ Subsidiary ” or “ Subsidiaries ” of Parent, the Company, the Surviving Corporation or any other Person means any corporation, limited liability corporation, partnership, joint venture or other legal entity of which Parent, the Company, the Surviving Corporation or such other Person, as the case may be (either alone or through or together with any other Subsidiary), owns, directly or indirectly, a majority of the stock or other equity interests the holders of which are generally entitled to vote for the election of the board of directors or other governing body of such corporation or other legal entity.
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“ Tax Adjusted Management Bonus Amount ” means Five Million Five Hundred Eighty Thousand Dollars ($5,580,000), provided that the entire Management Bonus Amount is paid prior to the Effective Time. In the event that less than the entire Management Bonus Amount is paid prior to the Effective Time, the Tax Adjusted Management Bonus Adjustment shall be proportionately adjusted.
“ Taxes ” means any and all taxes, fees, levies, duties, tariffs, imposts and other charges of any kind (together with any and all interest, penalties, additions to tax and additional amounts imposed with respect thereto) imposed by any Governmental Entity or domestic or foreign taxing authority, including, without limitation, income, franchise, estimate, windfall or other profits, gross receipts, property, sales, use, net worth, capital stock, payroll, employment, social security, workers’ compensation, unemployment compensation, excise, withholding, ad valorem, stamp, transfer, value-added, gains tax and license, registration and documentation fees.
“ Tax Returns ” means any report, return (including information return), claim for refund, election, estimated tax filing or declaration required to be supplied to any Governmental Entity or domestic or foreign taxing authority with respect to Taxes, including any schedule or attachment thereto, and including any amendments thereof.
Section 1.1 Terms Defined Elsewhere . The following terms are defined elsewhere in this Agreement, as indicated below:
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Section 2.1 The Merger . Upon the terms and subject to satisfaction or waiver of the conditions set forth in this Agreement, and in accordance with the MGCL, Merger Sub shall be merged with and into the Company. As a result of the Merger, the separate corporate existence of Merger Sub shall cease and the Company shall continue as the surviving corporation of the Merger (the “ Surviving Corporation ”).
Section 2.2 Effective Time . As soon as practicable after the satisfaction or, if permissible, waiver of the conditions set forth in Article 8, the Parties shall cause the Merger to be consummated by filing articles of merger substantially in the form attached hereto as Exhibit 2.2 (the “ Articles of Merger ”) with the State of Maryland Department of Taxation and Assessments, in such form as required by, and executed in accordance with the relevant provisions of, the MGCL (the date and time of such filing, or if another date and time is specified in such filing, such specified date and time, being the “ Effective Time ”).
Section 2.3 Effect of the Merger . At the Effective Time, the effect of the Merger shall be as provided in the applicable provisions of the MGCL. Without limiting the generality of the foregoing, at the Effective Time, except as otherwise provided herein, all the property, rights, privileges, powers and franchises of the Company and Merger Sub shall vest in the Surviving Corporation, and all debts, liabilities and duties of the Company and Merger Sub shall become the debts, liabilities and duties of the Surviving Corporation.
Section 2.4 Articles of Incorporation; Bylaws . At the Effective Time, the Articles of Incorporation and the Bylaws of the Surviving Corporation shall be amended in their entirety to contain the provisions set forth in the Articles of Incorporation and the Bylaws of Merger Sub, each as in effect immediately prior to the Effective Time; provided that the name of the Surviving Corporation shall be “Music & Arts Center, Inc.”
Section 2.5 Directors and Officers . The directors of Merger Sub immediately prior to the Effective Time shall be the initial directors of the Surviving Corporation, each to hold office in accordance with the Articles of Incorporation and Bylaws of the Surviving Corporation. The Persons designated in writing by Parent in a certificate delivered to the Company prior to the Effective Time shall be the initial officers of the Surviving Corporation, each to hold office in accordance with the Articles of Incorporation and Bylaws of the Surviving Corporation. Upon request of Parent, the Company shall cause each or any director and officer of the Company to tender his or her resignation prior to the Effective Time, with each such resignation to be effective as of the Effective Time.
Article 3.
Section 3.1 Conversion of Securities in the Merger . At the Effective Time, by virtue of the Merger and without any action on the part of Merger Sub, the Company or the holders of any of the following securities:
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Section 3.1.1 Conversion of Class A Preferred Stock. Each share of Class A Preferred Stock, par value $10.00 per share (the “ Class A Preferred Stock ”), of the Company issued and outstanding immediately prior to the Effective Time (other than any shares of Class A Preferred Stock to be canceled pursuant to Section 3.1.4) shall be converted, subject to Section 3.2.4, into the right to receive an amount in cash equal to Ten Dollars ($10) plus accrued and unpaid dividends to, but excluding, the date of the Effective Time (collectively, the “ Class A Preferred Merger Consideration Per Share ”), payable to the holder thereof in accordance with the provisions of this Agreement, without interest. The aggregate Class A Preferred Merger Consideration Per Share payable to all holders of Class A Preferred Stock is referred to herein as the “ Class A Preferred Merger Consideration .” All such shares of Class A Preferred Stock shall no longer be outstanding and shall automatically be canceled and retired and shall cease to exist, and each certificate previously representing any such shares shall thereafter solely represent the right to receive the Class A Preferred Merger Consideration therefor. Certificates previously representing shares of Class A Preferred Stock shall be exchanged for the Class A Preferred Merger Consideration upon the surrender of such certificates in accordance with the provisions of Section 3.2, without interest.
Section 3.1.2 Conversion of Common Stock . Each share of common stock, par value $10.00 per share (“ Company Common Stock ”), of the Company issued and outstanding immediately prior to the Effective Time (other than any shares of Company Common Stock to be canceled pursuant to Section 3.1.4) shall be converted, subject to Section 3.2.4, into the right to receive an amount in cash equal to the Common Merger Consideration Per Share, payable to the holder thereof in accordance with the provisions of this Agreement, without interest. The aggregate Common Merger Consideration Per Share payable to all holders of Company Common Stock is referred to herein as the “ Common Merger Consideration ,” (and collectively with the Class A Preferred Merger Consideration, the “ Merger Consideration ”.) All such shares of Company Common Stock shall no longer be outstanding and shall automatically be canceled and retired and shall cease to exist, and each certificate previously representing any such shares shall thereafter represent the right to receive the Common Merger Consideration therefor. Certificates previously representing shares of Company Common Stock shall be exchanged for the Common Merger Consideration upon the surrender of such certificates in accordance with the provisions of Section 3.2, without interest.
Section 3.1.3 Calculation of Common Merger Consideration. The Common Merger Consideration shall equal the sum (the “ Purchase Price ”) of Ninety Million Dollars ($90,000,000) less: (A) the Class A Preferred Merger Consideration; (B) the Management Bonus Adjustment; (C) the Debt Adjustment, if any; (D) the Company’s Expenses, including, without limitation, the Company’s Expenses set forth in Exhibit 7.5.2; and (E) the Working Capital Adjustment, if any. For purposes of calculating the Closing Payment Per Share pursuant to Section 3.2.1, (1) the Working Capital Adjustment shall be assumed to be zero and any actual Working Capital Adjustment shall be determined and paid in accordance with the provisions of Section 3.7.5 and (2) the Company’s Expenses shall be estimated in accordance with the provisions of Section 3.10, provided that after the Effective Time the Company’s actual Expenses shall be determined and paid in accordance with the provisions of Section 3.10. The “ Common Merger Consideration Per Share ” shall equal the quotient of the Common Merger
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Consideration divided by the Number of Fully Diluted Shares. The “ Number of Fully Diluted Shares ” shall equal the sum of (a) the number of outstanding shares of Company Common Stock, (b) any other outstanding shares of capital stock of the Company (other than Class A Preferred Stock) and (c) any other outstanding securities convertible into or exercisable or exchangeable for capital stock of the Company (other than Class A Preferred Stock) assuming the conversion, exercise or exchange of all such other securities, in each case immediately prior to the Effective Time.
Section 3.1.4 Cancellation of Certain Shares. Each share of Company Preferred Stock and Company Common Stock held in the treasury of the Company or by any wholly-owned Subsidiary of the Company immediately prior to the Effective Time shall be canceled and extinguished without any conversion thereof and no payment shall be made with respect thereto.
Section 3.1.5 Merger Sub. Each share of common stock, par value $0.01 per share, of Merger Sub issued and outstanding immediately prior to the Effective Time shall be converted into and be exchanged for one newly and validly issued, fully paid and nonassessable share of common stock of the Surviving Corporation.
Section 3.1.6 Change in Shares. If between the date of this Agreement and the Effective Time the outstanding shares of Class A Preferred Stock and/or Company Common Stock shall have been changed into a different number of shares or a different class, by reason of any stock dividend, subdivision, reclassification, recapitalization, split, combination or exchange of shares, the Class A Preferred Merger Consideration Per Share and/or Common Merger Consideration Per Share, as the case may be, shall be correspondingly adjusted to reflect such stock dividend, subdivision, reclassification, recapitalization, split, combination or exchange of shares.
Section 3.1.7 Contribution to Capital or Reduction in Consideration Payable to Kenneth M. O’Brien. Notwithstanding any other provision of this Agreement, Kenneth M. O’Brien shall make a contribution of cash to the capital of the Company subsequent to the execution of this Merger Agreement and prior to the Effective Time in an amount equal to the amount by which the Tax Adjusted Management Bonus Amount exceeds the Management Bonus Adjustment, provided that that Kenneth M. O’Brien shall not be entitled to receive any additional shares of capital stock or other equity or other interests of the Company in connection with any such capital contribution. To the extent that Kenneth M. O’Brien fails to make such contribution to the capital of the Company prior to the Effective Time (a “ Contribution Shortfall ”), the aggregate Common Merger Consideration otherwise payable to Kenneth M. O’Brien or any successor under this Article 3 shall be reduced by an amount equal to the Contribution Shortfall and shall be paid by Parent to the Company on the day after the Effective Time. The Parties agree that any Contribution Shortfall paid by Parent to the Company pursuant to this Section 3.1.7 shall be treated as having been paid to Kenneth M. O’Brien as Common Merger Consideration and as having been paid by Kenneth M. O’Brien to the Company as a contribution to the capital of the Company immediately prior to the Effective Time.
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Section 3.2 Exchange of Certificates.
Section 3.2.1 Exchange Procedures and Payment of Merger Consideration. At the Effective Time, Parent shall make available to each holder of record of a certificate or certificates which immediately prior to the Effective Time represented outstanding shares of Class A Preferred Stock or Company Common Stock (collectively, the “ Certificates ”) (A) a letter of transmittal (which shall specify that delivery shall be effected, and risk of loss and title to the Certificates shall pass, only upon proper delivery of the Certificates to Parent and shall be in customary form) and (B) instructions for use in effecting the surrender of the Certificates in exchange for the Class A Preferred Merger Consideration or Common Merger Consideration, as the case may be. At the Effective Time, upon surrender of a Certificate for cancellation to Parent together with such letter of transmittal, properly completed and duly executed, and such other documents as may be required pursuant to such instructions, the holder of such Certificate shall be entitled to receive in exchange therefor the applicable Closing Payment Per Share that such holder has the right to receive in respect of the shares of Class A Preferred Stock or Company Common Stock formerly represented by such Certificate plus, in the case of any holder of Company Common Stock, the right to receive his, her or its pro rata portion of the Escrowed Funds upon the terms and subject to the conditions set forth in the Escrow Agreement, and the Certificate so surrendered shall forthwith be canceled. The “ Closing Payment Per Share ” for the Class A Preferred Stock shall equal the Class A Preferred Merger Consideration Per Share. The “ Closing Payment Per Share ” for the Company Common Stock shall equal the quotient of (1) the sum of (a) the Common Merger Consideration (assuming for this purpose only that the Working Capital Adjustment is zero, provided that any actual Working Capital Adjustment shall be made in accordance with the provisions of Section 3.7.5) less (b) the Escrow Amount and less (c) the Stockholder Representative Holdback divided by (2) the Number of Fully Diluted Shares, provided that the aggregate Common Merger Consideration otherwise payable to Kenneth M. O’Brien under this Article 3 shall be reduced as set forth in Section 3.1.7. The portion of the Common Merger Consideration not paid at the Effective Time, upon surrender of a Certificate, letter of transmittal and such other documents (i.e., the portion of the Common Merger Consideration represented by the Escrowed Funds) shall be disbursed to the Stockholders upon the terms and subject to the conditions set forth in the Escrow Agreement.
Section 3.2.2 Subsequent Transfers. In the event of a transfer of ownership of shares of Class A Preferred Stock or Company Common Stock that is not registered in the transfer records of the Company, the Class A Preferred Merger Consideration or Common Merger Consideration, as the case may be, may be issued to a transferee if the Certificate representing such shares is presented to Parent, 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 3.2.2, each Certificate shall be deemed at any time after the Effective Time to represent solely the right to receive upon such surrender the Class A Preferred Merger Consideration or Common Merger Consideration, as the case may be.
Section 3.2.3 Further Rights in Company Stock. The Class A Preferred Merger Consideration and Common Merger Consideration paid or payable in accordance with
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the terms hereof shall be deemed to have been issued in full satisfaction of all rights pertaining to such shares of Class A Preferred Stock or Company Common Stock, as the case may be.
Section 3.2.4 No Liability. None of Parent, the Company or the Surviving Corporation shall be liable to any holder of a Certificate for any cash delivered to a public official pursuant to any abandoned property, escheat or similar Law.
Section 3.2.5 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 Parent, the posting by such Person of a bond, in such reasonable amount as Parent may direct, as indemnity against any claim that may be made against it with respect to such Certificate, Parent will issue in exchange for such lost, stolen or destroyed Certificate the Class A Preferred Merger Consideration or the Common Merger Consideration, as the case may be, without any interest thereon.
Section 3.2.6 Withholding. Parent shall be entitled to deduct and withhold from the consideration otherwise payable pursuant to this Agreement such amounts as Parent is required to deduct and withhold under the Code, or any provision of state, local or foreign tax Law, with respect to the making of such payment. To the extent that amounts are so withheld by Parent, such withheld amounts shall be treated for all purposes of this Agreement as having been paid to the holder of Class A Preferred Stock or Company Common Stock in respect of whom such deduction and withholding was made by Parent.
Section 3.3 Stock Transfer Books. At the Effective Time, the stock transfer books of the Company shall be closed and thereafter, there shall be no further registration of transfers of shares of Class A Preferred Stock or Company Common Stock theretofore outstanding on the records of the Company. From and after the Effective Time, the holders of certificates representing shares of Company Preferred Stock or Company Common Stock outstanding immediately prior to the Effective Time shall cease to have any rights with respect to such shares except as otherwise provided herein or by Law. On or after the Effective Time, any Certificates presented to the Parent for any reason shall be converted into the Class A Preferred Merger Consideration or Common Merger Consideration, as the case may be.
Section 3.4 Payment of Stockholder Representative Holdback . At the Effective Time, Parent shall deliver to the Stockholder Representative, in his capacity as such, by wire transfer of immediately available funds, Five Hundred Thousand Dollars ($500,000) (the “ Stockholder Representative Holdback ”) for the purpose of reimbursing the Stockholder Representative for anticipated expenses, charges and liabilities, including reasonable attorneys’ fees, incurred by the Stockholder Representative in the performance or discharge of his rights and obligations under this Agreement pursuant to Section 3.8.3 and for such additional purposes as may be agreed in writing among the Stockholder Representative and the Stockholders. The Stockholders agree that the payment of the Stockholder Representative Holdback to the Stockholder Representative discharges in accordance with this Section 3.4 in full the obligation of Parent with respect to the payment of that portion of the Purchase Price.
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Section 3.5 Escrow .
Section 3.5.1 Establishment . On the date of the Effective Time, Parent shall deliver to Zions First National Bank (Attn: Corporate Trust Department, 550 South Hope Street, Suite 2650, Los Angeles, CA 90071; facsimile: (213) 593-3160) in its capacity as the escrow agent (the “ Escrow Agent ”), by wire transfer of immediately available funds, the Escrow Amount, which amount shall be withheld from the Common Merger Consideration and shall be deposited with the Escrow Agent for the purpose of securing the indemnification obligations of the Stockholders set forth in this Agreement. Such deposit shall be made with the Escrow Agent pursuant to the terms of an escrow agreement substantially in the form attached to this Agreement (the “ Escrow Agreement ”). The Parties agree that the provisions of the Escrow Agreement shall be incorporated into this Agreement as if they were set forth herein.
Section 3.5.2 Administration. The Escrowed Funds shall be administered in accordance with, and be released to the respective Parties upon the terms and subject to the conditions set forth in, the Escrow Agreement. In the event of any conflict between this Agreement and the Escrow Agreement, the terms of this Agreement shall prevail.
Section 3.6 Debt Adjustment . In the event that the Indebtedness of the Company as of the Effective Time (“ Closing Indebtedness ”) exceeds Three Million Dollars ($3,000,000) (the “ Indebtedness Threshold ”), the “Debt Adjustment” shall equal the excess of Closing Indebtedness over the Indebtedness Threshold. On or before the date that is five (5) Business Days prior to the date on which the Effective Time is scheduled, the Company will provide Parent with a written certificate of its Chief Executive Officer setting forth (A) the payments necessary to be made in order for the Indebtedness of the Company to be repaid in full and retired as of the Effective Time, (B) the identity of the Persons to receive such payments and (C) wire transfer instructions and such other information necessary to affect such payments. Upon request, the Company will provide reasonable documentary support for its calculations and obtain payoff letters from, and arrange for lien releases by, the lenders and vendors involved.
Section 3.7 Net Working Capital Adjustment .
Section 3.7.1 Calculation of Closing Net Working Capital. As soon as reasonably practicable following the Effective Time, and in any event within twenty (20) Business Days thereof, the Stockholder Representative shall cause to be prepared and delivered to Parent (A) a balance sheet of the Company as of the Effective Time (the “ Closing Balance Sheet ”) and (B) a calculation of Net Working Capital (as defined below) of the Company as of the Effective Time as determined from the Closing Balance Sheet (“ Closing Net Working Capital ”). The date on which the Stockholder Representative delivers such Closing Balance Sheet and calculation of Closing Net Working Capital is referred to herein as the “ Stockholder Representative Delivery Date .” The Closing Balance Sheet shall (1) be prepared in accordance with GAAP and (2) fairly present the financial position of the Company as of the Effective Time. Parent shall provide the Stockholder Representative and his accountants full access to the Company’s records and personnel to the extent reasonably related to the preparation of the Closing Balance Sheet and the calculation of Closing Net Working Capital.
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For the purpose hereof, “ Net Working Capital ” as of any date shall, subject to the adjustments and conventions set forth in this Section 3.7.1, mean (A) the current assets of the Company as of such date minus (B) the current liabilities of the Company as of such date, in each case determined under GAAP and as provided in Section 4.7.1 of the Company Disclosure Schedule. Notwithstanding any provision of this Agreement to the contrary, the following conventions shall apply to the preparation of the Closing Balance Sheet for the purpose of the determination of Closing Net Working Capital:
(1) all Inventory shall be carried at the lower of cost or market on a basis consistent with past accounting practices of the Company;
(2) all musical instruments, whether new or used on hand or on rent, shall be carried at the lower of cost or market on a basis consistent with past accounting practices of the Company and net of accumulated depreciation. The Company shall record depreciation through the Effective Time on a basis consistent with its past accounting practices; it being understood that all new and never rented new instruments shall have no depreciation expense calculated through the Effective Time, consistent with the Company’s past practices;
(3) Parent may, if it elects, verify the Inventory count based on an actual physical count subject to inspection by Representatives of the Stockholder Representative and Representatives of the Parent;
(4) current assets and current liabilities shall not attribute any value to deferred income tax assets and deferred income tax liabilities;
(5) current liabilities shall include all deferred payments for goods acquired by the Company (including, without limitation, deferred payables to vendors for the purchase of Inventory), whether or not due within one year;
(6) current liabilities shall exclude any obligation included in Indebtedness, other than the obligation related to the line of credit and deal notes payable, provided that such Indebtedness amount was included in the Debt Adjustment pursuant to Section 3.6;
(7) the liability for current taxes payable shall be recorded on a basis consistent with the Company’s normal interim policy ( i.e., 40% of the period income). Any under-accrued liability or overpayment for the fiscal year ending January 31, 2005 shall be included in the Closing Balance Sheet. The liability for Taxes provided for in the Closing Balance Sheet (whether current or non-current) shall consist solely of Taxes accrued but not yet payable since the date of the most recent related Tax return or estimated tax payment and (A) in no event shall include any reserve or “cushion” for prior period Taxes and (B) shall disregard any effect of the deductions related to the Carveout Plan Termination Payment;
(8) current assets and current liabilities shall not attribute any value to the assets or liabilities to life insurance participants or deferred compensation plans;
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(9) Net Working Capital shall exclude any effect related to payment of the Management Bonuses, or Company Expenses included in Section 3.1.3(D), including, without limitation, related Tax effects; and
(10) current assets will include all receivables due from MACBEN, LLC or Kenneth M. O’Brien, provided that such receivables are paid in cash no later than the Effective Time.
Section 3.7.2 Resolution of Disputes as to Closing Net Working Capital . The Parties acknowledge and agree that Parent intends to engage KPMG LLP (the “ Auditor ”) to audit the Closing Balance Sheet and related calculation of Closing Net Working Capital delivered to Parent by the Stockholder Representative. If Parent shall disagree with the calculation of Closing Net Working Capital prepared by the Stockholder Representative, it shall notify the Stockholder Representative of such disagreement in writing, setting forth in reasonable detail the particulars of such disagreement, within sixty (60) days after the Stockholder Representative Delivery Date (subject to extension by Parent to a date not later than 120 days after the Stockholder Representative Delivery Date in the event that, for any reason, the Auditor has not completed its audit of the Closing Balance Sheet and related calculation of Closing Net Working Capital). In the event that Parent does not provide such a notice of disagreement within such period, Parent shall be deemed to have accepted the calculation of Closing Net Working Capital delivered by the Stockholder Representative, which shall be final, binding and conclusive on the Parties for the purposes of determining the Working Capital Adjustment. In the event any such notice of disagreement is timely provided, Parent and the Stockholder Representative shall use commercially reasonable efforts for a period of twenty (20) Business Days (or such longer period as they may mutually agree) to resolve any disagreements with respect to the calculation of Closing Net Working Capital. If, at the end of such period, they are unable to resolve such disagreements, then a nationally recognized independent public accounting firm (other than the Auditor) mutually selected by Parent and the Stockholder Representative (the “ Independent Auditor ”) shall resolve any remaining disagreements. The Independent Auditor shall promptly deliver to Parent and the Stockholder Representative its determination in writing, which determination shall be made subject to the definitions and principles set forth in this Agreement and shall be (A) consistent with either the position of Parent or the Stockholder Representative or (B) between the positions of Parent and the Stockholder Representative. All fees and expenses of the Independent Auditor shall be paid one-half by Parent and one-half by the Stockholder Representative. The determination of the Independent Auditor shall be final, conclusive and binding on the Parties. The date on which Closing Net Working Capital is finally determined in accordance with this Section 3.7.2 is hereinafter referred as to the “ Determination Date .” The Independent Auditor shall act as an arbitrator to determine, based on the provisions of this Section 3.7.2, only those matters in dispute. Within twenty (20) Business Days after the Independent Auditor has been retained, Parent and the Stockholder Representative shall each deliver to the Independent Auditor and the other Party, such Party’s position with respect to each matter in dispute. Within ten (10) Business Days after the expiration of such twenty (20) Business Day period, Parent and the Stockholder Representative may each deliver to the Independent Auditor and the other Party such Party’s response to the other Party’s position on each matter in dispute. With each submission, each Party may also furnish to the Independent
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Auditor such other information and documents as it deems relevant or such documents or information that may be requested by the Independent Auditor with appropriate copies or notification being given to the other Party. The Independent Auditor may, at its discretion, conduct or order conferences, hearings, oral examinations, testimony, depositions, discovery or other similar proceedings concerning the disagreement with Parent and Stockholder Representative, at which each Party shall have the right to present additional documents, materials and other information and to have present its advisors, counsel and accountants.
Section 3.7.3 Working Capital Estimates . As used herein, “Working Capital Estimate” shall mean Eighteen Million Dollars ($18,000,000).
Section 3.7.4 Calculation of Working Capital Adjustment . If Closing Net Working Capital as finally determined in accordance with the provisions of this Section 3.7 is less than the Working Capital Estimate (any such amount, the “ Working Capital Adjustment ”), Parent and the Stockholder Representative shall promptly issue joint instructions to the Escrow Agent to pay to Parent out of the Escrowed Funds an amount equal to the Working Capital Adjustment.
Section 3.8 Stockholder Representative .
Section 3.8.1 Appointment of Stockholder Representative . Kenneth M. O’Brien is hereby appointed, effective from and after the Effective Time, to act as the Stockholder Representative under this Agreement in accordance with the provisions of this Section 3.8. In the event that Mr. Kenneth M. O’Brien or a successor Stockholder Representative is unable or unwilling to serve as the Stockholder Representative as a result of death, resignation or incapacity, the Stockholders holding a majority of the Company Common Stock immediately prior to the Effective Time shall appoint a successor Stockholder Representative and provide written notice thereof to Parent.
Section 3.8.2 Authority After the Effective Time. From and after the Effective Time, the Stockholder Representative shall be authorized to (A) take all actions required by, and exercise all right granted to, the Stockholder Representative by this Agreement, (B) receive all notices or other documents given or to be given to the Stockholder Representative by Parent pursuant to this Agreement, (C) negotiate, undertake, compromise, defend, resolve and settle any suit, proceeding or dispute under this Agreement, (D) execute and deliver all agreements, certificates and documents required or deemed appropriate by the Stockholder Representative in connection with any of the transactions contemplated by this Agreement, (E) engage special counsel, accountants and other advisors and incur related expenses in connection with any of the transactions contemplated by this Agreement and (F) take such other action as the Stockholder Representative may deem appropriate, including, without limitation, (1) agreeing to any modification or amendment of this Agreement and executing and delivering an agreement of such modification or amendment and (2) all such other matters as the Stockholder Representative may deem necessary or appropriate to carry out the intents and purposes of this Agreement.
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Section 3.8.3 Reimbursement of Expenses. The Stockholder Representative shall be entitled to receive reimbursement from the Stockholders for any and all expenses, charges and liabilities, including reasonable attorneys’ fees, incurred by the Stockholder Representative in the performance or discharge of his rights and obligations under this Agreement. In addition to the Stockholder Representative Holdback, the Stockholder Representative, upon written notice delivered to Parent no less than five (5) Business Days prior to the disbursement of any Escrowed Funds to the Stockholders, shall be entitled to cause the Escrow Agent to deduct amounts from that portion of such Escrowed Funds that is not subject to reduction in accordance with the provisions of this Agreement for purposes of paying the amount of any such expenses previously incurred or reasonably anticipated to be incurred. Any amount originally deposited with the Stockholder Representative pursuant to this Section 3.8.3 (including, without limitation, the Stockholder Representative Holdback) that has not been consumed by the Stockholder Representative pursuant to the terms of this Agreement or as otherwise agreed in writing among the Stockholder Representative and the Stockholders shall be distributed by the Stockholder Representative to the Stockholders pro rata based on their respective rights to participate in the Escrowed Funds from which such amounts were originally deducted.
Section 3.8.4 Authority of Stockholder Representative. By virtue of the adoption of this Agreement and the approval of the Merger by the Stockholders, each Stockholder (regardless of whether or not such Stockholder executes this Agreement or votes in favor of the adoption of this Agreement and the approval of the Merger) appoints, as of the date of this Agreement, the Stockholder Representative as his, her or its true and lawful agent and attorney-in-fact to enter into any agreement in connection with the transactions contemplated by this Agreement, to exercise all or any of the powers, authority and discretion conferred on him under this Agreement, to give and receive notices on their behalf and to be his, her or its exclusive representative with respect to any matter, suit, claim, action or proceeding arising with respect to any transaction contemplated by this Agreement, including, without limitation, the defense, settlement or compromise of any claim, action or proceeding for which any GC Indemnified Party may be entitled to indemnification and, by virtue of its approval of this Agreement, the Stockholder Representative agrees to act as, and to undertake the duties and responsibilities of, such agent and attorney-in-fact.
Section 3.8.5 Acknowledgement of Reliance by Parent. Parent may rely exclusively upon any such decision, act, consent or instruction of the Stockholder Representative as being the decision, act, consent or instruction of every Stockholder. Parent is hereby relieved from any liability to any Person for any acts done by them in accordance with such decision, act, consent or instruction of the Stockholder Representative.
Section 3.8.6 Release From Liability; Indemnification. Each Stockholder hereby releases the Stockholder Representative from, and each Stockholder, jointly and severally, agrees to indemnify the Stockholder Representative against, liability for any action taken or not taken by the Stockholder Representative in good faith in his capacity as the Stockholder Representative.
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Section 3.9 No Dissenters Rights . Each Stockholder acknowledges that he or she voted in favor of the Merger and that he or she therefore has no appraisal, dissenter’s or similar rights under Maryland law.
Section 3.10 Company Expenses . Not later than three (3) Business Days prior to the Effective Time, the Company shall deliver to Parent a certificate signed by the Chief Financial Officer of the Company setting forth in reasonable detail the Company’s estimate of the Company’s Expenses, together with supporting documentation for such estimate. Prior to the Effective Time, the Company and Parent shall agree in good faith upon an estimate of the Company’s aggregate Expenses, upon which the calculation of Common Merger Consideration pursuant to Section 3.1.3 shall be based. In the event that the Company’s actual aggregate Expenses are greater than such estimated amount, Parent and the Stockholder Representative shall cause the Escrow Agent to disburse to Parent from the Escrowed Funds, on a dollar-for-dollar basis, such excess amount, provided that in the event that the Company’s actual aggregate Expenses are less than such estimated amount, Parent shall pay, on a dollar-for-dollar basis, such difference to the Stockholder Representative for the benefit of the Stockholders.
Article 4.
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