AMENDED AND RESTATED AGREEMENT AND PLAN OF MERGER

 

AMENDED AND RESTATED AGREEMENT AND PLAN OF MERGER

 

by and among

 

HOLLYWOOD ENTERTAINMENT CORPORATION,

 

and

 

CARSO HOLDINGS CORPORATION

 

and

 

HOLLYWOOD MERGER CORPORATION

 

Dated as of October 13, 2004

 

Table of Contents

                                        Page

ARTICLE I DEFINITIONS                     2

1.1.     Definitions                       2

ARTICLE II THE MERGER                    11

2.1.     The Merger                       11

2.2.     Organizational Documents     11

2.3.     Directors and Officers               12

ARTICLE III CONVERSION OF SECURITIES

        AND RELATED MATTERS            12

3.1.     Capital Stock of Acquiror    12

3.2.     Cancellation of Parent

        and Acquiror-Owned Shares    12

3.3.     Conversion of Company Shares       12

3.4.     Exchange of Certificates     12

3.5.     Company Stock Options         14

3.6.     Adjustments                      15

ARTICLE IV REPRESENTATIONS

        AND WARRANTIES OF THE COMPANY      15

4.1.     Corporate Existence and Power      15

4.2.     Corporate Authorization              16

4.3.     Governmental Authorization   16

4.4.     Non-Contravention              17

4.5.     Capitalization                   17

4.6.     Subsidiaries                     18

4.7.     Company SEC Documents         19

4.8.     Financial Statements;

        No Material Undisclosed

        Liabilities                       19

4.9.     Internal Control over

        Financial Reporting;

        Disclosure Controls and

        Procedures; Certifications   20

4.10.    Absence of Certain Changes   21

4.11.    Litigation                   23

4.12.    Taxes                               23

4.13.    Employee Benefits              24

4.14.    Compliance with Laws;

        Licenses, Permits and

        Registrations                    26

4.15.    Finders' Fees;

        Opinion of Financial Advisor       27

4.16.    Affiliate Transactions               28

4.17.    Intellectual Property         28

4.18.    Material Contracts             30

4.19.    Reserved                   32

4.20.    Real Estate                      32

4.21.    Accounts Payable and Inventory     32

4.22.    Suppliers                 32

4.23.    Personnel, etc                    32

4.24.    Assets                             33

4.25.    Insurance                 33

ARTICLE V REPRESENTATIONS AND WARRANTIES

        OF PARENT AND ACQUIROR               33

5.1.     Corporate Existence and Power      33

5.2.     Corporate Authorization               34

5.3.     Governmental Authorization   34

5.4.     Non-Contravention              34

5.5.     Employment Agreement           35

5.6.     Financing                 35

5.7.     Finders' Fees                    35

ARTICLE VI COVENANTS OF THE COMPANY 35

6.1.     Company Interim Operations   35

6.2.     Acquisition Proposals;

        Board Recommendation           39

6.3.     The Notes Tender Offer               40

6.4.     Real Property Holding Company      42

6.5.     Change of Control Plan               42

ARTICLE VII COVENANTS OF PARENT

        AND ACQUIROR                     42

7.1.     Director and Officer Liability     42

7.2.     Transfer Taxes                   44

7.3.     Repayment of Debt              44

7.4.     Acknowledgment                   44

7.5.     Efforts to Obtain Financing

        and Substitute Financing     44

ARTICLE VIII COVENANTS OF PARENT,

        ACQUIROR AND THE COMPANY     45

8.1.     Efforts and Assistance/HSR Act     45

8.2.     Shareholder Meeting/Proxy

        Statement and Schedule 13E-3       46

8.3.     Public Announcements           47

8.4.     Access to Information;

        Notification of Certain Matters    48

8.5.     Further Assurances             49

8.6.     Disposition of Litigation    49

8.7.     Confidentiality Agreement    50

ARTICLE IX CONDITIONS TO MERGER              50

9.1.     Conditions to the Obligations

         of Each Party                    50

9.2.     Conditions to the Obligations

        of the Company                   50

9.3.     Conditions to the Obligations

        of Acquiror                      51

ARTICLE X TERMINATION                    53

10.1.     Termination                     53

10.2.     Effect of Termination               55

10.3.     Fees and Expenses             56

ARTICLE XI MISCELLANEOUS             56

11.1.     Notices                   56

11.2.     Survival                 57

11.3.     Amendments; No Waivers              57

11.4.     Successors and Assigns              58

11.5.     Counterparts; Effectiveness;

         Third Party Beneficiaries   58

11.6.     Governing Law                   58

11.7.     Jurisdiction                    58

11.8.     Entire Agreement              59

11.9.     Authorship                      59

11.10.     Severability                   59

11.11.     Waiver of Jury Trial               59

11.12.     Headings; Construction     59

 

Exhibit A - Form of Amended and Restated Voting Agreement

Exhibit B - Form of Amended and Restated Option Exchange

            and Contribution Agreement

Exhibit C - Form of Mark J. Wattles Employment Agreement

Exhibit D - Articles of Incorporation of the Surviving Corporation

Exhibit E - Form of Consent Agreement with Senior Management

 

 

AMENDED AND RESTATED AGREEMENT AND PLAN OF MERGER

 

This AMENDED AND RESTATED AGREEMENT AND PLAN OF MERGER (this

"Agreement") is made and entered into as of October13, 2004, by and among

Hollywood Entertainment Corporation, an Oregon corporation (the "Company"),

Carso Holdings Corporation, a Delaware corporation ("Parent"), and Hollywood

Merger Corporation, an Oregon corporation ("Acquiror") wholly owned by

Parent.

 

WHEREAS, it is the intention of the parties that Acquiror shall

merge with and into the Company (the "Merger") with the Company being the

surviving corporation and a wholly owned subsidiary of Parent;

 

WHEREAS, the Special Committee of the Board of Directors (the

"Special Committee") and the Board of Directors of the Company, consisting of

a majority of directors who have no direct or indirect interest in the

transactions contemplated by this Agreement, other than ownership of Company

Shares (as defined below) and Company Options (as defined below), have

determined, by the unanimous vote of all of the directors voting on the

matter, that it is fair to and in the best interests of the Company and the

holders of the Company's common stock (the "Company Shares"), to enter into

this Agreement and to consummate the Merger upon the terms and subject to the

conditions set forth in this Agreement and in accordance with the Oregon

Business Corporation Act (the "OBCA");

 

WHEREAS, the Special Committee of the Board of Directors and the

Board of Directors of the Company, by resolutions unanimously adopted by all

of the directors voting on the matter, have (i) approved and declared

advisable this Agreement and the Merger and the other transactions

contemplated hereby, upon the terms and subject to the conditions set forth

in this Agreement and in accordance with the OBCA; (ii) resolved that this

Agreement be submitted for a vote at a meeting of Company Shareholders and

(iii) resolved to recommend that the holders of Company Shares approve this

Agreement;

 

WHEREAS, the Board of Directors of Acquiror has unanimously (i)

determined that the Merger is fair to and in the best interests of Acquiror

and its shareholders, (ii) adopted resolutions approving and declaring

advisable this Agreement and the Merger and the other transactions

contemplated hereby, upon the terms and subject to the conditions set forth

in this Agreement and in accordance with the OBCA and (iii) resolved to

recommend that the holders of Acquiror Common Shares (as defined below)

approve this Agreement;

 

WHEREAS, Parent, as the sole stockholder of Acquiror, has adopted

and approved this Agreement and approved the transactions contemplated

hereby;

 

WHEREAS, concurrently with the execution and delivery of this

Agreement and as a condition to the willingness of Parent and Acquiror to

enter into this Agreement, Mark J. Wattles, as a holder of Company Shares

(the "Principal Shareholder"), is entering into an amended and restated

voting agreement with Parent in the form attached hereto as Exhibit A (the

"Voting Agreement"), pursuant to which, among other things, the Principal

Shareholder will (subject to certain conditions) agree to vote all of his

Equity Interests (as defined below) in the Company in favor of adopting and

approving this Agreement;

 

WHEREAS, concurrently with the execution and delivery of this

Agreement and as a condition to the willingness of Parent and Acquiror to

enter into this Agreement, Mark J. Wattles is entering into an amended and

restated Option Exchange, Contribution and Subscription Agreement with Parent

substantially in the form attached hereto as Exhibit B (the "Option Exchange

and Contribution Agreement"), pursuant to which, among other things, Mr.

Wattles will exchange his Company Shares for Parent Common Shares (as defined

below) and Parent Junior Preferred Shares (as defined below) and exchange a

portion of his Company Options for options to acquire Parent Junior Preferred

Shares, in each case, immediately prior to the Effective Time;

 

WHEREAS, the parties entered into an Agreement and Plan of Merger

dated as of March 28, 2004 (the "Original Agreement Date"), as amended by the

First Amendment to the Agreement and Plan of Merger dated as of June 4, 2004

(collectively, the "Original Merger Agreement"); and

 

WHEREAS, the parties have agreed to amend and restate in its

entirety the Original Merger Agreement as set forth herein.

 

NOW, THEREFORE, in consideration of the premises and promises

contained herein, and intending to be legally bound, the parties hereto agree

as set forth below.

 

ARTICLE I

 

DEFINITIONS

 

1.1.     Definitions.  

 

As used herein, the following terms have the meanings set forth

below:

 

"Acquiror" has the meaning specified in the recitals to this

Agreement.

 

"Acquiror Common Shares" means the common stock, par value

$0.0001 per share, of Acquiror.

 

"Acquiror Disclosure Schedule" has the meaning specified in the

preamble to Article V.

 

"Acquiror Material Adverse Effect" means any change or effect

that would prevent or materially impair the ability of Parent or Acquiror to

consummate the Merger and the other transactions contemplated hereby in a

timely manner.

 

"Acquisition Proposal" means any inquiry, offer or proposal from

any Person (whether or not in writing) (other than an offer or proposal by or

on behalf of Parent, Acquiror, LGP or any Affiliate of LGP, including the

Merger and the transactions contemplated hereby) relating to, or that could

reasonably be expected to lead to: (a) a transaction pursuant to which any

Person or group of Persons acquires or would acquire Beneficial Ownership of

more than fifteen percent (15%) of the outstanding voting power of the

Company, whether from the Company or pursuant to a tender offer, exchange

offer or otherwise, (b) a merger, consolidation, business combination,

reorganization, share exchange, sale of substantially all assets,

recapitalization, liquidation, dissolution or similar transaction which would

result in a Third Party acquiring fifteen percent (15%) or more of the fair

market value of the assets of the Company and its Subsidiaries, taken as a

whole, (c) any transaction which would result in a Third Party acquiring

fifteen percent (15%) or more of the fair market value of the assets

(including, without limitation, the capital stock of Subsidiaries) of the

Company and its Subsidiaries, taken as a whole, immediately prior to such

transaction (whether by purchase of assets, acquisition of stock of a

Subsidiary or otherwise), or (d) any combination of the foregoing.

 

"Affiliate" means, with respect to any Person, any other Person,

directly or indirectly, controlling, controlled by, or under common control

with, such Person.   For purposes of this definition, the term "control"

(including the correlative terms "controlling", "controlled by" and "under

common control with") means the possession, directly or indirectly, of the

power to direct or cause the direction of the management and policies of a

Person, whether through the ownership of voting securities, by contract or

otherwise.

 

"Agreement" has the meaning specified in the preamble to this

Agreement.

 

"Ancillary Agreements" means the Option Exchange and Contribution

Agreement, the Voting Agreement and the Employment Agreement.

 

"Articles of Incorporation" means the Restated Articles of

Incorporation of the Company, as amended.

 

"Articles of Merger" has the meaning specified in Section 2.1(b).

 

"Audited Financial Statements" has the meaning specified in

Section 4.8(a).

 

"Balance Sheet Date" means December 31, 2003.

 

"Bank Commitment Letter" has the meaning specified in Section

5.6.

 

"Bear Stearns" means, collectively, Bear Stearns Corporate

Lending Inc. and Bear, Stearns & Co. Inc.

 

"Beneficial Ownership" shall have the meaning provided therefor

under Section 13(d) of the Exchange Act and the rules and regulations

promulgated under such Section.

 

"Business Day" means any day, other than a Saturday, Sunday or

one on which banks are authorized by Law to be closed in New York, New York

or Portland, Oregon.

 

"By-laws" means the 1999 Restated By-laws of the Company.

 

"Certificate" has the meaning specified in Section 3.3.

 

"Change of Control Plan" means the Company's Change of Control

Plan for Senior Management, dated as of February 3, 2001.

 

"Closing" has the meaning specified in Section 2.1(d).

 

"Closing Date" has the meaning specified in Section 2.1(d).

 

"Code" means the U.S. Internal Revenue Code of 1986, as amended,

together with the rules and regulations promulgated thereunder.

 

"Company" has the meaning specified in the preamble to this

Agreement.

 

"Company Balance Sheet" means the Company's consolidated balance

sheet included in the Company's Annual Report on Form 10-K relating to its

fiscal year ended on December 31, 2003.

 

"Company Contract" means any note, bond, mortgage, indenture,

deed of trust, license, lease, agreement, contract, commitment, arrangement,

Permit, concession, franchise, limited liability or partnership agreement, or

other instrument to which the Company or any of its Subsidiaries is a party,

or by which they or any of their respective properties, assets or business

activities may be bound.

 

"Company Disclosure Schedule" has the meaning specified in the

preamble to Article IV.

 

"Company Employee Plans" has the meaning assigned in Section

4.13(a).

 

"Company Material Adverse Effect" means any change, effect,

event, occurrence, state of facts or development which had or has a material

adverse effect on (a) the business, assets, liabilities, condition (financial

or otherwise) or results of operations of the Company and its Subsidiaries,

taken as a whole, or (b) the ability of the Company to perform its

obligations under this Agreement or any of the Ancillary Agreements to which

it is or will become a party.   In no event, however, shall any of the

following, in and of itself, constitute a Company Material Adverse Effect:  

(i) any change in the trading price of the Company Shares between the date

hereof and the Effective Time (it being understood that any fact or

development giving rise to or contributing to such change in the trading

price of the Company Shares may be the cause of a Company Material Adverse

Effect); (ii) any changes, effects, events, occurrences, states of facts or

developments resulting from any change in law or generally accepted

accounting principles that affect generally entities such as the Company;

(iii) any effect resulting from compliance by the Company with the terms of

this Agreement; (iv) the effect of any change that is generally applicable to

the industries in which the Company operates or the United States economy or

securities markets or the world economy or international securities markets,

(v) the effect of any change arising in connection with earthquakes or acts

of war, sabotage or terrorism, (vi) any effect of the public announcement of

this Agreement, the transactions contemplated hereby or the consummation of

such transactions or (vii) any change in the mix of the sources of the

Company's total revenue.  

 

"Company Options" means any options to purchase Company Shares

granted pursuant to the Company Option Plans.

 

"Company Option Plans" means the Company's 1993 Stock Incentive

Plan, as amended, the Company's 1997 Employee Nonqualified Stock Option Plan,

as amended and the Company's 2001 Stock Incentive Plan.

 

"Company Preferred Stock" has the meaning specified in Section

4.5(a).

 

"Company Proxy Statement" has the meaning specified in Section

8.2(c).

 

"Company Recommendation" has the meaning specified in Section

6.2(c).

 

"Company Returns" has the meaning specified in Section 4.12.

 

"Company SEC Documents" means each form, registration statement

(in the form declared effective by the SEC), prospectus, report, schedule,

definitive proxy statement or other document filed or otherwise furnished by

the Company or any of its Subsidiaries with or to the SEC since January 1,

2000 pursuant to the Securities Act or the Exchange Act, in each case

including all exhibits, appendices and attachments thereto, whether filed or

otherwise furnished therewith or incorporated by reference therein.

 

"Company Securities" has the meaning specified in Section 4.5(b).

 

"Company Shares" has the meaning specified in the recitals to

this Agreement.

 

"Company Shareholders" or "Shareholders" means the holders of

Company Shares.

 

"Company Shareholder Approval" means approval of this Agreement

by the vote of holders (other than the Principal Shareholder) of a number of

Company Shares equal to the sum of (a) a number of Company Shares equal to

50% of the outstanding Company Shares, plus (b) one Company Share.   It is the

intent of the parties that, for the purpose of determining whether the

Company Shareholder Approval has been obtained, shares held by the Principal

Shareholder and voted in favor of approval of the Merger shall not be

counted.   For the avoidance of doubt, any shares held by the Principal

Shareholder shall count toward the number of outstanding Company Shares.

 

"Company Shareholder Meeting" has the meaning specified in

Section 8.2(b).

 

"Company Subsidiary" means a Subsidiary of the Company.

 

"Confidentiality Agreement" has the meaning specified in Section

8.4(a).

 

"Contributing Holders" means Mark J. Wattles and any other holder

of Company Shares or Company Options who enters into an agreement with Parent

prior to the Effective Time providing for such holder to acquire shares of

capital stock, or options to acquire shares of capital stock, of Parent

immediately prior to the Effective Time.

 

"Current Policies" has the meaning specified in Section 7.1(a).

 

"Default" has the meaning specified in Section 4.18(c).

 

"Effective Time" has the meaning specified in Section 2.1(b).

 

"Employment Agreement" means the employment and non-competition

agreement, dated the date hereof, by and between the Acquiror and Mark J.

Wattles substantially in the form attached hereto as Exhibit C.

 

"End Date" has the meaning specified in Section 10.1(b)(i).

 

"Environmental Laws" has the meaning specified in Section

4.14(d).

 

"Equity Commitment Letter" has the meaning specified in Section

5.6.

 

"Equity Interest" means with respect to any Person, any and all

shares, interests, participations, rights in, or other equivalents (however

designated and whether voting or non-voting) of, such Person's capital stock

or other equity interests (including, without limitation, partnership or

membership interests in a partnership or limited liability company or any

other interest or participation that confers on a Person the right to receive

a share of the profits and losses, or distributions of assets, of the issuing

Person) whether outstanding on the date hereof or issued after the date

hereof.

 

"ERISA" has the meaning specified in Section 4.13(a).

 

"ERISA Affiliate" has the meaning specified in Section 4.13(a).

 

"Exchange Act" means the Securities Exchange Act of 1934, as

amended, and the rules and regulations promulgated thereunder.

 

"Exchange Agent" has the meaning specified in Section 3.4(a).

 

"Exchange Fund" has the meaning specified in Section 3.4(a).

 

"Financing" has the meaning specified in Section 5.6.

 

"Financing Letters" has the meaning specified in Section 5.6.

 

"First Supplemental Indenture" shall mean the first supplemental

indenture relating to the Senior Subordinated Notes, dated as of December 18,

2002, among the Company, Hollywood Management Company and BNY Western Bank,

as trustee.

 

"GAAP" means United States generally accepted accounting

principles, applied on a consistent basis.

 

"Governmental Entity" means any supranational, federal, state,

local or foreign government, court, administrative agency or commission or

other governmental or regulatory authority or instrumentality.

 

"Hollywood Management Company" means Hollywood Management

Company, an Oregon corporation and a wholly owned Subsidiary of the Company.

 

"HSR Act" has the meaning specified in Section 4.3.

 

"Insurance Policies" has the meaning specified in Section 4.25.

 

"Intellectual Property" means (i) all inventions (whether

patentable or unpatentable and whether or not reduced to practice), all

improvements thereto, and all patents, patent applications, and patent

disclosures, together with all provisionals, reissuances, continuations,

continuations-in-part, divisions, revisions, extensions, and reexaminations

thereof, (ii) all trademarks, service marks, trade dress, logos, brand names,

trade names, domain names and corporate names, together with all

translations, adaptations, derivations, and combinations thereof and

including all goodwill associated therewith, and all applications,

registrations, and renewals in connection therewith, (iii) all copyrightable

works, all copyrights, any and all website content, and all applications,

registrations, and renewals in connection therewith, (iv) all mask works and

all applications, registrations, and renewals in connection therewith, (v)

all trade secrets and confidential business information (including research

and development, know-how, formulas, compositions, manufacturing and

production processes and techniques, technical data, designs, drawings,

specifications, research records, records of inventions, test information,

customer and supplier lists, pricing and cost information, and business and

marketing plans and proposals), (vi) all source code and object code versions

of computer software (including data and related documentation), (vii) all

moral rights, (viii) all other proprietary rights, and (ix) all copies and

tangible embodiments thereof (in whatever form or medium), any rights in or

licenses of any of the foregoing, and any claims or causes of actions

(pending or filed) arising out of or related to any infringement or

misappropriation of any of the foregoing.

 

"Knowledge" as used in this Agreement, knowledge shall refer to

the actual knowledge, after due inquiry, of each of the Persons listed on

Annex 1.1.

 

"Law" means any supranational, federal, state, local, or foreign

law, rule, regulation, judgment, code, ruling, statute, order, decree,

injunction, ordinance or other legal requirement (including any arbitral

decision or award).

 

"Leases" has the meaning specified in Section 4.20.

 

"LGP" has the meaning specified in Section 5.6.

 

"Lien" means, with respect to any asset, any mortgage, lien,

pledge, charge, security interest or encumbrance of any kind; provided,

however, that the term "Lien" shall not include (a) liens for utilities and

current Taxes not yet due and payable, (b) mechanics', carriers', workers',

repairers', materialmen's, warehousemen's and other similar liens arising or

incurred in the ordinary course of business relating to claims not yet due or

payable or (c) liens for Taxes (not to exceed $500,000 in the aggregate)

being contested in good faith.

 

"Material Contract" and "Material Contracts" have the meanings

specified in Section 4.18(a).

 

"Merger" has the meaning specified in the recitals to this

Agreement.

 

"Merger Consideration" has the meaning specified in Section 3.3.

 

"Merger Funds" has the meaning specified in Section 5.6.

 

"Minimum Notes Condition" has the meaning specified in Section

6.3(b).

 

"Noteholders" has the meaning specified in Section 6.3(c).

 

"Notes Consents" has the meaning specified in Section 6.3(b)

 

"Notes Offer to Purchase" has the meaning specified in Section

6.3(a).

 

"Notes Tender Offer" has the meaning specified in Section 6.3(a).

 

"Notes Tender Offer Documents" has the meaning specified in

Section 6.3(c).

 

"Notes Tender Price" has the meaning specified in Section 6.3(a).

 

"Notice of Superior Proposal" has the meaning specified in

Section 6.2(b).

 

"OBCA" has the meaning specified in the recitals to this

Agreement.

 

"Option Exchange and Contribution Agreement" has the meaning

specified in the recitals to this Agreement.

 

"Original Agreement Date" has the meaning specified in the

recitals to this Agreement.

 

"Original Merger Agreement" has the meaning specified in the

recitals to this Agreement.

 

"Parent" has the meaning specified in the preamble to this

Agreement.

 

"Parent Common Shares" means the common stock, par value $0.01

per share, of Parent.

 

"Parent Expense Reimbursement Amount" means all reasonable,

documented, out of pocket expenses and fees (including reasonable attorneys

fees) actually incurred by Parent and its Affiliates on or prior to the

termination of this Agreement in connection with the transactions

contemplated by this Agreement and the Ancillary Agreements; provided that

this amount shall not be greater than $4,000,000.

 

"Parent Junior Preferred Shares" means the 10% junior cumulative

preferred stock, par value $0.01 per share, original liquidation preference

$1,000 per share, of Parent.

 

"Permits" has the meaning specified in Section 4.14.

 

"Person" means an individual, corporation, limited liability

company, partnership, association, trust or any other entity or organization,

including any Governmental Entity.

 

"Premises" has the meaning specified in Section 8.4(c).

 

"Principal Shareholder" has the meaning specified in the recitals

to this Agreement.

 

"Proposed Amendments" has the meaning specified in Section

6.3(d).

 

"Real Property" has the meaning specified in Section 4.20.

 

"Record Holder" has the meaning specified in Section 3.4(b).

 

"Replacement Policies" has the meaning specified in Section

7.1(a).

 

"Representatives" has the meaning specified in Section 6.2(a).

 

"Schedule 13E-3" has the meaning specified in Section 8.2(c).

 

"SEC" means the United States Securities and Exchange Commission.

 

"Secretary of State" has the meaning specified in Section 2.1(b).

 

"Securities Act" means the Securities Act of 1933, as amended,

and the rules and regulations promulgated thereunder.

 

"Senior Subordinated Notes" means the Company's 9.625% Senior

Subordinated Notes due 2011 issued pursuant to the Senior Subordinated Notes

Indenture.

 

"Senior Subordinated Notes Indenture" means the indenture

relating to the Senior Subordinated Notes, dated as of January 25, 2002,

among the Company, Hollywood Management Company and BNY Western Bank, as

trustee, as supplemented by the First Supplemental Indenture.

 

"Special Committee" has the meaning specified in the recitals to

this Agreement.

 

"Subsidiary" means, with respect to any Person, any other Person

(including joint ventures) of which such Person, directly or indirectly, (a)

has the right or ability to elect, designate or appoint a majority of the

Board of Directors or other Persons performing similar functions for such

Person, whether as a result of the beneficial ownership of Equity Interests,

contractual rights or otherwise or (b) beneficially owns a majority of the

voting Equity Interests or a majority of the economic interests.

 

"Substitute Financing" has the meaning specified in Section 7.5.

 

"Superior Proposal" means any bona fide written Acquisition

Proposal (with all of the percentages included in the definition of

Acquisition Proposal increased to 50% for purposes of this definition) that a

majority of the members of the Company's Board of Directors or Special

Committee determines in good faith by resolution duly adopted, after

consultation with its outside legal counsel and a nationally recognized

investment banking firm, (a) provides to the Company's Shareholders

consideration with a value per Company Share that exceeds the value per

Company Share of the consideration provided for in this Agreement (after

taking into account any revisions made or proposed by Parent or Acquiror) and

(b) is reasonably capable of being consummated on the terms proposed (taking

into account all legal, financial, regulatory and other relevant

considerations).

 

"Supplemental Indenture" has the meaning specified in Section

6.3(d).

 

"Surviving Corporation" has the meaning specified in Section

2.1(a).

 

"Takeover Statute" means any restrictive provision or any

applicable "fair value," "control share acquisition," "interested

shareholder" or other similar anti-takeover statute or regulation, including

Sections 60.801 through 60.816 of the OBCA and Sections 60.825 through 60.845

of the OBCA.

 

"Taxes" means all United States federal, state, local or foreign

income, profits, estimated gross receipts, windfall profits, environmental

(including taxes under Section 59A of the Code), severance, property,

intangible property, occupation, production, sales, use, license, excise,

emergency excise, franchise, escheat, capital gains, capital stock,

employment, withholding, social security (or similar), disability, transfer,

registration, stamp, payroll, goods and services, value added, alternative or

add-on minimum tax, estimated, or any other tax, custom, duty or governmental

fee, or other like assessment or charge of any kind whatsoever, together with

any interest, penalties, fines, related liabilities or additions to taxes

that may become payable in respect therefor imposed by any Governmental

Entity, whether disputed or not.

 

"Third Party" means any Person (or group of Persons) other than

Parent, Acquiror or any of their Affiliates.   For the avoidance of doubt, the

Principal Shareholder shall be deemed a Third Party.

 

"Third Party Acquisition" means the consummation by a Third Party

of any transaction or series of transactions described in clauses (a) through

(d) of the definition of "Acquisition Proposal."

 

"Transfer Taxes" has the meaning specified in Section 7.2.

 

"UBS" means, collectively, UBS Loan Finance LLC and UBS

Securities LLC.

 

"Voting Agreement" has the meaning specified in the recitals to

this Agreement.

 

"Wells Fargo" means Wells Fargo Bank, N.A.

 

ARTICLE II

 

THE MERGER

 

2.1.     The Merger.  

 

(a) At the Effective Time, Acquiror shall be merged with and

into the Company in accordance with the terms and conditions of this

Agreement and the OBCA, at which time the separate corporate existence of

Acquiror shall cease and the Company shall continue its existence as the

surviving corporation.   In its capacity as the corporation surviving the

Merger, this Agreement sometimes refers to the Company as the "Surviving

Corporation."

 

(b) As soon as practicable on or after the Closing Date, the

Company will file articles of merger or other appropriate documents (the

"Articles of Merger") with the Secretary of State of the State of Oregon (the

"Secretary of State") and make all other filings or recordings required by

the OBCA in connection with the Merger.   The Merger shall become effective

when the Articles of Merger are duly filed with and accepted by the Secretary

of State, or at such later time as is agreed upon by the parties and

specified in the Articles of Merger (such time as the Merger becomes

effective is referred to herein as the "Effective Time").

 

(c) From and after the Effective Time, the Merger shall have

the effects set forth in the applicable provisions of the OBCA.   Without

limiting the generality of the foregoing, at the Effective Time, without

further act or deed, all the property, rights, immunities, privileges,

powers, franchises and licenses of the Company and Acquiror shall vest in the

Surviving Corporation and all debts, liabilities, obligations, restrictions

and duties of each of the Company and Acquiror shall become the debts,

liabilities, obligations, restrictions and duties of the Surviving

Corporation.

 

(d) The closing of the Merger (the "Closing") shall be held

at the offices of Latham & Watkins LLP, 633 W. Fifth Street, Suite 4000, Los

Angeles, CA 90071 (or such other place as agreed by the parties) not later

than the third Business Day following the date on which all of the conditions

set forth in Article IX are satisfied or waived (other than those conditions

to be satisfied at the Closing, but subject to the satisfaction or waiver

thereof), unless the parties hereto agree to another date.   The date upon

which the Closing occurs is hereinafter referred to as the "Closing Date."

 

2.2.     Organizational Documents.  

 

(a) At the Effective Time, the Articles of Incorporation of

the Company as in effect immediately prior to the Effective Time shall be

amended to read in their entirety as set forth in Exhibit D hereto, and as so

amended shall be the Articles of Incorporation of the Surviving Corporation

until thereafter amended in accordance with its terms and as provided in the

OBCA.

 

(b) At the Effective Time, the By-laws of the Company as in

effect immediately prior to the Effective Time shall be the By-laws of the

Surviving Corporation until thereafter amended in accordance with their terms

and as provided by the OBCA and the Articles of Incorporation of the

Surviving Corporation.

 

2.3.     Directors and Officers.  

 

(a) From and after the Effective Time, the directors of

Acquiror shall be the directors of the Surviving Corporation until the

earlier of their resignation or removal or until their respective successors

are duly elected and qualified, as the case may be, in accordance with the

Articles of Incorporation and By-laws of the Surviving Corporation, the OBCA

and this Agreement.

 

(b) From and after the Effective Time, the officers of the

Company shall be the officers of the Surviving Corporation until the earlier

of their resignation or removal or until their respective successors are duly

elected and qualified, as the case may be, in accordance with the Articles of

Incorporation and By-laws of the Surviving Corporation, the OBCA and this

Agreement.

 

ARTICLE III

 

CONVERSION OF SECURITIES AND RELATED MATTERS

 

3.1.     Capital Stock of Acquiror.   At the Effective Time, by virtue

of the Merger and without any action on the part of the holder thereof, each

Acquiror Common Share that is issued and outstanding immediately prior to the

Effective Time shall be converted into one newly issued, fully paid and

nonassessable share of common stock of the Surviving Corporation.

 

3.2.     Cancellation of Parent and Acquiror-Owned Shares.   At the

Effective Time, by virtue of the Merger and without any action on the part of

the holder of any Company Share, each Company Share owned by Parent, Acquiror

or any Company Subsidiary, if any, immediately prior to the Effective Time

shall be canceled and retired and shall cease to exist, and no payment shall

be made or consideration delivered in respect therefor.

 

3.3.     Conversion of Company Shares.   At the Effective Time, by

virtue of the Merger and without any action on the part of the holder of any

Company Share, each Company Share issued and outstanding immediately prior to

the Effective Time other than any Company Shares to be cancelled pursuant to

Section 3.2 shall be canceled, retired and shall cease to exist and shall be

converted automatically into the right to receive an amount in cash equal to

Ten Dollars and Twenty-Five Cents ($10.25) (the "Merger Consideration"),

payable to the holder thereof upon surrender of the certificate (a

"Certificate") which immediately prior to the Effective Time represented any

such Company Shares in the manner provided in Section 3.4; and no other

consideration shall be delivered or deliverable on or in exchange therefor.

 

3.4.     Exchange of Certificates.  

 

(a) Exchange Agent.   Prior to the Closing Date, Parent shall

appoint a bank or trust company reasonably acceptable to the Company as agent

(the "Exchange Agent") for the benefit of holders of Company Shares for the

purpose of exchanging, pursuant to this Article III, Certificates

representing Company Shares for the Merger Consideration.   On or before the

Closing Date, Parent will deposit or cause to be deposited with the Exchange

Agent the aggregate Merger Consideration to be paid in respect of all Company

Shares pursuant to this Article III (the "Exchange Fund"), and except as

contemplated by Section 3.4(e), Section 3.4(f) or Section 3.4(g) hereof, the

Exchange Fund shall not be used for any other purpose.   The Exchange Agent

shall invest such Merger Consideration as directed by Parent.   Any interest

and other income resulting from such investments shall be paid to Parent.  

All fees, costs and expenses of the Exchange Agent shall be borne by Parent.

 

(b) Exchange Procedures.   As promptly as practicable after

the Effective Time (but not later than five (5) Business Days after the date

on which the Effective Time occurs), the Surviving Corporation shall send, or

shall cause the Exchange Agent to send, to each record holder of Certificates

("Record Holder") immediately prior to the Effective Time, a letter of

transmittal and instructions (which shall be in customary form and specify

that delivery shall be effected, and risk of loss and title shall pass, only

upon delivery of the Certificates to the Exchange Agent), for use in the

exchange contemplated by this Section 3.4.   Upon surrender of a Certificate

to the Exchange Agent, together with a duly executed letter of transmittal,

the holder shall be entitled to receive in exchange therefor, the Merger

Consideration as provided in this Article III in respect of the Company

Shares represented by the Certificate (after giving effect to any required

withholding Tax).   Until surrendered as contemplated by this Section 3.4,

each such Certificate representing Company Shares shall be deemed, after the

Effective Time, to represent only the right to receive the Merger

Consideration.   No interest shall be paid on any such delivery of cash to be

paid pursuant to this Article III upon such delivery.

 

(c) No Further Rights in Company Shares.   Holders of Company

Shares shall cease to be, and shall have no rights as, shareholders of the

Company, other than to receive (i) any dividend or other distribution with

respect to the Company Shares with a record date occurring prior to the

Effective Time and (ii) the Merger Consideration provided in Section 3.3.  

All cash paid upon surrender of Certificates in accordance with the terms

hereof shall be deemed to have been issued in full satisfaction of all rights

pertaining to Company Shares represented thereby.   As of the Effective Time,

the stock transfer books of the Company shall be closed and there shall be no

further registration of transfers on the Company's stock transfer books of

any Company Shares, other than transfers that occurred before the Effective

Time.   If, after the Effective Time, Certificates representing Company Shares

are presented to the Surviving Corporation for any reason, they shall be

canceled and exchanged as provided in this Section 3.4.

 

(d) Alternate Endorsement.   If payment of the Merger

Consideration in respect of Company Shares is to be made to a Person other

than the Person in whose name a surrendered Certificate is registered, it

shall be a condition to such payment that the Certificate so surrendered

shall be properly endorsed or shall be otherwise in proper form for transfer

and that the Person requesting such payment shall have paid any transfer and

other Taxes required by reason of such payment in a name other than that of

the registered holder of the Certificate surrendered or shall have

established to the satisfaction of Parent or the Exchange Agent that such

Taxes either have been paid or are not payable.

 

(e) Return of Merger Consideration.   Upon demand by Parent,

the Exchange Agent shall deliver to Surviving Corporation any portion of the

Merger Consideration made available to the Exchange Agent pursuant to this

Section 3.4 (with any interest and earnings thereon) that remains

undistributed to Record Holders twelve (12) months after the Effective Time.  

Record Holders who have not complied with this Section 3.4 prior to the

demand by Parent shall thereafter look only to Surviving Corporation for

payment of any claim to the Merger Consideration without any interest

thereon.   Any Merger Consideration remaining unclaimed as of a date which is

immediately prior to such time as such amounts would otherwise escheat to or

become property of any Governmental Entity shall, to the extent permitted by

applicable Law, become the property of Surviving Corporation free and clear

of any claims or interest of any Person previously entitled thereto.

 

(f) No Liability.   None of the Surviving Corporation, Parent

or the Exchange Agent shall be liable to any Person in respect of amounts

paid to a public official pursuant to any applicable abandoned property,

escheat or similar Law.

 

(g) Withholding Rights.   Parent, Surviving Corporation and

the Exchange Agent shall be entitled to deduct and withhold from the Merger

Consideration otherwise payable hereunder to any holder of any Certificate

any amounts that it is required to deduct and withhold with respect to

payment under any provision of federal, state, local or foreign Tax Law.   To

the extent that amounts are so withheld, the withheld amounts shall be

treated for all purposes of this Agreement as having been paid to the holder

of such Certificate.  

 

(h) Lost Certificates.   If any Certificate has been or is

claimed to have been lost, stolen or destroyed, upon the making of an

affidavit of that fact by the Person claiming that a Certificate has been

lost, stolen or destroyed and, if required by Parent, the posting by such

Person of a bond, in such reasonable amount as the Surviving Corporation may

direct, as indemnity against any claim that may be made against it with

respect to that Certificate, the Exchange Agent will deliver to such Person

in exchange for such lost, stolen or destroyed Certificate, the proper amount

of the Merger Consideration.

 

(i) Exchange of Acquiror Stock Certificates.   Immediately

after the Effective Time, the Surviving Corporation shall deliver to Parent

in exchange for the certificates which immediately prior to the Effective

Time represented all the outstanding Acquiror Common Shares that were

converted into the right to receive shares of common stock of the Surviving

Corporation in accordance with Section 3.1, share certificates registered in

the name of Parent, representing the number of shares of common stock of the

Surviving Corporation to which Parent is so entitled by virtue of

 

Section 3.1.

 

3.5.     Company Stock Options.   With respect to each outstanding

Company Option, except to the extent otherwise provided for by the Option

Exchange and Contribution Agreement, the Board of Directors shall provide a

30-day period prior to the consummation of the Merger during which time each

outstanding Company Option shall be exercisable to the extent vested.   At the

Effective Time, each unexercised Company Option (whether vested or unvested)

shall be cancelled with the holder thereof becoming entitled to receive an

amount in cash equal to the excess, if any, of (i) the Merger Consideration

over (ii) the per share exercise price of such Company Option, multiplied by

the number of Company Shares subject to such cancelled Company Options, as

such amount may be reduced by any applicable withholding Taxes.

 

3.6.     Adjustments.   If between the date of this Agreement and the

Effective Time the number of outstanding Company Shares shall have been

changed into a different number of shares or a different class, by reason of

any stock dividend, subdivision, reclassification, recapitalization, split-

up, combination, exchange of shares or the like other than pursuant to the

Merger, the amount of Merger Consideration shall be correspondingly adjusted

and, if and as appropriate, all other appropriate corresponding adjustments

shall be made.

 

ARTICLE IV

 

REPRESENTATIONS AND WARRANTIES OF THE COMPANY

 

Except (i) as disclosed in the Company disclosure schedule

delivered by the Company to the Acquiror prior to the execution of this

Agreement (the "Company Disclosure Schedule") with specific reference to the

particular Section or subsection of this Agreement to which the information

set forth in such disclosure schedule relates (it being understood that any

information set forth in a particular section of the Company Disclosure

Schedule shall be deemed to apply to each other section or subsection thereof

or hereof to which its relevance is clearly apparent on its face) and (ii) as

disclosed in the Company SEC Documents filed with or furnished to the SEC

between the date of the Original Agreement Date and the date hereof, the

Company represents and warrants to Parent and Acquiror as set forth below:

 

4.1.     Corporate Existence and Power.  

 

(a) The Company is a corporation, duly incorporated and

validly existing under the Laws of the State of Oregon, and has all corporate

power and authority required to own, lease and operate its properties, to

carry on its business as now conducted and (assuming this Agreement is duly

approved and adopted at the Company Shareholder Meeting) to consummate the

Merger and the other transactions contemplated hereby.

 

(b) The Company is duly qualified to do business as a

foreign corporation and is in good standing in each jurisdiction where the

character of the property owned, leased or operated by it or the nature of

its activities makes qualification necessary, except where the failure to be

so qualified has not had, and would not be reasonably expected to have,

individually or in the aggregate, a Company Material Adverse Effect.

 

(c) The Company has made available to Acquiror a complete

and correct copy of the Articles of Incorporation and By-laws (or other

constituent documents) of the Company and each of the Company Subsidiaries.  

The corporate records and minute books of the Company and each of the Company

Subsidiaries reflect all material action taken and authorizations made at

meetings of such companies' Boards of Directors or any committees thereof and

at any shareholders' meetings thereof.

 

4.2.     Corporate Authorization.  

 

(a) The execution, delivery and performance by the Company

of this Agreement and the consummation by the Company of the Merger and the

other transactions contemplated hereby have been duly and validly authorized

by the Board of Directors of the Company and, except for the Company

Shareholder Approval, no other corporate proceedings on the part of the

Company are necessary to authorize or consummate this Agreement or to

consummate the other transactions contemplated hereby (other than the filing

and recordation of the appropriate documents with respect to the Merger in

accordance with the OBCA).

 

(b) On or prior to the date hereof, the Company's Board of

Directors has (i) determined that this Agreement, the Voting Agreement and

the transactions contemplated hereby and thereby, including the Merger, are

fair to and in the best interests of the Company and its Shareholders, (ii)

adopted resolutions approving this Agreement and the transactions

contemplated hereby and thereby, including the Merger, (iii) adopted

resolutions declaring this Agreement and the Merger advisable, (iv) adopted

resolutions directing that this Agreement be submitted to a vote at a meeting

of Company Shareholders; (v) adopted resolutions recommending to the Company

Shareholders that they vote in favor of approving this Agreement in

accordance with the terms hereof; and (vi) adopted resolutions approving this

Agreement, the Merger and the Voting Agreement, prior to the date on which,

to the Knowledge of the Company, any Person that is a party to this Agreement

or the Voting Agreement became an "interested shareholder" as such term is

defined in Section 60.825 of the OBCA.   Neither the execution, delivery or

performance of this Agreement or any of the Ancillary Agreements, nor the

consummation of the Merger or any of the other transactions contemplated

hereby or thereby constitute (a) a control share acquisition under Sections

60.801 through 60.816 of the OBCA or any applicable Takeover Statute or (b) a

prohibited business combination under Section 60.835 of the OBCA or any

applicable Takeover Statute.   To the Knowledge of the Company, no other

Takeover Statute applies or purports to apply to this Agreement, any of the

Ancillary Agreements, the Merger or any of the transactions contemplated

hereby or thereby.   No provision of the Articles of Incorporation or the By-

laws of the Company or similar governing instruments of any Company

Subsidiary would, directly or indirectly, restrict or impair the ability of

Parent to vote, or otherwise to exercise the rights of a shareholder with

respect to, any shares of the Company and any Company Subsidiary that may be

acquired or controlled by Parent.

 

(c) This Agreement has been duly and validly executed and

delivered by the Company and, assuming that this Agreement constitutes the

valid and binding obligation of Parent and Acquiror, constitutes the legal,

valid and binding obligation of the Company, enforceable against the Company

in accordance with its terms, except as enforcement may be limited by

bankruptcy, insolvency, moratorium, reorganization, arrangement or similar

laws affecting creditors' rights generally and by general principles of

equity

 

4.3.     Governmental Authorization.   The execution, delivery and

performance by the Company of this Agreement and the consummation by the

Company of the Merger and the other transactions contemplated hereby do not

and will not require any consent, approval, action, order, authorization, or

permit of, or registration or filing with, any Governmental Entity, other

than (a) the filing of (i) the Articles of Merger in accordance with the OBCA

and (ii) the appropriate documents with respect to the Company's

qualification to do business with the relevant authorities of other states or

jurisdictions in which the Company is qualified to do business; (b)

compliance with any applicable requirements of the Hart-Scott-Rodino

Antitrust Improvements Act of 1976, as amended (the "HSR Act"); (c)

compliance with any applicable requirements of the Exchange Act; (d) such as

may be required under any applicable state securities or blue sky Laws; and

(e) other consents, approvals, actions, orders, authorizations,

registrations, declarations, filings and permits which, if not obtained or

made, have not had, and would not be reasonably expected to have,

individually or in the aggregate, a Company Material Adverse Effect.

 

4.4.     Non-Contravention.   The execution, delivery and performance

by the Company of this Agreement and the consummation by the Company of the

Merger and the other transactions contemplated hereby do not and will not (a)

contravene, breach or conflict with the Company's Articles of Incorporation

or By-laws, (b) assuming compliance with the matters referred to in Section

4.3, contravene, breach or conflict with or constitute a violation of any

provision of any Law binding upon or applicable to the Company or its

Subsidiaries or by which any of their respective properties is bound or

affected, (c) constitute a default under (or an event that with notice or

lapse of time or both could reasonably be expected to become a default) or

give rise (with or without notice or lapse of time or both) to a right of

termination, amendment, cancellation or acceleration under any Material

Contract, or (d) result in the creation or imposition of any material Lien on

any asset of the Company or any Company Subsidiary, other than, in the case

of clauses (b) or (c) any items that have not had, and would not be

reasonably expected to have, individually or in the aggregate, a Company

Material Adverse Effect.

 

4.5.     Capitalization.  

 

(a) The authorized capital stock of the Company consists

solely of 100,000,000 Company Shares and 25,000,000 shares of preferred stock

(the "Company Preferred Stock").   As of October 12, 2004, (i) 60,915,139

Company Shares were issued and outstanding, all of which have been duly

authorized and validly issued and are fully paid and nonassessable and were

issued free of preemptive or similar rights, (ii) no Company Shares were held

by Subsidiaries of the Company, (iii) 4,944,005 Company Shares were issuable

upon the exercise of Company Options then outstanding, (iv) 4,791,871    

Company Shares were reserved for issuance upon the grant of options reserved

and available under the Company Option Plans, and (v) no shares of Company

Preferred Stock were issued and outstanding.   Since December 31, 2003, the

Company has not (i) declared, set aside or paid any dividend or distribution

(whether in cash, stock or property) or capital return in respect of any of

its Equity Interests including, without limitation, Company Shares, (ii)

repurchased, redeemed or otherwise acquired any Company Securities (as

defined below), or (iii) amended any material term of any outstanding Company

Securities, and its Board of Directors has not resolved to do any of the

foregoing.   Since March 25, 2004, the Company has not issued, sold or

disposed of any Company Securities other than upon exercise of Company

Options outstanding on such date.

 

(b) Except as set forth in this Section 4.5, the Company has

not issued, or reserved for issuance, any (i) Equity Interests of the

Company, (ii) securities of the Company convertible into or exchangeable for

Equity Interests of the Company or (iii) options, warrants or other rights to

acquire from the Company, or obligations of the Company to issue, any Equity

Interests of the Company or securities convertible into or exchangeable for,

or requiring payments based on the value of, Equity Interests of the Company

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

the "Company Securities").   There are no outstanding agreements or other

obligations of the Company or any Company Subsidiary to issue, sell,

repurchase, redeem or otherwise acquire any Company Securities.

 

(c) Section 4.5(c) of the Company Disclosure Schedule sets

forth a complete and accurate list of all outstanding Company Options as of

October 11, 2004, which list sets forth the name of the holders thereof and,

to the extent applicable, (i) the exercise price or purchase price thereof,

(ii) the number of Company Shares subject thereto, and (iii) the expiration

date thereof.

 

(d) On or prior to the Original Agreement Date, the

Company's Board of Directors has duly and validly authorized all corporate

actions required to be taken by the Company to (i) effect the actions set

forth in Section 3.5 hereof and (ii) permit the transfer of Company Options

by Mark J. Wattles to Parent pursuant to the terms and conditions of the

Option Exchange and Contribution Agreement.   The terms and provisions of

Section 3.5 hereof (i) do not conflict with or violate any of the terms or

provisions of the Company Option Plans and (ii) do not require the prior

approval or consent of the holders of any Company Options.

 

4.6.     Subsidiaries.  

 

(a) Section 4.6(a) of the Company Disclosure Schedule lists

each Company Subsidiary together with the jurisdiction of incorporation of

each Subsidiary.   Except for the Equity Interests in each Company Subsidiary,

and as set forth in Section 4.6(a) of the Company Disclosure Schedule, the

Company does not own, directly or indirectly, any capital stock or other

ownership interest in any other Person.

 

(b) Each Company Subsidiary (i) is a corporation duly

incorporated and is validly existing and in good standing under the Laws of

its jurisdiction of incorporation, and has all powers and authority required

to own, lease or operate its properties, to carry on its business as now

conducted, (ii) has all governmental licenses, authorizations, consents and

approvals required to carry on its business as now conducted, and (iii) is

duly qualified to do business as a foreign corporation or entity and is in

good standing in each jurisdiction where the character of the property owned,

leased or operated by it or the nature of its activities makes such

qualification necessary, except, in the case of clauses (ii) or (iii) above,

where the failure to have such licenses, authorizations, consents and

approvals or to be so qualified has not had, and would not be reasonably

expected to have, individually or in the aggregate, a Company Material

Adverse Effect.   All of the outstanding Equity Interests in each Company

Subsidiary have been duly authorized and validly issued and are fully paid

and nonassessable and free of preemptive or similar rights.   All of the

Equity Interests in each Company Subsidiary are beneficially owned, directly

or indirectly, by the Company.   Since December 31, 2003, no Company

Subsidiary has (i) declared, set aside or paid any dividend or distribution

(whether in cash, stock or property) or capital return in respect of any of

its Equity Interests, (ii) repurchased, redeemed or otherwise acquired any of

its Equity Interests or other securities, or (iii) amended any material term

of any outstanding security of the Company Subsidiary, and its Board of

Directors has not resolved to do any of the foregoing.   Since March 25, 2004,

the Company Subsidiary has not issued, sold or disposed of any Equity

Interests.

 

(c) Except as set forth in Section 4.6(c) of the Company

Disclosure Schedule, such Equity Interests in each Company Subsidiary are

owned free and clear of any Lien and free of any other limitation or

restriction (including any limitation or restriction on the right to vote,

sell or otherwise dispose of the stock or other ownership interests).   There

are no outstanding (i) securities of the Company or any Company Subsidiary

convertible into or exchangeable or exercisable for Equity Interests in any

Company Subsidiary, (ii) options, warrants or other rights to acquire from

the Company or any Company Subsidiary, or obligations of the Company or any

Company Subsidiary to issue, any Equity Interests in, or any securities

convertible into or exchangeable or exercisable for any Equity Interests in,

any Company Subsidiary or (iii) agreements, obligations or arrangements of

the Company or any Company Subsidiary to issue, sell, repurchase, redeem or

otherwise acquire any Equity Interests of any Company Subsidiary.

 

(d) None of the Company or any Company Subsidiary is in

violation of any provision of its articles of incorporation or by-laws or

equivalent organizational documents.

 

4.7.     Company SEC Documents.  

 

(a)   The Company has timely filed or otherwise furnished all

forms, registration statements, prospectuses, reports, schedules, definitive

proxy statements or other documents required to be filed with or furnished to

the SEC by the Company since January 1, 2000.   No Company Subsidiary

currently is, and no Company Subsidiary at any time since January 1, 2000 has

been, required to file or otherwise furnish any form, report, registration

statement or prospectus or other document with or to the SEC.

 

(b) As of their respective filing dates, each Company SEC

Document including, without limitation, any financial statements or schedules

included or incorporated by reference therein, at the time filed (and, in the

case of registration statements and proxy statements, on the dates of

effectiveness and the dates of mailing, respectively) (i) complied in all

material respects with all applicable requirements of the Securities Act

and/or the Exchange Act, as the case may be and (ii) did not contain any

untrue statement of a material fact or omit to state a material fact required

to be stated therein or necessary in order to make the statements therein, in

 

light of the circumstances under which they were made, not misleading.  

(c) The Company will file with the SEC and promptly will

make available to Acquiror true and complete copies of each form,

registration statement, report, schedule, proxy or information statement and

other documents (including exhibits thereto) required to be filed with the

SEC under the Securities Act or the Exchange Act.

 

4.8.     Financial Statements; No Material Undisclosed Liabilities.  

 

(a) Each of the audited consolidated financial statements

(including the notes thereto) (the "Audited Financial Statements") and

unaudited consolidated interim financial statements of the Company included

in the Company SEC Documents were prepared in conformity with GAAP throughout

the periods involved, and each fairly presents, in all material respects, the

consolidated financial position of the Company and its consolidated

Subsidiaries as of the dates thereof and their consolidated results of

operations and statement of cash flows for the periods then ended (subject to

normal year-end adjustments in the case of any unaudited interim financial

statements, which adjustments shall not be material).

 

(b) There are no liabilities or obligations of the Company

or any Company Subsidiary, which, individually or in the aggregate, would be

material to the Company and its Subsidiaries taken as a whole, of any kind

whatsoever, whether accrued, contingent, absolute, determined, determinable

or otherwise and would be required by GAAP to be reflected on a consolidated

balance sheet of the Company (including the notes thereto) other than: (i)

liabilities or obligations disclosed or provided for in the Company Balance

Sheet or disclosed in the notes thereto; (ii) liabilities or obligations

incurred after December 31, 2003 in the ordinary course of business

consistent with past practice; and (iii) liabilities under this Agreement or

incurred in connection with the transactions contemplated hereby.

 

4.9.     Internal Control over Financial Reporting; Disclosure

Controls and Procedures; Certifications.  

 

(a) The Company and each of its Subsidiaries maintain a

process of internal control over financial reporting sufficient to provide

reasonable assurance regarding the reliability of financial reporting and the

preparation of financial statements for external purposes in accordance with

generally accepted accounting principles and that includes policies and

procedures that: (i) pertain to the maintenance of records that in reasonable

detail accurately and fairly reflect the transactions and dispositions of the

assets of the Company; (ii) provide reasonable assurance that transactions

are recorded as necessary to permit preparation of financial statements in

accordance with generally accepted accounting principles, and that receipts

and expenditures of the Company are being made only in accordance with

authorizations of management and directors of the Company; and (iii) provide

reasonable assurance regarding prevention or timely detection of unauthorized

acquisition, use or disposition of the Company's assets that could have a

material effect on the financial statements.

 

(b) The Company has established and maintains disclosure

controls and procedures (as such term is defined in Rule 13a-15(e) under the

Exchange Act), which (i) are designed to ensure that material information

relating to the Company, including its consolidated Subsidiaries, is made

known to the Company's principal executive officer and its principal

financial officer by others within those entities, particularly during the

periods in which the periodic reports required under the Exchange Act are

being prepared; (ii) have been evaluated for effectiveness (A) as of a date

within 90 days prior to the filing date of each of the Company's quarterly or

annual reports filed since January 1, 2003 and prior to August 14, 2003, and

(B) as of the end of each quarterly or annual period of the Company since

August 14, 2003; and (iii) are effective in all material respects to perform

the functions for which they were established.

 

(c) The Company is not aware of (i) any significant

deficiency in the design or operation of internal controls which could

adversely affect the Company's ability to record, process, summarize and

report financial data or any material weaknesses in internal controls; or

(ii) any fraud, whether or not material, that involves management or other

present employees who have a significant role in the Company's internal

controls.   Since the most recent evaluation of the Company's disclosure

controls and procedures described in Section 4.9(b) above, there have been no

significant changes in internal control over financial reporting or, to the

Company's Knowledge, in other factors that could significantly affect

internal control over financial reporting.

 

(d) The Chief Executive Officer and the Chief Financial

Officer of the Company have signed, and the Company has furnished to the SEC,

all certifications required by Sections 302 and 906 of the Sarbanes-Oxley Act

of 2002; such certifications contain no qualifications or exceptions to the

matters certified therein, except as to knowledge, and have not been modified

or withdrawn; and neither the Company nor any of its officers has received

notice from the SEC or any other Governmental Entity questioning or

challenging the accuracy, completeness, content, form or manner of filing or

submission of such certifications.

 

4.10.     Absence of Certain Changes.   Since December 31, 2003,

except as set forth in Section 4.10 of the Company Disclosure Schedule or

otherwise expressly contemplated by this Agreement, the Company and each

Company Subsidiary has conducted its business in the ordinary course

consistent with past practice and neither the Company nor any Company

Subsidiary has engaged in any transaction or series of transactions material

to the Company or any Company Subsidiary other than in the ordinary course of

business and consistent with past practices, and there has not been any

action, event, occurrence, development or state of circumstances or facts

that, individually or in the aggregate, constitutes or would be reasonably

expected to have, a Company Material Adverse Effect.   Without limiting the

generality of the foregoing, and except as set forth by the Company on

Section 4.10 of the Company Disclosure Schedule or otherwise expressly

contemplated by this Agreement, since December 31, 2003, there has not been:

 

(i) any damage, destruction or other casualty loss

(whether or not covered by insurance) affecting the business or

assets of the Company or any Company Subsidiary that has had or

would be reasonably expected to have a Company Material Adverse

Effect;

 

(ii) any amendment or change in the Company's

Articles of Incorporation or By-laws;

 

(iii) any material change by the Company or any

Company Subsidiary in its accounting methods, principles or

practices (other than changes required by GAAP or Law);

 

(iv) any material Tax election, any change in method

of accounting with respect to Taxes or any compromise or

settlement of any proceeding with respect to any material Tax

liability;

 

(v) any sale, assignment, transfer, lease or other

disposition or agreement to sell, assign, transfer, lease or

otherwise dispose of any of the assets of the Company or any

Company Subsidiary other than in the ordinary course of business

consistent with past practices;

 

(vi) any acquisition (by merger, consolidation, or

acquisition of stock or assets) by the Company or any Company

Subsidiary of any corporation, partnership or other business

organization or division thereof or any Equity Interest therein

for consideration;

 

(vii) any (A) incurrence of, (B) guarantee with

respect to, or (C) provision of credit support for, any

indebtedness by the Company or any Company Subsidiary other than

pursuant to the Company's existing credit facilities in the

ordinary course of business or any creation or assumption by the

Company or any Company Subsidiary of any Lien on any material

asset;

 

(viii) (A) any employment, deferred compensation,

severance or similar agreement entered into or amended by the

Company or any Company Subsidiary and any employee, (B) any

increase in the compensation payable or to become payable by it

to any of its directors or officers or generally applicable to

all or any category of the Company's or any Company Subsidiary's

employees, (C) any increase in the coverage or benefits available

under any vacation pay, company awards, salary continuation or

disability, sick leave, deferred compensation, bonus or other

incentive compensation, insurance, pension or other employee

benefit plan, payment or arrangement made to, for or with any of

the directors or officers of the Company or any Company

Subsidiary or generally applicable to all or any category of the

Company's or any Company Subsidiary's employees or (D) any

severance pay arrangements made to, for or with such directors,

officers or employees other than, in the case of clauses (B) and

(C) above and only with respect to employees who are not officers

or directors of the Company or any Company Subsidiary, increases

in the ordinary course of business consistent with past practices

and that, in the aggregate, have not resulted in a material

increase in the benefits or compensation expense of the Company

or any Company Subsidiary;

 

(ix) any loan, advance or capital contribution made

by the Company or any Company Subsidiary to, or investment in,

any Person other than loans, advances or capital contributions,

or investments of the Company or any Company Subsidiary made in

the ordinary course of business consistent with past practices;

 

(x) any waiver, direct or indirect, by the Company

or any Company Subsidiary of (A) any right or rights of material

value or (B) any payment of any material debt, liability or other

obligation, except for non-material waivers and payments made in

the ordinary course of business consistent with past practices;

 

(xi) any payment, loan or advance of any amount to

or in respect of, or the sale, transfer or lease of any

properties or assets (whether real, personal or mixed, tangible

or intangible) to any officer, director, or employee of the

Company, any Company Subsidiary or any Affiliate of any of them,

or any business or entity in which the Company, any Company

Subsidiary or any Affiliate of any of them, or relative of any

such Person, has any material, direct or indirect, interest,

except for (A) directors' fees (B) compensation to the officers

and employees of the Company in the ordinary course of business

consistent with past practices and (C) advancement or

reimbursement of expenses in the ordinary course of business

consistent with past practices;

 

(xii) any amendment, alteration or modification in

the terms of any currently outstanding options, warrants or other

rights to purchase any capital stock or Equity Interest in the

Company or any securities convertible into or exchangeable for

such capital stock or Equity Interest, including, without

limitation, any reduction in the exercise or conversion price of

any such rights or securities, any change to the vesting or

acceleration terms of any such rights or securities, or any

change to terms relating to the grant of any such rights or

securities;

 

(xiii) any action which, if it had been taken after

the date hereof, would have required the consent of Acquiror

under Section 6.1 hereof; or

 

(xiv) any agreement to take any of the actions

specified in this Section 4.10, except for this Agreement.

 

4.11.     Litigation.   Except as set forth in Section 4.11 of the

Company Disclosure Schedule, there is no action, suit, claim, investigation,

arbitration or proceeding pending, or to the Knowledge of the Company

threatened, against the Company or any Company Subsidiary or any of their

respective assets or properties before any arbitrator or Governmental Entity

that has had, or would be reasonably expected to have, individually or in the

aggregate, a Company Material Adverse Effect, and to the Knowledge of the

Company, there is no basis for any such action, suit, claim, investigation,

arbitration or proceeding.   Neither the Company, nor any Company Subsidiary,

any officer, director or employee of the Company or any Company Subsidiary

has been permanently or temporarily enjoined by any order, judgment or decree

of any arbitrator or any Governmental Entity from engaging in or continuing

any conduct or practice in connection with the business or assets of the

Company or any Company Subsidiary nor, to the Company's and the Company

Subsidiaries' Knowledge, is the Company, any Company Subsidiary or any

officer, director or employee of the Company or any Company Subsidiary under

investigation by any Governmental Entity related to the conduct of the

Company's or any Company Subsidiaries' business.   To the Knowledge of the

Company, there is not in existence any order, judgment or decree of any

arbitrator or Governmental Entity that is applicable to the Company or any

Company Subsidiary enjoining or requiring the Company or any Company

Subsidiary to take or refrain from taking any action of any kind with respect

to its business or assets.

 

4.12.     Taxes.   Except as set forth in Section 4.12 of the Company

Disclosure Schedule, (a) all material Tax returns, statements, reports and

forms required to be filed with any taxing authority by, or with respect to,

the Company and each Company Subsidiary (collectively, the "Company Returns")

has been timely filed in accordance with all applicable Laws; (b) the Company

and each Company Subsidiary has timely paid all material Taxes due and

payable and the Company Returns are true, correct and complete in all

material respects; (c) the Company and each Company Subsidiary has withheld

and paid all material Taxes required to have been withheld and paid in

connection with amounts paid or owing to any employee, independent

contractor, creditor, shareholder or other third party; (d) there is no

action, suit, proceeding, audit or claim proposed, pending or in progress

against the Company or any Company Subsidiary in respect of any Taxes; (e)

neither the Company nor any Company Subsidiary is party to, bound by, or has

any obligation under, any Tax sharing agreement or similar contract or

arrangement or any agreement that obligates any of them to make any payment

computed by reference to the Taxes, taxable income or taxable losses of any

other Person; (f) there are no Liens with respect to Taxes on any of the

assets or properties of the Company or any Company Subsidiary except with

respect to Taxes not yet due and payable; (g) neither the Company nor any

Company Subsidiary (1) is, or has been, a member of an affiliated,

consolidated, combined or unitary group, other than one of which the Company

was the common parent or (2) has any liability for the Taxes of any Person

(other than the Company and the Company Subsidiaries) under Section 1.1502-6

of the Treasury regulations promulgated under the Code (or any similar

provision of state, local or foreign Law), or as a transferee or successor,

by contract or otherwise; (h) no consent under Section 341(f) of the Code has

been filed with respect to the Company or any Company Subsidiary; (i) neither

the Company nor any Company Subsidiary has agreed to make or is required to

make any adjustment under Section 481(a) of the Code by reason of a change in

accounting method or otherwise; (j) no waivers of statutes of limitation with

respect to any Company Returns have been given by or requested from the

Company or a Company Subsidiary; (k) all material deficiencies asserted or

assessments made as a result of any examinations of the Company Returns have

been fully paid, or are fully reflected as a liability in the Company Balance

Sheet, or are being contested and an adequate reserve therefor has been

established and is fully reflected in the Company Balance Sheet; (l) none of

the Company or any of the Company Subsidiaries has received written notice

from any governmental agency in a jurisdiction in which such entity does not

file a Tax return stating that such entity is or may be subject to taxation

by that jurisdiction; (m) none of the assets of the Company or any Company

Subsidiary is property required to be treated as being owned by any other

Person pursuant to the "safe harbor lease" provisions of former Section

168(f)(8) of the Code; (n) none of the assets of the Company or any Company

Subsidiary directly or indirectly secures any debt the interest on which is

tax-exempt under Section 103(a) of the Code; (o) none of the assets of the

Company or any Company Subsidiary is "tax-exempt use property" within the

meaning of Section 168(h) of the Code; and (p) neither the Company nor any

predecessor of the Company by merger or consolidation has within the past

three years been a party to a transaction intended to qualify under Section

355 of the Code or under so much of Section 356 of the Code as relates to

Section 355 of the Code.  

 

4.13.     Employee Benefits.  

 

(a) Except as set forth in Section 4.13(a) of the Company

Disclosure Schedule, none of the Company or any ERISA Affiliate (as defined

below) maintains, administers, sponsors or otherwise has any liability with

respect to any "employee benefit plan", as defined in Section 3(3) of the

Employee Retirement Income Security Act of 1974, as amended ("ERISA"), or any

employment, severance or similar contract, plan, arrangement or policy or any

other plan or arrangement (written or oral) whether or not subject to ERISA

(including any funding mechanism therefore now in effect or required)

providing for compensation, bonuses, profit-sharing, stock option or other

stock related rights or other forms of incentive or deferred compensation,

vacation benefits, insurance coverage (including any self-insured

arrangements), health or medical benefits, disability benefits, workers'

compensation, supplemental unemployment benefits, severance benefits and

post-employment or retirement benefits (including compensation, pension,

health, medical or life insurance benefits) which covers any employee or

former employee or director of the Company or any Company Subsidiary.   The

Company has delivered to Parent (i) current, accurate and complete copies (or

to the extent no such copy exists, an accurate description of the material

features) of each Company Employee Plan (as defined below and, if applicable,

related trust agreements), (ii) all amendments thereto and written

interpretations thereof and (iii) if applicable, for the two most recent

years (A) the Form 5500 and attached schedules, (B) audited financial

statements and (C) actuarial valuation reports.   The plans required to be

listed on Section 4.13(a) of the Company Disclosure Schedule are referred to

collectively herein as the "Company Employee Plans."   An "ERISA Affiliate"

means any Person which would be treated as a single employer with the Company

or any Company Subsidiary under Section 414 of the Code.

 

(b) None of the Company Employee Plans are subject to Title

IV of ERISA.   None of the Company, any Company Subsidiary, or any ERISA

Affiliate has incurred any liability (whether absolute or contingent) with

respect to any employee pension benefit plan (as defined in Section 3(2) of

ERISA) or any multiemployer plan (as defined in Section 3(37) of ERISA) under

Title IV of ERISA, and no events have occurred and no circumstances exist

that could reasonably be expected to result in any such liability to the

Company, any Company Subsidiary or any ERISA Affiliate.

 

(c) Each Company Employee Plan which is intended to be

qualified under Section 401(a) of the Code is so qualified and has been so

qualified during the period from its adoption to date, and each trust forming

a part thereof is exempt from Tax pursuant to Section 501(a) of the Code and

nothing has occurred, whether by action or failure to act, that could

reasonably be expected to cause the loss of such qualification.   The Company

has furnished to Acquiror copies of the most recent Internal Revenue Service

determination letters with respect to each Company Employee Plan.   Each

Company Employee Plan has been maintained in compliance with its terms