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

 

Article 1.

Definitions

 

 

 

 

Section 1.1 

Terms Defined Elsewhere

 

 

 

 

Article 2. 

The Merger

 

 

 

 

Section 2.1

The Merger

 

Section 2.2

Effective Time

 

Section 2.3

Effect of the Merger

 

Section 2.4

Articles of Incorporation; Bylaws

 

Section 2.5

Directors and Officers

 

 

 

 

Article 3.

Conversion of Securities; Exchange of Certificates

 

 

 

 

Section 3.1

Conversion of Securities in the Merger

 

Section 3.1.1

Conversion of Class A Preferred Stock

 

Section 3.1.2

Conversion of Common Stock

 

Section 3.1.3

Calculation of Common Merger Consideration

 

Section 3.1.4

Cancellation of Certain Shares

 

Section 3.1.5

Merger Sub

 

Section 3.1.6

Change in Shares

 

Section 3.1.7

Contribution to Capital or Reduction in Consideration Payable to Kenneth M.
O’Brien

 

Section 3.2

Exchange of Certificates

 

Section 3.2.1

Exchange Procedures and Payment of Merger Consideration

 

Section 3.2.2

Subsequent Transfers

 

Section 3.2.3

Further Rights in Company Stock

 

Section 3.2.4

No Liability

 

Section 3.2.5

Lost Certificates

 

Section 3.2.6

Withholding

 

Section 3.3

Stock Transfer Books

 

Section 3.4

Payment of Stockholder Representative Holdback

 

Section 3.5

Escrow

 

Section 3.5.1

Establishment

 

Section 3.5.2

Administration

 

Section 3.6

Debt Adjustment

 

Section 3.7

Net Working Capital Adjustment

 

Section 3.7.1

Calculation of Closing Net Working Capital

 

Section 3.7.2

Resolution of Disputes as to Closing Net Working Capital

 

Section 3.7.3 [a05-3243_1ex10d2.htm#Section3_7_3_175919]

Working Capital Estimates [a05-3243_1ex10d2.htm#Section3_7_3_175919]

 

 

i

--------------------------------------------------------------------------------

 

Section 3.7.4 [a05-3243_1ex10d2.htm#Section3_7_4_175913]

Calculation of Working Capital Adjustment
[a05-3243_1ex10d2.htm#Section3_7_4_175913]

 

Section 3.8  [a05-3243_1ex10d2.htm#Section3_8_175906]

Stockholder Representative [a05-3243_1ex10d2.htm#Section3_8_175906]

 

Section 3.8.1 [a05-3243_1ex10d2.htm#Section3_8_1_175856]

Appointment of Stockholder Representative
[a05-3243_1ex10d2.htm#Section3_8_1_175856]

 

Section 3.8.2 [a05-3243_1ex10d2.htm#Section3_8_2_175847]

Authority After the Effective Time [a05-3243_1ex10d2.htm#Section3_8_2_175847]

 

Section 3.8.3 [a05-3243_1ex10d2.htm#Section3_8_3_175834]

Reimbursement of Expenses [a05-3243_1ex10d2.htm#Section3_8_3_175834]

 

Section 3.8.4 [a05-3243_1ex10d2.htm#Section3_8_4_175830]

Authority of Stockholder Representative
[a05-3243_1ex10d2.htm#Section3_8_4_175830]

 

Section 3.8.5 [a05-3243_1ex10d2.htm#Section3_8_5_175824]

Acknowledgement of Reliance by Parent [a05-3243_1ex10d2.htm#Section3_8_5_175824]

 

Section 3.8.6 [a05-3243_1ex10d2.htm#Section3_8_6_175820]

Release From Liability; Indemnification
[a05-3243_1ex10d2.htm#Section3_8_6_175820]

 

Section 3.9 [a05-3243_1ex10d2.htm#Section3_9_175814]

No Dissenters Rights [a05-3243_1ex10d2.htm#Section3_9_175814]

 

Section 3.10 [a05-3243_1ex10d2.htm#Section3_10_175811]

Company Expenses and Carveout Plan Deficiency
[a05-3243_1ex10d2.htm#Section3_10_175811]

 

 

 

 

Article 4. [a05-3243_1ex10d2.htm#Article4_RepresentationsAndWarran_173846]

Representations and Warranties of the Company and Kenneth M. O’Brien
[a05-3243_1ex10d2.htm#Article4_RepresentationsAndWarran_173846]

 

 

 

 

Section 4.1 [a05-3243_1ex10d2.htm#Section4_1_175802]

Organization and Qualification; Subsidiaries
[a05-3243_1ex10d2.htm#Section4_1_175802]

 

Section 4.2 [a05-3243_1ex10d2.htm#Section4_2_175756]

Articles of Incorporation and Bylaws; Corporate Books and Records
[a05-3243_1ex10d2.htm#Section4_2_175756]

 

Section 4.3  [a05-3243_1ex10d2.htm#Section4_3_175750]

Capitalization; No Dissenters’ Rights [a05-3243_1ex10d2.htm#Section4_3_175750]

 

Section 4.3.1 [a05-3243_1ex10d2.htm#Section4_3_1_175744]

Capitalization [a05-3243_1ex10d2.htm#Section4_3_1_175744]

 

Section 4.3.2 [a05-3243_1ex10d2.htm#Section4_3_2_175737]

No Dissenters’ Rights [a05-3243_1ex10d2.htm#Section4_3_2_175737]

 

Section 4.4  [a05-3243_1ex10d2.htm#Section4_4_175733]

Authority; No Restrictions on Business Combinations
[a05-3243_1ex10d2.htm#Section4_4_175733]

 

Section 4.4.1 [a05-3243_1ex10d2.htm#Section4_4_1_175728]

Authority [a05-3243_1ex10d2.htm#Section4_4_1_175728]

 

Section 4.4.2 [a05-3243_1ex10d2.htm#Section4_4_2_175720]

No Restrictions on Business Combinations
[a05-3243_1ex10d2.htm#Section4_4_2_175720]

 

Section 4.5  [a05-3243_1ex10d2.htm#Section4_5_175712]

No Conflict; Required Filings and Consents
[a05-3243_1ex10d2.htm#Section4_5_175712]

 

Section 4.5.1 [a05-3243_1ex10d2.htm#Section4_5_1_175707]

No Conflict. [a05-3243_1ex10d2.htm#Section4_5_1_175707]

 

Section 4.5.2 [a05-3243_1ex10d2.htm#Section4_5_2_175701]

Required Filings and Consents. [a05-3243_1ex10d2.htm#Section4_5_2_175701]

 

Section 4.6  [a05-3243_1ex10d2.htm#Section4_6_175656]

Permits; Compliance With Law [a05-3243_1ex10d2.htm#Section4_6_175656]

 

Section 4.7 [a05-3243_1ex10d2.htm#Section4_7_175647]

Financial Statements; Internal Controls [a05-3243_1ex10d2.htm#Section4_7_175647]

 

Section 4.7.1 [a05-3243_1ex10d2.htm#Section4_7_1_175635]

Financial Statements [a05-3243_1ex10d2.htm#Section4_7_1_175635]

 

Section 4.7.2 [a05-3243_1ex10d2.htm#Section4_7_2_175629]

Internal Controls [a05-3243_1ex10d2.htm#Section4_7_2_175629]

 

Section 4.7.3 [a05-3243_1ex10d2.htm#Section4_7_3_175624]

Books and Records [a05-3243_1ex10d2.htm#Section4_7_3_175624]

 

Section 4.7.4 [a05-3243_1ex10d2.htm#Section4_7_4_175619]

All Accounts Recorded [a05-3243_1ex10d2.htm#Section4_7_4_175619]

 

Section 4.7.5 [a05-3243_1ex10d2.htm#Section4_7_5_175613]

Corporate Records [a05-3243_1ex10d2.htm#Section4_7_5_175613]

 

Section 4.8 [a05-3243_1ex10d2.htm#Section4_8_175608]

Absence of Certain Changes or Events [a05-3243_1ex10d2.htm#Section4_8_175608]

 

Section 4.9 [a05-3243_1ex10d2.htm#Section4_9_175559]

Employee Benefit Plans [a05-3243_1ex10d2.htm#Section4_9_175559]

 

Section 4.9.1 [a05-3243_1ex10d2.htm#Section4_9_1_175552]

ERISA Plans. [a05-3243_1ex10d2.htm#Section4_9_1_175552]

 

Section 4.9.2 [a05-3243_1ex10d2.htm#Section4_9_2_175546]

Compliance With Law. [a05-3243_1ex10d2.htm#Section4_9_2_175546]

 

Section 4.9.3 [a05-3243_1ex10d2.htm#Section4_9_3_175540]

Code Section 401 Plans. [a05-3243_1ex10d2.htm#Section4_9_3_175540]

 

Section 4.9.4 [a05-3243_1ex10d2.htm#Section4_9_4_175533]

[Intentionally Omitted]. [a05-3243_1ex10d2.htm#Section4_9_4_175533]

 

Section 4.9.5 [a05-3243_1ex10d2.htm#Section4_9_5_175526]

Code Section 280G; Deductibility [a05-3243_1ex10d2.htm#Section4_9_5_175526]

 

Section 4.9.6 [a05-3243_1ex10d2.htm#Section4_9_6_175518]

Compliance with COBRA. [a05-3243_1ex10d2.htm#Section4_9_6_175518]

 

Section 4.9.7 [a05-3243_1ex10d2.htm#Section4_9_7_175509]

No Employee Plans. [a05-3243_1ex10d2.htm#Section4_9_7_175509]

 

Section 4.9.8 [a05-3243_1ex10d2.htm#Section4_9_8_175505]

Termination of Certain Plans. [a05-3243_1ex10d2.htm#Section4_9_8_175505]

 

Section 4.10 [a05-3243_1ex10d2.htm#Section4_10_175458]

Labor and Other Employment Matters [a05-3243_1ex10d2.htm#Section4_10_175458]

 

Section 4.10.1 [a05-3243_1ex10d2.htm#Section4_10_1_175452]

Employees. [a05-3243_1ex10d2.htm#Section4_10_1_175452]

 

Section 4.10.2 [a05-3243_1ex10d2.htm#Section4_10_2_175443]

Employment Arrangements. [a05-3243_1ex10d2.htm#Section4_10_2_175443]

 

 

ii

--------------------------------------------------------------------------------

 

Section 4.10.3 [a05-3243_1ex10d2.htm#Section4_10_3_175438]

No Claims. [a05-3243_1ex10d2.htm#Section4_10_3_175438]

 

Section 4.11 [a05-3243_1ex10d2.htm#Section4_11_175432]

Contracts [a05-3243_1ex10d2.htm#Section4_11_175432]

 

Section 4.12 [a05-3243_1ex10d2.htm#Section4_12_175419]

Litigation [a05-3243_1ex10d2.htm#Section4_12_175419]

 

Section 4.13 [a05-3243_1ex10d2.htm#Section4_13_175412]

Environmental Matters [a05-3243_1ex10d2.htm#Section4_13_175412]

 

Section 4.13.1 [a05-3243_1ex10d2.htm#Section4_13_1Compliance__174151]

Compliance. [a05-3243_1ex10d2.htm#Section4_13_1Compliance__174151]

 

Section 4.13.2 [a05-3243_1ex10d2.htm#Section4_13_2_175249]

No Violation. [a05-3243_1ex10d2.htm#Section4_13_2_175249]

 

Section 4.13.3 [a05-3243_1ex10d2.htm#Section4_13_3_175238]

No Litigation. [a05-3243_1ex10d2.htm#Section4_13_3_175238]

 

Section 4.13.4 [a05-3243_1ex10d2.htm#Section4_13_4_175233]

National Priorities List. [a05-3243_1ex10d2.htm#Section4_13_4_175233]

 

Section 4.14 [a05-3243_1ex10d2.htm#Section4_14_175229]

Intellectual Property [a05-3243_1ex10d2.htm#Section4_14_175229]

 

Section 4.15 [a05-3243_1ex10d2.htm#Section4_15_175224]

Taxes [a05-3243_1ex10d2.htm#Section4_15_175224]

 

Section 4.15.1 [a05-3243_1ex10d2.htm#Section4_15_1_175219]

Filed Tax Returns. [a05-3243_1ex10d2.htm#Section4_15_1_175219]

 

Section 4.15.2 [a05-3243_1ex10d2.htm#Section4_15_2_175212]

Unpaid Taxes. [a05-3243_1ex10d2.htm#Section4_15_2_175212]

 

Section 4.15.3 [a05-3243_1ex10d2.htm#Section4_15_3_175207]

No Audits or Assessments. [a05-3243_1ex10d2.htm#Section4_15_3_175207]

 

Section 4.15.4 [a05-3243_1ex10d2.htm#Section4_15_4_175202]

No Tax Liens. [a05-3243_1ex10d2.htm#Section4_15_4_175202]

 

Section 4.15.5 [a05-3243_1ex10d2.htm#Section4_15_5_175156]

Withholding. [a05-3243_1ex10d2.htm#Section4_15_5_175156]

 

Section 4.15.6 [a05-3243_1ex10d2.htm#Section4_15_6_175002]

No Tax Sharing Agreements. [a05-3243_1ex10d2.htm#Section4_15_6_175002]

 

Section 4.15.7 [a05-3243_1ex10d2.htm#Section4_15_7_174954]

No Change in Status. [a05-3243_1ex10d2.htm#Section4_15_7_174954]

 

Section 4.15.8 [a05-3243_1ex10d2.htm#Section4_15_8_174949]

Controlled Person. [a05-3243_1ex10d2.htm#Section4_15_8_174949]

 

Section 4.15.9 [a05-3243_1ex10d2.htm#Section4_15_9_174945]

No Listed Transactions. [a05-3243_1ex10d2.htm#Section4_15_9_174945]

 

Section 4.16 [a05-3243_1ex10d2.htm#Section4_16_174940]

Insurance [a05-3243_1ex10d2.htm#Section4_16_174940]

 

Section 4.17 [a05-3243_1ex10d2.htm#Section4_17_174935]

Vote Required [a05-3243_1ex10d2.htm#Section4_17_174935]

 

Section 4.18 [a05-3243_1ex10d2.htm#Section4_18_174931]

Brokers [a05-3243_1ex10d2.htm#Section4_18_174931]

 

Section 4.19 [a05-3243_1ex10d2.htm#Section4_19_174925]

Approvals [a05-3243_1ex10d2.htm#Section4_19_174925]

 

Section 4.20 [a05-3243_1ex10d2.htm#Section4_20_174921]

Product Liability [a05-3243_1ex10d2.htm#Section4_20_174921]

 

Section 4.21 [a05-3243_1ex10d2.htm#Section4_21_174913]

Rental Contracts [a05-3243_1ex10d2.htm#Section4_21_174913]

 

Section 4.22 [a05-3243_1ex10d2.htm#Section4_22_174908]

Real Estate [a05-3243_1ex10d2.htm#Section4_22_174908]

 

Section 4.22.1 [a05-3243_1ex10d2.htm#Section4_22_1_174859]

General [a05-3243_1ex10d2.htm#Section4_22_1_174859]

 

Section 4.22.2 [a05-3243_1ex10d2.htm#Section4_22_2_174849]

Owned Facilities [a05-3243_1ex10d2.htm#Section4_22_2_174849]

 

Section 4.22.3 [a05-3243_1ex10d2.htm#Section4_22_3_174843]

Leased Facilities [a05-3243_1ex10d2.htm#Section4_22_3_174843]

 

Section 4.22.4 [a05-3243_1ex10d2.htm#Section4_22_4_174836]

Certificate of Occupancy [a05-3243_1ex10d2.htm#Section4_22_4_174836]

 

Section 4.22.5 [a05-3243_1ex10d2.htm#Section4_22_5_174830]

Utilities [a05-3243_1ex10d2.htm#Section4_22_5_174830]

 

Section 4.23 [a05-3243_1ex10d2.htm#Section4_23_174824]

Assets Necessary to Continue to Conduct Business
[a05-3243_1ex10d2.htm#Section4_23_174824]

 

Section 4.24 [a05-3243_1ex10d2.htm#Section4_24_174816]

Accounts Receivable [a05-3243_1ex10d2.htm#Section4_24_174816]

 

Section 4.25 [a05-3243_1ex10d2.htm#Section4_25_174807]

Inventory [a05-3243_1ex10d2.htm#Section4_25_174807]

 

Section 4.26 [a05-3243_1ex10d2.htm#Section4_26_174759]

Purchase Commitments and Outstanding Bids
[a05-3243_1ex10d2.htm#Section4_26_174759]

 

Section 4.27 [a05-3243_1ex10d2.htm#Section4_27_174754]

Suppliers [a05-3243_1ex10d2.htm#Section4_27_174754]

 

Section 4.28 [a05-3243_1ex10d2.htm#Section4_28_174747]

Foreign Corrupt Practices Act [a05-3243_1ex10d2.htm#Section4_28_174747]

 

Section 4.29 [a05-3243_1ex10d2.htm#Section4_29_174741]

Officers and Directors; Loans [a05-3243_1ex10d2.htm#Section4_29_174741]

 

Section 4.30 [a05-3243_1ex10d2.htm#Section4_30_174735]

Bank Accounts [a05-3243_1ex10d2.htm#Section4_30_174735]

 

Section 4.31 [a05-3243_1ex10d2.htm#Section4_31_174729]

No Other Agreements to Sell the Company
[a05-3243_1ex10d2.htm#Section4_31_174729]

 

Section 4.32 [a05-3243_1ex10d2.htm#Section4_32_174723]

Material Misstatements or Omissions [a05-3243_1ex10d2.htm#Section4_32_174723]

 

 

 

 

Article 5. [a05-3243_1ex10d2.htm#Article5_AdditionalRepresentation_174349]

Additional Representations and Warranties of the Stockholders
[a05-3243_1ex10d2.htm#Article5_AdditionalRepresentation_174349]

 

 

 

 

Section 5.1 [a05-3243_1ex10d2.htm#Section5_1_174714]

Authority [a05-3243_1ex10d2.htm#Section5_1_174714]

 

 

iii

--------------------------------------------------------------------------------

 

Section 5.2 [a05-3243_1ex10d2.htm#Section5_2_174708]

No Conflict; Required Filings and Consents
[a05-3243_1ex10d2.htm#Section5_2_174708]

 

Section 5.3 [a05-3243_1ex10d2.htm#Section5_3_174702]

Brokers [a05-3243_1ex10d2.htm#Section5_3_174702]

 

 

 

 

Article 6. [a05-3243_1ex10d2.htm#Article6_RepresentationsAndWarran_174401]

Representations and Warranties of Parent and Merger Sub
[a05-3243_1ex10d2.htm#Article6_RepresentationsAndWarran_174401]

 

 

 

 

Section 6.1 [a05-3243_1ex10d2.htm#Section6_1_174653]

Organization and Qualification; Subsidiaries
[a05-3243_1ex10d2.htm#Section6_1_174653]

 

Section 6.2 [a05-3243_1ex10d2.htm#Section6_2_174647]

Authority [a05-3243_1ex10d2.htm#Section6_2_174647]

 

Section 6.3 [a05-3243_1ex10d2.htm#Section6_3_174636]

No Conflict; Required Filings and Consents
[a05-3243_1ex10d2.htm#Section6_3_174636]

 

Section 6.4 [a05-3243_1ex10d2.htm#Section6_4_174605]

Ownership of Merger Sub; No Prior Activities
[a05-3243_1ex10d2.htm#Section6_4_174605]

 

Section 6.5 [a05-3243_1ex10d2.htm#Section6_5_174530]

Board Approval [a05-3243_1ex10d2.htm#Section6_5_174530]

 

Section 6.6 [a05-3243_1ex10d2.htm#Section6_6_174532]

Financing [a05-3243_1ex10d2.htm#Section6_6_174532]

 

Section 6.7 [a05-3243_1ex10d2.htm#Section6_7_174534]

Brokers [a05-3243_1ex10d2.htm#Section6_7_174534]

 

 

 

 

Article 7. [a05-3243_1ex10d2.htm#Article7__192114]

Covenants and Agreements [a05-3243_1ex10d2.htm#Article7__192114]

 

 

 

 

Section 7.1 [a05-3243_1ex10d2.htm#Section7_1_174536]

Conduct of Business by the Company Pending the Effective Time
[a05-3243_1ex10d2.htm#Section7_1_174536]

 

Section 7.2 [a05-3243_1ex10d2.htm#Section7_2]

Cooperation Generally [a05-3243_1ex10d2.htm#Section7_2]

 

Section 7.3 [a05-3243_1ex10d2.htm#Section7_3]

Access to Information; Confidentiality [a05-3243_1ex10d2.htm#Section7_3]

 

Section 7.4 [a05-3243_1ex10d2.htm#Section7_4]

No Solicitation of Transactions [a05-3243_1ex10d2.htm#Section7_4]

 

Section 7.5 [a05-3243_1ex10d2.htm#Section7_5]

Appropriate Action; Consents; Filings [a05-3243_1ex10d2.htm#Section7_5]

 

Section 7.6 [a05-3243_1ex10d2.htm#Section7_6]

Certain Notices [a05-3243_1ex10d2.htm#Section7_6]

 

Section 7.7 [a05-3243_1ex10d2.htm#Section7_7]

Public Announcements [a05-3243_1ex10d2.htm#Section7_7]

 

Section 7.8 [a05-3243_1ex10d2.htm#Section7_8]

Repayment of Officer and Director Loans [a05-3243_1ex10d2.htm#Section7_8]

 

Section 7.9 [a05-3243_1ex10d2.htm#Section7_9]

Tax Matters [a05-3243_1ex10d2.htm#Section7_9]

 

Section 7.9.1 [a05-3243_1ex10d2.htm#Section7_9_1]

Tax Return Filing for Periods Ending on or before the Effective Time
[a05-3243_1ex10d2.htm#Section7_9_1]

 

Section 7.9.2 [a05-3243_1ex10d2.htm#Section7_9_2]

Tax Returns for Straddle Periods [a05-3243_1ex10d2.htm#Section7_9_2]

 

Section 7.9.3 [a05-3243_1ex10d2.htm#Section7_9_3]

Special Procedures to Apply to Deduction of the Management Bonus.
[a05-3243_1ex10d2.htm#Section7_9_3]

 

Section 7.9.4 [a05-3243_1ex10d2.htm#Section7_9_4]

Special Procedures to Apply to Personal Property Taxes.
[a05-3243_1ex10d2.htm#Section7_9_4]

 

Section 7.9.5 [a05-3243_1ex10d2.htm#Section7_9_5]

Cooperation on Tax Matters [a05-3243_1ex10d2.htm#Section7_9_5]

 

Section 7.9.6 [a05-3243_1ex10d2.htm#Section7_9_6]

Transfer Taxes [a05-3243_1ex10d2.htm#Section7_9_6]

 

Section 7.9.7 [a05-3243_1ex10d2.htm#Section7_9_7]

FIRPTA Certificate [a05-3243_1ex10d2.htm#Section7_9_7]

 

Section 7.9.8 [a05-3243_1ex10d2.htm#Section7_9_8]

Forms W-9 [a05-3243_1ex10d2.htm#Section7_9_8]

 

Section 7.10 [a05-3243_1ex10d2.htm#Section7_10]

Company’s Auditors [a05-3243_1ex10d2.htm#Section7_10]

 

Section 7.11 [a05-3243_1ex10d2.htm#Section7_11]

Confidential Information [a05-3243_1ex10d2.htm#Section7_11]

 

Section 7.12 [a05-3243_1ex10d2.htm#Section7_12]

Treatment of Company Benefit Plans [a05-3243_1ex10d2.htm#Section7_12]

 

Section 7.13  [a05-3243_1ex10d2.htm#Section7_13]

Delivery of Ancillary Agreements. [a05-3243_1ex10d2.htm#Section7_13]

 

Section 7.14  [a05-3243_1ex10d2.htm#Section7_14]

Payment of William Blair Fees. [a05-3243_1ex10d2.htm#Section7_14]

 

Section 7.15 [a05-3243_1ex10d2.htm#Section7_15]

Termination of Retirement Agreement. [a05-3243_1ex10d2.htm#Section7_15]

 

 

 

 

Article 8. [a05-3243_1ex10d2.htm#Article8__191419]

Closing Conditions [a05-3243_1ex10d2.htm#Article8__191419]

 

 

 

 

Section 8.1 [a05-3243_1ex10d2.htm#Section8_1]

Conditions to Obligations of Each Party Under This Agreement
[a05-3243_1ex10d2.htm#Section8_1]

 

Section 8.1.1 [a05-3243_1ex10d2.htm#Section8_1_1]

No Order [a05-3243_1ex10d2.htm#Section8_1_1]

 

Section 8.1.2 [a05-3243_1ex10d2.htm#Section8_1_2]

HSR Act [a05-3243_1ex10d2.htm#Section8_1_2]

 

 

iv

--------------------------------------------------------------------------------

 

Section 8.1.3 [a05-3243_1ex10d2.htm#Section8_1_3]

Extension of Warehouse Lease. [a05-3243_1ex10d2.htm#Section8_2]

 

Section 8.2 [a05-3243_1ex10d2.htm#Section8_2]

Additional Conditions to Obligations of Parent and Merger Sub
[a05-3243_1ex10d2.htm#Section8_2]

 

Section 8.2.1 [a05-3243_1ex10d2.htm#Section8_2_1]

Representations and Warranties [a05-3243_1ex10d2.htm#Section8_2_1]

 

Section 8.2.2 [a05-3243_1ex10d2.htm#Section8_2_2]

Agreements and Covenants [a05-3243_1ex10d2.htm#Section8_2_2]

 

Section 8.2.3 [a05-3243_1ex10d2.htm#Section8_2_3]

Consents and Approvals [a05-3243_1ex10d2.htm#Section8_2_3]

 

Section 8.2.4 [a05-3243_1ex10d2.htm#Section8_2_4]

Material Adverse Effect [a05-3243_1ex10d2.htm#Section8_2_4]

 

Section 8.2.5 [a05-3243_1ex10d2.htm#Section8_2_5]

Court Proceedings [a05-3243_1ex10d2.htm#Section8_2_5]

 

Section 8.2.6 [a05-3243_1ex10d2.htm#Section8_2_6]

Ancillary Agreements [a05-3243_1ex10d2.htm#Section8_2_6]

 

Section 8.2.7 [a05-3243_1ex10d2.htm#Section8_2_7]

Resignation of Officers and Directors [a05-3243_1ex10d2.htm#Section8_2_7]

 

Section 8.2.8 [a05-3243_1ex10d2.htm#Section8_2_8]

Results for Year Ended January 31, 2005 [a05-3243_1ex10d2.htm#Section8_2_8]

 

Section 8.2.9 [a05-3243_1ex10d2.htm#Section8_2_9]

Employment Status of Kenneth O’Brien [a05-3243_1ex10d2.htm#Section8_2_9]

 

Section 8.2.10 [a05-3243_1ex10d2.htm#Section8_2_10]

Release of Lien on Warehouse [a05-3243_1ex10d2.htm#Section8_2_10]

 

Section 8.2.11 [a05-3243_1ex10d2.htm#Section8_2_11]

Financing [a05-3243_1ex10d2.htm#Section8_2_11]

 

Section 8.2.12 [a05-3243_1ex10d2.htm#Section8_2_12]

Termination of Rights Under Investors Agreement.
[a05-3243_1ex10d2.htm#Section8_2_12]

 

Section 8.3 [a05-3243_1ex10d2.htm#Section8_3]

Additional Conditions to Obligations of the Company
[a05-3243_1ex10d2.htm#Section8_3]

 

Section 8.3.1 [a05-3243_1ex10d2.htm#Section8_3_1]

Representations and Warranties [a05-3243_1ex10d2.htm#Section8_3_1]

 

Section 8.3.2 [a05-3243_1ex10d2.htm#Section8_3_2]

Agreements and Covenants [a05-3243_1ex10d2.htm#Section8_3_2]

 

Section 8.3.3 [a05-3243_1ex10d2.htm#Section8_3_3]

Consents and Approvals [a05-3243_1ex10d2.htm#Section8_3_3]

 

Section 8.3.4 [a05-3243_1ex10d2.htm#Section8_3_4]

Ancillary Agreements. [a05-3243_1ex10d2.htm#Section8_3_4]

 

 

 

 

Article 9. [a05-3243_1ex10d2.htm#Article9_191424]

Termination, Amendment and Waiver [a05-3243_1ex10d2.htm#Article9_191424]

 

 

 

 

Section 9.1 [a05-3243_1ex10d2.htm#Section9_1]

Termination [a05-3243_1ex10d2.htm#Section9_1]

 

Section 9.2 [a05-3243_1ex10d2.htm#Section9_2]

Effect of Termination [a05-3243_1ex10d2.htm#Section9_2]

 

Section 9.2.1 [a05-3243_1ex10d2.htm#Section9_2_1]

Limitation on Liability [a05-3243_1ex10d2.htm#Section9_2_1]

 

Section 9.2.2 [a05-3243_1ex10d2.htm#Section9_2_2]

Parent Expenses [a05-3243_1ex10d2.htm#Section9_2_2]

 

Section 9.2.3 [a05-3243_1ex10d2.htm#Section9_2_3]

Company Expenses [a05-3243_1ex10d2.htm#Section9_2_3]

 

Section 9.2.4 [a05-3243_1ex10d2.htm#Section9_2_4]

Payment of Expenses [a05-3243_1ex10d2.htm#Section9_2_4]

 

Section 9.2.5 [a05-3243_1ex10d2.htm#Section9_2_5]

All Payments [a05-3243_1ex10d2.htm#Section9_2_5]

 

 

 

 

Article 10. [a05-3243_1ex10d2.htm#Article10__191435]

Indemnity; Remedies [a05-3243_1ex10d2.htm#Article10__191435]

 

 

 

 

Section 10.1 [a05-3243_1ex10d2.htm#Section10_1]

Survival of Representations [a05-3243_1ex10d2.htm#Section10_1]

 

Section 10.2 [a05-3243_1ex10d2.htm#Section10_2]

Indemnification [a05-3243_1ex10d2.htm#Section10_2]

 

Section 10.2.1 [a05-3243_1ex10d2.htm#Section10_2_1]

Indemnification by Stockholders [a05-3243_1ex10d2.htm#Section10_2_1]

 

Section 10.2.2 [a05-3243_1ex10d2.htm#Section10_2_2]

Indemnification by Stockholders [a05-3243_1ex10d2.htm#Section10_2_2]

 

Section 10.2.3 [a05-3243_1ex10d2.htm#Section10_2_3]

Tax Indemnification by Stockholders [a05-3243_1ex10d2.htm#Section10_2_3]

 

Section 10.2.4 [a05-3243_1ex10d2.htm#Section10_2_4]

Indemnification by Parent [a05-3243_1ex10d2.htm#Section10_2_4]

 

Section 10.2.5 [a05-3243_1ex10d2.htm#Section10_2_5]

Investigation [a05-3243_1ex10d2.htm#Section10_2_5]

 

Section 10.2.6 [a05-3243_1ex10d2.htm#Section10_2_6]

Tax Indemnification by Parent [a05-3243_1ex10d2.htm#Section10_2_6]

 

Section 10.2.7 [a05-3243_1ex10d2.htm#Section10_2_7]

Procedures for Claims [a05-3243_1ex10d2.htm#Section10_2_7]

 

Section 10.3 [a05-3243_1ex10d2.htm#Section10_3]

No Contribution by the Company [a05-3243_1ex10d2.htm#Section10_3]

 

Section 10.4 [a05-3243_1ex10d2.htm#Section10_4]

Limitations on Indemnity [a05-3243_1ex10d2.htm#Section10_4]

 

Section 10.4.1 [a05-3243_1ex10d2.htm#Section10_4_1]

 

 

Section 10.4.2 [a05-3243_1ex10d2.htm#Section10_4_2]

 

 

Section 10.4.3 [a05-3243_1ex10d2.htm#Section10_4_3]

 

 

 

v

--------------------------------------------------------------------------------

 

Section 10.4.4 [a05-3243_1ex10d2.htm#Section10_4_4]

 

 

Section 10.4.5 [a05-3243_1ex10d2.htm#Section10_4_5]

 

 

Section 10.4.6 [a05-3243_1ex10d2.htm#Section10_4_6]

 

 

Section 10.4.7 [a05-3243_1ex10d2.htm#Section10_4_7]

 

 

Section 10.5 [a05-3243_1ex10d2.htm#Section10_5]

Tax Refunds. [a05-3243_1ex10d2.htm#Section10_5]

 

Section 10.6 [a05-3243_1ex10d2.htm#Section10_6]

Interest. [a05-3243_1ex10d2.htm#Section10_6]

 

 

 

 

Article 11. [a05-3243_1ex10d2.htm#Article11_191444]

General [a05-3243_1ex10d2.htm#Article11_191444]

 

 

 

 

Section 11.1 [a05-3243_1ex10d2.htm#Section11_1]

Notices [a05-3243_1ex10d2.htm#Section11_1]

 

Section 11.2 [a05-3243_1ex10d2.htm#Section11_2_184750]

Headings [a05-3243_1ex10d2.htm#Section11_2_184750]

 

Section 11.3 [a05-3243_1ex10d2.htm#Section11_3_184753]

Severability [a05-3243_1ex10d2.htm#Section11_3_184753]

 

Section 11.4 [a05-3243_1ex10d2.htm#Section11_4_184755]

Entire Agreement [a05-3243_1ex10d2.htm#Section11_4_184755]

 

Section 11.5 [a05-3243_1ex10d2.htm#Section11_5_184757]

Amendment [a05-3243_1ex10d2.htm#Section11_5_184757]

 

Section 11.6 [a05-3243_1ex10d2.htm#Section11_6_184800]

Waiver [a05-3243_1ex10d2.htm#Section11_6_184800]

 

Section 11.7 [a05-3243_1ex10d2.htm#Section11_7_184803]

Fees and Expenses [a05-3243_1ex10d2.htm#Section11_7_184803]

 

Section 11.8 [a05-3243_1ex10d2.htm#Section11_8_184805]

Assignment [a05-3243_1ex10d2.htm#Section11_8_184805]

 

Section 11.9 [a05-3243_1ex10d2.htm#Section11_9_184806]

Parties in Interest [a05-3243_1ex10d2.htm#Section11_9_184806]

 

Section 11.10 [a05-3243_1ex10d2.htm#Section11_10_184808]

Mutual Drafting [a05-3243_1ex10d2.htm#Section11_10_184808]

 

Section 11.11 [a05-3243_1ex10d2.htm#Section11_11_184811]

Governing Law [a05-3243_1ex10d2.htm#Section11_11_184811]

 

Section 11.12 [a05-3243_1ex10d2.htm#Section11_12_184816]

Remedies; Dispute Resolution [a05-3243_1ex10d2.htm#Section11_12_184816]

 

Section 11.12.1 [a05-3243_1ex10d2.htm#Section11_12_1_184826]

Remedies [a05-3243_1ex10d2.htm#Section11_12_1_184826]

 

Section 11.12.2 [a05-3243_1ex10d2.htm#Section11_12_2_184830]

Dispute Resolution [a05-3243_1ex10d2.htm#Section11_12_2_184830]

 

Section 11.13 [a05-3243_1ex10d2.htm#Section11_13_184835]

Waiver of Jury Trial [a05-3243_1ex10d2.htm#Section11_13_184835]

 

Section 11.14 [a05-3243_1ex10d2.htm#Section11_14_184837]

Counterparts [a05-3243_1ex10d2.htm#Section11_14_184837]

 

 

 

 

EXHIBITS

 

 

 

Exhibit 2.2

Articles of Merger

 

 

 

 

Exhibit 4.21

Rental Contract Data

 

 

 

 

Exhibit 7.3.2

Confidentiality Agreement

 

 

 

 

Exhibit 7.5.2

Covenants and Closing Conditions Relating to Facility Leases

 

 

 

 

ANCILLARY AGREEMENTS

 

 

 

Form of Severance Agreement

 

 

 

Form of Employment Agreement

 

 

 

Form of Agreement Not to Compete

 

 

 

Form of Escrow Agreement

 

 

vi

--------------------------------------------------------------------------------

 

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:

 

Article 1.
Definitions

 

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.

 

1

--------------------------------------------------------------------------------

 

“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,

 

2

--------------------------------------------------------------------------------

 

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

 

3

--------------------------------------------------------------------------------

 

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

 

4

--------------------------------------------------------------------------------

 

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

 

5

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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.

 

6

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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:

 

“2004 Tax Returns”

 

Section 7.9.1

 

 

 

“401(k) Plan”

 

Section 7.12

 

 

 

“Agreement”

 

Preamble

 

 

 

“Articles of Merger”

 

Section 2.2

 

 

 

“Auditor”

 

Section 3.7.2

 

 

 

“Bonus Deduction”

 

Section 7.9.3

 

 

 

“Carryback Tax Return”

 

Section 7.9.3

 

 

 

“Certificates”

 

Section 3.2.1

 

 

 

“Claim”

 

Section 10.2.7

 

 

 

“Claim Notice”

 

Section 10.2.7

 

 

 

“Class A Preferred Merger Consideration”

 

Section 3.1.1

 

 

 

“Class A Preferred Merger Consideration Per Share”

 

Section 3.1.1

 

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“Class A Preferred Stock”

 

Section 3.1.1

 

 

 

“Class B Preferred Stock”

 

Section 4.3.1

 

 

 

“Closing Balance Sheet”

 

Section 3.7.1

 

 

 

“Closing Indebtedness”

 

Section 3.6

 

 

 

“Closing Net Working Capital”

 

Section 3.7.1

 

 

 

“Closing Payment Per Share”

 

Section 3.2.1

 

 

 

“Common Merger Consideration”

 

Section 3.1.2

 

 

 

“Common Merger Consideration Per Share”

 

Section 3.1.3

 

 

 

“Company”

 

Preamble

 

 

 

“Company Articles”

 

Section 4.2

 

 

 

“Company Benefit Plan”

 

Section 4.9.1

 

 

 

“Company Board”

 

Section 4.4.1

 

 

 

“Company Bylaws”

 

Section 4.2

 

 

 

“Company Common Stock”

 

Section 3.1.2

 

 

 

“Company Disclosure Schedule”

 

Article 4

 

 

 

“Company Material Contract”

 

Section 4.11

 

 

 

“Company Permits”

 

Section 4.6

 

 

 

“Company Preferred Stock”

 

Section 4.3.1

 

 

 

“Company Subsidiary”

 

Section 4.1

 

 

 

“Confidential Information”

 

Section 7.11

 

 

 

“Confidentiality Agreement”

 

Section 7.3.2

 

 

 

“Contribution Shortfall”

 

Section 3.1.7

 

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“Credit Agreement”

 

Section 6.6

 

 

 

“Debt Adjustment”

 

Section 3.6

 

 

 

“Determination Date”

 

Section 3.7.2

 

 

 

“Effective Time”

 

Section 2.2

 

 

 

“ERISA”

 

Section 4.9.1

 

 

 

“ERISA Affiliate”

 

Section 4.9.1

 

 

 

“Escrow Agent”

 

Section 3.5.1

 

 

 

“Escrow Agreement”

 

Section 3.5.1

 

 

 

“GC Indemnified Party”

 

Section 10.2.1

 

 

 

“General Tax Benefit Factor”

 

Section 7.9.3

 

 

 

“Indebtedness Threshold”

 

Section 3.6

 

 

 

“Indemnified Party”

 

Section 10.2.7

 

 

 

“Indemnifying Party”

 

Section 10.2.7

 

 

 

“Independent Auditor”

 

Section 3.7.2

 

 

 

“Material Intellectual Property”

 

Section 4.14

 

 

 

“Merger”

 

Recitals

 

 

 

“Merger Consideration”

 

Section 3.1.2

 

 

 

“Merger Sub”

 

Preamble

 

 

 

“MGCL”

 

Recitals

 

 

 

“Multiemployer Plan”

 

Section 4.9.3

 

 

 

“Music & Arts Indemnified Party”

 

Section 10.2.4

 

 

 

“Net Working Capital”

 

Section 3.7.1

 

 

 

“Number of Fully Diluted Shares”

 

Section 3.1.3

 

 

 

“Parent”

 

Preamble

 

9

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“Parent Subsidiary”

 

Section 6.3.1

 

 

 

“PBGC”

 

Section 4.9.4

 

 

 

“Principal Stockholder”

 

Section 10.4.2

 

 

 

“Purchase Price”

 

Section 3.1.3

 

 

 

“Qualifying Pre-Effective Time Tax Refund”

 

Section 10.5

 

 

 

“Regulatory and Consent Conditions”

 

Section 9.1.2

 

 

 

“Representatives”

 

Section 7.3.1

 

 

 

“Stockholders”

 

Preamble

 

 

 

“Stockholder Representative Delivery Date”

 

Section 3.7.1

 

 

 

“Stockholder Representative Holdback”

 

Section 3.4

 

 

 

“Stub Period Return”

 

Section 7.9.3

 

 

 

“Stub Period Tax Benefit Calculation”

 

Section 7.9.3

 

 

 

“Surviving Corporation”

 

Section 2.1

 

 

 

“Termination Adjustment”

 

Section 3.9

 

 

 

“Third Party Claim”

 

Section 10.2.7

 

 

 

“Transfer Taxes”

 

Section 7.9.6

 

 

 

“Working Capital Adjustment”

 

Section 3.7.4

 

 

 

“Working Capital Estimate”

 

Section 3.7.3

 

10

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Article 2.
The Merger

 

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.
Conversion of Securities; Exchange of Certificates

 

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

 

12

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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.
REPRESENTATIONS AND WARRANTIES OF THE COMPANY AND KENNETH M. O’BRIEN

 

Except as set forth in the Disclosure Schedule delivered by the Company to
Parent prior to the execution of this Agreement (the “Company Disclosure
Schedule”), the Company and Kenneth M. O’Brien, jointly and severally, hereby
represent and warrant to Parent as set forth below.  The sections of the Company
Disclosure Schedule are numbered to correspond to the various subsections of
this Article 4, and no disclosure made in any particular section of the Company
Disclosure Schedule shall be deemed made in any other section of the Company
Disclosure Schedule unless expressly made therein (by cross-reference or
otherwise) or it is reasonably apparent on its face that such disclosure applies
to such other section of the Company Disclosure Schedule.

 

Section 4.1                                   Organization and Qualification;
Subsidiaries.  The Company is a corporation duly organized, validly existing and
in good standing under the laws of the State of Maryland.  Each Subsidiary of
the Company (each a “Company Subsidiary” and, collectively, the “Company
Subsidiaries”) has been duly organized, and is validly existing and in good
standing under the laws of the jurisdiction of its incorporation or
organization.  Each of the Company and each Company Subsidiary has the requisite
power and authority and all necessary governmental approvals to own, lease and
operate its properties and to carry on its business as it is now being
conducted.  Each of the Company and each Company Subsidiary is duly qualified or
licensed to do business, and is in good standing, in each jurisdiction where the
character of the properties owned, leased or operated by it or the nature of its
business makes such qualification, licensing or good standing necessary, except
as would not reasonably be expected to result in a Company Material Adverse
Effect.  Section 4.1 of the Company Disclosure Schedule sets forth a true and
complete list of all of the Company Subsidiaries and their respective
jurisdictions of incorporation or organization.  Except as set forth in
Section 4.1 of the Company Disclosure Schedule, none of the Company or any
Company Subsidiary holds an Equity Interest in any other Person.

 

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Section 4.2                                   Articles of Incorporation and
Bylaws; Corporate Books and Records.  The copies of the Company’s Articles of
Incorporation (the “Company Articles”) and Bylaws (the “Company Bylaws”) and the
analogous organizational documents of each of the Company Subsidiaries delivered
to Parent are complete and correct copies thereof as in effect on the date
hereof.  The Company is not in violation of any of the provisions of the Company
Articles or the Company Bylaws.  No Company Subsidiary is in violation of any of
the provisions of its organization documents.  True and complete copies of all
minute books of the Company and the Company Subsidiaries have been made
available by the Company to Parent.

 

Section 4.3                                   Capitalization; No Dissenters’
Rights.

 

Section 4.3.1                         Capitalization.  The authorized capital
stock of the Company consists of Five Thousand (5,000) shares of Company Common
Stock and Thirty Thousand (30,000) shares of preferred stock, Twenty-Five
Thousand (25,000) of which are designated as Class A Preferred Stock and Five
Thousand (5,000) of which are designated as Class B Preferred Stock, par value
$10.00 per share (“Class B Preferred Stock” and, together with the Class A
Preferred Stock, “Company Preferred Stock”).  As of the date of this Agreement,
(A) Three Thousand Nine Hundred Fifty-Eight (3,958) shares of Company Common
Stock are issued and outstanding and no shares of Company Common Stock are held
in the treasury of the Company or by the Company Subsidiaries, (B) Eighty (80)
shares of Class A Preferred Stock are issued and outstanding and no shares of
Class A Preferred Stock are held in the treasury of the Company or by the
Company Subsidiaries and (C) no shares of Class B Preferred Stock are issued and
outstanding or held in the treasury of the Company or by the Company
Subsidiaries.  Each outstanding share of Company Common Stock and Class A
Preferred Stock is duly authorized, validly issued, fully paid, nonassessable
and free of preemptive rights.  Section 4.3 of the Company Disclosure Schedule
includes a true and complete list of all the holders of the Company’s capital
stock and the number and kind of shares owned by each such Person.  Section 4.3
of the Company Disclosure Schedule includes a true and complete list of all
repurchases of capital stock or other Equity Interests of the Company made by
the Company or Kenneth M. O’Brien in the last five years.  All such repurchase
transactions have been completed, and the Company has no unpaid liability in
connection therewith of any nature whatsoever.  There are no options, warrants
or other rights, agreements, arrangements or commitments of any character to
which the Company or any Company Subsidiary is a party or by which the Company
or any Company Subsidiary is bound relating to the issued or unissued capital
stock or other Equity Interests of the Company or any Company Subsidiary, or
securities convertible into or exchangeable for such capital stock or other
Equity Interests, or obligating the Company or any Company Subsidiary to issue
or sell any shares of its capital stock or other Equity Interests, or securities
convertible into or exchangeable for such capital stock of, or other Equity
Interests in, the Company or any Company Subsidiary.  Since the date of this
Agreement, the Company has not issued any shares of its capital stock, or
securities convertible into or exchangeable for such capital stock or other
Equity Interests.  There are no outstanding contractual obligations of the
Company or any Company Subsidiary (A) restricting the transfer of, (B) affecting
the voting rights of, (C) requiring the repurchase, redemption or disposition
of, or containing any right of first refusal with respect to, (D) requiring the
registration for sale of, or (E) granting any preemptive or antidilutive right
with respect to,

 

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any shares of Company Common Stock or any capital stock of, or other Equity
Interests in, the Company or any Company Subsidiary.  Each outstanding share of
capital stock of each Company Subsidiary is duly authorized, validly issued,
fully paid, nonassessable and free of preemptive rights and is owned,
beneficially and of record, by the Company or another Company Subsidiary free
and clear of all security interests, liens, claims, pledges, options, rights of
first refusal, agreements, limitations on the Company’s or such other Company
Subsidiary’s voting rights, charges and other encumbrances of any nature
whatsoever.  There are no outstanding contractual obligations of the Company or
any Company Subsidiary to provide funds to, or make any investment (in the form
of a loan, capital contribution or otherwise) in, any Company Subsidiary or any
other Person.

 

Section 4.3.2                             No Dissenters’ Rights.  In connection
with the Merger and the other transactions contemplated by this Agreement, no
Person has “dissenters’ rights” or any similar legal remedy, including, without
limitation, any remedy under Sections 3-201 through 3-213 of the MGCL.

 

Section 4.4                                   Authority; No Restrictions on
Business Combinations.

 

Section 4.4.1                         Authority.  The Company has all necessary
corporate power and authority to execute and deliver this Agreement and each
Ancillary Agreement to which it is a party, to perform its obligations hereunder
and thereunder and to consummate the transactions contemplated by this Agreement
and each Ancillary Agreement to be consummated by the Company.  The execution
and delivery of this Agreement and each Ancillary Agreement to which it is a
party by the Company and the consummation by the Company of the transactions
contemplated hereby and thereby have been duly and validly authorized by all
necessary corporate action and no other corporate proceedings on the part of the
Company and no additional stockholder votes are necessary to authorize this
Agreement or any Ancillary Agreement or to consummate the transactions
contemplated hereby or thereby.  The Board of Directors of the Company (the
“Company Board”) has approved this Agreement and each Ancillary Agreement,
declared advisable the transactions contemplated hereby and thereby and has
directed that this Agreement and each Ancillary Agreement to which it is a party
and the transactions contemplated hereby and thereby be submitted to the
Company’s stockholders for approval.  The Company’s stockholders have approved
this Agreement and the Merger in accordance with the Company Articles, the
Company Bylaws and the MGCL.  This Agreement and each Ancillary Agreement to
which the Company is a party have been duly authorized and validly executed and
delivered by the Company and constitute a legal, valid and binding obligation of
the Company, enforceable against the Company in accordance with their respective
terms.

 

Section 4.4.2                         No Restrictions on Business Combinations. 
The Company has taken all appropriate actions so that the restrictions on
business combinations contained in Section 3-602 of the MGCL will not apply with
respect to or as a result of this Agreement or any Ancillary Agreement and the
transactions contemplated hereby and thereby, including the Merger, without any
further action on the part of the Stockholders or the Company Board.  True and
complete copies of all resolutions of the Company Board reflecting such actions
have been previously provided to Parent.  No other state takeover statute or
similar statute or regulation is

 

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applicable to or purports to be applicable to the Merger or any other
transaction contemplated by this Agreement or any Ancillary Agreement.

 

Section 4.5                                   No Conflict; Required Filings and
Consents.

 

Section 4.5.1                         No Conflict.  The execution and delivery
by the Company of this Agreement and each Ancillary Agreement to which the
Company is a party do not, and the performance by the Company of this Agreement
and each such Ancillary Agreement will not, (A) conflict with or violate any
provision of the Company Articles or Company Bylaws or any equivalent
organizational documents of any Company Subsidiary, (B) assuming that all
consents, approvals, authorizations and permits described in Section 4.5.2 have
been obtained and all filings and notifications described in Section 4.5.2 have
been made and any waiting periods thereunder have terminated or expired,
conflict with or violate any Law applicable to the Company or any Company
Subsidiary or by which any property or asset of the Company or any Company
Subsidiary is bound or affected or (C) require any consent or approval under,
result in any breach of or any loss of any benefit under, or constitute a
default (or an event which with notice or lapse of time or both would become a
default) under, or give to others any right of termination, vesting, amendment,
acceleration or cancellation of, or result in the creation of a lien or other
encumbrance on any property or asset of the Company or any Company Subsidiary
pursuant to, any (1) contract to which the Company or any Company Subsidiary is
a party or by which any of their assets are bound or (2) Company Permit.

 

Section 4.5.2                         Required Filings and Consents.  The
execution and delivery by the Company of this Agreement and each Ancillary
Agreement to which the Company is a party does not, and the performance by the
Company of this Agreement and each such Ancillary Agreement will not, require
any consent, approval, authorization or permit of, or filing with or
notification to, any Governmental Entity or any other Person, except as required
under the HSR Act and the filing and recordation of the Articles of Merger as
required by the MGCL.

 

Section 4.6                                   Permits; Compliance With Law. 
Each of the Company and each Company Subsidiary is in possession of all
authorizations, licenses, permits, certificates, approvals and clearances of any
Governmental Entity necessary for the Company and each Company Subsidiary to
own, lease and operate its properties or to carry on its respective businesses
substantially as it is being conducted as of the date hereof (the “Company
Permits”), and all such Company Permits are valid, and in full force and
effect.  None of the Company or any Company Subsidiary is in conflict with, or
in default or violation of, (A) any Law applicable to the Company or any Company
Subsidiary or by which any property or asset of the Company or any Company
Subsidiary is bound or affected or (B) any Company Permits.

 

Section 4.7                                   Financial Statements; Internal
Controls.

 

Section 4.7.1                         Financial Statements.  The (A)(1) audited
consolidated financial statements of the Company for the years ended January 31,
2002, 2003 and 2004 and (2) interim consolidated financial statements of the
Company for the eight-month period ended September 30, 2004 (including, in each
case, any notes thereto) provided to Parent were, and (B)

 

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the audited consolidated financial statements of the Company for the year ended
January 31, 2005 (including any notes thereto) when delivered to Parent pursuant
to Section 8.2.8 will be, prepared in accordance with GAAP (except as may be
expressly indicated in the notes thereto) consistently applied throughout the
periods indicated (except as may be indicated in the notes thereto), and each
fairly present the consolidated financial position, results of operations and
cash flows of the Company and the consolidated Company Subsidiaries as of the
respective dates thereof and for the respective periods indicated therein, in
the case of the interim financial statements (1) except for the absence of
required footnotes and (2) subject to normal year-end adjustments consistent
with the Company’s past practice.  Set forth on Schedule 4.7.1 of the Company
Disclosure Schedule are the material accounting conventions applied by the
Company to its financial statements that are not evident from the notes thereto.

 

Section 4.7.2                         Internal Controls.  The Company maintains
a system of internal accounting controls sufficient to provide reasonable
assurance that (A) transactions are executed with management’s authorizations,
(B) transactions are recorded as necessary to permit preparation of financial
statements in accordance with GAAP and to maintain accountability for assets,
(C) access to assets is permitted only in accordance with management’s
authorization and (D) the recorded accountability for assets is compared with
existing assets at reasonable intervals and appropriate action is taken with
respect to any differences.  Neither Parent nor the Surviving Corporation may
assert any claim for indemnification upon a breach of this Section 4.7.2 unless
such breach was also accompanied by a material misstatement of related financial
statements.

 

Section 4.7.3                         Books and Records.  The accounting books
and records of the Company, in reasonable detail, accurately and fairly reflect
the activities of the Company in connection with its business, and all financial
information provided to Parent is in accordance therewith.

 

Section 4.7.4                         All Accounts Recorded.  The Company has
not engaged in any transaction, maintained any bank account or used any
corporate funds, except for transactions, bank accounts or funds which have been
and are reflected in the normally maintained accounting books and records.

 

Section 4.7.5                         Corporate Records.  The Company’s stock
records and minute books that have been made available to Parent fully reflect
all minutes of meetings, resolutions and other material actions and proceedings
of its stockholders and board of directors and all committees thereof, all
issuances, transfers and redemptions of capital stock to the Company’s Knowledge
and contain true, correct and complete copies of the Company Articles and the
Company Bylaws and all amendments thereto through the date hereof.

 

Section 4.8                                   Absence of Certain Changes or
Events.  Since February 1, 2004, except as specifically contemplated by, or as
disclosed in, this Agreement or in Section 4.8 of the Company Disclosure
Schedule, the Company and each Company Subsidiary has conducted its businesses
in the ordinary course consistent with past practice and, since such date, there
has not been (A) any Company Material Adverse Effect or an event or development
that would, individually or in the aggregate, reasonably be expected to have a
Company Material Adverse Effect or (B) any action taken by the Company or any
Company Subsidiary during the period

 

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from February 1, 2004 through the date of this Agreement that, if taken during
the period from the date of this Agreement through the Effective Time, would
constitute a breach of Section 7.1.

 

Section 4.9                                   Employee Benefit Plans.

 

Section 4.9.1                         ERISA Plans.  Section 4.9.1 of the Company
Disclosure Schedule sets forth a true and complete list of each “employee
benefit plan” as defined in Section 3(3) of the Employee Retirement Income
Security Act of 1974, as amended (“ERISA”) and any other plan, policy, program,
practice, agreement, understanding or arrangement (whether written or oral)
providing compensation or other benefits to any current or former director,
officer, employee or consultant (or to any dependent or beneficiary thereof of
the Company or any ERISA Affiliate (as defined below)) which are now or were
within the past six years maintained, sponsored or contributed to by the Company
or any ERISA Affiliate, or under which the Company or any ERISA Affiliate has
obligation or liability, whether actual or contingent, including, without
limitation, all incentive, bonus, deferred compensation, vacation, holiday,
cafeteria, medical, disability, stock purchase, stock option, stock
appreciation, phantom stock, restricted stock or other stock-based compensation
plans, policies, programs, practices or arrangements (each a “Company Benefit
Plan”).  For purposes of this Section 4.9, “ERISA Affiliate” shall mean any
entity (whether or not incorporated) other than the Company that, together with
the Company, is considered under common control and treated as one employer
under Section 414(b), (c), (m) or (o) of the Code.  Except as set forth in
Section 4.9.1 of the Company Disclosure Schedule, none of the Company or, to the
Company’s Knowledge, any other Person or entity, has any express or implied
commitment, whether legally enforceable or not, to modify, change or terminate
any Company Benefit Plan, other than with respect to a modification, change or
termination required by ERISA or the Code.

 

With respect to each Company Benefit Plan, the Company has delivered to Parent
true, correct and complete copies of (A) each Company Benefit Plan (or, if not
written a written summary of its material terms), including without limitation
all plan documents, trust agreements, insurance contracts or other funding
vehicles and all amendments thereto, (B) all summaries and summary plan
descriptions, including any summary of material modifications applicable on or
after January 1, 2000, (C) the most recent annual reports (Form 5500 series)
filed with the IRS with respect to such Company Benefit Plan (and, if the most
recent annual report is a Form 5500R, the most recent Form 5500C filed with
respect to such Company Benefit Plan), (D) the most recent actuarial report or
other financial statement relating to such Company Benefit Plan, (E) the most
recent determination or opinion letter, if any, issued by the IRS with respect
to any Company Benefit Plan and any pending request for such a determination
letter, (F) the most recent nondiscrimination tests performed under the Code
(including 401(k) and 401(m) tests) for each Company Benefit Plan, (G) all
filings made with any Governmental Entity on or after January 1, 2000, including
but not limited to any filings under the Voluntary Compliance Resolution or
Closing Agreement Program or the Department of Labor Delinquent Filer Program.

 

Section 4.9.2                         Compliance With Law.  Each Company Benefit
Plan has been administered in accordance with its terms and all applicable Laws,
including ERISA and the Code, and contributions required to be made under the
terms of any of the Company Benefit

 

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Plans as of the date of this Agreement have been timely made or, if not yet due,
will be properly reflected on the Closing Balance Sheet.  With respect to the
Company Benefit Plans, no event has occurred and, to the Company’s Knowledge,
there exists no condition or set of circumstances in connection with which the
Company could be subject to any material liability (other than for routine
contributions and premium payments, routine benefit liabilities and routine
administrative expenses, in each case consistent with historical contributions,
premium payments, benefit liabilities and administrative expenses with respect
to each such Company Benefit Plan) under the terms of, or with respect to, such
Company Benefit Plans, ERISA, the Code or any other applicable Law.

 

Section 4.9.3                         Code Section 401 Plans.  Except as
disclosed on Section 4.9.3 of the Company Disclosure Schedule:  (A) each Company
Benefit Plan which is intended to qualify under Section 401(a) of the Code has
either received a favorable determination or opinion letter from the IRS as to
its qualified status or the remedial amendment period for such Company Benefit
Plan has not yet expired, and each trust established in connection with any
Company Benefit Plan which is intended to be exempt from federal income taxation
under Section 501(a) of the Code is so exempt, and to the Company’s knowledge no
fact or event has occurred that could adversely affect the qualified status of
any such Company Benefit Plan or the exempt status of any such trust, (B) to the
Company’s knowledge there has been no prohibited transaction (within the meaning
of Section 406 of ERISA or Section 4975 of the Code, other than a transaction
that is exempt under a statutory or administrative exemption) with respect to
any Company Benefit Plan that could result in liability to the Company or an
ERISA Affiliate, (C) each Company Benefit Plan can be amended, terminated or
otherwise discontinued after the Effective Time in accordance with its terms,
without any additional liability whatsoever to the Company or the Company
Benefit Plans (other than (i) liability for ordinary administrative expenses
typically incurred in a termination event or (ii) if the Company Benefit Plan is
a pension benefit plan subject to Part 2 of Subtitle B of Title I of ERISA,
liability for the accrued benefits as of the date of such termination (if and to
the extent required by ERISA) to the extent either there are insufficient assets
set aside in a trust or insurance contract to satisfy such liability or such
liability will be reflected on the Closing Balance Sheet), (D) no suit,
administrative proceeding, action or other litigation has been brought, or to
the Company’s Knowledge is threatened, against or with respect to any such
Company Benefit Plan, including any audit or inquiry by the IRS or United States
Department of Labor (other than routine benefits claims), (E) no Company Benefit
Plan is a multiemployer pension plan (as defined in Section 3(37) of ERISA)
(“Multiemployer Plan”) or other pension plan subject to Title IV of ERISA and
neither the Company nor any ERISA Affiliate has at any time sponsored or
contributed to or been required to contribute to a Multiemployer Plan or other
pension plan subject to Title IV of ERISA, (F) neither the Company nor any ERISA
Affiliate has any liability under ERISA Section 502, (G) all tax, annual
reporting and other governmental filings required by ERISA and the Code have
been timely filed with the appropriate Governmental Entity and all notices and
disclosures have been timely provided to participants, (H) all contributions and
payments, if any, to such Company Benefit Plan are deductible under Code
Sections 162 or 404, (I) no amount is subject to Tax as unrelated business
taxable income under Section 511 of the Code, and (J) no condition exists that
could result in the imposition of an excise tax upon the Company under Chapter
43 of the Code.

 

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SECTION 4.9.4                         [INTENTIONALLY OMITTED].

 

Section 4.9.5                         Code Section 280G; Deductibility.  Except
as set forth on Section 4.9.5 of the Company Disclosure Schedule, no amount that
could be received (whether in cash or property or the vesting of property) as a
result of the consummation of the transactions contemplated by this Agreement by
any employee, officer or director of the Company or any Company Subsidiary who
is a “disqualified individual” (as such term is defined in Treasury Regulation
Section 1.280G-1) under any Company Benefit Plan could be characterized as an
“excess parachute payment” (as defined in Section 280G(b)(1) of the Code). 
There are no payments or benefits that will be made or become payable to any
employee, officer or director of the Company or any Company Subsidiary under
this Agreement or any Company Benefit Plan as in effect as of the date hereof as
a result of the consummation of the transactions contemplated by this Agreement
(excluding any transaction contemplated by the Ancillary Agreements other than
the Severance Agreements), including without limitation payment of the
Management Bonuses and the Carveout Plan Termination Payment, for which the
Company or such Company Subsidiary (as applicable) would be disallowed a federal
or state income tax deduction, whether by reason of Sections 162 or 280G of the
Code, corresponding state Law provisions or otherwise.  As of the Effective
Time, the Management Bonus and the Carveout Plan Termination Payment shall have
been fully earned by the Company employees receiving such payments.

 

Section 4.9.6                         Compliance with COBRA.  Except as required
by Law, no Company Benefit Plan provides any of the following retiree or
post-employment benefits to any Person: medical, disability or life insurance
benefits.  No Company Benefit Plan is a voluntary employee benefit association
under Section 501(a)(9) of the Code.  The Company and each ERISA Affiliate are
in material compliance with (A) the requirements of the applicable health care
continuation and notice provisions of the Consolidated Omnibus Budget
Reconciliation Act of 1985, as amended and the regulations (including proposed
regulations) thereunder and any similar state law and (B) the applicable
requirements of the Health Insurance Portability and Accountability Act of 1996,
as amended, and the regulations (including the proposed regulations) thereunder.

 

Section 4.9.7                         No Employee Plans.  No employee benefit
plans, programs or other arrangements providing incentive compensation or other
benefits similar to those provided under any Company Benefit Plan to any
employee or former employee or dependent thereof is subject to the laws of any
jurisdiction outside of the United States.

 

Section 4.9.8                         Termination of Certain Plans.  No later
than the Effective Time, the Company’s Executive Nonqualified Excess Plan shall
be terminated and the Company shall distribute in a single payment and/or
transfer in their entirety to the plan participants the account balances and
insurance policies described in Section 4.9.8 of the Company Disclosure
Schedule.  Neither the termination of the Executive Nonqualified Excess Plan nor
the distributions made pursuant to the previous sentence will result in any
surrender fees, administrative costs or other fees to the Company.  In
connection with such termination, the Company will obtain from each participant
a release of any further obligation in respect of such plan.  At and after the
Effective Time, the Company shall have no further obligations with regard to
such plan.

 

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Section 4.10                            Labor and Other Employment Matters.

 

Section 4.10.1                  Employees.  Section 4.10.1 of the Company
Disclosure Schedule sets forth a true and complete list of all employees of the
Company or any Company Subsidiary that earned total cash compensation in excess
of One Hundred Thousand Dollars ($100,000) in the calendar year ended December
31, 2004.  Each of the Company and each Company Subsidiary is and at all times
has been in compliance with all applicable Laws respecting labor, employment,
employee classification, fair employment practices, terms and conditions of
employment, independent contractors, child labor, work permits, workers’
compensation, occupational safety, plant closings, and wages and hours.  The
Company is and at all times has been in compliance with the Immigration Reform
and Control Act of 1986 and maintains a current Form I-9, as required by such
Act, in the personnel file of each employee of the Company or any Company
Subsidiary hired after November 9, 1986.  None of Company or any Company
Subsidiary is liable for any payment to any trust or other fund or to any
Governmental Entity, with respect to unemployment compensation benefits, social
security or other benefits or obligations for employees (other than routine
payments to be made in the normal course of business consistent with past
practice and in compliance with applicable Law).  No employees of the Company or
any Company Subsidiary is represented by a labor union, and neither the Company
nor any Company Subsidiary is a party to any collective bargaining agreement.

 

Section 4.10.2                  Employment Arrangements.  The Company has
identified in Section 4.10.2 of the Company Disclosure Schedule and has made
available to Parent true and complete copies (or with respect to undocumented
severance programs and policies, written summaries thereof) of (A) all severance
and employment agreements with directors, officers or employees of or
consultants to the Company or any Company Subsidiary; (B) all severance programs
and policies of the Company and each Company Subsidiary with or relating to its
employees; and (C) all plans, programs, agreements and other arrangements of the
Company and each Company Subsidiary with or relating to its directors, officers,
employees or consultants which contain change in control provisions.  Except as
set forth in Section 4.10.2 of the Company Disclosure Schedule, none of the
execution and delivery of this Agreement or the consummation of the transactions
contemplated hereby will (either alone or as a precondition together with any
other event, such as termination of employment) (1) result in any payment
(including, without limitation, severance, unemployment compensation, parachute
or otherwise) becoming due to any director or any employee of the Company or any
Company Subsidiary or Affiliate from the Company or any Company Subsidiary or
Affiliate under any Company Benefit Plan or agreement listed on Schedule 4.10.2,
(2) significantly increase any benefits otherwise payable under any Company
Benefit Plan or agreement listed on Schedule 4.10.2 or (3) result in any
acceleration of the time of payment or vesting of any material benefits under
any Company Plan or agreement listed on Schedule 4.10.2.  No individual who is a
party to an employment agreement listed in Section 4.10.2 of the Company
Disclosure Schedule or any agreement incorporating change in control provisions
with the Company or any Company Subsidiary has terminated employment or been
terminated, and no notice of termination has been given by the Company or any
Company Subsidiary to any such individual under circumstances that have given,
or could give, rise to a severance obligation on the part of the Company under
such

 

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agreement nor does any condition exist under which any such individual could
terminate his or her employment with the Company or any Company Subsidiary and
give rise to a severance obligation on the Part of the Company under such
agreement.  Section 4.10.2 of the Company Disclosure Schedule sets forth the
Company’s estimates of the amounts (including, without limitation, in the form
of Taxes) payable by the Company or a Company Subsidiary to the executives
listed therein under the Company Benefit Plans (other than any 401(k) Plan as
defined in Section 7.12) and agreements set forth in Section 4.10.2 of the
Company Disclosure Schedule by reason of the transactions contemplated by this
Agreement assuming the employment of such executives is terminated at the
Effective Time, which amounts shall be based on compensation data applicable as
of the date of the Company Disclosure Schedule and the assumptions stated
thereon and shall include, without limitation, any cash-out and any gross-up
payments.

 

Section 4.10.3                  No Claims.  There are no pending or, to the
Company’s Knowledge, threatened claims (other than claims for benefits in the
ordinary course), lawsuits or arbitrations which have been asserted or
instituted against any Company Benefit Plan, any fiduciaries thereof with
respect to their duties to the Company Benefit Plans or the assets of any of the
trusts thereunder which could reasonably be expected to result in any material
liability of the Company or any Company Subsidiary to the PBGC, the Department
of Treasury, the Department of Labor or any Multiemployer Plan.

 

Section 4.11                            Contracts.  Section 4.11 of the Company
Disclosure Schedule sets forth a complete and accurate list as of the date of
this Agreement of all of the following categories of contracts to which the
Company or any Company Subsidiary is a party or by which any of their assets are
bound:

 

(A)                              contracts not made in the ordinary course of
business;

 

(B)                                license agreements or royalty agreements
involving any form of Intellectual Property, whether the Company is the licensor
or licensee thereunder (excluding licenses that are commonly available on
standard commercial terms, such as software “shrink-wrap” licenses);

 

(C)                                confidentiality and non-disclosure agreements
(whether the Company is the beneficiary or the obligated party thereunder),
other than related to commercial transactions in the ordinary course of business
that are not individually material;

 

(D)                               contracts or commitments involving future
expenditures or Liabilities in excess of Twenty-Five Thousand Dollars ($25,000)
after the date hereof or otherwise material to the Company or its business,
other than purchases of Inventory in the ordinary course of business;

 

(E)                                 contracts or commitments relating to
commission arrangements with others that are material to the Company or its
business;

 

(F)                                 employment contracts, consulting contracts,
severance agreements, “stay-bonus” agreements and similar arrangements,
including contracts (A) to employ or terminate

 

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executive officers or other personnel and other contracts with present or former
officers or directors of the Company or any Company Subsidiary or (B) that will
result in the payment by, or the creation of any liability of the Company or the
Surviving Corporation to pay any severance, termination, “golden parachute,” or
other similar payments to any present or former personnel following termination
of employment or otherwise as a result of the consummation of the transactions
contemplated by this Agreement;

 

(G)                                indemnification agreements, other than
related to commercial transactions in the ordinary course of business that are
not individually material;

 

(H)                               promissory notes, loans, agreements,
indentures, evidences of indebtedness, letters of credit, guarantees, or other
instruments relating to an obligation to pay money, whether the Company shall be
the borrower, lender or guarantor thereunder and related to any lien on any of
the Company’s assets (excluding credit provided by the Company in the ordinary
course of business to buyers of its products and obligations to pay vendors in
the ordinary course of business consistent with past practice);

 

(I)                                    contracts containing covenants limiting
the freedom of the Company, or any officer, director, employee or Affiliate of
the Company, to engage in any line of business or compete with any Person that
relates directly or indirectly to the Company or its business;

 

(J)                                   any contract with the federal, state or
local government or any agency or department thereof;

 

(K)                               any contract or other arrangement with a
Related Party (excluding payments to stockholders as such);

 

(L)                                 leases of real property;

 

(M)                            leases of personal property involving annual
payments of more than Ten Thousand Dollars ($10,000); and

 

(N)                               any other contract under which the
consequences of a default or termination would reasonably be expected to have a
Company Material Adverse Effect.

 

Complete and accurate copies of all of the contracts listed in Section 4.11 of
the Company Disclosure Schedule, including all amendments and supplements
thereto, have been delivered to Parent.  Each contract, to which the Company or
a Company Subsidiary is a party or by which any of their assets are bound, of
the type described in this Section 4.11, whether or not set forth in
Section 4.11 of the Company Disclosure Schedule, is referred to herein as a
“Company Material Contract.”  Each Company Material Contract is valid and
binding on the Company and each Company Subsidiary party thereto and, to the
Company’s Knowledge, each other party thereto, and in full force and effect, and
the Company and each Company Subsidiary have performed all obligations required
to be

 

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performed by them to the date hereof under each Company Material Contract and,
to the Company’s Knowledge, each other party to each Company Material Contract
has in all material respects performed all obligations required to be performed
by it under such Company Material Contract.  None of the Company or any Company
Subsidiary knows of, or has received notice of, any violation or default under
(or any condition which with the passage of time or the giving of notice would
cause such a violation of or default under) any Company Material Contract or any
other contract to which it is a party or by which it or any of its properties or
assets is bound.  Section 4.11 of the Company Disclosure Schedule provides the
Company’s good faith estimate of the additional costs which will accrue to the
Company under the contracts described in clause (A) above as a result of the
transactions contemplated by this Agreement or any Ancillary Agreement, and such
estimate is, in the aggregate, accurate in all material respects.

 

Section 4.12                            Litigation.  There is no Action pending
or, to the Company’s Knowledge, threatened or anticipated (A) against, relating
to or affecting the Company, the Stockholder Representative or any of the
Company’s assets employees as such, (B) which seeks to enjoin or obtain damages
in respect of the transactions contemplated hereby, (C) with respect to which
there is a reasonable likelihood of a determination which would prevent the
Company from consummating the transactions contemplated hereby or (D) that
involve any potential criminal liability.  None of the Actions, if adversely
determined against the Company, its directors or officers, or any other Person
could reasonably be expected to result in a loss to the Company, individually or
in the aggregate, in excess of Fifty Thousand Dollars ($50,000), provided that
the foregoing threshold shall not apply to any Action that purports to be
brought in a class or similar representative capacity.  To the Company’s
Knowledge, there is no basis for any Action, which if adversely determined
against the Company, its directors or officers, or any other Person could
reasonably be expected to result in a loss to the Company, individually or in
the aggregate, in excess of Fifty Thousand Dollars ($50,000), provided that the
foregoing threshold shall not apply to any Action that purports to be brought in
a class or similar representative capacity.  There are presently no outstanding
judgments, decrees or orders of any court or any governmental or administrative
agency against or affecting the Company or its business or any of the Company’s
assets.

 

Section 4.13                            Environmental Matters.

 

Section 4.13.1                  Compliance.  The Company and each Company
Subsidiary (A) is in compliance with all, and is not subject to any liability,
with respect to any, applicable Environmental Laws, (B) holds or has applied for
all Environmental Permits necessary to conduct their current operations and (C)
is in compliance with their respective Environmental Permits.

 

Section 4.13.2                  No Violation.  None of the Company or any
Company Subsidiary has received any written notice, demand, letter, claim or
request for information alleging that the Company or any Company Subsidiary may
be in violation of, or liable under, any Environmental Law.

 

Section 4.13.3                  No Litigation.  None of the Company or any
Company Subsidiary (A) has entered into or agreed to any consent decree or order
or is subject to any judgment, decree or judicial order relating to compliance
with Environmental Laws, Environmental Permits or the investigation, sampling,
monitoring, treatment, remediation,

 

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removal or cleanup of Hazardous Materials and, to the Company’s Knowledge, no
investigation, litigation or other proceeding is pending or threatened with
respect thereto, or (B) is an indemnitor in connection with any claim threatened
or asserted in writing by any third-party indemnitee for any liability under any
Environmental Law or relating to any Hazardous Materials.

 

Section 4.13.4                  National Priorities List.  None of the real
property owned or leased by the Company or any Company Subsidiary is listed or,
to the Company’s Knowledge, proposed for listing on the “National Priorities
List” under the Comprehensive Environmental Response, Compensation and Liability
Act of 1980, as amended as of the date hereof, or any similar state or foreign
list of sites requiring investigation or cleanup.

 

Section 4.14                            Intellectual Property.  The Company owns
or has the defensible right to use, whether through ownership, licensing or
otherwise, all Intellectual Property significant to the businesses of the
Company and each Company Subsidiary in substantially the same manner as such
businesses are conducted on the date hereof (“Material Intellectual Property”). 
Except as set forth in Section 4.14 of the Company Disclosure Schedule, (A) no
written claim of invalidity or conflicting ownership rights with respect to any
Material Intellectual Property has been made by a third party and no such
Material Intellectual Property is the subject of any pending or, to the
Company’s Knowledge, threatened action, suit, claim, investigation, arbitration
or other proceeding; (B) no Person or entity has given notice to the Company or
any Company Subsidiary that the use of any Material Intellectual Property by the
Company, any Company Subsidiary or any licensee is infringing or has infringed
any domestic or foreign patent, trademark, service mark, trade name, or
copyright or design right, or that the Company, any Company Subsidiary or any
licensee has misappropriated or improperly used or disclosed any trade secret,
confidential information or know-how; (C) the making, using, selling,
manufacturing, marketing, licensing, reproduction, distribution, or publishing
of any process, machine, manufacture or product related to any Material
Intellectual Property, does not and will not infringe any domestic or foreign
patent, trademark, service mark, trade name, copyright or other intellectual
property right of any third party, and does not and will not involve the
misappropriation or improper use or disclosure of any trade secrets,
confidential information or know-how of any third party; (D) there exists no
prior act or current conduct or use by the Company, any Company Subsidiary or
any third party that would void or invalidate any Material Intellectual
Property; and (E) the execution, delivery and performance of this Agreement and
each Ancillary Agreement by the Company and the consummation of the transactions
contemplated hereby and thereby will not breach, violate or conflict with any
instrument or agreement concerning any Material Intellectual Property, will not
cause the forfeiture or termination or give rise to a right of forfeiture or
termination of any of the Material Intellectual Property or impair the right of
Parent or the Surviving Corporation to make, use, sell, license or dispose of,
or to bring any action for the infringement of, any Material Intellectual
Property.

 

Section 4.15                                Taxes.

 

Section 4.15.1                  Filed Tax Returns.  The Company and each Company
Subsidiary has duly and timely filed all Tax Returns with the appropriate tax
authority required to be filed, taking into account any extensions of time
within which to file such Tax Returns, and

 

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all such Tax Returns were true, complete and correct in all material respects. 
All Taxes owed by the Company and each Company Subsidiary (whether or not shown
on any Tax Return) have been paid.  No claim has ever been made by a tax
authority in a jurisdiction where the Company does not file Tax Returns that the
Company is or may be subject to taxation by that jurisdiction.

 

Section 4.15.2                  Unpaid Taxes.  The unpaid Taxes of the Company
and each Company Subsidiary (A) did not, as of the date of the interim
consolidated financial statements, exceed the reserve for Tax liability
(excluding any reserve for deferred Taxes established to reflect timing
differences between book and Tax income) set forth on the face of such interim
consolidated financial statements (rather than in any notes thereto), and (B)
will not exceed that reserve as adjusted for operations and transactions through
the Effective Time in accordance with the past custom and practice of the
Company and each Company Subsidiary in filing their Tax Returns and the
requirements of clause (7) of the definition of Net Working Capital in Section
3.7.1.

 

Section 4.15.3                  No Audits or Assessments.  There are no audits
or other administrative proceedings or court proceedings presently pending or,
to the Company’s Knowledge, threatened with regard to any Taxes or Tax Returns
of the Company or any Company Subsidiary and none of the Company or any Company
Subsidiary has received any notice or announcement of any audits or
proceedings.  No requests for waivers of time to assess any Taxes are pending
and none of the Company or any Company Subsidiary has waived any statute of
limitations with respect to Taxes or agreed to any extension of time with
respect to any Tax assessment or deficiency for any open tax year.  No
deficiencies for Taxes have been claimed, proposed or assessed in writing by any
tax authority against the Company or any Company Subsidiary.  The Company has
delivered or made available to Parent complete and accurate copies of federal,
state and local Tax Returns of the Company, each Company Subsidiary and any
predecessors for the years ended January 31, 2000, 2001, 2002, 2003 and 2004 and
complete and accurate copies of all examination reports and statements of
deficiencies assessed against or agreed to by the Company or any Company
Subsidiary.  No power of attorney granted by the Company or any Company
Subsidiary with respect to any Taxes is currently in force.

 

Section 4.15.4                  No Tax Liens.  There are no Tax liens upon any
property or assets of the Company or any Company Subsidiary except liens for
current Taxes not yet due and payable and liens for Taxes that are being
contested in good faith by appropriate proceedings and for which adequate
reserves have been made on the face of the financial statements of the Company
(including the Closing Balance Sheet).

 

Section 4.15.5                  Withholding.  The Company and each Company
Subsidiary has withheld and paid all Taxes required to have been withheld and
paid in connection with amounts paid or owing to any employee, independent
contractor, creditor, stockholder, or other third party.

 

Section 4.15.6                  No Tax Sharing Agreements.  None of the Company
or any Company Subsidiary is (A) a party to any Tax allocation or Tax sharing
agreement (other than an agreement exclusively among the Company and the Company
Subsidiaries) or (B) responsible

 

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for the Taxes of any other Person under Treasury Regulation Section 1.1502-6 (or
any similar provision of state, local, or foreign law), as a transferee, by
contract, or otherwise.

 

Section 4.15.7                  No Change in Status.  Neither the Company nor
any Company Subsidiary has: (A) consented at any time under Section 341(f)(1) of
the Code to have the provisions of Section 341(f)(2) of the Code apply to any
disposition of any of the Company’s assets; (B) agreed, or is required, to make
any adjustment under Section 481(a) of the Code by reason of a change in
accounting method or otherwise; or (C) elected at any time to be treated as an S
corporation within the meaning of Sections 1361 and 1362 of the Code.

 

Section 4.15.8                  Controlled Person.  Neither the Company nor any
Company Subsidiary has constituted either a “distributing corporation” or a
“controlled corporation” in a distribution of stock qualifying for tax-free
treatment under Section 355 of the Code (A) in the two (2) years prior to the
date of this Agreement or (B) in a distribution which could otherwise constitute
part of a “plan” or “series of related transactions” (within the meaning of
Section 355(e) of the Code) that includes the Merger.

 

Section 4.15.9                  No Listed Transactions.  Neither the Company nor
any Company Subsidiary has entered into or participated in any transaction
identified as a “listed transaction” for purposes of Treasury Regulations
Sections 1.6011-4(b)(2) or 301.6111-2(b)(2).

 

Section 4.16                            Insurance.  The Company maintains
insurance coverage with reputable insurers, or maintains self-insurance
practices, in such amounts and covering such risks as are in accordance with
normal industry practice for companies engaged in businesses similar to that of
the Company (taking into account the cost and availability of such insurance).
The data provided to Parent by the Company and its Representatives relating to
such insurance coverage is true, correct and complete in all material respects.

 

Section 4.17                            Vote Required.  The affirmative vote of
the holders of two–thirds of the Company Common Stock is the only vote, if any,
of the holders of any class or series of capital stock or other Equity Interests
of the Company necessary to approve the Merger, which stockholder vote shall be
received by the Company and delivered to the Parent immediately after the
execution and delivery by the Company of a counterpart signature page to this
Agreement.

 

Section 4.18                            Brokers.  No broker, finder or
investment banker is entitled to any brokerage, finder’s or other fee or
commission in connection with the Merger based upon arrangements made by or on
behalf of the Company or any Company Subsidiary.

 

Section 4.19                            Approvals.  Section 4.19 of the Company
Disclosure Schedule contains a list of all material approvals or consents
relating to the Company’s business that are required to be given to or obtained
by Company from any Person in connection with the consummation of the
transactions contemplated by this Agreement.

 

Section 4.20                            Product Liability.  The Company has
committed no act, and there has been no omission by the Company, which is
reasonably likely to result in, and there has been

 

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no occurrence relating to any product of the Company which is reasonably likely
to result in, product liability (whether covered by insurance or not) on the
part of the Company, with respect to products distributed, delivered or sold by
the Company prior to the Effective Time.

 

Section 4.21                            Rental Contracts.  All Rental Contracts
are valid, binding and enforceable against all parties thereto in accordance
with their respective terms.  All Rental Contracts are in compliance with
applicable state Law.  The data set forth in Exhibit 4.21 provided to Parent by
the Company and its Representatives relating to the Rental Contracts is true,
correct and complete in all material respects as January 31, 2005, and the
update to such Exhibit to be provided by the Company at least five days prior to
the Effective Time based on the most recent month-end prior thereto, will be
true and correct in all material respects as of such month-end.

 

Section 4.22                                Real Estate.

 

Section 4.22.1                  General.  The Company owns or leases all real
property necessary for the conduct of its business as presently conducted.

 

Section 4.22.2                  Owned Facilities.  Section 4.22.2 of the Company
Disclosure Schedule sets forth all Facilities owned by the Company or to be
acquired by it prior to the Effective Time.  With respect to each parcel of
owned real property, except as set forth on Section 4.22.2 of the Company
Disclosure Schedule, (A the Company has good and marketable fee simple title to
such parcel of real property, free and clear of any and all Encumbrances other
than Permitted Encumbrances, (B) there are no leases, subleases, licenses,
options, rights, concessions or other agreements, written or oral, granting to
any Person the right of use or occupancy of any portion of such parcel of real
property, except for those which constitute a Permitted Encumbrance, (C) there
are no outstanding options or rights of first refusal in favor of any other
party to purchase any such parcel of real property or any portion thereof or
interest therein, (D) there are no Persons (other than the Company) who are in
possession of or who are using any such parcel of real property, except in
connection with a Permitted Encumbrance, and (E) there is no (1) pending or, to
the Company’s Knowledge, threatened condemnation proceeding relating to such
parcel of real property, (2) pending or, to the Company’s Knowledge, threatened
Action relating to such parcel of real property, or (3) other matter adversely
affecting the current or currently proposed use, occupancy or value of, such
parcel of real property in any material respect.

 

Section 4.22.3                  Leased Facilities.  Section 4.22.3 of the
Company Disclosure Schedule sets forth all Facility Leases, true and correct
copies of which have been delivered to Parent.  Such Facility Leases constitute
all leases, subleases or other occupancy agreements pursuant to which the
Company occupies or uses Facilities.  The Company has good and valid leasehold
title to, and enjoys peaceful and undisturbed possession of, all leased property
described in such Facility Leases, free and clear of any and all Encumbrances
other than any Permitted Encumbrances which would not permit the termination of
the applicable Facility Lease therefor by the lessor.  With respect to each such
property noted in the Facility Leases (A) there are no pending or, to the
Company’s Knowledge, threatened condemnation proceedings relating to, or any
pending or, to the Company’s Knowledge, threatened claims or actions

 

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relating to, the Company’s leasehold interests in such Facility Leases or any
portion thereof, (B) neither the Company nor, to the Company’s Knowledge, any
third party has entered into any sublease, license, option, right, concession or
other agreement or arrangement, written or oral, granting to any Person the
right to use or occupy such property or any portion thereof or interest therein,
except in connection with a Permitted Encumbrance and (C) the Company has not
received notice of any pending or threatened special assessment relating to such
leased property or otherwise has any knowledge of any pending or threatened
special assessment relating thereto.

 

With respect to each Facility Lease listed on Section 4.22.3 of the Company
Disclosure Schedule, (A) there has been no material default under any such
Facility Lease by the Company or, to the Company’s Knowledge, by any other
party, (B) the execution, delivery and performance of this Agreement and the
Ancillary Agreements and the consummation of the transactions contemplated
hereby and thereby will not cause a material default under any such Facility
Lease, (C) such Facility Lease is a valid and binding obligation of the lessor,
is in full force and effect with respect to and is enforceable against the
lessor in accordance with its terms, (D) no action has been taken by the
Company, and no event has occurred which, with notice or lapse of time or both,
would permit termination, modification or acceleration by a party thereto other
than the Company without the consent of the Company under any such Facility
Lease that is material to the Company, (E) no party has repudiated in writing to
the Company any term thereof or threatened in writing to the Company to
terminate, cancel or not renew any such Facility Lease that is material to the
Company and (F) the Company has not assigned, transferred, conveyed, mortgaged
or encumbered any interest therein or in any leased property subject thereto (or
any portion thereof).

 

Section 4.22.4                  Certificate of Occupancy.  The Facilities have
received all required approvals of Governmental Entities (including, without
limitation, Company Permits and a certificate of occupancy or other similar
certificate permitting lawful occupancy of the Facilities) required in
connection with the operation thereof and has been operated and maintained in
all material respects in accordance with applicable Law.

 

Section 4.22.5                  Utilities.  The Facilities are supplied with
utilities (including, without limitation, water, sewage, disposal, electricity,
gas and telephone) and other services necessary for the operation of the
Facilities as currently operated, and there is no condition which would
reasonably be expected to result in the termination of the present access from
the Facilities to such utility services.

 

Section 4.23                            Assets Necessary to Continue to Conduct
Business.  Upon consummation of the transactions contemplated by this Agreement,
Parent will obtain the resources necessary to conduct the Company’s business as
currently conducted by Company and the Company Subsidiaries.  The Company’s
business is conducted solely through Company and the Company Subsidiaries.  The
Company owns, leases or otherwise has the right to use all assets and
properties, and holds all rights, used in, or necessary to conduct, the
Company’s business as currently conducted.

 

Section 4.24                                Accounts Receivable.  All accounts
receivables arising under contracts to which the Company or any Company
Subsidiary is a party (including, without

 

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limitation, Rental Contracts) represent bona fide claims against debtors for
sales, services performed or other charges, and all the goods delivered and
services performed that gave rise to such accounts receivable were delivered or
performed in accordance with the applicable contract.  Since January 31, 2004,
the Company has not altered its accounts receivable collection practices or
policies.

 

Section 4.25                            Inventory.  The Inventory consists only
of items of quality and quantity commercially usable and saleable or rentable in
the ordinary course of business consistent with past practice (excluding items
which would not materially adversely effect the value of the Inventory in the
aggregate), and the present quantity of all Inventory is reasonable, in all
material respects, in the present circumstances of the Company’s business. 
Since February 1, 2004, the Company has not purchased or otherwise acquired, or
sold, transferred or otherwise disposed of, any Inventory outside the ordinary
course of business other than Inventory acquired in connection with acquisitions
of businesses.

 

Section 4.26                            Purchase Commitments and Outstanding
Bids.  As of the date of this Agreement, the aggregate of all contracts for the
purchase of products or services by Company in connection with the Company’s
business, other than in the ordinary course of business, does not exceed One
Hundred Thousand Dollars ($100,000).  No outstanding purchase or outstanding
lease commitment of Company presently is in excess of the normal, ordinary and
usual requirements of the Company’s business or was made at any price in excess
of the now current market price or contains terms and conditions more onerous
than those usual and customary in Company’s business.  There are outstanding no
pending obligations of Company in connection with the Company’s business to
lease real property other than the Facility Leases.

 

Section 4.27                            Suppliers.  Section 4.27 of the Company
Disclosure Schedule sets forth a complete and accurate list of the names of the
ten (10) suppliers with the greatest dollar volume of sales to Company during
the calendar year ended December 31, 2004, showing the approximate total
purchases in dollars by Company from each such supplier during such calendar
year.  Since December 31, 2004, there has been no adverse change in the business
relationship of Company with any supplier named in Section 4.27 of the Company
Disclosure Schedule.  The Company has not received any written communication
from any supplier named in Section 4.27 of the Company Disclosure Schedule of
any intention to return, terminate or materially reduce purchases from or
supplies to the Company.

 

Section 4.28                            Foreign Corrupt Practices Act.  Neither
the Company nor Company Subsidiaries nor any predecessor of the Company or
Company Subsidiaries, nor to the Company’s Knowledge, any agent, employee or
other Person associated with or acting on behalf of the Company or any
predecessor has, directly or indirectly, used any corporate funds for unlawful
contributions, gifts, entertainment or other unlawful expenses relating to
political activity, made any unlawful payment to foreign or domestic government
officials or employees or to foreign or domestic political parties or campaigns
from corporate funds, violated any provision of the Foreign Corrupt Practices
Act of 1977, as amended, or made any bribe, rebate, payoff, influence payment,
kickback or other similar unlawful payment.

 

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Section 4.29                            Officers and Directors; Loans.  Section
4.29 of the Company Disclosure Schedule contains a true and complete list of all
the officers and directors of the Company and each Company Subsidiary.  Section
4.29 of the Company Disclosure Schedule contains a true and complete list of all
outstanding loans made to such officers and directors by the Company or any
Company Subsidiary

 

Section 4.30                            Bank Accounts.  Section 4.30 of the
Company Disclosure Schedule contains a list of all of the Company’s bank
accounts, safe deposit boxes and Persons authorized to draw thereon or have
access thereto.

 

Section 4.31                            No Other Agreements to Sell the
Company.  Neither the Company nor any Company Subsidiaries nor any Stockholder
has any legal obligation, absolute or contingent, to any other Person to sell
the Company, its business, assets or any portion thereof or to sell any capital
stock of Company or to effect any merger, consolidation or other reorganization
of Company or to enter into any agreement with respect thereto, except pursuant
to this Agreement.

 

Section 4.32                            Material Misstatements or Omissions. 
The representations and warranties of the Company contained in this Agreement,
the exhibits to this Agreement and the Company Disclosure Schedule, taken as a
whole, do not, and will not, contain any untrue statement of a material fact or
omit to state any material fact necessary to make the statements or facts
contained herein and therein not misleading.

 

ARTICLE 5.
ADDITIONAL REPRESENTATIONS AND WARRANTIES OF THE STOCKHOLDERS

 

Except as set forth in the Company Disclosure Schedule, each of the
Stockholders, severally and not jointly, hereby represents and warrants to
Parent as set forth below.  The sections of the Company Disclosure Schedule are
numbered to correspond to the various subsections of this Article 5, and no
disclosure made in any particular section of the Company Disclosure Schedule
shall be deemed made in any other section of the Company Disclosure Schedule
unless expressly made therein (by cross-reference or otherwise) or it is
reasonably apparent on its face that such disclosure applies to such other
section of the Company Disclosure Schedule.

 

Section 5.1                                   Authority.  Each Stockholder, in
each case, in his, her or its individual capacity only, has all necessary power
and authority to execute and deliver this Agreement and each Ancillary Agreement
to which he, she or it is a party, to perform his, her or its obligations
hereunder and thereunder and to consummate the transactions contemplated by this
Agreement and each Ancillary Agreement to be consummated by such Stockholder,
and no consent of any other Person is required to be obtained by such
Stockholder in such individual capacity in connection therewith by virtue of
such action by the Stockholder in his, her or its individual capacity.  This
Agreement and each Ancillary Agreement to which such Stockholder is a party have
been validly executed and delivered by such Stockholder and constitute a legal,
valid and binding obligation of such Stockholder, enforceable against such
Stockholder in accordance with their respective terms.

 

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Section 5.2                                   No Conflict; Required Filings and
Consents.  The execution and delivery by such Stockholder of this Agreement and
each Ancillary Agreement to which such Stockholder is a party do not, and the
performance by such Stockholder of this Agreement and each such Ancillary
Agreement will not result in any breach of or any loss of any benefit under, or
constitute a default (or an event which with notice or lapse of time or both
would become a default) under, or give to others any right of termination,
vesting, amendment, acceleration or cancellation of, or result in the creation
of a lien or other encumbrance on any property or asset of such Stockholder
pursuant to, any note, bond, mortgage, indenture, contract, agreement, lease,
license, or other instrument or obligation to which such Stockholder is bound in
his, her or its individual capacity.

 

Section 5.3                                   Brokers.  No broker, finder or
investment banker is entitled to any brokerage, finder’s or other fee or
commission in connection with the Merger based upon arrangements made by or on
behalf of such Stockholder.

 

ARTICLE 6.
REPRESENTATIONS AND WARRANTIES OF PARENT AND MERGER SUB

 

Parent and Merger Sub hereby, jointly and severally, represent and warrant to
the Company and the Stockholders as follows:

 

Section 6.1                                   Organization and Qualification;
Subsidiaries.  Parent is a corporation duly organized, validly existing and in
good standing under the laws of the State of Delaware, and has the requisite
power and authority and all necessary governmental approvals to own, lease and
operate its properties and to carry on its business as it is now being
conducted.  Merger Sub is a corporation duly organized, validly existing and in
good standing under the laws of the State of Maryland.  Each of Parent and
Merger Sub is duly qualified or licensed to do business, and is in good
standing, in each jurisdiction where the character of the properties owned,
leased or operated by it or the nature of its business makes such qualification,
licensing or good standing necessary, except as would not reasonably be expected
to result in a Parent Material Adverse Effect.

 

Section 6.2                                   Authority.  Each of Parent and
Merger Sub has all necessary corporate power and authority to execute and
deliver this Agreement and each Ancillary Agreement to which it is party, to
perform its obligations hereunder and thereunder and to consummate the
transactions contemplated by this Agreement and each Ancillary Agreement to be
consummated by it.  The execution and delivery of this Agreement and each
Ancillary Agreement to which it is a party by each of Parent and Merger Sub, as
applicable, and the consummation by Parent and Merger Sub of the transactions
contemplated hereby and thereby have been duly and validly authorized by all
necessary corporate action (including approval by Parent as the sole stockholder
of the Merger Sub), and no other corporate proceedings on the part of Parent and
Merger Sub and no other stockholder votes are necessary to authorize this
Agreement or any such Ancillary Agreement or to consummate the transactions
contemplated hereby or thereby.  This Agreement and each Ancillary Agreement to
which Parent or the Merger Sub is a party have been duly authorized and validly
executed and delivered by Parent and Merger Sub, as applicable, and constitute a
legal, valid and binding obligation of Parent and

 

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MERGER SUB, ENFORCEABLE AGAINST PARENT AND MERGER SUB IN ACCORDANCE WITH THEIR
RESPECTIVE TERMS.

 

Section 6.3                                   No Conflict; Required Filings and
Consents.

 

The execution and delivery of this Agreement and each Ancillary Agreement to
which Parent or Merger Sub is a party do not, and the performance thereof by
Parent and Merger Sub will not, (A) conflict with or violate any provision of
the Articles of Incorporation or Bylaws of Parent or Merger Sub, (B) assuming
that all consents, approvals, authorizations and permits described in
Section 6.3.2 have been obtained and all filings and notifications described in
Section 6.3.2 have been made and any waiting periods thereunder have terminated
or expired, conflict with or violate any Law applicable to Parent or Merger Sub
or any other Subsidiary of Parent (each a “Parent Subsidiary” and, collectively,
the “Parent Subsidiaries”) or by which any property or asset of Parent, Merger
Sub or any Parent Subsidiary is bound or affected or (C) require any consent or
result in any breach of, any loss of any benefit under, constitute a default (or
an event which with notice or lapse of time or both would become a default)
under, or give to others any right of termination, amendment, acceleration or
cancellation of, or result in the creation of a lien or other encumbrance on any
property or asset of Parent, Merger Sub or any Parent Subsidiary pursuant to any
contract to which any of them is a party or by which any of their assets are
bound.

 

The execution and delivery of this Agreement and each Ancillary Agreement to
which Parent or Merger Sub is a party do not, and the performance hereof and
thereof by Parent and Merger Sub will not, require any consent, approval,
authorization or permit of, or filing with or notification to, any Governmental
Entity or other Person, except under the Exchange Act, the rules and regulations
of the Exchange, the HSR Act, filing and recordation of the Articles of Merger
as required by the MGCL.

 

Section 6.4                                   Ownership of Merger Sub; No Prior
Activities.  Parent is the sole stockholder of Merger Sub.  Merger Sub was
formed solely for the purpose of engaging in the transactions contemplated by
this Agreement.  Except for obligations or liabilities incurred in connection
with its incorporation or organization and the transactions contemplated by this
Agreement and each Ancillary Agreement, Merger Sub has not and will not have
incurred, directly or indirectly, through any Subsidiary or Affiliate, any
obligations or liabilities or engaged in any business activities of any type or
kind whatsoever or entered into any agreements or arrangements with any Person.

 

Section 6.5                                   Board Approval.  The Board of
Directors of Parent has approved this Agreement and the transactions
contemplated hereby.

 

Section 6.6                                   Financing.  Parent has furnished
to the Company a copy of the form of Third Amendment to Second Amended and
Restated Loan and Security Agreement, which amends the Second Amended and
Restated Loan and Security Agreement by and among Wells Fargo Retail Finance,
LLC, as arranger and agent, the lenders party thereto, Parent and certain
Affiliates of Parent (as amended, the “Credit Agreement”).  The funds covered by
the Credit Agreement, together with the funds of Parent and its Affiliates, are
sufficient to pay in full the

 

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Purchase Price at the Effective Time.  Assuming the Effective Time occurs during
the month of April 2005, as of the date of this Agreement, Parent believes that
the amount that it will be required to draw under the Credit Agreement to fund
its obligations hereunder on the date of the Effective Time will be $60 million
or less.

 

Section 6.7                                   Brokers.  No broker, finder or
investment banker (other than William Blair & Company) is entitled to any
brokerage, finder’s or other fee or commission in connection with the Merger
based upon arrangements made by or on behalf of Parent or any Parent Subsidiary.

 

ARTICLE 7.
COVENANTS AND AGREEMENTS

 

Section 7.1                                   Conduct of Business by the Company
Pending the Effective Time.  The Company agrees that, between the date of this
Agreement and the Effective Time, except as set forth in Section 7.1 of the
Company Disclosure Schedule or as specifically permitted by any other provision
of this Agreement, unless Parent shall otherwise agree in writing, the Company
will, and will cause each Company Subsidiary to, (A) conduct its operations only
in the ordinary and usual course of business consistent with past practice and
(B) use its commercially reasonable efforts to keep available the services of
the current officers, key employees and consultants of the Company and each
Company Subsidiary and to preserve the current relationships of the Company and
each Company Subsidiary with such of the customers, suppliers and other Persons
with which the Company or any Company Subsidiary has significant business
relations to preserve substantially intact its business organization.  Without
limiting the foregoing, and as an extension thereof, except as set forth in
Section 7.1 of the Company Disclosure Schedule or as specifically permitted by
any other provision of this Agreement, the Company shall not (unless required by
applicable Law), and shall not permit any Company Subsidiary to, between the
date of this Agreement and the Effective Time, directly or indirectly, do, or
agree to do, any of the following without the prior written consent of Parent:

 

Section 7.1.1                             amend or otherwise change its articles
of incorporation or bylaws or equivalent organizational documents;

 

Section 7.1.2                             (A) issue, sell, pledge, dispose of,
grant, transfer, encumber, or authorize the issuance, sale, pledge, disposition,
grant, transfer, or encumbrance of any shares of capital stock of, or other
Equity Interests in, the Company or any Company Subsidiary of any class, or
securities convertible or exchangeable or exercisable for any shares of such
capital stock or other Equity Interests, or any options, warrants or other
rights of any kind to acquire any shares of such capital stock or other Equity
Interests or such convertible or exchangeable securities, or any other ownership
interest (including, without limitation, any such interest represented by
contract right), of the Company or any Company Subsidiary, (B) sell, pledge,
dispose of, transfer, lease, license, guarantee or encumber, or authorize the
sale, pledge, disposition, transfer, lease, license, guarantee or encumbrance
of, any material property or assets (including Intellectual Property) of the
Company or any Company Subsidiary, except pursuant to existing contracts or
commitments or the sale, lease, rental or purchase of Inventory in the

 

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ordinary course of business consistent with past practice or (C) enter into any
commitment or transaction outside the ordinary course of business consistent
with past practice:

 

Section 7.1.3                             declare, set aside, make or pay any
dividend or other distribution (whether payable in cash, stock, property or a
combination thereof) with respect to any of its capital stock (other than
dividends paid by a wholly-owned Company Subsidiary to the Company or to any
other wholly-owned Company Subsidiary) or enter into any agreement with respect
to the voting of its capital stock;

 

Section 7.1.4                             reclassify, combine, split, subdivide
or redeem, purchase or otherwise acquire, directly or indirectly, any of its
capital stock, other Equity Interests or other securities;

 

Section 7.1.5                             (A)  acquire (including, without
limitation, by merger, consolidation, or acquisition of stock or assets) any
interest in any Person or any division thereof or any assets, other than
acquisitions of Inventory in the ordinary course of business consistent with
past practice and any other acquisitions for consideration that is individually
not in excess of Twenty-Five Thousand Dollars ($25,000), or in the aggregate not
in excess of Fifty Thousand Dollars ($50,000), for the Company and the Company
Subsidiaries taken as a whole, (B) incur any indebtedness for borrowed money or
issue any debt securities or assume, guarantee or endorse, or otherwise as an
accommodation become responsible for, the obligations of any Person (other than
a wholly-owned Company Subsidiary) for borrowed money, except for indebtedness
for borrowed money incurred in the ordinary course of business under the
Company’s existing line of credit with Bank of America, N.A., (C) terminate,
cancel or request any material change in, or agree to any material change in,
any Company Material Contract other than in the ordinary course of business
consistent with past practice, (D) make or authorize any capital expenditure in
excess of the Company’s budget as disclosed to Parent prior to the date hereof,
other than capital expenditures that are not in excess of One Hundred Thousand
Dollars ($100,000) in the aggregate for the Company and the Company Subsidiaries
taken as a whole, or (E) enter into or amend any contract, agreement, commitment
or arrangement that, if fully performed, would not be permitted under this
Section 7.1.5;

 

Section 7.1.6                             except as may be required by
contractual commitments or corporate policies with respect to severance or
termination pay in existence on the date of this Agreement as disclosed in
Section 4.11 of the Company Disclosure Schedule: (A) increase the compensation
or benefits payable or to become payable to its directors, officers or key
employees; (B) grant any rights to severance or termination pay to, or enter
into any employment or severance agreement with, any director, officer or other
key employee of the Company or any Company Subsidiary, or establish, adopt,
enter into or amend any collective bargaining, bonus, profit sharing, thrift,
compensation, stock option, restricted stock, pension, retirement, deferred
compensation, employment, termination, severance or other plan, agreement,
trust, fund, policy or arrangement for the benefit of any director, officer or
key employee, except to the extent required by applicable Law; (C) make any
bonus or similar payments, except that the Company may pay the Management Bonus
and the Carveout Plan Termination Payment in accordance with Section 7.1.6 of
the Company Disclosure Schedule; or

 

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(D) take any affirmative action to amend or waive any performance or vesting
criteria or accelerate vesting, exercisability or funding under any Company
Benefit Plan.

 

Section 7.1.7        (A) pre-pay any long-term debt, except in the ordinary
course of business in an amount not to exceed One Hundred Thousand Dollars
($100,000) in the aggregate for the Company and the Company Subsidiaries taken
as a whole, or pay, discharge or satisfy any claims, liabilities or obligations
(absolute, accrued, contingent or otherwise), except in the ordinary course of
business consistent with past practice and in accordance with their terms;
provided, however, that the Company shall not prepay or otherwise accelerate any
payments with respect to the Indebtedness, (B) accelerate or delay collection of
notes or accounts receivable in advance of or beyond their regular due dates or
the dates when the same would have been collected in the ordinary course of
business consistent with past practice, (C) delay or accelerate payment of any
account payable in advance of its due date or the date such liability would have
been paid in the ordinary course of business consistent with past practice, or
(D) vary the Company’s Inventory practices in any material respect from the
Company’s past practices;

 

Section 7.1.8        make any change in accounting policies or procedures, other
than in the ordinary course of business consistent with past practice or except
as required by GAAP;

 

Section 7.1.9        waive, release, assign, settle or compromise any material
claims, or any material litigation or arbitration;

 

Section 7.1.10      (A) make or change any material Tax election, (B) settle or
compromise any material liability for Taxes, (C) enter into any Tax sharing, Tax
indemnity or closing agreement or (D) consent to any extension or waiver of the
limitation period applicable to any claim or assessment in respect of any Tax
with any taxing authority;

 

Section 7.1.11      modify, amend or terminate, or waive, release or assign any
material rights or claims with respect to any confidentiality or standstill
agreement to which the Company is a party;

 

Section 7.1.12      write up, write down or write off the book value of any
assets, except for depreciation and amortization in accordance with GAAP
consistently applied;

 

Section 7.1.13      take any action to exempt or make not subject to any state
takeover law or state law that purports to limit or restrict business
combinations or the ability to acquire or vote shares, any Person or entity
(other than Parent, Merger Sub and any Parent Subsidiary) or any action taken
thereby, which Person, entity or action would have otherwise been subject to the
restrictive provisions thereof and not exempt therefrom;

 

Section 7.1.14      take any action that is intended or would reasonably be
expected to result in any of the conditions to the Merger set forth in Article 8
not being satisfied; or

 

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Section 7.1.15      authorize or enter into any agreement or otherwise make any
commitment to do any of the foregoing.

 

Section 7.2            Cooperation Generally.  The Company and Parent shall
coordinate and cooperate in connection with (A) determining whether any action
by or in respect of, or filing with, any Governmental Entity is required, or any
actions, consents, approvals or waivers are required to be obtained from parties
to any Company Material Contracts, in connection with the consummation of the
Merger and (B) seeking any such actions, consents, approvals or waivers or
making any such filings, furnishing information required in connection therewith
and timely seeking to obtain any such actions, consents, approvals or waivers. 
Parent shall use its commercially reasonable efforts to obtain the financing
contemplated by the Credit Agreement and shall not intentionally take any action
for the principal purpose of causing the financing contemplated by the Credit
Agreement to be unavailable at the Effective Time.

 

Section 7.3            Access to Information; Confidentiality.

 

Section 7.3.1        From the date of this Agreement to the Effective Time, the
Company shall, and shall cause each Company Subsidiary and each of their
respective directors, officers, employees, accountants, consultants, legal
counsel, advisors, and agents and other representatives (collectively,
“Representatives”) to: (A) provide to Parent and Merger Sub and their
Representatives access at reasonable times upon prior notice to the officers,
employees, agents, properties, offices and other facilities of such party and
its Subsidiaries and to the books and records thereof and (B) furnish promptly
such information concerning the business, properties, contracts, assets,
liabilities, personnel and other aspects of such party and its Subsidiaries as
the other party or its Representatives may reasonably request.  No investigation
conducted pursuant to this Section 7.3.1 shall affect or be deemed to modify or
limit any representation or warranty made in this Agreement; provided, however,
that nothing contained in this Section 7.3.1 shall require the Company or any
Company Subsidiary to provide Parent, Merger Sub or their Representatives with
access to the Company’s or any Company Subsidiary’s personnel, facilities or
books and records in accordance with subsection (A) of this Section 7.3.1, or
with Company or Company Subsidiary information in accordance with subsection (B)
of this Section 7.3.1, if such access or information would cause, in the good
faith belief of the Company’s Board of Directors upon receipt of advice of
counsel, the Company to lose the benefit of any attorney-client privilege, work
product doctrine, or similar privilege or doctrine so long as the Company or
relevant Company Subsidiary shall have in good faith endeavored to arrive at a
substitute arrangement, such as a joint defense or similar agreement, to provide
the required access without waiver of the relevant privilege or doctrine.

 

Section 7.3.2        With respect to the information disclosed pursuant to
Section 7.3.1, the Parties shall comply with, and shall cause their respective
Representatives to comply with, all of their respective obligations under the
Confidentiality Agreement dated October 7, 2004, by and between the Company and
Parent (the “Confidentiality Agreement”) attached hereto as Exhibit 7.3.2.

 

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Section 7.4            No Solicitation of Transactions.

 

Section 7.4.1        None of the Company or any Company Subsidiary shall,
directly or indirectly, take (and the Company shall not authorize or permit the
Company Representatives or, to the extent within the Company’s control, other
Affiliates to take) any action to (A) encourage (including by way of furnishing
non-public information), solicit, initiate or facilitate any Acquisition
Proposal, (B) enter into any agreement with respect to any Acquisition Proposal
or enter into any agreement, arrangement or understanding requiring it to
abandon, terminate or fail to consummate the Merger or any other transaction
contemplated by this Agreement or (C) participate in any way in discussions or
negotiations with, or furnish any information to, any Person in connection with,
or take any other action to facilitate any inquiries or the making of any
proposal that constitutes, or could reasonably be expected to lead to, any
Acquisition Proposal.  Upon execution of this Agreement, the Company shall cease
immediately and cause to be terminated any and all existing discussions or
negotiations with any Persons conducted heretofore with respect to an
Acquisition Proposal and promptly request that all confidential information with
respect thereto furnished on behalf of the Company be returned.

 

Section 7.4.2        The Company shall, as promptly as practicable (and in no
event later than 24 hours after receipt thereof), advise Parent of any inquiry
received by it relating to any potential Acquisition Proposal and of the
material terms of any proposal or inquiry, including the identity of the Person
and its Affiliates making the same, that it may receive in respect of any such
potential Acquisition Proposal, or of any information requested from it or of
any negotiations or discussions being sought to be initiated with it, and shall
furnish to Parent a copy of any such proposal or inquiry, if it is in writing,
or a written summary of any such proposal or inquiry, if it is not in writing
and shall keep Parent fully informed on a prompt basis with respect to any
developments with respect to the foregoing.

 

Section 7.5            Appropriate Action; Consents; Filings.

 

Section 7.5.1        The Company and Parent shall use their commercially
reasonable efforts to (A) take, or cause to be taken, all appropriate action,
and do, or cause to be done, all things necessary, proper or advisable under any
applicable Law or otherwise to consummate and make effective the transactions
contemplated by this Agreement and each Ancillary Agreement as promptly as
practicable, (B) obtain from any Governmental Entities any consents, licenses,
permits, waivers, approvals, authorizations or orders required to be obtained or
made by Parent or the Company or any of their respective Subsidiaries, or to
avoid any action or proceeding by any Governmental Entity (including, without
limitation, those in connection with the HSR Act), in connection with the
authorization, execution and delivery of this Agreement and each Ancillary
Agreement and the consummation of the transactions contemplated herein and
therein, including, without limitation, the Merger, and (C) make all necessary
filings, and thereafter make any other required submissions, with respect to
this Agreement and each Ancillary Agreement and the Merger required under (1)
the Exchange Act, and any other applicable federal or state securities Laws, (2)
the HSR Act and (3) any other applicable Law; provided that Parent and the
Company shall cooperate with each other in connection with the making of all
such filings, including providing copies of all such documents to the non-filing
party and its advisors prior to filing and, if requested, to accept all
reasonable

 

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additions, deletions or changes suggested in connection therewith and provided
that nothing in this Section 7.5.1 shall require Parent, Company or any Company
Subsidiary to agree to (a) the imposition of conditions, (b) the requirement of
divestiture of assets or property or (c) the requirement of expenditure of money
by Parent to a third party in exchange for any such consent.  The Company and
Parent shall furnish to each other all information required for any application
or other filing under the rules and regulations of any applicable Law in
connection with the transactions contemplated by this Agreement and each
Ancillary Agreement.  Parent shall pay the filing fee under the HSR Act,
provided that each Party will pay its own Expenses in connection with complying
with the HSR Act.

 

Section 7.5.2        The Parties shall comply with their respective covenants
and obligations set forth in Exhibit 7.5.2 related to the Facility Leases.  The
Parties expressly agree that Exhibit 7.5.2 shall constitute a part of, and be
fully incorporated into, this Agreement as if fully set forth herein for all
purposes.

 

Section 7.5.3        The Company and Parent shall give (or shall cause their
respective Subsidiaries to give) any notices to third parties, and use, and
cause their respective Subsidiaries to use, all commercially reasonable efforts
to obtain any third party consents, (A) necessary, proper or advisable to
consummate the transactions contemplated in this Agreement and each Ancillary
Agreement, (B) required to be disclosed in the Company Disclosure Schedule or
the Parent Disclosure Schedule, as applicable, or (C) required to prevent a
Company Material Adverse Effect from occurring prior to or after the Effective
Time or a Parent Material Adverse Effect from occurring after the Effective
Time.  In the event that any Party shall fail to obtain any third party consent
described in the first sentence of this Section 7.5.3, such Party shall use all
commercially reasonable efforts, and shall take any such actions reasonably
requested by the other Party, to minimize any adverse effect upon the Company
and Parent, their respective Subsidiaries, and their respective businesses
resulting, or which could reasonably be expected to result after the Effective
Time, from the failure to obtain such consent.  Notwithstanding the foregoing,
this Section 7.5.3 shall not apply to third party notices or third party
consents relating to the Facility Leases covered by Section 7.5.2.

 

Section 7.5.4        From the date of this Agreement until the Effective Time,
the Company shall promptly notify Parent in writing of any pending or, to the
Company’s Knowledge, threatened action, suit, arbitration or other proceeding or
investigation by any Governmental Entity or any other Person (A) challenging or
seeking damages in connection with the Merger or the conversion of Company
Common Stock into the Merger Consideration pursuant to the Merger or (B) seeking
to restrain or prohibit the consummation of the Merger or otherwise limit the
right of Parent or any Parent Subsidiary to own or operate all or any portion of
the businesses or assets of the Company or any Company Subsidiary.

 

Section 7.6            Certain Notices.  From and after the date of this
Agreement until the Effective Time, each Party shall promptly notify the other
Party of (A) the occurrence, or non-occurrence, of any event that would be
likely to cause any condition to the obligations of any Party to effect the
Merger and the other transactions contemplated by this Agreement or any
Ancillary Agreement not to be satisfied or (B) the failure of the Company or
Parent, as the case may be, to comply with or satisfy any covenant, condition or
agreement to be complied with or

 

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satisfied by it pursuant to this Agreement or any Ancillary Agreement which
would reasonably be expected to result in any condition to the obligations of
any Party to effect the Merger and the other transactions contemplated by this
Agreement or any Ancillary Agreement not to be satisfied; provided, however,
that the delivery of any notice pursuant to this Section 7.6 shall not cure any
breach of any representation or warranty requiring disclosure of such matter
prior to the date of this Agreement or otherwise limit or affect the remedies
available hereunder to the Party receiving such notice.

 

Section 7.7            Public Announcements.  Parent and the Company shall
consult with each other before issuing any press release or otherwise making any
public statements with respect to the Merger and shall not issue any such press
release or make any such public statement prior to such consultation, except as
may be required by applicable Law or any listing agreement with the Exchange.

 

Section 7.8            Repayment of Officer and Director Loans.  At the
Effective Time, each officer and director of the Company and/or a Company
Subsidiary shall repay in cash all outstanding loans made to such officer by the
Company or any Company Subsidiary.

 

Section 7.9            Tax Matters.

 

Section 7.9.1        Tax Return Filing for Periods Ending on or before the
Effective Time.  Parent shall prepare or cause to be prepared and file or cause
to be filed on a basis consistent with past practice of the Company (but only to
the extent such past practice does not violate any Law or accounting rule) all
Tax Returns for the Company and any Company Subsidiary for all periods ending on
or prior to the Effective Time which are due to be filed after the Effective
Time, and shall present such Tax Returns to the Stockholder Representative for
review at least fifteen (15) Business Days before the date on which such Tax
Returns are required to be filed (or if the filing due date is within forty-five
(45) days following the Effective Time, as promptly as practicable following the
Effective Time).  If the Stockholder Representative, within ten (10) Business
Days after receipt of any such Tax Return, notifies Parent in writing that he
objects to any of the items in such Tax Return, Parent and the Stockholder
Representative shall attempt in good faith to resolve the dispute, and, if they
are unable to do so, the disputed items shall be submitted to the Independent
Auditor for determination of the disputed items prior to the filing deadline of
such Tax Returns. The Stockholders shall pay to Parent, within ten (10) Business
Days after the date on which Taxes are paid with respect to such periods, that
amount equal to such Taxes of the Company and each Company Subsidiary with
respect to such periods, except to the extent that such Taxes are reflected in
the reserve for Tax liability (excluding any reserve for deferred Taxes
established to reflect timing differences between book and Tax income) shown on
the face of the Closing Balance Sheet.  Notwithstanding the foregoing, the
Stockholder Representative shall prepare or cause to be prepared at its sole
expense and on a basis consistent with past practice of the Company (but only to
the extent such past practice does not violate any Law or accounting rule)
federal and state income Tax Returns of the Company and any Company Subsidiary
for the fiscal year ended January 31, 2005 (the “2004 Tax Returns”).  With
regard to any 2004 Tax Return to be prepared by the Stockholder Representative
pursuant to this Section 7.9.1, the Stockholder Representative shall provide a
copy of such Tax Return to the Parent (with copies to its Chief

 

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Financial Officer and Chief Administrative Officer) not less than ten (10)
Business Days prior to the date the related Tax Return is to be filed and make
available to Parent all supporting data that Parent shall reasonably request. 
If Parent, within ten (10) Business Days after receipt of any such Tax Return,
notifies the Stockholder Representative in writing that it objects to any of the
items in such Tax Return, Parent and the Stockholder Representative shall
attempt in good faith to resolve the dispute, and, if they are unable to do so,
the disputed items shall be submitted to the Independent Auditor for
determination of the disputed items prior to the filing deadline in the case of
any such Tax Returns.  Upon compliance with the procedures set forth in the
immediately preceding two sentences (including, as required, any determination
by the Independent Auditor), Parent shall cause a duly authorized officer of the
Company to sign and file the related Tax Return, it being expressly understood
that the Stockholder Representative shall have no independent authority under
agency or any other theory to execute any Tax Return on behalf of the Company
from and after the Effective Time.

 

Section 7.9.2        Tax Returns for Straddle Periods.  Parent shall prepare or
cause to be prepared and file or cause to be filed any Tax Returns of the
Company and any Company Subsidiary for Straddle Periods and shall present such
Tax Returns to the Stockholder Representative for review at least fifteen (15)
Business Days before the date on which such Tax Returns are required to be filed
(or if the filing due date is within forty-five (45) days following the
Effective Time, as promptly as practicable following the Effective Time).  If
the Stockholder Representative, within ten (10) Business Days after receipt of
any such Tax Return, notifies Parent in writing that he objects to any of the
items in such Tax Return, Parent and the Stockholder Representative shall
attempt in good faith to resolve the dispute, and, if they are unable to do so,
the disputed items shall be submitted to the Independent Auditor for
determination prior to the filing deadline of such Tax Returns.  The
Stockholders shall pay to Parent within ten (10) Business Days after the date on
which Taxes are paid with respect to such Straddle Periods, that amount equal to
the portion of such Taxes which relates to the portion of such Straddle Period
ending at the Effective Time, except to the extent that such Taxes are reflected
in the accrual for Tax liability (excluding any reserve for deferred Taxes
established to reflect timing differences between book and Tax income) shown on
the face of Closing Balance Sheet.  For purposes of the preceding sentence,
Taxes shall be allocated in the manner set forth in the last sentence of Section
10.2.3 hereof.

 

Section 7.9.3        Special Procedures to Apply to Deduction of the Management
Bonus and Carveout Plan Termination Payment.  Notwithstanding the provisions of
Section 7.9.1, the Stockholder Representative shall prepare or cause to be
prepared at its sole expense and on a basis consistent with past practice of the
Company (but only to the extent such past practice does not violate any Law or
accounting rule) federal and state income Tax Returns of the Company and any
Company Subsidiary for the period from February 1, 2005 through the Effective
Time (each a “Stub Period Return”), certain of which Tax Returns the Parties
acknowledge will include a compensation expense deduction for the payments and
payroll taxes (A) related to the Tax Adjusted Management Bonus Amount in the
expected amount of $5,580,000 and (B) the Carveout Plan Termination Payment in
the expected amount of approximately $1,150,000 (together, the “Bonus
Deduction”).  In each instance in which a Stub Period Return includes the Bonus
Deduction, at the time of filing of the return, a reasonably

 

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detailed calculation will be prepared by the Stockholder Representative of the
income Tax due with, and without, the Bonus Deduction (each a “Stub Period Tax
Benefit Calculation”).  Parent shall pay to the Stockholder Representative for
the benefit of the Stockholders within ten (10) Business Days after the later of
the date on which a given Stub Period Return is filed and the related Stub
Period Tax Benefit Calculation is approved (as set forth below), an amount equal
to (a) in the case of federal income Taxes, the full amount of reduction in
federal income Taxes due to the Bonus Deduction as reflected in the Stub Period
Tax Benefit Calculation, and (b) in the case of any state income Taxes, the full
amount of reduction in state income Taxes due to the Bonus Deduction as
reflected in the Stub Period Tax Benefit Calculation, multiplied by a factor
equal to one minus the maximum marginal federal income Tax rate then applicable
to corporations provided for in the Code, presently 35% (the “General Tax
Benefit Factor”).  If by virtue of including the Bonus Deduction in a Stub
Period Return, the full amount of such Bonus Deduction cannot be utilized and a
resulting net operating loss carryover is created, to the extent permitted by
applicable Law, the Stockholder Representative may if it elects prepare or cause
to be prepared at its sole expense and on a basis consistent with past practice
of the Company (but only to the extent such past practice does not violate any
Law or accounting rule) amended federal and state income Tax Returns of the
Company for one or more periods prior to the period covered by the Stub Period
Returns solely for the purpose of requesting refunds by virtue of the carryback
to a prior period of any net operating loss deduction caused by the inability to
utilize fully the Bonus Deduction in a Stub Period Return (each a “Carryback Tax
Return”).  Upon receipt by the Company of a cash payment from a taxing authority
in respect of a Carryback Tax Return, Parent shall cause the Company to pay to
the Stockholder Representative for the benefit of the Stockholders an amount
equal to (x) in the case of federal income Taxes, the full amount of the refund
resulting from the filing of the Carryback Tax Return, and (y) in the case of
any state income Taxes, the full amount of the refund resulting from the
Carryback Return, multiplied by the General Tax Benefit Factor.  With regard to
any Stub Period Tax Return, Carryback Tax Return or Stub Period Tax Benefit
Calculation to be prepared by the Stockholder Representative pursuant to this
Section 7.9.3, the Stockholder Representative shall provide a copy of such Tax
Return or calculation, as the case may be, to the Parent (with copies to its
Chief Financial Officer and Chief Administrative Officer) not less than ten (10)
Business Days prior to the date the related Tax Return is to be filed and make
available to Parent all supporting data that Parent shall reasonably request. 
If Parent, within ten (10) Business Days after receipt of any such Stub Period
Tax Return, Carryback Tax Return or Stub Period Tax Benefit Calculation,
notifies the Stockholder Representative in writing that it objects to any of the
items in such Tax Return or Stub Period Tax Benefit Calculation, Parent and the
Stockholder Representative shall attempt in good faith to resolve the dispute,
and, if they are unable to do so, the disputed items shall be submitted to the
Independent Auditor for determination of the disputed items prior to the filing
deadline in the case of any such Tax Returns or as promptly as reasonably
practicable in the case of a Stub Period Tax Benefit Calculation.  Upon
compliance with the procedures set forth in the immediately preceding two
sentences (including, as required, any determination by the Independent
Auditor), Parent shall cause a duly authorized officer of the Company to sign
and file the related Stub Period Tax Return or Carryback Tax Return, as the case
may be, it being expressly understood that the Stockholder Representative shall
have no independent authority under agency or any other theory to execute any
Tax Return on behalf of the Company from and after the Effective Time.  Any
amount payable by Parent to the Stockholder Representative

 

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pursuant to this Section 7.9.3 shall be paid without offset or deduction of any
kind (other than in respect of a claim pending pursuant to Section 10.2.3 at the
time after the Escrowed Funds have been fully disbursed or reserved) to the
Stockholder Representative for the benefit of the Stockholders and shall be
deemed an adjustment to the Purchase Price.  The sole and exclusive purpose of
this Section 7.9.3 is to document the agreement by Parent to cooperate with the
Stockholder Representative on behalf of the Stockholders to obtain the income
tax benefit of the Bonus Deduction, it being expressly understood that (1) such
agreements do not limit, waive, modify, or otherwise change in any way the
representations, warranties and indemnities provided by the Stockholders in
respect of Tax matters, (2) by virtue of Section 4.9.5 the Stockholders have
expressly represented that each element of the Bonus Deduction is a valid and
proper deduction for federal and applicable state income Tax purposes and (3) if
for any reason the Bonus Deduction or any portion thereof is disallowed after
one or more payments have been made in respect of the Tax benefit of such
deduction hereunder, the related Damages shall be deemed to involve Taxes, shall
be subject to indemnification in accordance with the provisions of Section
10.2.3 and shall not be subject to any of the limitations set forth in Section
10.4.

 

Section 7.9.4        Special Procedures to Apply to Personal Property Taxes. 
Notwithstanding the provisions of Sections 7.9.1 and 7.9.2, the Stockholders
shall not pay or be responsible for any personal property Taxes of the Company
or any Company Subsidiary it such personal Property Taxes are due after the
Effective Time.

 

Section 7.9.5        Cooperation on Tax Matters.  Parent, the Stockholder
Representative, the Stockholders, the Company and each Company Subsidiary shall
cooperate fully, as and to the extent reasonably requested by the other party,
in connection with the filing of Tax Returns pursuant to this Agreement and any
audit, litigation or other proceeding with respect to Taxes.  Such cooperation
shall include the retention and (upon the other Party’s request) the provision
of records and information which are reasonably relevant to any such audit,
litigation or other proceeding and making employees available on a mutually
convenient basis to provide additional information and explanation of any
material provided hereunder.  Following the Effective Time, the Company and the
Surviving Corporation shall not, and shall not cause or permit any of their
Subsidiaries to, file any amendment or adjustment to any Tax Return with respect
to taxable periods or portions thereof ending on or prior to the Effective Time
without Parent’s and Stockholder Representative’s prior written consent, which,
in each case, shall not be unreasonably withheld or delayed.

 

Section 7.9.6        Transfer Taxes.  All transfer, documentary, sales, use,
stamp, registration and other substantially similar Taxes and fees (including
any penalties and interest) incurred in connection with this Agreement
(collectively, “Transfer Taxes”) shall be paid by the Stockholders when due, and
the Stockholders will, at their own expense, file all necessary Tax Returns and
other documentation with respect to all such Transfer Taxes and, if required by
applicable law, Parent will, and will cause its affiliates to, join in the
execution of any such Tax Returns and other documentation.

 

Section 7.9.7        FIRPTA Certificate.  The Company shall have delivered to
Parent a form of notice to the IRS in accordance with the requirements of
Treasury Regulations Section 1.897-2(h)(2) and in form and substance reasonably
acceptable to Parent along with

 

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written authorization for Parent to deliver such notice form to the IRS on
behalf of the Company upon the Effective Time.

 

Section 7.9.8        Forms W-9.  Prior to a Stockholder’s receipt of payment of
the amounts to which such holder has a right to receive pursuant to the
provisions of Article 3, each such holder shall have delivered to Parent a
properly completed and duly executed IRS Form W-9 or IRS Form W-8BEN (or
suitable substitute form) establishing an exemption from backup withholding.

 

Section 7.10         Company’s Auditors.  The Company and the Stockholders will
use commercially reasonable efforts to cause its management and independent
auditors, to facilitate on a timely basis (A) the preparation of financial
statements (including pro forma financial statements if required) as required by
Parent to comply with applicable SEC regulations and (B) the review of any
Company or predecessor audit work papers, including, as applicable, the review
of selected interim financial statements and data.

 

Section 7.11         Confidential Information.  Each of the Stockholders
acknowledges that Parent is acquiring in the Merger information that constitutes
trade secrets.  Such trade secret information includes, without limitation,
information related to customers, including customer lists, the identities of
existing, past or prospective customers, prices charged or proposed to be
charged to customers, the quantity and quality of customary mail, customer
contacts, special customer requirements and all related information, marketing
techniques, compilations of information, copyrightable material and technical
information (collectively, “Confidential Information”).  None of the
Stockholders shall directly or indirectly disclose to any Person other than the
duly authorized Representatives of Parent or use for their benefit (other than
as an employee of the Company) any of the Confidential Information, except as
may be required by law or by a court or arbitrator.

 

Section 7.12         Treatment of Company Benefit Plans.  Unless Parent directs
otherwise in writing, the Company Board shall adopt resolutions terminating,
effective at least two (2) days prior to the Effective Time, any Company Benefit
Plan which is intended to meet the requirements of Section 401(k) of the Code
(each such Company Benefit Plan, a “401(k) Plan”) together with any other
Company Benefit Plan designated in writing by Parent that is a “welfare plan”
within the meaning of Section 3(1) of ERISA.  At or prior to the Effective Time,
the Company shall provide Parent (A) executed resolutions of the Company Board
authorizing such termination(s), (B) an executed amendment to each such 401(k)
Plan sufficient to assure compliance with all applicable requirements of the
Code and regulations thereunder and (C) an executed amendment to each such
401(k) Plan providing that distributions from such plan shall be made solely in
the form of a lump sum and that any other forms of distribution shall cease to
be available.  Parent shall take all commercially reasonable efforts to cause
the Parent 401(k) Plan to accept as “eligible rollover distributions” within the
meaning of Section 402(c) of the Code the account balances of participants in
the Company’s 401(k) Plan immediately before the Effective Time who become
participants in the Parent 401(k) Plan following the Effective Time that are
distributed in connection with the termination of the Company’s 401(k) Plan.

 

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Section 7.13         Delivery of Ancillary Agreements.  Without limiting any of
the covenants contained in this Agreement, each party to an Ancillary Agreement
agrees on the Closing Date to execute and deliver all such Ancillary Agreements
to which such Person is a party.

 

Section 7.14         Payment of William Blair Fees.  Parent acknowledges and
agrees that it is solely responsible for the payment of the investment banking
fees of William Blair & Company LLC.

 

Section 7.15         Termination of Retirement Agreement.  The Company and
Lawana J. O’Brien hereby confirm that the “Retirement Agreement” by and between
them has terminated with no further payments or other obligations due
thereunder.

 

Article 8.

Closing Conditions

 

Section 8.1            Conditions to Obligations of Each Party Under This
Agreement.  The respective obligations of each Party to effect the Merger and
the other transactions contemplated herein shall be subject to the satisfaction
at or prior to the Effective Time of the following conditions, any or all of
which may be waived, in whole or in part, to the extent permitted by applicable
Law:

 

Section 8.1.1        No Order.  No Governmental Entity, nor any federal or state
court of competent jurisdiction or arbitrator shall have enacted, issued,
promulgated, enforced or entered any statute, rule, regulation, executive order,
decree, judgment, injunction or arbitration award or finding or other order
(whether temporary, preliminary or permanent), in any case which is in effect
and which prevents or prohibits consummation of the Merger or any other
transactions contemplated in this Agreement or any Ancillary Agreement.

 

Section 8.1.2        HSR Act.  Any applicable waiting periods, together with any
extensions thereof, under the HSR Act and the antitrust or competition laws of
any other applicable jurisdiction shall have expired or been terminated.

 

Section 8.1.3        Extension of Warehouse Lease.  The Company and MACBEN, LLC
shall have entered into an extension of the Facility Lease for the Company’s
warehouse located at 4626 Wedgwood Boulevard, Frederick, Maryland, which
extension shall be reasonably acceptable in form and substance to Parent and
shall contain only the following material provisions:  (A) the term of such
extension shall be five years, subject to the Company’s right to terminate upon
12 months’ prior notice given not earlier than the first day of such extension
period; (B) the rent shall not be increased (other than through continuation of
the existing standard CPI adjustment); and (C) the Warehouse Building Management
Agreement, dated as of January 3, 2001, by and between the Company and MACBEN,
LLC shall not be terminated and shall be extended on the same terms as such
Facility Lease.

 

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Section 8.2            Additional Conditions to Obligations of Parent and Merger
Sub.  The obligations of Parent and Merger Sub to effect the Merger and the
other transactions contemplated herein are also subject to the following
conditions:

 

Section 8.2.1        Representations and Warranties.  Each of the
representations and warranties of the Company contained in this Agreement and
each Ancillary Agreement that are qualified by materiality shall be true and
correct as of the date hereof and as of the Effective Time as though made on and
as of the Effective Time (except that those representations and warranties which
address matters only as of a particular date need only be true and correct as of
such date), and all representations and warranties which are not so qualified
shall be true and correct in all material respects (except that those
representations and warranties which address matters only as of a particular
date need only remain true and correct in all material respects as of such
date).  Parent shall have received a certificate of the Chief Executive Officer
or Chief Financial Officer of the Company to that effect.

 

Section 8.2.2        Agreements and Covenants.  The Company shall have performed
or complied in all material respects with all agreements and covenants required
by this Agreement and each Ancillary Agreement to be performed or complied with
by it at or prior to the Effective Time.  Parent shall have received a
certificate of the Chief Executive Officer or Chief Financial Officer of the
Company to that effect.

 

Section 8.2.3        Consents and Approvals.  (A) All consents, approvals and
authorizations of any Person or Governmental Entity required to be set forth in
Section 4.5 or Section 6.3 or the related sections of the Company Disclosure
Schedule (other than the consents of landlords under the Facility Leases
pursuant to Section 7.5.2) shall have been obtained in each case, without (1)
the imposition of conditions, (2) the requirement of divestiture of assets or
property or (3) the requirement of expenditure of money by Parent to a third
party in exchange for any such consent and (B) the conditions to the obligations
of Parent set forth in Exhibit 7.5.2 regarding the Facility Leases shall have
been satisfied with respect to all consents, releases and amendments referred to
therein in accordance with the provisions of Exhibit 7.5.2 and shall be
reasonably acceptable in form and substance to Parent.

 

Section 8.2.4        Material Adverse Effect.  Since the date of this Agreement,
there shall not have occurred any Company Material Adverse Effect or any event
or development that would, individually or in the aggregate, reasonably be
expected to have a Company Material Adverse Effect.

 

Section 8.2.5        Court Proceedings.  No action or claim shall be pending or
threatened before any court or quasi-judicial or administrative agency of any
federal, state, local or foreign jurisdiction or before any arbitrator wherein
an unfavorable injunction, judgment, order, decree, ruling or charge would (A)
prevent consummation of any of the transactions contemplated by this Agreement
or any Ancillary Agreement, (B) cause any of the transactions contemplated by
this Agreement or any Ancillary Agreement to be rescinded following consummation
thereof or (C) affect adversely the right or powers of Parent to own, operate or
control the Company, and no such injunction, judgment, order, decree, ruling or
charge shall be in effect.

 

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Section 8.2.6        Ancillary Agreements.  Parent shall have received executed
copies of each of the Ancillary Agreements, and each of such Ancillary
Agreements shall be in full force and effect.

 

Section 8.2.7        Resignation of Officers and Directors.  Each director and
officer of the Company whom Parent has requested resign pursuant to Section 2.5
shall have tendered his or her resignation, and the Company shall have delivered
a copy of all such resignations to Parent.

 

Section 8.2.8        Results for Year Ended January 31, 2005.  The Company’s
audited consolidated financial statements for the year ended January 31, 2005
shall have been delivered to Parent, and the Company’s Adjusted Pre-Tax Net
Income derived from such financial statements shall be no less than Eight
Million Five Hundred Thousand Dollars ($8,500,000).

 

Section 8.2.9        Employment Status of Kenneth O’Brien.  Kenneth O’Brien
shall not have ceased to be an employee of the Company or suffered any event
which with the passage of time would constitute Disability (as defined in the
Employment Agreement)

 

Section 8.2.10      Release of Lien on Warehouse.  Parent shall have received a
release in form and substance reasonably acceptable to Parent of the Company’s
guarantee relating to the warehouse facility located at 4626 Wedgwood Boulevard,
Frederick, Maryland.

 

Section 8.2.11      Financing.  Parent shall have obtained, through the Credit
Agreement or otherwise, financing sufficient to pay in full the Purchase Price
at the Effective Time.

 

Section 8.2.12      Termination of Rights Under Investors Agreement.  Parent
shall have received an acknowledgement in form and substance reasonably
acceptable to Parent of the termination of rights under the Investors Agreement
from each of Kenneth M. O’Brien, Anthony Jacobs and Simon Jacobs.

 

Section 8.3            Additional Conditions to Obligations of the Company.  The
obligation of the Company to effect the Merger and the other transactions
contemplated herein are also subject to the following conditions:

 

Section 8.3.1        Representations and Warranties.  Each of the
representations and warranties of Parent and Merger Sub contained in this
Agreement and each Ancillary Agreement that are qualified by materiality shall
be true and correct as of the date hereof and as of the Effective Time as though
made on and as of the Effective Time (except that those representations and
warranties which address matters only as of a particular date need only be true
and correct as of such date), and all representations and warranties which are
not so qualified shall be true and correct in all material respects (except that
those representations and warranties which address matters only as of a
particular date need only remain true and correct in all material respects as of
such date).  The Company shall have received a certificate of an officer of
Parent to that effect.

 

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Section 8.3.2        Agreements and Covenants.  Parent and Merger Sub shall have
performed or complied in all material respects with all agreements and covenants
required by this Agreement and each Ancillary Agreement to be performed or
complied with by them at or prior to the Effective Time.  The Company shall have
received a certificate of an officer of Parent to that effect.

 

Section 8.3.3        Consents and Approvals.  (A) All consents, approvals and
authorizations of any Governmental Entity set forth in Section 4.5.2 or Section
6.3.2, or required to be set forth in the related sections of the Company
Disclosure Schedule shall have been obtained and (B) the conditions to the
obligations of the Company set forth in clause (b) of Section A and Section D of
Exhibit 7.5.2 regarding the Facility Leases shall have been satisfied.

 

Section 8.3.4        Ancillary Agreements.  The parties to the Ancillary
Agreements (other than Parent) shall have received executed copies of each of
the Ancillary Agreements to which such Person is a party, and each of such
Ancillary Agreements shall be in full force and effect.

 

Article 9.

Termination, Amendment and Waiver

 

Section 9.1            Termination.  This Agreement may be terminated, and the
Merger contemplated hereby may be abandoned, at any time prior to the Effective
Time, by action taken or authorized by the Board of Directors of the terminating
Party or Parties:

 

Section 9.1.1        By mutual written consent of Parent and the Company;

 

Section 9.1.2        By either the Company or Parent if the Merger shall not
have been consummated prior to April 15, 2005; provided, however, that such date
may, from time to time, be extended (A) by the Company (by written notice
thereof to Parent) up to and including May 15, 2005 in the event all conditions
to effect the Merger other than those set forth in Sections 8.1.2, 8.2.3 and
8.2.5 have been or are capable of being satisfied at the time of each such
extension and the conditions set forth in Sections 8.1.2, 8.2.3 and 8.2.5 have
been or are reasonably capable of being satisfied on or prior to May 15, 2005 or
(B) by Parent (by written notice thereof to the Company) up to and including May
31, 2005 in the event all conditions to effect the Merger other than those set
forth in Sections 8.1.2, 8.2.3, 8.2.4 or 8.2.5 (the “Regulatory and Consent
Conditions”) have been or are capable of being satisfied at the time of each
such extension and the Regulatory and Consent Conditions have been or are
reasonably capable of being satisfied on or prior to May 31, 2005, provided
further that the right to terminate this Agreement under this Section 9.1.2
shall not be available to any Party whose failure to fulfill any obligation
under this Agreement has been the cause of, or resulted in, the failure of the
Merger to occur on or before such date;

 

Section 9.1.3        By either the Company or Parent if any Governmental Entity
shall have issued an order, decree or ruling or taken any other action
permanently restraining, enjoining or otherwise prohibiting the transactions
contemplated by this

 

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Agreement or any Ancillary Agreement, and such order, decree, ruling or other
action shall have become final and nonappealable (which order, decree, ruling or
other action the Parties shall have used their commercially reasonable efforts
to resist, resolve or lift, as applicable, subject to the provisions of Section
7.5);

 

Section 9.1.4        By Parent, (A) if since the date of this Agreement, there
shall have been any event, development or change of circumstance that
constitutes, has had or could reasonably be expected to have, individually or in
the aggregate, a Company Material Adverse Effect and such Company Material
Adverse Effect is not cured within ten (10) Business Days after written notice
thereof or if (B)(1) there shall be breached any covenant or agreement on the
part of a Party other than Parent or Merger Sub set forth in this Agreement or
any Ancillary Agreement, (2) any representation or warranty of a Party other
than Parent or Merger Sub set forth in this Agreement or any Ancillary Agreement
that is qualified as to materiality shall have become untrue or (3) any
representation or warranty of a Party other than Parent or Merger Sub set forth
in this Agreement or any Ancillary Agreement that is not so qualified shall have
become untrue in any material respect, (C) such breach or misrepresentation is
not cured within ten (10) Business Days after written notice thereof and (D)
such breach of misrepresentation would cause the conditions set forth in Section
8.2.1 or Section 8.2.2 not to be satisfied; or

 

Section 9.1.5        By the Company, if (A)(1) Parent or Merger Sub has breached
any covenant or agreement on the part of Parent or Merger Sub set forth in this
Agreement or any Ancillary Agreement, (2) any representation or warranty of
Parent or Merger Sub set forth in this Agreement or any Ancillary Agreement that
is qualified as to materiality shall have become untrue or (3) any
representation or warranty of Parent or Merger Sub set forth in this Agreement
or any Ancillary Agreement that is not so qualified shall have become untrue in
any material respect, (B) such breach or misrepresentation is not cured within
ten (10) Business Days after written notice thereof and (C) such breach or
misrepresentation would cause the conditions set forth in Section 8.3.1 or
Section 8.3.2 not to be satisfied.

 

Section 9.2            Effect of Termination.

 

Section 9.2.1        Limitation on Liability.  In the event of termination of
this Agreement by either the Company or Parent as provided in Section 9.1, this
Agreement shall forthwith become void and there shall be no liability or
obligation on the part of Parent or the Company or their respective
Subsidiaries, officers or directors except (A) with respect to Section 7.7, this
Section 9.2 and Article 11 and (B) with respect to any liabilities or damages
incurred or suffered by a Party as a result of the intentional and material
breach by another Party of any of its representations, warranties, covenants or
other agreements set forth in this Agreement or any Ancillary Agreement.

 

Section 9.2.2          Parent Expenses.  Parent and the Company agree that if
this Agreement is terminated pursuant to the terms of subsections (B), (C) and
(D) of Section 9.1.4, then the Company shall pay Parent, as the sole and
exclusive remedy of Parent with respect to the breaches set forth in subsections
(B), (C) and (D) of Section 9.1.4 (other than

 

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an intentional and material breach on the part of the Company), an amount equal
to the sum of Parent’s Expenses up to an amount equal to One Million Dollars
($1,000,000).

 

SECTION 9.2.3        COMPANY EXPENSES.  PARENT AND THE COMPANY AGREE THAT IF
THIS AGREEMENT IS TERMINATED PURSUANT TO SECTION 9.1.5, THEN PARENT SHALL PAY TO
THE COMPANY, AS THE SOLE AND EXCLUSIVE REMEDY OF THE COMPANY WITH RESPECT TO THE
BREACHES SET FORTH IN SUBSECTIONS (A), (B) AND (C) OF SECTION 9.1.5 (OTHER THAN
AN INTENTIONAL AND MATERIAL BREACH ON THE PART OF PARENT) AN AMOUNT EQUAL TO THE
SUM OF THE COMPANY’S EXPENSES UP TO AN AMOUNT EQUAL TO ONE MILLION DOLLARS
($1,000,000) (BUT WITHOUT DUPLICATION OF ANY PAYMENT MADE PURSUANT TO THE NEXT
SENTENCE).  PARENT AND THE COMPANY FURTHER AGREE THAT IF (A) THIS AGREEMENT IS
TERMINATED BY PARENT OR THE COMPANY PURSUANT TO SECTION 9.1.2, (B) AT THE TIME
OF SUCH TERMINATION THE CONDITIONS SPECIFIED IN SECTIONS 8.1 AND 8.2.1 THROUGH
8.2.10 HAD BEEN SATISFIED OR (IN THE CASE OF THE CONDITIONS SPECIFIED IN
SECTIONS 8.2.1, 8.2.2, 8.2.3, 8.2.6 AND 8.2.7) WERE REASONABLY CAPABLE OF BEING
SATISFIED AT A CLOSING HELD ON OR PRIOR TO SUCH DATE, AND (C) THE CONDITION
SPECIFIED IN SECTION 8.2.11 HAS NOT BEEN SATISFIED, THEN PARENT SHALL PAY TO THE
COMPANY, AS THE SOLE AND EXCLUSIVE REMEDY OF THE COMPANY WITH RESPECT TO THE
FAILURE OF THE PARENT TO ACHIEVE THE CONDITION SET FORTH IN SECTION 8.2.11
(OTHER THAN AN INTENTIONAL AND MATERIAL BREACH OR FAILURE ON THE PART OF
PARENT), AN AMOUNT EQUAL TO THE SUM OF THE COMPANY’S EXPENSES UP TO AN AMOUNT
EQUAL TO ONE MILLION DOLLARS ($1,000,000) (BUT WITHOUT DUPLICATION OF ANY
PAYMENT MADE PURSUANT TO THE IMMEDIATELY PRECEDING SENTENCE).

 

SECTION 9.2.4        PAYMENT OF EXPENSES.  PAYMENT OF EXPENSES PURSUANT TO
SECTION 9.2.2 OR SECTION 9.2.3 SHALL BE MADE NOT LATER THAN THREE BUSINESS DAYS
AFTER DELIVERY TO THE OTHER PARTY OF NOTICE OF DEMAND FOR PAYMENT AND A
DOCUMENTED ITEMIZATION SETTING FORTH IN REASONABLE DETAIL ALL EXPENSES OF THE
PARTY ENTITLED TO RECEIVE PAYMENT (WHICH ITEMIZATION MAY BE SUPPLEMENTED AND
UPDATED FROM TIME TO TIME BY SUCH PARTY UNTIL THE 30TH BUSINESS DAY AFTER SUCH
PARTY DELIVERS SUCH NOTICE OF DEMAND FOR PAYMENT).

 

Section 9.2.5        All Payments.  All payments under this Section 9.2 shall be
made by wire transfer of immediately available funds to an account designated by
the Party entitled to receive payment.

 

ARTICLE 10.
INDEMNITY; REMEDIES

 

Section 10.1         Survival of Representations.  All of the representations
and warranties of the Company and the Stockholders contained in this Agreement
shall have been accurate as of the date of this Agreement and as of the
Effective Time, and all such representations and warranties shall survive the
Effective Time until the 18-month anniversary of the Effective Time; provided,
however, that (A) the representations and warranties made in Sections 4.9
(Employee Benefit Plans), 4.10 (Labor and Other Employment Matters), 4.13
(Environmental Matters) and 4.15 (Taxes) shall survive until 60 calendar days
after the expiration of the applicable statute of limitations and (B) the
representations and warranties made in Sections 4.3 (Capitalization), 4.4.1
(Authority), 5.1 (Authority) and 5.2 (No Conflict) shall survive indefinitely. 
All of the representations and warranties of Parent and Merger Sub contained in
this Agreement shall have been accurate as of the date of this Agreement and as
of

 

 

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the Effective Time, and all such representations and warranties shall survive
the Effective Time until the 18-month anniversary of the Effective Time;
provided, however, that the representations made in Sections 6.2 (Authority) and
6.5 (Board Approval) shall survive indefinitely.  Except as set forth herein,
all of the covenants, agreements and other obligations of the Parties shall
survive indefinitely.  Notwithstanding anything herein to the contrary, any
representation, warranty, covenant, agreement or obligation which is the subject
of a claim which is asserted in writing and in reasonable detail prior to the
expiration of the applicable period set forth above, shall survive with respect
to such claim until the final resolution thereof.

 

Section 10.2         Indemnification

 

SECTION 10.2.1      INDEMNIFICATION BY STOCKHOLDERS.  FROM AND AFTER THE
EFFECTIVE TIME, AND SUBJECT TO THE OTHER PROVISIONS OF THIS ARTICLE 10, EACH OF
THE STOCKHOLDERS AGREES, JOINTLY AND SEVERALLY, TO FULLY DEFEND, INDEMNIFY AND
HOLD PARENT AND THE SURVIVING CORPORATION AND EACH OF THEIR RESPECTIVE OFFICERS,
DIRECTORS, EMPLOYEES AND AFFILIATES (EACH, A “GC INDEMNIFIED PARTY”) HARMLESS
FROM AND AGAINST ANY AND ALL DAMAGES AS A RESULT OF (A) ANY INACCURACY OR BREACH
OF ANY REPRESENTATION OR WARRANTY CONTAINED IN ARTICLE 4 OF THIS AGREEMENT OR
ANY COVENANT OR AGREEMENT OF THE COMPANY OR THE STOCKHOLDERS CONTAINED IN THIS
AGREEMENT OR ANY INSTRUMENT DELIVERED BY THE COMPANY OR THE STOCKHOLDER
REPRESENTATIVE HEREUNDER OR THEREUNDER (BUT EXCLUDING ANY INFORMATION REGARDING
PROJECTIONS SEPARATE FROM THIS AGREEMENT) OR (B) ANY LIABILITY RELATING TO THE
REPURCHASE BY THE COMPANY OR ANY AFFILIATE OF THE COMPANY OF COMPANY COMMON
STOCK, COMPANY PREFERRED STOCK OR OTHER EQUITY INTEREST OF THE COMPANY PRIOR TO
THE EFFECTIVE TIME.

 

SECTION 10.2.2      INDEMNIFICATION BY STOCKHOLDERS.  FROM AND AFTER THE
EFFECTIVE TIME, AND SUBJECT TO THE OTHER PROVISIONS OF THIS ARTICLE 10, EACH OF
THE STOCKHOLDERS AGREES, SEVERALLY AND NOT JOINTLY, TO FULLY DEFEND, INDEMNIFY
AND HOLD EACH GC INDEMNIFIED PARTY HARMLESS FROM AND AGAINST ANY AND ALL DAMAGES
AS A RESULT OF ANY INACCURACY OR BREACH OF ANY REPRESENTATION OR WARRANTY OF
SUCH STOCKHOLDER CONTAINED IN ARTICLE 5 OF THIS AGREEMENT.

 

SECTION 10.2.3      TAX INDEMNIFICATION BY STOCKHOLDERS.  FROM AND AFTER THE
EFFECTIVE TIME, AND SUBJECT TO THE OTHER PROVISIONS OF THIS ARTICLE 10, EACH OF
THE STOCKHOLDERS AGREES, JOINTLY AND SEVERALLY, TO FULLY DEFEND, INDEMNIFY AND
HOLD THE GC INDEMNIFIED PARTIES HARMLESS FROM AND AGAINST ANY AND ALL DAMAGES
INCURRED IN CONNECTION WITH, ARISING OUT OF, RESULTING FROM OR INCIDENT TO (A)
ANY TAXES OF ANY OF THE COMPANY AND EACH COMPANY SUBSIDIARY WITH RESPECT TO ANY
TAX YEAR OR PORTION THEREOF ENDING ON OR BEFORE THE EFFECTIVE TIME (OR FOR ANY
STRADDLE PERIOD, TO THE EXTENT ALLOCABLE (AS DETERMINED IN THE FOLLOWING
SENTENCE) TO THE PORTION OF SUCH STRADDLE PERIOD ENDING ON THE EFFECTIVE TIME),
EXCEPT TO THE EXTENT THAT SUCH TAXES ARE REFLECTED IN THE RESERVE FOR TAX
LIABILITY (EXCLUDING ANY RESERVE FOR DEFERRED TAXES ESTABLISHED TO REFLECT
TIMING DIFFERENCES BETWEEN BOOK AND TAX INCOME) SHOWN ON THE FACE OF THE CLOSING
BALANCE SHEET, (B) THE UNPAID TAXES OF ANY PERSON (OTHER THAN ANY OF THE COMPANY
AND ITS SUBSIDIARIES) UNDER TREASURY REGULATIONS SECTION 1.1502-6 (OR ANY
SIMILAR PROVISION OF STATE, LOCAL OR FOREIGN LAW), AS A TRANSFEREE OR SUCCESSOR,
BY CONTRACT OR OTHERWISE AND (C) THE DISALLOWANCE BY ANY RELEVANT FEDERAL OR
STATE TAXING AUTHORITY OF A DEDUCTION BY THE COMPANY OR ANY COMPANY SUBSIDIARY
IN RESPECT OF ANY PAYMENT MADE OR BENEFIT THAT BECOMES AVAILABLE TO ANY
EMPLOYEE, OFFICER OR DIRECTOR OF THE COMPANY OR ANY COMPANY SUBSIDIARY OF ANY

 

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Bonus Deduction or any portion thereof, whether by reason of Sections 162 or
280G of the Code or otherwise to the extent the Tax benefit of such deduction
has been paid by Parent or the Company to the Stockholder Representative
pursuant to Section 7.9.3.  For purposes of the preceding sentence, in the case
of any Taxes that are imposed on a periodic basis and are payable for a Straddle
Period, the portion of such Tax that relates to the portion of such Straddle
Period ending on the Effective Time shall (1) in the case of any Taxes other
than Taxes based upon or related to income or receipts, be deemed to be the
amount of such Tax for the entire Straddle Period multiplied by a fraction the
numerator of which is the number of days in the Straddle Period ending on the
Effective Time and the denominator of which is the number of days in the entire
Tax period and (2) in the case of any Tax based upon or related to income or
receipts, be deemed equal to the amount which would be payable if the relevant
Tax period ended on the Effective Time.  Notwithstanding the provisions of this
Section 10.2.3, the Stockholders shall not have any indemnification obligation
to the GC Indemnified Parties for personal property Taxes of the Company or any
Company Subsidiary that are due after the Effective Time (irrespective of
whether such personal property taxes related to pre-Effective Time Tax periods).

 

SECTION 10.2.4      INDEMNIFICATION BY PARENT.  FROM AND AFTER THE EFFECTIVE
TIME, AND SUBJECT TO THE OTHER PROVISIONS OF THIS ARTICLE 10, EACH OF PARENT AND
THE SURVIVING CORPORATION AGREES, JOINTLY AND SEVERALLY, TO FULLY DEFEND,
INDEMNIFY AND HOLD EACH OF THE STOCKHOLDERS (EACH, A “MUSIC & ARTS INDEMNIFIED
PARTY”) HARMLESS FROM AND AGAINST ANY AND ALL DAMAGES AS A RESULT OF ANY
INACCURACY OR BREACH OF ANY REPRESENTATION, WARRANTY, COVENANT OR AGREEMENT OF
PARENT OR MERGER SUB, IN EACH CASE CONTAINED THIS AGREEMENT, ANY ANCILLARY
AGREEMENT OR ANY INSTRUMENT DELIVERED BY PARENT OR MERGER SUB HEREUNDER OR
THEREUNDER.

 

SECTION 10.2.5      INVESTIGATION.  THE RIGHT TO INDEMNIFICATION, PAYMENT OF
DAMAGES OR OTHER REMEDY BASED ON SUCH REPRESENTATIONS, WARRANTIES, COVENANTS AND
AGREEMENTS WILL NOT BE AFFECTED BY ANY INVESTIGATION CONDUCTED WITH RESPECT TO,
OR ANY KNOWLEDGE ACQUIRED (OR CAPABLE OF BEING ACQUIRED) AT ANY TIME, WHETHER
BEFORE OR AFTER THE EFFECTIVE TIME, WITH RESPECT TO THE ACCURACY OR INACCURACY
OF OR COMPLIANCE WITH, ANY SUCH REPRESENTATION, WARRANTY, COVENANT OR AGREEMENT.

 

SECTION 10.2.6      TAX INDEMNIFICATION BY PARENT.  EACH OF PARENT AND THE
SURVIVING CORPORATION AGREES, JOINTLY AND SEVERALLY, TO FULLY DEFEND, INDEMNIFY
AND HOLD EACH MUSIC & ARTS INDEMNIFIED PARTY HARMLESS FROM AND AGAINST ANY AND
ALL DAMAGES INCURRED IN CONNECTION WITH, ARISING OUT OF, RESULTING FROM OR
INCIDENT TO (A) ANY TAXES OF ANY OF THE COMPANY AND EACH COMPANY SUBSIDIARY WITH
RESPECT TO ANY TAX YEAR BEGINNING AFTER THE EFFECTIVE TIME (OR FOR ANY STRADDLE
PERIOD, TO THE EXTENT ALLOCABLE (AS DETERMINED IN THE FOLLOWING SENTENCE) TO THE
PORTION OF SUCH STRADDLE PERIOD BEGINNING AFTER THE EFFECTIVE TIME) AND (B) ALL
PERSONAL PROPERTY TAXES OF THE COMPANY OR ANY COMPANY SUBSIDIARY THAT ARE DUE TO
BE PAID AFTER THE EFFECTIVE TIME (IRRESPECTIVE OF WHETHER SUCH PERSONAL PROPERTY
TAXES RELATE TO PRE-EFFECTIVE TIME TAX PERIODS).  FOR PURPOSES OF THE PRECEDING
SENTENCE, IN THE CASE OF ANY TAXES THAT ARE IMPOSED ON A PERIODIC BASIS AND ARE
PAYABLE FOR A STRADDLE PERIOD, THE PORTION OF SUCH TAX THAT RELATES TO THE
PORTION OF SUCH STRADDLE PERIOD BEGINNING AFTER THE EFFECTIVE TIME SHALL (1) IN
THE CASE OF ANY TAXES OTHER THAN TAXES BASED UPON OR RELATED TO INCOME OR
RECEIPTS, BE DEEMED TO BE THE AMOUNT OF SUCH TAX FOR THE STRADDLE PERIOD
MULTIPLIED BY A FRACTION THE

 

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numerator of which is the number of days in the Straddle Period beginning after
the Effective Time and the denominator of which is the number of days in the
entire Straddle Period and (2) in the case of any Tax based upon or related to
income or receipts, be deemed equal to the amount which would be payable if the
relevant Straddle Period began after the Effective Time.

 

SECTION 10.2.7      PROCEDURES FOR CLAIMS.  IF A CLAIM FOR DAMAGES (A “CLAIM”)
IS TO BE MADE BY A PERSON ENTITLED TO INDEMNIFICATION HEREUNDER, THE PERSON
CLAIMING SUCH INDEMNIFICATION (THE “INDEMNIFIED PARTY”) SHALL GIVE WRITTEN
NOTICE (A “CLAIM NOTICE”) TO THE INDEMNIFYING PERSON (THE “INDEMNIFYING PARTY”)
REASONABLY PROMPTLY AFTER THE INDEMNIFIED PARTY BECOMES AWARE OF ANY FACT,
CONDITION OR EVENT WHICH MAY GIVE RISE TO DAMAGES FOR WHICH INDEMNIFICATION MAY
BE SOUGHT UNDER THIS SECTION 10.2, PROVIDED THAT IF THE INDEMNIFIED PARTY IS A
MUSIC & ARTS INDEMNIFIED PARTY, SUCH CLAIM NOTICE SHALL ONLY BE VALID IF IT IS
DELIVERED BY THE STOCKHOLDER REPRESENTATIVE.  THE FAILURE OF ANY INDEMNIFIED
PARTY TO GIVE TIMELY NOTICE HEREUNDER SHALL NOT AFFECT RIGHTS TO INDEMNIFICATION
HEREUNDER, EXCEPT AND ONLY TO THE EXTENT THAT, THE INDEMNIFYING PARTY
DEMONSTRATES ACTUAL MATERIAL DAMAGE CAUSED BY SUCH FAILURE.  IN THE CASE OF A
CLAIM INVOLVING THE ASSERTION OF A CLAIM BY A THIRD PARTY (WHETHER PURSUANT TO A
LAWSUIT, OTHER LEGAL ACTION OR OTHERWISE, A “THIRD PARTY CLAIM”), IF THE
INDEMNIFYING PARTY SHALL ACKNOWLEDGE IN WRITING TO THE INDEMNIFIED PARTY THAT
THE INDEMNIFYING PARTY SHALL BE OBLIGATED TO INDEMNIFY THE INDEMNIFIED PARTY
UNDER THE TERMS OF ITS INDEMNITY HEREUNDER IN CONNECTION WITH SUCH THIRD PARTY
CLAIM, THEN (A) THE INDEMNIFYING PARTY SHALL BE ENTITLED AND, IF IT SO ELECTS,
SHALL BE OBLIGATED AT ITS OWN COST, RISK AND EXPENSE, (1) TO TAKE CONTROL OF THE
DEFENSE AND INVESTIGATION OF SUCH THIRD PARTY CLAIM AND (2) TO PURSUE THE
DEFENSE THEREOF IN GOOD FAITH BY APPROPRIATE ACTIONS OR PROCEEDINGS PROMPTLY
TAKEN OR INSTITUTED AND DILIGENTLY PURSUED, INCLUDING, WITHOUT LIMITATION, TO
EMPLOY AND ENGAGE ATTORNEYS OF ITS OWN CHOICE REASONABLY ACCEPTABLE TO THE
INDEMNIFIED PARTY TO HANDLE AND DEFEND THE SAME, AND (B) THE INDEMNIFYING PARTY
SHALL BE ENTITLED (BUT NOT OBLIGATED), IF IT SO ELECTS, TO COMPROMISE OR SETTLE
SUCH CLAIM, WHICH COMPROMISE OR SETTLEMENT SHALL BE MADE ONLY WITH THE WRITTEN
CONSENT OF THE INDEMNIFIED PARTY, SUCH CONSENT NOT TO BE UNREASONABLY WITHHELD
OR DELAYED.  IN THE EVENT THE INDEMNIFYING PARTY ELECTS TO ASSUME CONTROL OF THE
DEFENSE AND INVESTIGATION OF SUCH LAWSUIT OR OTHER LEGAL ACTION IN ACCORDANCE
WITH THIS SECTION 10.2, THE INDEMNIFIED PARTY MAY, AT ITS OWN COST AND EXPENSE,
PARTICIPATE IN THE INVESTIGATION, TRIAL AND DEFENSE OF SUCH THIRD PARTY CLAIM,
PROVIDED THAT IF THE NAMED PERSONS TO A LAWSUIT OR OTHER LEGAL ACTION INCLUDE
BOTH THE INDEMNIFYING PARTY AND THE INDEMNIFIED PARTY AND THE INDEMNIFIED PARTY
HAS BEEN ADVISED BY COUNSEL THAT THERE MAY BE ONE OR MORE LEGAL DEFENSES
AVAILABLE TO SUCH INDEMNIFIED PARTY THAT ARE DIFFERENT FROM OR ADDITIONAL TO
THOSE AVAILABLE TO THE INDEMNIFYING PARTY, THE INDEMNIFIED PARTY SHALL BE
ENTITLED, AT THE INDEMNIFYING PARTY’S COST, RISK AND EXPENSE, TO RETAIN ONE FIRM
OF SEPARATE COUNSEL OF ITS OWN CHOOSING (ALONG WITH ANY REQUIRED LOCAL
COUNSEL).  IF THE INDEMNIFYING PARTY FAILS TO ASSUME THE DEFENSE OF SUCH THIRD
PARTY CLAIM IN ACCORDANCE WITH THIS SECTION 10.2 WITHIN TEN (10) BUSINESS DAYS
AFTER DELIVERY OF THE CLAIM NOTICE IN ACCORDANCE WITH SECTION 12.1, THE
INDEMNIFIED PARTY AGAINST WHICH SUCH THIRD PARTY CLAIM HAS BEEN ASSERTED SHALL
(UPON DELIVERING NOTICE TO SUCH EFFECT TO THE INDEMNIFYING PARTY) HAVE THE RIGHT
TO UNDERTAKE THE DEFENSE, COMPROMISE AND SETTLEMENT OF SUCH THIRD PARTY CLAIM,
AND THE INDEMNIFYING PARTY SHALL BE LIABLE FOR ANY RESULTING SETTLEMENT OF SUCH
THIRD PARTY CLAIM AND FOR ANY FINAL JUDGMENT WITH RESPECT THERETO (SUBJECT TO
ANY RIGHT OF APPEAL), IF ANY, BUT ONLY TO THE FULL EXTENT OTHERWISE PROVIDED IN
THIS AGREEMENT.  IN THE EVENT THE INDEMNIFYING PARTY ASSUMES THE DEFENSE OF THE
CLAIM, THE INDEMNIFYING PARTY SHALL

 

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keep the Indemnified Party reasonably informed of the progress of any such
defense, compromise or settlement, and in the event the Indemnified Party
assumes the defense of the claim, the Indemnified Party shall keep the
Indemnifying Party reasonably informed of the progress of any such defense,
compromise or settlement.

 

Section 10.3         No Contribution by the Company.  From and after the
Effective Time, no Music & Arts Indemnified Party may seek contribution from the
Company or any Company Subsidiary.

 

Section 10.4         Limitations on Indemnity.  The indemnification obligations
of the Parties under this Article 10 are subject to the following limitations:

 

SECTION 10.4.1                      ALL CLAIMS MADE BY A GC INDEMNIFIED PARTY
UNDER SECTION 10.2.1, 10.2.2 OR 10.2.3 SHALL FIRST BE SATISFIED THROUGH THE
APPLICATION OF THE ESCROWED FUNDS UNTIL THE ESCROWED FUNDS ARE REDUCED TO ZERO.

 

SECTION 10.4.2                      OTHER THAN KENNETH M. O’BRIEN (THE
“PRINCIPAL STOCKHOLDER”), NO STOCKHOLDER SHALL HAVE AGGREGATE LIABILITY FOR
DAMAGES ARISING UNDER THIS AGREEMENT IN EXCESS OF THE ESCROWED FUNDS AND ANY
CLAIMS PAID BY SUCH STOCKHOLDERS (OTHER THAN CLAIMS PAID BY THE PRINCIPAL
STOCKHOLDER) SHALL BE PAID SOLELY FROM THE ESCROWED FUNDS.  THE MAXIMUM
AGGREGATE LIABILITY OF THE PRINCIPAL STOCKHOLDER FOR DAMAGES ARISING UNDER THIS
AGREEMENT IN EXCESS OF THE ESCROWED FUNDS SHALL BE ELEVEN MILLION DOLLARS
($11,000,000).  THE MAXIMUM AGGREGATE LIABILITY OF PARENT AND THE SURVIVING
CORPORATION FOR DAMAGES ARISING UNDER THIS AGREEMENT SHALL BE EIGHTEEN MILLION
DOLLARS ($18,000,000).  NOTWITHSTANDING THE FOREGOING, THE LIMITATIONS SET FORTH
IN THIS SECTION 10.4.2 SHALL NOT APPLY TO (A) THE BREACH OF A REPRESENTATION OR
WARRANTY SET FORTH IN SECTIONS 4.3, 4.4.1, 4.9.5, 5.1, 5.2, 6.2 OR 6.5 OF THIS
AGREEMENT, (B) THE INTENTIONAL BREACH OF A REPRESENTATION, WARRANTY, COVENANT OR
AGREEMENT, (C) THE BREACH OF A REPRESENTATION, WARRANTY, COVENANT OR AGREEMENT
INVOLVING FRAUD, (D) ANY CLAIM RELATING TO THE REPURCHASE BY THE COMPANY OR ANY
AFFILIATE OF THE COMPANY OF COMPANY COMMON STOCK, COMPANY PREFERRED STOCK OR
OTHER SECURITIES OF THE COMPANY PRIOR TO THE EFFECTIVE TIME, (E) ANY
INDEMNIFICATION FOR TAXES PURSUANT TO SECTION 10.2.3 OR (F) ANY CLAIM BY A
STOCKHOLDER OF ACTUAL OR PURPORTED APPRAISAL OR SIMILAR RIGHTS UNDER MARYLAND
LAW.

 

SECTION 10.4.3                      NO INDEMNIFIED PARTY SHALL BE ENTITLED TO
ANY INDEMNIFICATION FROM AN INDEMNIFYING PARTY UNDER THIS AGREEMENT UNLESS AND
UNTIL THE AGGREGATE CLAIMS BY SUCH INDEMNIFIED PARTY FOR DAMAGES EXCEED FIVE
HUNDRED THOUSAND DOLLARS ($500,000), AT WHICH TIME, SUBJECT TO THE OTHER
LIMITATIONS SET FORTH IN THIS ARTICLE 10, THE INDEMNIFIED PARTY SHALL BE
ENTITLED TO RECOVER THE ENTIRE AMOUNT OF SUCH DAMAGES (INCLUDING THE INITIAL
$500,000 THEREOF).  NOTWITHSTANDING THE FOREGOING, THE LIMITATIONS ON INDEMNITY
SET FORTH IN THIS SECTION 10.4.3 SHALL NOT APPLY TO (A) THE BREACH OF A
REPRESENTATION OR WARRANTY SET FORTH IN SECTION 4.3, 4.4.1, 4.9.5, 5.1, 5.2, 6.2
OR 6.5 OF THIS AGREEMENT, (B) THE INTENTIONAL BREACH OF A REPRESENTATION,
WARRANTY, COVENANT OR AGREEMENT, (C) THE BREACH OF A REPRESENTATION, WARRANTY,
COVENANT OR AGREEMENT INVOLVING FRAUD, (D) ANY CLAIM RELATING TO THE REPURCHASE
BY THE COMPANY OR ANY AFFILIATE OF THE COMPANY OF COMPANY COMMON STOCK, COMPANY
PREFERRED STOCK OR OTHER SECURITIES OF THE COMPANY PRIOR TO THE EFFECTIVE TIME,
(E) ANY INDEMNIFICATION FOR

 

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Taxes pursuant to Section 10.2.3, or (F) any claim by a Stockholder of actual or
purported appraisal or similar rights under Maryland law.

 

SECTION 10.4.4                      THE AMOUNT WHICH AN INDEMNIFYING PARTY IS
REQUIRED TO PAY TO, FOR, OR ON BEHALF OF AN INDEMNIFIED PARTY PURSUANT TO THIS
ARTICLE 10 SHALL BE REDUCED (INCLUDING, WITHOUT LIMITATION, RETROACTIVELY) BY
ANY INSURANCE PROCEEDS ACTUALLY RECOVERED BY OR ON BEHALF OF THE INDEMNIFIED
PARTY IN REDUCTION OF THE RELATED INDEMNIFIABLE LOSS, LESS THE PRESENT VALUE OF
THE GOOD FAITH ESTIMATED AMOUNT OF ANY INCREASE IN THE INDEMNIFIED PARTY’S
INSURANCE PREMIUMS RELATED THERETO.  IF AN INDEMNIFIED PARTY SHALL HAVE
RECEIVED, OR IF AN INDEMNIFYING PARTY SHALL HAVE PAID ON ITS BEHALF, ANY
INDEMNITY PAYMENT IN RESPECT OF AN INDEMNIFIABLE LOSS AND THE INDEMNIFIED PARTY
SHALL SUBSEQUENTLY RECEIVE, DIRECTLY OR INDIRECTLY, INSURANCE PROCEEDS IN
RESPECT OF SUCH INDEMNIFIABLE LOSS, THEN SUCH INDEMNIFIED PARTY SHALL PROMPTLY
PAY TO THE INDEMNIFYING PARTY (OR THE ESCROW AGENT, AS THE CASE MAY BE) THE
AMOUNT OF SUCH INSURANCE PROCEEDS, OR, IF LESS, THE AMOUNT OF THE INDEMNITY
PAYMENT, LESS THE PRESENT VALUE OF THE GOOD FAITH ESTIMATED AMOUNT OF ANY
INCREASE IN THE INDEMNIFIED PARTY’S INSURANCE PREMIUMS RELATED THERETO.  THE
PARTIES HERETO AGREE THAT THE FOREGOING SHALL NOT AFFECT THE SUBROGATION RIGHTS
OF ANY INSURANCE COMPANIES MAKING PAYMENTS HEREUNDER.

 

SECTION 10.4.5                      THE MAXIMUM AGGREGATE LIABILITY OF ANY
STOCKHOLDER FOR DAMAGES ARISING UNDER THIS AGREEMENT OR ANY INSTRUMENT DELIVERED
HEREUNDER SHALL NOT EXCEED THE TOTAL MERGER CONSIDERATION ACTUALLY RECEIVED BY
SUCH STOCKHOLDER IN CONNECTION WITH THE TRANSACTIONS CONTEMPLATED BY THIS
AGREEMENT.

 

SECTION 10.4.6                      FROM AND AFTER THE EFFECTIVE TIME, THE
INDEMNIFIED PARTY’S RIGHT TO INDEMNIFICATION UNDER THIS ARTICLE 10 CONSTITUTES
THE INDEMNIFIED PARTY’S SOLE REMEDY FOR DAMAGES WITH RESPECT TO THE BREACH OF
ANY REPRESENTATION OR WARRANTY CONTAINED IN THIS AGREEMENT, UNLESS SUCH BREACH
WAS INTENTIONAL OR INVOLVED FRAUD.

 

SECTION 10.4.7                      NOTWITHSTANDING ANYTHING ELSE TO THE
CONTRARY CONTAINED HEREIN, THE LIMITATIONS OF THIS SECTION 10.4 SHALL NOT APPLY
TO (A) THE ANCILLARY AGREEMENTS, OR (B) ANY PAYMENT OF MERGER CONSIDERATION,
COMPONENTS THEREOF OR ADJUSTMENTS THERETO, OR REQUIRED EXPENSES, UNDER THIS
AGREEMENT, INCLUDING WITHOUT LIMITATION THE PAYMENTS REQUIRED BY SECTIONS 3.2.1,
3.4, 3.5.1, 3.6, 3.7.4, 3.10, 7.9.3, 9.2.2 AND 9.2.3.

 

Section 10.5         Tax Refunds.  Notwithstanding anything to the contrary in
this Article 10, in the event that Parent shall assert any claim for a payment
by the Stockholders under Section 7.9.1, Section 7.9.2 or this Article 10, such
claim shall first be satisfied by crediting against such claim any Tax refunds
of the Company or any Company Subsidiary with respect to any Tax period ending
on or prior to the Effective Time (or for any Straddle Period, the portion of
such period ending at the Effective Time) to the extent actually received by the
Company, a Company Subsidiary or Parent after the Effective Time, but only to
the extent such Tax Refunds (a) have not previously been credited against
similar claims previously made or refunded pursuant to the following sentence,
(b) have not previously been included in calculating the Working Capital
Adjustment and (c) do not relate to the Bonus Deduction as provided for in
Section 7.9.3 (such a Tax refund, a “Qualifying Pre-Effective Time Tax
Refund”).   To the extent that the Company, a Company Subsidiary or Parent
receives a Qualifying Pre-Effective Time

 

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Tax Refund after the Stockholders have made a payment under Section 7.9.1, 7.9.2
or this Article 10, Parent shall refund to the Stockholders the lesser of (i)
the amount of such Qualifying Pre-Effective Time Tax Refund received by the
Company, a Company Subsidiary or Parent or (ii) the amount of such payment made
by the Stockholders under Section 7.9.1, 7.9.2 or this Article 10 not previously
refunded.

 

Section 10.6         Interest.  All Claims for Damages against the Escrowed
Funds shall not include interest, provided that disbursements to Parent or a GC
Indemnified Party of all or any portion of the Escrowed Funds shall be
accompanied by a payment of a pro rata portion of the interest and investment
income in the Escrow Account attributable to such disbursed funds as set forth
in the Escrow Agreement.  All Claims for Damages in excess of the Escrowed Funds
shall include interest from the date that the Damages were suffered to the date
of payment at a rate equal to the average rate return (interest and income) on
the Escrowed Funds during the term of the Escrow Agreement.

 

ARTICLE 11.
GENERAL

 

Section 11.1           Notices. Any notices or other communications required or
permitted under, or otherwise in connection with this Agreement, shall be in
writing and shall be deemed to have been duly given when delivered in Person or
upon confirmation of receipt when transmitted by facsimile transmission (but
only if followed by transmittal by national overnight courier or hand for
delivery on the next Business Day) or on receipt after dispatch by registered or
certified mail, postage prepaid, addressed, or on the next Business Day if
transmitted by national overnight courier, in each case as follows:

 

If to Parent, Merger Sub or the Surviving Corporation, addressed to it at:

 

Guitar Center Stores, Inc.

5795 Lindero Canyon Road

Westlake Village, California 91362

Attention:  General Counsel

Fax:  (818) 735-4923

 

with a copy to:

 

Latham & Watkins LLP

135 Commonwealth Drive

Menlo Park, California 94025

Attention:  Anthony J. Richmond, Esq.

Fax:  (650) 463-2600

 

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If to the Company or the Stockholder Representative, addressed to it or him, as
the case may be, at:

 

Music & Arts Center, Inc.

11401 Falls Road

Potomac, Maryland 20854

Attention:  Kenneth M. O’Brien

Fax:  (301) 620-2529

 

with a copy to:

 

Arnold & Porter LLP

1600 Tysons Boulevard, Suite 900

McLean, Virginia 22101-4865

Attention:  Robert B. Ott, Esq.

Fax:  (703) 720-7399

 

Section 11.2         Headings.  The headings contained in this Agreement are for
reference purposes only and shall not affect in any way the meaning or
interpretation of this Agreement.

 

Section 11.3         Severability.  If any term or other provision of this
Agreement is invalid, illegal or incapable of being enforced by any rule of Law
or public policy, all other conditions and provisions of this Agreement shall
nevertheless remain in full force and effect so long as the economic or legal
substance of the transactions contemplated hereby is not affected in any manner
materially adverse to any Party.  Upon such determination that any term or other
provision is invalid, illegal or incapable of being enforced, the Parties shall
negotiate in good faith to modify this Agreement so as to effect the original
intent of the Parties as closely as possible in an acceptable manner to the end
that transactions contemplated hereby are fulfilled to the extent possible.

 

Section 11.4         Entire Agreement.  This Agreement (together with the
Exhibits, Company Disclosure Schedule and the other documents delivered pursuant
hereto), each Ancillary Agreement and the Confidentiality Agreement constitute
the entire agreement of the Parties and supersede all prior agreements and
undertakings, both written and oral, between the Parties, or any of them, with
respect to the subject matter hereof and, except as otherwise expressly provided
herein, are not intended to confer upon any other Person any rights or remedies
hereunder.

 

Section 11.5         Amendment.  This Agreement may be amended by the Parties by
action taken by or on behalf of them; it being understood that the Stockholder
Representative shall have all requisite power and authority to approve any
amendment of this Agreement on behalf of the Stockholders.  This Agreement may
not be amended except by an instrument in writing signed by or on behalf of the
Parties.

 

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Section 11.6         Waiver.  At any time prior to the Effective Time, any Party
may (A) extend the time for the performance of any of the obligations or other
acts of the other Party hereto, (B) waive any inaccuracies in the
representations and warranties of the other Party contained herein or in any
document delivered pursuant hereto and (C) waive compliance by the other Party
with any of the agreements or conditions contained herein.  Any such extension
or waiver shall be valid only if set forth in an instrument in writing signed by
the Party or Parties to be bound thereby (it being understood that the
Stockholder Representative shall have all requisite power and authority to waive
any provision this Agreement on behalf of the Stockholders), but such extension
or waiver or failure to insist on strict compliance with an obligation,
covenant, agreement or condition shall not operate as a waiver of, or estoppel
with respect to, any subsequent or other failure.

 

Section 11.7         Fees and Expenses.  Subject to Section 3.1.3(D), Section
3.7, Section 3.10, Section 7.5.1, Exhibit 7.5.2, Section 9.2.1, Section 9.2.2,
Section 9.2.3 and Article 10 of this Agreement, all expenses incurred by the
Parties shall be borne solely and entirely by the Party which has incurred the
same.

 

Section 11.8         Assignment.  This Agreement shall not be assigned by
operation of law or otherwise.

 

Section 11.9         Parties in Interest.  This Agreement shall be binding upon
and inure solely to the benefit of each Party and its respective successors and
assigns, and nothing in this Agreement, express or implied, is intended to or
shall confer upon any other Person any right, benefit or remedy of any nature
whatsoever under or by reason of this Agreement.

 

Section 11.10       Mutual Drafting.  Each Party hereto has participated in the
drafting of this Agreement, which each Party acknowledges is the result of
extensive negotiations between the Parties.

 

Section 11.11       Governing Law.  This Agreement shall be governed by, and
construed in accordance with, the Laws of the State of Delaware, without regard
to laws that may be applicable under conflicts of laws principles, provided that
the provisions of Article 2 and Article 3 relating to the Merger and the
conversion of the Company Preferred Stock and the Company Common Stock shall be
governed by, and construed in accordance with, the MGCL.

 

Section 11.12       Remedies; Dispute Resolution

 

SECTION 11.12.1    REMEDIES.  EACH OF THE PARTIES ACKNOWLEDGES AND AGREES THAT
THE OTHER PARTIES WOULD BE IRREPARABLY DAMAGED IN THE EVENT ANY OF THE
PROVISIONS OF THIS AGREEMENT WERE NOT PERFORMED IN ACCORDANCE WITH THEIR
SPECIFIC TERMS OR WERE OTHERWISE BREACHED.  ACCORDINGLY, EACH OF THE PARTIES
AGREES THAT HE, SHE OR IT EACH SHALL BE ENTITLED, WITHOUT THE REQUIREMENT THAT A
BOND OR OTHER SECURITY BE POSTED, TO AN INJUNCTION OR INJUNCTIONS TO PREVENT
BREACHES OF ANY OF THE PROVISIONS OF THIS AGREEMENT TO ENFORCE SPECIFICALLY THIS
AGREEMENT IN ANY ACTION INSTITUTED IN ANY COURT OF THE UNITED STATES OR ANY
STATE HAVING COMPETENT JURISDICTION AS PROVIDED FOR IN THIS AGREEMENT, IN
ADDITION TO ANY OTHER REMEDY TO WHICH SUCH PARTY MAY BE ENTITLED, AT LAW OR IN
EQUITY.

 

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SECTION 11.12.2    DISPUTE RESOLUTION.  EXCEPT AS OTHERWISE PROVIDED IN SECTION
11.12.1, ANY CLAIM OR DISPUTE ARISING OUT OF OR RELATED TO THIS AGREEMENT, THE
INTERPRETATION, MAKING PERFORMANCE, BREACH OR TERMINATION THEREOF, SHALL BE
FINALLY AND EXCLUSIVELY SETTLED BY BINDING ARBITRATION TO BE HELD IN NEW YORK,
NEW YORK.  THE ARBITRATION SHALL BE MADE IN ACCORDANCE WITH THE THEN CURRENT
COMMERCIAL ARBITRATION RULES OF THE AMERICAN ARBITRATION ASSOCIATION AND SUCH
ARBITRATION SHALL BE CONDUCTED BY AN ARBITRATOR CHOSEN BY MUTUAL AGREEMENT OF
PARENT AND THE STOCKHOLDER REPRESENTATIVE; FAILING SUCH AGREEMENT, THE
ARBITRATION SHALL BE CONDUCTED, BY THREE INDEPENDENT ARBITRATORS, ONE CHOSEN BY
PARENT, ONE CHOSEN BY THE STOCKHOLDER REPRESENTATIVE, AND SUCH TWO ARBITRATORS
SHALL MUTUALLY SELECT A THIRD ARBITRATOR, WITH ANY DECISION OF TWO SUCH
ARBITRATORS SHALL BE BINDING.  THE ARBITRATOR SHALL HAVE THE AUTHORITY TO GRANT
ANY EQUITABLE AND LEGAL REMEDIES THAT WOULD BE AVAILABLE IN ANY JUDICIAL
PROCEEDING INSTITUTED IN NEW YORK, NEW YORK TO RESOLVE THE DISPUTE.  JUDGMENT
UPON THE AWARD RENDERED BY THE ARBITRATOR MAY BE ENTERED IN ANY COURT HAVING
JURISDICTION THEREOF.  EACH PARTY SHALL PAY ITS OWN COSTS AND EXPENSES
(INCLUDING COUNSEL FEES) OF ANY SUCH ARBITRATION, PROVIDED THAT THE PREVAILING
PARTY SHALL BE ENTITLED TO RECOVER ITS REASONABLE COSTS AND EXPENSES (INCLUDING
COUNSEL FEES) IN CONNECTION WITH SUCH ARBITRATION.  THE PARTIES EXPRESSLY WAIVE
ALL RIGHTS WHATSOEVER TO FILE AN APPEAL AGAINST OR OTHERWISE TO CHALLENGE ANY
AWARD BY THE ARBITRATOR(S) HEREUNDER, PROVIDED THAT THE FOREGOING SHALL NOT
LIMIT THE RIGHTS OF EITHER PARTY TO BRING A PROCEEDING IN ANY APPLICABLE
JURISDICTION TO CONFORM, ENFORCE OR ENTER JUDGMENT UPON SUCH AWARD (AND THE
RIGHTS OF THE OTHER PARTY, IF SUCH PROCEEDING IS BROUGHT, TO CONTEST SUCH
CONFIRMATION, ENFORCEMENT OR ENTRY OF JUDGMENT).

 

Section 11.13       Waiver of Jury Trial.  EACH PARTY ACKNOWLEDGES AND AGREES
THAT ANY CONTROVERSY WHICH MAY ARISE UNDER THIS AGREEMENT IS LIKELY TO INVOLVE
COMPLICATED AND DIFFICULT ISSUES, AND THEREFORE IT HEREBY IRREVOCABLY AND
UNCONDITIONALLY WAIVES ANY RIGHT IT MAY HAVE TO A TRIAL BY JURY IN RESPECT OF
ANY LITIGATION DIRECTLY OR INDIRECTLY ARISING OUT OF OR RELATING TO THIS
AGREEMENT AND ANY OF THE AGREEMENTS DELIVERED IN CONNECTION HEREWITH OR THE
TRANSACTIONS CONTEMPLATED HEREBY OR THEREBY.  EACH PARTY CERTIFIES AND
ACKNOWLEDGES THAT (A) NO REPRESENTATIVE, AGENT OR ATTORNEY OF ANY OTHER PARTY
HAS REPRESENTED, EXPRESSLY OR OTHERWISE, THAT SUCH OTHER PARTY WOULD NOT, IN THE
EVENT OF LITIGATION, SEEK TO ENFORCE EITHER OF SUCH WAIVERS, (B) IT UNDERSTANDS
AND HAS CONSIDERED THE IMPLICATIONS OF SUCH WAIVERS, (C) IT MAKES SUCH WAIVERS
VOLUNTARILY, AND (D) IT HAS BEEN INDUCED TO ENTER INTO THIS AGREEMENT BY, AMONG
OTHER THINGS, THE MUTUAL WAIVERS AND CERTIFICATIONS IN THIS SECTION 11.13.

 

Section 11.14       Counterparts.  This Agreement may be executed in one or more
counterparts, and by the different Parties in separate counterparts, each of
which when executed shall be deemed to be an original but all of which taken
together shall constitute one and the same agreement.

 

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IN WITNESS WHEREOF, Parent, Merger Sub, the Company, the Stockholder
Representative and the Stockholders have caused this Agreement and Plan of
Merger to be executed as of the date first written above by their respective
officers thereunto duly authorized.

 

 

GUITAR CENTER STORES, INC.

 

 

 

 

 

By:

  /s/ Erick Mason

 

Name: Erick Mason

 

Title: President

 

 

 

 

 

GCSI ACQUISITION CORP.

 

 

 

 

 

By:

   /s/ Leland P. Smith

 

Name: Leland P. Smith

 

Title: President

 

 

 

 

 

MUSIC & ARTS CENTER, INC.

 

 

 

 

 

By:

  /s/ Kenneth M. O’Brien

 

Name: Kenneth M. O’Brien

 

Title: President

 

 

 

 

 

STOCKHOLDER REPRESENTATIVE:

 

 

 

 

 

/s/ Kenneth M. O’Brien

 

Name: Kenneth M. O’Brien

 

 

The undersigned acknowledges and agrees to his obligation

to execute and deliver a Non-Compete Agreement and Severance Agreement

as provided for herein:

 

/s/ Allan Greenberg

 

Allan Greenberg

 

 

 

[Signature Page to Agreement and Plan of Merger]

 

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IN WITNESS WHEREOF, Parent, Merger Sub, the Company, the Stockholder
Representative and the Stockholders have caused this Agreement to be executed as
of the date first written above by their respective officers thereunto duly
authorized.

 

STOCKHOLDERS:

 

 

/s/ Lawana J. O’Brien

 

Name: Lawana J. O’Brien

 

 

 

 

 

/s/ Kenneth M. O’Brien

 

Name: Kenneth M. O’Brien

 

 

 

 

 

/s/ Phillip C. O’Brien

 

Name: Phillip C. O’Brien

 

 

 

 

 

/s/ Christopher Tuel

 

Name: Christopher Tuel

 

 

 

 

 

/s/ Richard Davy

 

Name: Richard Davy

 

 

 

 

 

/s/ Bruce Feldman

 

Name: Bruce Feldman

 

 

 

 

 

/s/ Alan Dapsauski

 

Name: Alan Dapsauski

 

 

 

 

 

/s/ Lisa Shannon

 

Name: Lisa Shannon

 

 

 

 

 

/s/ Linwood Johnson

 

Name: Linwood Johnson

 

 

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IN WITNESS WHEREOF, Parent, Merger Sub, the Company, the Stockholder
Representative and the Stockholders have caused this Agreement to be executed as
of the date first written above by their respective officers thereunto duly
authorized.

 

STOCKHOLDERS:

 

 

/s/ Shelley Mick

 

Name: Shelley Mick

 

 

 

 

 

/s/ Steven Hesselbacher

 

Name: Steven Hesselbacher

 

 

 

 

 

/s/ Monique Leaberry

 

Name: Monique Leaberry

 

 

 

 

 

/s/ Kerry Nelson

 

Name: Kerry Nelson

 

 

 

 

 

/s/ Simon Jacobs

 

Name: Simon Jacobs

 

 

 

 

 

/s/ Anthony Jacobs

 

Name: Anthony Jacobs

 

 

 

 

 

/s/ Kenneth M. O’Brien

 

Name: Benjamin O’Brien, by Kenneth M. O’Brien as Personal Representative

 

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