Document:

Exhibit
10.1

 

THIRD
AMENDMENT TO

SECOND AMENDED AND RESTATED

	
  LOAN
  AND SECURITY AGREEMENT

  	
  Wells Fargo Retail Finance,
  LLC, Agent

  

 

Effective Date:  February 8, 2005

Execution Date:  February 8, 2005

 

THIS THIRD AMENDMENT (this “Third Amendment”)
is made in consideration of the mutual covenants contained herein and benefits
to be derived herefrom to the Second Amended and Restated Loan and Security
Agreement (the “Loan Agreement”)
dated December 21, 2001 entered into by and among WELLS FARGO RETAIL
FINANCE, LLC, a Delaware limited liability company, as the arranger and
administrative agent for the Lenders (in such capacity, together with its
successors, if any, in such capacity, the “Agent” and
together with the Lenders, collectively, the “Lender Group”),
and, on the other hand, GUITAR CENTER, INC., a Delaware corporation (“GCI”), GUITAR CENTER STORES, INC., a Delaware corporation (“GCS”), and MUSICIAN’S FRIEND, INC.,
a Delaware corporation (“MFI”; and
together with GCI and GCS, referred to hereinafter each individually as a “Borrower”, and individually and collectively, jointly and
severally, as the “Borrowers”).

 

BACKGROUND:

 

The Borrowers and the Lender Group are parties to the Loan Agreement,
as amended by a certain Consent and Amendment dated June 9, 2003, and as
further amended by a certain Second Amendment dated December 5, 2003.  At this time, the Borrowers and the Lender
Group desire to further amend the Loan Agreement.  Accordingly, it is hereby agreed by and between
the Borrowers and the Lender Group, as follows:

 

Part 1.                                   Amendment of Loan Agreement:

 

The Loan Agreement is amended as follows:

 

1.                                       The
definition of Applicable Base Rate Margin is
hereby deleted in its entirety, and the following is inserted in its place:

 

“Applicable Base Rate
Margin” means 0.00 percentage points.

 

2.                                       The
definition of Applicable LIBOR Rate Margin is
hereby deleted in its entirety, and the following is inserted in its place:

 

“Applicable LIBOR Rate
Margin” means, as of any date of determination, the margin opposite the applicable
Excess Availability level set forth in the grid below; provided, that for the
period from December 31, 2004 through June 30, 2005, the Applicable
LIBOR Rate Margin shall be 1.00 percentage points:

 

	
  Excess
  Availability

  	
   

  	
  Applicable LIBOR Rate Margin

  
	
  Greater than $20,000,000

  	
   

  	
  1.00 percentage points

  
	
  Less than or equal to $20,000,000 and greater than
  $10,000,000

  	
   

  	
  1.25 percentage points

  
	
  Less than or equal to $10,000,000

  	
   

  	
  1.50 percentage points

  

 

 

The Applicable LIBOR Rate
Margin shall be based upon Excess Availability, which will be calculated
quarterly on an average daily basis at the end of each fiscal quarter, which
calculation shall determine the Applicable LIBOR Rate Margin for the
immediately succeeding fiscal quarter. 
The applicable margin shall be redetermined quarterly on the date Agent
receives the certified calculation of Excess Availability pursuant to Section 6.3(b)(v)
hereof.  Anything to the contrary
contained herein notwithstanding, any LIBOR Rate Advance that is outstanding on
the day on which the Applicable LIBOR Rate Margin changes, shall, until the end
of the Interest Period relating to such LIBOR Rate Advance, continue to bear
interest at the Applicable LIBOR Rate Margin that was in effect on the date
such LIBOR Rate Advance initially was made.

 

3.                                       The
definition of Applicable Prepayment Premium is
hereby deleted in its entirety, and the following is inserted in its place:

 

“Applicable
Prepayment Premium” means, as of any date of determination, an amount equal
to 0.25% multiplied by the aggregate Revolving
Credit Commitments; provided, however, that if the Obligations are prepaid in
full in cash with the proceeds of a credit facility in which the Agent acts as
agent or a refinancing at least a portion of which is provided by a Wells Fargo
commercial banking unit, then the Applicable Prepayment Premium shall be 0.00%.

 

4.                                       The
definition of Applicable Unused Line Multiple
is hereby deleted in its entirety, and the following is inserted in its place:

 

“Applicable
Unused Line Multiple” means 0.25%.

 

5.                                       The
definition of Cash Equivalents is hereby
deleted in its entirety and the following is inserted in its place:

 

“Cash
Equivalents” means and refers to: (a) marketable direct obligations issued
or unconditionally guaranteed by the United States Government or issued by any
agency thereof, in each case maturing within one (1) year from the date of
acquisition thereof; (b) marketable direct obligations issued by any state of
the United States of America or any political subdivision of any such state or
any public agency or instrumentality thereof maturing within one (1) year from
the date of acquisition thereof and, at the time of acquisition, having the
highest rating obtainable from either S&P or Moody’s; (c) commercial paper
maturing no more than one (1) year from the date of acquisition thereof and, at
the time of acquisition, having a rating of A-2 or better from S&P or P-2
or better from Moody’s; (d) auction rate securities maturing no more than
one (1) year from the date of acquisition thereof and, at the time of
acquisition, having a rating of A or better from S&P or A or better from
Moody’s; (e) certificates of deposit or bankers’ acceptances maturing within
one (1) year from the date of acquisition thereof and either (i) issued by
any bank organized under the laws of the United States of America or any state
thereof or the District of Columbia which bank (or the parent company of such
bank) has a longer term debt rating of A or better from S&P or A or better
from Moody’s, or (ii) in an amount less than or equal to One Hundred Thousand
Dollars ($100,000) in the aggregate issued by any other bank insured by the
Federal Deposit Insurance Corporation; (f) repurchase agreements with a
term of not more than 30 days for underlying securities of the types described
in clauses (a), (b) and/or (c) above entered into with any commercial bank,
broker/dealer or other financial institution meeting the requirements specified
in clause (e)(i); and

 

 

(g) shares of investment companies that
are money market funds registered under the Investment Company Act of 1940.

 

6.                                       The
following definition is hereby inserted in its appropriate alphabetical order
into Section 1.1:

 

“Commitment
Decrease” has the meaning set forth in Section 2.18.

 

7.                                       The
following definition is hereby inserted in its appropriate alphabetical order
into Section 1.1:

 

“Commitment
Increase” has the meaning set forth in Section 2.17.

 

8.                                       The
following definition is hereby inserted in its appropriate alphabetical order
into Section 1.1:

 

“Commitment
Increase Date” has the meaning set forth in Section 2.17.

 

9.                                       7.                                       The
following definition is hereby inserted in its appropriate alphabetical order
into Section 1.1:

 

“Commitment
Increase Fee” means $50,000.00.

 

10.                                 The
following definition is hereby inserted in its appropriate alphabetical order
into Section 1.1:

 

“Increased
Maximum Facility Amount” has the meaning set forth in Section 2.17.

 

11.           Subsection (c)
of the definition of Permitted Acquisition
is hereby deleted in its entirety, and the following is inserted in its place:

 

(c)                                  the
aggregate consideration (but excluding consideration paid or payable in Stock
of GCI that does not require any cash payment until after the second
anniversary of the Maturity Date) paid or payable for Permitted Acquisitions
during any fiscal year, after giving effect to the proposed Acquisition, shall
not exceed $200,000,000.00,”

 

12.           The
definition of Permitted Investment is hereby
deleted in its entirety, and the following is inserted in its place:

 

Permitted
Investments: Means (a) Investments in Cash Equivalents in an
amount not to exceed $20,000,000 unless Excess Availability is greater than
$25,000,000 at the time such Investment is made, (b) loans and advances to
officers and employees of the Obligors in the ordinary course of business, so
long as Excess Availability is greater than $25,000,000 at the time such
Investment is made, (c) Investments in negotiable instruments for collection, (d)
advances made in connection with purchases of goods or services in the ordinary
course of business, (e) Permitted Acquisitions, (f) Investments in any Obligor,
and (g) other Investments, so long as Excess Availability is greater than
$25,000,000 at the time such Investment is made.”

 

13.                                 The
following definition is hereby inserted in its appropriate alphabetical order
into Section 1.1:

 

 

“Reduction
Election” has the meaning set forth in Section 2.18.

 

14.                                 A
new paragraph 2.11(d) is hereby inserted in its appropriate numerical order, as
follows:

 

(d)                                 To
the Agent, for the ratable benefit of the Lenders, a Commitment Increase Fee in
the amount of $50,000.00, due and payable upon a Commitment Increase.

 

15.                                 The
provisions of Section 2.12(a)(ii) are hereby deleted in their entirety,
and the following is inserted in their place:

 

(ii)                                  the
Letter of Credit Usage would exceed $25,000,000.00, or

 

16.                                 A
new paragraph 2.17 is hereby inserted in its appropriate numerical order, as
follows:

 

2.17  Increase in Facility Amounts and
Commitments.

 

(a)                                                          Increase in Maximum Facility Amount.  Provided that no Event of Default has
occurred and is continuing, Borrowers shall have the right at any time, on one
occasion (subject to Section 2.18(b)(2)) and upon not less than 5 Business
Days prior written notice to the Agent, to elect to increase the Maximum
Facility Amount by $25,000,000.00 (a “Commitment Increase”) from the
existing aggregate amount of $125,000,000.00, to an aggregate amount of
$150,000,000.00 (the “Increased Maximum Facility Amount”).  Any such requested increase shall be made to
all existing Lenders on a pro rata basis, in accordance with Schedule C-1.

 

(b)                                                         Increase Conditions.  
The Commitment Increase shall not become effective unless and until each
of the following conditions have been satisfied:

 

(1)                                  The
Borrowers shall have paid the Agent the Commitment Increase Fee;

 

(2)                                  A
note will be issued at the Borrowers’ expense, to each Lender, to the extent
necessary to reflect the new Commitments of such Lenders; and

 

(3)                                  The
Borrowers shall have delivered such other instruments, documents and agreements
with respect to the Commitment Increase as the Agent may reasonably have
requested.

 

(c)                                                          Commitment Increase Date. 
The Agent shall promptly notify each Lender as to the effectiveness of the
Commitment Increase (with the date of such effectiveness being referred to
herein as the “Commitment Increase Date”), and at such time (i) the Maximum
Facility Amount under, and for all purposes of, this Agreement shall be
increased by the aggregate amount of the Commitment Increase, (ii) the
increased Commitments set forth on Schedule C-1 shall be deemed effective,
without further action,  to reflect the
revised Commitments of the Lenders, and (iii) this Agreement shall be deemed
amended, without further action, to the extent necessary to reflect such Increased
Maximum Facility Amount.

 

(d)                                                         Pro Rata Share.  In
connection with Commitment Increase hereunder, the Lenders and the Borrowers
agree that, notwithstanding anything to the contrary in this Agreement, the
Borrowers shall, in coordination with the Agent, (i) repay outstanding loans of
certain Lenders, and obtain loans from certain other Lenders, or (ii) take such
other actions as reasonably may be required by the Agent, in each case to the
extent necessary so that all of the Lenders effectively participate in each of
the outstanding loans pro rata on the basis of their Revolving Credit Commitment
(determined after giving effect to the Increased Maximum Facility Amount pursuant
to this Section 2.17) ; provided that the Agent and the Lenders agree that
no such prepayment

 

 

shall be required
if, as a result thereof, the Borrowers would be obligated to pay Funding Losses
pursuant to Section 2.13(c).

 

17.           The
Maturity Date listed in Section 3.4 is hereby deleted in its entirety, and
the following Maturity Date is inserted in its place:

 

“December 16,
2010.”

 

18.           The
provisions of Section 6.2(c) are hereby deleted in their entirety, and the
following is inserted in their place:

 

(c)                          on a
quarterly basis and, in any event, by no later than 45 days after the end of
each fiscal quarter, and monthly during any period when Excess Availability has
not been greater than $25,000,000.00 at all times during the immediately
preceding 30 day period, by no later than the 15th day of each month, during
the term of this Agreement,

 

(i)                                     from
and after the Receivables Activation Date, a sales journal, collection journal,
and credit register since the last such schedule,

 

(ii)                                  during
any period when no Event of Default has occurred and is continuing, a Borrowing
Base Certificate setting forth the calculation of the Borrowing Base and
demonstrating Borrowers’ compliance with the limitation on Advances set forth
in Section 2.1(a)(iii) as of the last day of the immediately preceding
month.

 

19.           The
provisions of Section 6.2(d) are hereby deleted in their entirety, and the
following is inserted in their place:

 

(d)                                 Intentionally Left Blank.

 

20.           The
provisions of Section 6.2(e) are hereby deleted in their entirety, and the
following is inserted in their place:

 

(e)                                  such other reports as to the Collateral or
the financial condition of the Borrowers as Agent may request from time to time
in its Permitted Discretion.

 

21.           The
provisions of Section 6.2(f) are hereby deleted in their entirety, and the
following is inserted in their place:

 

(f)                                    Intentionally
Left Blank.

 

22.           The
provisions of Section 6.3(a) are hereby deleted in their entirety, and the
following is inserted in their place:

 

(a)                                  as
soon as available, but in any event within 45 days after the end of such month,

 

(i)                                     for
any month during any of GCI’s fiscal years during which Borrower fails, on any
day, to maintain Excess Availability of at least $15,000,000, a company
prepared balance sheet, income statement, and statement of cash flow covering
GCI’s consolidated operations during such period, and

 

 

(ii)                                  for
any month during any of GCI’s fiscal years during any period when Excess
Availability has not been greater than $15,000,000.00 at all times during the
immediately preceding 30 day period, a certificate signed by the chief financial
officer of Administrative Borrower to the effect that:

 

(A)                              the
financial statements delivered hereunder have been prepared in accordance with
GAAP (except for the lack of footnotes and being subject to year-end audit
adjustments) and fairly present the consolidated financial condition of GCI in
all material respects,

 

(B)                                the
representations and warranties of each Obligor contained in this Agreement and
the other Loan Documents are true and correct in all material respects on and
as of the date of such certificate, as though made on and as of such date
(except to the extent that such representations and warranties relate solely to
an earlier date), and

 

(C)                                there
does not exist any condition or event that constitutes a Default or Event of
Default (or, to the extent of any non-compliance, describing such
non-compliance as to which he or she may have knowledge and what action
Borrowers have taken, are taking, or propose to take with respect thereto).

 

23.                                 The
provisions of Section 6.3(f) are hereby deleted in their entirety, and the
following is inserted in their place:

 

(f)                                    Intentionally Left Blank.

 

24.                                 The
provisions of Section 6.4 are hereby deleted in their entirety, and the
following is inserted in their place:

 

6.4                                 Intentionally Left Blank.

 

25.                                 The
provisions of Section 6.16 are hereby deleted in their entirety, and the
following is inserted in their place:

 

6.16                           Projections.  Not
later than 90 days after the end of each fiscal year of GCI, deliver to Agent
Projections of GCI, in form and substance (including as to scope and underlying
assumptions) satisfactory to Agent in its Permitted Discretion, for the
forthcoming fiscal year, month by month, certified by the chief financial
officer of Administrative Borrower as being such officer’s good faith best
estimate of the financial performance of the Obligors during the period covered
thereby.

 

26.                                 The
provisions of Section 7.13 are hereby deleted in their entirety, and the
following is inserted in their place:

 

Investments.  Except for Permitted Investments, directly or
indirectly make, acquire, or incur any liabilities (including contingent
obligations) for or in connection with any Investment; provided, however,
that no Obligor shall have Permitted Investments consisting of Investment
Property or Cash Equivalents (other than (x) Investment Property delivered
to Agent with undated transfer powers and (y) Cash Equivalents and
Investment Property held in the GCS Collection Accounts, the Concentration
Accounts, the Designated Accounts or in any other account with respect to which
the Agent has entered into a Control Agreement or similar arrangement to
perfect Agent’s Lien) in excess of $100,000 outstanding at any one time without
the prior written consent of Agent, which consent may be conditioned, at Agent’s
election, on such Obligor entering into Control Agreements or similar
arrangements governing such Permitted

 

 

Investments, as
Agent shall determine in its Permitted Discretion, to perfect (and further
establish) Agent’s Lien in such Permitted Investments.

 

Part 2.                                   Ratification of Loan Documents.
No Claims against the Agents and the Lenders:

 

1.                                       Except
as provided herein, all terms and conditions of the Loan Agreement and each of
the other Loan Documents remain in full force and effect.  The 
Borrowers hereby ratify, confirm, and re-affirm all terms and provisions
of the Loan Documents.

 

2.                                       The
Borrowers represent and warrant that, no Event of Default exists as of the date
of this Third Amendment.

 

3.                                       The
Borrowers acknowledge and agree that there is no basis nor set of facts on
which any amount (or any portion thereof) owed by the Borrowers under any Loan
Document could be reduced, offset, waived, or forgiven, by rescission or
otherwise; nor is there any claim, counterclaim, off set, or defense (or other
right, remedy, or basis having a similar effect) available to the Borrowers
with regard thereto; nor is there any basis on which the terms and conditions
of any of the Obligations could be claimed to be other than as stated on the
written instruments which evidence such Obligations.

 

4.                                       The
Borrowers hereby acknowledge and agree that the Borrowers have no offsets,
defenses, claims, or counterclaims against the Agents, the Lenders, or their
respective officers, directors, employees, attorneys, representatives,
predecessors, successors, or assigns with respect to the Obligations, or
otherwise, and that if the Borrowers now have, or ever did have, any offsets,
defenses, claims, or counterclaims against the Agents, the Lenders, or their
respective officers, directors, employees, attorneys, representatives,
predecessors, successors, and assigns, whether known or unknown, at law or in
equity, from the beginning of the world through this date and through the time
of execution of this Third Amendment, all of them are hereby expressly WAIVED, and the Borrowers hereby RELEASE the Agents, the Lenders, and their
respective officers, directors, employees, attorneys, representatives,
predecessors, successors, and assigns from any liability therefor.

 

Part 3.                                   Miscellaneous:

 

1.             Capitalized
terms used in this Third Amendment which are defined in the Loan Agreement are
used as so defined.

 

2.             This
Third Amendment may be executed in counterparts, each of which when so executed
and delivered shall be an original, and all of which together shall constitute
one agreement.

 

 

3.             This
Third Amendment expresses the entire understanding of the parties with respect
to the transactions contemplated hereby. 
No prior negotiations or discussions shall limit, modify, or otherwise
affect the provisions hereof.

 

4.             Any
determination that any provision of this Third Amendment or any application
hereof is invalid, illegal, or unenforceable in any respect and in any instance
shall not affect the validity, legality, or enforceability of such provision in
any other instance, or the validity, legality, or enforceability of any other
provisions of this Third Amendment.

 

5.             In
connection with the interpretation of this Third Amendment and all other
documents, instruments, and agreements incidental hereto:

 

a.                                       All
rights and obligations hereunder and thereunder, including matters of
construction, validity, and performance, shall be governed by and construed in
accordance with the law of The State of California and are intended to take
effect as sealed instruments.

 

b.                                      The
captions of this Third Amendment are for convenience purposes only, and shall
not be used in construing the intent of the Agents, the Lenders, and the
Borrowers under this Third Amendment.

 

c.                                       In
the event of any inconsistency between the provisions of this Third Amendment
and any of the other Loan Documents or other agreements entered into by and
between the Agents, the Lenders, and the Borrowers, the provisions of this Third
Amendment shall govern and control.

 

d.                                      The
Agents, the Lenders, and the Borrowers have prepared this Third Amendment and
all documents, instruments, and agreements incidental hereto with the aid and
assistance of their respective counsel. 
Accordingly, all of them shall be deemed to have been drafted mutually
by the Agents, the Lenders, and the Borrowers and shall not be construed
against any party.

 

e.                                       Upon
the execution of this Third Amendment, the Borrowers shall reimburse the Agent
and the Lenders for all reasonable costs, expenses, and attorneys’ fees incurred
in connection with the negotiation and preparation of this Third Amendment, and
all documents, instruments, and agreements incidental hereto.  The Agent is hereby authorized to make an
Advance for the purpose of effecting the foregoing reimbursement.

 

Signatures  follow

 

 

IN WITNESS WHEREOF, the parties hereto have caused this Third Amendment to be executed and
delivered as of the date set forth above.

 

 

	
   

  	
  GUITAR CENTER, INC.,

  
	
   

  	
  a Delaware corporation

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
  /s/ Bruce L. Ross

  	
   

  
	
   

  	
  Title:

  	
  Executive Vice President & Chief
  Financial

  Officer

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  GUITAR CENTER STORES, INC.,

  
	
   

  	
  a Delaware corporation

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
  /s/ Bruce L. Ross

  	
   

  
	
   

  	
  Title:

  	
  Director

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  MUSICIAN’S FRIEND, INC.,

  
	
   

  	
  a Delaware corporation

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
  /s/ Bruce L. Ross

  	
   

  
	
   

  	
  Title:

  	
  Secretary

  

 

 

[signature page continues]

 

 

	
   

  	
  WELLS FARGO RETAIL FINANCE, LLC,

  
	
   

  	
  a Delaware limited liability company, as
  Agent and as

  a Lender

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
  /s/ Lynn S. Whitmore

  	
   

  
	
   

  	
  Name:

  	
  Lynn S. Whitmore

  
	
   

  	
  Title:

  	
  Vice President

  	
   

  
					

 

 

	
   

  	
  FLEET RETAIL GROUP INC,

  
	
   

  	
  formerly known as Fleet Retail Finance
  Inc., a

  Delaware corporation, as Documentation Agent and

  as a Lender

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
  /s/ Christina M. Scott

  	
   

  
	
   

  	
  Name:

  	
  Christina M. Scott

  
	
   

  	
  Title:

  	
  Director

  	
   

  
					

 

 

	
   

  	
  UNION BANK OF CALIFORNIA, N.A.,

  
	
   

  	
  as a Lender

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
  /s/ Nancy A. Parkins

  	
   

  
	
   

  	
  Name:

  	
  Nancy A. Parkins

  
	
   

  	
  Title:

  	
  Vice President

  	
   

  
						

 

 

	
   

  	
  PNC BANK, NATIONAL ASSOCIATION

  
	
   

  	
  as a Lender

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
  /s/ Lawrence Weinstein

  	
   

  
	
   

  	
  Name:

  	
  Lawrence Weinstein

  
	
   

  	
  Title:

  	
  Vice PresidentExhibit 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

  	
  Working Capital Estimates

  	
   

  
					

 

i

 

	
  Section 3.7.4

  	
  Calculation of Working Capital Adjustment

  	
   

  
	
  Section 3.8 

  	
  Stockholder Representative

  	
   

  
	
  Section 3.8.1 

  	
  Appointment of Stockholder Representative

  	
   

  
	
  Section 3.8.2

  	
  Authority After the Effective Time

  	
   

  
	
  Section 3.8.3

  	
  Reimbursement of Expenses

  	
   

  
	
  Section 3.8.4

  	
  Authority of Stockholder Representative

  	
   

  
	
  Section 3.8.5

  	
  Acknowledgement of Reliance by Parent

  	
   

  
	
  Section 3.8.6

  	
  Release From Liability; Indemnification

  	
   

  
	
  Section 3.9

  	
  No Dissenters Rights

  	
   

  
	
  Section 3.10

  	
  Company Expenses and Carveout Plan
  Deficiency

  	
   

  
	
   

  	
   

  	
   

  
	
  Article 4.

  	
  Representations
  and Warranties of the Company and Kenneth M. O’Brien

  	
   

  
	
   

  	
   

  	
   

  
	
  Section 4.1

  	
  Organization and Qualification; Subsidiaries

  	
   

  
	
  Section 4.2

  	
  Articles of Incorporation and Bylaws;
  Corporate Books and Records

  	
   

  
	
  Section 4.3 

  	
  Capitalization; No Dissenters’ Rights

  	
   

  
	
  Section 4.3.1

  	
  Capitalization

  	
   

  
	
  Section 4.3.2

  	
  No Dissenters’ Rights

  	
   

  
	
  Section 4.4 

  	
  Authority; No Restrictions on Business
  Combinations

  	
   

  
	
  Section 4.4.1

  	
  Authority

  	
   

  
	
  Section 4.4.2

  	
  No Restrictions on Business Combinations

  	
   

  
	
  Section 4.5 

  	
  No Conflict; Required Filings and Consents

  	
   

  
	
  Section 4.5.1

  	
  No Conflict.

  	
   

  
	
  Section 4.5.2

  	
  Required Filings and Consents.

  	
   

  
	
  Section 4.6 

  	
  Permits; Compliance With Law

  	
   

  
	
  Section 4.7

  	
  Financial Statements; Internal Controls

  	
   

  
	
  Section 4.7.1

  	
  Financial Statements

  	
   

  
	
  Section 4.7.2 

  	
  Internal Controls

  	
   

  
	
  Section 4.7.3

  	
  Books and Records

  	
   

  
	
  Section 4.7.4

  	
  All Accounts Recorded

  	
   

  
	
  Section 4.7.5 

  	
  Corporate Records

  	
   

  
	
  Section 4.8

  	
  Absence of Certain Changes or Events

  	
   

  
	
  Section 4.9

  	
  Employee Benefit Plans

  	
   

  
	
  Section 4.9.1

  	
  ERISA Plans.

  	
   

  
	
  Section 4.9.2

  	
  Compliance With Law.

  	
   

  
	
  Section 4.9.3

  	
  Code Section 401 Plans.

  	
   

  
	
  Section 4.9.4

  	
  [Intentionally Omitted].

  	
   

  
	
  Section 4.9.5

  	
  Code Section 280G; Deductibility

  	
   

  
	
  Section 4.9.6

  	
  Compliance with COBRA.

  	
   

  
	
  Section 4.9.7

  	
  No Employee Plans.

  	
   

  
	
  Section 4.9.8

  	
  Termination of Certain Plans.

  	
   

  
	
  Section 4.10

  	
  Labor and Other Employment Matters

  	
   

  
	
  Section 4.10.1

  	
  Employees.

  	
   

  
	
  Section 4.10.2 

  	
  Employment Arrangements.

  	
   

  
					

 

ii

 

	
  Section 4.10.3

  	
  No Claims.

  	
   

  
	
  Section 4.11

  	
  Contracts

  	
   

  
	
  Section 4.12

  	
  Litigation

  	
   

  
	
  Section 4.13

  	
  Environmental Matters

  	
   

  
	
  Section 4.13.1

  	
  Compliance.

  	
   

  
	
  Section 4.13.2

  	
  No Violation.

  	
   

  
	
  Section 4.13.3

  	
  No Litigation.

  	
   

  
	
  Section 4.13.4

  	
  National Priorities List.

  	
   

  
	
  Section 4.14

  	
  Intellectual Property

  	
   

  
	
  Section 4.15

  	
  Taxes

  	
   

  
	
  Section 4.15.1

  	
  Filed Tax Returns.

  	
   

  
	
  Section 4.15.2

  	
  Unpaid Taxes.

  	
   

  
	
  Section 4.15.3

  	
  No Audits or Assessments.

  	
   

  
	
  Section 4.15.4

  	
  No Tax Liens.

  	
   

  
	
  Section 4.15.5 

  	
  Withholding.

  	
   

  
	
  Section 4.15.6

  	
  No Tax Sharing Agreements.

  	
   

  
	
  Section 4.15.7

  	
  No Change in Status.

  	
   

  
	
  Section 4.15.8

  	
  Controlled Person.

  	
   

  
	
  Section 4.15.9

  	
  No Listed Transactions.

  	
   

  
	
  Section 4.16

  	
  Insurance

  	
   

  
	
  Section 4.17

  	
  Vote Required

  	
   

  
	
  Section 4.18

  	
  Brokers

  	
   

  
	
  Section 4.19

  	
  Approvals

  	
   

  
	
  Section 4.20

  	
  Product Liability

  	
   

  
	
  Section 4.21

  	
  Rental Contracts

  	
   

  
	
  Section 4.22

  	
  Real Estate

  	
   

  
	
  Section 4.22.1

  	
  General

  	
   

  
	
  Section 4.22.2

  	
  Owned Facilities

  	
   

  
	
  Section 4.22.3

  	
  Leased Facilities

  	
   

  
	
  Section 4.22.4

  	
  Certificate of Occupancy

  	
   

  
	
  Section 4.22.5

  	
  Utilities

  	
   

  
	
  Section 4.23

  	
  Assets Necessary to Continue to Conduct
  Business

  	
   

  
	
  Section 4.24

  	
  Accounts Receivable

  	
   

  
	
  Section 4.25

  	
  Inventory

  	
   

  
	
  Section 4.26

  	
  Purchase Commitments and Outstanding Bids

  	
   

  
	
  Section 4.27

  	
  Suppliers

  	
   

  
	
  Section 4.28

  	
  Foreign Corrupt Practices Act

  	
   

  
	
  Section 4.29

  	
  Officers and Directors; Loans

  	
   

  
	
  Section 4.30

  	
  Bank Accounts

  	
   

  
	
  Section 4.31

  	
  No Other Agreements to Sell the Company

  	
   

  
	
  Section 4.32

  	
  Material Misstatements or Omissions

  	
   

  
	
   

  	
   

  	
   

  
	
  Article 5.

  	
  Additional
  Representations and Warranties of the Stockholders

  	
   

  
	
   

  	
   

  	
   

  
	
  Section 5.1

  	
  Authority

  	
   

  
					

 

iii

 

	
  Section 5.2

  	
  No Conflict; Required Filings and Consents

  	
   

  
	
  Section 5.3

  	
  Brokers

  	
   

  
	
   

  	
   

  	
   

  
	
  Article 6.

  	
  Representations
  and Warranties of Parent and Merger Sub

  	
   

  
	
   

  	
   

  	
   

  
	
  Section 6.1

  	
  Organization and Qualification;
  Subsidiaries

  	
   

  
	
  Section 6.2

  	
  Authority

  	
   

  
	
  Section 6.3

  	
  No Conflict; Required Filings and Consents

  	
   

  
	
  Section 6.4

  	
  Ownership of Merger Sub; No Prior
  Activities

  	
   

  
	
  Section 6.5

  	
  Board Approval

  	
   

  
	
  Section 6.6

  	
  Financing

  	
   

  
	
  Section 6.7

  	
  Brokers

  	
   

  
	
   

  	
   

  	
   

  
	
  Article 7.

  	
  Covenants and Agreements

  	
   

  
	
   

  	
   

  	
   

  
	
  Section 7.1

  	
  Conduct of Business by the Company Pending
  the Effective Time

  	
   

  
	
  Section 7.2

  	
  Cooperation Generally

  	
   

  
	
  Section 7.3

  	
  Access to Information; Confidentiality

  	
   

  
	
  Section 7.4

  	
  No Solicitation of Transactions

  	
   

  
	
  Section 7.5

  	
  Appropriate Action; Consents; Filings

  	
   

  
	
  Section 7.6

  	
  Certain Notices

  	
   

  
	
  Section 7.7

  	
  Public Announcements

  	
   

  
	
  Section 7.8

  	
  Repayment of Officer and Director Loans

  	
   

  
	
  Section 7.9

  	
  Tax Matters

  	
   

  
	
  Section 7.9.1

  	
  Tax Return Filing for Periods Ending on
  or before the Effective Time

  	
   

  
	
  Section 7.9.2

  	
  Tax Returns for Straddle Periods

  	
   

  
	
  Section 7.9.3

  	
  Special Procedures to Apply to Deduction
  of the Management Bonus.

  	
   

  
	
  Section 7.9.4
  

  	
  Special Procedures to Apply to Personal
  Property Taxes.

  	
   

  
	
  Section 7.9.5

  	
  Cooperation on Tax Matters

  	
   

  
	
  Section 7.9.6

  	
  Transfer Taxes

  	
   

  
	
  Section 7.9.7

  	
  FIRPTA Certificate

  	
   

  
	
  Section 7.9.8
  

  	
  Forms W-9

  	
   

  
	
  Section 7.10

  	
  Company’s Auditors

  	
   

  
	
  Section 7.11

  	
  Confidential Information

  	
   

  
	
  Section 7.12

  	
  Treatment of Company Benefit Plans

  	
   

  
	
  Section 7.13 

  	
  Delivery of Ancillary Agreements.

  	
   

  
	
  Section 7.14 

  	
  Payment of William Blair Fees.

  	
   

  
	
  Section 7.15

  	
  Termination of Retirement Agreement.

  	
   

  
	
   

  	
   

  	
   

  
	
  Article 8.

  	
  Closing Conditions

  	
   

  
	
   

  	
   

  	
   

  
	
  Section 8.1

  	
  Conditions to Obligations of Each Party
  Under This Agreement

  	
   

  
	
  Section 8.1.1

  	
  No Order

  	
   

  
	
  Section 8.1.2

  	
  HSR Act

  	
   

  
					

 

iv

 

	
  Section 8.1.3

  	
  Extension of Warehouse Lease.

  	
   

  
	
  Section 8.2

  	
  Additional Conditions to Obligations of
  Parent and Merger Sub

  	
   

  
	
  Section 8.2.1

  	
  Representations and Warranties

  	
   

  
	
  Section 8.2.2

  	
  Agreements and Covenants

  	
   

  
	
  Section 8.2.3

  	
  Consents and Approvals

  	
   

  
	
  Section 8.2.4
  

  	
  Material Adverse Effect

  	
   

  
	
  Section 8.2.5

  	
  Court Proceedings

  	
   

  
	
  Section 8.2.6
  

  	
  Ancillary Agreements

  	
   

  
	
  Section 8.2.7

  	
  Resignation of Officers and Directors

  	
   

  
	
  Section 8.2.8
  

  	
  Results for Year Ended January 31,
  2005

  	
   

  
	
  Section 8.2.9

  	
  Employment Status of Kenneth O’Brien

  	
   

  
	
  Section 8.2.10

  	
  Release of Lien on Warehouse

  	
   

  
	
  Section 8.2.11

  	
  Financing

  	
   

  
	
  Section 8.2.12

  	
  Termination of Rights Under Investors
  Agreement.

  	
   

  
	
  Section 8.3

  	
  Additional Conditions to Obligations of the
  Company

  	
   

  
	
  Section 8.3.1

  	
  Representations and Warranties

  	
   

  
	
  Section 8.3.2

  	
  Agreements and Covenants

  	
   

  
	
  Section 8.3.3

  	
  Consents and Approvals

  	
   

  
	
  Section 8.3.4

  	
  Ancillary Agreements.

  	
   

  
	
   

  	
   

  	
   

  
	
  Article 9.

  	
  Termination, Amendment and Waiver

  	
   

  
	
   

  	
   

  	
   

  
	
  Section 9.1

  	
  Termination

  	
   

  
	
  Section 9.2

  	
  Effect of Termination

  	
   

  
	
  Section 9.2.1

  	
  Limitation on Liability

  	
   

  
	
  Section 9.2.2

  	
  Parent Expenses

  	
   

  
	
  Section 9.2.3

  	
  Company Expenses

  	
   

  
	
  Section 9.2.4

  	
  Payment of Expenses

  	
   

  
	
  Section 9.2.5

  	
  All Payments

  	
   

  
	
   

  	
   

  	
   

  
	
  Article 10.

  	
  Indemnity; Remedies

  	
   

  
	
   

  	
   

  	
   

  
	
  Section 10.1

  	
  Survival of Representations

  	
   

  
	
  Section 10.2

  	
  Indemnification

  	
   

  
	
  Section 10.2.1

  	
  Indemnification by Stockholders

  	
   

  
	
  Section 10.2.2

  	
  Indemnification by Stockholders

  	
   

  
	
  Section 10.2.3

  	
  Tax Indemnification by Stockholders

  	
   

  
	
  Section 10.2.4

  	
  Indemnification by Parent

  	
   

  
	
  Section 10.2.5

  	
  Investigation

  	
   

  
	
  Section 10.2.6

  	
  Tax Indemnification by Parent

  	
   

  
	
  Section 10.2.7
  

  	
  Procedures for Claims

  	
   

  
	
  Section 10.3

  	
  No Contribution by the Company

  	
   

  
	
  Section 10.4

  	
  Limitations on Indemnity

  	
   

  
	
  Section 10.4.1

  	
   

  	
   

  
	
  Section 10.4.2

  	
   

  	
   

  
	
  Section 10.4.3

  	
   

  	
   

  
					

 

v

 

	
  Section 10.4.4

  	
   

  	
   

  
	
  Section 10.4.5

  	
   

  	
   

  
	
  Section 10.4.6

  	
   

  	
   

  
	
  Section 10.4.7

  	
   

  	
   

  
	
  Section 10.5

  	
  Tax Refunds.

  	
   

  
	
  Section 10.6

  	
  Interest.

  	
   

  
	
   

  	
   

  	
   

  
	
  Article 11.

  	
  General

  	
   

  
	
   

  	
   

  	
   

  
	
  Section 11.1

  	
  Notices

  	
   

  
	
  Section 11.2

  	
  Headings

  	
   

  
	
  Section 11.3

  	
  Severability

  	
   

  
	
  Section 11.4

  	
  Entire Agreement

  	
   

  
	
  Section 11.5

  	
  Amendment

  	
   

  
	
  Section 11.6

  	
  Waiver

  	
   

  
	
  Section 11.7

  	
  Fees and Expenses

  	
   

  
	
  Section 11.8

  	
  Assignment

  	
   

  
	
  Section 11.9

  	
  Parties in Interest

  	
   

  
	
  Section 11.10

  	
  Mutual Drafting

  	
   

  
	
  Section 11.11

  	
  Governing Law

  	
   

  
	
  Section 11.12

  	
  Remedies; Dispute Resolution

  	
   

  
	
  Section 11.12.1

  	
  Remedies

  	
   

  
	
  Section 11.12.2

  	
  Dispute Resolution

  	
   

  
	
  Section 11.13

  	
  Waiver of Jury Trial

  	
   

  
	
  Section 11.14

  	
  Counterparts

  	
   

  
	
   

  	
   

  	
   

  
	
  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

 

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

 

“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

  

 

7

 

	
  “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

  

 

8

 

	
  “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

 

	
  “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

 

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:

 

11

 

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

 

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.

 

13

 

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

 

14

 

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.

 

15

 

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.

 

16

 

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;

 

17

 

(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

 

18

 

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.

 

19

 

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.

 

20

 

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.

 

21

 

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,

 

22

 

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

 

23

 

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)

 

24

 

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

 

25

 

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

 

26

 

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.

 

27

 

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.

 

28

 

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

 

29

 

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

 

30

 

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

 

31

 

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,

 

32

 

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

 

33

 

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

 

34

 

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

 

35

 

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

 

36

 

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

 

37

 

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.

 

38

 

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.

 

39

 

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

 

40

 

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

 

41

 

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

 

42

 

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

 

43

 

(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

 

44

 

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.

 

45

 

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

 

46

 

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

 

47

 

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

 

48

 

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

 

49

 

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

 

50

 

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

 

51

 

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.

 

52

 

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.

 

53

 

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.

 

54

 

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.

 

55

 

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

 

56

 

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

 

57

 

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

 

 

58

 

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

 

59

 

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

 

60

 

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

 

61

 

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

 

62

 

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

 

63

 

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

 

64

 

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.

 

65

 

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.

 

66

 

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.

 

67

 

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]

 

 

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

  	
   

  

 

 

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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