AGREEMENT OF MERGER AND PLAN OF REORGANIZATION
by and among
VIDEO CITY, INC.,
VIDEO GALAXY, INC.
and
▇▇▇▇▇ ▇. ▇▇▇▇▇▇, ▇▇▇▇▇▇ ▇. ▇▇▇▇▇▇
and ▇▇▇▇ ▇▇▇▇▇▇▇▇
Dated as of March 30, 1999
AGREEMENT OF MERGER AND PLAN OF REORGANIZATION
THIS AGREEMENT OF MERGER AND PLAN OF REORGANIZATION, dated as of March 30,
1999, is by and among VIDEO CITY, INC., a Delaware corporation ("VCI"), VIDEO
GALAXY, INC., a Delaware corporation ("Video Galaxy"), and ▇▇▇▇▇ ▇. ▇▇▇▇▇▇,
▇▇▇▇▇▇ ▇. ▇▇▇▇▇▇ and ▇▇▇▇ ▇▇▇▇▇▇▇▇, with reference to the following facts:
A. ▇▇▇▇▇ ▇. ▇▇▇▇▇▇, ▇▇▇▇▇▇ ▇. ▇▇▇▇▇▇, ▇▇▇▇ ▇▇▇▇▇▇▇▇ (collectively, the
"Selling Shareholders") and certain other persons own all of the outstanding
shares of capital stock of Video Galaxy; and
B. VCI, Video Galaxy, each of the Selling Shareholders and the other
stockholders of Video Galaxy believe that it is in their best interests to adopt
and consummate a plan of reorganization that provides for the merger of a newly
formed wholly-owned subsidiary of VCI, with and into Video Galaxy, with such
newly formed subsidiary of VCI disappearing and Video Galaxy surviving, and the
conversion of all outstanding shares of capital stock of Video Galaxy into the
right to receive the Merger Consideration (as defined herein).
NOW THEREFORE, in consideration of the foregoing and the mutual agreements
and covenants contained herein and for other good and valuable consideration,
the receipt and sufficiency of which is hereby acknowledged, the parties hereto
agree as follows:
ARTICLE I
DEFINITIONS
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1.1 Defined Terms. As used herein, the terms below shall have the
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following meanings. Any of such terms, unless the context otherwise requires,
may be used in the singular or plural, and in the masculine or feminine gender,
depending upon the reference.
"Action" shall mean any action, order, writ, injunction, judgment or
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decree outstanding or any claim, suit, litigation, proceeding, labor dispute,
arbitral action, governmental audit or investigation.
"Affiliate" shall mean, with respect to any Person, a Person that
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directly or indirectly controls, is controlled by or is under common control
with such Person.
"Agreement" shall mean this Agreement of Merger and Plan of
---------
Reorganization, together with all schedules (including the Disclosure Schedule)
and exhibits referenced herein.
"Alternative Transaction" shall mean, with respect to any Person, any
-----------------------
merger, consolidation, sale of substantial assets, sale of shares of capital
stock or other equity securities, recapitalization, debt restructuring or
similar transaction involving such Person or
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any of its subsidiaries or any divisions, other than as contemplated by this
Agreement.
"Assets" shall mean those assets and properties owned by Video Galaxy,
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or in which Video Galaxy has any right, title or interest of any kind and
description as of the Effective Time, except as set forth in the Disclosure
Schedule.
"Books and Records" shall mean all books and records, stock transfer
-----------------
books, minute books, copies of outstanding stock certificates, ledgers, employee
records, customer lists, files, correspondence, and other written records of
every kind.
"Code" shall mean the Internal Revenue Code of 1986, as amended, and
----
the rules and regulations thereunder.
"Contracts" shall mean all executory agreements, contracts, leases,
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commitments, evidences of indebtedness, letters of credit, franchise agreements,
purchase agreements and purchase orders, whether oral or written.
"Disclosure Schedule" shall mean, collectively, the schedules attached
-------------------
hereto and delivered by the parties as of the date hereof which set forth the
exceptions to the representations and warranties contained in Article III hereof
(as to Video Galaxy and the Selling Shareholders) and Article IV hereof (as to
VCI) and certain other information called for by this Agreement. Unless
otherwise specified, each reference in this Agreement to any numbered schedule
is a reference to that numbered schedule which is included in the Disclosure
Schedule. Any information disclosed on a particular schedule on the Disclosure
Schedule or subparts thereof shall be deemed disclosed on any and all schedules.
"Encumbrance" shall mean any claim, lien, pledge, option, charge,
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easement, security interest, deed of trust, mortgage, right-of-way,
encroachment, building or use restriction, conditional sales agreement,
encumbrance, restriction or other right of third parties, whether voluntarily
incurred or arising by operation of law, and includes, without limitation, 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, except liens for
current taxes, assessments, governmental charges or levies on property not yet
due and payable.
"ERISA" shall mean the Employee Retirement Income Security Act of
-----
1974, as the same may be amended from time to time.
"ERISA Affiliate" shall mean any entity that is a member of a group of
---------------
which Video Galaxy is a member and which is under common control with Video
Galaxy, within the meaning of the regulations promulgated under Section 414 of
the Code.
"ERISA Plans" shall mean, collectively, all Pension Plans and all
-----------
Welfare Plans required to be disclosed on Schedule 3.22.
"Marks" shall mean all registered and unregistered trademarks, service
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marks,
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trade names, and slogans, all applications therefor, and all goodwill associated
therewith.
"Material" shall mean, unless otherwise specifically defined herein,
--------
any amounts of $100,000 or more as to Video Galaxy or VCI, except that where the
context requires, "material" shall mean an effect resulting in loss, liability,
payment, damage or expense of $100,000 or more in the case of Video Galaxy or
VCI.
"Material Adverse Change" shall mean a material adverse change in the
-----------------------
business, assets, financial condition or results of operations of Video Galaxy
or VCI which involves a loss or exposure of more than $100,000.
"Pension Plan" shall mean any employee pension benefit plan within
------------
the meaning of Section 3(2) of ERISA.
"Permits" shall mean all licenses, permits, orders, consents,
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approvals, registrations, authorizations, qualifications and filings under all
federal, state, local or foreign laws with governmental or regulatory bodies, or
any other Person.
"Person" shall mean an individual, a partnership, a limited liability
------
company, a joint venture, a corporation, a trust, an unincorporated
organization, a government or any department or agency thereof or any other
entity.
"Representative" shall mean any officer, director, principal,
--------------
attorney, accountant, agent, employee or other representative.
"Securities Act" shall mean the Securities Act of 1933, as amended.
--------------
"Tax" or "Taxes" shall mean any federal, state, local, foreign or
--- -----
other tax, levy, impost, fee, assessment or other government charge, including
without limitation income, estimated income, business, occupation, franchise,
property, payroll, personal property, sales, transfer, use, import duty,
employment, commercial rent, occupancy, franchise or withholding taxes, and any
premium, including without limitation interest, penalties and additions in
connection therewith.
"VCI Common Stock" shall mean shares of common stock, $0.01 par value
----------------
per share, of VCI.
"VCI Documents" shall mean this Agreement and any other documents,
-------------
instruments or certificates to be delivered by VCI in connection with this
Agreement.
"Video Galaxy Capital Stock" shall mean shares of capital stock of
--------------------------
Video Galaxy, which shall consist of shares of voting common stock, no par
value, and shares of non-voting common stock, no par value, of Video Galaxy.
"Video Galaxy Disclosure Schedules" shall mean all Disclosure
---------------------------------
Schedules
3
delivered by Video Galaxy and the Selling Shareholders pursuant to this
Agreement.
"Video Galaxy Documents" shall mean this Agreement, the Certificate of
----------------------
Merger and any other documents, instruments or certificates to be delivered by
Video Galaxy or the Selling Shareholders in connection with this Agreement.
"Video Galaxy Intangible Property" shall mean all intangible property
--------------------------------
owned by Video Galaxy or in which Video Galaxy has any interest (including the
right to use) or owned by any Selling Shareholder and used in Video Galaxy's
business (other than intangible property owned by third parties and available
generally for commercial license from others), including without limitation, (i)
Video Galaxy's name and all Marks; (ii) all statutory, common law and registered
copyrights and mask work rights, and all applications for the registration
thereof; (iii) all patents and applications therefor; (iv) all software; (v) all
other inventories, discoveries, improvements, processes, formulae (secret or
otherwise), trade secrets, information, know-how and ideas (including those in
the possession of third parties, but that are the property of Video Galaxy); and
(vi) all technical documentation relating thereto.
"Welfare Plan" shall mean any employee welfare benefit plan within
------------
the meaning of Section 3(1) of ERISA.
1.2 Other Defined Terms. The following terms shall have the meanings
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defined for such terms in the Sections set forth below:
Term Section
---- -------
Basket Amount 11.4
Certificate of Merger 2.3
Claim 11.5
Closing 2.6
Closing Date 2.6
Delaware Law 2.3
Effective Time 2.3
Losses 11.2
Merger 2.2(a)
Merger Consideration 2.2(b)
Noncompetition Agreement 6.4
Surviving Corporation 2.2(a)
Termination Date 6.1
VCI Indemnified Parties 11.2
Video Galaxy Balance Sheet 3.8(b)
Video Galaxy Consents 3.7
Video Galaxy Financial Statements 3.8(a)
Video Galaxy Indemnified Parties 11.3
Video Galaxy Permits 3.14
Video Sub 2.2(a)
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ARTICLE II
PLAN OF REORGANIZATION
----------------------
2.1 Adoption of Plan. VCI, Video Galaxy and each of the Selling
----------------
Shareholders believe that it is in their best interests to adopt and consummate
the Merger.
2.2 The Merger.
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(a) As soon as practicable following the execution of this Agreement,
VCI shall form a wholly-owned subsidiary called "Video Galaxy Acquisition Corp."
("Video Sub") under the laws of the State of Delaware. VCI shall cause Video
Sub to be merged with and into Video Galaxy (the "Merger") with Video Galaxy as
the surviving corporation in the Merger (the "Surviving Corporation"), and as of
the Effective Time as a result thereof, the Surviving Corporation shall become a
wholly-owned subsidiary of VCI. From and after the Effective Time, the name of
the Surviving Corporation shall be "Video Galaxy, Inc." until changed or amended
in accordance with applicable law.
(b) Pursuant to the Merger, all of the shares of capital stock of
Video Galaxy issued and outstanding immediately prior to the Effective Time
shall thereupon be converted into and become the right to receive 360,667 shares
of VCI Common Stock (the "Merger Consideration") reduced by the number of shares
of VCI Common Stock (valued at $3.00 per share) equal to (x) the total amount of
indebtedness and liabilities of Video Galaxy in excess of $4,833,000 (which
$4,833,000 includes the indebtedness of $1,757,000 to be paid by VCI on or
before the Effective Time pursuant to Section 2.2(c) hereof and the indebtedness
of $2,000,000 of Video Galaxy owed to Mortco, Inc. to be converted into 2,000
shares of VCI Series D Convertible Redeemable Preferred Stock, with a stated
value of $1,000 per share, on or before the Effective Time pursuant to Section
2.2(d) hereof) immediately prior to the Effective Time; and (y) the total amount
of dollar reduction, if any, called for by Section 2.8 below.
(c) As part of the transactions contemplated by this Agreement, VCI
(i) shall pay to Mortco, Inc. on or before the Effective Time certain
indebtedness of Video Galaxy to Mortco, Inc. in an amount of $1,117,000; and
(ii) shall pay to Savings Bank of Manchester on or before the Effective Time
certain indebtedness of Video Galaxy to Savings Bank of Manchester in an amount
of $640,000.
(d) As part of the transactions contemplated by this Agreement and as
a condition to the obligation of VCI to consummate the transactions contemplated
by this Agreement, VCI and Video Galaxy acknowledge that of the $3,117,000 owed
by Video Galaxy to Mortco, Inc. as of March 31, 1999 pursuant to a Promissory
Note, dated February 11, 1997 in the principal amount of $2,600,000, Mortco,
Inc. shall convert $2,000,000 of such indebtedness into 2,000 shares of VCI
Series D Convertible Redeemable Preferred Stock, with a stated value of $1,000
per share, and certain warrants to purchase VCI Common Stock on or before the
Effective Time pursuant to the Debt Conversion Agreement, dated as of March 30,
1999.
5
(e) Of the amount of the Merger Consideration to be delivered pursuant
to Section 2.2(b), 344,000 shares of VCI Common Stock shall be delivered at the
Effective Time. The remainder of the Merger Consideration shall be delivered to
the Selling Shareholders not later than 90 days after the Effective Time,
reflecting the adjustments described in Sections 2.2(b) and 2.8; and if the
total amount of the reduction (if any) pursuant to Sections 2.2(b) and 2.8
exceeds $50,000, so that no remaining amount of the Merger Consideration is
required to be delivered by VCI, then the Selling Shareholders (on behalf of
themselves and the other selling shareholders of Video Galaxy) shall return to
VCI, no later than 90 days after the Effective Time, cash equal to the amount of
which the total amount of all reductions (if any) pursuant to Sections 2.2(b)
and 2.8 exceeds $75,000, and the Selling Shareholders agree to share equally in
the liability for said repayment. Video Galaxy and the Selling Shareholders
acknowledge the receipt by the Selling Shareholders of a cash deposit in the
amount of $5,000 delivered by VCI to ▇▇▇▇▇▇▇ & ▇▇▇▇▇▇▇▇, P.A. in September 1998
in connection with the transactions contemplated by this Agreement. VCI and the
Selling Shareholders agree that such $5,000 cash deposit shall be credited
towards the payment of indebtedness of Video Galaxy to Savings Bank of
Manchester at the Closing pursuant to Section 2.2(c).
(f) Video Galaxy and the Selling Shareholders (on behalf of themselves
and the other selling shareholders of Video Galaxy) shall cause all stock
certificates representing issued and outstanding shares of Video Galaxy Capital
Stock to be delivered, free and clear of all Encumbrances, to VCI at or prior to
the Effective Time. Each certificate which immediately prior to the Effective
Time represents outstanding shares of Video Galaxy Capital Stock shall at and
after the Effective Time be deemed to represent only the number of shares of VCI
Common Stock into which such shares of Video Galaxy Capital Stock shall have the
right to be converted pursuant to Section 2.2(b) above. Certificates
representing the shares of VCI Common Stock shall be delivered to the Selling
Shareholders (on behalf of themselves and the other selling shareholders of
Video Galaxy) upon surrender to VCI of valid stock certificates representing
their shares of Video Galaxy Capital Stock. At the Closing, certificates
representing the Shares of VCI Common Stock will bear a legend substantially as
follows:
"THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1933 AND MAY NOT BE SOLD, TRANSFERRED OR OTHERWISE
DISPOSED OF UNLESS REGISTERED UNDER SAID ACT OR UNLESS AN EXEMPTION FROM
SUCH REGISTRATION IS AVAILABLE IN THE OPINION OF COUNSEL FOR THE ISSUER."
(g) At the Effective Time, each share of common stock of Video Sub
that is issued and outstanding will be converted into one newly issued share of
Video Galaxy common stock. From and after the Effective Time, VCI, as the sole
shareholder of the Surviving Corporation, shall be entitled to receive one or
more certificates representing the Video Galaxy common stock into which such
shares have been converted.
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2.3 Effective Time. The Merger shall become effective (such time and
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date are referred to herein as the "Effective Time") on the business day (which
day shall be on or before April 15, 1999) on which (a) all conditions to the
Closing of the transactions contemplated by this Agreement shall have occurred,
and (b) the Certificate of Merger (the "Certificate of Merger") and any other
documents necessary to effect the Merger shall be filed in accordance with the
Delaware General Corporation Law (the "Delaware Law").
2.4 Certificate of Incorporation and Bylaws. From and after the
---------------------------------------
Effective Time, the Certificate of Incorporation of Video Galaxy set forth in
Exhibit A attached hereto shall be the Certificate of Incorporation of the
Surviving Corporation and the Bylaws of Video Galaxy set forth in Exhibit B
attached hereto shall be the Bylaws of the Surviving Corporation, until changed
or amended as provided therein or under the Delaware Law.
2.5 Directors and Officers. From and after the Effective Time, ▇▇▇▇▇▇ ▇.
----------------------
▇▇▇, ▇▇▇▇▇▇▇ ▇. ▇▇▇▇▇▇ and ▇▇▇▇▇ ▇. ▇▇▇ shall be the directors and officers of
the Surviving Corporation, in each case until their successors shall have been
elected and shall qualify or until otherwise provided by law or the Certificate
of Incorporation or Bylaws of the Surviving Corporation. Each of the Selling
Shareholders shall resign as a director and/or officer of Video Galaxy effective
as of the Effective Time.
2.6 The Closing. The closing of the transactions contemplated by this
-----------
Agreement (the "Closing") shall be held on the date of the Effective Time at
such place and time as the parties may agree (the "Closing Date").
2.7 Closing Adjustments. Except as otherwise provided in this Agreement,
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all rent payments, insurance premiums, utility payments and annual personal
property tax prepayments (but not utility deposits or lease deposits) made by
Video Galaxy and covering time periods in which the Closing occurs shall be
prorated as of the Closing Date; and VCI shall cause Video Galaxy to pay to the
Selling Shareholders, no later than 90 days after the Closing Date, the amount,
if any, by which such payments made prior to the Closing Date which are
applicable to periods on and after the Closing Date exceed such payments that
are made on or after the Closing Date and are allocable to periods prior to the
Closing Date; or, conversely, the Selling Shareholders shall pay to Video
Galaxy, no later than 90 days after the Closing Date, the amount, if any, by
which such payments made on or after the Closing Date for expenses allocable to
periods prior to the Closing Date exceed the amounts paid by Video Galaxy prior
to the Closing Date for expenses allocable to periods on or after the Closing
Date. VCI and Video Galaxy acknowledge and agree that (i) any amounts of cash
remaining at Video Galaxy's video stores, at Video Galaxy's corporate office or
at any of Video Galaxy's depository banks on the Closing Date, and (ii) all
amounts of accounts receivable by Video Galaxy as of the Closing Date pursuant
to depository accounts established with credit card companies, pursuant to
arrangements with Video Galaxy's franchisee stores and pursuant to advertising
co-op credits shall be deemed to be the assets of the Selling Shareholders and
shall be credited to the Selling Shareholders no later than 90 days after the
Closing Date. All other assets of Video Galaxy including any and all utility
deposits or lease deposits shall be deemed to be the assets of VCI.
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2.8 Inventory. An itemized physical inventory of Video Galaxy's
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videocassettes as of the Closing Date shall be taken by VCI or its
representatives. In the event such inventory as of the Closing Date shows that
the number of videocassettes on hand is less than 99,500 units, the number of
shares of VCI Common Stock (valued at $3.00 per share) payable pursuant to
Section 2.2(b) of this Agreement as part of the Merger Consideration shall be
reduced by $10.00 multiplied by the number of videocassettes less than 99,500
units. There shall be no increase in the amount of cash payable pursuant to
Section 2.2(b) of this Agreement as part of the Merger Consideration if the
number of videocassettes on hand as of the Closing Date is greater than 99,500.
VCI and Video Galaxy agree that VCI shall be responsible for payment of the
invoice cost of all videocassettes purchased by and delivered to Video Galaxy in
the ordinary course of business during the period commencing on the Monday of
the week of the Closing Date and ending on the Closing Date. The videocassettes
so purchased during the period commencing on the Monday of the week of the
Closing Date and ending on the Closing Date shall not be included for purposes
of determining the inventory of Video Galaxy's videocassettes as of the Closing
Date pursuant to this Section 2.8 and Section 9.8 of this Agreement.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF VIDEO GALAXY
----------------------------------------------
AND THE SELLING SHAREHOLDERS
----------------------------
Subject to the exceptions set forth in the Video Galaxy Disclosure
Schedules, Video Galaxy and each of the Selling Shareholders, and solely with
respect to Sections 3.27 and 3.28 each Selling Shareholder, hereby represent and
warrant to VCI that:
3.1 Corporate Existence and Power. Video Galaxy is a corporation duly
-----------------------------
organized, validly existing and in good standing under the laws of the State of
Delaware and has all corporate power and authority and all governmental
licenses, authorizations, consents and approvals required to carry on its
business and operations as now conducted. Schedule 3.1 sets forth those
jurisdictions in which Video Galaxy is required to be qualified to do business
as a foreign corporation because of the character of the property owned or
leased by Video Galaxy or the nature of its activities; Video Galaxy is duly
qualified to do business in each of these jurisdictions.
3.2 Corporate Authorization. The execution, delivery and performance by
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Video Galaxy of this Agreement and all of the other Video Galaxy Documents and
the consummation by Video Galaxy of the transactions contemplated hereby and
thereby are within the corporate powers of Video Galaxy and have been duly
authorized by all necessary corporate action on the part of Video Galaxy. This
Agreement is, and as of the Closing the other Video Galaxy Documents shall be,
the legal, valid and binding obligations of Video Galaxy and the Selling
Shareholders, enforceable against Video Galaxy and the Selling Shareholders in
accordance with their respective terms.
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3.3 Governmental Authorization. The execution, delivery and performance
--------------------------
by Video Galaxy and the Selling Shareholders of this Agreement and the other
Video Galaxy Documents require no action by or in respect of, or filing with,
any governmental body, agency, official or authority other than the filing of
the Certificate of Merger and this Agreement with the Secretary of State of the
State of Delaware as contemplated by Section 2.3 and the filing of such other
notifications of merger as may be required by any appropriate state authorities.
3.4 Non-Contravention. Except as set forth in Schedule 3.4, the
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execution, delivery and performance by Video Galaxy of this Agreement and the
other Video Galaxy Documents does not and will not (i) contravene or conflict
with the Certificate of Incorporation or Bylaws of Video Galaxy, (ii) contravene
or conflict with or constitute a violation of any provision of any law, statute,
rule, regulation, judgment, injunction, order, writ or decree binding upon or
applicable to Video Galaxy or any part of its business, (iii) assuming the
obtaining of all Video Galaxy Consents (as hereinafter defined), constitute a
default under or breach of, or violate or give rise to any right of termination,
cancellation or acceleration of any right or obligation of Video Galaxy, or to a
loss of any benefit relating to its business or operations to which Video Galaxy
is entitled under any provision of any Contract to which Video Galaxy is a party
or by which any of its assets is or may be bound or (iv) result in the creation
or imposition of any Encumbrance on any of Video Galaxy's assets.
3.5 Video Galaxy Capitalization. The authorized capital stock of Video
---------------------------
Galaxy consists solely of 51,000 shares of voting common stock, no par value,
and 49,000 shares of non-voting common stock, no par value, of which 6,431
shares of common stock and 2,629 shares of non-voting common stock are issued
and outstanding. All such outstanding shares are duly authorized, validly
issued, fully paid and nonassessable. Schedule 3.5 lists each of the
shareholders of Video Galaxy and the number of shares of Video Galaxy Capital
Stock owned by each of them as of the date of this Agreement. The shareholders
listed on Schedule 3.5 own, and are the record holders of, all of the
outstanding shares of capital stock of Video Galaxy. All outstanding shares of
Video Galaxy Capital Stock have been issued in compliance with all federal and
state securities laws and are not subject to any rights or obligations that
require the registration of such shares. Except as set forth on Schedule 3.5,
there are no outstanding options, warrants, subscription rights, rights of first
refusal or other rights in or with respect to any shares of Video Galaxy Capital
Stock or any securities convertible into such stock, and Video Galaxy is not
obligated to issue any additional shares of Video Galaxy Capital Stock or any
options, warrants, subscription rights, rights of first refusal or other rights
to acquire Video Galaxy Capital Stock or any other securities convertible into
Video Galaxy Capital Stock.
3.6 Subsidiaries. Video Galaxy does not own, directly or indirectly,
------------
securities or other ownership interests in any other entity, nor is Video Galaxy
a party to any agreement relating to the formation of any other entity or joint
venture.
3.7 Consents. Schedule 3.7 sets forth each Contract of Video Galaxy and
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each of the Video Galaxy Permits (as hereinafter defined) that requires a
consent, approval,
9
authorization, order or other action of or filing with any Person as a result of
the execution, delivery and performance of this Agreement or any of the other
Video Galaxy Documents or the consummation of the transactions contemplated
hereby or thereby (each of the foregoing, a "Video Galaxy Consent").
3.8 Financial Statements.
--------------------
(a) Video Galaxy has delivered to VCI financial statements of Video
Galaxy consisting of balance sheets as of September 30, 1997 and 1998, and
statements of operations for the years ended September 30, 1997 and 1998
(collectively, the "Video Galaxy Financial Statements"). The Video Galaxy
Financial Statements fairly present, in conformity with general accepted
accounting principles applied on a consistent basis, the financial position of
Video Galaxy as of the dates thereof and the results of operations of Video
Galaxy for the periods then ended.
(b) Except for (i) those liabilities specifically reflected or
reserved against on the Video Galaxy balance sheet as of September 30, 1998
(the "Video Galaxy Balance Sheet"), (ii) those current liabilities for trade or
business obligations incurred since September 30, 1998 in connection with the
purchase of goods or services in the ordinary course of Video Galaxy's business
and consistent with past practices (none of which is, individually or in the
aggregate, material and none of which is for breach of contract, breach of
warranty, tort or infringement), (iii) those liabilities arising under any
Contract which was previously disclosed and delivered to VCI (none of which
liabilities is for breach of contract, breach of warranty, tort or infringement)
or (iv) those matters otherwise disclosed on Schedule 3.8 (none of which
liabilities, except as stated in a Schedule hereto, is for breach of contract,
breach of warranty, tort or infringement), Video Galaxy does not have, as of the
date hereof, any direct or indirect indebtedness, liabilities, claims, losses,
damages, deficiencies, obligations (including, without limitation, the
obligation to indemnify any other Person for any liabilities or expenses which
have been or may in the future be incurred by or asserted against such other
Person, or responsibilities, known or unknown, liquidated or unliquidated,
accrued, absolute, contingent or otherwise, and whether or not of a kind
required by generally accepted accounting principles to be set forth on a
financial statement), which individually or in the aggregate are material to the
condition (financial or otherwise), assets, liabilities, business or operations
of Video Galaxy. To the best knowledge of Video Galaxy, there are no
circumstances, conditions, events or arrangements which may hereafter give rise
to any liabilities of Video Galaxy except in the ordinary course of business or
as otherwise set forth in this Section 3.8 or in a Schedule to this Agreement.
3.9 Absence of Certain Changes. Except as set forth on Schedule 3.9,
--------------------------
since August 31, 1998, Video Galaxy has conducted its business in the ordinary
course consistent with past practices, and there has not been:
(a) any Material Adverse Change or any event, occurrence, development
or state of circumstances or facts which could reasonably be expected to result
in a Material Adverse Change;
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(b) any dividend or other distribution declared or paid with respect
to any of the Video Galaxy Capital Stock;
(c) any loan or forgiveness of indebtedness to any holder of Video
Galaxy Capital Stock or any Affiliate thereof;
(d) any bonus, salary or other compensation paid or agreed to be paid
to any employee except in accordance with Schedule 3.17 hereto;
(e) any incurrence of indebtedness for borrowed money other than in
the ordinary course consistent with past practices;
(f) any creation or other incurrence of any Encumbrance on any of
Video Galaxy's assets;
(g) any transaction, Contract entered into, or commitment made, by
Video Galaxy relating to its business, operations or any of its assets
(including the acquisition or disposition of any assets) or any relinquishment
by Video Galaxy of any contract or other right, in either case other than
transactions and commitments in the ordinary course of business consistent with
past practices and those contemplated by this Agreement (other than payments of
compensation); or
(h) any transfer of any assets of Video Galaxy to any Person who is a
stockholder or other Affiliate of Video Galaxy other than the regular payment of
salary and benefits to the Selling Shareholders in amounts and manner consistent
with past practices.
3.10 Title to Assets. Video Galaxy has good and marketable title to the
---------------
Assets owned or stated to be owned by Video Galaxy, free and clear of all
Encumbrances except: (i) as set forth in the Video Galaxy Balance Sheet, (ii)
Encumbrances for current taxes not yet due, (iii) Encumbrances incurred in the
ordinary course of business, (iv) Encumbrances that are not substantial in
character, amount or extent (individually or collectively) and that do not
(individually or collectively) materially detract from the value, or interfere
with present use, of the property subject thereto or affected thereby, or
otherwise materially impair the conduct of business of Video Galaxy, or (v) as
set forth on Schedule 3.10. All Assets used by Video Galaxy or held by Video
Galaxy, other than any leased assets listed on Schedule 3.10, are owned by Video
Galaxy, free and clear of any Encumbrances except as set forth on Schedule 3.10.
3.11 Real Property. Schedule 3.11 sets forth a true and complete list of
-------------
all leaseholds owned by Video Galaxy. Video Galaxy has valid leasehold interest
in such leaseholds, free and clear of all Encumbrances, except: (i) for rights
of lessors and such matters that are reflected in the relevant lease, (ii)
current Taxes not yet due and payable, (iii) Encumbrances of public record, (iv)
Encumbrances, if any, as do not materially detract from the value of or
materially interfere with the present use of such property, and (v) as set forth
on Schedule 3.11.
11
3.12 Litigation. Other than as set forth on Schedule 3.12, there is no
----------
action, suit, investigation, hearing or proceeding pending against or, to the
best knowledge of Video Galaxy, threatened against or affecting, Video Galaxy,
any of its officers, directors, or stockholders, its business or any assets or
any Contract before any court or arbitrator or any governmental body or agency
official, which involves an amount in controversy of greater than $20,000, or in
any manner challenges or seeks to prevent, enjoin, alter or delay Video Galaxy's
business or operations or the transactions contemplated by this Agreement.
There are no outstanding judgments against Video Galaxy.
3.13 Contracts. Each Contract of Video Galaxy is a valid and binding
---------
agreement of Video Galaxy, and is in full force and effect, and Video Galaxy is
not in default (whether with or without the passage of time or the giving of
notice or both) under the terms of any such Contract. Video Galaxy has not
assigned, delegated, or otherwise transferred any of its rights or obligations
with respect to any Contracts, or granted any power of attorney with respect
thereto. Schedule 3.13 is a true and correct list of all Contracts involving an
outstanding monetary obligation greater than $50,000 or with a remaining term
greater than one year. Schedule 3.13 sets forth all franchise and licensee
agreements in which Video Galaxy is a party which sets forth all obligations of
Video Galaxy thereunder; Video Galaxy is not in default and has complied in all
material respects with the terms and conditions of such franchise or licensee
agreements.
3.14 Licenses and Permits. Schedule 3.14 correctly lists each material
--------------------
license, franchise, permit or other similar authorization affecting, or relating
in any way to Video Galaxy's business, together with the name of the
governmental agency or entity issuing such license or permit (the "Video Galaxy
Permits"). The Video Galaxy Permits are valid and in full force and effect and,
assuming the related Video Galaxy Consents have been obtained prior to the
Closing, to the best knowledge of Video Galaxy and each of the Selling
Shareholders, will not be terminated or impaired or become terminable as a
result of the transactions contemplated by this Agreement.
3.15 Compliance with Laws. Video Galaxy is not in material violation of,
--------------------
has not violated, and is neither under investigation with respect to nor has
been threatened to be charged with or given notice of any violation of, any law,
rule, statute, ordinance or regulation, or judgment, order or decree entered by
any court, arbitrator or governmental authority, domestic or foreign, materially
applicable to Video Galaxy's assets or the conduct of its business.
3.16 Intangible Property.
-------------------
(a) Schedule 3.16 sets forth all material Video Galaxy Intangible
Property and identifies each material contract to which Video Galaxy is a party
relating to any item of Video Galaxy Intangible Property. The Video Galaxy
Intangible Property is adequate to conduct the business of Video Galaxy as it is
presently conducted. No Contract requires Video
12
Galaxy to (or will require VCI to) pay, or entitles it to receive any material
royalty, license fee, or other compensation with respect to the Video Galaxy
Intangible Property. Except as set forth on Schedule 3.16, no Video Galaxy
Intangible Property development was funded by a third Person (other than any
stockholder of Video Galaxy) or was conducted by or as a joint venture, in
partnership, or otherwise in collaboration, with any other Person (except an
employee solely in his or her capacity as such). The transactions contemplated
hereby will not adversely affect in any manner any item or part of the Video
Galaxy Intangible Property or the nature or usefulness thereof in the hands of
VCI.
(b) All Video Galaxy Intangible Property and all federal, state and
foreign registrations with respect thereto, and all applications therefor are
valid and in full force and effect and are not subject to any taxes, maintenance
fees or actions.
(c) No Selling Shareholder has violated any agreement with any former
employer which pertains to any of the Video Galaxy Intangible Property.
3.17 Employees.
---------
(a) Schedule 3.17 sets forth a true and complete list of the names,
titles, annual salaries or wage rates and other compensation and office location
of all employees of Video Galaxy, indicating part-time and full-time employment,
and all changes in salaries and wage rates per employee since July 31, 1998.
(b) Except as set forth on Schedule 3.17, Video Galaxy is not a party
to or subject to any employment contract, consulting agreement, collective
bargaining agreement, confidentiality agreement restricting the activities of
Video Galaxy, non-competition agreement restricting the activities of Video
Galaxy, or any similar agreement.
3.18 Prepaids. Except as set forth on Schedule 3.18, Video Galaxy has
--------
not received any material payments with respect to any services to be rendered
or goods to be provided by Video Galaxy after the Closing.
3.19 Taxes.
-----
13
(a) Video Galaxy has filed all federal and foreign income tax returns,
all state and local franchise and income tax, real and personal property tax,
sales and use tax, premium tax, excise tax, employment tax and other tax returns
of every character required to be filed by it and has paid in full all Taxes
(including, without limitation, all tax deposits), together with any interest
and penalties owing in connection therewith, shown on such returns to be due in
respect of the periods covered by such returns, other than Taxes which are being
contested in good faith and for which adequate reserves have been established.
Adequate provision has been made in the Books and Records of Video Galaxy and,
to the extent required by generally accepted accounting principles, reflected in
the Video Galaxy Financial Statements, for all Tax liabilities, including
interest or penalties, whether or not due and payable and whether or not
disputed, with respect to any and all Taxes for the periods covered by the Video
Galaxy Financial Statements and for all prior periods. Schedule 3.19 sets forth
the date or dates through which the Internal Revenue Service has examined the
federal income taxes of Video Galaxy and the date or dates through which any
foreign, state, local or other taxing authority has examined any other tax
returns of Video Galaxy. Schedule 3.19 also contains a complete list of each
year for which any federal, state, local or foreign tax authority has obtained
or has requested an extension of the statute of limitations from Video Galaxy
and lists each tax case of Video Galaxy currently pending in audit, at the
administrative appeals level or in litigation. Schedule 3.19 further lists the
date and issuing authority of each statutory notice of deficiency, notice or
proposal assessment and revenue agent's report issued to Video Galaxy within the
last twelve months. Except as set forth on Schedule 3.19, to Video Galaxy's
best knowledge, neither the Internal Revenue Service nor any foreign, state,
local or other taxing authority has, during the past three years, examined or is
in the process of examining any federal, foreign, state, local or other tax
returns of Video Galaxy. Neither the Internal Revenue Service nor any foreign,
state, local or other taxing authority is now asserting or threatening to assert
any deficiency or claim for additional taxes (or interest thereon or penalties
in connection therewith) except as set forth on Schedule 3.19.
(b) Video Galaxy has not made any requests for rulings, and Video
Galaxy has not received any subpoenas or requests for information, or notices of
proposed reassessment of any property owned or leased by Video Galaxy. There
are no liens for Taxes upon any property or assets of Video Galaxy (other than
for real property taxes, not yet due, on premises leased by Video Galaxy for
which Video Galaxy will be liable under the terms of the applicable leases).
(c) Video Galaxy has delivered to VCI true and complete copies of all
federal, state and foreign income tax returns (together with any Revenue Agent's
Reports) filed by Video Galaxy relating to its operations for the taxable year
ended September 30, 1997 and for the prior interim period since the inception of
VCI, if any.
(d) Video Galaxy has not filed a consent pursuant to Section 341(f) of
the Code, and has not filed, and would not be deemed to have filed, any election
under Section 338 of the Code.
(e) Video Galaxy has never been, nor is Video Galaxy currently, bound
by
14
or subject to any obligation under any agreement relating to the sharing of any
liability for, or payment of, Taxes with any other Person.
(f) Video Galaxy has withheld or will withhold, and has paid over or
will pay over to applicable taxing authorities amounts from its employees and
has filed or will file all federal, foreign, state, and local returns and
reports with respect to employee income tax withholding and social security and
unemployment Taxes for all periods (or portions thereof) ending on or before the
Effective Time, in compliance with the provisions of the Code and other
applicable federal, foreign, state and local laws.
3.20 Environmental Compliance. Video Galaxy has not received any notice
------------------------
that it or any of its properties have not been or are not now in complete
compliance with all applicable environmental law.
3.21 Labor and Employment Matters.
----------------------------
(a) Except as set forth on Schedule 3.21, as of the date hereof;
(1) The employment of each employee of Video Galaxy may be
terminated immediately by Video Galaxy, except as otherwise provided by statute
or decisional authority;
(2) To Video Galaxy's best knowledge, no key executive employee
of Video Galaxy and no group of employees of Video Galaxy has plans to terminate
his or her employment at or prior to the Closing, whether or not as a result of
the transactions contemplated herein;
(3) Video Galaxy has not had any material labor relations
problems; and
(4) Video Galaxy has complied in all material respects with all
collective bargaining agreements and all applicable laws and orders relating to
the employment of labor, including those related to wages, hours, collective
bargaining and the payment and withholding of Taxes and other sums as required
by appropriate governmental authorities and has withheld and paid to the
appropriate governmental authorities, or is holding for payment not yet due to
such governmental authorities, all amounts required to be withheld from such
employees of Video Galaxy and is not liable for any arrears of wages, Taxes,
penalties or other sums for failure to comply with any of the foregoing. No
present or former employee, officer or director of Video Galaxy has notified
Video Galaxy that he or she has or will have at the Effective Time, any claim
against Video Galaxy for any matter, including but not limited to (i) overtime
pay for work done through the Effective Time; (ii) wages or salary for the work
done through the Effective Time; (iii) vacation time off or pay in lieu of
vacation time off for the period through the Effective Time; (iv) any violation
of any statute, ordinance or relation relating to minimum wages or maximum hours
or work-place conditions; or (v) injuries or other damages which are not fully
covered by Video Galaxy's insurance policies; except, in the
15
case of clauses (i) and (ii), for amounts accrued in the current pay period that
are not yet due and payable, and in the case of clause (iii), for vacation
accrued in accordance with Video Galaxy's policies and set forth in Schedule
3.21, which its employees have not yet taken.
(b) Except as set forth on Schedule 3.21, as of the date hereof,
Video Galaxy has not received any notice of any:
(1) unfair labor practice complaint against Video Galaxy pending
before the National Labor Relations Board or any state or local agency;
(2) pending labor strike or other material labor trouble
affecting Video Galaxy;
(3) material labor grievance pending against Video Galaxy;
(4) pending representation question respecting the employees of
Video Galaxy; or
(5) pending arbitration proceedings arising out of or under any
collective bargaining agreement to which Video Galaxy is a party.
(c) In addition: (i) none of the matters specified in clauses (b) (1)
through (5) is threatened against Video Galaxy; (ii) no union organizing
activities have taken place with respect to Video Galaxy; and (iii) no basis
exists for which a claim may be made under any collective bargaining agreement
to which Video Galaxy is a party.
3.22 Pension and Benefit Plans.
-------------------------
(a) All accrued obligations of Video Galaxy applicable to its
employees, whether arising by operation of law, by contract, by past custom or
otherwise, for payments by Video Galaxy to trusts or other funds or to any
governmental agency, with respect to unemployment compensation benefits, social
security benefits or any other benefits for its employees with respect to the
employment of said employees through the date hereof have been paid or adequate
accruals therefor have been made on, as applicable, the Books and Records of
Video Galaxy and the Video Galaxy Financial Statements.
(b) Except as disclosed on Schedule 3.22, as of the date hereof:
(1) Neither Video Galaxy nor any of its ERISA Affiliates maintains
or has any obligations to contribute to, or has in effect or has committed to
adopt, any Pension Plan or any Welfare Plan;
(2) Each ERISA Plan conforms in all material respects to all
applicable laws and orders, including ERISA and the applicable provisions of the
Code. All notices, reports, returns, applications and disclosures have been
timely made which are
16
required to be made to the Internal Revenue Service, the U.S. Department of
Labor, the Pension Benefit Guaranty Corporation, any participants in the ERISA
Plans, any trustee, or any insurer with respect to the ERISA Plans;
(3) Video Galaxy and its ERISA Affiliates have made or provided for
(with fully-funded reserves) all contributions heretofore required to have been
made under all of the ERISA Plans, and will, by the Closing, have made or
provided for (with fully-funded reserves) all contributions required to be made
on or before the Closing under all such plans;
(4) No ERISA Plan nor any trust created thereunder, nor any trustee or
administrator thereof has engaged in a transaction which may subject any of such
ERISA Plans, any such trust, or any party dealing with such ERISA Plans or any
such trust, to the Tax or penalty on prohibited transactions imposed by Section
4975 of the Code or to a civil penalty imposed by Section 502 of ERISA;
(5) There are no material actions, claims or lawsuits which have been
asserted or instituted against the assets of any of the trusts under the ERISA
Plans, and no basis for such action, claim or lawsuit exists, and no such
action, claim or lawsuit has been threatened;
(6) Video Galaxy has not agreed to indemnify any other party for any
liabilities or expenses which have been or may in the future be incurred by or
asserted against such other party in respect of any ERISA Plan;
(7) Each Pension Plan constituting one of the ERISA Plans is qualified
under Section 401 of the Code, each of the trusts maintained with respect
thereto is exempt from federal income taxation under Section 501 of the Code,
and nothing has occurred which would cause the loss of such qualification or
exemption or the imposition of any penalty under Section 4971 of the Code;
(8) The assets of each Pension Plan constituting one of the ERISA
Plans (including Pension Plans maintained by an ERISA Affiliate) are sufficient
to pay all liabilities of the plan, including, without limitation, all
liabilities to pay benefits to any past or present participant or beneficiary in
such plan, any expense incurred in administering the plan, and any liabilities
for Taxes which may be imposed on the plan or on any trust maintained in
connection with the plan;
(9) The value of all accrued benefits under each Pension Plan
constituting one of the ERISA Plans (including Pension Plans maintained by an
ERISA Affiliate) which is a "defined benefit plan" within the meaning of Section
3(35) of ERISA, including each "multi-employer plan" within the meaning of
Section 3(37) of ERISA, does not exceed, on an accrual basis, the aggregate
value of the assets of each such plan;
(10) There has been no "reportable event," within the meaning of
Section 4043(b) of ERISA, with respect to any Pension Plan which constitutes one
of the ERISA Plans since the effective date of Section 4043(b) of ERISA;
17
(11) The transaction contemplated by this Agreement will not result in
a reportable event, within the meaning of ERISA Section 4043, other than a
reportable event with respect to which (i) the ERISA Section 4043 reportable
event notice requirement has been waived or (ii) the Pension Benefit Guaranty
Corporation will not apply a penalty for failure to satisfy the reportable event
notice requirement;
(12) Neither Video Galaxy nor any of its ERISA Affiliates has any
liability to the Pension Benefit Guaranty Corporation pursuant to Title IV of
ERISA in respect of any Pension Plan constituting one of the ERISA Plans
(including Pension Plans maintained, or formerly maintained, by an ERISA
Affiliate);
(13) Neither Video Galaxy nor any of its ERISA Affiliates maintains or
has any obligation to contribute to any multi-employer plan;
(14) Neither Video Galaxy nor any of its ERISA Affiliates has
terminated a defined benefit plan or multi-employer plan or suffered or
otherwise caused a "complete withdrawal" or "partial withdrawal" as such terms
are respectively defined in Sections 4203 and 4205 of ERISA from any multi-
employer plan. Since April 1, 1979, neither Video Galaxy nor any of its ERISA
Affiliates has complied with Section 4204 of ERISA in order to avoid any such
"complete withdrawal" or "partial withdrawal";
(15) The transaction contemplated by this Agreement will not result in
a Video Galaxy liability for severance or termination pay or result in increased
employee benefits becoming payable to any employees of Video Galaxy;
(16) Neither Video Galaxy nor any of its ERISA Affiliates has any
unpaid liability in respect of any employee for any contributions and/or
premiums due under any Welfare Plan constituting one of the ERISA Plans;
(17) Neither Video Galaxy nor its ERISA Affiliates has any liability
as to any benefits to which any employee may be entitled under any Welfare Plan
constituting one of the ERISA Plans, whether for benefits due or claims filed;
and
(18) Video Galaxy does not maintain any health or life insurance plan
that provides for continuing benefits or coverage for any participant or any
spouse, dependent or beneficiary under such plan after termination of
employment, other than as may be required under Section 4980B of the Code and
regulations thereunder ("COBRA"). Video Galaxy is in compliance with the COBRA
notice and continuation coverage requirements with respect to Plans maintained
by Video Galaxy.
(c) True, correct and complete copies of the following documents, with
respect to each of the ERISA Plans, have been delivered to VCI:
18
(1) Each ERISA Plan document, employment contract, policy,
procedure or other governing instrument relating to an ERISA Plan, including all
amendments, supplements, collective bargaining agreements, letters, memoranda,
understandings and any other document reasonably necessary to reflect the terms
and conditions of each ERISA Plan.
(2) The most recent summary plan description of each ERISA Plan
for which a summary plan description is required under ERISA, and summaries of
material modification thereto.
(3) All instruments under which the assets of any ERISA Plan are
held or managed and benefits provided, including, but not limited to, insurance
contracts, trust agreements, custodial contracts and investment management
agreements.
(4) The two most recent Forms 5500, 5500-C or 5500-R for each
ERISA Plan for which such filing is required, with all attachments and schedules
thereto.
(5) The two most recent annual financial statements for each ERISA
Plan, if not included with such Form 5500 (5500-C or 5500-R).
(6) The most recent actuarial valuation report for each ERISA Plan
(as applicable).
(7) With respect to each ERISA Plan that has received a
determination letter under Section 401(a) of the Code, and any voluntary
employee benefit association trust that has received a determination letter
under Section 501(c) of the Code, the most recent Internal Revenue Service
determination letter (including any letter concerning the tax-exempt status of
any trust under Section 501(a) of the Code), the application submitted when
requesting such determination letter, and any subsequently filed determination
letter request.
(d) All Pension Plans shall be terminated by Video Galaxy prior to
the Effective Time.
3.23 Insurance. Schedule 3.23 sets forth a true and correct list of all
---------
policies or binders of fire, liability, workers' compensation, vehicular or
other insurance held by or on behalf of Video Galaxy specifying the insurer, the
policy number or covering note number with respect to binders, and describing
each pending claim thereunder of more than $50,000. Such policies and binders
are in full force and effect. No such policy is terminable or cancelable by the
insurer by virtue of the consummation of the transactions contemplated herein.
3.24 Books and Records. Video Galaxy will furnish or make available to
-----------------
VCI for its examination the following, each of which is, and will be maintained
so as to remain until the Closing, accurate and complete in all material
respects:
19
(a) copies of the Certificate of Incorporation and Bylaws of Video
Galaxy, as in effect on the date of this Agreement;
(b) the minute books of Video Galaxy containing all proceedings,
consents, actions and meetings of its stockholders and Boards of Directors;
(c) copies of all Video Galaxy Permits, orders and consents with
respect to Video Galaxy's securities issued by any administrative agency or
governmental body regulating the issuance or transfer of such securities and all
applications for such permits, orders and consents;
(d) the stock transfer books of Video Galaxy setting forth all
transfers of its securities;
(e) copies of all agreements and documents referred to in any Video
Galaxy Disclosure Schedule;
(f) all other Books and Records of Video Galaxy; and
(g) an accurate list of all of the incumbent officers and directors
of Video Galaxy.
3.25 Inventory. The inventory of Video Galaxy reflected on the Video
---------
Galaxy Balance Sheet, as well as other inventory items acquired since the date
of the Video Galaxy Balance Sheet that are now the property of Video Galaxy, are
of such quality and held in such quantities as are being used and will be usable
and salable or rentable in the ordinary course of the business of Video Galaxy.
The inventory excludes slow-moving items and obsolete items, and are recorded at
cost and amortized over their estimated life with no provision for salvage
value. Since the date of the Video Galaxy Balance Sheet, Video Galaxy has
continued to replenish its inventories in a normal and customary manner
consistent with practice prevailing in the retail video sales and rental
industry.
3.26 Accuracy and Provision of Information. None of the documents or
-------------------------------------
other information made available to VCI or its Affiliates, attorneys,
accountants, agents or representatives in connection with the transactions
contemplated by this Agreement contains any untrue statement of a material fact.
Video Galaxy has provided VCI all requested information regarding its business
and operations.
3.27 Stockholder Approval. On or before the Effective Time, the
--------------------
stockholders holding all of the outstanding shares of capital stock of Video
Galaxy will have approved this Agreement and the transactions contemplated
hereby.
3.28 Investor Representations. Each Selling Shareholder who will receive
------------------------
shares of VCI Common Stock in connection with the transactions contemplated by
this Agreement represents that (i) he or she is an accredited investor as
defined in Regulation D under the
20
Securities Act, or (ii) by reason of his or her business and financial
experience, and the business and financial experience of those persons
unaffiliated with VCI retained by him or her, if any, to advise him or her with
respect to an investment in the shares of VCI Common Stock, such Selling
Shareholder together with such advisers have such knowledge, sophistication and
experience in business and financial matters as to be capable of evaluating the
merits and risk of the prospective investment, and that he or she is acquiring
the shares of VCI Common Stock for his or her own account or for one or more
separate accounts maintained by him or her, if any, for investment and not with
a view to the distribution thereof except in compliance with the Securities Act
or an exemption available thereunder. Each Selling Shareholder who receives
shares of VCI Common Stock in connection with the transactions contemplated by
this Agreement understands and agrees that the shares of VCI Common Stock have
not been registered under the Securities Act and may be resold only if
registered pursuant to the applicable provisions of the Securities Act or if an
exemption from registration is available.
3.29 No Brokers. Neither Video Galaxy nor the Selling Shareholders nor
----------
any of their respective Representatives or Affiliates has employed or made any
agreement with any broker, finder or similar agent, person or firm or incurred
any liability for any finder's fee, brokerage fees or commission or similar
payment in connection with the transactions contemplated hereby which would
result in any liability of Video Galaxy or VCI.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF VCI
-------------------------------------
Except as set forth in a Disclosure Schedule delivered by VCI hereunder,
and except for the transactions contemplated by this Agreement, VCI hereby
represents and warrants to Video Galaxy and the Selling Shareholders as follows:
4.1 Organization of VCI. VCI is a corporation duly organized, validly
-------------------
existing and in good standing under the laws of the State of Delaware, has full
corporate power and authority to conduct its business as it is presently being
conducted and to own, lease and operate its properties and assets, and is duly
qualified to do business and is in good standing in each jurisdiction in which
the ownership of its property or the conduct of its business requires such
qualification, except for jurisdictions in which such failure to be so qualified
or to be in good standing would not result in a Material Adverse Change to VCI
or its business.
4.2 VCI Capital Stock. The authorized capital stock of VCI consists of
-----------------
30,000,000 shares of common stock, $0.01 par value per share, and 2,000,000
shares of preferred stock, $0.01 par value per share, of which 13,572,436 shares
of VCI Common Stock, 7,000 shares of Series AA Convertible Redeemable Preferred
Stock, 76,000 shares of Series B Convertible Redeemable Preferred Stock and 112
shares of Series C Convertible Redeemable Preferred Stock were issued and
outstanding as of the date of this Agreement. No shares of any other class or
series of capital stock are issued or outstanding as of the date of this
Agreement. All of the outstanding shares of capital stock of VCI have been duly
and validly authorized and issued and are fully paid and nonassessable.
21
4.3 Authorization Relative to this Agreement. The execution, delivery
----------------------------------------
and performance by VCI of this Agreement and all of the other VCI Documents and
the consummation by VCI of the transactions contemplated hereby and thereby are
within the corporate powers of VCI and will be duly authorized by all necessary
corporate action on the part of VCI. This Agreement is, and as of the Closing
the other VCI Documents shall be, the legal, valid and binding obligations of
VCI, enforceable against VCI in accordance with their respective terms.
4.4 No Conflict or Violation. Except such approvals, consents or
------------------------
authorizations as may be required from BankBoston Retail Finance Inc., Rentrak
Corporation, Mortco, Inc. and ▇▇▇▇▇▇ Entertainment Inc., neither the execution
and delivery of this Agreement or the Certificate of Merger nor the consummation
of the transactions contemplated hereby or thereby will result in (a) a
violation of or a conflict with any provision of the Certificate of
Incorporation, Bylaws or other organizational document of VCI, (b) a breach of,
or a default under, any material term or provision of any material Contract,
indebtedness, Encumbrance, Permit or concession to which VCI is a party or is
subject or by which any assets of VCI are bound, including, without limitation,
any such breach or default which would interfere in any way with its ability to
consummate the transactions contemplated by this Agreement or the Certificate of
Merger, (c) a material violation by VCI of any statute, rule, regulation,
ordinance, code, order, judgment, writ, injunction, decree or award, including
any violation which would interfere with its ability to consummate the
transactions contemplated by this Agreement or the Certificate of Merger, (d)
the imposition of any material Encumbrance, restriction or charge on the
business or assets of VCI, or (e) give rise to any right of termination,
cancellation or acceleration under any material Contract or other agreement to
which VCI is a party or by or to which they or any of their material assets or
properties may be bound or subject.
4.5 Litigation. There is no action, suit, investigation, hearing or
----------
proceeding pending against or, to the best knowledge of VCI, threatened against
or affecting, VCI, any of its officers, directors, or stockholders, its business
or any assets or any Contract before any court or arbitrator or any governmental
body or agency official, which will have material adverse effect on the business
or operations of VCI, or in any manner challenges or seeks to prevent, enjoin,
alter or delay the transactions contemplated by this Agreement. There are no
outstanding unsatisfied judgments against VCI involving amounts in excess of
$20,000.
4.6 Validity of Shares to be Issued to Selling Shareholders. The shares
-------------------------------------------------------
of VCI Common Stock to be issued to the selling shareholders of Video Galaxy
hereunder will, when issued and paid for in accordance with this Agreement, be
duly and validly issued, nonassessable shares free and clear of any and all
Encumbrances (other than Encumbrances which may exist prior to the Closing on
the Video Galaxy Capital Stock), and will be issued in compliance with all
applicable federal and state securities laws.
4.7 Governmental Authorization. The execution, delivery and performance
--------------------------
by VCI of this Agreement and the other VCI Documents require no action by or in
respect of, or
22
filing with, any governmental body, agency, official or authority other than the
filing of the Certificate of Merger and this Agreement with the Secretary of
State of the State of Delaware and the filing of such other notifications of
merger as may be required by any appropriate state authorities.
4.8 No Brokers. Neither VCI nor any of its Representatives or Affiliates
----------
has employed or made any agreement with any broker, finder or similar agent,
person or firm or incurred any liability for any finder's fee, brokerage fees or
commission or similar payment in connection with the transactions contemplated
hereby which would result in any liability of the Selling Shareholders.
ARTICLE V
COVENANTS OF EACH PARTY
-----------------------
Video Galaxy and VCI each covenant with the other for the period from the
date hereof through the Effective Time as follows:
5.1 Notification of Certain Matters. From the date hereof through the
-------------------------------
Effective Time, Video Galaxy and VCI shall each give prompt notice to the other
of:
(a) any notice or other communication from any Person alleging that
the consent of such Person is or may be required in connection with the
transactions contemplated by this Agreement;
(b) any notice or other communication from any governmental or
regulatory agency or authority in connection with the transactions contemplated
by this Agreement; and
(c) any actions, suits, claims, investigations or proceedings
commenced or threatened against, relating to or involving or otherwise affecting
Video Galaxy or its business that, if pending on the date of this Agreement,
would have been required to have been disclosed pursuant to Section 3.12 or that
relate to the consummation of the transactions contemplated by this Agreement.
5.2 Confidential Information.
------------------------
(a) Preservation of Confidentiality. In connection with the
-------------------------------
negotiation of this Agreement, the preparation for the consummation of the
transactions contemplated hereby, and the performance of obligations hereunder,
each of the parties hereto acknowledges that it will have access to confidential
information relating to the other parties. Each party shall treat such
information as confidential, preserve the confidentiality thereof and not
disclose such information, except to its respective Representatives and
Affiliates in connection with the transactions contemplated hereby. Each party
agrees to maintain in confidence, and not to disclose to any third party, any
ideas, methods, developments, inventions, improvements and business plans and
information which are the confidential information of the other parties. If,
23
however, confidential information is disclosed, the disclosing party shall
immediately notify the other parties in writing and take all reasonable steps
required to prevent further disclosure.
(b) Property Right in Confidential Information. Until the Effective
------------------------------------------
Time or the Termination Date (as hereinafter defined), all confidential
information shall remain the property of the party who originally possessed such
information. In the event of the termination of this Agreement for any reason
whatsoever, Video Galaxy shall return to VCI, and VCI shall return to Video
Galaxy, all documents, work papers and other material (including all copies
thereof) obtained from the other party in connection with the transactions
contemplated hereby and will use all reasonable efforts, including, without
limitation, instructing its employees and others who have had access to such
information, to keep confidential and not to use any such information, unless
such information is now, or is hereafter disclosed, through no act or omission
of such party, in any manner making it available to the general public. If VCI
or any of its Affiliates is required by legal process or by operation of law to
disclose any confidential information in anticipation of a possible acquisition
of Video Galaxy by VCI or any such Affiliate, VCI shall provide Video Galaxy
with prompt notice of such request to making such disclosure and, without any
need to obtain the consent of such other parties, shall be entitled to make such
disclosure. If any party is compelled by legal process to disclose any
confidential information, such party shall provide the other parties with prompt
written notice of such request and, without any need to obtain the consent of
such other parties, shall be entitled to make such disclosure.
(c) Termination of Agreement. Subject to the requirements of law,
------------------------
each party hereto and its Affiliates shall, and shall use all reasonable efforts
to cause their Representatives who obtain such information from the other party
to, hold in confidence all such non-public information until such time as such
information is otherwise publicly available, and, if this Agreement is
terminated and if so requested by another party, each party and its Affiliates
shall, and shall use all reasonable efforts to cause their Representatives who
obtain such information to, deliver to such other party all documents, work
papers and other material (including copies of extracts and summaries thereof)
obtained by or on behalf of any of them directly or indirectly as a result of
this Agreement or in connection herewith, whether so obtained before or after
the execution hereof.
5.3 Store Lease Assignments. Video Galaxy and the Selling Shareholders
-----------------------
shall take all reasonable action and execute and deliver all documents and
instruments as may be necessary to obtain landlord waivers, third party consents
and assignments with respect to Video Galaxy's video store leases in connection
with the transactions contemplated by this Agreement. VCI shall reasonably
cooperate with Video Galaxy and the Selling Shareholders in connection with
their obtaining of such landlord waivers, third party consents and assignments.
5.4 Notifications of Merger. The parties hereto shall execute, deliver
-----------------------
and file such notifications of merger and any other documents as may be required
by any appropriate state authorities in connection with the transactions
contemplated by this Agreement.
24
ARTICLE VI
ADDITIONAL COVENANTS OF VIDEO GALAXY
------------------------------------
6.1 Conduct of Business. From the date hereof through the Effective Time
-------------------
or the date, if any, on which this Agreement is earlier terminated pursuant to
Section 10.1 (the "Termination Date"), except as contemplated or as may be
required by this Agreement, or as consented to by VCI in writing, Video Galaxy
shall diligently carry on its business and in the ordinary course only, and
shall use its best efforts to preserve its present business organization intact
and to keep available the services of its present officers, agents or employees
(nothing herein implying an obligation of Video Galaxy to maintain or retain any
specific officer, agent or employee), and preserve its present relationships
with customers and other Persons having business dealings with it, and will not
take any action inconsistent with this Agreement or with the consummation of the
transactions contemplated hereby. Without limiting the generality of the
foregoing, from the date hereof through the Effective Time or the Termination
Date, if any, Video Galaxy shall not, except as specifically contemplated by
this Agreement:
(a) change or amend its Certificate of Incorporation or Bylaws;
(b) enter into, extend, modify, terminate or renew any (i) material
Contract, except in the ordinary course of business, or (ii) Contract involving
$10,000 or more;
(c) sell, assign, transfer, convey, lease, mortgage, pledge or
otherwise dispose of or encumber any material assets, or any interests therein,
and, without limiting the generality of the foregoing, Video Galaxy shall
maintain and sell or rent inventory consistent with its past practices and in
accordance with the provisions of this Agreement;
(d) incur any obligations or liability for long-term indebtedness, or
incur any other obligation or liability of $10,000 or more except in the
ordinary course of business;
(e) (i) grant any bonus, severance or termination pay or increase in
any manner the compensation or fringe benefits of any employee or pay any
benefit not required by any existing Video Galaxy Employee Plan or policy;
provided, however, Video Galaxy may pay to the Selling Shareholders a year-end
performance bonus consistent with Video Galaxy's past practices in an aggregate
amount not exceeding $100,000;
(ii) make any change in the key management structure of Video
Galaxy, including, without limitation, the hiring of additional officers or the
termination without cause of existing officers;
(iii) adopt, enter into or amend any Video Galaxy Employee Plan,
agreement (including, without limitation, any collective bargaining or
employment agreement), trust, fund or other arrangement for the benefit or
welfare of any employee;
(f) acquire by merger or consolidation with, or merge or consolidate
with,
25
or purchase substantially all of the assets of, or otherwise acquire any
material assets or business of any corporation, partnership, association or
other business organization or division thereof;
(g) declare, set aside, make or pay any dividend or other distribution
in respect of Video Galaxy's capital stock;
(h) fail to expend funds for budgeted capital expenditures or
commitments that have been disclosed to VCI;
(i) willingly allow or permit any of Video Galaxy's insurance policies
to be suspended, impaired or canceled;
(j) fail to pay its accounts payable and any debts owed or obligations
due to it, or pay or discharge when due any liabilities, in the ordinary course
of business;
(k) enter into, renew, modify or revise any agreement or transaction
with any of its Affiliates;
(l) fail to maintain any assets in substantially their current state
of repair, excepting normal wear and tear or fail to replace consistent with
Video Galaxy's past practice inoperable, worn-out or obsolete or destroyed
assets;
(m) make any loans or advances to any partnership, firm, corporation,
officer, director or Affiliate, or, except for expenses incurred in the ordinary
course of business, any individual who is not an officer, director or Affiliate;
(n) make any material income tax election or settlement or compromise
with tax authorities;
(o) fail to comply in any material respect with all laws applicable
to it;
(p) intentionally do any other act which would cause any
representation or warranty of Video Galaxy in this Agreement to be or become
untrue in any material respect;
(q) issue any shares of Video Galaxy capital stock or any options,
warrants, subscription rights, rights of first refusal or any other rights or
other securities convertible into, or exercisable or exchangeable for, Video
Galaxy capital stock; or
(r) enter into any agreement, arrangement or understanding or
otherwise become obligated, to do any action prohibited hereunder.
6.2 Public Statements and Press Releases. Except as provided for
------------------------------------
hereinbelow, Video Galaxy, the Selling Shareholders and their Affiliates shall
not, from and after the date hereof make, issue or release any public
announcement, press release, statement or
26
acknowledgment of the existence of, or reveal publicly the terms, conditions and
status of, the transactions provided for herein, without the prior written
consent of VCI as to the content and time of release of such statement or
announcement.
6.3 No Solicitation. Prior to the Effective Time (or the earlier
---------------
termination of this Agreement in accordance with its terms), neither Video
Galaxy nor the Selling Shareholders nor any of their Affiliates or
Representatives shall directly or indirectly solicit or initiate any
discussions, offers or negotiations with, or participate in any negotiations or
discussions with, or provide any information or data of any nature whatsoever
to, or otherwise encourage any effort or attempt by, any Person other than VCI,
concerning any Alternative Transaction with respect to Video Galaxy. Video
Galaxy and the Selling Shareholders shall promptly notify VCI if any proposal,
offer, inquiry or other contact is received by Video Galaxy or any of the
Selling Shareholders in respect of an Alternative Transaction, and shall
indicate the identity of the offeror and the terms and conditions of any
proposals or offers or the nature of any inquiries or contacts, and thereafter
shall keep VCI informed on a current basis of the status and terms of any such
proposals or offers and the status of any such discussions or negotiations.
6.4 Noncompetition Agreement. At or prior to the Effective Time, ▇▇▇▇▇
------------------------
▇. ▇▇▇▇▇▇, ▇▇▇▇▇▇ ▇. ▇▇▇▇▇▇ and ▇▇▇▇ ▇▇▇▇▇▇▇▇ shall each have executed and
delivered a noncompetition agreement in favor of VCI substantially in
accordance with the form of noncompetition agreement attached hereto as Exhibit
E (the "Noncompetition Agreement").
6.5 Insurance. From the date hereof through the Effective Time, Video
---------
Galaxy shall maintain in force (including necessary renewals thereof) the
insurance policies listed on Schedule 3.23.
6.6 Reporting and Compliance With Law. From the date hereof through the
---------------------------------
Effective Time, Video Galaxy shall duly and timely file all tax returns required
to be filed with governmental authorities and duly observe and conform to in all
material respects all applicable laws and orders.
6.7 Approval of Stockholders of Video Galaxy. Video Galaxy shall take
----------------------------------------
all actions necessary, in accordance with the Delaware Law and its Certificate
of Incorporation and Bylaws, to obtain the approval of all of the outstanding
shares of capital stock of Video Galaxy for this Agreement and the Certificate
of Merger, the forgiveness by Video Galaxy of certain indebtedness of certain
stockholders of Video Galaxy to Video Galaxy as disclosed in Schedule 3.9
hereto, and the transactions contemplated hereby and thereby, and Video Galaxy
shall provide all of its stockholders with full disclosure of all terms of this
Agreement, the forgiveness by Video Galaxy of such indebtedness and all
transactions contemplated hereby and thereby. Without limiting the generality
of the foregoing, Video Galaxy and the Selling Shareholders shall, and shall
cause all of the stockholders of Video Galaxy to, execute and deliver any and
all documents that may be reasonably requested by VCI in order to comply with
all applicable laws.
27
6.8 Termination of Employee Benefit Plans and Employment Agreements Prior
---------------------------------------------------------------------
to Effective Time. Video Galaxy agrees that its employee benefit plans,
-----------------
programs and arrangements (in addition to those for non-employee directors) (and
if required by such plans, programs or arrangements, any agreements entered
thereunder and awards and options granted thereunder) shall be terminated or
amended, to the extent necessary or appropriate, to reflect the transactions
contemplated by this Agreement. In addition, Video Galaxy shall terminate on or
prior to the Effective Time, all employment agreements in which Video Galaxy is
a party.
6.9 Access to Information. Video Galaxy and the Selling Shareholders
---------------------
shall afford VCI and its Representatives reasonable access during normal
business hours, throughout the period prior to the earlier of the Effective Time
or the Termination Date (as hereinafter defined), to its personnel, facilities,
contracts, commitments, books, computer software application systems, files and
records and to furnish such financial and operating data and other information
with respect to its business, assets and properties, and shall use its best
efforts to cause its Representatives to furnish promptly to VCI and its
Representatives such additional financial and operating data and other
information as to its business and properties as the other or its duly
authorized Representatives may from time to time reasonably request.
ARTICLE VII
ADDITIONAL COVENANTS OF VCI
---------------------------
7.1 VCI Guaranties. From the date hereof through the Effective Time,
--------------
VCI shall use its best good faith efforts in cooperating with Video Galaxy and
the Selling Shareholders to secure a release of the Selling Shareholders'
guaranties under any and all of Video Galaxy's store leases, which best efforts
shall include substitution of guaranties by VCI for that of the Selling
Shareholders. In addition, after the Effective Time, VCI shall pay all of the
assumed indebtedness (to the extent disclosed to VCI by Video Galaxy) as it
becomes due and VCI agrees to warrant, defend, hold harmless and indemnify each
of the Selling Shareholders from any losses, costs or damages (including
reasonable attorney's fees) arising out of any claim against a Selling
Shareholder under any assumed contract, debt, guaranty or indemnity agreement
(to the extent previously disclosed to VCI by Video Galaxy), including but not
limited to, guaranties of leases, and/or financial obligations which obligation
is disclosed to VCI by Video Galaxy and is assumed by VCI and a claimed breach
thereof which occurs on or after the Closing Date.
ARTICLE VIII
CONDITIONS TO THE OBLIGATIONS OF VIDEO GALAXY
---------------------------------------------
AND THE SELLING SHAREHOLDERS
----------------------------
The obligations of Video Galaxy and the Selling Shareholders to consummate
the transactions contemplated hereby are subject, in the discretion of Video
Galaxy, to the satisfaction, at or prior to the Effective Time, of each of the
following conditions, any of which may be waived by Video Galaxy:
8.1 Representations, Warranties and Covenants. All representations and
-----------------------------------------
28
warranties of VCI contained in this Agreement shall be true and correct at and
as of the date of this Agreement and at and as of the Effective Time as if such
representations and warranties were made at and as of the Effective Time, and
VCI shall have performed all agreements and covenants required hereby to be
performed by it prior to or at the Effective Time.
8.2 Approvals. All Permits, waivers, consents, approvals and
---------
authorizations from governmental authorities and other parties, necessary to
consummate the transactions contemplated hereby shall have been obtained.
8.3 No Governmental Actions. No governmental action or proceeding shall
-----------------------
have been commenced or threatened seeking any injunction, restraining or other
order which seeks to prohibit, restrain, invalidate or set aside the
effectuation of the Merger and no order, statute, rule, regulation, executive
order, stay, decree, judgment or injunction shall have been enacted, entered,
issued, promulgated or enforced by any court or governmental authority which
prohibits or restricts the effectuation of the Merger.
8.4 No Material Adverse Change. Since January 31, 1999, there shall not
--------------------------
have occurred any material adverse change in the business, assets, financial or
operating conditions or prospects of VCI taken as a whole, except for changes
contemplated hereby or changes which have not, individually or in the aggregate,
resulted in a Material Adverse Change to the business, assets, financial or
operating conditions or prospects of VCI, and VCI shall have delivered a
certificate signed by a duly authorized officer to such effect.
8.5 Due Diligence. Video Galaxy and its counsel shall have completed
-------------
and be satisfied with the results of their due diligence investigation of the
business, assets, and financial and legal conditions of VCI.
8.6 Board of Directors Approval. The Board of Directors of Video
---------------------------
Galaxy shall have adopted and approved this Agreement and the Certificate of
Merger and the transactions contemplated hereby and thereby.
8.7 Release by Savings Bank of Manchester. The Savings Bank of
-------------------------------------
Manchester shall have released each of the Selling Shareholders from any
personal obligations under the Commercial Promissory Note, dated July 29, 1998,
made by Video Galaxy and each of the Selling Shareholders for the benefit of The
Savings Bank of Manchester in the principal amount of $640,000.
ARTICLE IX
CONDITIONS TO THE OBLIGATIONS OF VCI
------------------------------------
The obligations of VCI to consummate the transactions provided for hereby
are subject, in the discretion of VCI, to the satisfaction, at or prior to the
Effective Time, of each of the following conditions, any of which may be waived
by VCI:
9.1 Representations, Warranties and Covenants. All representations and
-----------------------------------------
29
warranties of Video Galaxy and the Selling Shareholders contained in this
Agreement shall be true and correct at and as of the date of this Agreement and
at and as of the Effective Time as if such representations and warranties were
made at and as of the Effective Time, and Video Galaxy and the Selling
Shareholders shall have performed all agreements and covenants required hereby
to be performed by them prior to or at the Effective Time, and Video Galaxy
shall have delivered a certificate signed by each of the Selling Shareholders to
such effect.
9.2 Approvals. All Permits, waivers, consents, approvals and
---------
authorizations from governmental authorities and other parties, including
certain creditors and principal stockholders of VCI, necessary to consummate the
transactions contemplated hereby shall have been obtained.
9.3 No Governmental Actions. No governmental action or proceeding shall
-----------------------
have been commenced or threatened seeking any injunction, restraining or other
order which seeks to prohibit, restrain, invalidate or set aside the
effectuation of the Merger and no order, statute, rule, regulation, executive
order, stay, decree, judgment or injunction shall have been enacted, entered,
issued, promulgated or enforced by any court or governmental authority which
prohibits or restricts the effectuation of the Merger.
9.4 No Material Adverse Change. Since December 31, 1997, there shall
--------------------------
not have occurred any change in the business, assets, financial or operating
conditions or prospects of Video Galaxy taken as a whole, except for changes
contemplated hereby or changes which have not, individually or in the aggregate,
resulted in a Material Adverse Change to the business, assets, financial or
operating conditions or prospects of Video Galaxy, and Video Galaxy shall have
delivered a certificate signed by a duly authorized officer to such effect.
9.5 Limitation on Indebtedness and Liabilities. In no event shall the
-------------------------------------------
aggregate of all notes payable, loans payable, accounts payable and other
indebtedness and liabilities of Video Galaxy immediately prior to the Effective
Time exceed $4,633,000. The total indebtedness and liabilities of Video Galaxy
immediately prior to the Effective Time and the assumption thereof by VCI shall
be on terms acceptable to VCI, such acceptance to not be unreasonably withheld.
9.6 Financial Statements. Video Galaxy shall have obtained and delivered
--------------------
to VCI financial statements of Video Galaxy consisting of balance sheets as of
September 30, 1997 and 1998, and statements of operations for the years ended
September 30, 1997 and 1998. Such financial statements shall show a financial
condition and results of operations of Video Galaxy that are satisfactory to
VCI.
9.7 Cash Flow of Video Galaxy. The aggregate operating cash flow
-------------------------
excluding corporate overhead (i.e., earnings before interest, taxes,
----
depreciation and amortization, but after all inventory purchases) of Video
Galaxy's video stores during the twelve month period ending on the month prior
to the month in which the Closing shall take place shall be equal to or exceed
$1,800,000, and Video Galaxy shall have delivered a certificate signed by a duly
authorized officer to such effect.
30
9.8 Inventory. Notwithstanding any other provision in this Agreement,
---------
Video Galaxy's rental and sale inventory of pre-recorded videocassettes at the
Closing shall not be less than 99,500 units.
9.9 Due Diligence. VCI and its counsel shall have completed and be
-------------
satisfied with the results of their due diligence investigation of the business,
assets, and financial and legal conditions of Video Galaxy.
9.10 Board of Directors Approval. The Board of Directors of VCI shall
---------------------------
have adopted and approved this Agreement and the Certificate of Merger, and the
transactions contemplated hereby and thereby.
9.11 Video Galaxy Video Stores. Video Galaxy shall own and operate not
-------------------------
less than 15 retail video stores immediately prior to the Effective Time.
9.12 Store Lease Assignments. For any video stores held by Video Galaxy,
-----------------------
VCI shall have received from Video Galaxy copies of all landlord waivers and
third party consents that VCI deems necessary to the assignment to VCI or the
change of control of Video Galaxy pursuant to the Merger. Other than such
consents, there shall not be any other change of control or similar provisions
in any Contracts of Video Galaxy which would give rise to adverse consequences
or prevent the assignment to VCI of any store leases held by Video Galaxy.
9.13 Selling Shareholder Approval. This Agreement, the Certificate of
----------------------------
Merger and the transactions contemplated hereby and thereby shall have been
approved and adopted by the vote or consent of all of the outstanding shares of
capital stock of Video Galaxy and an officer's certificate as to such approval
shall be delivered by Video Galaxy to VCI.
9.14 Delivery of Stock Certificates. Stock certificates representing all
------------------------------
of the issued and outstanding capital stock of Video Galaxy shall have been
delivered to VCI.
9.15 Termination of Employment Agreements. On or prior to the Effective
------------------------------------
Time, all employment agreements in which Video Galaxy is a party shall have been
terminated.
9.16 Conversion of Indebtedness Owed to Mortco, Inc. On the Effective
----------------------------------------------
Time, Mortco, Inc. shall have converted certain indebtedness of Video Galaxy to
Mortco, Inc. in the amount of $2,000,000 in exchange for 2,000 shares of VCI
Series D Convertible Redeemable Preferred Stock, with a stated value of $1,000
per share and having a conversion price of $3.00 per share, and warrants to
purchase 500,000 shares of VCI Common Stock at an exercise price of $3.00 per
share, as more fully set forth in the Debt Conversion Agreement, dated as of
March 30, 1999.
31
ARTICLE X
TERMINATION, AMENDMENTS, WAIVERS AND POST-CLOSING COVENANTS
-----------------------------------------------------------
10.1 Termination.
-----------
(a) Termination. Notwithstanding any prior approval by the
-----------
stockholders of Video Galaxy, this Agreement and the Merger and other
transactions contemplated hereby may be terminated at any time prior to the
Effective Time:
(1) By mutual written consent of Video Galaxy and VCI;
(2) By either Video Galaxy or VCI, if the Closing shall not have
occurred on or before April 15, 1999 unless such date is extended by the mutual
agreement of the parties; provided however, that this provision shall not be
available to Video Galaxy if VCI has the right to terminate this Agreement under
clause (4) of this Section 10.1(a), and this provision shall not be available to
VCI if Video Galaxy has the right to terminate this Agreement under clause (3)
of this Section 10.1(a);
(3) By Video Galaxy, if there is a breach of any representation
or warranty set forth in Article IV hereof or any covenant or agreement to be
complied with or performed by VCI pursuant to the terms of this Agreement or an
occurrence of any event which results or would result in the failure of a
condition set forth in Article VIII to be satisfied at or prior to the Effective
Time; or
(4) By VCI, if there is a breach of any representation or
warranty set forth in Article III hereof or of any covenant or agreement to be
complied with or performed by Video Galaxy or the Selling Shareholders pursuant
to the terms of this Agreement or the occurrence of any event which results or
would result in the failure of a condition set forth in Article IX to be
satisfied at or prior to the Effective Time.
(b) Effect of Termination. In the event of termination of this
---------------------
Agreement as provided in Section 10.1, this Agreement shall forthwith become
void and no party hereto shall have any liability or further obligation to any
other party hereto under or by reason of this Agreement or the transactions
contemplated hereby, except for any willful breach of this Agreement occurring
prior to or as a result of termination of this Agreement, and except that:
(1) Each party shall redeliver all documents, work papers and
other material of any other party relating to the transactions contemplated
hereby, whether so obtained before or after the execution hereof, to the party
furnishing the same; and
(2) The provisions of Sections 5.2 and 12.5 shall continue in
full force and effect.
The foregoing provisions shall not limit or restrict the availability of
injunctive relief to the extent that such relief would otherwise be available to
a party hereunder.
10.2 Amendments. This Agreement may not be amended except by action of
----------
each
32
of the parties hereto set forth in an instrument in writing signed by or on
behalf of each of the parties hereto.
10.3 Waivers. At any time prior to the Effective Time, any party hereto
-------
may (i) extend the time for the performance of any of the obligations or other
acts of any other party hereto, (ii) waive any inaccuracies in the
representations and warranties of any other party contained herein or in any
document delivered pursuant hereto, or (iii) waive compliance with any of the
agreements of any other party or with any conditions to its own obligations. Any
agreement on the part of a party hereto to any such extension or waiver shall be
valid only if set forth in an instrument in writing signed on behalf of such
party by a duly authorized officer. No waiver of any of the provisions of this
Agreement shall be deemed or shall constitute a waiver of any other provision
hereof (whether or not similar), nor shall such waiver constitute a continuing
waiver unless otherwise expressly provided.
10.4 Office Lease. Effective as of the Effective Time, the real property
------------
lease entered into by Video Galaxy with K & G Enterprises, as lessor, with
respect to the Video Galaxy office located at ▇▇▇ ▇▇▇▇ ▇▇▇▇▇▇, ▇▇▇▇▇▇▇▇▇,
▇▇▇▇▇▇▇▇▇▇▇ ▇▇▇▇▇ shall be terminated, and Video Galaxy shall enter into a
month-to-month lease with K & G Enterprises, providing for rental payments at a
rate of $2,500 per month and having such other terms and conditions that shall
be mutually satisfactory to such parties.
10.5 Contracts. From and after the Effective Time, VCI shall cause all of
---------
the contracts, payables or notes of Video Galaxy, which have been disclosed to
VCI by Video Galaxy, to be paid by Video Galaxy as they become due, including
but not limited to, all obligations and liabilities of Video Galaxy to Rentrak
Corporation and/or Mortco, Inc. as more fully set forth in the Assumption
Agreement, dated as of March 30, 1999, subject to VCI's right to dispute the
validity and amount of any liability in good faith.
10.6 Certain Tax Liabilities and Filings. The parties hereto understand
-----------------------------------
that Video Galaxy will be required to file a federal corporate income tax return
covering the period from the commencement of its current taxable year through
and including the day immediately before the Closing Date. The Selling
Shareholders (on behalf of themselves and the other stockholders of Video
Galaxy) hereby acknowledge and agree that all tax liabilities of Video Galaxy
applicable to such period and to any prior periods (collectively, "Prepurchase
Tax Liabilities") shall be the responsibility of the Selling Shareholders, and
that the Selling Shareholders (on behalf of themselves and the other
stockholders of Video Galaxy) shall, jointly and severally, indemnify and hold
harmless VCI, Video Galaxy and their affiliates from Prepurchase Tax
Liabilities. ▇▇▇▇▇ ▇. ▇▇▇▇▇▇ agrees to timely file all tax returns, and pay all
taxes, penalties and interest, required of Video Galaxy which are applicable to
any such periods and agrees to bear all costs and expenses of preparing and
filing such tax returns. VCI and Video Galaxy hereby appoint and confer full
authority upon ▇▇▇▇▇ ▇. ▇▇▇▇▇▇ to prepare, execute, and file all tax returns
required of Video Galaxy that are applicable to such periods. VCI shall
indemnify and hold harmless the Selling Shareholders from all tax liabilities of
Video Galaxy applicable to all periods on and after the Closing Date.
33
ARTICLE XI
INDEMNIFICATION; SURVIVAL
-------------------------
11.1 Survival of Representations, Etc. The representations, warranties,
--------------------------------
covenants and agreements of Video Galaxy, each Selling Shareholder and VCI
contained herein and the indemnification by the Selling Shareholders under
Section 11.2 with respect thereto, and the indemnification by VCI under Section
11.3 with respect thereto, shall survive the Effective Time for two years;
provided, however, that the representations and warranties of Video Galaxy in
Section 3.19 and the related indemnification by the Selling Shareholders with
respect thereto shall survive until the applicable statutes of limitations have
expired, and those contained in Section 3.5 and the related indemnification by
the Selling Shareholders with respect thereto shall survive without any
limitation in time. For purposes of this Article XI, "representations" and
"warranties" of Video Galaxy and each Selling Shareholder shall mean
collectively those representations and warranties of Video Galaxy and each
Selling Shareholder set forth in Article III and the Disclosure Schedules
referenced therein and "representations" and "warranties" of VCI shall mean
collectively those representations and warranties of VCI set forth in Article IV
and the Disclosure Schedules referenced therein.
11.2 Indemnification by Video Galaxy and the Selling Shareholders.
------------------------------------------------------------
Subject to, and in the manner described in, this Article XI, Video Galaxy and
each Selling Shareholder, jointly and severally, shall indemnify and hold
harmless VCI and its Representatives and Affiliates (the "VCI Indemnified
Parties") to the fullest extent lawful, for the respective periods of time
specified in Section 11.1, from and against any and all losses, damages,
diminution in value, claims, liabilities, actions and expenses (including,
without limitation, costs of investigating, preparing or defending any such
claim or action, costs of settlement, judgments, and reasonable legal fees and
expenses), net of any amounts actually received under any insurance policy as a
result of such loss, damage, diminution in value, claim, liability, action, or
expense (collectively "Losses") arising out of or in connection with the breach
of any representation, warranty, covenant or agreement of Video Galaxy or any
Selling Shareholder contained in this Agreement. The term "Losses" as used in
this Section 11.2 is not limited to matters asserted by third parties against a
VCI Indemnified Party, but includes Losses incurred or sustained by a VCI
Indemnified Party in the absence of third party claims. Notwithstanding the
foregoing, with respect to any Losses arising out of or in connection with the
breach of any representation, warranty, covenant or agreement of Video Galaxy or
any Selling Shareholder contained in this Agreement, each Selling Shareholder
shall indemnify and hold harmless any VCI Indemnified Party only to the extent
of the percentage of such Losses equal to the percentage of Video Galaxy's
outstanding voting common stock (excluding for this purposes the non-voting
common stock) held by such Selling Shareholder as of the date hereof.
11.3 Indemnification by VCI. Subject to, and in the manner described in,
----------------------
this Article XI, for a period of two years from the Effective Time, VCI shall
indemnify and hold harmless Video Galaxy and the Selling Shareholders and their
respective Representatives and Affiliates (the "Video Galaxy Indemnified
Parties") to the fullest extent lawful, from and against any and all Losses
arising out of or in connection with the breach of any
34
representation, warranty, covenant or agreement of VCI. The term "Losses" (as
defined in Section 11.2 hereof) as used in this Section 11.3 is not limited to
matters asserted by third parties against a Video Galaxy Indemnified Party, but
includes Losses incurred or sustained by a Video Galaxy Indemnified Party in the
absence of third party claims.
11.4 Basket and Cap. VCI shall be indemnified by Video Galaxy and the
--------------
Selling Shareholders, and Video Galaxy and the Selling Shareholders shall be
indemnified by VCI, in each case to the extent that the aggregate of all Losses,
determined without regard to whether any Loss was material or not, exceeds
$25,000 ("Basket Amount"), provided that in no circumstance shall the aggregate
liability of Video Galaxy, the Selling Shareholders or VCI exceed $5,000,000.
Notwithstanding the foregoing, there shall be no Basket Amount applicable to any
Loss resulting from a breach of representations and warranties in Sections 3.5
or 3.19 or from a failure to make any adjustment or pay any amount payable under
Article II.
11.5 Indemnification Procedure.
-------------------------
(a) If a third party asserts a claim against any indemnified party
for which indemnification would be available under this Article XI (a "Claim"),
the indemnified party shall promptly give notice of such Claim, describing such
Claim with reasonable specificity, to the indemnifying party. If the amount of
the Claim exceeds, or the aggregate amount of Losses incurred prior to such date
have exceeded, the Basket Amount, the indemnifying party shall be entitled to
assume the defense of such Claim, including the employment of counsel reasonably
satisfactory to the indemnified party; provided, however, that if the
indemnified party reasonably determines in good faith that its interests with
respect to such Claim cannot appropriately be represented by the indemnifying
party, such indemnified party shall have the right to assume control of the
defense of such Claim and to have its expenses reimbursed promptly with respect
to such Claim to the extent entitled thereto. In addition, in the event that
such indemnifying party, within a reasonable time after notice that any such
Claim or the total Losses incurred exceeds the Basket Amount, fails to defend
any indemnified party, such indemnified party will (upon further notice to such
indemnifying party) have the right to undertake its defense of such Claim for
the account of such indemnifying party and to have its expenses reimbursed
promptly with respect to such Claim to the extent entitled thereto. Regardless
of which party is controlling the defense of any Claim, (i) both the
indemnifying party and the indemnified party shall act in good faith; (ii) no
settlement of such Claim may be agreed to without the written consent of the
indemnifying party, which consent shall not be unreasonably withheld; and (iii)
no part of any Claim shall be paid without such consent or unless a final
judgment from which no appeal may be taken is entered on such Claim against the
indemnified party. The controlling party shall deliver, or cause to be
delivered, to the other party copies of all correspondence, pleadings, motions,
briefs, appeals or other written statements relating to or submitted in
connection with the defense of any such Claim, and timely notices of any hearing
or other court proceeding relating to such Claim.
(b) In the absence of a third party Claim, if any party shall have a
claim that another is liable for Losses, the party seeking indemnification shall
provide notice within
35
90 days of the discovery of the Loss of the nature and extent thereof, and the
other party shall repay such Losses within 90 days thereafter to the extent the
Losses exceed the Basket Amount, or shall inform the party seeking
indemnification that it is denying in good faith all or a portion of such Claim.
If the party seeking indemnification disputes the denial of such Claim, it may
thereupon proceed to enforce its rights under this Agreement.
ARTICLE XII
GENERAL PROVISIONS
------------------
12.1 Assignment. Neither this Agreement nor any of the rights or
----------
obligations hereunder may be assigned by any party without the prior written
consent of the other parties; provided, however, the representations and
warranties of Video Galaxy and the Selling Shareholders set forth in Article III
of this Agreement may be assigned by VCI to VCI's lender, including BankBoston
Retail Finance Inc., in connection with the financing of the transactions
contemplated by this Agreement. Subject to the foregoing, this Agreement shall
be binding upon and inure to the benefit of the parties hereto and their
respective successors and permitted assigns, and no other Person shall have any
right, benefit or obligation under this Agreement as a third party beneficiary
or otherwise.
12.2 Notices. All notices, requests, demands and other communications
-------
which are required or may be given under this Agreement shall be in writing and
shall be deemed to have been duly given when received if personally delivered;
when transmitted if transmitted by telecopy, electronic or digital transmission
method; the day after it is sent, if sent for next day delivery to a domestic
address by recognized overnight delivery service (e.g., FED EX); and upon
----
receipt, if sent by certified or registered mail, return receipt requested. In
each case notice shall be sent to:
If to Video Galaxy or the Selling Shareholders, addressed to:
▇▇▇▇▇ ▇. ▇▇▇▇▇▇
Video Galaxy, Inc.
▇▇▇ ▇▇▇▇ ▇▇▇▇▇▇
▇▇▇▇▇▇▇▇▇, ▇▇▇▇▇▇▇▇▇▇▇ ▇▇▇▇▇
Facsimile: (▇▇▇) ▇▇▇-▇▇▇▇
With a copy to:
▇▇▇▇ ▇▇▇▇▇▇▇, Esq.
▇▇▇▇▇▇▇ & ▇▇▇▇▇▇▇▇, P.A.
Fort Andross
▇▇ ▇▇▇▇▇ ▇▇▇▇▇▇
▇▇▇▇▇▇▇▇▇, ▇▇▇▇▇ ▇▇▇▇▇
Facsimile: (▇▇▇) ▇▇▇-▇▇▇▇
If to VCI, addressed to:
36
▇▇▇▇▇▇ ▇. ▇▇▇
Video City, Inc.
▇▇▇ ▇▇▇▇▇▇▇ ▇▇▇▇▇▇, ▇▇▇▇▇ ▇▇▇
▇▇▇▇▇▇▇▇, ▇▇▇▇▇▇▇▇▇▇ ▇▇▇▇▇
Facsimile: (▇▇▇) ▇▇▇-▇▇▇▇
With a copy to:
▇▇▇▇▇▇▇ ▇. ▇▇▇▇, Esq.
▇▇▇▇ & ▇▇▇▇▇ Professional Corporation
▇▇▇▇ ▇▇▇▇▇▇▇ ▇▇▇▇ ▇▇▇▇, ▇▇▇▇ ▇▇▇▇▇
▇▇▇ ▇▇▇▇▇▇▇, ▇▇▇▇▇▇▇▇▇▇ ▇▇▇▇▇-▇▇▇▇
Facsimile: (▇▇▇) ▇▇▇-▇▇▇▇
or to such other place and with such other copies as each party hereto may
designate as to itself by written notice to the other parties hereto.
12.3 Choice of Law. This Agreement shall be governed by and construed
-------------
in accordance with the laws of the State of California without reference to
choice of law provisions.
12.4 Multiple Counterparts. This Agreement may be executed in one or
---------------------
more counterparts, each of which shall be deemed an original but all of which
together shall constitute one and the same instrument. Any or all signatures
required pursuant to this Agreement may be a facsimile.
12.5 Expenses. Each party hereto shall pay its own legal, accounting,
--------
out-of-pocket and other expenses incident to this Agreement and to any action
taken by such party in preparation for carrying this Agreement into effect.
12.6 Invalidity. In the event that any one or more of the provisions
----------
contained in this Agreement or in any other instrument referred to herein,
shall, for any reason, be held to be invalid, illegal or unenforceable in any
respect, then to the maximum extent permitted by law, such invalidity,
illegality or unenforceability shall not affect any other provision of this
Agreement or any other such instrument.
12.7 Titles. The titles, captions or headings of the Articles and
------
Sections herein are inserted for convenience of reference only and are not
intended to be a part of or to affect the meaning or interpretation of this
Agreement.
12.8 Cumulative Remedies. All rights and remedies of either party hereto
-------------------
are cumulative of each other and of every other right or remedy such party may
otherwise have at law or in equity, and the exercise of one or more rights or
remedies shall not prejudice or impair the concurrent or subsequent exercise of
other rights or remedies.
37
12.9 Entire Agreement. This Agreement, together with all exhibits and
----------------
schedules hereto and thereto (including the Disclosure Schedule), constitutes
the entire agreement among the parties pertaining to the subject matter hereof
and supersedes all prior agreements, understandings, negotiations and
discussions, whether oral or written, of the parties, including, without
limitation, the letter of intent, dated September 16, 1998, and the Agreement of
Merger and Plan of Reorganization, dated as November 3, 1998, and all other
prior letters entered into by the parties. The parties agree that the Agreement
of Merger and Plan of Reorganization, dated as November 3, 1998, is hereby
terminated and shall be null and void effective as of the date hereof.
12.10 Attorneys' Fees. In the event of any legal action or proceeding to
---------------
enforce or interpret the provisions hereof, the prevailing party shall be
entitled to reasonable attorneys' fees, whether or not the proceeding results in
a final judgment.
12.11 Waiver of Right to Trial by Jury. Each party to this Agreement
--------------------------------
hereby waives its rights to a trial by jury.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed and delivered as of the date and year first above written.
VIDEO CITY, INC.
By: /S/ ▇▇▇▇▇▇ ▇. ▇▇▇
-------------------------
▇▇▇▇▇▇ ▇. ▇▇▇,
Chief Executive Officer
VIDEO GALAXY, INC.
By: /S/ ▇▇▇▇▇ ▇. ▇▇▇▇▇▇
-------------------------
▇▇▇▇▇ ▇. ▇▇▇▇▇▇
President
▇▇▇▇▇ ▇. ▇▇▇▇▇▇:
/S/ ▇▇▇▇▇ ▇. ▇▇▇▇▇▇
-----------------------------
▇▇▇▇▇ ▇. ▇▇▇▇▇▇
38
▇▇▇▇▇▇ ▇. ▇▇▇▇▇▇:
/S/ ▇▇▇▇▇▇ ▇. ▇▇▇▇▇▇
----------------------
▇▇▇▇▇▇ ▇. ▇▇▇▇▇▇
▇▇▇▇ ▇▇▇▇▇▇▇▇:
/S/ ▇▇▇▇ ▇▇▇▇▇▇▇▇
----------------------
▇▇▇▇ ▇▇▇▇▇▇▇▇
39
