FORM OF TAG-ALONG RIGHTS AGREEMENT
This Tag-Along Rights Agreement (this "AGREEMENT") is made as of
January 31, 1997 by and between Cerberus Partners, L.P., a Delaware limited
partnership ("CERBERUS") on behalf of itself and its affiliates and the accounts
referred to in clause (B) of Section 1(b)(ii) below, United States Trust Company
of New York, as the warrant agent (together with its successor and assigns, the
"WARRANT AGENT") under the Warrant Agreements (as defined below) and the Initial
Holders (as defined below).
RECITALS
WHEREAS, pursuant to the Debtors' First Amended Chapter 11 Plan, as
Revised for Technical Corrections dated October 4, 1996 and Supplemental
Amendments on December 2, 1996 and December 13, 1996, (the "POR"; all
capitalized terms used herein without definition having the meanings given
thereto in the POR), and an Asset Purchase Agreement dated as of January 31,
1997, WEI Acquisition Co., a Delaware corporation (the "COMPANY") will acquire
substantially all of the assets of Wherehouse Entertainment, Inc., and its
parent, WEI Holdings, Inc., which companies are debtors and debtors-in-
possession in Case Xx. 00-000 (XXX) (Xxxxxxx Administered) in the United States
Bankruptcy Court for the District of Delaware;
WHEREAS, Cerberus and the other holders of the Senior Lender Claims
will acquire pursuant to the POR a majority of the shares of common stock, par
value $0.01, of the Company (the "COMMON STOCK");
WHEREAS, the POR provides that the Company shall issue to the holders
of the Senior Subordinated Note Claims three tranches of warrants and such
warrants will be issued pursuant to (i) that certain Warrant Agreement dated as
of the date hereof (the "TRANCHE A WARRANT AGREEMENT") by and between the
Company and the Warrant Agent relating to the Tranche A Warrants (the "TRANCHE A
WARRANTS"), (ii) that certain Warrant Agreement dated as of the date hereof (the
"TRANCHE B WARRANT AGREEMENT") by and between the Company and the Warrant Agent
relating to the Tranche B Warrants (the "TRANCHE B WARRANTS") and (iii) that
certain Warrant Agreement dated as of the date hereof (the "TRANCHE C WARRANT
AGREEMENT"; and, together with the Tranche A Warrant Agreement and the Tranche B
Warrant Agreement, the "WARRANT AGREEMENTS") by and between the Company and the
Warrant Agent relating to the Tranche C Warrants (the "TRANCHE C WARRANTS"; and,
together with the Tranche A Warrants and the Tranche B Warrants, the
"WARRANTS");
WHEREAS, the POR provides that this Agreement shall have been entered
into by Cerberus and the Warrant Agent as a condition to the effectiveness of
the POR.
NOW, THEREFORE, in consideration of the foregoing and for other good
and valuable consideration, the parties hereto agree as follows:
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11. TAG-ALONG RIGHT; NOTICES; EXERCISED SHARES; CUTBACKS; EXPIRATION.
(a) TAG-ALONG RIGHT. Prior to the Expiration Date (as defined in
Section 1(e) below), each Holder (as defined below) that executes and delivers a
counterpart of this Agreement (each an "INITIAL HOLDER") shall have the right
(the "TAG-ALONG RIGHT") to require Cerberus to cause any third party (the "THIRD
PARTY PURCHASER") who proposes to purchase from Cerberus (or any of its
affiliates or any accounts managed by Cerberus after which purchase Cerberus
shall cease to have the power to exercise control of the shares of Common Stock
so transferred) in one or a series of related transactions beneficial ownership
to at least 750,000 shares of Common Stock acquired by Cerberus under the POR
(as adjusted for any stock split, stock dividend, subdivision, reissuance,
reclassification or other adjustment to the Common Stock held by Cerberus) (such
sale, a "TAG-ALONG SALE") to purchase from such Initial Holder up to the number
of whole Exercised Shares (as defined in Section 1(c) below and rounded to avoid
fractional shares) equal to the number (the "WARRANTHOLDER'S PORTION") derived
by multiplying the total number of shares of Common Stock subject to the
Warrant(s) initially distributed to such Initial Holder exercising a Tag-Along
Right and held by such Initial Holder prior to the Tag-Along Sale (whether
through unexercised Warrants or through Exercised Shares (as defined in Section
1(c) below)) by a fraction, the numerator of which is the number of shares of
Common Stock proposed to be purchased by the Third Party Purchaser in the Tag-
Along Sale and the denominator of which is the sum of (x) the total number of
shares of Common Stock held by Cerberus, (y) the total number of shares of
Common Stock issuable upon exercise of all of the unexercised Warrants and the
total number of Exercised Shares, in each case, held by all of the Initial
Holders prior to the Tag-Along Sale and (z) if Xxxxxxx & Marsal, Inc. or its
affiliates (collectively, "A&M") have the right to participate in the Tag-Along
Sale, the total number of shares of Common Stock issuable to A&M upon the
exercise of all stock options, rights or warrants held by A&M, in each case on a
fully diluted basis, assuming the exercise in full of all such Warrants, options
and other rights outstanding. The purchase price for any Exercised Shares
purchased from the Initial Holders pursuant to this Section 1 shall be at the
same price per share and the sale shall also be made upon the same terms and
conditions as such proposed transfer by Cerberus (the "TRANSFER TERMS"). As
used in this Agreement, "Holder" shall mean only those holders of Senior
Subordinated Note Claims (i) that are holders of Senior Subordinated Note Claims
as of January 31, 1997 (the "Record Date") and (ii) that have provided evidence
reasonably satisfactory to the Warrant Agent that they were holders of Senior
Subordinated Note Claims as of the Record Date. No other holders of Senior
Subordinated Note Claims or Warrants shall be entitled to any rights under this
Agreement.
(b) NOTICES; ELECTION TO SELL. (i) If a Tag-Along Sale is a
negotiated sale to a non-broker-dealer Third-Party Purchaser, Cerberus shall
promptly notify the Warrant Agent if Cerberus proposes to make a Tag-Along Sale
giving rise to the Tag-Along Right, and shall furnish to the Warrant Agent the
Transfer Terms and a copy of any written offer or agreement pertaining thereto
(the "CERBERUS NOTICE"). Upon receipt of the Cerberus Notice, the Warrant Agent
shall, within three (3) Business Days of the receipt of such notice from
Cerberus, provide written notice to the Initial Holders (the "WARRANT AGENT
NOTICE") of the
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proposed Tag-Along Sale setting forth the Transfer Terms, together with a
letter of transmittal in the form set forth on Exhibit A attached hereto (the
"LETTER OF TRANSMITTAL"). The Tag-Along Right may be exercised by an Initial
Holder by delivery of a properly completed Letter of Transmittal, together
with the share certificates, to the Warrant Agent within fifteen (15)
Business Days following its receipt of the Warrant Agent Notice. Among other
matters, the Letter of Transmittal shall state the number of Exercised Shares
that the Warrantholder proposes to include in the Tag-Along Sale (not to
exceed the Warrantholder's Portion). Any Tag-Along Rights held by an Initial
Holder to participate in a Tag-Along Sale shall expire with respect to that
Tag-Along Sale if a properly completed Letter of Transmittal, together with
the requisite certificates and other documents required thereby, are not
timely received by the Warrant Agent.
(ii) Notwithstanding anything to the contrary in this Agreement, Tag-
Along Sales shall be deemed NOT to include, and Tag-Along Rights shall not be
available in connection with, any of the following transfers: (A) transfers to
affiliates of Cerberus; (B) transfers to funds or accounts managed by Cerberus
after which Cerberus continues to have the power to exercise control of the
shares of Common Stock so transferred; and (C) sales into the market or through
customary broker transactions.
(iii) In the case of a sale of Common Stock that in the absence of
clause (C) of paragraph (ii) above would constitute a Tag-Along Sale, Cerberus
shall notify the Warrant Agent of the number of shares sold and the cash price
received in such sale (the "CERBERUS TERMS") promptly following completion of
the sale. Upon receipt of such notice, the Warrant Agent shall promptly provide
written notice to the Initial Holders of the Cerberus Terms, together with a
letter of transmittal (a "MARKET SALE COMMITMENT") in the form set forth in
Exhibit B attached hereto. An Initial Holder may sell to Cerberus, and Cerberus
shall purchase at the cash price specified in the Cerberus Terms (a "TAG-ALONG
MARKET SALE"), the Warrant Holder's Portion of the Market Sale (calculated as if
it were a Tag-Along Sale) if such Initial Holder delivers a properly completed
Market Sale Commitment to the Warrant Agent within ten (10) Business Days after
receipt by such Initial Holder of notice from Cerberus of the Cerberus Terms.
Any right to cause Cerberus to purchase shares hereunder shall expire if a
properly completed Market Sale Commitment, together with the requisite
certificates and other documents required thereby, is not timely received by the
Warrant Agent.
(c) EXERCISED SHARES. Notwithstanding anything to the contrary
contained herein, only those Warrants that are exercised into shares of Common
Stock pursuant to the terms of the Warrant Agreement under which they were
issued (the "EXERCISED SHARES") prior to the Tag-Along Sale or Tag-Along Market
Sale, shall be entitled to the Tag-Along Right. On or prior to the date on
which the Tag-Along Sale or Tag-Along Market Sale pursuant to Section 1(b)(i) or
(iii) above, respectively, is scheduled to close, each Initial Holder that
submitted a Letter of Transmittal or Market Sale Commitment, as the case may be,
shall exercise that number of Warrants equal to the number of Exercised Shares
(not exceeding the Warrantholder's Portion) set forth in the Letter of
Transmittal or Market Sale Commitment, as the case may be (the "Noticed Shares")
in accordance with the terms of the
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Warrant Agreement under which such Warrants were issued, such exercise to be
effective upon consummation of the sale, and any such Warrants not so
exercised shall be deemed exercised to the extent of the Noticed Shares for
all purposes on the date of the Tag Along Sale or the Tag-Along Market Sale,
as the case may be, as reduced pursuant to Section 1(d) below, as applicable,
and in such event the Exercise Price shall be deducted from the purchase
price and delivered to the Warrant Agent.
(d) CUT-BACKS. If the Third Party Purchaser purchases a number of
shares of Common Stock that is less than the number of shares set forth in the
Transfer Terms or the number of shares that all persons entitled to participate
in the Tag-Along Sale propose to include in the Tag-Along Sale, the number of
shares to be included in the Tag-Along Sale by the Initial Holders, Cerberus and
the other parties entitled to participate in the Tag-Along Sale shall be reduced
pro-rata based on the number of shares originally permitted to be included by
such parties prior to such reduction. Any Exercised Shares not actually sold by
an Initial Holder as a result of the application of the previous sentence shall
not be deemed exercised.
(e) EXPIRATION. Each Initial Holder's rights under Section 1 shall
expire upon the earliest of (the "EXPIRATION DATE") (i) three years after the
issuance of the Warrants, (ii) the completion of a public offering of the Common
Stock yielding proceeds of at least $5,000,000 pursuant to a registration
statement under the Securities Act of 1933, as amended, (iii) the 181st day
after the listing of the Common Stock on the New York Stock Exchange or the
American Stock Exchange, or the commencement of bid and ask or similar price
quotations for the Common Stock on the "National Market" system of NASDAQ, and
(iv) with respect to the Warrants and Exercised Shares so transferred, upon the
sale, disposition, grant or other transfer of a Warrant or Exercised Share.
2. NON-TRANSFERABLE. The Tag-Along Right granted to an Initial
Holder under this Agreement shall not be transferrable by the Initial Holder and
the Warrant Agent shall not recognize or give effect to any such transfer.
3. GENERAL.
(a) AMENDMENT. No modification or amendment of, or waiver under,
this Agreement shall be valid unless in writing and signed by each of the
parties hereto.
(b) GOVERNING LAW. This Agreement shall be governed by and construed
in accordance with the internal laws of the State of California without regard
to conflict of law principles.
(c) SEVERABILITY. If any term, provision, covenant or restriction
herein is held by a court of competent jurisdiction to be invalid, void or
unenforceable, the remainder of the terms, provisions, covenants and
restrictions of this Agreement shall remain in full force and effect and shall
in no way be affected, impaired or invalidated thereby.
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(d) NOTICES. All notices, requests, demands and other communications
hereunder shall be in writing and shall be deemed to have been duly given when
delivered personally or sent by overnight courier express service or two days
after having been deposited in the United States mail, registered or certified,
return receipt requested, postage prepaid, addressed as follows:
(1) If to the Warrant Agent, to:
United States Trust Company of New York
Corporate Trust Division
000 Xxxx 00xx Xxxxxx, 00xx Xxxxx
Xxx Xxxx, XX 00000-0000
Attention: Xxxxx Xxxxx
(2) If to the Company, to:
00000 Xxxxxxxx Xxxxxx
Xxxxxxxx, Xxxxxxxxxx 00000-0000
Attention: Xxxxx Del Xxxxxxxx
with a copy to:
O'Melveny & Xxxxx LLP
000 Xxxxx Xxxx Xxxxxx
Xxx Xxxxxxx, Xxxxxxxxxx 00000
Attention: Xxx X. Xxxxx, Esq. and
C. Xxxxx Xxxxx Esq.
and a copy to:
Cerberus Partners, L.P.
000 Xxxxx Xxxxxx
Xxx Xxxx, Xxx Xxxx 00000
Attention: Xxxxxx Xxxxxxxxx
(3) If to the Initial Holders, to the address set forth in the
register maintained by the Warrant Agent
or to such other address or addresses as each of the parties hereto (except the
Initial Holders) may communicate in writing to the other. Written notice given
by any other method shall be deemed effective only when actually received by the
party to whom given.
(e) ENTIRE AGREEMENT. This Agreement contains the entire
understanding of the parties hereto respecting the subject matter hereof and
supersedes all prior discussions and understandings.
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(f) ASSIGNMENT. This Agreement may not be assigned by the Initial
Holders.
(g) COUNTERPARTS. This Agreement may be signed in counterparts and
each such counterpart shall be deemed to be an original and all such
counterparts shall be deemed to be one and the same instrument.
(h) NON-SIGNING HOLDERS. This Agreement shall be effective with
respect to each Initial Holder irrespective of whether there are other holders
of Senior Subordinated Note Claims who were eligible to become an Initial Holder
with rights under this Agreement, but failed to execute this Agreement or failed
to provide evidence to the Warrant Agent that they were holders of Senior
Subordinated Note Claims as of the Record Date. Any holder of a Senior
Subordinated Note Claim who fails to execute this Agreement by the date that is
two-months from the Effective Date (the "INITIAL HOLDER DEADLINE") shall not be
entitled to any Tag-Along Rights or other rights under this Agreement
irrespective of whether such holder would otherwise have qualified as an Initial
Holder. Warrant Agent shall use its commercially reasonable best efforts to
identify the parties entitled to become an Initial Holder hereunder prior to the
Initial Holder Deadline, but shall not have any obligation to identify such
parties after the Initial Holder Deadline.
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IN WITNESS THEREOF, the parties have executed this Agreement as of the
day and year first above written.
CERBERUS PARTNERS, L.P.
By:
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Name:
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Its: General Partner
UNITED STATES TRUST COMPANY OF NEW YORK
By:
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Name:
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Its:
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INITIAL HOLDERS
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