EXHIBIT 10.2
Xxxxxxx.xxx Inc.
0000 XX 00xx Xxxxx
Xxxxxxxx, XX 00000
October 24, 2001
Board of Directors
CD Warehouse, Inc.
0000 Xxxxxxxxx Xxx
Xxxxxxxx Xxxx, XX 00000
This letter sets forth certain terms and conditions of the proposed
acquisition (the "Acquisition") by Xxxxxxx.xxx Inc., an Oregon corporation
("Djangos"), of all of the outstanding stock of CD Warehouse, Inc., a Delaware
corporation ("CD Warehouse"). This letter is intended as a good faith expression
of our mutual intent and not as a binding contract, except that paragraphs 4, 5,
7, 8, 9, 10, 11 and 12 will be binding.
1. Structure of Transaction
The Acquisition will be effected through a cash tender offer to the
shareholders of CD Warehouse by a Djangos subsidiary ("Acquisition Sub"),
followed by a merger (the "Merger") of Acquisition Sub with CD Warehouse. The
Merger Agreement shall provide that if the cash tender offer is completed first,
then the Merger must be completed without delay or any other conditions
restricting its completion. Following the Merger, CD Warehouse would be a wholly
owned subsidiary of Djangos.
2. Merger Consideration
The consideration to be paid to the stockholders of CD Warehouse in both
the cash tender offer and the Merger will be $1.50 cash per share outstanding,
or an aggregate of approximately $5.5 million (the "Merger Consideration"), plus
holders of options and warrants to purchase shares of CD Warehouse Common Stock
should receive the positive difference in cash, if any, between the exercise
price per share of their options or warrants and the per share purchase price of
the Merger Consideration, with such consideration payable to the holders of the
options and warrants upon completion of the earlier of (i) cash tender offer and
(ii) the Merger. Options and warrants that are outstanding as of the date of
this letter but which are scheduled to expire pursuant to its terms prior to
completion of the Merger, shall be extended by CD Warehouse and be considered
outstanding for all purposes, including, without limitation, payment of the
Merger Consideration as provided above.
CD Warehouse, Inc.
October 24, 2001
Page 2
3. Due Diligence Review
Between the date of this letter of intent and December 31, 2001, Xxxxxxx
will have the right, at reasonable times and in a reasonable manner and during
normal business hours of CD Warehouse, to undertake a due diligence review of
the financial condition, results of operations, business prospects, employees,
systems, books and records and other properties of CD Warehouse. Among other
matters, Xxxxxxx will review the assets (tangible and intangible), liabilities
(including contingent liabilities) and stockholders' equity of CD Warehouse.
Djangos's satisfaction, in its sole discretion, with the results of its due
diligence review will be a condition of its obligation to enter into the Merger
Agreement (defined below).
4. Confidentiality
On December 28, 2000, CD Warehouse and Xxxxxxx entered into a
Confidentiality Agreement ("Confidentiality Agreement"). All data,
interpretations, reports, forecasts, records and other information which Xxxxxxx
receives or obtains from CD Warehouse or others in connection with the parties
hereto performing due diligence as provided in Section 3 hereof shall be
considered for all purposes as Confidential Information (as defined in the
Confidentiality Agreement). The parties hereto agree that the Confidentiality
Agreement is incorporated by reference into this letter as if fully embodied
herein, and the parties hereto acknowledge and agree that the Confidentiality
Agreement is in full force and effect. Djangos and the other Recipients (as
defined in the Confidentiality Agreement) are bound and obligated by and shall
perform all of the terms, provisions, agreements, conditions and covenants
contained in the Confidentiality Agreement and the parties hereto shall have all
of the rights and remedies in the event of a breach or violation of the
Confidentiality Agreement as provided in the Confidentiality Agreement. The
parties hereto agree that if any of the other provisions in this letter conflict
with the Confidentiality Agreement, the terms and provisions of the
Confidentiality Agreement shall control in all respects.
5. Reimbursement of Expenses
(a) In reliance upon this letter of intent, Xxxxxxx will incur
significant expenses during its due diligence investigation of CD Warehouse. CD
Warehouse agrees to reimburse Djangos within 10 days of invoice all reasonable
expenses incurred by Xxxxxxx and its advisors (including, without limitation,
its attorneys) in connection with such due diligence in the event subsequent to
this letter of intent and before entering into the Merger Agreement described in
paragraph 6 hereof, if (i) CD Warehouse accepts an offer from another party to
acquire CD Warehouse for a value or purchase price higher than the Merger
Consideration, or (ii) Djangos abandons the Acquisition due to breach by CD
Warehouse or any of its directors, officers or representatives of the provisions
of this letter of intent. In no event will CD Warehouse's reimbursement
obligation under this paragraph 5(a) exceed $75,000.
(b) In reliance upon this letter of intent, CD Warehouse will incur
significant expenses in connection with the transactions contemplated by this
letter of intent. Xxxxxxx agrees to reimburse CD Warehouse within 10 days of
invoice all reasonable expenses incurred by CD Warehouse and its advisors
(including, without limitation, its attorneys but excluding its investment
banking firm) in the event subsequent to this letter of intent and before
entering into the Merger Agreement described in paragraph 6 hereof, if CD
Warehouse abandons the Acquisition due to breach by Xxxxxxx or any of its
directors, officers or representatives of the provisions of this letter of
intent. In no event will CD Warehouse's reimbursement obligation under this
paragraph 5(b) exceed $50,000; provided, however, nothing contained herein shall
limit CD Warehouse's rights and remedies under the Confidentiality Agreement.
(c) In reliance upon this letter of intent, CD Warehouse will retain a
reputable, nationally-recognized investment banking firm to formally opine that
the Merger Consideration is fair, from a financial point of view, to the
shareholders of CD Warehouse (the "Fairness Opinion"). If such investment
banking firm is unable to give the Fairness Opinion and the failure to give the
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Fairness Opinion results in the termination of the transaction contemplated by
this letter of intent, Xxxxxxx agrees to reimburse CD Warehouse within 10 days
of invoice all reasonable expenses incurred by CD Warehouse in connection with
attempting to obtain the Fairness Opinion. In no event will Xxxxxxx's
reimbursement obligation under this paragraph 5(c) exceed $35,000 plus
reasonable out-of-pocket expenses incurred by the investment banking firm.
6. Definitive Merger Agreement
Subject to the provisions of this letter of intent, CD Warehouse and
Djangos will by December 31, 2001, enter into a definitive merger and plan of
reorganization ("Merger Agreement") with terms, conditions, representations and
warranties typical of transactions similar to the Merger. Xxxxxxx's attorneys
will prepare the initial draft of the Merger Agreement for review and changes by
CD Warehouse and its attorneys. The Merger Agreement must be in form and
substance satisfactory to both Djangos and CD Warehouse and their respective
counsel.
7. Termination
Unless extended by mutual agreement of the Board of Directors of both CD
Warehouse and Xxxxxxx, this letter of intent will terminate if the Merger
Agreement is not signed by both Xxxxxxx and CD Warehouse on or before December
31, 2001. In addition, either party may terminate this letter and abandon the
Acquisition if the other party hereto or any of their officers, directors or
representatives breach or violate any of the terms of this letter or the
Confidentiality Agreement. After termination, the parties will be bound only by
paragraphs 4, 5, and 11 of this letter and the Confidentiality Agreement.
8. Approval of Respective Boards of Directors and Other Conditions
Each party's obligation to execute the Merger Agreement is conditioned
upon approval of the transaction by the Board of Directors of the other party.
Each party
CD Warehouse, Inc.
October 24, 2001
Page 4
will use its reasonable commercial efforts to obtain such approval. It is also
understood that, among other things, (i) approval of the Merger Agreement by the
CD Warehouse Board of Directors is subject to obtaining the Fairness Opinion;
and (ii) that the Merger Agreement is subject to approval by the shareholders of
CD Warehouse pursuant to the requirements of the Delaware Law and Section 14(a)
of the Securities Exchange Act of 1934, as amended. In addition, the parties
contemplate that a condition to closing of the Merger and the tender offer will
be the dismissal with prejudice of the lawsuit brought by Xxxxx Xxxxxx against
CD Warehouse and certain of its directors, pending in the District Court of
Oklahoma County, Oklahoma, Case No. CJ-2001-7605.
9. Usual and Ordinary Course
Between the date of this letter and the earlier of the termination of
this letter or execution by the parties hereto of the Merger Agreement, CD
Warehouse will operate in the ordinary course of business and will not, without
the prior written consent of Djangos which will not be unreasonably withheld:
a) make any change in its authorized capital stock by amending its
Certificate of Incorporation;
b) issue any stock options or stock appreciation rights or similar benefits,
except pursuant to CD Warehouse's existing plans and consistent with past
practices and not to exceed, in the aggregate, 50,000 stock options or
equivalent stock appreciation rights with exercise prices at or above
fair market value of the underlying stock at the time of issuance;
c) make any reclassification in respect of its capital stock;
d) issue or sell any shares of its capital stock, except in connection with
the exercise of options rights or warrants outstanding as of the date of
this letter of intent;
e) sell, transfer, mortgage, encumber or otherwise dispose of a substantial
amount of its properties except for transactions in the usual and ordinary
course of business;
f) declare or pay or set apart in respect of any capital stock any cash
dividend or other distribution; or
g) enter into or commit to any new pension, retirement, profit sharing or
welfare plan or employment agreement (collectively, "Plans") with or for
the benefit of any employee, officer or director, except in the usual and
ordinary course of business and in any event with aggregate cost or
expense to CD Warehouse, when combined with all existing Plans, not to
exceed the current aggregate cost or expense to CD Warehouse of all
existing Plans.
10. Brokers/Finders
CD Warehouse represents and warrants that is has incurred no broker or
finder's commissions or fees in connection with the transactions contemplated by
this letter of intent, except the parties hereto understand and acknowledge that
CD Warehouse has or will retain a financial advisor in connection with the
transactions contemplated by this letter of intent and will incur fees and
expenses in connection therewith.
11. Expenses
Except as provided in paragraph 5 hereof or the Confidentiality
Agreement, each party will be responsible for its own expenses in connection
with a tender offer, Merger and the transactions contemplated by this letter and
the Merger Agreement.
12. Publicity
CD Warehouse and Xxxxxxx will coordinate all publicity relating to this
letter of intent and no party will issue any press release, publicity statement
or other public notice relating to this letter of intent and the matters
contemplated herein without prior consent of the other party, which consent will
not be unreasonably withheld.
If this letter of intent correctly sets forth our understanding, please
sign and return to me the enclosed copy to reflect your agreement to the terms
hereof. This letter of intent will terminate and be of no further force or
effect if not accepted and agreed to by CD Warehouse by 5:00 p.m., Pacific Time,
on Thursday, October 25, 2001.
This letter of intent can be signed in one or more counterparts, each of
which will be deemed an original but all of which together will constitute one
and the same instrument. For purposes of this letter of intent, signatures
transmitted by facsimile transmission will be deemed original signatures.
Very truly yours,
/s/ XXXXXXX X. XXXX
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Xxxxxxx X. Xxxx
Chairman and Chief Executive Officer
ACCEPTED AND AGREED
CD WAREHOUSE, INC.
By: /s/ XXXXXXXXXXX X. XXXXXX
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Xxxxxxxxxxx X. Xxxxxx
President and Chief Executive Officer
