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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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SCHEDULE 14D-9
(RULE 14D-101)
SOLICITATION/RECOMMENDATION STATEMENT UNDER SECTION 14(D)(4)
OF THE SECURITIES EXCHANGE ACT OF 1934
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FUNCO, INC.
(NAME OF SUBJECT COMPANY)
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FUNCO, INC.
(NAME OF PERSON FILING STATEMENT)
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COMMON STOCK, PAR VALUE $0.01 PER SHARE
(TITLE OF CLASS OF SECURITIES)
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360762108
(CUSIP NUMBER OF CLASS OF SECURITIES)
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STANLEY A. BODINE
10120 WEST 76TH STREET
EDEN PRAIRIE, MINNESOTA 55344
(952) 946-8883
(NAME, ADDRESS AND TELEPHONE NUMBER OF PERSON AUTHORIZED
TO RECEIVE NOTICE AND COMMUNICATIONS ON BEHALF OF THE PERSON FILING STATEMENT)
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Copies to:
PHILIP S. GARON, ESQ. DEANNE M. GRECO, ESQ.
FAEGRE & BENSON LLP MOSS & BARNETT,
2200 NORWEST CENTER A PROFESSIONAL ASSOCIATION
90 SOUTH SEVENTH STREET 4800 NORWEST CENTER
MINNEAPOLIS, MINNESOTA 55402 90 SOUTH SEVENTH STREET
(612) 336-3000 MINNEAPOLIS, MINNESOTA 55402
(612) 347-0300
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/ / Check the box if the filing relates to preliminary communications made
before the commencement date of a tender offer.
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ITEM 1. SUBJECT COMPANY INFORMATION
The name of the subject company is Funco, Inc., a Minnesota corporation
("Company"). The address of Company's principal executive offices is 10120 West
76th Street, Eden Prairie, Minnesota 55344, and the telephone number of
Company's principal executive offices is (952) 946-8883. The title of the class
of equity securities to which this statement relates is the Common Stock, $.01
par value per share, of Company (the "Common Stock"). As of May 4, 2000, there
were 6,120,908 shares of the Common Stock outstanding.
ITEM 2. TENDER OFFER OF THE BIDDER
Company is the filing person and the subject company. The name, business
address and business telephone number of Company are set forth in Item 1 above.
This Schedule 14D-9 statement relates to the cash tender offer described in
the Tender Offer Statement on Schedule TO, dated May 16, 2000 (the "Schedule
TO"), the Offer to Purchase filed as Exhibit (a)(1) thereto (the "Offer to
Purchase") and the related Letter of Transmittal filed as Exhibit
(a)(2) thereto (the "Letter of Transmittal"), filed by Barnes & Noble, Inc., a
Delaware corporation ("Parent"), and B&N Acquisition Corporation, a Minnesota
corporation and an indirect wholly owned subsidiary of Parent ("Purchaser"),
relating to the offer by Purchaser to purchase all outstanding shares of the
Common Stock (the "Shares") at a purchase price of $24.75 per Share, or such
higher price as may be paid in such tender offer, net to the seller in cash,
without interest thereon (the "Per Share Amount"), on the terms and subject to
the conditions set forth in the Offer to Purchase and in the Letter of
Transmittal and any amendments or supplements thereto (all of the foregoing
collectively constituting the "Offer"). Purchaser is making the Offer pursuant
to an Agreement and Plan of Merger, dated as of May 4, 2000 (the "Merger
Agreement"), by and among Company, Parent and Purchaser. A copy of the Merger
Agreement is filed as Exhibit 1 hereto and is incorporated herein by reference.
Pursuant to the Merger Agreement, following completion of the Offer and
satisfaction or waiver of certain other conditions specified in the Merger
Agreement, Purchaser will be merged with and into Company, with Company as the
surviving corporation of the Merger and an indirect wholly owned subsidiary of
Parent (the "Merger"). In the Merger, each Share (other than any Shares owned by
Parent or Purchaser or any other direct or indirect wholly owned subsidiary of
Parent or Company and any Shares held by any shareholder of Company who properly
exercises, preserves and perfects dissenters' rights under the Minnesota
Business Corporation Act (the "MBCA")) will be converted into the right to
receive the Per Share Amount, without interest, prorated for any fractional
shares.
The Schedule TO states that the address of the principal executive offices
of Parent is 122 Fifth Avenue, New York, New York 10011, and of Purchaser is c/o
Barnes & Noble, Inc., 122 Fifth Avenue, New York, New York 10011.
ITEM 3. PAST CONTACTS, TRANSACTIONS, NEGOTIATIONS AND AGREEMENTS
Descriptions of the Merger Agreement, a Shareholder Agreement, dated
May 4, 2000, between Parent and David R. Pomije (the "Shareholder Agreement"), a
Letter Agreement, dated March 5, 1999, between Company and George E. Mileusnic,
and a Letter Agreement regarding confidentiality, dated April 21, 1999, between
Company and Babbage's Etc. LLC, a Delaware limited liability company and an
indirect wholly owned subsidiary of Parent ("Babbage's"), as supplemented by a
Letter Agreement, dated April 7, 2000, among Company, Parent and Babbage's, are
set forth below. Except as described or referred to below or in Annex I hereto,
on the date hereof, no material contract, agreement, arrangement or
understanding, and no actual or potential conflict of interest, exists between
Company or its affiliates and (i) Company or its directors, executive officers
or affiliates or (ii) Purchaser, Parent or any of their directors, executive
officers or affiliates.
Certain contracts, agreements, arrangements and understandings between
Company or its affiliates and its directors, executive officers or affiliates
are described in the Information Statement Pursuant to Section 14(f) of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and
Rule 14f-1 thereunder, attached hereto as Annex I (the "Information Statement")
and incorporated herein by reference. The agreements described in the
Information Statement are filed herewith as Exhibits 2 through 5 and are
incorporated herein by reference.
THE MERGER AGREEMENT
The following is a summary of the Merger Agreement, a copy of which is
filed as Exhibit 1 hereto and is incorporated herein by reference. Such summary
is qualified in its entirety by reference to the Merger Agreement. The Merger
Agreement should be read in its entirety for a more complete description of the
matters summarized below.
The Offer. The obligation of Parent to cause Purchaser to commence the
Offer, to consummate the Offer and to accept tender of and to pay for Shares
validly tendered in the Offer and not withdrawn in accordance therewith will be
subject to, and only to, those conditions set forth in Annex A to the Merger
Agreement and described in Section 14 of the Offer to Purchase (the "Offer
Conditions"). Subject to the foregoing, the Merger Agreement states that as
promptly as practicable (but in any event not later than 10 business days after
the public announcement of Purchaser's intention to commence the Offer), Parent
will cause Purchaser to commence (within the meaning of Rule 14d-2 under the
Exchange Act) the Offer whereby Purchaser will offer to purchase for cash all of
the Shares at the Per Share Amount, net to the seller in cash (subject to
reduction for any stock transfer taxes payable by the seller if payment is to be
made to an individual or entity other than the individual, corporation, limited
liability company, limited liability partnership, partnership, association,
trust, unincorporated organization or other entity or group (as defined in
Section 13(d)(3) or 14(d)(2) of the Exchange Act) (each, a "Person") in whose
name the certificate for such Shares is registered or any applicable federal
back-up withholding).
The Merger Agreement provides that, without the prior written consent of
Company, Purchaser will not, and Parent will cause Purchaser not to, (i)
decrease or change the form of the Per Share Amount, (ii) decrease the number of
Shares sought in the Offer, (iii) amend or waive the condition that there be
validly tendered and not withdrawn before the Expiration Date (as defined below)
a number of Shares which, together with all Shares already owned, directly or
indirectly, by Parent or Purchaser, represents at least 51% of the total voting
power of the outstanding securities of Company entitled to vote in the election
of directors or in a merger, calculated on a fully diluted basis, on the date of
purchase (the "Minimum Condition"), or impose conditions other than the Offer
Conditions on the Offer, (iv) extend the date that the Offer, as it may be
extended pursuant to the Merger Agreement, expires (which will initially be 20
business days following the commencement of the Offer) (the "Expiration Date")
except (A) as required by law, and (B) that, in the event that the Offer
Conditions are not satisfied or waived at the time that the Expiration Date
would otherwise occur, (1) Purchaser must extend the Expiration Date for an
aggregate of 10 additional business days to the extent necessary to permit such
conditions to be satisfied and (2) Purchaser may, in its sole discretion, extend
the Expiration Date for such additional periods as it may determine to be
appropriate (but not beyond August 4, 2000) to permit the Offer Conditions to be
satisfied, or (v) amend any term of the Offer in any manner adverse to Company's
shareholders (the "Shareholders") (including, without limitation, to result in
any extension which would be inconsistent with the preceding provisions of this
sentence); provided, however, that (1) subject to applicable legal requirements,
Parent may cause Purchaser to waive any Offer Condition, other than the Minimum
Condition, in Parent's sole discretion and (2) the Offer may be extended (but
not beyond August 4, 2000) in connection with an increase in the consideration
to be paid pursuant to the Offer so as to comply with applicable rules and
regulations of the Securities and Exchange Commission (the "SEC").
In addition to Purchaser's rights to extend and amend the Offer subject to
the provisions of the Merger Agreement, Purchaser (i) will not be required to
accept for payment or, subject to any applicable rules and regulations of the
SEC, pay for, and (subject to any such rules and regulations) may delay the
acceptance for payment of, or payment for, any tendered Shares, and (ii) may
terminate the Offer or amend the Offer as to any Shares not then paid for if any
of the events described in Section 14 of the Offer to Purchase exists (to the
extent permitted by the Merger Agreement).
Company Action. The Merger Agreement states that the Board of Directors of
Company (the "Company Board") and a special committee of the Company Board
formed in accordance with Section 302A.673 of the MBCA (the "Special Committee")
(each at a meeting duly called and held) (i) determined that the Merger
Agreement, the Offer and the Merger are fair to and in the best interests of
Company and the Shareholders, (ii) approved the Merger Agreement and the
transactions contemplated by the Merger Agreement, including the Offer and the
Merger, (iii) resolved to recommend acceptance of the Offer and approval of the
Merger Agreement by the Shareholders.
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Company's Board of Directors. Pursuant to the Merger Agreement, promptly
upon the purchase of the Shares by Purchaser pursuant to the Offer (provided
that the Minimum Condition has been satisfied), and from time to time
thereafter, (i) Parent will be entitled, subject to compliance with
Section 14(f) of the Exchange Act, to designate such number of directors
("Parent's Designees"), rounded up to the next whole number, on the Company
Board as will give Parent representation on the Company Board (and on each
committee of the Company Board) equal to the product of (A) the total number of
directors on the Company Board (and on each committee of the Company Board)
(giving effect to any increase in the number of directors pursuant to the Merger
Agreement) multiplied by (B) the percentage that such number of Shares so
purchased bears to the aggregate number of Shares outstanding at the time of
Parent's designation (such product being the "Board Percentage"), and
(ii) Company will, upon request by Parent, promptly satisfy the Board Percentage
by (A) increasing the size of the Company Board (and each committee of the
Company Board) or (B) using its reasonable best efforts to secure the
resignations of such number of directors as is necessary to enable Parent's
Designees to be elected to the Company Board (and each committee of the Company
Board), or both, and will use its best efforts to cause Parent's Designees
promptly to be so elected, subject in all instances to compliance with
Section 14(f) of the Exchange Act and Rule 14f-1 promulgated thereunder.
Notwithstanding the foregoing, Parent and Purchaser have agreed to use their
best efforts to assure that at all times prior to the time of the filing of the
articles of merger with respect to the Merger with the Secretary of State of the
State of Minnesota in accordance with the MBCA (with the time such articles are
filed being referred to herein as the "Effective Time"), the Company Board will
include two directors who were members of the Company Board on the date of the
Merger Agreement and who are not employees of Company.
The Merger. At the Effective Time, and in accordance with, and subject to,
the terms and conditions of the Merger Agreement and the terms of the MBCA,
Purchaser will be merged with and into Company, the separate corporate existence
of Purchaser will thereupon cease, and Company shall be the surviving
corporation in the Merger (sometimes hereinafter referred to as the "Surviving
Corporation"). At the Effective Time, the Merger will have the other effects
provided in the applicable provisions of the MBCA. Without limiting the
generality of the foregoing and subject thereto, at the Effective Time, all the
property, rights, privileges, powers, immunities and franchises of Company and
Purchaser will vest in the Surviving Corporation, and all debts, liabilities,
obligations and duties of Company and Purchaser will become the debts,
liabilities, obligations and duties of the Surviving Corporation.
Conversion of Shares. At the Effective Time, each share of Common Stock
that is issued and outstanding immediately prior to the Effective Time (other
than (i) Dissenting Shares (as defined below), and (ii) shares of Common Stock
held of record by Parent or Purchaser or any other direct or indirect wholly
owned subsidiary of Parent or Company immediately prior to the Effective Time)
will, by virtue of the Merger and without any action on the part of the holder
thereof, be converted into and represent the right to receive the Per Share
Amount in cash (the "Merger Consideration"), without interest, prorated for
fractional shares, if any. Any payment made pursuant to the Merger Agreement
will be made net of applicable withholding taxes to the extent such withholding
is required by law.
At the Effective Time, each share of the Common Stock, par value $.0001 per
share, of Purchaser ("Purchaser Common Stock"), that is issued and outstanding
immediately prior to the Effective Time will, by virtue of the Merger and
without any action on the part of the holder thereof, be converted into and
exchanged for one fully paid and nonassessable share of common stock of the
Surviving Corporation ("Surviving Corporation Common Stock"), which will
constitute the only issued and outstanding shares of capital stock of the
Surviving Corporation immediately after the Effective Time. From and after the
Effective Time, each outstanding certificate theretofore representing shares of
Purchaser Common Stock will be deemed for all purposes to evidence ownership and
to represent the same number of shares of Surviving Corporation Common Stock.
At the Effective Time, each share of Common Stock held of record by Parent
or Purchaser or any other direct or indirect wholly owned subsidiary of Parent
or Company immediately prior to the Effective Time shall, by virtue of the
Merger and without any action on the part of the holder thereof, be canceled and
cease to exist, and no payment shall be made with respect thereto.
Stock Options. Pursuant to the Merger Agreement, after the purchase of
Shares by Purchaser pursuant to the Offer (provided the Minimum Condition has
been satisfied) (the "Offer Completion") and prior to the Effective Time,
Company will take all such actions as it is permitted or required to take under
the terms of its
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stock option plans to cancel all outstanding options (collectively, the "Stock
Options" and individually, a "Stock Option") to purchase shares of Common Stock
theretofore granted under any such employee or non-employee director stock
option plan of Company and to pay, promptly, and in any event within five days,
after the Offer Completion, in cancellation of each such Stock Option (whether
or not such Stock Option is then exercisable) a cash amount equal to the amount,
if any, by which the Merger Consideration exceeds the per share exercise price
of such Stock Option, multiplied by the number of shares of Common Stock then
subject to such Stock Option (the "Stock Option Settlement Amount"), but subject
to all required tax withholdings by Company. Each holder of a then-outstanding
Stock Option that Company does not have a right to cancel pursuant to the terms
of the applicable stock option plan, upon execution of a cancellation agreement
(a "Stock Option Cancellation Agreement") with Company, which Company shall use
reasonable efforts to obtain from each such holder prior to or promptly after
the Offer Completion, shall have the right to receive in cancellation of such
Stock Option (whether or not such Stock Option is then exercisable) a cash
payment from Company promptly and in any event within five days after the later
of the Offer Completion or the execution of a Stock Option Cancellation
Agreement in an amount equal to the Stock Option Settlement Amount, without
interest, but subject to all required tax withholdings by Company. Each Stock
Option that is subject to a Stock Option Cancellation Agreement shall be
canceled upon payment of the Stock Option Settlement Amount for such Stock
Option. The Merger Agreement states that the Company Board or the committee
appointed pursuant to Section 2 of the Funco, Inc. 1993 Stock Option Plan
Amended and Restated Through July 31, 1998, has determined that a Potential
Change in Control (as defined in such Stock Option Plan) has occurred for
purposes of determining the Change in Control Price (as defined in such Stock
Option Plan).
Surviving Corporation. Pursuant to the Merger Agreement, the Articles of
Incorporation of Company in effect immediately prior to the Effective Time will
be the Articles of Incorporation of the Surviving Corporation, until amended in
accordance with the laws of the State of Minnesota and such Articles of
Incorporation. In addition, the Bylaws of Purchaser in effect immediately prior
to the Effective Time will be deemed, by virtue of the Merger and the Merger
Agreement and without further action by the shareholders or directors of the
Surviving Corporation or Purchaser, to be the Bylaws of the Surviving
Corporation, until further amended in accordance with the laws of the State of
Minnesota, the Articles of Incorporation of the Surviving Corporation and such
Bylaws.
Pursuant to the Merger Agreement, the directors of Purchaser immediately
prior to the Effective Time will be the directors of the Surviving Corporation,
each of such directors to hold office, subject to the applicable provisions of
the Articles of Incorporation and Bylaws of the Surviving Corporation, until the
expiration of the term for which such director was elected and until his or her
successor is elected and has qualified or as otherwise provided in the Articles
of Incorporation or Bylaws of the Surviving Corporation. In addition, the
officers of Purchaser immediately prior to the Effective Time will be the
officers of the Surviving Corporation until their respective successors are
chosen and have qualified or as otherwise provided in the Bylaws of the
Surviving Corporation.
Dissenters' Rights. The Merger Agreement states that Shares issued and
outstanding immediately prior to the Effective Time, if any, which are held of
record or beneficially owned by a Person who has properly exercised and
preserved and perfected dissenters' rights with respect to such Shares pursuant
to Sections 302A.471 and 302A.473 of the MBCA and has not withdrawn or lost such
rights ("Dissenting Share(s)") will not be converted into or represent the right
to receive the Merger Consideration for such Dissenting Shares, but instead will
be treated in accordance with Sections 302A.471 and 302A.473 of the MBCA unless
and until the Person effectively withdraws or loses the Person's right to
payment under Section 302A.473 of the MBCA (through failure to preserve or
protect the right or otherwise). If, after the Effective Time, any such Person
effectively withdraws or loses such right (through failure to preserve or
protect such right or otherwise), then each such Dissenting Share held of record
or beneficially owned by such Person will thereupon be treated as if it had been
converted into, at the Effective Time, the right to receive the Merger
Consideration, without interest. Each Person holding of record or beneficially
owning Dissenting Shares who becomes entitled, pursuant to Sections 302A.471 and
302A.473 of the MBCA, to payment of the fair value of the Dissenting Shares
shall receive payment for the Shares (plus interest determined in accordance
with Section 302A.473 of the MBCA, currently 5% per year, commencing five days
after the Effective Time) from the Surviving Corporation and/or from The Bank of
New York on behalf of the Surviving Corporation pursuant to Sections 302A.471
and 302A.473 of the MBCA. Furthermore, Company shall give Parent prompt notice
upon receipt by Company at
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any time prior to the Effective Time of any notice of intent to demand the fair
value of any Shares under Section 302A.473 of the MBCA and any withdrawal of any
such notice of intent to demand fair value under Section 302A.473 of the MBCA.
Company has agreed that it will not, except with the prior written consent of
Parent, negotiate, voluntarily make any payment with respect to, or settle or
offer to settle, any demand at any time prior to the Effective Time.
Representations and Warranties of Company. Pursuant to the Merger
Agreement, Company has made representations and warranties to Parent (as of
April 26, 2000, unless otherwise expressly stated in the Merger Agreement) with
respect to, among other things: (i) the organization, corporate powers and
qualification to do business of Company and any subsidiary of Company; (ii) the
capital structure of Company; (iii) the due authorization, execution, delivery
and performance of the Merger Agreement; (iv) the enforceability of the Merger
Agreement; (v) the absence of conflicts of the Merger Agreement and the
transactions contemplated thereby with any provision of the Articles of
Incorporation or Bylaws of Company or any of its subsidiaries or, subject to
certain specified exceptions, any law, statute, ordinance, rule, regulation,
order, judgment, decree, permit, license, concession, franchise, contract,
document or other instrument or obligation; (vi) the absence of required
consents, approvals, orders, authorizations, registrations, declarations or
filings; (vii) the accuracy of documents, and financial statements included in
documents, filed and to be filed with the SEC; (viii) the absence of certain
undisclosed liabilities, adverse changes or events; (ix) accounts receivable;
(x) inventories; (xi) taxes; (xii) rights to the use of properties and the
absence of owned real property; (xiii) patents, trademarks, service marks, trade
names, copyrights and other intellectual property; (xiv) certain contractual
obligations; (xv) litigation involving Company; (xvi) compliance with
environmental laws; (xvii) employee benefit plans; (xviii) compliance with laws;
(xix) permits, licenses, registrations and similar rights with respect to
Company's business; (xx) the Year 2000 capabilities of Company's systems; (xxi)
labor matters; (xxii) insurance; (xxiii) the receipt of an opinion from William
Blair & Company, L.L.C. ("Blair"); (xxiv) the absence of ongoing discussions or
negotiations, as of the date of the Merger Agreement, with any other party with
respect to an Acquisition Proposal (as defined below); (xxv) voting requirements
regarding approval of the Merger Agreement and the transactions contemplated
thereby; (xxvi) the agreement of David R. Pomije to tender his Shares (but in no
event more than 19.9% of all Shares, in the aggregate) pursuant to the Offer and
to give an irrevocable proxy to Parent granting certain rights regarding the
ability to vote his Shares (but in no event more than 19.9% of all Shares, in
the aggregate) to the extent such Shares are not tendered in the Offer; (xxvii)
this Schedule 14D-9 statement's compliance with the Exchange Act and applicable
laws, rules and regulations; (xxviii) termination of that certain Agreement and
Plan of Merger, dated as of March 31, 2000 (the "Original EB Merger Agreement"),
as amended by an Amendment to Agreement and Plan of Merger, entered into as of
April 20, 2000 (the "EB Merger Agreement Amendment" and, together with the
Original EB Merger Agreement, sometimes referred to herein as the "EB Merger
Agreement"), each by and among Company, Electronics Boutique Holdings Corp., a
Delaware corporation ("Electronics Boutique"), and EB Acquisition Corporation, a
Minnesota corporation and wholly owned subsidiary of Electronics Boutique ("EB
Subsidiary"), in accordance with the terms of the EB Merger Agreement; and
(xxix) termination of that certain Shareholder Agreement, dated as of March 31,
2000, by and between Electronics Boutique and David R. Pomije (the "EB
Shareholder Agreement"), in accordance with its terms.
Representations and Warranties of Parent and Purchaser. Pursuant to the
Merger Agreement, Parent and Purchaser have made representations and warranties,
jointly and severally, to Company with respect to, among other things: (i) the
organization, corporate powers and qualification to do business of Parent and
Purchaser; (ii) the due authorization, execution, delivery and performance of
the Merger Agreement; (iii) the enforceability of the Merger Agreement;
(iv) the absence of conflicts of the Merger Agreement and the transactions
contemplated thereby with any provision of the Certificate of Incorporation or
Articles of Incorporation, as applicable, or Bylaws of Parent or Purchaser or
any law, statute, ordinance, rule, regulation, order, judgment, decree, permit,
license, concession, franchise, contract, document or other instrument or
obligation; (v) the accuracy of information furnished by Parent or Purchaser
expressly for inclusion in documents to be filed by Company with the SEC
pursuant to the Merger Agreement; (vi) litigation involving Parent and
Purchaser; (vii) the availability of funds to consummate the transactions
contemplated by the Merger Agreement; (viii) the lack of ownership, by Parent or
any affiliate or associate of Parent, of capital stock of Company; and (ix) the
Offer documents' compliance with the Exchange Act and applicable laws, rules and
regulations.
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Interim Operations. Except as expressly contemplated by the Merger
Agreement, during the period from April 26, 2000, and continuing until the
earlier of the termination of the Merger Agreement or the Effective Time,
Company has agreed as to itself and its subsidiaries (except to the extent that
Parent shall otherwise consent in writing) to carry on its business in the
usual, regular and ordinary course in substantially the same manner as
previously conducted, to pay its debts and Taxes (as defined in the Merger
Agreement) when due subject to good faith disputes over such debts or Taxes, to
pay or perform its other obligations when due, and, to the extent consistent
with such business, use all reasonable efforts consistent with past practices
and policies to (i) preserve intact its present business organization,
(ii) keep available the services of its present officers and key employees and
(iii) preserve its relationships with customers, suppliers, distributors, and
others having business dealings with it.
Notwithstanding the foregoing, except as expressly contemplated by the
Merger Agreement, during the period from April 26, 2000, and continuing until
the earlier of the termination of the Merger Agreement or the Effective Time,
Company has agreed not to (and has agreed not to permit any of its subsidiaries
to) do any of the following without the written consent of Parent:
(i) accelerate, amend or change the period of exercisability of
options or restricted stock granted under any Stock Plan (as defined in the
Merger Agreement) or authorize cash payments in exchange for any options
granted under any such Stock Plan, except as required by the terms of such
Stock Plan or any related agreements in effect as of the date of the Merger
Agreement;
(ii) declare or pay any dividends on or make any other distributions
(whether in cash, stock or property) in respect of any of its capital
stock, or split, combine or reclassify any of its capital stock or issue or
authorize the issuance of any other securities in respect of, in lieu of or
in substitution for shares of its capital stock, or purchase or otherwise
acquire, directly or indirectly, any shares of its capital stock, except
from former employees, directors and consultants in accordance with
agreements providing for the repurchase of shares in connection with any
termination of service to such party;
(iii) issue, deliver or sell, or authorize or propose the issuance,
delivery or sale of, any shares of its capital stock or securities
convertible into or exchangeable for shares of its capital stock, or
subscriptions, rights, warrants or options to acquire, or other agreements
or commitments of any character obligating it to issue, any such shares or
other convertible securities, other than the issuance of shares of Common
Stock pursuant to the exercise of options or warrants outstanding on the
date of the Merger Agreement;
(iv) acquire or agree to acquire by merging or consolidating with, or
by purchasing a substantial equity interest in, or substantial portion of
the assets of, or by any other manner, any business or any corporation,
partnership or other business organization or division, or otherwise
acquire or agree to acquire any assets (other than inventory and other
items in the ordinary course of business), except for any such acquisitions
involving aggregate consideration of not more than $50,000;
(v) sell, lease, license or otherwise dispose of any of its material
properties or assets, except for transactions in the ordinary course of
business; provided, however, that in no event shall Company enter into any
agreement, option or other arrangement (including, without limitation, any
joint venture) involving the licensing of its name in any foreign country,
except for transactions in the ordinary course of business;
(vi) enter into any material agreement or other arrangement which
would constitute a Material Contract (as defined in the Merger Agreement)
if Company or any of its subsidiaries were a party thereto as of the date
of the Merger Agreement, which agreements or other arrangements obligate
Company to pay more than $50,000 thereunder, individually, or more than
$100,000 in the aggregate; provided, however, Company shall not (and shall
not permit any of its subsidiaries to) enter into any retail store leases
without the prior written consent of Parent, such consent not to be
unreasonably withheld;
(vii) incur inventory other than in the ordinary course of business;
(viii) (A) increase or agree to increase the compensation payable or
to become payable to its directors, officers, employees or consultants,
except for increases in salary or wages of employees in accordance with
past practices, (B) grant any additional severance or termination pay to,
or enter into any employment or severance agreements with, any consultants,
employees, officers or directors, (C) enter into any collective bargaining
agreement (other than as required by law or extensions to existing
agreements in the ordinary course of business), or (D) establish, adopt,
enter into or amend, in any manner materially adverse to
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Company or its subsidiaries, any bonus, profit sharing, thrift,
compensation, stock option, restricted stock, pension, retirement, deferred
compensation, employment, termination, severance or other plan, trust,
fund, policy or arrangement for the benefit of any directors, officers,
employees or consultants;
(ix) amend or propose to amend its Articles of Incorporation or
Bylaws;
(x) incur any indebtedness for borrowed money other than intercompany
indebtedness and indebtedness incurred in the ordinary course of business;
provided, however, in no event shall Company or any of its subsidiaries
incur any indebtedness for borrowed money in excess of $50,000 in the
aggregate without the written consent of Parent;
(xi) take any action that would or is reasonably likely to result in a
breach of any covenant, agreement, representation or warranty in the Merger
Agreement that is qualified as to materiality; or take any action that
would or is reasonably likely to result in a breach of any covenant,
agreement, representation or warranty set forth in the Merger Agreement
that is not so qualified, which breach is reasonably likely to have a
Company Material Adverse Effect (as defined in the Merger Agreement);
(xii) make or rescind any material express or deemed election relating
to Taxes, settle or compromise any material claim, action, suit,
litigation, proceeding, arbitration, investigation, audit or controversy
relating to Taxes, or change any of its methods of reporting income or
deductions for federal income Tax purposes from those employed in the
preparation of its federal income Tax return for the taxable year ended
March 28, 1999, except as may be required by applicable law;
(xiii) settle any material litigation, such consent of Parent not to
be unreasonably withheld; or
(xiv) take, or agree in writing or otherwise to take, any of the
foregoing actions.
No Solicitation. Pursuant to the Merger Agreement, from the date of the
Merger Agreement until the earlier of the Effective Time or the termination of
the Merger Agreement, Company has agreed that it will not and will not authorize
or permit any of its officers, directors, employees, financial advisors,
representatives or agents to (i) solicit, seek, initiate or encourage any
inquiries or proposals that constitute, or would be reasonably likely to lead
to, a proposal or offer for a merger, consolidation, business combination, sale
of substantial assets of Company and its subsidiaries, taken as whole (other
than the sale of inventory or obsolete property in the ordinary course of
business), sale of shares of its capital stock (including without limitation by
way of a tender offer) or similar transaction involving such party or any of its
subsidiaries, other than the transactions contemplated by the Merger Agreement
(any of the foregoing inquiries or proposals being referred to in the Merger
Agreement as an "Acquisition Proposal"), (ii) engage in negotiations or
discussions with any Person other than Parent or its affiliates (a "Third
Party") concerning, or provide any nonpublic information to any Person relating
to, any Acquisition Proposal, or (iii) agree to or recommend any Acquisition
Proposal; provided, however, that nothing contained in the Merger Agreement
shall prevent Company or the Company Board or the Special Committee from
(A) furnishing nonpublic information to, or entering into discussions or
negotiations with, any Person in connection with an unsolicited bona fide
written Acquisition Proposal by such Person or modifying or withdrawing its
recommendation with respect to the transactions contemplated in the Merger
Agreement or recommending an unsolicited bona fide written Acquisition Proposal
to the Shareholders, if and only to the extent that (1) the Company Board or the
Special Committee believes in good faith (after consultation with its financial
and legal advisors) that such Acquisition Proposal is reasonably capable of
being completed on the terms proposed and would, if consummated, result in a
transaction more favorable to the Shareholders than the transactions
contemplated by the Merger Agreement, and the Company Board or the Special
Committee determines in good faith after consultation with outside legal counsel
that such action is required for the Company Board or the Special Committee to
comply with its fiduciary duties to the Shareholders under applicable law and
(2) prior to furnishing such nonpublic information to, or entering into
discussions or negotiations with, such Person, the Company Board or the Special
Committee receives from such Person an executed confidentiality and standstill
agreement with terms no less favorable to Company than those contained in the
confidentiality agreement, dated April 21, 1999, between Babbage's and Company,
as supplemented by the letter agreeement, dated April 7, 2000, by and among
Parent, Babbage's and Company; or (B) complying with Rule 14e-2 promulgated
under the Exchange Act with regard to an Acquisition Proposal. Company agreed
not to release any Third Party from, or waive any provision of, any standstill
agreement to which it is a party or any confidentiality agreement between it and
another Person who has made, or who may reasonably be considered
7
likely to make, an Acquisition Proposal, unless the Company Board or the Special
Committee determines in good faith after consultation with outside legal counsel
that such action is necessary for the Company Board or the Special Committee to
comply with its fiduciary duties to the Shareholders under applicable law.
Notwithstanding the foregoing, the Merger Agreement provides that Company need
not refuse a request from any Person who has signed a standstill agreement with
Company to make an Acquisition Proposal to the chief executive officer of
Company or the Company Board if the Company Board or the Special Committee
determines in good faith after consultation with outside legal counsel that such
action is necessary for the Company Board or the Special Committee to comply
with its fiduciary duties to Shareholders under applicable law.
Pursuant to the Merger Agreement, Company agreed to notify Parent
immediately after receipt by Company (or its advisors) of any Acquisition
Proposal or any request for nonpublic information in connection with an
Acquisition Proposal or for access to its properties, books or records by any
Person that informs Company that it is considering making, or has made, an
Acquisition Proposal. Such notice must be made orally and in writing and must
indicate in reasonable detail the terms and conditions of such proposal, inquiry
or contact (including, without limitation, the identity of the Person making the
Acquisition Proposal). Company also agreed to continue to keep Parent informed,
on a current basis, of the status of any such discussions or negotiations and
the terms being discussed or negotiated. Pursuant to the Merger Agreement,
neither the Company Board nor the Special Committee may withdraw, modify or
change, or propose to withdraw, modify or change, in a manner adverse to Parent,
the approval or recommendation by the Company Board or the Special Committee, as
the case may be, of the Offer, the Merger Agreement or the Merger unless the
Company Board or the Special Committee, as the case may be, determines, in the
exercise of its fiduciary duties, that it is necessary to do so; provided,
however, the preceding restriction does not prohibit Company from taking and
disclosing to the Shareholders a position contemplated by Rule 14e-2 promulgated
under the Exchange Act.
Inspection of Records; Access and Information; Cooperation and
Notification. Pursuant to the Merger Agreement, subject to compliance with
applicable law, from the date of the Merger Agreement until the earlier of the
Effective Time or the termination of the Merger Agreement, Company has agreed to
confer on a regular and frequent basis with one or more representatives of
Parent to report on the general status of ongoing operations and litigation, and
to promptly provide Parent or its counsel with copies of all filings made by
Company with the SEC or with any court, administrative agency or commission or
other governmental authority or instrumentality (each, a "Governmental Entity")
in connection with the Merger Agreement, the Merger and the transactions
contemplated thereby. In addition, each party has agreed to notify the other
party of, and to use all commercially reasonable efforts to cure before the
Closing Date (as defined in the Merger Agreement), any event, transaction or
circumstance, as soon as practical after it becomes known to the notifying
party, that causes or will cause any covenant or agreement of the notifying
party under the Merger Agreement to be breached in any material respect or that
renders or will render untrue in any material respect any representation or
warranty of the notifying party contained in the Merger Agreement.
Further, pursuant to the Merger Agreement, upon reasonable notice, Company
has agreed to (and has agreed to cause its subsidiaries to) afford to the
officers, employees, accountants, counsel and other representatives of Parent
access, during normal business hours during the period from the date of the
Merger Agreement to the earlier of the Effective Time or the termination of the
Merger Agreement, to all its personnel, properties, books, contracts,
commitments and records and, during such period, Company has agreed to, and has
agreed to cause each of its subsidiaries to, furnish promptly to Parent all
information concerning its business, properties and personnel as Parent may
reasonably request, and Parent shall hold any of such information that is
nonpublic in confidence (as described in the Merger Agreement). In connection
with such access, Parent has agreed to act in a manner as not to unreasonably
interfere with the operations of Company and its subsidiaries. In addition,
pursuant to the Merger Agreement, Company has agreed to (and has agreed to cause
its subsidiaries to) offer to the representatives of Parent access, during
normal business hours during the period from the date of the Merger Agreement to
the earlier of the Effective Time or the termination of the Merger Agreement, to
all of Company's and its subsidiaries' current employees for purposes of
conducting any analysis reasonably related to such employees' employment by
Company or any of its subsidiaries and the prospect of such employees' continued
employment by Parent, the Surviving Corporation, its subsidiaries or any other
affiliate of Parent after the Effective Time; provided, however, that such
access shall be subject to the prior consent of Company, such consent not to be
unreasonably withheld and further provided, that a representative of Company
shall be entitled
8
to participate in any meetings with employees. In connection with such access,
Parent has agreed to act in a manner as not to unreasonably interfere with the
operations of Company and its subsidiaries.
Employee Matters. Pursuant to the Merger Agreement, for a period of at
least one year after the Offer Completion, Parent has agreed to (or will cause
the Surviving Corporation, its subsidiaries or any other affiliate of Parent to)
maintain welfare and pension benefit plans, programs and arrangements for the
benefit of Persons who were employees of Company or any subsidiary of Company
immediately prior to the Offer Completion for as long as they continue to be
employees of Parent, the Surviving Corporation, its subsidiaries or any other
affiliate of Parent, which plans, programs and arrangements are, in the
aggregate, no less favorable than those provided by Company and any subsidiary
of Company to those Persons (provided that the foregoing does not create any
obligation regarding stock or stock-based compensation). After the Effective
Time, for purposes of determining eligibility, vesting and entitlement to
vacation and severance benefits for such Persons under any compensation,
severance, welfare, pension, benefit or savings plan of Parent or any of its
affiliates in which such Persons become eligible to participate, employment by
Company or any subsidiary of Company will be credited as if such Persons had
been employed by Parent or any affiliate of Parent.
Directors' and Officers' Liability Insurance. Pursuant to the Merger
Agreement, for a period from the Offer Completion until at least six years after
the Effective Time, Parent has agreed to cause the Surviving Corporation to
maintain in effect either (i) the current policy of directors' and officers'
liability insurance maintained by Company (provided that Parent or the Surviving
Corporation may substitute therefor policies of at least the same coverage and
amounts containing terms and conditions that are no less advantageous in any
material respect to the insured parties thereunder) with respect to claims
arising from facts or events which occurred at or before the Effective Time
(including consummation of the transactions contemplated by the Merger
Agreement), or (ii) a runoff (i.e., "tail") policy or endorsement with respect
to the current policy of directors' and officers' liability insurance covering
claims asserted within six years after the Effective Time arising from facts or
events which occurred at or before the Effective Time (including consummation of
the transactions contemplated by the Merger Agreement); and such policies or
endorsements will name as insureds thereunder all present and former directors
and officers of Company or its subsidiary. Notwithstanding the foregoing, in the
event the amount of the annual premium for the insurance coverage required
pursuant to the foregoing exceeds 200% of the amount of the annual premiums paid
as of the date of the Merger Agreement by Parent for such coverage or equivalent
coverage, Parent shall use all reasonable efforts to maintain the most
advantageous policies of directors' and officers' insurance obtainable for an
annual premium equal to no more than 200% of the amount of the annual premiums
paid as of the date of the Merger Agreement by Company for such coverage.
Legal Conditions to the Merger. The Merger Agreement provides as follows:
(i) Company, Parent and Purchaser shall each use its reasonable best
efforts to (A) take, or cause to be taken, all appropriate action, and do,
or cause to be done, all things necessary and proper under applicable law
to consummate and make effective the transactions contemplated by the
Merger Agreement as promptly as practicable, (B) obtain from any
Governmental Entity or any other third party any material consents,
licenses, permits, waivers, approvals, authorizations or orders required to
be obtained or made by Company or Parent or any of their subsidiaries in
connection with the authorization, execution and delivery of the Merger
Agreement and the consummation of the transactions contemplated by the
Merger Agreement including, without limitation, the completion of the Offer
and the Merger, and (C) as promptly as practicable and, with respect to the
Offer, in any event within the time periods specified in the Merger
Agreement, make all necessary filings, and thereafter make any other
required submissions, with respect to the Merger Agreement, the Offer and
the Merger required under (1) the Securities Act of 1933, as amended, and
the Exchange Act, and any other applicable federal or state securities
laws, (2) the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as
amended (the "HSR Act"), and any related governmental request thereunder,
and (3) any other applicable law (provided that nothing stated in the
Merger Agreement shall require Company to take or cause to be taken any
action, or to do or cause to be done anything, which the Company Board, in
the exercise of its fiduciary duties, determines, in good faith after
consultation with its legal advisors, should not be taken or done).
Company, Parent and Purchaser shall cooperate with each other in connection
with the making of all such filings, including providing copies of all such
documents to the non-
9
filing party and its advisors prior to filing and, if requested, consult
with the non-filing party regarding additions, deletions or changes
suggested by the non-filing party in connection therewith.
(ii) Company and Parent agree, and shall cause each of their
respective subsidiaries, to cooperate and to use their respective
reasonable best efforts to obtain any government clearances required for
completion of the Offer and the Closing (as defined in the Merger
Agreement) (including compliance with the HSR Act and any applicable
foreign government reporting requirements), to respond to any government
requests for information, and, to the extent not inconsistent with the
fiduciary duties of their respective Board of Directors, to contest and
resist any action, including any legislative, administrative or judicial
action, and to have vacated, lifted, reversed or overturned any decree,
judgment, injunction or other order (whether temporary, preliminary or
permanent) that restricts, prevents or prohibits the completion of the
Offer, the consummation of the Merger or any other transactions
contemplated by the Merger Agreement. Each of Company and Parent shall use
reasonable efforts to make its initial filing under the HSR Act with the
appropriate Governmental Entities within 10 business days after the date of
the Merger Agreement. The parties to the Merger Agreement will consult and
cooperate with one another, and consider in good faith the views of one
another, in connection with any analyses, appearances, presentations,
memoranda, briefs, arguments, opinions and proposals made or submitted by
or on behalf of any party to the Merger Agreement in connection with
proceedings under or relating to the HSR Act, or any other federal, state
or foreign antitrust or fair trade law. Company, Parent and Purchaser shall
cooperate and work together in any proceedings or negotiations with any
Governmental Entity relating to any of the foregoing.
(iii) Each of Company and Parent shall give (or shall cause their
respective subsidiaries to give) any notices to third parties related to or
required in connection with the completion of the Offer and Merger, other
than those notices, the failure of which to give is not reasonably likely
to have a Company Material Adverse Effect or a Parent Material Adverse
Effect (as defined in the Merger Agreement), as applicable.
Public Disclosure. Pursuant to the Merger Agreement, Company and Parent
agreed to consult with each other before issuing, and to use reasonable efforts
to agree upon, any press release or other public statement regarding any of the
transactions contemplated by the Merger Agreement and agreed that they would not
issue any such press release or public statement prior to such consultation;
provided, however, the Merger Agreement does not prevent any party from making a
public disclosure it believes in good faith, after consultation with its legal
advisors, is legally required or required by any listing or trading agreement
concerning its publicly traded securities.
Other Conditions to the Merger. The Merger Agreement provides that the
respective obligations of each party to the Merger Agreement to effect the
Merger shall be subject to the satisfaction at or prior to the Effective Time of
the following conditions:
(i) Parent shall have caused Purchaser to make the Offer, and
Purchaser shall have purchased the Shares validly tendered and not
withdrawn pursuant to the Offer, provided that this condition shall be
deemed to have been satisfied with respect to the obligation of Parent and
Purchaser to effect the Merger if Purchaser fails to accept tender of or
pay for Shares pursuant to the Offer in violation of the terms of the Offer
or of the Merger Agreement;
(ii) if so required by the MBCA, the Merger Agreement and the Merger
shall have been approved in the manner required by the MBCA by the holders
of a majority of the issued and outstanding Shares;
(iii) any waiting period applicable to the purchase of the Shares
under the HSR Act shall have expired or been terminated; and
(iv) no Governmental Entity shall have enacted, issued, promulgated,
enforced or entered any order, executive order, stay, decree, judgment or
injunction or statute, rule or regulation which is in effect and which has
the effect of making the Merger illegal or otherwise prohibiting
consummation of the Merger.
Termination. The Merger Agreement may be terminated at any time prior to
the Effective Time (with respect to clauses (ii) through (v) below, by written
notice by the terminating party to the other party), whether before or after
approval of the Merger Agreement and the Merger by the Shareholders:
(i) by mutual written consent of Company and Parent; or
10
(ii) by either Company or Parent if the Offer Completion shall not
have occurred by August 4, 2000 (the "Outside Date"); provided, however,
that the right to terminate the Merger Agreement under this clause (ii) is
not available to a party if such party's failure to fulfill any obligation
under the Merger Agreement has been the cause of or resulted in the failure
of the Offer Completion to occur on or before such date, and provided
further that Parent may not so terminate the Merger Agreement under this
clause (ii) unless the failure of the Offer Completion to occur prior to
the Outside Date resulted from the failure of an Offer Condition to be
satisfied; or
(iii) by either Company or Parent if a court of competent jurisdiction
or other Governmental Entity shall have issued a nonappealable final order,
decree or ruling or taken any other nonappealable final action, in each
case having the effect of permanently restraining, enjoining or otherwise
prohibiting the consummation of the Offer or the Merger; or
(iv) by Company or Parent, if (A) the Company Board or the Special
Committee, in the exercise of its fiduciary duties, in good faith after
consultation with its legal advisors, shall have withdrawn or modified, in
any manner adverse to Parent as reasonably determined by Parent, its
recommendation of the Merger Agreement, the Offer or the Merger prior to
the Offer Completion; (B) the Company Board or the Special Committee, in
the good faith exercise of its fiduciary duties, after consultation with
its legal advisors, shall have recommended to the Shareholders an
Alternative Transaction (as defined below) prior to the Offer Completion;
provided, however, Company shall not terminate the Merger Agreement under
this clause (B) and enter into a definitive agreement for such Alternative
Transaction until the expiration of five business days following Parent's
receipt of written notice advising Parent that Company has received a
proposal for an Alternative Transaction, which notice shall specify the
material terms and conditions of such proposal (including a copy thereof),
identify the Person making such proposal and state whether Company intends
to enter into a definitive agreement for such Alternative Transaction; and
further provided Company shall have afforded a reasonable opportunity
within such five business day period to Parent after delivering such notice
to make such adjustments to the terms and conditions of the Merger
Agreement as would enable the Company Board or the Special Committee to
maintain its recommendation of the Merger Agreement, the Offer and the
Merger to the Shareholders and enable Company to proceed with the Merger on
such adjusted terms; (C) a tender offer or exchange offer for 35% or more
of the outstanding shares of the Common Stock is commenced (other than by
Parent or an affiliate of Parent) and the Company Board or the Special
Committee recommends, prior to the Offer Completion, that the Shareholders
tender their shares of Common Stock in such tender or exchange offer; or
(D) the Offer expires or is terminated or withdrawn pursuant to its terms
as a result of the failure of any of the Offer Conditions to be satisfied
or waived prior to the Expiration Date (provided that neither Parent nor
Purchaser may terminate the Merger Agreement under this clause (D) if such
Offer Conditions are not satisfied as a result of a breach by Parent or
Purchaser of obligations of Parent or Purchaser under the Merger
Agreement); or
(v) by Company or Parent at any time prior to the Offer Completion, if
there has been a breach of any representation, warranty, covenant or
agreement on the part of the other party set forth in the Merger Agreement,
which breach would impair the ability of the breaching party to consummate
the transactions contemplated by the Merger Agreement or, if the breach is
by Company, would have a Company Material Adverse Effect and which shall
not have been cured within 15 days following receipt by the breaching party
of written notice of such breach from the other party; provided, however,
to the extent that any such representation, warranty, covenant or agreement
of Company is qualified as to materiality, such representation, warranty,
covenant or agreement by Company shall not be deemed to be so qualified for
purposes of this clause (v).
In the event of termination of the Merger Agreement under the foregoing
clauses (i) through (v), the Merger Agreement shall immediately become void and
there shall be no liability or obligation on the part of Company, Parent or
their respective officers, directors, shareholders or affiliates, except as
specifically set forth in the Merger Agreement; provided, however, that such
termination shall not limit liability for a willful and material breach of the
Merger Agreement; and further provided, that the provisions of the Merger
Agreement relating to any termination fees and expenses shall remain in full
force and effect and survive any termination of the Merger Agreement.
11
As used in the Merger Agreement, an "Alternative Transaction" means either
(i) a transaction pursuant to which any Third Party acquires more than 35% of
the outstanding shares of Common Stock pursuant to a tender offer or exchange
offer or otherwise, (ii) a merger or other business combination involving
Company pursuant to which any Third Party acquires more than 35% of the
outstanding shares of Common Stock or of the entity surviving such merger or
business combination, or (iii) any other transaction pursuant to which any Third
Party acquires assets (including for this purpose the outstanding equity
securities of subsidiaries of Company) of Company having a fair market value (as
determined by the Company Board in good faith) equal to more than 35% of the
fair market value of all the assets of Company and its subsidiaries, taken as a
whole, immediately prior to such transaction.
Termination Fee. Pursuant to the Merger Agreement, Company has agreed to
pay Parent a termination fee equal to $3,000,000.00, plus up to $500,000.00 for
fees and expenses incurred in connection with the transactions contemplated by
the Merger Agreement (the "Termination Fee"), if the Merger Agreement is
terminated:
(i) pursuant to Sections 8.1(b) (clause (ii) above, under
"Termination") or 8.1(d)(iv) (clause (iv)(D) above, under "Termination") of
the Merger Agreement, if in either case a proposal for an Alternative
Transaction involving Company shall have been made on or after April 26,
2000, and prior to the Offer Completion; provided, however, such
termination occurs upon the failure to satisfy the Minimum Condition; or
(ii) pursuant to Section 8.1(d)(i), (ii) or (iii) (clauses (iv)(A),
(B) or (C) above, under "Termination") of the Merger Agreement; or
(iii) pursuant to Section 8.1(e) (clause (v) above, under
"Termination") of the Merger Agreement, but only if a proposal for an
Alternative Transaction involving Company shall have been made prior to the
Offer Completion and either a definitive agreement for an Alternative
Transaction is entered into, or an Alternative Transaction is consummated,
within 12 months after such termination.
Expenses. Pursuant to the Merger Agreement, and subject to Parent's right
to the Termination Fee, all fees and expenses incurred by the parties in
connection with the Merger Agreement and the transactions contemplated thereby
shall be paid by the party incurring such expenses, if the Merger is not
consummated.
Electronics Boutique Termination Fee. The Merger Agreement states that
immediately after its execution and the execution of the Shareholder Agreement,
Parent will wire transfer immediately available funds to a bank account
designated by Company in an amount equal to the termination fee required to be
paid by Company pursuant to the EB Merger Agreement (the "EB Termination Fee"),
which funds shall be used by Company solely for such purpose. The Merger
Agreement states that Company shall pay Parent an amount (the "Reimbursement
Fee") equal to the EB Termination Fee in the event (i) a Termination Fee is paid
or payable by Company to Parent pursuant to the terms of the Merger Agreement,
or (ii) the Merger Agreement is terminated by Parent pursuant to
Section 8.1(e) of the Merger Agreement (clause (v) above, under "Termination").
In no event shall more than one Reimbursement Fee be payable under this
provision of the Merger Agreement.
Assignment. Neither the Merger Agreement nor any of the rights, interests
or obligations thereunder shall be assigned by any of the parties to the Merger
Agreement (whether by operation of law or otherwise) without the prior written
consent of the other parties. Subject to the preceding sentence, the Merger
Agreement will be binding upon, inure to the benefit of and be enforceable by
the parties and their respective successors and assigns. Notwithstanding
anything in the Merger Agreement to the contrary, the direct parent of Purchaser
may at any time prior to the Effective Time transfer all of the capital stock of
Purchaser to Parent or to another wholly owned subsidiary of Parent, and Company
hereby acknowledges and agrees that such transfer may be consummated at or
before such time.
Amendments. The Merger Agreement may be amended, modified or supplemented
by the parties thereto, by action taken or authorized by their respective Board
of Directors, at any time before or after approval of the matters presented in
connection with the Merger by the Shareholders, but, after any such approval, no
amendment, modification or supplement shall be made which decreases the amount,
or changes the form, of Merger Consideration, or by law requires further
approval by the Shareholders, in each case without further approval by the
Shareholders. The Merger Agreement may not be amended, modified or supplemented
except by an instrument in writing signed on behalf of each of the parties
thereto.
12
SHAREHOLDER AGREEMENT WITH DAVID R. POMIJE
Pursuant to the Shareholder Agreement, Mr. Pomije agreed to tender,
pursuant to the Offer, all Shares then held of record by Mr. Pomije, or with
respect to which Mr. Pomije is the Beneficial Owner (as defined in the
Shareholder Agreement), as of the date of the commencement of the Offer, and any
shares of Common Stock thereafter acquired by Mr. Pomije prior to the expiration
of the Offer; provided, however, that such shares shall be limited to 19.9% of
the outstanding shares of Common Stock in the aggregate. If for any reason the
shares of Common Stock tendered by Mr. Pomije represent less than 19.9% of the
issued and outstanding shares of Common Stock in the aggregate, Mr. Pomije also
agreed to vote the shares of Common Stock then held of record by Mr. Pomije or
with respect to which he is the Beneficial Owner (but not to exceed the amount
by which 19.9% of the issued and outstanding shares of Common Stock exceeds the
number of shares tendered by him in the Offer), and he has granted an
irrevocable proxy to an officer of Parent to vote those shares of Common Stock
in favor of the Merger at the Shareholders meeting contemplated in the Merger
Agreement and against certain competing proposals and transactions. Mr. Pomije
also waived any dissenters' rights to payment for his shares of Common Stock
under the dissenters' rights provisions of the MBCA or rights to dissent from
the Merger. The Shareholder Agreement terminates if either the Merger is
completed or the Merger Agreement is terminated in accordance with its terms. A
copy of the Shareholder Agreement is filed herewith as Exhibit 6 and is
incorporated herein by reference. The foregoing summary of the Shareholder
Agreement is qualified in its entirety by reference to the Shareholder
Agreement.
LETTER AGREEMENT WITH GEORGE E. MILEUSNIC
Pursuant to a Letter Agreement, dated March 5, 1999 (the "Mileusnic
Agreement"), Company engaged the services of George E. Mileusnic, a director of
Company, to be its principal contact in the Company Board's consideration of
strategic alternatives. Under the Mileusnic Agreement, Company agreed to pay
Mr. Mileusnic, in addition to his regular Company Board fees, $150 per hour for
such additional duties and to reimburse him for his reasonable out-of-pocket
expenses. The Mileusnic Agreement provided that such compensation and
reimbursement is to be paid whether or not a transaction is completed. The
Mileusnic Agreement was terminated on June 18, 1999. A copy of the Mileusnic
Agreement is filed herewith as Exhibit 7 and is incorporated herein by
reference. The foregoing summary of the Mileusnic Agreement is qualified in its
entirety by reference to the Mileusnic Agreement.
INDEMNIFICATION RIGHTS CONTAINED IN COMPANY'S ARTICLES OF INCORPORATION AND
BYLAWS
The Articles of Incorporation of Company, as amended and restated, provide
that, to the fullest extent permitted by the MBCA (as in effect at the time such
Articles of Incorporation took effect or as subsequently amended), a director of
Company shall not be liable to Company or its shareholders for monetary damages
for breach of such director's fiduciary duty as a director. The Bylaws of
Company provide that a director shall not be liable to Company or its
shareholders for dividends illegally declared, distributions illegally made to
shareholders or any other action taken in good faith reliance upon financial
statements of Company represented to such director to be correct by the chief
executive officer of Company or the officer having charge of Company's books of
account or certified by an independent or certified public accountant to fairly
reflect the financial condition of Company, nor shall a director be liable if in
good faith in determining the amount available for dividends or distribution the
Company Board values the assets in a manner allowable under applicable law. Such
Bylaws also provide that Company shall indemnify a person for such expenses and
liabilities, in such manner, under such circumstances, and to such extent, as
required or permitted by Section 302A.521 of the MBCA, as amended from time to
time, or as permitted by other provisions of law. Pursuant to the Merger
Agreement, the Articles of Incorporation of Company, as in effect immediately
prior to the Effective Time, will be the Articles of Incorporation of the
Surviving Corporation. Pursuant to the Merger Agreement, the Bylaws of
Purchaser, as in effect immediately prior to the Effective Time, will be the
Bylaws of the Surviving Corporation. The Merger Agreement provides that all
rights to indemnification, expense advancement and exculpation existing in favor
of any present or former director or officer of Company or any subsidiary of
Company, as provided in the Articles of Incorporation, Bylaws or similar
organizational documents of Company or any subsidiary of Company, on the date of
the Merger Agreement, will survive the Merger for a period of six years after
the Effective Time (or the final disposition of any claim made before the
expiration of such six-year period) with respect to matters
13
occurring at or prior to the Effective Time, and that Parent guarantees,
effective from and after the Effective Time, all obligations of the Surviving
Corporation and its subsidiaries in respect of indemnification and expense
reimbursement.
DIRECTORS' AND OFFICERS' LIABILITY INSURANCE PURSUANT TO THE MERGER AGREEMENT
The Merger Agreement provides that for a period from the completion of the
Offer until at least six years after the Effective Time, Parent will cause the
Surviving Corporation to maintain in effect either (i) the current policy of
directors' and officers' liability insurance maintained by Company (provided
that Parent or the Surviving Corporation may substitute policies of at least the
same coverage and amounts containing terms and conditions that are no less
advantageous in any material respect to the insured parties thereunder) with
respect to claims arising from facts or events which occurred at or before the
Effective Time (including consummation of the transactions contemplated by the
Merger Agreement), or (ii) a runoff (i.e., "tail") policy or endorsement with
respect to the current policy of directors' and officers' liability insurance
covering claims asserted within six years after the Effective Time arising from
facts or events which occurred at or before the Effective Time (including
consummation of the transactions contemplated by the Merger Agreement); and such
policies or endorsements will name as insureds thereunder all present and former
directors and officers of Company or its subsidiary. Notwithstanding the
foregoing, in the event the amount of the annual premium for such insurance
coverage exceeds 200% of the amount of the annual premiums paid, as of the date
of the Merger Agreement, by Parent for such coverage or equivalent coverage,
Parent shall use all reasonable efforts to maintain the most advantageous
policies of directors' and officers' insurance obtainable for an annual premium
equal to no more than 200% of the amount of the annual premiums paid as of the
date of the Merger Agreement by Company for such coverage. The foregoing summary
is qualified in its entirety by reference to the Merger Agreement, which is
filed as Exhibit 1 hereto.
LETTER AGREEMENTS REGARDING CONFIDENTIALITY
Pursuant to a Letter Agreement, dated April 21, 1999 (the "Original
Confidentiality Agreement"), Company agreed to furnish certain information to
Babbage's to allow Babbage's to consider a possible transaction with Company,
and Babbage's agreed to keep such information confidential. Pursuant to the
Original Confidentiality Agreement, Babbage's agreed that, for a period of two
years from the date thereof and subject to certain conditions, without Company's
authorization, Babbage's (and any person acting in concert with Babbage's) would
refrain from taking certain actions with respect to a transaction with Company
or taking control of Company. Pursuant to the Original Confidentiality
Agreement, Babbage's agreed that, for a period of two years from the date
thereof and subject to certain conditions, Babbage's (and certain of its
affiliates) would refrain from taking certain actions with respect to the
employees of Company, including influencing any such employee to leave the
employ of Company. Company, Parent and Babbage's executed a Letter Agreement,
dated April 7, 2000 (the "Supplemental Confidentiality Agreement" and, together
with the Original Confidentiality Agreement, the "Confidentiality Agreement"),
pursuant to which Parent and Babbage's agreed that certain restrictions on each
such company's actions regarding Company's employees would remain in effect from
the date of the Original Confidentiality Agreement through March 31, 2002.
Pursuant to the Supplemental Confidentiality Agreement, Parent also agreed to be
bound by the Confidentiality Agreement as if it were Babbage's and that all
obligations of Babbage's in the Original Confidentiality Agreement shall be
deemed to be joint and several obligations of Parent and Babbage's. Pursuant to
the Merger Agreement, Company, Parent and Purchaser agreed that the
Confidentiality Agreement shall remain in full force and effect until the
Effective Time, without modification, except that the Confidentiality Agreement
was deemed to have been dated and restated as of the date of the Merger
Agreement, and all obligations contained in the Confidentiality Agreement that
extend for two years from and after the date of the Confidentiality Agreement
were deemed to extend for two years from the date of the Merger Agreement. A
copy of the Original Confidentiality Agreement is filed herewith as Exhibit 8
and is incorporated herein by reference. A copy of the Supplemental
Confidentiality Agreement is filed herewith as Exhibit 9 and is incorporated
herein by reference. The foregoing summary is qualified in its entirety by
reference to the Confidentiality Agreement.
14
ITEM 4. THE SOLICITATION OR RECOMMENDATION
THE COMPANY BOARD'S RECOMMENDATION
At a meeting of the Special Committee, held on May 4, 2000, the Special
Committee unanimously approved the Merger Agreement and the transactions
contemplated thereby, including the Offer and the Merger. The Special Committee
unanimously resolved to recommend that the Shareholders accept the Offer and
approve the Merger Agreement and determined that the Offer, the Merger and the
Merger Agreement were fair to and in the best interests of Company and the
Shareholders.
At a meeting of the Company Board, held on May 4, 2000, the Company Board
unanimously approved the Merger Agreement and the transactions contemplated
thereby, including the Offer and the Merger. The Company Board unanimously
resolved to recommend that the Shareholders accept the Offer and approve the
Merger Agreement and the Merger and determined that the Offer, the Merger and
the Merger Agreement were fair to and in the best interests of Company and the
Shareholders.
A letter to Company's shareholders communicating the Company Board's
recommendation regarding the Offer, the Merger and the Merger Agreement is filed
herewith as Exhibit 10 and is incorporated herein by reference.
BACKGROUND FOR THE COMPANY BOARD'S RECOMMENDATION
In August 1998, representatives of Babbage's, then owned by an affiliate of
Parent, contacted Blair about the possibility of a potential financing for
Babbage's, which financing Babbage's later chose not to pursue. At the
suggestion of Blair, however, representatives of Babbage's and Company had
informal discussions concerning a potential business combination. These
discussions did not result in any proposals or offers being made.
In early 1999, Company management and the Company Board held internal
discussions to consider pursuing new strategies for maximizing shareholder
value. Company management, including Mr. Pomije, Company's chairman and chief
executive officer, and Stanley A. Bodine, Company's president and chief
operating officer, believed that the interactive entertainment retailing
industry was becoming increasingly competitive because of a number of factors,
including, without limitation, (a) the recent entry by several large,
well-capitalized store-based retailers into direct competition with Company,
(b) emerging competition from diversified Internet-based retailers, (c) the
increasing emphasis by the primary video game hardware and software
manufacturers on selling their products directly to consumers and reducing their
reliance on retailers like Company, (d) the development and growing popularity
of video games that consumers may access or download directly from the Internet
and (e) the limited leverage that smaller companies have with vendors to secure
sufficient quantities of new, popular video games and hardware to meet consumer
demand.
In consultation with Company management, the Company Board determined to
explore various possible business transactions, including a potential sale of
Company. On March 5, 1999, Company retained Blair to serve as its financial
advisor. After consulting with Blair, Company decided that the optimal way to
maximize shareholder value was to pursue a possible sale of Company. In March
and April 1999, Company and Blair jointly prepared a descriptive memorandum to
be provided to potential acquirors. The memorandum discussed Company and its
operations, financial performance and prospects in detail. Concurrently with the
preparation of the memorandum, Blair and Company identified 35 potential
acquirors of Company, including both strategic buyers that were participants in,
or likely to be interested in entering, the interactive entertainment retailing
industry, and financial buyers that would likely view acquiring Company as an
attractive investment.
At Company's direction, Blair contacted each of the 35 potential acquirors
in April 1999 to ascertain its level of interest in pursuing a transaction with
Company. Fifteen of the potential acquirors, including Electronics Boutique and
Babbage's, expressed an interest in exploring a transaction with Company. In
mid-April 1999, Company entered into confidentiality agreements with those 15
parties and provided each of them with a copy of the descriptive memorandum and
a letter setting forth bidding requirements and a deadline for the submission of
written preliminary indications of interest in Company.
In May 1999, Company received preliminary indications of interest from 5 of
the 15 parties that had received the descriptive memorandum, including three
strategic buyers, one of which was Electronics Boutique,
15
and two financial buyers. Babbage's did not submit a preliminary indication of
interest. The preliminary indications of interest contemplated acquisitions of
Company at valuations ranging from $16.50 to $27.00 per Share and consideration
to Shareholders of all cash, all stock or a combination of cash and stock. On
May 19, 1999, the Company Board reviewed the indications of interest that the
five potential acquirors had submitted and authorized Company to invite the
three potential acquirors that indicated interest at the highest valuations,
including Electronics Boutique, to participate in a due diligence review of
Company.
Each of the three potential acquirors that were invited to Company met
separately in late May 1999 and early June 1999 with Company management and
reviewed confidential due diligence materials in Minneapolis, Minnesota.
Following such meetings, Company requested that each of the three parties submit
a formal acquisition proposal and include in such proposal their comments on a
draft acquisition agreement provided by Company. On June 16, 1999, one potential
acquiror, which was a private investment fund (the "Financial Company"),
submitted a formal written proposal in response to Company's request. The other
two parties declined to submit formal proposals.
The Financial Company proposed acquiring Company through a recapitalization
under which Shareholders would receive $24.00 per Share in cash. The proposal
contemplated a financing condition under which the Financial Company would have
the right to terminate the definitive acquisition agreement if it was unable to
obtain sufficient financing to complete the transaction. The proposal also
contemplated that a very substantial portion of the equity interests of certain
members of Company management in Company would become equity interests in the
recapitalized entity and would not be sold for cash.
The Company Board met on June 18, 1999 with Blair, Moss & Barnett, A
Professional Association, Company's outside counsel, and Faegre & Benson LLP
("Faegre & Benson"), a law firm retained by Company in connection with the sale
process, to consider the Financial Company's proposal. Blair reviewed the
financial terms of the proposal with the Company Board. Faegre & Benson reviewed
the fiduciary duties of directors in connection with the proposal. Because the
proposal contemplated management participation with the Financial Company in the
acquisition of Company, the Company Board appointed a special committee of
independent directors to consider the potential transaction, and the special
committee met on June 18, 1999, following the meeting of the Company Board.
Mr. Mileusnic and Patrick Ferrell, the two independent directors on the Company
Board, comprised the special committee. Mr. Pomije and Mr. Bodine informed the
special committee that they were willing to participate on a limited basis with
the Financial Company in the proposed acquisition, but were unwilling to
participate at the level proposed by the Financial Company. After further
consideration of the Financial Company's proposal, the special committee
authorized Blair to contact the Financial Company to attempt to negotiate a
higher price for the Shares and to attempt to convince the Financial Company to
proceed with management participation at the lesser levels proposed by
Mr. Pomije and Mr. Bodine. The special committee informed Blair that its strong
preference was that the transaction contain no financing condition and requested
that Blair try to convince the Financial Company to provide comments on
Company's draft acquisition agreement so that the committee could fully evaluate
the proposal in context.
On behalf of Company, Blair contacted the Financial Company on June 21,
1999 and requested an increase in the proposed transaction price, removal of the
financing condition and its comments on the draft acquisition agreement and
informed the Financial Company of the discussions at the June 18, 1999 Company
Board meeting and Special Committee meeting to the effect that there was a
better chance of management's agreeing to participate with the Financial Company
in the transaction if the Financial Company agreed to complete the transaction
even if management participated at a lesser level. On June 23, 1999, the
Financial Company submitted a supplemental written proposal offering no increase
over the $24.00 per Share price and requiring the same level of management
participation as its prior proposal contemplated. The supplemental proposal also
continued to contain a financing condition. The Financial Company also submitted
its counsel's proposed extensive revision of the draft acquisition agreement.
On June 25, 1999, the special committee met to consider the Financial
Company's supplemental proposal and its markup of the draft agreement. The
special committee expressed concern that the proposal continued to contain a
financing condition and found unacceptable several of the changes that the
Financial Company made to the draft acquisition agreement. The special committee
also expressed concern about whether the transaction could be completed because
key members of Company management desired substantially less participation in
the
16
company surviving the acquisition than the Financial Company proposed. The
special committee determined to continue to pursue negotiations with the
Financial Company if the Financial Company and Company management reached
agreement upon the level of management's participation in the company surviving
the acquisition. The Financial Company and management did not reach agreement on
a mutually acceptable level of participation, none of the key disputed terms of
the proposed transaction, including the financing condition, were resolved, the
Financial Company did not attempt to continue the negotiations and discussions
between the parties ended in late June 1999.
After negotiations with the Financial Company ended, Blair and Company, at
the direction of the Company Board, engaged in informal discussions with
Electronics Boutique and one other potential strategic buyer in the second half
of 1999 concerning a potential acquisition of Company or other strategic
alliance with Company. While Company and the other potential strategic buyer
considered a variety of possible strategic alliances in which Company was
interested, Company did not receive any proposals from that potential strategic
buyer with respect to any of such strategic alliances or any other proposed
transaction. Company was not contacted by Babbage's or Parent concerning a
potential acquisition of Company or other strategic alliance with Company during
the second half of 1999.
During the fourth calendar quarter of 1999, Company experienced lower
comparable store sales as compared to the holiday season of 1998 because of,
among other reasons, industry-wide shortages of certain high demand products, a
general lack of big hit software title releases for Nintendo 64 and PlayStation
game consoles and price reductions on PlayStation and Nintendo 64 hardware.
After the close of trading on December 21, 1999, Company announced that it would
not meet research analysts' consensus revenue or earnings estimates for the
quarter ending January 2, 2000. Company also stated that it expected earnings to
be significantly lower than the then-current research analysts' consensus
estimates for both the full fiscal year ending April 2, 2000 and fiscal year
2001. Company's stock price declined 38.5% from $18.50, the closing price on
December 21, 1999, to $11.375, the closing price on December 22, 1999.
Meanwhile, the ongoing informal discussions between Company and Electronics
Boutique continued in late 1999 and into 2000. On January 25, 2000, Electronics
Boutique, through Prudential Securities Incorporated ("Prudential"), its
financial advisor, made a verbal proposal to acquire Company for $16.50 per
Share in cash. Company authorized Blair to continue discussions with Electronics
Boutique and determine if Electronics Boutique would be willing to make a
proposal in which one-half of the consideration to Shareholders would be common
stock of Electronics Boutique, which would have resulted in tax-free treatment
for the stock portion of the consideration held by those Shareholders who would
otherwise have taxable gains in the event of a sale. On February 9, 2000,
Company received a written proposal from Electronics Boutique to acquire Company
under which the consideration to Shareholders would be $16.25 per Share in cash
or, at the option of Shareholders if they elected in the aggregate to receive
more than 50% of the total purchase price for all outstanding Shares in
Electronics Boutique common stock, $15.50 per Share in Electronics Boutique
common stock, provided that Electronics Boutique would not issue more than
3,450,000 shares of Electronics Boutique common stock. Blair calculated that
Electronics Boutique's new proposal implied a value of $15.875 per Share on a
blended basis.
The Company Board believed, based upon the combined cash and stock
proposal, that Electronics Boutique was willing to pay a significantly higher
price for an all-cash purchase transaction than for a combined cash and stock
transaction. Company authorized Blair to continue negotiations with Electronics
Boutique in order to maximize an all-cash proposal from Electronics Boutique and
to contact other potential acquirors to determine their level of interest in
acquiring Company and the price that they might be willing to pay for Company.
On February 18, 2000, Electronics Boutique, through an oral proposal
communicated from Prudential to Blair, offered to acquire Company for $17.00 per
Share in cash. Following further negotiations, Electronics Boutique submitted a
written proposal on February 22, 2000 to acquire Company for $17.50 per Share in
cash. The proposal represented a 68.7% premium to Company's February 22, 2000
closing price of $10.375 and did not contain a financing condition. Electronics
Boutique also requested that Company grant it the exclusive right to negotiate
with Company for 60 days.
Meanwhile, on February 17 and 18, 2000, at the direction of the Company
Board, Blair contacted seven of the parties who had expressed interest in a
transaction during the 1999 auction process described above (including the
Financial Company and Babbage's) as well as three additional strategic buyers
that Company and
17
Blair determined might have an interest in acquiring Company. On February 21,
2000, Blair offered each of these parties additional information regarding
Company, including updated financial projections, advised them that there was a
competitive process occurring to acquire Company and invited them to submit a
non-binding indication of interest to acquire Company by February 25, 2000. Six
parties requested such additional information. The Financial Company indicated
that it was not interested in pursuing a transaction. Blair received a written
indication of interest on February 25, 2000 from Babbage's, which is now a
subsidiary of Parent, one of the six parties that had requested additional
information. The Babbage's indication of interest contemplated an all-cash
transaction in the range of $80 to $90 million (or approximately $13.00-$14.50
per Share on a fully diluted basis) and represented a considerable discount to
Electronics Boutique's offer of $17.50 per Share. The other five parties who
requested information declined to submit a proposal.
On February 28, 2000, the Company Board met to discuss Electronics
Boutique's February 22, 2000 proposal to acquire Company for $17.50 per Share
and the results of Blair's contacts with other potential acquirors, including
the fact that Babbage's continued to express an interest in acquiring Company.
Faegre & Benson reviewed with the Company Board certain terms of Electronics
Boutique's proposal and the Company Board's fiduciary duties in evaluating the
proposal. Blair reviewed the financial and other terms of Electronics Boutique's
proposal with the Company Board and discussed the lack of interest of other
potential acquirors (except Babbage's) in Company and the fact that the only
indication that it received in connection with its February 2000 contacts (i.e.,
the indication of interest from Babbage's) was at a price significantly lower
than Electronics Boutique's proposal. The Company Board authorized officers of
Company and Company's advisors to pursue a transaction with Electronics Boutique
on the basis of Electronics Boutique's proposal and to negotiate an exclusivity
agreement with Electronics Boutique of the nature requested by Electronics
Boutique under which Electronics Boutique would have the exclusive right (for a
more limited period than the 60-day period proposed by Electronics Boutique) to
conduct due diligence and negotiate with Company in connection with the
transaction.
Electronics Boutique and Company agreed upon a 30-day exclusivity period
(subject to Company's right, if deemed necessary in the exercise of its
fiduciary duties, to have discussions and negotiations with third parties making
unsolicited proposals) and, on March 2, 2000, entered into an exclusivity
agreement. Following the execution of such exclusivity agreement and continuing
through the end of March 2000, representatives of Electronics Boutique, its
legal and financial advisors and its independent accountants conducted further
due diligence on Company, including reviewing the data room materials. Members
of Electronics Boutique's management team also met with Company management to
discuss Company's financial performance and operations. During the 30-day
exclusivity period, Company received no acquisition inquiries or other
communications from Babbage's, Parent or any other potential acquiror, including
the other potential acquirors contacted by Blair in February 2000.
The Company Board met on March 22, 2000, to discuss the status of Company's
negotiations with Electronics Boutique. Blair analyzed the proposed transaction
assuming a $17.50 per Share price. The draft of the Original Merger Agreement
received from counsel to Electronics Boutique and EB Subsidiary was distributed
and that draft, together with the changes that had been negotiated by Faegre &
Benson and counsel to Electronics Boutique and EB Subsidiary, was reviewed by
Faegre & Benson with the Company Board and the major outstanding issues and the
fiduciary duties of the directors were discussed. The draft provided for an
all-cash tender offer followed by a cash merger. The Company Board authorized
management and the Company's advisors to continue negotiations on the
outstanding issues. The Special Committee, consisting of all independent
directors on the Company Board for purposes of Section 302A.673 of the MBCA, was
appointed to consider whether to approve the Original EB Merger Agreement, the
tender offer and the merger contemplated by the Original EB Merger Agreement and
related matters.
Between March 23, 2000 and March 31, 2000, representatives of Faegre &
Benson and counsel to Electronics Boutique and EB Subsidiary continued their
negotiation of the Original EB Merger Agreement and Electronics Boutique
continued its due diligence review of Company.
On March 31, 2000, the Company Board met again. Members of Company's
management, Blair and Faegre & Benson updated the Company Board on the status of
negotiations, including Electronics Boutique's acceptance of a $3 million
termination fee plus up to $500,000 in expenses in lieu of the $4 million
termination
18
fee that Electronics Boutique had initially requested and the proposed
resolution of the remaining issues regarding the Original EB Merger Agreement.
Faegre & Benson reviewed with the Company Board the other provisions of the most
recent draft of the Original EB Merger Agreement that had previously been
distributed to the members of the Company Board. Blair made a presentation to
the Company Board describing the financial aspects of the proposed transaction
and rendered to the Company Board its oral opinion (which opinion was
subsequently confirmed by delivery of a written opinion dated March 31, 2000) as
to the fairness, from a financial point of view, of the $17.50 per Share cash
consideration to be received in the tender offer and the merger contemplated by
the Original EB Merger Agreement by the holders of Shares (other than
Electronics Boutique and its wholly owned subsidiaries and persons who properly
exercised, preserved and perfected dissenters' rights under the MBCA). The
Special Committee unanimously approved the Original EB Merger Agreement and the
tender offer and the merger contemplated by the Original EB Merger Agreement.
Immediately thereafter, the Company Board unanimously approved the Original EB
Merger Agreement and the tender offer and the merger contemplated by the
Original EB Merger Agreement and determined that the Original EB Merger
Agreement and the terms of the tender offer and the merger contemplated by the
Original EB Merger Agreement were fair to and in the best interests of Company
and the Shareholders.
After the Company Board meeting and at Electronics Boutique's request, each
of Company's four executive officers (Messrs. Pomije and Bodine, Jeffrey R.
Gatesmith and Robert M. Hiben) and Company entered into an amendment of such
officer's employment agreement under which, among other things, Company agreed
to pay, within five business days after the completion of Electronics Boutique's
tender offer, certain amounts owing to such executive under such employment
agreement as if a change in control of Company had occurred and such executive
had been terminated without cause in exchange for certain agreements by each
executive, including the agreement to abide by certain restrictive covenants.
The amendments had no effect unless Electronics Boutique's tender offer was
completed. On March 31, 2000, the parties signed the Original EB Merger
Agreement.
On April 3, 2000, Electronics Boutique and Company publicly announced that
they had entered into the Original EB Merger Agreement. Later that day, Richard
Fontaine, chief executive officer of Babbage's, and Daniel DeMatteo, president
and chief operating officer of Babbage's, separately contacted Mr. Pomije
concerning Babbage's interest in acquiring Company. Mr. Fontaine then contacted
Blair and informed Blair that Babbage's was interested in making a competing
proposal to acquire Company.
On April 5, 2000, Babbage's sent an unsolicited, non-binding letter to
Mr. Pomije by facsimile stating that Babbage's was prepared to offer the sum of
$135 million for Company (which was approximately $21.00 per Share on a fully
diluted basis), subject to the necessary regulatory approvals and only to the
negotiation of an acceptable agreement between the parties, and to pay the
purchase price entirely in cash or, at Company's option, any combination of cash
and stock in Parent.
On April 6, 2000, Company publicly announced the Babbage's proposal and
held a Company Board meeting concerning the proposal. Faegre & Benson reviewed
the non-solicitation provisions of the Original EB Merger Agreement and the
Company Board's fiduciary duties, and Blair discussed the financial capacity of
Parent to consummate a $135 million acquisition. The directors discussed their
views that the Babbage's proposal was a serious, bona fide proposal. After
further discussion, the Company Board determined that the conditions set forth
in the Original EB Merger Agreement to entering into discussions with Babbage's
regarding an "acquisition proposal" (as defined in the Original EB Merger
Agreement) were satisfied and authorized management to enter into the
Supplemental Confidentiality Agreement with Parent and Babbage's as required
under the terms of the Original EB Merger Agreement and to commence discussions
concerning Babbage's proposal following the signing of the Supplemental
Confidentiality Agreement.
On April 7, 2000, the Company Board again met to discuss the Babbage's
proposal, and the Company Board, after considering the recent, and possible
future, volatility of Parent's stock, the unpredictability of the stock market,
the certainty of cash and the increased difficulty and uncertainty of
negotiating and completing a part-cash and part-stock transaction, instructed
its advisors to inform Babbage's advisors of Company's preference for an
all-cash transaction. On the same day, Babbage's and Parent signed the
Supplemental Confidentiality Agreement, and Faegre & Benson commenced
discussions with Robinson Silverman Pearce Aronsohn & Berman LLP ("Robinson
Silverman"), legal counsel to Babbage's and Parent.
19
On April 10, 2000, representatives of Parent and Babbage's began meeting
with Company management and began their review of Company due diligence
materials in Minneapolis, Minnesota.
On April 11, 2000, Faegre & Benson received a draft merger agreement from
Robinson Silverman providing for the acquisition of Company by Parent in
accordance with the terms of Babbage's April 5 letter, and Faegre & Benson and
Robinson Silverman, on April 12, 2000, negotiated concerning the draft merger
agreement and a binding agreement by Parent to enter into a merger agreement at
such time as Company was permitted to do so under the terms of the Original EB
Merger Agreement. Such binding agreement was to be made pursuant to a letter
from Parent addressed to Company in which, among other things, Parent would
unconditionally commit to (i) enter into an agreement and plan of merger with
Company that, except for changes to the named parties and a per Share purchase
price of $21.00 rather than $17.50, would be substantially identical to the
Original EB Merger Agreement and a shareholder agreement with Mr. Pomije that,
except for changes to the named parties, would be substantially identical to the
EB Shareholder Agreement and (ii) pay Company an amount equal to the termination
fee payable under the Original EB Merger Agreement if Company terminated the
Original EB Merger Agreement and entered into the merger agreement with Parent
that Parent committed to sign.
On April 12, 2000, the Company Board determined that if Parent executed the
proposed commitment letter, Company would give Electronics Boutique the five
business days' notice required by the Original EB Merger Agreement of Company's
intent to enter into a merger agreement with Parent at the $21.00 per Share
price. Parent executed the commitment letter, dated April 12, 2000, and provided
it to Company, together with the forms of the agreement and plan of merger and
shareholder agreement that Parent committed to sign. The commitment letter
provided that unless Company and Mr. Pomije, by April 21, 2000, entered into
such agreement and plan of merger and shareholder agreement, respectively, with
Parent, Parent would have no further obligations to Company.
After receiving Parent's executed commitment letter on April 12, 2000,
Company gave written notice to Electronics Boutique, dated April 12, 2000,
notifying Electronics Boutique pursuant to the Original EB Merger Agreement that
Company had received a proposal from Parent for an "alternative transaction" (as
defined in the Original EB Merger Agreement) and that Company intended to enter
into a definitive agreement for such alternative transaction after the
expiration of five business days following Electronics Boutique's receipt of
such letter and enclosing a copy of Parent's April 12 letter and forms of its
proposed agreement and plan of merger and shareholder agreement. Electronics
Boutique, EB Subsidiary and Company entered into two letter agreements, each
dated April 12, 2000, one extending the deadline for commencement of Electronics
Boutique's tender offer and the parties' initial filings under the HSR Act until
April 19, 2000, and the other confirming that such five-business day period
would expire on April 19, 2000.
Company issued a press release on April 13, 2000, announcing Company's
receipt of the commitment letter from Parent and Company's notice to Electronics
Boutique of its intent to enter into a definitive agreement with Parent.
On April 19, 2000, Electronics Boutique sent a letter to Company stating
that Electronics Boutique and EB Subsidiary proposed an adjustment to the
Original EB Merger Agreement to the effect that the per Share price would be
increased to $21.00 per Share, the same per Share price that Parent had
proposed.
On April 20, 2000, Company issued a press release announcing Company's
receipt of the April 19 letter from Electronics Boutique, and Faegre & Benson
and counsel to Electronics Boutique and EB Subsidiary negotiated the language of
the EB Merger Agreement Amendment for consideration by the Company Board. Later
that day, the Company Board and the Special Committee met to consider
Electronics Boutique's proposal and the EB Merger Agreement Amendment. Members
of Company management reported to the Company Board on Company's financial
performance for the fiscal year ended April 2, 2000 and its performance to date
and prospects in fiscal year 2001. Blair made a presentation to the Company
Board describing the financial aspects of Electronics Boutique's April 19
proposal and communicated to the Company Board Prudential's affirmation to Blair
of Electronics Boutique's ability to finance the increased per Share price.
Blair also rendered to the Company Board its oral opinion (which opinion was
subsequently confirmed by delivery of a written opinion, dated April 20, 2000)
as to the fairness, from a financial point of view, of the $21.00 per Share cash
consideration to be received in the tender offer and the merger contemplated by
the EB Merger Agreement Amendment by the holders of Shares (other than
Electronics Boutique and its wholly owned subsidiaries and persons who properly
20
exercised, preserved and perfected dissenters' rights under the MBCA). After
Blair's presentation, Faegre & Benson reviewed the directors' fiduciary duties
under applicable law, terms of the Original EB Merger Agreement and terms of the
EB Merger Agreement Amendment. The Special Committee then unanimously approved
the EB Merger Agreement Amendment and maintained its recommendation that the
Shareholders approve the tender offer and the merger contemplated by the EB
Merger Agreement and approve the Original EB Merger Agreement, as amended by the
EB Merger Agreement Amendment, and its determination that the tender offer and
the merger contemplated by the EB Merger Agreement, after giving effect to the
EB Merger Agreement Amendment, and the Original EB Merger Agreement, as amended
by the EB Merger Agreement Amendment, remained fair to and in the best interests
of Company and the Shareholders. Immediately thereafter, the Company Board
unanimously approved the EB Merger Agreement Amendment and maintained its
recommendation that the Shareholders approve the tender offer and the merger
contemplated by the EB Merger Agreement and approve the Original EB Merger
Agreement, as amended by the EB Merger Agreement Amendment, and its
determination that the terms of the tender offer and the merger, after giving
effect to the EB Merger Agreement Amendment, and the Original EB Merger
Agreement, as amended by the EB Merger Agreement Amendment, remained fair to and
in the best interests of Company and the Shareholders.
On April 20, 2000, Electronics Boutique, EB Subsidiary and Company signed
the EB Merger Agreement Amendment. On April 21, 2000, Company publicly announced
the EB Merger Agreement Amendment.
On April 25, 2000, Robinson Silverman informed Faegre & Benson that Parent
intended to offer to acquire Company for approximately $160 million. Later that
day, Parent sent a letter to the Company Board stating that Parent proposed to
acquire Company for $24.75 per Share in cash (which is approximately $161.5
million in the aggregate) and that Parent's proposal would be submitted to
Company by April 26, 2000 as a binding offer accompanied by a proposed agreement
and plan of merger. On April 25, 2000, the Company Board met concerning Parent's
proposal. Faegre & Benson reviewed the non-solicitation provisions of the EB
Merger Agreement and the Company Board's fiduciary duties. Blair then discussed
the financial capacity of Parent to consummate an acquisition at the new
proposed price. The directors discussed their views that Parent's proposal was a
serious, bona fide proposal. After further discussion, the Company Board
concluded that the conditions set forth in the EB Merger Agreement to entering
into discussions with Parent regarding an "acquisition proposal" (as defined in
the EB Merger Agreement) were satisfied and authorized management and its
advisors to commence discussions with Parent concerning its new proposal. Faegre
& Benson and Robinson Silverman then negotiated concerning a draft of the Merger
Agreement and a binding agreement by Parent to enter into the Merger Agreement
at such time as Company was permitted to do so under the terms of the EB Merger
Agreement. Such binding agreement was to be made pursuant to a letter from
Parent addressed to Company in which, among other things, Parent unconditionally
committed to (i) enter into the Merger Agreement with Company that, except for
changes to the named parties, a per Share price of $24.75 rather than $21.00 and
changes to the timing of the commencement of the tender offer and the HSR
filings, was substantially identical to the EB Merger Agreement, and the
Shareholder Agreement with Mr. Pomije, which, except for changes to the named
parties, was substantially identical to the EB Shareholder Agreement and
(ii) pay Company an amount equal to the termination fee payable pursuant to the
EB Merger Agreement if Company terminated the EB Merger Agreement and entered
into the Merger Agreement.
On April 26, 2000, Company publicly announced Parent's $24.75 per Share
proposal. That same day, the Company Board determined that if Parent executed
the proposed commitment letter, Company would give Electronics Boutique the five
business days' notice required by the EB Merger Agreement of Company's intent to
enter into the Merger Agreement with Parent at the $24.75 per Share price.
Parent executed the commitment letter, dated April 26, 2000, and provided it to
Company, together with the forms of Merger Agreement and Shareholder Agreement.
The commitment letter provided that unless Company and Mr. Pomije, by May 5,
2000, entered into the Merger Agreement and the Shareholder Agreement,
respectively, with Parent, Parent would have no further obligations to Company.
After receiving Parent's executed commitment letter, Company sent a letter
to Electronics Boutique, dated April 26, 2000, notifying Electronics Boutique
pursuant to the EB Merger Agreement that Company had received a proposal from
Parent for an "alternative transaction" (as defined in the EB Merger Agreement)
and that Company intended to enter into a definitive agreement for such
alternative transaction after the expiration of five
21
business days following Electronics Boutique's receipt of such letter and
enclosing a copy of Parent's April 26 letter and the forms of the Merger
Agreement and the Shareholder Agreement.
Company issued a press release on April 27, 2000, announcing Company's
receipt of the commitment letter from Parent and Company's notice to Electronics
Boutique of its intent to enter into a definitive agreement with Parent.
Electronics Boutique, EB Subsidiary and Company then entered into a letter
agreement dated April 27, 2000, extending the deadline for commencement of the
tender offer contemplated by the EB Merger Agreement and the parties' initial
filings under the HSR Act until May 10, 2000.
On May 2, 2000, Company received a telephone call and written notice from
Electronics Boutique informing Company that neither Electronics Boutique nor EB
Subsidiary intended to propose any price or other adjustments to the EB Merger
Agreement. Electronics Boutique issued a press release on May 2 announcing that
it did not intend to make adjustments to the EB Merger Agreement in response to
Parent's $24.75 per Share acquisition proposal.
On May 3 and May 4, 2000, Faegre & Benson and Robinson Silverman finalized
the proposed Merger Agreement for consideration by the Company Board. On May 4,
2000, the Company Board met to consider the Merger Agreement and the
transactions contemplated thereby. Mr. Bodine reported on Company's financial
performance for the fiscal year ended April 2, 2000, and the month of April 2000
and its performance prospects in fiscal year 2001. Faegre & Benson then
discussed the provisions of the most recent draft of the proposed Merger
Agreement and Shareholder Agreement. Blair made a presentation to the Company
Board describing the financial aspects of the proposed transaction with Parent
and rendered to the Company Board its oral opinion (which opinion was
subsequently confirmed by delivery of a written opinion dated May 4, 2000) as to
the fairness, from a financial point of view, of the $24.75 per Share cash
consideration to be received in the Offer and the Merger by the holders of
Shares (other than Parent and its direct and indirect wholly owned subsidiaries
and persons who properly exercise, preserve and perfect dissenters' rights under
the MBCA). The Company Board authorized the Special Committee to consider the
Merger Agreement and the transactions contemplated thereby. The Special
Committee unanimously approved the Offer, the Merger, the Merger Agreement and
the transactions provided for in the Shareholder Agreement and withdrew its
recommendation of the EB Merger Agreement. Immediately thereafter, the Company
Board unanimously approved the Offer, the Merger and the Merger Agreement and
determined that the terms of the Offer, the Merger and the Merger Agreement were
fair to and in the best interests of Company and the Shareholders. The Company
Board also withdrew its recommendation of the EB Merger Agreement and authorized
officers of Company to give notice to Electronics Boutique of such withdrawal,
the termination of the EB Merger Agreement and its recommendation of the Merger
Agreement.
Later on May 4, 2000, Company, Parent and Purchaser signed the Merger
Agreement and Parent and Mr. Pomije signed the Shareholder Agreement. Company
sent a written notice, dated May 4, 2000, to Electronics Boutique advising it
that Company was terminating the EB Merger Agreement and that the Company Board
and the Special Committee had each withdrawn its recommendation of the EB Merger
Agreement and resolved to recommend the Merger Agreement instead. On May 4,
2000, Parent and Company publicly announced that they had entered into the
Merger Agreement. On May 5, 2000, Company received $3.5 million from Parent
pursuant to Parent's commitment to pay Company the amount of the termination fee
owed by Company to Electronics Boutique following termination of the EB Merger
Agreement.
REASONS FOR THE COMPANY BOARD'S RECOMMENDATION
Prior to approving the Merger, the Offer and the Merger Agreement and
recommending that all Shareholders tender their Shares pursuant to the Offer and
approve and adopt the Merger Agreement and the transactions contemplated by the
Merger Agreement, including the Merger, the Company Board considered a number of
factors, including:
1. the financial and other terms and conditions of the Offer, the
Merger and the Merger Agreement;
2. the Company Board's familiarity with and review of the business,
financial condition, results of operations and prospects of Company,
including the desirability of continuing to implement Company's strategy of
expansion in the number of retail stores it operates and in Internet-based
retailing and the need
22
for substantial additional capital and management in order to fully
implement Company's expansion strategy;
3. the Company Board's belief, after considering the possible
alternatives to the Offer and the Merger, the auction process conducted by
Blair that canvassed the market of the most likely prospective purchasers
and the highly competitive, publicly announced bidding for Company between
Parent and Electronics Boutique, which continued for approximately one
month after the public announcement of the Original EB Merger Agreement,
that no buyer would be likely to provide a comparable value to the
Shareholders. In reaching that conclusion, the Company Board focused upon
Electronics Boutique's failure to match Parent's $24.75 per Share proposal
despite its opportunity to do so, the lack of any offers to acquire Company
from any parties besides Parent and Electronics Boutique despite the public
nature of Company's sale process following the announcement of the Original
EB Merger Agreement, Parent's financial condition, Parent's and its
affiliates' status and influence in the retail interactive entertainment
business and the significance to Parent of the business transaction;
4. the market price performance of the Shares prior to the public
announcement of the Original EB Merger Agreement, Company's relatively
small market capitalization and the likelihood that Company's market price
performance in the foreseeable future (particularly on a present value
basis) would not substantially exceed its recent performance in the absence
of an announced acquisition, considering Company's market capitalization,
the risks referred to herein and the Company Board's belief that the long-
term market price performance prospects of the Shares might be even more
questionable because of the long-term risks;
5. the risks of emerging competition in the interactive entertainment
retailing industry from large, well-capitalized, store-based and Internet
retailers as well as specialty retailers in other sectors, such as video
rental retailers, toy retailers and music retailers, and the likelihood
that such competition will adversely affect Company's profit margins and
revenues;
6. the risks of the emergence of interactive entertainment delivered
through, or digitally downloadable from, the Internet, including the
possibility that the availability of interactive entertainment on the
Internet will reduce consumer demand for console-based video games of the
type sold by Company and that the public markets will accordingly place
lower values on traditional specialty retailers like Company that derive a
large portion of their revenues from retail store sales;
7. the likelihood that manufacturers of video games, hardware and
accessories will increasingly seek and use methods of selling their
products directly to consumers, such as through Internet-based commerce,
and decrease their reliance on retailers such as Company to sell and market
such products;
8. the risks of implementing Company's strategies and increasing its
profitability as an independent company, including the limited leverage
with leading vendors that Company has as compared to larger companies like
Parent and Electronics Boutique with respect to a limited amount of new
product, the ability of Company, given its size and management, to prosper
in the future in a highly cyclical industry and the high costs and
technological challenges associated with developing and maintaining a
viable Internet-based retail operation;
9. the volatility of The Nasdaq Stock Market, particularly with
respect to small capitalization stocks, and the recent market price
performance of the stock of other corporations in the retail video game and
related businesses;
10. the benefits to Company's employees from Parent's covenant
contained in the Merger Agreement to provide current employees of Company
who continue to be employees of Company after the Merger with certain
employee benefits no less favorable than those they currently enjoy for at
least one year after the Offer Completion and, for purposes of determining
eligibility, vesting and entitlement to vacation and severance benefits, to
credit such employees' employment with the Company and its subsidiary as if
such employees had been employed by Parent or its affiliates;
11. the fact that the Merger Agreement, which prohibits Company and
its officers, directors, employees, financial advisors, representatives and
agents from soliciting, seeking, initiating or encouraging
23
any inquiries or proposals that constitute or reasonably may lead to an
Acquisition Proposal, engaging in negotiations or discussions with any
person relating to an Acquisition Proposal, providing nonpublic information
to any person relating to an Acquisition Proposal or recommending an
Acquisition Proposal, does permit Company to furnish information to, or to
participate in discussions and negotiations with, any person or entity that
makes an unsolicited Acquisition Proposal after the date of the Merger
Agreement and to modify or withdraw its recommendation of the Offer and the
Merger or recommend an alternative Acquisition Proposal and terminate the
Merger Agreement, if the Company Board determines in good faith after
consultation with outside legal counsel that such action is required to
comply with its fiduciary duties to Shareholders under applicable law and
that the Acquisition Proposal is reasonably capable of being completed on
the terms proposed and would, if consummated, result in a more favorable
transaction to Shareholders than the transactions contemplated by the
Merger Agreement; however, as described above, the Company Board did not
believe that such a superior third party proposal would be made;
12. the Company Board's belief that the terms of the Merger Agreement,
taking into account the $3,000,000 termination fee and the required
reimbursement of not more than $500,000 of out-of-pocket expenses payable
to Parent (and reimbursement to Parent of the $3,500,000 paid by Parent to
Company to enable Company to pay the required termination fee, including
expenses, to Electronics Boutique pursuant to the EB Merger Agreement), in
the event that the Merger Agreement is terminated because of, among other
things, Company's withdrawal or modification, in a manner adverse to
Parent, of its recommendation of the Merger or its recommendation of an
Alternative Transaction, its recommendation of a tender offer or exchange
offer by a person other than Parent or an affiliate of Parent for 35% or
more of the outstanding Shares or its entry into a definitive agreement for
an Alternative Transaction, should not unduly discourage superior
third-party offers and that Company, subject to certain conditions, has the
right under the terms of the Merger Agreement, prior to completion of the
Offer, which must remain open as a matter of law for at least 20 business
days, to enter into a superior definitive agreement with another party
simultaneously with the termination of the Merger Agreement upon five
business days' notice to Parent of its intent to enter into such superior
definitive agreement and that, as long as the Offer is open, any tendering
Shareholder may withdraw such Shareholder's tendered Shares as a matter of
law;
13. the presentations of Blair at various Company Board meetings and
its final presentation at the May 4, 2000 meeting, including the opinion of
Blair, dated May 4, 2000, to the effect that, as of such date and based
upon and subject to certain matters stated in such opinion, the $24.75 per
Share cash consideration to be received in the Offer and the Merger by
holders of Shares (other than Parent and its direct and indirect wholly
owned subsidiaries and persons who properly exercise, preserve and perfect
dissenters' rights under the MBCA) was fair, from a financial point of
view, to such holders. The full text of the Blair opinion, which sets forth
the assumptions made, matters considered and limitations on the review
undertaken by Blair, is filed herewith as Exhibit 11 and is incorporated
herein by reference. Blair's opinion is directed only to the fairness, from
a financial point of view, of the $24.75 per Share cash consideration to be
received in the Offer and the Merger by holders of Shares (other than
Parent and its direct and indirect wholly owned subsidiaries and persons
who properly exercise, preserve and perfect dissenters' rights under the
MBCA) and is not intended to constitute, and does not constitute, a
recommendation as to whether any Shareholder should tender Shares pursuant
to the Offer (HOLDERS OF SHARES ARE ENCOURAGED TO READ BLAIR'S OPINION
CAREFULLY IN ITS ENTIRETY); and
14. the limited number of conditions to the obligations of Parent and
Purchaser to consummate the Offer and the Merger, including the absence of
a financing condition to the Offer or any condition based on due diligence
or fluctuations in general stock prices.
Each of the factors set forth above was believed by the Company Board to
support its decision to recommend acceptance of the Offer and to approve, and to
recommend approval by the Shareholders of, the Merger and the Merger Agreement,
except for the eleventh and twelfth factors, which are inherent in merger
transactions.
The Company Board did not find it necessary or practical to assign relative
weights to the factors or determine that any factor was determinative or of more
importance than other factors. Rather, the Company
24
Board viewed its position and recommendation as being based on the totality of
the information presented to and considered by it. Moreover, individual
directors may have given different weights to different factors.
The Company Board also considered the detriments of the Merger, including:
1. Company's short-term potential for growth and profitability because
of expected new product releases in the fall of 2000 and in 2001 and its
long-term potential for growth and profitability if it could overcome the
risks referenced above, to the extent not reflected in the Merger
Consideration, would not benefit the former Shareholders;
2. the synergies resulting from the Merger, to the extent not
reflected in the Merger Consideration, would not benefit the former
Shareholders; and
3. the sale of Shares in the Offer and the conversion of Shares in the
Merger would be taxable to Shareholders for federal income tax purposes.
However, the Company Board determined that such detriments were inherent in
proceeding with the Offer and the Merger and were more than offset by the
benefits of the Offer and the Merger summarized above.
INTENT TO TENDER
To Company's knowledge, all of its directors, executive officers,
affiliates or subsidiaries currently intend to tender all Shares which are held
of record or beneficially owned by such persons pursuant to the Offer, other
than Shares, if any, held by such persons which, if tendered, could cause such
person to incur liability under the provisions of Section 16(b) of Exchange Act.
Also see the summary of the Shareholder Agreement above.
ITEM 5. PERSONS/ASSETS RETAINED, EMPLOYED, COMPENSATED OR USED
Company engaged the services of Blair, pursuant to a Letter Agreement,
dated March 5, 1999. Company and Blair amended and superseded that Letter
Agreement by entering into a new Letter Agreement, dated March 20, 2000, under
which Blair was engaged to render financial advisory and investment banking
services with respect to a possible business combination. The amended Letter
Agreement provides that if Blair renders an opinion to the Company Board as to
the fairness, from a financial point of view, to the Shareholders of the
consideration to be received by the Shareholders, or if Blair advises the
Company Board that it is unable to render that opinion due to the inadequacy of
such consideration, then Company is obligated to pay Blair an opinion fee of
$100,000. In the event that a business combination is consummated, Company shall
pay or cause to be paid to Blair a fee equal to either (i) 0.80% of the value
received for all of the outstanding capital stock (on a fully diluted basis) by
Company and the Shareholders as a result of that consummation if the price per
share received by Company and the Shareholders is less than $17.50 per Share or,
alternatively, (ii) 1.0% of the value received for all of the outstanding
capital stock (on a fully diluted basis) by Company and the Shareholders as a
result of the consummation if the price per share received by Company and the
Shareholders is equal to or greater than $17.50 per Share. In each of such cases
(i) or (ii) above, such fee is to be reduced by the amount of the opinion fee
described above. Company agreed to reimburse Blair for all out-of-pocket
expenses reasonably incurred by Blair in connection with its engagement, limited
to $30,000 without Company's prior approval.
Company and Blair also entered into a separate Letter Agreement, dated
March 5, 1999, under which Company agreed, subject to limitations, to indemnify
and hold harmless Blair (and persons affiliated or associated with Blair)
against losses, fees and expenses incurred by any of them as a result of a claim
or litigation arising out of Blair's engagement by Company.
Except as described above, neither Company nor any other person acting on
its behalf currently intends to employ, retain or compensate any other person to
make solicitations or recommendations to the Shareholders on its behalf
concerning the Offer or the Merger.
ITEM 6. INTEREST IN SECURITIES OF THE SUBJECT COMPANY
Except as described above, during the past 60 days, no transactions in the
Common Stock have been effected by Company or, to the best of Company's
knowledge, by any director, executive officer, affiliate or subsidiary of
Company.
25
ITEM 7. PURPOSE OF THE TRANSACTION AND PLANS OR PROPOSALS
SUBJECT COMPANY NEGOTIATIONS
Except as set forth in this Schedule 14D-9 statement, Company is not
undertaking or engaged in any negotiation in response to the Offer that relates
to or would result in (i) an extraordinary transaction, such as a merger,
reorganization or liquidation, involving Company or any subsidiary of Company;
(ii) a purchase, sale or transfer of a material amount of assets of Company or
any subsidiary of Company; (iii) a tender offer for or other acquisition of
Company's securities by Company, any subsidiary of Company or any other person;
or (iv) a material change in the present dividend rate or policy, indebtedness
or capitalization of Company. As described in Item 3 above as part of the
summary of the Merger Agreement, the Company Board, in connection with the
exercise of its fiduciary duties, is permitted under certain conditions to
engage in negotiations in response to an unsolicited takeover proposal.
TRANSACTIONS AND OTHER MATTERS
Except as set forth in this Schedule 14D-9 statement, there is no
transaction, resolution of the Company Board, agreement in principle or signed
contract that is entered into in response to the Offer that relates to or would
result in one or more of the matters referred to in the immediately preceding
paragraph of this Item 7.
ITEM 8. ADDITIONAL INFORMATION
(a) The Information Statement attached as Annex I hereto and incorporated
herein by reference is being furnished pursuant to Rule 14f-1 under the Exchange
Act in connection with the potential designation by Parent, pursuant to the
Merger Agreement, of certain persons to be appointed to the Company Board other
than at a meeting of Shareholders, as described in Item 3 above.
(b) At its meeting held on May 4, 2000, the Special Committee authorized
and approved entering into the Merger Agreement and the transactions
contemplated thereby, for purposes of Sections 302A.671 and 302A.673 of the
MBCA.
(c) On April 11, 2000, Company received notice of a putative class action
(the "First Shareholder Lawsuit") against Company and its directors in the
Fourth Judicial District of the District Court for the State of Minnesota,
County of Hennepin (the "Court").
The First Shareholder Lawsuit was a putative class action on behalf of the
Shareholders of Company. In the lawsuit, the plaintiff alleged that the
individual defendants, by virtue of their positions as officers and directors of
Company, breached their fiduciary duties by taking actions that allegedly
inhibited the maximization of shareholder value. More specifically, the
plaintiff alleged that the defendants took actions designed to halt any other
offers and deter higher offers from other potential acquirors, including, among
other things:
(i) allegedly concealing Company's fourth quarter results until after
Company entered into and disclosed the Original EB Merger Agreement, thus
allegedly capping the price of the Common Stock;
(ii) allegedly failing to exercise ordinary care and diligence in the
exercise of their fiduciary obligations;
(iii) allegedly structuring a "preferential deal" pursuant to which
the defendants would receive "change of control" payments following
consummation of the merger contemplated by the Original EB Merger
Agreement;
(iv) allegedly adopting provisions in the Original EB Merger Agreement
which "tilted the playing field" in favor of EB Subsidiary and made it
difficult for a competing bid from another party to succeed; and
(v) allegedly concealing other material information.
26
The lawsuit sought an order from the Court:
(i) enjoining the defendants from proceeding with the merger
contemplated by the Original EB Merger Agreement;
(ii) enjoining the defendants from consummating the merger
contemplated by the Original EB Merger Agreement;
(iii) directing the individual defendants to exercise their fiduciary
duties to negotiate, in good faith, with Babbage's;
(iv) awarding plaintiff the costs and disbursements of the lawsuit,
including reasonable attorneys' and experts' fees; and
(v) granting such other and further equitable relief as the Court
deemed just and proper.
On April 25, 2000, the plaintiff in the First Shareholder Lawsuit filed a
notice of voluntary dismissal of the lawsuit. The notice stated that the relief
sought in the First Shareholder Lawsuit had become moot because of Company's
unwillingness to pursue a transaction with Electronics Boutique at an
acquisition price of $17.50 per Share. The Court subsequently dismissed the
First Shareholder Lawsuit.
(d) On April 28, 2000, Company received notice of another putative class
action on behalf of the Shareholders (the "Second Shareholder Lawsuit") against
Company and its directors in the Court, filed by the same law firms that filed
the First Shareholder Lawsuit on behalf of a different plaintiff.
In the Second Shareholder Lawsuit, which was filed after Company's public
announcement of its notice to Electronics Boutique of Company's intent to enter
into the Merger Agreement with Parent, the plaintiff alleges that the individual
defendants, by virtue of their positions as officers and directors of Company,
have breached their fiduciary duties by taking actions that allegedly inhibit
the maximization of shareholder value. More specifically, the plaintiff alleges
that the defendants have taken actions designed to halt any other offers and
deter higher offers from other potential acquirors, including, among other
things:
(i) allegedly concealing Company's fourth quarter results until after
Company entered into and disclosed the EB Merger Agreement, thus allegedly
capping the price of the Common Stock;
(ii) allegedly failing to exercise ordinary care and diligence in the
exercise of their fiduciary obligations;
(iii) allegedly structuring a "preferential deal" pursuant to which
the defendants would receive "change of control" payments following
consummation of the merger contemplated by the EB Merger Agreement;
(iv) allegedly adopting provisions in the EB Merger Agreement which
"tilt the playing field" in favor of EB Subsidiary and make it difficult
for a competing bid from another party to succeed;
(v) agreeing to the termination fee provision of the EB Merger
Agreement;
(vi) allegedly concealing other material information; and
(vii) entering into the EB Merger Agreement Amendment.
The lawsuit seeks an order from the Court:
(i) enjoining the defendants from proceeding with the merger
contemplated by the EB Merger Agreement;
(ii) enjoining the defendants from consummating the merger
contemplated by the EB Merger Agreement;
(iii) directing the individual defendants to exercise their fiduciary
duties to negotiate, in good faith, with Babbage's;
(iv) enjoining the defendants from honoring the termination fee
provision of the EB Merger Agreement;
27
(v) awarding plaintiff the costs and disbursements of the lawsuit,
including reasonable attorneys' and experts' fees; and
(vi) granting such other and further equitable relief as the Court may
deem just and proper.
(e) No dissenters' rights are available in connection with the Offer.
However, if the Merger is consummated, dissenting Shareholders who comply with
statutory procedural requirements will be entitled to exercise dissenters'
rights for the fair value of the dissenting Shareholders' Shares under Section
302A.473 of the MBCA. To be entitled to payment, the dissenting Shareholder must
not accept the Offer, must file with Company, prior to the vote for the Merger,
a written notice of intent to demand payment of the fair value of the dissenting
Shareholder's Shares, must not vote in favor of the Merger and must satisfy the
other procedural requirements of Section 302A.473 of the MBCA. Any Shareholder
contemplating the exercise of such Shareholder's dissenters' rights should
review carefully the provisions of Sections 302A.471 and 302A.473 of the MBCA,
particularly the procedural steps required to perfect such rights. SUCH RIGHTS
WILL BE LOST IF THE PROCEDURAL REQUIREMENTS OF SECTION 302A.473 OF THE MBCA ARE
NOT FULLY AND PRECISELY SATISFIED.
If a vote of Shareholders is required to approve the Merger under the MBCA,
the notice and proxy statement for the meeting of the Shareholders will again
inform each Shareholder of record as of the record date of the meeting of the
Shareholders (excluding persons who tender all of their Shares pursuant to the
Offer if such Shares are purchased in the Offer) of their dissenters' rights and
will include a copy of Sections 302A.471 and 302A.473 of the MBCA and a summary
description of the procedures to be followed under those Sections to obtain
payment of fair value for their Shares under those Sections. If a vote of the
Shareholders is not required to approve the Merger, the Surviving Corporation
will send a notice to those persons who are shareholders of the Surviving
Corporation immediately prior to the Effective Time which, among other things,
will include a copy of Sections 302A.471 and 302A.473 of the MBCA and a summary
description of the procedures to be followed under those Sections to obtain
payment of fair value for their Shares under those Sections.
28
ITEM 9. EXHIBITS
Exhibit 1 Agreement and Plan of Merger, dated May 4, 2000, by and among Parent, Purchaser and Company (filed
as Exhibit 2(a) to Company's Report on Form 8-K, filed May 10, 2000, and incorporated herein by
reference).
Exhibit 2 Executive Employment Agreement, dated May 19, 1999, by and between Company and David R. Pomije
(filed as Exhibit 10.3 to Company's Report on Form 10-Q, filed July 30, 1999, and incorporated
herein by reference).
Exhibit 3 Executive Employment Agreement, dated May 19, 1999, by and between Company and Stanley A. Bodine
(filed as Exhibit 10.4 to Company's Report on Form 10-Q, filed July 30, 1999, and incorporated
herein by reference).
Exhibit 4 Executive Employment Agreement, dated May 19, 1999, by and between Company and Robert M. Hiben
(filed as Exhibit 10.5 to Company's Report on Form 10-Q, filed July 30, 1999, and incorporated
herein by reference).
Exhibit 5 Executive Employment Agreement, dated May 19, 1999, by and between Company and Jeffrey R. Gatesmith
(filed as Exhibit 10.6 to Company's Report on Form 10-Q, filed July 30, 1999, and incorporated
herein by reference).
Exhibit 6 Shareholder Agreement, dated May 4, 2000, between Parent and David R. Pomije (filed as
Exhibit 2(b) to Company's Report on Form 8-K, filed May 10, 2000, and incorporated herein by
reference).
Exhibit 7 Letter Agreement, dated March 5, 1999, between Company and George E. Mileusnic.
Exhibit 8 Letter Agreement (Original Confidentiality Agreement), dated April 21, 1999, between Company and
Babbage's.
Exhibit 9 Letter Agreement (Supplemental Confidentiality Agreement), dated April 7, 2000, by and among
Company, Parent and Babbage's.
Exhibit 10 Letter to holders of the Common Stock, dated May 16, 2000.*
Exhibit 11 Opinion of William Blair & Company, L.L.C., dated May 4, 2000.*
- ------------------
* Included in copies of the Schedule 14D-9 statement mailed to Shareholders.
29
SIGNATURE
After due inquiry and to the best of my knowledge and belief, I certify
that the information set forth in this statement is true, complete and correct.
Dated: May 16, 2000
FUNCO, INC.
By /s/ STANLEY A. BODINE
-----------------------------------
Stanley A. Bodine
President and Chief Operating Officer
30
ANNEX I
FUNCO, INC.
10120 W. 76TH STREET
EDEN PRAIRIE, MINNESOTA 55344
INFORMATION STATEMENT PURSUANT TO
SECTION 14(F) OF THE SECURITIES EXCHANGE
ACT OF 1934 AND RULE 14F-1 THEREUNDER
------------------
GENERAL INFORMATION
This Information Statement is mailed on or about May 16, 2000, as part of
the Solicitation/Recommendation Statement on Schedule 14D-9 (the "Schedule
14D-9") of Funco, Inc., a Minnesota corporation ("Company"), to the holders of
record of shares of Common Stock, par value $.01 per share, of Company (the
"Common Stock"). You are receiving this Information Statement in connection with
the possible election of persons designated by Parent (as defined below) to a
majority of the seats on the Board of Directors of Company (the "Company
Board").
On May 4, 2000, Company, Barnes & Noble, Inc., a Delaware corporation
("Parent"), and B&N Acquisition Corporation, a Minnesota corporation and an
indirect, wholly owned subsidiary of Parent ("Purchaser"), entered into an
Agreement and Plan of Merger (the "Merger Agreement"). Pursuant to the Merger
Agreement, subject to certain conditions and as more fully described in the
Merger Agreement, (i) Parent will cause Purchaser to commence a cash tender
offer (the "Offer") for all outstanding shares of the Common Stock (the
"Shares") at a price of $24.75 per Share, net to the seller in cash without
interest thereon, and (ii) Purchaser will be merged with and into Company (the
"Merger"). If the Offer and the Merger are completed, Company will become an
indirect, wholly owned subsidiary of Parent.
The Merger Agreement provides that, promptly upon the purchase by Purchaser
of the Shares pursuant to the Offer (provided that the Minimum Condition, as
defined in the Merger Agreement, has been satisfied), and from time to time
thereafter, Parent will be entitled to designate directors (the "Parent
Designees") on the Company Board that will give Parent representation
substantially proportionate to its ownership interest. The Merger Agreement
requires that Company promptly take necessary action to cause the Parent
Designees to be elected or appointed to the Company Board under the
circumstances described in the Merger Agreement. This Information Statement is
required by Section 14(f) of the Securities Exchange Act of 1934, as amended
(the "Exchange Act"), and Rule 14f-1 thereunder. Capitalized terms used herein
and not otherwise defined shall have the meaning set forth in the Schedule
14D-9.
You are urged to read this Information Statement carefully. You are not,
however, required to take any action in connection with this Information
Statement.
The information contained in this Information Statement concerning Parent
and Purchaser and the Parent Designees has been furnished to Company by Parent
and Purchaser. Company assumes no responsibility for the accuracy or
completeness of such information.
The Common Stock is the only class of voting securities of Company
outstanding. Each Share of Common Stock has one vote. As of May 4, 2000, there
were 6,120,908 Shares of Common Stock outstanding.
RIGHT TO DESIGNATE DIRECTORS; PARENT DESIGNEES
The Merger Agreement provides that, promptly upon the purchase by Purchaser
of the Shares pursuant to the Offer (provided that the Minimum Condition has
been satisfied), and from time to time thereafter, Parent will be entitled,
subject to compliance with Section 14(f) of the Exchange Act, to designate up to
such number of directors, rounded up to the next whole number, on the Company
Board as will give Parent representation on the Company Board (and on each
committee of the Company Board) equal to the product of (A) the total number of
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directors on the Company Board (and on each committee of the Company Board)
(giving effect to any increase in the number of directors pursuant to the
requirements of the Merger Agreement) multiplied by (B) the percentage that the
aggregate number of Shares purchased pursuant to the Offer bears to the
aggregate number of Shares outstanding at the time of Parent's designation (such
product being referred to as the "Board Percentage"). The Merger Agreement
further provides that Company will, at such time upon request by Parent,
promptly satisfy the Board Percentage by increasing the size of the Company
Board (and each committee of the Company Board) or using its reasonable best
efforts to secure the resignations of incumbent directors or both.
Notwithstanding the foregoing, prior to the Merger, Parent and Purchaser must
use their best efforts to ensure that the Company Board will include two
directors who were members of the Company Board on the date of the Merger
Agreement and who are not employees of Company.
The Parent Designees will be selected by Parent from among the directors
and executive officers of Parent or Purchaser listed on Schedule I annexed
hereto. Certain information regarding such candidates is contained in such
Schedule I. In the event that additional Parent Designees are required in order
to constitute a majority of the Company Board, such additional Parent Designees
will be selected by Parent from among the directors and executive officers of
Parent or Purchaser contained in Schedule I to the Offer to Purchase, which is
incorporated herein by reference.
None of the persons from among whom the Parent Designees will be selected,
or their associates, is a director of, or holds any position with, Company. To
the knowledge of Company, except as set forth in Schedule I annexed hereto, none
of the persons from among whom the Parent Designees will be selected or their
associates beneficially owns any equity securities, or rights to acquire any
equity securities, of Company or has been involved in any transactions with
Company or any of its directors or executive officers that are required to be
disclosed pursuant to the rules and regulations of the Securities and Exchange
Commission (the "SEC").
COMPANY BOARD OF DIRECTORS AND EXECUTIVE OFFICERS
The Company Board consists of four directors, each of whom holds office
until his resignation or removal and until his successor is duly elected and
qualified. In accordance with the terms of Company's Amended and Restated
Articles of Incorporation, at each annual meeting, directors are elected for a
one-year term.
DAVID R. POMIJE, age 43, is the founder of Company and has been chairman of
the Company Board and chief executive officer of Company since its inception in
March 1988. He also served Company as its president and chief financial officer
until April 1995. Mr. Pomije's prior experience includes nine years within the
consumer electronics industry.
STANLEY A. BODINE, age 50, has served as a director since 1992 and as
president and chief operating officer of Company since April 1995. He served as
executive vice president from March 1992 to April 1995. From October 1991 to
March 1992, Mr. Bodine worked for Company as a management consultant.
Mr. Bodine held various management positions with The Pillsbury Company from
1978 to 1991, most recently as senior vice president of The Haagen-Dazs Company,
with responsibility for business development in the United States, Europe and
the Pacific Rim. He also served as general manager of Haagen-Dazs International
and director of planning and development for Pillsbury's domestic and
international divisions.
GEORGE E. MILEUSNIC, age 45, has served as a director since 1993. In May
2000, Mr. Mileusnic assumed the positions of executive vice president and chief
financial officer of Dean & DeLuca, Inc., a retailer of gourmet foods, wines and
high-end kitchenware. From 1998 to 2000, Mr. Mileusnic was an independent
consultant. From 1996 to 1998, he served as executive vice president of
administration of the Outdoor Recreation division of The Coleman Company, Inc.,
a leading manufacturer and marketer of brand name consumer products for the
camping and related outdoor recreational markets in the United States, Canada,
Europe and Japan. From 1994 to 1996, he served as executive vice president and
chief financial officer of The Coleman Company. He joined The Coleman Company in
September 1989 as senior vice president and chief financial officer. From 1987
to 1989, he was senior vice president and controller of Burger King Corporation,
a subsidiary of The Pillsbury Company. Mr. Mileusnic currently serves on the
Board of Directors of U.S. Restaurant Properties, Inc.
PATRICK J. FERRELL, age 43, has served as a director since 1995. He is
currently managing partner of Xscape Velocity, Palo Alto, California, a
management consulting firm providing early-stage Internet companies with
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mentoring, strategic planning, financing consultation and business development
assistance. Prior to joining Xscape Velocity in 1999, Mr. Ferrell had served as
the president and chief executive officer and was a co-founder of SocialNet,
Inc., an Internet company providing products in the area of social networking,
since 1997. From 1989 to 1997, Mr. Ferrell served as chief executive officer of
Infotainment World, Inc., a subsidiary of IDG Communications that publishes
GamePro, S.W.A.T. Pro and PC Games magazines, as well as related tip books and
strategy guides. While with Infotainment World, Mr. Ferrell created and
co-produced the Electronic Entertainment Expo, the world's largest trade show
dedicated exclusively to interactive entertainment products and services.
Mr. Ferrell, a CPA, has held a variety of financial management positions at Visa
U.S.A. Inc., Foster Poultry Farms and KPMG LLP.
Company's executive officers, other than Messrs. Pomije and Bodine, are
identified below.
JEFFREY R. GATESMITH, age 48, has served as vice president of retail
operations and human resources of Company since January 1992. From 1988 to 1991,
he served as vice president of human resources for the 60-store retail jewelry
operations of Henry Birks and Sons, Ltd., Montreal, Quebec, Canada, and as vice
president of operations for Amerpro, Inc., a California firm offering
residential painting services from 1987 to 1988.
ROBERT M. HIBEN, age 42, has served as chief financial officer and
secretary of Company since April 1995. Mr. Hiben joined Company as controller in
February 1992. He was chief financial officer of Bretts Department Store
Company, a 19-store chain, from 1990 to 1992, and served in various financial
capacities, most recently as director of financial planning, for Wilsons The
Leather Experts Inc., a national retailer of leather apparel, from 1982 to 1990.
Executive officers are elected by the Company Board for an indefinite term
or until their successors are elected.
COMMITTEES OF THE COMPANY BOARD AND MEETING ATTENDANCE
The Company Board met eight times during fiscal 2000. All directors
attended at least 75% of the meetings of the Company Board and the committees on
which they served. The Company Board has Executive, Compensation and Audit
Committees, each comprised of two members. The Company Board does not have a
Nominating Committee.
Executive Committee. The Executive Committee is authorized to take action
between meetings of the Company Board, subject to Company Board ratification.
The Executive Committee did not meet during fiscal 2000. The current members of
the Executive Committee are Messrs. Pomije and Bodine.
Compensation Committee. The principal function of the Compensation
Committee is to make recommendations to the Company Board concerning the
compensation of executive officers and other management personnel. The
Compensation Committee met three times during fiscal 2000. The current members
of the Compensation Committee are Messrs. Mileusnic and Ferrell.
Audit Committee. The Audit Committee has the principal function of
reviewing the adequacy of Company's internal controls, conferring with the
independent auditors concerning the scope of their examination of the books and
records of Company, recommending to the Company Board the appointment of
independent auditors and considering other appropriate matters regarding the
financial affairs of Company. The Audit Committee met one time during fiscal
2000. The current members of the Audit Committee are Messrs. Mileusnic and
Ferrell.
DIRECTORS' COMPENSATION
Directors who are not otherwise employees of Company are paid an annual
retainer of $5,000, plus $1,250 for each Company Board meeting other than a
regular Company Board meeting and $200 for each committee meeting attended that
is not held on the same date as a regular Company Board meeting. For services
rendered in fiscal 2000, each nonemployee director received $10,000 in retainer
and meeting fees. In addition, each nonemployee director received $10,000 for
service on a special committee. Nonemployee directors are eligible for stock
option awards under Company's 1992 Stock Option Plan for Nonemployee Directors.
During fiscal 2000, options to purchase an aggregate of 3,000 shares of Common
Stock at an exercise price of $17.78 were granted to Company's nonemployee
directors.
A-3
In addition, Mr. Mileusnic was retained by Company as a special consultant
to serve as the principal contact in the Company Board's consideration of
strategic alternatives. Mr. Mileusnic was paid $17,775 in fiscal 2000 for these
services. A copy of the agreement between Mr. Mileusnic and Company is filed as
Exhibit 7 to the Schedule 14D-9 and is incorporated herein by reference.
REPORT OF THE COMPENSATION COMMITTEE
With respect to executive compensation, the objectives of the Committee are
to establish and maintain programs and practices that will align executive
compensation with Company's performance and profitability as well as motivate
and retain executive officers. In meeting these objectives, the Compensation
Committee has determined that executive compensation plans are to include
competitive base salaries, performance-based cash bonuses and appropriate
long-term stock-based incentive awards.
ELEMENTS OF THE COMPANY'S EXECUTIVE COMPENSATION PLANS
Base Salary. The Company Board establishes the base salary level for each
executive officer, including the chief executive officer, based upon
recommendation of the Compensation Committee. In developing specific salary
recommendations, the Compensation Committee considers the scope of
responsibility for each executive officer, the individual's experience, the
competitive marketplace for the position and input from a consultant. Base
salaries of Company's Named Executive Officers (as defined below) increased an
average of approximately 13% during fiscal 2000.
Performance-Based Cash Bonus. The Company Board establishes an annual cash
bonus plan based upon recommendation of the Compensation Committee, which
correlates incentive payments to factors including overall Company financial
performance, specific individual objectives and the individual executive
officer's base salary. Company has not awarded performance-based cash bonuses to
its Named Executive Officers for fiscal 2000.
Stock-Based Incentive Awards. The Compensation Committee and the Company
Board believe that stock-based incentive awards encourage and reward effective
management actions that bring about long-term corporate financial success,
primarily as measured by increases in shareholder value. No options were granted
in fiscal 2000.
COMPENSATION FOR THE CHIEF EXECUTIVE OFFICER
The following criteria were applied by the Compensation Committee to
determine compensation for the chief executive officer, Mr. Pomije, for the last
fiscal year.
The Committee established Mr. Pomije's annual base salary for fiscal 2000
at $300,000, based upon the criteria described above regarding base salary. The
Committee established Mr. Pomije's annual incentive bonus opportunity at a level
at which achievement of bonus, together with base salary, would have been
marketplace competitive. No stock options were granted to Mr. Pomije in fiscal
2000.
OTHER INFORMATION
Section 162(m) of the Internal Revenue Code of 1986, as amended (the
"Code"), imposes an annual deduction limitation of $1.0 million on the
compensation of certain executive officers of publicly held companies. In the
past, the Section 162(m) limitation has not affected Company because the level
of compensation for any executive officer has not exceeded $1.0 million. The
payments described below under "Employment Agreements, Termination of Employment
and Change in Control Arrangements" may exceed that level and a substantial
portion of such payments may also be non-deductible under another section of the
Code; however, the Compensation Committee believed that providing for such
payments was important to continue to retain the services of the executives in
the event of a business combination or an attempted takeover.
The Compensation Committee: George E. Mileusnic and Patrick J. Ferrell
A-4
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table sets forth certain information regarding compensation
paid during each of Company's last three fiscal years to Company's chief
executive officer and the three other executive officers whose total cash
compensation for fiscal 2000 (based on salary and bonus) exceeded $100,000 (the
"Named Executive Officers").
LONG-TERM
COMPENSATION
-----------------
AWARDS
ANNUAL COMPENSATION -----------------
FISCAL -------------------- SHARES UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS OPTIONS (#) COMPENSATION(1)
- --------------------------------------------- ------ -------- -------- ----------------- ---------------
David R. Pomije.............................. 2000 $300,000 -- -- --
Chief Executive Officer 1999 270,000 $ 40,500 42,000 --
1998 255,000 127,500 42,400 --
Stanley A. Bodine............................ 2000 250,000 -- -- $ 2,601
President and Chief Operating Officer 1999 220,000 33,000 42,000 --
1998 200,000 100,000 36,640 --
Jeffrey R. Gatesmith......................... 2000 144,000 -- -- 1,488
Vice President of Retail Operations 1999 125,000 15,625 20,000 --
and Human Resources 1998 115,000 50,300 18,080 --
Robert M. Hiben.............................. 2000 144,000 -- -- 1,391
Chief Financial Officer 1999 125,000 15,625 20,000 --
1998 110,000 47,200 17,280 --
- ------------------
(1) All Other Compensation for each individual consists of matching
contributions under Company's 401(k) plan.
OPTIONS GRANTED DURING FISCAL 2000
No options were granted to the Named Executive Officers during fiscal 2000.
AGGREGATE OPTION EXERCISES DURING FISCAL 2000 AND FISCAL YEAR-END OPTION VALUES
The following table provides information related to options exercised by
the Named Executive Officers during fiscal 2000 and the number and value of
options held at fiscal year-end. Company does not have any outstanding stock
appreciation rights.
VALUE OF
NUMBER OF UNEXERCISED
UNEXERCISED IN-THE-MONEY
SHARES OPTIONS AT OPTIONS AT
ACQUIRED FISCAL YEAR-END FISCAL YEAR-END(1)
ON VALUE ---------------------------- ----------------------------
NAME EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ----------------------------------- -------- -------- ----------- ------------- ----------- -------------
David R. Pomije.................... 14,214 $108,133 140,200 -- $ 220,154 --
Stanley A. Bodine.................. 10,500 80,029 155,995 -- 220,737 --
Jeffrey R. Gatesmith............... -- -- 106,041 -- 302,254 --
Robert M. Hiben.................... 8,000 91,688 86,070 -- 172,242 --
- ------------------
(1) Value is determined by the difference between the closing price of the
Common Stock on March 31, 2000, which was $11.875, and the option exercise
price (if less than $11.875) multiplied by the number of shares of Common
Stock subject to the option.
A-5
EMPLOYMENT AGREEMENTS, TERMINATION OF EMPLOYMENT AND CHANGE IN CONTROL
ARRANGEMENTS
Company has entered into Executive Employment Agreements with each of the
Named Executive Officers, each dated May 19, 1999 (the "Executive Employment
Agreements"). Each Executive Employment Agreement may be terminated at any time
by either the individual or Company, subject to certain limitations and
continuing obligations. Each Executive Employment Agreement prohibits the
individual from engaging in certain activities competitive with the business of
Company, including contacting customers for such purpose or interfering with
Company's relationships with its employees during the individual's employment
and for a period of one year following termination of employment ("Noncompete
Covenants"). Each Executive Employment Agreement provides for an initial term
ending March 31, 2001, and is renewable annually thereafter for additional
one-year periods. If any of the Executive Employment Agreements is terminated at
any time by Company other than for "Cause" (as defined in each Executive
Employment Agreement), in most cases, Company is obligated to continue payment
of salary and certain other benefits to the affected individual for the
remainder of the term of the Executive Employment Agreement. If any of the
Executive Employment Agreements is terminated due to death or disability,
Company is obligated to make certain payments to the affected individual.
Each of these individuals is entitled to compensation if his employment is
terminated following a Change in Control (as defined in each Executive
Employment Agreement). A "Change in Control" occurs, subject to certain details
and conditions more fully described in each Executive Employment Agreement, when
o the majority of the directors of Company are persons other than persons
who are serving as of May 19, 1999 ("Incumbent Directors") or whose
election or appointment was approved by a majority of Incumbent
Directors,
o any person or group of persons (as defined in Section 13(d) or 14(d) of
the Exchange Act and the rules thereunder) acquires 35% or more of the
outstanding voting stock of Company (with certain exceptions), or
o the shareholders of Company approve a merger, consolidation or similar
transaction (other than a merger, consolidation or similar transaction in
which the shareholders of Company immediately prior to the transaction
own more than 65% of the outstanding voting stock of the corporation that
results from such transaction, in substantially the same proportion as
such ownership prior to the transaction), or liquidation or dissolution
of Company.
If any "Anticipatory Event" occurs (meaning that (i) the individual's
employment is terminated during the term of the individual's Executive
Employment Agreement and prior to a Change in Control and (ii) the individual
reasonably demonstrates that such termination was at the request of a third
party who has taken steps reasonably calculated to effect a Change in Control or
arose in connection with or in anticipation of a Change in Control) or if,
during the first 24 months following a Change in Control, Company terminates the
individual's employment other than for Cause, disability or death, or the
individual terminates the individual's employment for "Good Reason" (as defined
in each Executive Employment Agreement), then the individual becomes entitled to
receive compensation that includes payments of two times the individual's
then-current base salary and target incentive bonus. In addition, the individual
is no longer bound by the Noncompete Covenants.
If the individual terminates his employment (upon at least three months'
notice) at the end of the first 15 months after a Change in Control for other
than Good Reason, the individual is entitled to a severance benefit of one
year's current base salary and target incentive bonus.
In the event that any payment made upon the occurrence of a Change in
Control becomes subject to the excise tax imposed by Section 4999 of the Code,
Company is required to pay such additional amounts as would put the individual
in the same after-tax position as if such excise tax did not apply (the
"Gross-Up Payment"), provided that the Gross-Up Payment shall not exceed 100% of
the individual's base salary and target incentive bonus in effect at the date of
termination.
Copies of the Executive Employment Agreements are filed as Exhibits 2
through 5 to the Schedule 14D-9, and each is incorporated herein by reference.
The foregoing summary of the Executive Employment Agreements is qualified in its
entirety by reference to the Executive Employment Agreements.
A-6
The Named Executive Officers and other key employees have been granted
options under Company's 1993 Stock Option Plan (the "Plan"). As a result of the
Company Board's declaration of a "Potential Change of Control" under the Plan at
the time the Original EB Merger Agreement was signed and related actions by the
Company Board and the Compensation Committee, all options granted under the Plan
have become fully exercisable and vested and the value of all outstanding
options will be cashed out following completion of the Offer at the amount, per
underlying Share for which the options are exercisable, by which the Per Share
Amount payable in the Offer exceeds the per Share exercise price of the option.
OWNERSHIP OF COMMON STOCK
The following information concerning ownership of Common Stock is furnished
as of May 4, 2000 (except as otherwise indicated) with respect to (i) all
persons known by Company to be the beneficial owners of more than 5% of the
outstanding Common Stock, (ii) each of the current directors of Company,
(iii) each of the Named Executive Officers and (iv) all directors and executive
officers as a group. Beneficial ownership has been determined for this purpose
in accordance with Rule 13d-3 of the Exchange Act, under which a person is
deemed to be the beneficial owner of securities if he or she has or shares
voting power or investment power in respect of such securities or has the right
to acquire beneficial ownership within 60 days.
NUMBER OF SHARES PERCENTAGE OF
NAME AND ADDRESS OF BENEFICIAL OWNER OR IDENTITY OF GROUP BENEFICIALLY OWNED OUTSTANDING SHARES
- --------------------------------------------------------------------------- ------------------ ------------------
David R. Pomije............................................................ 1,473,289(1) 23.5%
10120 West 76th Street
Minneapolis, MN 55344
Woodland Partners LLC...................................................... 552,000(2) 9.0
60 South Sixth Street
Suite 3750
Minneapolis, MN 55402
Wellington Management Company, LLP......................................... 538,000(3) 8.8
75 State Street
Boston, MA 02109
SAFECO Asset Management Company............................................ 519,400(4) 8.5
601 Union Street
Suite 2500
Seattle, WA 98101-4074
The Bear Stearns Companies Inc............................................. 366,295(5) 6.0
245 Park Avenue
New York, NY 10167
Fleet Boston Corporation................................................... 348,360(6) 5.7
One Federal Street
Boston, MA 02110
Stanley A. Bodine.......................................................... 243,697(7) 3.9
George E. Mileusnic........................................................ 21,688(8) Less than 1%
Patrick J. Ferrell......................................................... 3,000(9) Less than 1%
Jeffrey R. Gatesmith....................................................... 125,291(10) 2.0
Robert M. Hiben............................................................ 103,070(11) 1.7
All directors and executive officers as a group (6 persons)................ 1,970,035(12) 29.8
(Footnotes on next page)
A-7
(Footnotes from previous page)
- ------------------
(1) Includes 140,200 shares of Common Stock issuable upon exercise of currently
exercisable options. Effective May 4, 2000, Mr. Pomije and Parent entered
into a Shareholder Agreement, a copy of which is filed as Exhibit 6 to the
Schedule 14D-9 and is incorporated herein by reference, pursuant to which
Mr. Pomije agreed, subject to the terms and conditions of such agreement,
to tender Shares beneficially owned by him in the Offer and granted Parent
an irrevocable proxy to vote such Shares, provided that in no event shall
the number of such Shares tendered, or with respect to which such proxy was
granted, exceed 19.9% of the total number of Shares outstanding. This
arrangement is more fully described in the Schedule 14D-9 and in the
Schedule 13D, dated May 12, 2000, filed by Parent.
(2) Based on Schedule 13G/A, dated February 14, 2000, filed by Woodland
Partners LLC, which has sole voting power over 485,100 Shares and shared
voting power over 66,900 Shares.
(3) Based on Schedule 13G/A, dated February 11, 2000, filed by Wellington
Management Company, LLP, which has shared voting power over 348,000 Shares
and shared dispositive power over 538,000 Shares.
(4) Based on Schedule 13G/A, dated January 28, 2000, filed jointly by SAFECO
Common Stock Trust ("CST"), SAFECO Asset Management Company ("AMC") and
SAFECO Corporation ("SAFECO"). AMC, a subsidiary of SAFECO, is an
investment adviser and has shared voting and dispositive power over all of
such Shares, including Shares held by CST, an investment company.
(5) Based on Schedule 13D, dated May 5, 2000, filed jointly by The Bear Stearns
Companies Inc. and Bear, Stearns & Co. Inc., which have shared voting and
dispositive power over all of such Shares.
(6) Based on Schedule 13G/A, dated February 14, 2000, filed by Fleet Boston
Corporation.
(7) Includes 155,995 shares of Common Stock issuable upon exercise of currently
exercisable options.
(8) Includes 7,500 shares of Common Stock issuable upon exercise of currently
exercisable options.
(9) Includes 3,000 shares of Common Stock issuable upon exercise of currently
exercisable options.
(10) Includes 106,041 shares of Common Stock issuable upon exercise of currently
exercisable options.
(11) Includes 1,750 Shares held by or on behalf of Mr. Hiben's children and
86,070 shares of Common Stock issuable upon exercise of currently
exercisable options.
(12) Includes 498,806 shares of Common Stock issuable upon exercise of currently
exercisable options.
A-8
STOCK PERFORMANCE CHART
The following table compares the cumulative total shareholder return on the
Common Stock for the period commencing April 2, 1995, through April 2, 2000,
with the cumulative total return on the Nasdaq Stock Market (U.S.) Index and the
Nasdaq Retail Trade Index over the same period. This comparison assumes $100 was
invested on April 2, 1995 in the Common Stock and in each of the foregoing
indices and assumes reinvestment of all dividends.
[LINE GRAPH]
CUMULATIVE TOTAL RETURNS
--------------------------------------------------------
4/2/95 3/31/96 3/30/97 3/29/98 3/28/99 4/2/00
------ ------ ------ ------ ------ ------
Funco, Inc............................................. 100.00 89.74 302.56 358.97 387.18 243.59
Nasdaq Retail Trade Index.............................. 100.00 125.23 128.79 184.34 187.37 150.80
Nasdaq Stock Market (U.S.) Index....................... 100.00 135.80 154.45 227.27 303.56 573.99
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Exchange Act requires that Company's directors and
executive officers, and persons who own more than ten percent of the Common
Stock ("Reporting Persons") file with the SEC initial reports of ownership and
changes in ownership of Common Stock and other equity securities of Company.
Reporting Persons are required by SEC regulations to furnish Company with copies
of all Section 16(a) reports they file. To Company's knowledge, based solely on
review of the copies of such reports furnished to Company during fiscal 2000,
all Section 16(a) filing requirements applicable to its Reporting Persons were
complied with, except that Mr. Ferrell failed to file a Form 4 to report the
sale of 1,000 shares of Common Stock in December 1999. A Form 5 reporting the
transaction has been filed.
A-9
SCHEDULE I
DIRECTORS AND EXECUTIVE OFFICERS OF PARENT AND PURCHASER
The following table sets forth the name, age, present principal occupation
or employment and material occupations, positions, offices or employment for the
past five years of the directors and executive officers of Parent and Purchaser
whom Parent has identified as the candidates to be Parent Designees. Unless
otherwise indicated below, (i) each individual has held his positions for more
than the past five years, (ii) the business address of each person is 122 Fifth
Avenue, New York, New York 10011, and (iii) all individuals listed below are
citizens of United States. In the event that additional Parent Designees are
required in order to constitute a majority of the Company Board, such additional
Parent Designees will be selected by Parent from among the directors and
executive officers of Parent or Purchaser contained in Schedule I of the Offer
to Purchase, which is incorporated herein by reference.
NAME, AGE AND BUSINESS ADDRESS PRESENT PRINCIPAL OCCUPATION OR EMPLOYMENT AND FIVE-YEAR EMPLOYMENT HISTORY
- ------------------------------------ ---------------------------------------------------------------------------
Leonard Riggio, age 59.............. Leonard Riggio has been chairman of the board, chief executive officer and
a principal stockholder of Parent since its inception in 1986. Mr. Riggio
has also been chairman of the board of barnesandnoble.com inc. ("Barnes &
Noble.com Inc."), Parent's Internet subsidiary, since its inception in
February 1997. Since 1965, he has been chairman of the board, chief
executive officer and the principal stockholder of Barnes & Noble College
Bookstores ("B&N College"). For more than the past five years, Mr. Riggio
has been chairman of the board and a principal beneficial owner of MBS
Textbook Exchange, Inc. ("MBS"). Mr. Riggio is Stephen Riggio's brother.
Stephen Riggio, age 45.............. Stephen Riggio has been a director of Parent since April 1997 and was
appointed vice chairman of Parent in December 1997. He was chief operations
officer of Parent from February 1995 until December 1997. Since January
2000, he has been vice chairman and acting chief executive officer of
Barnes & Noble.com Inc., a position he previously held from February 1997
to December 1998. Mr. Riggio has been a director of Barnes & Noble.com Inc.
since its inception in February 1997. He was president of B. Dalton
Bookseller, Inc., a wholly owned indirect subsidiary of Parent, from July
1993 to February 1995, and he was executive vice president, merchandising
of Parent from January 1987 to February 1995. Mr. Riggio is Leonard
Riggio's brother.
Michael N. Rosen, age 59 ........... Michael N. Rosen has been secretary and a director of Parent since its
Robinson Silverman Pearce inception in 1986 and the chairman of Robinson Silverman Pearce Aronsohn &
Aronsohn & Berman LLP Berman LLP, legal counsel to Parent, for more than the past five years.
1290 Avenue of the Americas Mr. Rosen is also a director of Barnes & Noble.com Inc., B&N College and
New York, NY 10104 MBS.