PROXY STATEMENT PURSUANT TO
SECTION 14(A) OF THE SECURITIES EXCHANGE ACT OF 1934
Filed by the Registrant [x]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[ ] Preliminary Proxy Statement
[ ] Confidential, For Use of the Commission Only
(as permitted by Rule 14a-6(e)(2))
[x] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to /section/ 240.14a-11(c) or /section/
240.14a-12
SPEC'S MUSIC
(Name of Registrant as Specified In Its Charter)
NOT APPLICABLE
(Name of Person(s) Filing Proxy Statement if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[ ] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.
1) Title of each class of securities to which transaction applies:
2) Aggregate number of securities to which transaction applies:
3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which the
filing fee is calculated and state how it was determined):
4) Proposed maximum aggregate value of transaction:
5) Total fee paid:
[x] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its filing.
1) Amount Previously Paid:
2) Form, Schedule or Registration Statement No.:
3) Filing Party:
4) Date Filed:
[SPEC'S LOGO]
SPEC'S MUSIC, INC.
June 30, 1998
Dear Stockholder:
You are cordially invited to attend a Special Meeting of Stockholders of
Spec's Music, Inc. to be held at the Miami Airport Hilton Hotel, 5101 Blue
Lagoon Drive, Miami, Florida, on Wednesday, July 29, 1998, at 10:00 a.m.,
Eastern Daylight Savings Time. At this important meeting, you will be asked to
consider a proposal to approve the Agreement and Plan of Merger dated June 3,
1998 between Spec's Music, Inc. and Camelot Music Holdings, Inc. by which
Spec's will be acquired by Camelot. The attached Proxy Statement describes the
proposed Merger and the Merger Agreement in detail and provides additional
pertinent information about Spec's and Camelot. YOU ARE URGED TO CAREFULLY READ
THE FULL TEXT OF THE PROXY STATEMENT AND ITS APPENDICES.
If the Merger becomes effective, each outstanding share of Spec's Common
Stock will be converted into the right to receive $3.30 in cash. Upon the
consummation of the Merger, Spec's will become a wholly owned subsidiary of
Camelot.
THE BOARD OF DIRECTORS OF SPEC'S HAS DETERMINED THAT THE TERMS OF THE
PROPOSED MERGER ARE FAIR TO AND IN THE BEST INTERESTS OF SPEC'S AND ITS
STOCKHOLDERS AND UNANIMOUSLY RECOMMENDS THAT STOCKHOLDERS VOTE "FOR" APPROVAL
OF THE MERGER AGREEMENT.
It is important that you vote your shares by completing, dating and
returning the accompanying proxy card, whether or not you plan to attend the
Special Meeting. A failure to vote, either by not returning the enclosed proxy
card or by checking the "Abstain" box on the proxy card, will have the same
effect as a vote against approval of the Merger Agreement.
Your vote is important regardless of the number of shares that you own.
Please sign, date and return the accompanying proxy card in the enclosed
postage-paid envelope. YOU SHOULD NOT FORWARD YOUR STOCK CERTIFICATES AT THIS
TIME. IF THE MERGER IS CONSUMMATED, YOU WILL BE SENT INSTRUCTIONS REGARDING THE
SURRENDER OF YOUR CERTIFICATES.
Very truly yours,
/s/ ANN SPECTOR LIEFF
Ann Spector Lieff
President and Chief Executive Officer
[SPEC'S LOGO]
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
ON JULY 29, 1998
NOTICE IS HEREBY GIVEN that a Special Meeting of Stockholders (the
"Special Meeting") of Spec's Music, Inc. (the "Company") will be held at the
Miami Airport Hilton Hotel, 5101 Blue Lagoon Drive, Miami, Florida, on
Wednesday, July 29, 1998, at 10:00 a.m., Eastern Daylight Savings Time, for the
following purposes:
(1) To consider and vote upon approval of the Agreement and Plan of Merger
dated June 3, 1998 (the "Merger Agreement"), among the Company, Camelot
Music Holdings, Inc. ("Camelot"), and SM Acquisition, Inc., a
newly-formed subsidiary of Camelot ("MergerCo"), pursuant to which the
Company will be acquired by Camelot by means of a merger of MergerCo
with and into the Company (the "Merger"), upon the terms and subject to
the conditions set forth in the Merger Agreement, as described in the
accompanying Proxy Statement. A copy of the Merger Agreement is set
forth in Appendix A to the Proxy Statement; and
(2) To transact such other business as may properly come before the Special
Meeting and any adjournment or postponement thereof.
Upon consummation of the Merger, (i) each outstanding share of the
Company's common stock, $.01 par value (the "Common Stock"), other than shares
of Common Stock held by stockholders who have properly exercised their rights
to dissent from the Merger, will be converted into the right to receive a cash
payment of $3.30 (the "Per Share Amount"); and (ii) each outstanding stock
option will be surrendered and the holder thereof will be entitled to receive a
cash payment equal to the excess, if any, of the Per Share Amount over the per
share exercise price of such option, multiplied by the number of shares of
Common Stock underlying such option, less applicable withholding taxes. Upon
the consummation of the Merger, the stockholders of the Company will no longer
have any ownership in the Company, and the Company will become a wholly owned
subsidiary of Camelot.
Pursuant to the Bylaws of the Company, the Board of Directors has fixed
the close of business on June 29, 1998 as the record date for the determination
of the stockholders entitled to notice of and to vote at the Special Meeting.
If the Merger is consummated, holders of the Common Stock will be entitled
to dissenters' rights under applicable Florida law.
By Order of the Board of Directors
DOROTHY J. SPECTOR
SECRETARY
Miami, Florida
June 30, 1998
YOUR VOTE IS IMPORTANT REGARDLESS OF THE NUMBER OF SHARES YOU OWN. EACH
STOCKHOLDER, WHETHER OR NOT HE OR SHE PLANS TO ATTEND THE SPECIAL MEETING, IS
REQUESTED TO SIGN, DATE AND RETURN THE ENCLOSED PROXY CARD IN THE ENCLOSED
POSTAGE-PAID ENVELOPE WITHOUT DELAY. ANY PROXY GIVEN BY A STOCKHOLDER MAY BE
REVOKED AT ANY TIME BEFORE IT IS EXERCISED. ANY STOCKHOLDER PRESENT AT THE
SPECIAL MEETING MAY REVOKE HIS OR HER PROXY AND VOTE PERSONALLY ON EACH MATTER
BROUGHT BEFORE THE SPECIAL MEETING. IF YOU ARE A STOCKHOLDER WHOSE SHARES ARE
NOT REGISTERED IN YOUR OWN NAME, HOWEVER, YOU WILL NEED ADDITIONAL
DOCUMENTATION FROM YOUR RECORD HOLDER TO VOTE PERSONALLY AT THE SPECIAL
MEETING. PLEASE DO NOT SEND ANY CERTIFICATES FOR YOUR SHARES AT THIS TIME.
SPEC'S MUSIC, INC.
1666 N.W. 82ND AVENUE
MIAMI, FLORIDA 33126
----------------
PROXY STATEMENT
FOR THE JULY 29, 1998 SPECIAL MEETING OF STOCKHOLDERS
----------------
INTRODUCTION
This Proxy Statement is being furnished by Spec's Music, Inc. (the
"Company"), to the holders of the Company's outstanding common stock, par value
$.01 per share (the "Common Stock"), in connection with the solicitation of
proxies by the Company's Board of Directors for use at a Special Meeting of
Stockholders of the Company (the "Special Meeting") to be held at 10:00 a.m.,
Eastern Daylight Savings Time, on Wednesday, July 29, 1998, at the Miami
Airport Hilton Hotel, 5101 Blue Lagoon Drive, Miami, Florida (the "Special
Meeting"), and at any adjournment or postponement thereof.
The purpose of the Special Meeting is to consider and vote upon a proposal
to approve the Agreement and Plan of Merger dated June 3, 1998 (the "Merger
Agreement") among the Company, Camelot Music Holdings, Inc. ("Camelot"), and SM
Acquisition, Inc., a newly-formed subsidiary of Camelot ("MergerCo"), pursuant
to which the Company will be acquired by Camelot by means of a merger of
MergerCo with and into the Company (the "Merger"), upon the terms and subject
to the conditions set forth in the Merger Agreement. Upon consummation of the
Merger: (i) each outstanding share of the Company's Common Stock, other than
shares of Common Stock held by stockholders who have properly exercised their
rights to dissent from the Merger, will be converted into the right to receive
a cash payment of $3.30 (the "Per Share Amount"); and (ii) each outstanding
stock option will be surrendered and the holder thereof will be entitled to
receive a cash payment equal to the excess, if any, of the Per Share Amount
over the per share exercise price of such option, multiplied by the number of
shares of Common Stock underlying such option, less applicable withholding
taxes.
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT STOCKHOLDERS VOTE "FOR"
APPROVAL OF THE MERGER AGREEMENT.
Consummation of the Merger is conditioned upon, among other things,
approval and adoption of the Merger Agreement by the requisite vote of the
Company's stockholders and the expiration or termination of all necessary
regulatory waiting periods. The Special Meeting may be adjourned or postponed
until such conditions are satisfied. There can be no assurance that the
conditions to the Merger will be satisfied, or where permissible, waived, or
that the Merger will be consummated. See "APPROVAL OF THE MERGER--Conditions to
the Merger."
The Board of Directors knows of no additional matters that will be
presented for consideration at the Special Meeting. Execution of a proxy,
however, confers on the designated proxy holders discretionary authority to
vote the shares covered thereby in accordance with their best judgment on such
other business, if any, that may properly come before the Special Meeting or
any adjournment or postponement thereof.
This Proxy Statement and the accompanying Notice of Special Meeting and
proxy card are first being mailed to the stockholders of record of the Company
on or about June 30, 1998.
IT IS IMPORTANT THAT YOUR PROXY CARD BE RETURNED PROMPTLY. THEREFORE,
WHETHER OR NOT YOU PLAN TO ATTEND THE SPECIAL MEETING, PLEASE COMPLETE, DATE,
SIGN AND RETURN THE PROXY CARD IN THE ENCLOSED POSTAGE-PAID ENVELOPE.
The Date of this Proxy Statement Is June 30, 1998
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith, files reports, proxy statements and other information with the
Securities and Exchange Commission (the "Commission"). Such reports, proxy
statements and other information filed by the Company may be inspected and
copied (at prescribed rates) at the public reference facilities maintained by
the Commission at 450 Fifth Street, N.W., Room 1024, Washington, D.C. 20549 and
at the following regional offices located at Seven World Trade Center, Suite
1300, New York, New York 10048, and 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661, and may also be obtained from the Commission's website
located at http://www.sec.gov. Quotations relating to the Company's Common
Stock appear on The Nasdaq SmallCap Market, and reports, proxy statements and
other information concerning the Company can also be inspected at the offices
of the National Association of Securities Dealers, Inc., 1735 K Street, N.W.,
Washington, D.C. 20006.
THIS PROXY STATEMENT INCORPORATES DOCUMENTS BY REFERENCE THAT ARE NOT
PRESENTED HEREIN OR DELIVERED HEREWITH. A COPY OF ONE OR MORE OF THESE
DOCUMENTS IS AVAILABLE WITHOUT CHARGE (OTHER THAN CERTAIN EXHIBITS TO SUCH
DOCUMENTS) TO EACH PERSON, INCLUDING ANY BENEFICIAL OWNER OF THE COMPANY'S
STOCK, TO WHOM THIS PROXY STATEMENT IS DELIVERED, UPON WRITTEN OR ORAL REQUEST
TO: SPEC'S MUSIC, INC., ATTENTION: DONALD A. MOLTA, VICE PRESIDENT AND CHIEF
FINANCIAL OFFICER, 1666 N.W. 82ND AVENUE, MIAMI, FLORIDA 33126, TELEPHONE
NUMBER: (305) 592-7288. SEE "INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE."
All information contained in this Proxy Statement under the caption
"APPROVAL OF THE MERGER--Description of Camelot" was supplied by Camelot and,
except as otherwise indicated, all other information contained or incorporated
by reference in this Proxy Statement with respect to the Company was supplied
by the Company.
No person has been authorized to give any information or to make any
representations other than those contained in this Proxy Statement and, if
given or made, such information or representations must not be relied upon as
having been authorized by the Company or Camelot.
2
TABLE OF CONTENTS
PAGE
-----
INTRODUCTION .......................................................... 1
AVAILABLE INFORMATION ................................................. 2
SUMMARY OF PROXY STATEMENT ............................................ 4
Special Meeting of Stockholders ..................................... 4
Description of the Company and Camelot .............................. 5
The Merger .......................................................... 6
Additional Information Regarding the Special Meeting ................ 9
Selected Consolidated Financial Data ................................ 10
Market Price and Dividend Data ...................................... 12
THE SPECIAL MEETING ................................................... 13
Use of Proxies at the Special Meeting ............................... 13
Revocation of Proxies ............................................... 13
Record Date; Stockholders Entitled to Vote at the Special Meeting ... 13
Quorum; Vote Required for Approval .................................. 13
Solicitation ........................................................ 14
APPROVAL OF THE MERGER ................................................ 14
General ............................................................. 14
Description of the Company .......................................... 14
Description of Camelot .............................................. 15
The Merger .......................................................... 15
The Merger Agreement ................................................ 20
Merger Consideration ................................................ 21
Conditions to the Merger ............................................ 21
Regulatory Approvals ................................................ 21
Certain Federal Income Tax Consequences ............................. 22
Payment for Shares .................................................. 22
Conduct of Business Pending the Merger .............................. 23
No Solicitation of Transaction Proposals ............................ 24
Termination, Amendment and Expenses ................................. 25
Accounting Treatment ................................................ 25
Interests of Certain Persons ........................................ 26
Dissenters' Rights .................................................. 27
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT ....................................................... 29
STOCKHOLDER PROPOSALS ................................................. 31
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE ....................... 31
OTHER MATTERS ......................................................... 31
APPENDICES:
Appendix A--Agreement and Plan of Merger ............................ A-1
Appendix B--Opinion of PaineWebber Incorporated ..................... B-1
Appendix C--Dissenter's Rights Provisions of Florida Statutes ....... C-1
3
SUMMARY OF PROXY STATEMENT
THIS SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED INFORMATION
APPEARING ELSEWHERE IN THIS PROXY STATEMENT, INCLUDING THE APPENDICES HERETO,
AND IN THE DOCUMENTS INCORPORATED BY REFERENCE OR OTHERWISE REFERRED TO HEREIN.
STOCKHOLDERS ARE URGED TO READ THIS PROXY STATEMENT AND THE ACCOMPANYING
APPENDICES HERETO IN THEIR ENTIRETY.
SPECIAL MEETING OF STOCKHOLDERS
PURPOSE OF THE
SPECIAL MEETING............ This Proxy Statement is being furnished to the
stockholders of Spec's Music, Inc. (the "Company")
in connection with the solicitation of proxies by
the Company's Board of Directors for use at the
Special Meeting of Stockholders (the "Special
Meeting") called to consider and vote upon the
following matters:
(1) To consider and vote upon approval of the
Agreement and Plan of Merger dated June 3,
1998 (the "Merger Agreement"), among the
Company, Camelot Music Holdings, Inc.
("Camelot"), and SM Acquisition, Inc., a
newly-formed subsidiary of Camelot
("MergerCo"), pursuant to which the Company
will be acquired by Camelot by means of a
merger of MergerCo with and into the Company,
as described in this Proxy Statement (the
"Merger"); and
(2) To transact such other business as may
properly come before the Special Meeting and
any adjournment or postponement thereof.
A copy of the Merger Agreement is set forth in
Appendix A to this Proxy Statement.
TIME, DATE AND PLACE....... The Special Meeting will be held at the Miami
Airport Hilton Hotel, 5101 Blue Lagoon Drive,
Miami, Florida on Wednesday, July 29, 1998, at
10:00 a.m., Eastern Daylight Savings Time.
THE RECORD DATE; SHARES
ENTITLED TO VOTE; VOTE
REQUIRED.................. The close of business on June 29, 1998 has been
fixed as the record date (the "Record Date") for
determination of persons entitled to notice of and
to vote at the Special Meeting.
As of the Record Date, there were outstanding
5,292,230 shares of the Company's common stock,
$.01 par value (the "Common Stock"). Approval of
the Merger Agreement requires the affirmative
vote of the holders of a majority of the
outstanding shares of the Common Stock.
Concurrently with the execution of the Merger
Agreement, Ann S. Lieff, Martin W. Spector and
Rosalind S. Zacks (the "Spector Family"), who are
directors and principal stockholders of the
Company, each executed an agreement with Camelot
and MergerCo (the "Voting Agreement") whereby
each agreed,
4
among other things, to vote in favor of the
Merger all shares over which they have the right
to vote on the Record Date except for shares
owned by the Company's 401(k) Plan and shares
owned by members of the Spector Family as
fiduciaries for minor children (together, the
"Excluded Securities"). Excluding options, the
Spector Family beneficially owned (other than the
Excluded Securities) as of the Record Date
approximately 46.4% of the Company's outstanding
Common Stock. See "SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT."
As of the Record Date, the directors and
executive officers of the Company (including the
Spector Family) beneficially owned in the
aggregate (excluding shares of Common Stock
underlying stock options and the Excluded
Securities) approximately 46.5% of the Company's
outstanding Common Stock. As described above, the
members of the Spector Family have agreed to vote
their shares for approval of the Merger
Agreement. If they do so, approval of the Merger
Agreement will require the affirmative vote of
the holders of an additional 3.6% of the
outstanding shares of Common Stock entitled to
vote at the Special Meeting in order for the
Merger Agreement to be approved. If the Spector
Family also votes the Excluded Securities, which
represent approximately 2.9% of the Common Stock,
in favor of the Merger and the Company's other
executive officers and directors vote in favor of
the Merger, the approval of the Merger Agreement
will require the affirmative vote of less than an
additional 1% of the holders of the outstanding
shares of Common Stock entitled to vote at the
Special Meeting.
A FAILURE TO VOTE, INCLUDING A BROKER NONVOTE,
THE FAILURE TO RETURN THE ENCLOSED PROXY CARD OR
ABSTAINING BY CHECKING THE "ABSTAIN" BOX ON THE
PROXY CARD, WILL EACH HAVE THE SAME EFFECT AS A
VOTE AGAINST APPROVAL OF THE MERGER AGREEMENT.
DESCRIPTION OF THE COMPANY AND CAMELOT
THE COMPANY................ The Company, founded in 1948 and headquartered
in Miami, Florida, currently operates 42 stores in
Florida and Puerto Rico. The Company is among the
most highly recognized and largest retailers of
specialty music in the Miami/Fort Lauderdale
metropolitan area and Florida's Gold Coast. Its
particular strength lies in the diversity of
products it offers, including audio compact discs;
pre-recorded cassette tapes, pre-recorded video
cassettes, laser discs and digital video discs
("DVDs"); blank audio and video tapes; a wide
range of audio and video accessories; and boutique
items such as t-shirts, posters, and collectibles.
5
The overwhelming majority of the Company's 42
stores are located in Florida, with four located
throughout the island of Puerto Rico. The design
and format of each of the Company's stores has
been tailored specifically to best serve the
needs of its customers in a specific locale. The
Company operates 16 stores in enclosed
traditional shopping malls and 26 stores in
shopping centers and free-standing downtown
locations. Of these, 14 are "superstores," which
typically span 7,000-10,000 square feet of retail
space. Additionally, the Company's "megastores"
in Miami Beach and the Sawgrass Mills Mall each
are comprised of 20,000 square feet or more. See
"APPROVAL OF THE MERGER--Description of the
Company."
CAMELOT.................... Camelot is one of the largest mall-based
retailers of pre-recorded music and accessories
in the United States, operating more than 450
stores in 37 states with a strong geographic
concentration of stores in the eastern part of
the country.
Camelot offers a broad range of pre-recorded
music, including compact discs, cassettes,
pre-recorded video cassettes, DVDs and
accessories such as blank audio and video
cassettes and music tape and care products.
Camelot's merchandising strategy seeks to
position Camelot as the mall-based destination
store for music. Camelot's stores average 4,200
square feet in size and offer over 20,000 stock
keeping units, including both high-volume
Billboard Top 100 titles and a broad offering of
older releases and diverse music categories.
Camelot believes its merchandising strategy
enables it to attract a broad consumer base
thereby reducing its dependence on any one genre
of music and contributing to its relatively high
store productivity.
In recent years, Camelot has been able to
substantially improve the competitive positioning
of its business. Camelot invested over $8 million
in the development and implementation of
sophisticated merchandising, distribution,
replenishment, and financial software packages,
all of which were operational by the end of 1997.
See "APPROVAL OF THE MERGER--Description of
Camelot."
THE MERGER
MERGER CONSIDERATION....... At the Effective Time (as defined below), each
outstanding share of Common Stock, other than
shares of Common Stock held by stockholders who
have properly exercised their rights to dissent
from the Merger, will be cancelled and will be
converted into the right to receive $3.30 in cash
(the "Per Share Amount"). See "APPROVAL OF THE
MERGER--Merger Consideration."
Additionally, at the Effective Time, each holder
of an outstanding option to purchase shares of
Common Stock will be asked to surrender such
option in exchange for a cash payment
6
in an amount equal to the excess, if any, of the
Per Share Amount over the per share exercise
price of such option, multiplied by the number of
shares of Common Stock underlying such option and
less any applicable withholding taxes. As of the
Record Date, present and former executive
officers, directors, and employees (14 holders in
total), held options exercisable for an aggregate
of 824,276 shares of Common Stock, with an
average exercise price of $1.54 per share. See
"APPROVAL OF THE MERGER--Merger
Consideration--Stock Options."
OPINION OF
FINANCIAL ADVISOR.......... PaineWebber Incorporated ("PaineWebber"), the
Company's financial advisor, has rendered its
written opinion to the Board of Directors that the
cash consideration to be received by the Company's
stockholders is fair to the stockholders from a
financial point of view. Such opinion was
delivered orally to the Company's Board of
Directors at its meeting on May 29, 1998, and
subsequently confirmed in writing. The opinion
dated June 3, 1998, which is set forth in Appendix
B to this Proxy Statement, should be read in its
entirety with respect to the assumptions made,
matters considered and limits of the review
undertaken by PaineWebber in rendering its
opinion. See also "APPROVAL OF THE MERGER--The
Merger; Opinion of Financial Advisor."
RECOMMENDATION OF THE
COMPANY'S BOARD OF
DIRECTORS................. THE BOARD OF DIRECTORS OF THE COMPANY HAS
DETERMINED THAT THE TERMS OF THE MERGER AGREEMENT
ARE FAIR TO AND IN THE BEST INTERESTS OF THE
COMPANY AND ITS STOCKHOLDERS. ACCORDINGLY, THE
BOARD HAS APPROVED THE TERMS OF THE MERGER
AGREEMENT AND UNANIMOUSLY RECOMMENDS THAT THE
STOCKHOLDERS VOTE "FOR" APPROVAL OF THE MERGER
AGREEMENT. SEE "APPROVAL OF THE MERGER--THE
MERGER; BACKGROUND OF THE MERGER."
CONDITIONS; REGULATORY
APPROVALS.................. In addition to the approval of the Company's
stockholders, consummation of the Merger and the
transactions contemplated thereby are subject to
various other conditions, including the expiration
or early termination of the waiting period
applicable to the Merger under the
Hart-Scott-Rodino Antitrust Improvements Act of
1976, as amended (the "HSR Act")(which early
termination occurred on June 16, 1998), the
election by the holders of not more than 10% of
the Company's Common Stock to demand dissenters'
rights and satisfaction of other customary closing
conditions. Although no significant difficulties
are anticipated in obtaining such approvals, there
can be no assurance that such approval will be
obtained or as to the timing of receipt of or
conditions set forth therein. See "APPROVAL OF THE
MERGER--Conditions to the Merger" and "--
Regulatory Approvals."
EFFECTIVE TIME............. If the Merger Agreement is approved by the
requisite vote of the stockholders of the Company
and the other conditions to
7
the Merger are satisfied, the Merger will be
effective upon the filing of the Articles of
Merger with the Department of State of the State
of Florida (the "Effective Time"). It is
currently anticipated that the closing of the
Merger will occur on or about July 31, 1998, and
the Effective Time will occur simultaneously
therewith or as soon thereafter as possible.
CERTAIN FEDERAL INCOME
TAX CONSEQUENCES.......... The receipt of cash by a stockholder of the
Company in exchange for shares of the stock of the
Company pursuant to the Merger will be a taxable
transaction to such stockholder for federal income
tax purposes. In general, a stockholder will
recognize a gain or loss equal to the difference,
if any, between (i) the sum of the cash payment
received and (ii) the stockholder's tax basis in
the shares surrendered in the Merger. See
"APPROVAL OF THE MERGER--Certain Federal Income
Tax Consequences."
BECAUSE THE TAX CONSEQUENCES OF THE MERGER MAY
VARY DEPENDING UPON THE PARTICULAR CIRCUMSTANCES
OF EACH STOCKHOLDER AND OTHER FACTORS, EACH
HOLDER OF STOCK OF THE COMPANY IS URGED TO
CONSULT A TAX ADVISOR TO DETERMINE THE PARTICULAR
TAX CONSEQUENCES OF THE MERGER TO SUCH HOLDER
(INCLUDING THE APPLICATION AND EFFECT OF STATE
AND LOCAL INCOME AND OTHER TAX LAWS).
INTERESTS OF CERTAIN PERSONS
IN THE MERGER............. The Spector Family will receive cash
consideration in the Merger in the amount of
approximately $8,420,439, including the cash value
of their options. The rest of the Company's
executive officers and directors will receive
approximately $394,830 in the Merger, including
the cash value of their options. As described
above, the Merger Agreement provides that each
outstanding option will be surrendered in exchange
for a payment to the option holder determined by
multiplying the excess, if any, of the Per Share
Amount over the applicable exercise price per
share of Common Stock underlying such option by
the number of shares of Common Stock underlying
such option, less applicable withholding taxes.
Moreover, certain members of the Company's
management and Board of Directors, including
members of the Spector Family, have interests in
the Merger in addition to their interests as
stockholders and holders of options to acquire
Common Stock. These interests include, among
other things, provisions in the Merger Agreement
relating to the extension of a real estate lease
between the Company, as lessee, and a trust
controlled by the Spector Family, as lessor, for
property at which the Company operates a store
(the "Lease"), and relating to indemnification of
the directors and officers of the Company and its
subsidiaries. In addition, pursuant to the terms
of a consulting and non-competition agreement
(the "Consulting
8
Agreement") between Camelot and Ann S. Lieff, the
Company's President and Chief Executive Officer,
Ms. Lieff will receive certain payments during
the one year period after the Effective Time.
Such cash payments are estimated to total
approximately $178,000. In addition, other
officers and employees, including Rosalind S.
Zacks, will receive payments under a severance
policy agreed to by the Company and Camelot.
The Company's Board of Directors was aware of
these interests and considered them, among other
matters, in approving the Merger Agreement and
the transactions contemplated thereby. See
"APPROVAL OF THE MERGER--Interests of Certain
Persons."
DISSENTERS' RIGHTS......... Under Florida law, the holders of Common Stock
will have dissenters' rights in connection with
the Merger. See "APPROVAL OF THE
MERGER--Dissenters' Rights."
ADDITIONAL INFORMATION REGARDING THE SPECIAL MEETING
MARKET VALUE OF
COMMON STOCK............... The Common Stock is quoted in The Nasdaq SmallCap
Market under the symbol "SPEK." At the close of
business on April 8, 1998 (the last trading day
immediately preceding the April 9, 1998 public
announcement of an unidentified suitor's interest
in the Company), the high and low sales prices for
the Common Stock were $3.00 and $2.06 per share,
respectively. On June 3, 1998, the last trading
day preceding the public announcement of the
proposed Merger, the high and low sales prices of
the Common Stock were $2.75 and $2.625 per share,
respectively. As of June 26, 1998, the high and
low sales prices of the Common Stock were $3.219
and $3.186 per share, respectively. See "Market
Price and Dividend Data," below.
PAYMENT FOR SHARES......... In order to receive the cash payments for their
shares, holders of the Common Stock will be
required after the Effective Time to properly
surrender the stock certificates representing such
shares to the exchange agent (the "Exchange
Agent"). Within four business days after the
Effective Time, the Exchange Agent will mail to
each record holder as of the Effective Time a
letter of transmittal and instructions for use in
effecting the surrender of certificates for
payment of the Merger consideration. The Exchange
Agent will not be obligated to deliver the cash
payment amount to any stockholder of the Company
until such stockholder properly surrenders his or
her certificate or certificates representing
shares of the Common Stock or, in lieu thereof,
executes an appropriate affidavit of loss and
indemnity agreement and bond as may be required by
Camelot. STOCKHOLDERS SHOULD NOT SEND ANY STOCK
CERTIFICATES WITH THE ENCLOSED PROXY CARD.
9
ADDITIONAL INFORMATION..... For additional information regarding the Special
Meeting, please contact Donald A. Molta, Vice
President and Chief Financial Officer of the
Company, at 1666 N.W. 82nd Avenue, Miami, Florida
33126, telephone number: (305) 592-7288.
SELECTED CONSOLIDATED FINANCIAL DATA
The selected financial information presented on the next page under the
captions "Operations Statement Data" and "Balance Sheet Data" at and for each
of the five years in the period ended July 31, 1997 are derived from audited
Consolidated Financial Statements of the Company. The consolidated balance
sheets as of July 31, 1997 and 1996, the related consolidated statements of
operations, changes in stockholders' equity, and cash flows for each of the
three years in the period ended July 31, 1997 and the report thereon, by
Deloitte & Touche LLP, independent auditors, are incorporated by reference into
this Proxy Statement from the Company's Annual Report on Form 10-K for the
fiscal year ended July 31, 1997.
The selected financial information and other data presented below for the
nine-month periods ended and at April 30, 1998 and 1997 are derived from the
unaudited Consolidated Financial Statements of the Company as presented in the
Company's Form 10-Q filed by the Company for the quarter ended April 30, 1998,
which is incorporated by reference into this Proxy Statement. In the Company's
opinion, such financial statements reflect all adjustments, consisting only of
normal recurring adjustments, necessary for a fair presentation of the
financial position, results of operations and cash flows for such periods. The
results of operations for the nine months ended April 30, 1998 are not
necessarily indicative of the results that may be expected for the full year.
The selected financial information should be read in conjunction with the
Company's Consolidated Financial Statements and Notes thereto and "Management's
Discussion and Analysis of Financial Condition and Results of Operations" that
are presented in the Company's reports on Form 10-K for 1997 and Form 10-Q for
the quarters ended October 31, 1997, January 31, 1998 and April 30, 1998, which
are incorporated by reference into this Proxy Statement.
Representatives of Deloitte & Touche LLP are expected to be present at the
Special Meeting and will have an opportunity to make a statement if they desire
to do so and to respond to appropriate questions from stockholders.
10
SPEC'S MUSIC, INC.
SELECTED CONSOLIDATED FINANCIAL DATA
FOR THE
NINE MONTHS ENDED
APRIL 30,
-----------------------
1998 1997
---------- ------------
(IN THOUSANDS, EXCEPT
PER SHARE AND OPERATING
DATA)
OPERATIONS STATEMENT DATA:
Revenues ..................................... $51,021 $ 53,760
Gross Profit ................................. 17,303 18,040
Store operating, general and
administrative expenses ..................... 16,859 20,116
Impairment of long-lived assets .............. -- --
Store closing expenses ....................... -- 270
Restructuring charge ......................... -- 250
Interest (expense) and other income .......... (709) (681)
------- --------
Earnings (loss) before income taxes .......... $ (265) $ (3,277)
Provision (benefit) for income taxes ......... -- (28)
------- --------
Net earnings (loss) .......................... $ (265) $ (3,249)
------- --------
Basic and diluted earnings (loss)
per common share ............................ $ (.05) $ (.62)
-------- --------
Weighted average number of common shares
outstanding--basic .......................... 5,278 5,249
Weighted average number of common shares
outstanding--diluted ........................ 5,278 5,249
FOR THE YEAR ENDED JULY 31,
----------------------------------------------------------------
1997 1996 1995 1994 1993
------------- ------------- ---------- ------------ ------------
(IN THOUSANDS, EXCEPT PER SHARE AND OPERATING DATA)
OPERATIONS STATEMENT DATA:
Revenues ..................................... $ 68,536 $ 77,532 $79,603 $ 78,388 $ 72,733
Gross Profit ................................. 22,258 26,090 28,406 28,590 26,664
Store operating, general and
administrative expenses ..................... 28,036 29,065 26,338 24,136 22,834
Impairment of long-lived assets .............. 1,500 -- -- -- --
Store closing expenses ....................... 898 3,251 -- -- --
Restructuring charge ......................... 215 -- -- -- 3,204
Interest (expense) and other income .......... (905) (918) (410) 44 1,013
--------- --------- ------- -------- --------
Earnings (loss) before income taxes .......... (9,296) (7,144) 1,658 4,498 1,639
Provision (benefit) for income taxes ......... (161) (2,651) 626 1,681 485
--------- --------- ------- -------- --------
Net earnings (loss) .......................... $ (9,135) $ (4,493) $ 1,032 $ 2,817 $ 1,154
--------- --------- ------- -------- --------
Basic and diluted earnings (loss)
per common share ............................ $ (1.74) $ (.86) $ .20 $ .54 $ .22
--------- --------- ------- -------- --------
Weighted average number of common shares
outstanding--basic .......................... 5,252 5,246 5,244 5,213 5,185
Weighted average number of common shares
outstanding--diluted ........................ 5,252 5,246 5,248 5,264 5,195
AT APRIL 30,
-------------------------------
1998 1997
--------------- ---------------
BALANCE SHEET DATA:
Working capital ...................... $ (1,046) $ (153)
Total assets ......................... 28,061 36,368
Capital lease obligation and
long-term debt ...................... -- --
Common stockholders' equity .......... 9,344 15,409
STATISTICAL AND OTHER DATA:
Common stockholders' equity
per share ........................... 1.77 2.94
Cash flow from operating
activities*.......................... 130 2,830
Return on sales*...................... (0.5)% ( 6.0)%
Return on average common
stockholders' equity*................ (2.1)% (17.5)%
OPERATING DATA:
Number of stores ..................... 42 47
Weighted average revenue
per store*........................... $1,178,000 $1,120,000
Square feet of selling space ......... 251,027 288,108
Weighted average revenue per
square foot of selling space*........ $ 198 $ 182
AT JULY 31,
-------------------------------------------------------------------------
1997 1996 1995 1994 1993
--------------- --------------- ------------- ------------- -------------
BALANCE SHEET DATA:
Working capital ...................... $ 4,118 $ 10,822 $ 16,702 $ 12,117 $ 10,779
Total assets ......................... 29,253 42,125 46,497 37,364 31,155
Capital lease obligation and
long-term debt ...................... 6,696 9,654 11,435 67 97
Common stockholders' equity .......... 9,609 18,647 23,168 22,000 18,971
STATISTICAL AND OTHER DATA:
Common stockholders' equity
per share ........................... 1.83 3.55 4.41 4.22 3.66
Cash flow from operating
activities*.......................... 3,253 4,671 380 2,319 4,223
Return on sales*...................... (13.3)% (5.8)% 1.3% 3.6% 1.6%
Return on average common
stockholders' equity*................ (64.7)% (21.5)% 4.6% 13.8% 6.2%
OPERATING DATA:
Number of stores ..................... 45 52 58 55 56
Weighted average revenue
per store*........................... $1,444,000 $1,424,000 $1,385,000 $1,375,000 $1,198,000
Square feet of selling space ......... 266,307 323,323 336,130 280,100 273,400
Weighted average revenue per
square foot of selling space*........ $ 236 $ 227 $ 266 $ 279 $ 242
- ----------------
* For the nine months ended April 30, or the year ended July 31, as indicated
in the above table.
11
MARKET PRICE AND DIVIDEND DATA
The Common Stock is quoted in The Nasdaq SmallCap Market ("Nasdaq") under
the symbol "SPEK." As of the Record Date, there were 311 holders of record of
the Common Stock.
The following table sets forth the high and low bid price information as
quoted by Nasdaq for each quarter during the two most recent fiscal years and
for the first three quarters of fiscal 1998. Such quotations reflect
inter-dealer prices, without retail mark-ups, markdowns or commissions, and may
not necessarily represent actual transactions.
QUARTER ENDED HIGH LOW
- -------------------------- -------- -------
FISCAL 1998
October 31, 1997 ......... 1 1/2 5/8
January 31, 1998 ......... 1 3/4 5/16
April 30, 1998 ........... 2 7/8 1 9/32
FISCAL 1997
October 31, 1996 ......... 2 1
January 31, 1997 ......... 1 5/16 5/8
April 30, 1997 ........... 1 3/16 5/8
July 31, 1997 ............ 15/16 1/2
FISCAL 1996
October 31, 1995 ......... 4 1/8 2 1/2
January 31, 1996 ......... 3 1/8 1 1/4
April 30, 1996 ........... 2 5/8 1 3/4
July 31, 1996 ............ 2 1/8 1 3/8
On April 8, 1998, the last trading day immediately preceding the April 9,
1998 public announcement of an unidentified suitor's interest in the Company,
the high and low sales prices of the Common Stock as quoted in Nasdaq were
$3.00 and $2.06 per share, respectively. On June 3, 1998, the last trading day
preceding the public announcement of the proposed Merger, the high and low
sales prices of the Common Stock were $2.75 and $2.625 per share, respectively.
As of June 26, 1998, the high and low sales prices of the Common Stock were
$3.219 and $3.188 per share, respectively.
The Company has not paid any cash dividends on its Common Stock during the
periods shown, and does not intend to pay dividends in the forseeable future.
12
THE SPECIAL MEETING
This Proxy Statement is being furnished to the stockholders of Spec's
Music, Inc. (the "Company") in connection with the solicitation by the
Company's Board of Directors of proxies for the Special Meeting of Stockholders
(the "Special Meeting") to be held at the Miami Airport Hilton Hotel, 5101 Blue
Lagoon Drive, Miami, Florida, at 10.00 a.m., Eastern Daylight Savings Time, on
Wednesday, July 29, 1998, and at any adjournment or postponement thereof. The
approximate date of mailing of this Proxy Statement and the accompanying proxy
card to the Company's stockholders is June 30, 1998.
USE OF PROXIES AT THE SPECIAL MEETING
Proxies in the accompanying form, if properly executed, received by the
Company prior to the Special Meeting and not revoked prior to the use thereof,
will be voted at the Special Meeting as instructed thereon. Executed proxies
with no instructions indicated thereon will be voted "FOR" the approval of the
Agreement and Plan of Merger dated June 3, 1998 (the "Merger Agreement") among
the Company, Camelot Music Holdings, Inc. ("Camelot"), and SM Acquisition,
Inc., a newly-formed subsidiary of Camelot ("MergerCo"), providing for the
acquisition of the Company by Camelot by means of a merger (the "Merger") of
MergerCo with and into the Company, as set forth below under "APPROVAL OF THE
MERGER." The Board of Directors knows of no matters that are to be presented
for consideration at the Special Meeting other than those described in this
Proxy Statement, but if other matters are properly presented, it is the
intention of the persons designated as proxies on the enclosed proxy card to
vote as proxies with respect to such matters in accordance with their judgment.
REVOCATION OF PROXIES
A proxy may be revoked at any time prior to the use of such proxy in
voting. Any stockholder may revoke a proxy delivered pursuant to this
solicitation by delivery of written notice to the Secretary of the Company, by
submission of a later dated proxy card or by voting in person at the Special
Meeting.
RECORD DATE; STOCKHOLDERS ENTITLED TO VOTE AT THE SPECIAL MEETING
Holders of the Company's common stock, $.01 par value (the "Common
Stock"), of record on the books of the Company as of the close of business on
June 29, 1998 (the "Record Date"), will be entitled to notice of and to vote at
the Special Meeting and any adjournment or postponement thereof. As of the
Record Date, 5,292,230 shares of Common Stock were outstanding.
Holders of Common Stock will vote on the approval of the Merger Agreement,
as well as any other proposal that may be properly submitted to the
stockholders at the Special Meeting, with each share of Common Stock entitled
to one vote.
STOCKHOLDERS SHOULD NOT FORWARD ANY STOCK CERTIFICATES WITH THEIR PROXY
CARDS. IN THE EVENT THE MERGER IS CONSUMMATED, STOCK CERTIFICATES SHOULD BE
DELIVERED IN ACCORDANCE WITH INSTRUCTIONS SET FORTH IN A LETTER OF TRANSMITTAL
THAT WILL BE SENT TO STOCKHOLDERS BY THE EXCHANGE AGENT (AS HEREINAFTER
DEFINED) WITHIN FOUR BUSINESS DAYS AFTER THE EFFECTIVE TIME (AS HEREINAFTER
DEFINED).
QUORUM; VOTE REQUIRED FOR APPROVAL
As set forth in the Bylaws of the Company, the presence, in person or by
proxy, of shares representing at least a majority of the votes entitled to be
cast by the Company's outstanding Common Stock is necessary to constitute a
quorum for the transaction of business at the Special Meeting. Abstentions and
broker non-votes are included in the calculation of the number of votes
represented at a meeting for purposes of determining whether a quorum has been
achieved.
13
The Florida Business Corporation Act requires that the Merger Agreement be
approved by a majority of the votes entitled to be cast by the holders of
record on the Record Date of the outstanding shares of the Common Stock. As of
the Record Date, each of Ann S. Lieff, Martin W. Spector and Rosalind S. Zacks
(the "Spector Family"), who are directors and principal stockholders of the
Company, beneficially owned 49.3% of the Company's outstanding Common Stock
(excluding shares underlying options), and have agreed to vote their shares
(other than shares owned by the Company's 401(k) plan and shares owned by
members of the Spector Family as fiduciaries for minor children (together, the
"Excluded Securities"), which represent approximately 2.9% of the outstanding
Common Stock) in favor of the Merger Agreement. The directors and executive
officers of the Company (including the Spector Family) beneficially owned as of
the Record Date (excluding shares underlying options) approximately 49.4% of
the Company's outstanding Common Stock and have the right to vote shares (other
than the Excluded Securities) equal to approximately 46.5% of the Company's
outstanding Common Stock. In addition to the agreement of the members of the
Spector Family to vote their shares (other than the Excluded Securities) for
approval of the Merger Agreement, the Company believes that all of the shares
held by the other directors and executive officers and the Excluded Securities
will be voted for approval of the Merger Agreement. Accordingly, approval of
the Merger Agreement will require the affirmative vote of the holders of an
additional 0.6% of the outstanding shares of Common Stock entitled to vote at
the Special Meeting in order for the Merger Agreement to be approved. See
"APPROVAL OF THE MERGER--Interests of Certain Persons" and "SECURITY OWNERSHIP
OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT."
With respect to approval of the Merger Agreement, abstentions and failures
to vote (including broker non-votes and the failure to return the enclosed
proxy card) will have the same effect as votes against the Merger Agreement.
Accordingly, the Board of Directors urges all stockholders to complete, date
and sign the accompanying proxy card and return it promptly in the enclosed
postage-paid envelope.
SOLICITATION
The Company will bear the cost of solicitation of proxies. In addition to
the use of the U.S. mail, directors, officers and regular employees of the
Company may solicit proxies personally or by telephone, facsimile or telegram.
Such persons will receive no additional compensation. The Company will
reimburse custodians, brokerage houses, nominees and other fiduciaries for
their reasonable expenses in sending the proxy materials to their principals.
APPROVAL OF THE MERGER
GENERAL
The following information with respect to the Merger between the Company
and Camelot does not purport to be complete and is qualified in its entirety by
reference to the Merger Agreement between the Company and Camelot, a copy of
which is set forth in Appendix A to this Proxy Statement and incorporated
herein by reference. ALL STOCKHOLDERS ARE URGED TO READ THE MERGER AGREEMENT
CAREFULLY.
DESCRIPTION OF THE COMPANY
The Company, founded in 1948 and headquartered in Miami, Florida,
currently operates 42 stores in Florida and Puerto Rico. The Company is among
the most highly recognized and largest retailers of specialty music in the
Miami/Fort Lauderdale metropolitan area and Florida's Gold Coast. Its
particular strength lies in the diversity of products it offers, including
audio compact discs; pre-recorded cassette tapes; pre-recorded video cassettes,
laser discs and digital video discs ("DVDs"); blank audio and video tapes; a
wide range of audio and video accessories; and boutique items such as t-shirts,
posters and collectibles.
14
The overwhelming majority of the Company's 42 stores are located in
Florida, with the remaining four located throughout the island of Puerto Rico.
The design and format of each of the Company's stores has been tailored
specifically to best serve the needs of its customers in a specific locale. The
Company operates 16 stores in enclosed traditional shopping malls and 26 stores
in shopping centers and free-standing downtown locations. Of these, 14 are
"superstores," which typically span 7,000-10,000 square feet of retail space.
Additionally, the Company's "megastores" in Miami Beach and the Sawgrass Mills
Mall each are comprised of 20,000 square feet or more. The principal executive
offices of the Company are located at Spec's Music, Inc., 1666 N.W. 82nd
Avenue, Miami, Florida, 33126, and the telephone number is (305) 592-7288.
DESCRIPTION OF CAMELOT
Camelot is one of the largest mall-based retailers of pre-recorded music
and accessories in the United States, operating more than 450 stores in 37
states with a strong geographic concentration of stores in the eastern United
States. Camelot offers a broad range of pre-recorded music, including compact
discs, cassettes, prerecorded video cassettes, DVDs and accessories such as
blank audio and video cassettes and music and tape care products. Camelot's
merchandising strategy seeks to position Camelot as the mall-based destination
store for music. Camelot's stores average 4,200 square feet in size and offer
over 20,000 stock keeping units, including both high-volume Billboard Top 100
titles and a broad offering of older releases and diverse music categories.
Camelot believes its merchandising strategy enables it to attract a broad
consumer base thereby reducing its dependence on any one genre of music and
contributing to its relatively high store productivity. Camelot believes its
broad product offering, supported by a high level of customer service from its
courteous and knowledgeable sales force, combined with its competitive pricing
strategy and attractive locations within regional malls, positions Camelot to
benefit from the favorable trends occurring in the pre-recorded music industry.
On August 9, 1996, Camelot filed a petition for protection under Chapter
11 of the United States bankruptcy laws. On December 12, 1997, Camelot's plan
of reorganization was confirmed by the United States Bankruptcy Court for the
District of Delaware and became effective on January 27, 1998. Prior to and
during Camelot's reorganization, Camelot was able to modify its operations,
invest in a corporate infrastructure and significantly improve its financial
situation. Camelot was also able to substantially improve the competitive
positioning of its business. Camelot invested over $8 million in the
development and implementation of sophisticated merchandising, distribution,
replenishment and financial software packages, all of which were operational by
the end of 1997. The principal executive offices of Camelot are located at
Camelot Music Holdings, Inc., 8000 Freedom Avenue N.W., N. Canton, Ohio 44720,
and its telephone number is (330) 494-2282.
THE MERGER
BACKGROUND OF AND REASONS FOR THE MERGER
In the fall of 1994, the Company engaged PaineWebber Incorporated
("PaineWebber") as its exclusive financial advisor. As part of its engagement,
PaineWebber was directed by the Company's Board of Directors to solicit
interest from a select group of purchasers approved by the Board with respect
to a potential sale of the Company. In November 1994, the Company publicly
announced that it had engaged PaineWebber to advise it on the possible sale of
the Company and to review strategic and financial alternatives. PaineWebber
contacted a number of potential purchasers, including both strategic and
financial purchasers, and received several indications of interest, including a
preliminary indication of interest from Camelot. After further discussions with
the interested parties, the Board of Directors declined to pursue a
transaction. PaineWebber's engagement was terminated when the Company publicly
announced in March 1995 that it had ended its exploration of the sale of the
Company and had decided to remain an independent company.
On September 27, 1996, pursuant to an engagement letter (the "PaineWebber
Engagement Letter"), the Company retained PaineWebber again to provide
investment banking services and provide
15
advice on strategic and financial alternatives. With the Board's authorization,
PaineWebber resumed conversations in early 1997 with a select number of parties
about their potential interest in the Company. In early 1998, several companies
in the Company's industry and one private individual submitted proposals to
complete business combinations with the Company. The proposals ranged from $.75
to $3.00 per share of the Company's Common Stock, with Camelot's proposal,
which was submitted on March 16, 1998, at $3.00 per share. Following discussion
of the proposals by the Company, on March 31, 1998 Camelot delivered a proposed
letter of intent to the Company which contained an increased price of $3.30 per
share. The letter of intent was non-binding and subject to Camelot's
satisfactory completion of a due diligence examination of the Company and the
successful negotiation of a definitive merger agreement with the Company. After
evaluating all of the proposals, the Company decided that it wished to explore
Camelot's proposal further. On April 1, 1998, the Board of Directors discussed
the Camelot proposal and decided that, although it was interested in the basic
proposal, it did not wish to enter into a letter of intent until certain
contingencies were satisfied. Accordingly, the Board suggested that Camelot
conduct its due diligence examination of the Company prior to entering into a
letter of intent. Camelot rejected this alternative. As a compromise, on April
7, 1998, the Company entered into a 45-day exclusive dealing agreement with
Camelot to allow Camelot to conduct a due diligence examination of the Company
and negotiate the terms of a business combination.
Camelot began its due diligence examination of the Company immediately
after such compromise was reached. Such examination continued throughout the
month of April 1998. In late April 1998, Camelot contacted the Company to
discuss the form of the proposed business combination and the parties decided
to pursue a merger with proxy solicitation. On April 30, 1998, the Company
received Camelot's first draft of the Merger Agreement. This draft was reviewed
by management and the Board of Directors. Camelot also advised the Company that
it would require the Voting Agreement and the Consulting Agreement, and the
Company agreed in principle to such agreements. The Board also expressed
concern that Camelot and the Company agree upon a severance arrangement for any
of the Company's headquarters and distribution center employees who would not
be retained by Camelot.
On May 19, 1998, after the Company received a second draft of the Merger
Agreement, Camelot requested that the Company extend the term of the exclusive
dealing agreement, which was scheduled to expire on May 22, 1998. Although the
Company was concerned that any transaction with Camelot proceed expeditiously
and was thus reluctant to extend such agreement, after further consideration of
Camelot's efforts to expedite the transaction and Camelot's cooperation in its
due diligence review, the Board of Directors of the Company unanimously agreed
to extend the exclusive dealing agreement until May 30, 1998. On May 29, 1998,
the Board of Directors met to formally consider the Camelot proposal and Merger
Agreement. Prior to the meeting, the Board had been given a package that
included the then current draft of the Merger Agreement and exhibits. Counsel
provided an update on negotiated changes to these documents and the issues that
remained open for negotiation. The Board reviewed with counsel the terms of the
draft Merger Agreement and adopted resolutions approving the Merger subject to
successfully resolving certain open issues. The Board also agreed to again
extend the Company's exclusive dealing agreement with Camelot until June 8,
1998, to permit the parties adequate time to finalize the remaining issues with
respect to the Merger Agreement. The Company and Camelot resolved the open
issues and executed the Merger Agreement on June 3, 1998.
At the May 29, 1998 meeting, the Board also received PaineWebber's
analysis of the transaction. The directors received a preliminary analysis
regarding the similarities and differences of the Company and Camelot, the
principal terms of the proposed Merger, a valuation of the transaction, an
overview of the Company's operating statistics and historical market share
price and its relative market performance. PaineWebber also explained its
valuation methodology and orally delivered its opinion to the Board of
Directors that the cash consideration to be received by the Company's
stockholders was fair from a financial point of view. PaineWebber subsequently
confirmed its findings in a written opinion dated June 3, 1998 (the
"PaineWebber Opinion"). The PaineWebber Opinion is set forth in Appendix B to
this Proxy Statement.
The Board then discussed the Company's recent financial history, liquidity
issues, and the recent positive developments in the music retailing industry.
The Board also questioned why the Company had
16
not performed as well as some of its competitors during the recent turnaround
in the music retailing industry. PaineWebber explained to the Board that the
Company's operating margins were below that of its competitors and that the
Company lacked the critical mass necessary to compete in a consolidated
industry. The Board also discussed whether, based on the Company's internal
projections, it could perform as well independently as it could if it was
combined into another entity such as Camelot. Based on the price Camelot was
offering for the Company and the analysis provided by PaineWebber, the Board
concluded that it did not believe that the market price of the Common Stock
would increase a sufficient amount in the forseeable future to allow the
stockholders of the Company to obtain the premium of 65% per share that Camelot
was offering over the price at which the Common Stock had traded on the day
prior to Camelot's offer of $3.30 per share.
In its deliberations concerning the Merger, the Board of Directors
considered, among other factors, (i) the business condition and prospects of
the Company in light of the increased competition and consolidation faced by
the Company in its principal market areas; (ii) the current and historical
market prices of the Company's Common Stock, and the relationship of the Per
Share Amount to premiums paid in other similar business combinations; and (iii)
the opinion of PaineWebber that the Per Share Amount to be received in the
Merger is fair from a financial point of view to the holders of the Common
Stock. In evaluating the Merger, the Board of Directors generally considered
the going concern value and the liquidation value of the Company; however, the
Board of Directors did not arrive at any specific estimates for these values,
and did not obtain any appraisals for any assets of the Company. The Board of
Directors also determined that a higher price could be secured by selling the
Company's assets as a going concern because the Company has valuable intangible
assets, including its name.
The Board of Directors also recognized that the Merger will terminate the
stockholders' equity participation in any future growth of the Company; and the
Board weighed this fact against the benefits of the Merger before determining
to recommend that stockholders vote to approve and adopt the Merger Agreement.
RECOMMENDATION OF THE COMPANY'S BOARD OF DIRECTORS
THE BOARD OF DIRECTORS BELIEVES THAT THE TERMS OF THE MERGER AGREEMENT ARE
FAIR TO AND IN THE BEST INTERESTS OF THE COMPANY AND ITS STOCKHOLDERS.
ACCORDINGLY, THE BOARD OF DIRECTORS HAS UNANIMOUSLY APPROVED THE TERMS OF THE
MERGER AGREEMENT AND UNANIMOUSLY RECOMMENDS THAT THE STOCKHOLDERS VOTE "FOR"
APPROVAL OF THE MERGER AGREEMENT.
OPINION OF THE COMPANY'S FINANCIAL ADVISOR
THE FULL TEXT OF THE PAINEWEBBER OPINION, WHICH SETS FORTH THE ASSUMPTIONS
MADE, PROCEDURES FOLLOWED, MATTERS CONSIDERED AND LIMITATIONS ON THE REVIEW
UNDERTAKEN, IS ATTACHED AS APPENDIX B TO THIS PROXY STATEMENT. HOLDERS OF THE
COMPANY'S COMMON STOCK ARE URGED TO READ SUCH OPINION CAREFULLY AND IN ITS
ENTIRETY. THE SUMMARY OF THE PAINEWEBBER OPINION SET FORTH IN THIS PROXY
STATEMENT IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE FULL TEXT OF SUCH
OPINION.
The Company retained PaineWebber as its exclusive financial advisor in
connection with the Merger. In connection with such engagement, the Company
requested PaineWebber render an opinion as to whether or not the Per Share
Amount to be received in the Merger is fair, from a financial point of view, to
the holders of Common Stock.
In connection with the Company's Board of Directors' consideration of the
draft Merger Agreement, PaineWebber delivered the PaineWebber Opinion to the
effect that, as of June 3, 1998 and based upon its review and assumptions and
subject to the limitations set forth in the PaineWebber Opinion, the Per Share
Amount to be received in the Merger is fair, from a financial point of view, to
the holders of Common Stock. The PaineWebber Opinion was prepared for the use
of the Board of Directors of the Company and does not constitute a
recommendation to any holder of Common Stock
17
as to how any such holder should vote with respect to the Merger. The
PaineWebber Opinion does not address the relative merits of the Merger and
other transactions or business strategies discussed by the Board of Directors
of the Company as alternatives to the Merger or the decision of the Board of
Directors of the Company to proceed with the Merger. The Company did not place
any limitations upon PaineWebber with respect to the procedures followed or
factors considered in rendering the PaineWebber Opinion.
In arriving at its opinion, PaineWebber, among other things, (i) reviewed,
among other public information, the Company's annual reports, Forms 10-K and
related financial information for the three fiscal years ended July 31, 1997
and the Company's Form 10-Q and the related unaudited financial information for
the six months ended January 31, 1998; (ii) reviewed certain information,
including financial forecasts, relating to the business, earnings, cash flow,
assets and prospects of the Company furnished to PaineWebber by the Company;
(iii) conducted discussions with members of senior management of the Company
concerning its businesses and prospects; (iv) reviewed the historical market
prices and trading activity for the Common Stock with those of certain
publicly-traded companies which PaineWebber deemed to be relevant; (v) compared
the financial position and operating results of the Company with those of
certain publicly-traded companies which PaineWebber deemed to be relevant; (vi)
compared the proposed financial terms of the Merger with the financial terms of
certain other business combinations which PaineWebber deemed to be relevant;
(vii) reviewed the draft of the Merger Agreement dated May 18, 1998; and (viii)
reviewed such other financial studies and analyses and performed such other
investigations and took into account such other matters as PaineWebber deemed
to be necessary, including PaineWebber's assessment of regulatory, general
economic, market and monetary conditions.
In preparing the PaineWebber Opinion, PaineWebber relied on the accuracy
and completeness of all information that was publicly available, supplied or
otherwise communicated to PaineWebber by or on behalf of the Company, or was
otherwise reviewed by PaineWebber and PaineWebber did not assume any
responsibility to independently verify such information. PaineWebber assumed
that the financial forecasts examined by it were reasonably prepared on bases
reflecting the best currently available estimates and good faith judgments of
the management of the Company as to the future performance of the Company.
PaineWebber also relied upon assurances of the management of the Company that
they were unaware of any facts that would make the information or financial
forecasts provided to PaineWebber incomplete or misleading. PaineWebber also
assumed, with the consent of the Company, that all material assets and
liabilities (contingent or otherwise, known or unknown) of the Company are as
set forth in the financial statements. PaineWebber did not make an independent
evaluation or appraisal of the assets or liabilities (contingent or otherwise)
of the Company, nor was PaineWebber furnished with any such evaluations or
appraisals. The PaineWebber Opinion is based upon regulatory, general economic,
market and monetary conditions existing on the date thereof. Furthermore,
PaineWebber expressed no opinion as to the price or trading ranges at which the
Common Stock will trade from the date of the PaineWebber Opinion. It should be
understood that, although subsequent developments may affect the PaineWebber
Opinion, PaineWebber does not have any obligation to update, revise or reaffirm
its opinion.
The preparation of a fairness opinion involves various determinations as
to the most appropriate and relevant methods of financial analyses and the
application of those methods to the particular circumstances and, therefore,
such an opinion is not readily susceptible to partial analysis or summary
description. PaineWebber did not place particular reliance or weight on any
individual analysis. Accordingly, PaineWebber believes that its analysis must
be considered as a whole and that considering any portion of such analysis and
of the factors considered, without considering all analyses and factors, could
create a misleading or incomplete view of the process underlying the
PaineWebber Opinion. In its analyses, PaineWebber made numerous assumptions
with respect to industry performance, general business and economic conditions
and other matters, many of which are beyond the control of the Company. Any
estimates contained in these analyses are not necessarily indicative of actual
values or predictive of future results or values, which may be significantly
more or less favorable than as set forth therein. In addition, analyses
relating to the value of businesses do not purport to be appraisals or to
18
reflect the prices at which businesses may actually be sold. Accordingly, such
analyses and estimates are inherently subject to substantial uncertainty and
neither the Company nor PaineWebber assumes responsibility for the accuracy of
such analyses and estimates.
The following paragraphs summarize the presentation to the Company's Board
of Directors by PaineWebber on May 29, 1998 in connection with rendering the
PaineWebber Opinion:
SELECTED COMPARABLE PUBLIC COMPANY ANALYSIS: Using publicly available
information, PaineWebber compared selected historical and projected financial
and operating performance data of the Company to the corresponding data of a
group of comparable companies. The comparable companies included three
specialty music retail companies: Musicland Stores Corporation; National Record
Mart, Inc.; and Trans World Entertainment Corporation (collectively, the
"Comparable Companies").
PaineWebber calculated the Comparable Companies' multiples of enterprise
value (equity value, as hereinafter defined, plus preferred stock and debt less
cash and cash equivalents) to latest twelve months ("LTM") revenue, total
stores, LTM earnings before interest, taxes, depreciation and amortization
("EBITDA"), LTM earnings before interest and taxes ("EBIT") and calculated the
Comparable Companies' multiples of equity value (share price as of May 26, 1998
multiplied by shares outstanding including in-the-money options and warrants)
to book value of equity. The Comparable Companies' ranges of multiples of LTM
revenue, total stores, LTM EBITDA, LTM EBIT and book value of equity were
.44x-l.l5x, $411,581-$1,211,809, 7.6x-13.lx, 12.7x-16.8x and 2.88x-6.07x,
respectively. PaineWebber calculated comparable multiples of the Company's LTM
revenue, total stores, LTM EBITDA, LTM EBIT and book value of equity to be .30x
(as compared to .44x-1.15x), $465,681 (as compared to $411,581-$1,211,809), not
meaningful, not meaningful and 1.36x (as compared to 2.88x-6.07x),
respectively. In addition, PaineWebber calculated comparable multiples of the
Company's 1998 projected financial and operating performance (estimated by the
Company's management) including revenue, total stores, EBITDA and EBIT to be
.30x (as compared to .44x-1.15x), $465,681 (as compared to
$411,581-$l,211,809), 8.lx (as compared to 7.6x-13.lx) and not meaningful,
respectively.
SELECTED COMPARABLE TRANSACTIONS ANALYSIS: Using publicly available
information, PaineWebber compared the financial terms of the Merger to the
corresponding data of selected mergers and acquisitions involving specialty
music retailing companies. The selected mergers and acquisitions included
(acquirer/target): Grammy Corp. / Wherehouse Entertainment, Inc.; Blockbuster
Entertainment Corporation / Sound Warehouse and Music Plus; Blockbuster
Entertainment Corporation / Super Club Retail Entertainment Corporation;
Investor Group / Live Entertainment Inc.; Hollywood Entertainment Corporation /
Title Wave Stores, Inc.; and Trans World Entertainment Corporation /
Strawberries Inc. (collectively, the "Comparable Transactions").
PaineWebber reviewed the consideration paid (based, with respect to
acquisitions of public companies, on stock prices on the day prior to the
announcement of the transaction) in the Comparable Transactions and calculated
the Comparable Transactions' multiples of enterprise value paid to the target's
LTM (latest twelve months prior to the announcement of the transaction)
revenue, total stores, LTM EBITDA and LTM EBIT and calculated the Comparable
Transactions' multiples of equity value paid to the target's book value of
equity. The Comparable Transactions' ranges of multiples of LTM revenue, total
stores, LTM EBITDA, LTM EBIT and book value of equity were .37x-.56x, $233,333-
$836,743, 3.2x-5.2x, 13.6x-20.5x and 1.30x-2.00x, respectively. PaineWebber
calculated comparable multiples of the Company's LTM revenue, total stores, LTM
EBITDA, LTM EBIT and book value of equity to be .38x (as compared to
.37x-.56x), $595,154 (as compared to $233,333-$836,743), not meaningful, not
meaningful and 1.9lx (as compared to 1.30x-2.00x), respectively. In addition,
PaineWebber calculated comparable multiples of the Company' s 1998 projected
financial and operating performance (estimated by the Company's management)
including revenue, total stores, EBITDA and EBIT to be .38x (as compared to
.37x-.56x), $595,154 (as compared to $233,233-$836,743), 10.4x (as compared to
3.2x-5.2x) and not meaningful, respectively.
DISCOUNTED CASH FLOW ANALYSIS: PaineWebber analyzed the Company based on
an unleveraged discounted cash flow analysis of the projected financial
performance of the Company. Such projected
19
financial performance was based upon a five-year forecast for the Company
provided to PaineWebber. The discounted cash flow analysis determined the
discounted present value of the unleveraged after-tax cash flows generated over
the five-year period and then added a terminal value based upon ranges of
multiples of revenue and EBITDA of .30x-.60x and 7.5x-9.0x, respectively. The
unleveraged after-tax cash flows and terminal value were discounted using a
range of discount rates of 11.0%-15.5%. These discount rates were determined
through the use of the capital asset pricing model and, in conducting its
analysis, PaineWebber reviewed with the Company's management the Company's
projected financial performance and the risks associated with the Company's
business to derive what PaineWebber believes are appropriate discount rates.
PREMIUMS PAID ANALYSIS: PaineWebber reviewed purchase price per share
premiums paid in 122 publicly-disclosed cash majority acquisitions involving
non-financial companies announced and not withdrawn from January 1, 1995
through May 26, 1998 with a range of equity values between $10.0 million and
$50.0 million. PaineWebber reviewed the premiums paid to the target's closing
stock price one day prior to the announcement of the acquisition, one week
prior to the announcement of the acquisition and one month prior to the
announcement of the acquisition. The ranges of premiums paid (median and mean
premiums of the 122 acquisitions, respectively) to the target's closing stock
price one day prior to the announcement of the acquisition, one week prior to
the announcement of the acquisition and one month prior to the announcement of
the acquisition were 27.3%-28.5%, 29.7%-35.3% and 33.3%-37.3%, respectively.
PaineWebber reviewed the closing stock prices of the Common Stock one day, one
week and one month prior to March 31, 1998, the date on which Camelot proposed
the Merger Consideration, resulting in implied premiums per share of 65.0%,
99.2% and 60.0%, respectively.
The Company selected PaineWebber to be its exclusive financial advisor in
connection with the Merger because PaineWebber is a prominent investment
banking and financial advisory firm with experience in the valuation of
businesses and their securities in connection with mergers and acquisitions,
negotiated underwritings, secondary distributions of securities, private
placements and valuations for corporate purposes.
Pursuant to the PaineWebber Engagement Letter, the Company has agreed to
pay PaineWebber an aggregate fee of $250,000 for its services in connection
with the Merger. In addition, PaineWebber will be reimbursed for all of its
related out-of-pocket expenses. The fee is payable to PaineWebber upon
consummation of the Merger less certain amounts paid prior to such closing for
the PaineWebber Opinion and for financial advisory services rendered pursuant
to the PaineWebber Engagement Letter. The Company also agreed, under separate
agreement, to indemnify PaineWebber, its affiliates and each of its directors,
officers, agents and employees and each person, if any, controlling PaineWebber
or any of its affiliates against certain liabilities, including liabilities
under federal securities laws.
In the past, PaineWebber and its affiliates have provided financial
advisory services and financing services for the Company and have received fees
for rendering these services. Neither PaineWebber nor its affiliates has
received any other compensation from the Company during the past two years for
financial or other advisory services. In the ordinary course of PaineWebber's
business, PaineWebber may actively trade the securities of the Company and
Camelot for its own account and for the accounts of its customers and,
accordingly, may at any time hold long or short positions in such securities.
THE MERGER AGREEMENT
The following is a summary of the material terms of the Merger Agreement,
a copy of which is included as Appendix A to this Proxy Statement. All
references to and summaries of the Merger Agreement in this Proxy Statement are
qualified in their entirety by reference to the complete text of the Merger
Agreement.
EFFECTIVE TIME. Subject to the provisions of the Merger Agreement, the
Merger will become effective upon the filing of the Articles of Merger with the
Department of State of the State of Florida
20
(the "Effective Time"), which shall occur on the second business day after
satisfaction or waiver of the conditions set forth in the Merger Agreement
unless another date is agreed to in writing by the parties. It is currently
anticipated that the closing of the Merger will occur on or about July 31,
1998, and the Effective Time will occur simultaneously therewith or as soon
thereafter as possible.
MERGER CONSIDERATION
COMMON STOCK. At the Effective Time, each share of Common Stock
outstanding immediately prior to the Effective Time, other than shares of
Common Stock held by stockholders who properly elect to dissent from the
Merger, will be converted into the right to receive $3.30 in cash (the "Per
Share Amount"), without interest.
STOCK OPTIONS. At the Effective Time, each outstanding option to purchase
shares of Common Stock will be surrendered and the holder thereof will be paid
an amount in cash, without interest, equal to the excess of the Per Share
Amount, $3.30, over the per share exercise price of such option, multiplied by
the number of shares of Common Stock underlying such option and less applicable
withholding taxes. As of the Record Date, present and former executive
officers, directors and employees held outstanding options to purchase an
aggregate of 824,276 shares of Common Stock with an average exercise price of
$1.54 per share and will be entitled to receive cash payments of approximately
$1,652,563 pursuant to this provision of the Merger Agreement.
CONDITIONS TO THE MERGER
Pursuant to the Merger Agreement, the respective obligations of the
Company and Camelot to consummate and effectuate the Merger are subject to the
fulfillment or waiver at or prior to the Effective Time of certain conditions,
including, without limitation, the following: (i) approval of the Merger
Agreement by the holders of a majority of the votes entitled to be cast at the
Special Meeting by holders of the outstanding shares of Common Stock; (ii) the
expiration or early termination of the waiting period applicable to the Merger
under the HSR Act (which early termination occurred on June 16, 1998); and
(iii) the absence of any order, injunction or decree issued by any court or
agency of competent jurisdiction or other restraint or prohibition preventing
the consummation of the Merger or any other transaction contemplated by the
Merger Agreement or any statute, rule, regulation, order, injunction or decree
enacted, entered, promulgated or enforced by any regulatory entity that
prohibits, restricts or makes illegal consummation of the Merger, and the
absence of any governmental action seeking to enjoin the Merger. Neither the
Company nor Camelot is currently aware of any conditions to the Merger that are
expected to be unfulfilled or waived at or prior to the Effective Time.
The Merger Agreement also provides that each party's obligation to
consummate and effectuate the Merger is subject to the fulfillment in all
material respects as of the Effective Time, or waiver by such party, of the
representations and warranties of the other party made pursuant to the Merger
Agreement, and provides that the obligations, covenants and agreements of the
other party to be performed pursuant to the Merger Agreement must have been
duly performed and complied with in all material respects as of the Effective
Time. Camelot's obligation to consummate and effectuate the Merger is also
subject to it having obtained evidence of consents, permits and approvals of
all third parties, no material adverse change having occurred with respect to
the Company since January 31, 1998, the surrender of unexpired outstanding
stock options to purchase Common Stock by all holders and the election by the
holders of not more than 10% of the Company's Common Stock to demand
dissenters' rights.
REGULATORY APPROVALS
As a result of the proposed Merger, the Company and Camelot were required
to file a notification with the Department of Justice (the "DOJ") and the
Federal Trade Commission (the "FTC") under the HSR Act. The FTC and DOJ granted
early termination of the thirty-day waiting period with respect to such
notification effective as of June 16, 1998. As a result of such action, the
Company and Camelot may proceed with the Merger without any additional DOJ or
FTC approval.
21
The Company is not aware of any other regulatory approvals that would be
required for consummation of the Merger and the transactions contemplated
thereby except as described above. Should any such approval be required, it is
contemplated at this time that such approval would be sought. There can be no
assurances, however, that any such approval, if required, could be obtained.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
THE FOLLOWING IS A SUMMARY OF CERTAIN ANTICIPATED FEDERAL INCOME TAX
CONSEQUENCES OF THE MERGER TO STOCKHOLDERS OF THE COMPANY. THE COMPANY HAS NOT
OBTAINED AN OPINION OF TAX COUNSEL AS TO ANY OF THE ANTICIPATED TAX
CONSEQUENCES OF THE MERGER. THE DISCUSSION SET FORTH BELOW CONSTITUTES ONLY A
GENERAL DESCRIPTION OF THE MATERIAL FEDERAL INCOME TAX CONSEQUENCES OF THE
MERGER TO THE STOCKHOLDERS OF THE COMPANY, WITHOUT CONSIDERATION OF THE FACTS
AND CIRCUMSTANCES OF THE SITUATION OF EACH OF THE COMPANY'S STOCKHOLDERS.
THEREFORE, EACH STOCKHOLDER OF THE COMPANY IS URGED TO CONSULT HIS OR HER TAX
OR FINANCIAL ADVISORS AS TO THE MATTERS DESCRIBED HEREIN AND ALSO AS TO ANY
STATE, LOCAL, FOREIGN OR OTHER TAX CONSEQUENCES ARISING AS A RESULT OF THE
MERGER.
The conversion of a stockholder's shares of Company Common Stock into the
right to receive cash pursuant to the Merger will constitute a taxable
transaction to such stockholder for federal income tax purposes. In general, a
stockholder will recognize a gain or loss equal to the difference, if any,
between (i) the sum of the cash payment and (ii) the stockholder's tax basis in
such shares. Any gain or loss will be treated as capital gain or loss if the
stock exchanged was held as a capital asset by the holder.
The cash payments due to the holders of the Company's Common Stock (other
than certain exempt entities and persons) upon the exchange thereof pursuant to
the Merger will be subject to a 31% backup withholding tax by the Exchange
Agent (as hereinafter defined) under federal income tax law unless certain
requirements are met. Generally, the Exchange Agent will be required to deduct
and withhold the tax if (i) the stockholder fails to furnish a taxpayer
identification number ("TIN") to the Exchange Agent or fails to certify under
penalty of perjury that such TIN is correct, or (ii) the Internal Revenue
Service ("IRS") notifies the Exchange Agent that the TIN furnished by the
stockholder is incorrect. Any amounts withheld by the Exchange Agent in
collection of the backup withholding tax will reduce the federal income tax
liability of the stockholders from whom such tax was withheld. The TIN of an
individual stockholder is that stockholder's Social Security number.
No ruling has been or will be requested from the IRS as to any of the tax
effects to stockholders of the Company of the transactions discussed in this
Proxy Statement, and no opinion of counsel has been or will be rendered to the
Company's stockholders with respect to any of the tax effects of the Merger.
BECAUSE THE TAX CONSEQUENCES OF THE MERGER MAY VARY DEPENDING UPON THE
PARTICULAR CIRCUMSTANCES OF EACH STOCKHOLDER AND OTHER FACTORS, EACH HOLDER OF
STOCK OR OPTIONS OF THE COMPANY IS URGED TO CONSULT A TAX ADVISOR TO DETERMINE
THE PARTICULAR TAX CONSEQUENCES OF THE MERGER TO SUCH HOLDER (INCLUDING THE
APPLICATION AND EFFECT OF STATE, LOCAL, FOREIGN OR OTHER TAX LAWS).
PAYMENT FOR SHARES
In order to receive cash payment for their shares, holders of shares of
the Company's Common Stock will be required to properly surrender the stock
certificates representing such shares to the Exchange Agent, which will be The
Bank of New York (the "Exchange Agent"). Within four business days after the
Effective Time, the Exchange Agent will mail to each record holder of Common
Stock as of the Effective Time a form letter of transmittal and instructions
for use in effecting the surrender of certificates for payment of the cash
consideration to be received in the Merger. The Exchange Agent will not be
obligated to deliver the cash payment amount until a stockholder of the Company
properly surrenders his or her certificate or certificates representing shares
of Common Stock or, in lieu thereof, executes an appropriate affidavit of loss
and indemnity agreement and bond as may be required by Camelot. STOCKHOLDERS
SHOULD NOT SEND ANY STOCK CERTIFICATES WITH THE ENCLOSED PROXY CARD.
22
CONDUCT OF BUSINESS PENDING THE MERGER
Except as provided in the Merger Agreement, during the period from the
date of the Merger Agreement to the Effective Time, the Company and its
subsidiaries have agreed to act and carry on their respective businesses in the
usual, regular and ordinary course of business consistent with past practice
and use their respective reasonable best efforts to preserve intact their
current business organizations, keep available the services of their current
officers and employees and preserve their relationships with landlords,
customers, suppliers, licensors, licensees, advertisers, distributors, lenders
and others having business dealings with them and to preserve goodwill.
Generally, the Merger Agreement further provides that during the period from
the date of the Merger Agreement to the Effective Time, neither the Company nor
any of its subsidiaries shall, without the prior written consent of MergerCo or
except as provided in the Merger Agreement, do any of the following:
(a) declare, set aside or pay dividends on its capital stock, other than dividends paid to its parent;
(b) split, combine or reclassify any of its capital stock or issue or authorize the issuance of any
other securities;
(c) purchase, redeem or otherwise acquire any securities of the Company or any of its
subsidiaries, except for the acquisition of shares of Common Stock from holders of stock
options in full or partial payment of the exercise price payable upon exercise of outstanding
stock options;
(d) authorize for issuance, issue, grant, deliver, sell, pledge or otherwise encumber any of its
securities or the capital stock of any of its subsidiaries (other than the issuance of Common
Stock upon the exercise of outstanding stock options in accordance with their terms);
(e) in the case of the Company, amend its Articles of Incorporation, By-Laws or other
comparable charter or organizational documents;
(f) acquire or agree to acquire any business or any corporation, partnership, joint venture,
association or other business organization or division thereof material to the Company;
(g) sell, lease, license, mortgage or otherwise encumber or subject to any lien or otherwise
dispose of any of its properties or assets, except for sales of inventory or the use of supplies,
in either case in the ordinary course of business;
(h) incur any indebtedness for borrowed money or guarantee any such indebtedness of another
person, issue or sell any debt securities or warrants or other rights to acquire any debt
securities of the Company or any of its subsidiaries, guarantee any debt securities of another
person, or enter into any arrangement having the economic effect of any of the foregoing,
except for short-term borrowings and for lease obligations, in each case incurred in the
ordinary course of business;
(i) make any loans, advances or capital contributions to, or investments in, any person other
than the Company or a subsidiary of the Company;
(j) pay, discharge or satisfy any claims (including claims of stockholders), liabilities or obligations
(absolute, accrued, asserted or unasserted, contingent or otherwise), except for the payment,
discharge or satisfaction of (i) liabilities or obligations in the ordinary course of business or
(ii) claims settled or compromised to the extent permitted by the Merger Agreement, or
waive, write-off, release, grant, or transfer any rights of material value or modify or change in
any material respect any existing license, lease, permit, contract or other document, other
than in the ordinary course of business;
23
(k) adopt a plan of complete or partial liquidation, dissolution, merger, consolidation,
restructuring, recapitalization or reorganization;
(l) enter into any collective bargaining agreement;
(m) amend, negotiate the terms of, enter into or renew any lease of real property, or fail to renew
in a timely fashion any lease of real property to which the Company or any subsidiary is a
party;
(n) enter into any new material contract or, except in the ordinary course of business, any other
contract;
(o) change any material accounting principle used by it, except to the extent required by
generally accepted accounting principles;
(p) settle or compromise any litigation other than settlements or compromises of litigation where
the amount paid in settlement or compromise is not material to the Company;
(q) make any capital expenditures outside the ordinary course of business;
(r) delay or postpone the payment of accounts payable or any other liabilities outside the
ordinary course of business; or
(s) authorize any of, or commit or agree to take any of, the foregoing actions.
With respect to employment arrangements, the Merger Agreement provides
that neither the Company nor any of its subsidiaries shall adopt or amend
(except as may be required by law) any bonus, profit sharing, compensation,
stock option, pension, retirement, deferred compensation, employment or other
employee benefit plan, agreement, trust fund or other arrangement other than
increases for individuals other than officers and directors in the ordinary
course of business, or increase the compensation or fringe benefits of any
person (other than increases for individuals other than officers and directors
in the ordinary course of business) or pay any benefit not required by any
existing plan, arrangement or agreement. The Company also agreed that except as
disclosed in the Merger Agreement, neither the Company nor any of its
subsidiaries would grant any new or modified severance, change-of-control or
termination arrangement or increase or accelerate any benefits payable under
its severance, change-of-control or termination pay policies in effect on the
date of the Merger Agreement. Finally, the Company agreed that neither the
Company nor any of its subsidiaries would effectuate a "plant closing" or "mass
layoff," as those terms are defined in the Worker Adjustment and Retraining
Notification Act of 1988 or similar state law ("WARN"), affecting in whole or
in part any site of employment, facility, operating unit or employee of the
Company or any subsidiary, without the prior written consent of MergerCo or
Camelot in advance and without complying with the notice requirements and other
provisions of WARN.
NO SOLICITATION OF TRANSACTION PROPOSALS
The Merger Agreement provides that neither the Company, its subsidiaries,
nor any of their respective officers, directors, employees, agents or
affiliates (collectively, "Representatives") will, directly or indirectly, (i)
initiate, solicit, or knowingly encourage, or take any other action to
facilitate knowingly any inquiries or the making of any proposal that
constitutes, or may reasonably be expected to lead to, any acquisition proposal
(a "Transaction Proposal") to acquire all or any significant part of the
business, properties or stock of the Company or its subsidiaries, whether by
merger, consolidation, share exchange, recapitalization, business combination
or similar transaction; sale, lease, exchange, mortgage, pledge or other
disposition of 10% or more of the Company's assets; tender offer, exchange
offer or the acquisition of 10% or more of the outstanding shares of Common
Stock; or the public
24
announcement or intention to do any of the foregoing; or (ii) enter into or
maintain or continue discussions or negotiations in furtherance of such
inquiries or to obtain a Transaction Proposal, or agree to or endorse any
Transaction Proposal, or permit any Company Representative to take any such
action.
Notwithstanding the foregoing, the Company may: (i) furnish information to
or otherwise respond to a person or entity that makes an unsolicited bona fide
Transaction Proposal under certain circumstances; (ii) fail to make or withdraw
or modify its recommendation with respect to the Merger Agreement if there
exists a Transaction Proposal under certain circumstances; or (iii) make any
recommendation to the Company's security holders pursuant to applicable
securities laws under certain circumstances. In general, the Company may only
take any of the foregoing actions if counsel to the Company, after consultation
with counsel to Camelot, advises that such action is required for the Board of
Directors of the Company to comply with its fiduciary duties to the Company's
stockholders.
Since its public disclosure of the terms of the Merger Agreement on June
4, 1998, the Company has not received any indications of interest from any
third parties, including any of the other entities that had previously
expressed an interest in the Company.
TERMINATION, AMENDMENT AND EXPENSES
The Merger Agreement may be terminated and the Merger abandoned,
notwithstanding approval of the Merger Agreement by the stockholders of the
Company, at any time prior to the Effective Time (i) by mutual consent of the
Company and MergerCo; (ii) by either such Board of Directors if (a) any
government entity shall have issued a final and nonappealable order enjoining
or prohibiting the Merger, (b) the Effective Time does not occur by October 15,
1998, (c) there is a material breach by the other party of its representations,
warranties or obligations under the Merger Agreement, which breach has not been
or cannot be cured within 20 days after receipt of written notice thereof, or
(d) by MergerCo or the Company if the stockholders of the Company fail to
approve the Merger Agreement.
In addition, the Merger Agreement provides that MergerCo may terminate the
Merger Agreement if a person, group or entity acquires, after the date of the
Merger Agreement, 20% or more of the issued and outstanding shares of Common
Stock.
The Merger Agreement may be amended at any time prior to the consummation
of the Merger, except that after the approval of the Merger Agreement by the
stockholders of the Company, the Merger Agreement may not be amended to change
any provision that by law requires stockholder approval, without the further
requisite approval of the stockholders entitled to vote thereon.
The Merger Agreement provides that if the Merger Agreement is terminated
pursuant to certain provisions after a Transaction Proposal has been made, the
Company will, within five business days after termination of the Merger
Agreement, pay or cause to be paid to Camelot a termination fee of $2,000,000.
The Merger Agreement defines "Transaction Proposal" to mean, in general,
certain transactions that would involve a change in control of the Company or a
sale, lease or disposition of assets representing 10% or more of the Company's
assets on a consolidated basis. See "APPROVAL OF THE MERGER--No Solicitation of
Transaction Proposals."
The Company and Camelot each will bear their costs and expenses incurred
in connection with the Merger Agreement and the transactions contemplated
thereby, except that the Company shall pay all costs of filing, printing and
mailing this Proxy Statement and of obtaining the consents of any third
parties. Camelot shall pay all HSR Act filing fees and the fees of the Exchange
Agent.
ACCOUNTING TREATMENT
The Merger is expected to be accounted for by Camelot under the "purchase"
method of accounting in accordance with generally accepted accounting
principles. As such, all assets and liabilities of the Company will be recorded
at their fair market value at the Effective Time.
25
INTERESTS OF CERTAIN PERSONS
The Merger Agreement provides that for the six-year period following the
Effective Time, Camelot and the Company will indemnify the present and former
directors and officers of the Company and its subsidiaries against all losses,
expenses, claims, damages or liabilities arising out of actions or omissions
occurring at or before the Effective Time. Such indemnification will be to the
fullest extent permitted by applicable law and regulations and by Camelot's and
the Company's articles of incorporation and bylaws.
Concurrently with the execution of the Merger Agreement, certain members
of the Spector family (Ann S. Lieff, Martin W. Spector and Rosalind
Zacks)(collectively, the "Spector Family"), who are directors and principal
stockholders of the Company, executed an agreement with Camelot and MergerCo
(the "Voting Agreement") whereby each agreed, among other things, to vote in
favor of the Merger all shares that they are entitled to vote on the Record
Date except the Excluded Securities. Excluding options and the Excluded
Securities, the Spector Family is entitled to vote shares representing
approximately 46.4% of the total voting power of the Company's Common Stock as
of the Record Date. Under the terms of the Merger Agreement, the Spector Family
will receive consideration totaling approximately $8,107,829 for its shares and
$312,610 for its stock options, assuming no options are exercised prior to the
Effective Time. See "SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT."
The rest of the executive officers and directors of the Company will
receive consideration totaling approximately $21,942 for their shares and
$372,888 for their stock options, assuming no options are exercised prior to
the Effective Time.
Pursuant to the Merger Agreement, each of the Company's outstanding stock
options will be surrendered and the holder thereof will be paid an amount
determined by multiplying (i) the excess, if any, of the Per Share Amount over
the applicable exercise price per share of Common Stock underlying such option
by (ii) the number of shares of Common Stock underlying such option less
applicable withholding taxes. Executive officers, former executive officers,
directors and employees of the Company (a total of 14 persons) currently
beneficially own stock options exercisable for an aggregate of 824,276 shares
of Common Stock at an average exercise price of $1.54 per share. Pursuant to
the Merger Agreement, such persons would receive cash payments totaling
approximately $1,652,563 upon surrender of such options. Specifically (and
assuming no options are exercised prior to the Effective Time), the five most
highly compensated executive officers would receive aggregate consideration
upon surrender of their options as follows: Ann S. Lieff would receive
approximately $261,250; Rosalind S. Zacks would receive approximately $51,360;
Donald A. Molta would receive approximately $278,738; and former executive
officers, Jeffrey J. Fletcher and Barry J. Gibbons, would receive approximately
$310,046 and $284,660, respectively.
At the Effective Time, Camelot will enter into a consulting and
non-competition agreement with Ann S. Lieff (the "Consulting Agreement"). The
Consulting Agreement provides that Ms. Lieff will be available to consult with
the chief executive officer of Camelot for a period beginning 60 days after the
Effective Time and ending on the first anniversary of the Effective Time (the
"Consulting Period"). Ms. Lieff will continue to receive salary (at her present
rate) and employee benefits for a period of 60 days following the Effective
Time and receive a severance payment of approximately $58,000 at the end of
such period. Thereafter, she will receive an aggregate consulting fee of
approximately $100,000, paid monthly, during the Consulting Period. The
Consulting Agreement also provides that Ms. Lieff may not, directly or
indirectly, engage in the specialty music retail business in any area in which
Camelot conducts business until the end of the Consulting Period.
Certain of the officers and certain headquarters and distribution center
employees of the Company will receive severance and/or retention payments in
connection with the consummation of the Merger. In general, headquarters and
distribution center employees will receive one week's salary for each year such
employee has worked for the Company, subject to a minimum severance payment of
two week's
26
salary and a maximum severance payment of twenty-six week's salary. In
addition, certain officers and key employees will receive additional retention
payments for agreeing to work and actually working for the Company for
specified periods of time after the Effective Time. In order for any officer or
employee to receive such severance payment and/or retention payment, such
employee must continue his or her employment with the Company until so notified
by Camelot. Camelot shall provide all employees eligible for severance payments
with thirty days notice of termination. Two officers of the Company, Rosalind
S. Zacks and Donald A. Molta, will continue to receive salary (at their present
rates) and employee benefits for a period of 90 days following the Effective
Time and be eligible to receive severance and retention payments equal, in the
aggregate, to approximately $55,000 and $54,000, respectively.
At the Effective Time, Camelot will also enter into an extension of a real
estate lease between the Company, as lessee, and a trust controlled by the
Spector Family, as lessor, for property at which the Company operates a store
(the "Lease"). The Lease relates to real estate currently leased by the Company
from the trust and used as a store. Pursuant to the terms of the Lease, Camelot
will have the option to renew the current lease for one year on the present
terms and conditions and, upon the expiration thereof, to renew the current
lease a second time for three years for minimum rent of $187,950 per year plus
"Percentage Rent," as defined in the current lease, at the rate of six percent.
DISSENTERS' RIGHTS
Under Section 607.1302 of the Florida Business Corporation Act (the
"FBCA"), holders of the Company's Common Stock will have the right to dissent
from the Merger. Section 607.1302 and related provisions of the FBCA are
attached to this Proxy Statement as Appendix C.
Any stockholder who elects to exercise his or her right to dissent and
demand appraisal of the "fair value" of his or her shares must satisfy each of
the following conditions. Before the vote on the proposed Merger Agreement, a
dissenting stockholder must deliver to the Company a separate written notice of
his or her intent to demand payment for his or her shares (the "Notice of
Intent"), and must either vote against the Merger or abstain from voting. A
vote in favor of the Merger Agreement will nullify any previously filed Notice
of Intent. Within 10 days after the stockholder vote, every stockholder who
filed a Notice of Intent and who did not vote in favor of the Merger Agreement
will receive written notice of the approval of the Merger Agreement. Within 20
days after receiving this notice, a dissenting stockholder must file with the
Company a notice of election to dissent (the "Notice of Dissent"). This Notice
of Dissent must state the stockholder's name and address, the number, classes
and series of shares as to which he or she dissents, and a demand for payment
for the fair value of his or her shares. Simultaneously with the Notice of
Dissent, the dissenting stockholder must surrender to the Company the
certificates for the shares as to which he or she dissents. If a dissenting
stockholder fails to comply with any of the conditions and the Merger becomes
effective, he or she may be required to accept cash in accordance with the
formula provided in the Merger Agreement.
Any Notice of Intent or Notice of Dissent should be addressed to Spec's
Music, Inc., 1666 N.W. 82nd Avenue, Miami, Florida 33126, Attention: Donald A.
Molta, Vice President and Chief Financial Officer, and should be executed by or
on behalf of the holder of record. The Notice of Intent and the Notice of
Dissent must reasonably inform the Company of the identity of the stockholder
and that such stockholder is thereby objecting to the Merger and electing to
receive the fair value of his or her shares.
Once a dissenting stockholder complies with the procedures outlined above,
he or she is no longer entitled to vote or exercise any other rights as a
Company stockholder and instead is entitled only to be paid the fair value of
his or her shares. The right of a dissenting stockholder to be paid fair value
terminates, and his or her status as a stockholder is restored without
prejudice to any corporate proceedings that may have taken place in the
interim, if (i) the demand for payment is withdrawn (which may occur at any
time before an offer is made by the Company to pay for the dissenting
stockholder's shares); (ii) the Merger is abandoned or the stockholders by a
later vote revoke their approval of the Merger, (iii) no demand or petition for
the determination of fair value by a court is
27
made or filed within the time period contemplated by the FBCA; or (iv) a court
of competent jurisdiction determines that the stockholder is not entitled to
dissenters' rights.
The Company must make a written offer to pay fair value to all dissenting
stockholders who have made a proper demand for payment. This written offer must
be made within 10 days after expiration of the period in which Company
stockholders may file their Notices of Dissent, or within 10 days after the
Effective Date of the Merger, whichever is later (but in no case later than 90
days from the stockholders' vote approving the Merger Agreement), and must meet
certain other requirements of the FBCA. If the offer is accepted by the
dissenting stockholder or the fair value of the dissenting stockholder's shares
is otherwise agreed upon within 30 days, payment for the shares must be made
within 90 days after the making of such offer or the consummation of the
Merger, whichever is later. If the fair value of the dissenting stockholder's
shares is not agreed upon by the dissenting stockholder, then a judicial
determination of the fair value may be required and the expenses of such
proceeding will be determined by the court and may be assessed against the
surviving corporate entity, or may under certain circumstances be assessed as
the court may deem equitable against any or all of the dissenting stockholders.
STOCKHOLDERS ARE REQUESTED TO COMPLETE, DATE, SIGN AND RETURN PROMPTLY THE
ACCOMPANYING PROXY CARD TO THE COMPANY IN THE ENCLOSED POSTAGE-PAID ENVELOPE.
FAILURE TO RETURN A PROPERLY EXECUTED PROXY CARD OR TO VOTE AT THE SPECIAL
MEETING, A BROKER NON-VOTE OR AN ABSTENTION WILL HAVE THE SAME EFFECT AS A VOTE
AGAINST THE MERGER.
28
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information as of the Record Date
concerning the beneficial ownership, as such term is defined in Rule 13d-3 of
the Commission under the Exchange Act, by each person known by the Company to
be the beneficial owner of more than 5% of the Company's outstanding Common
Stock, by each director, by all individuals who served as the Company's chief
executive officer during its fiscal year ended July 31, 1997 ("Fiscal 1997"),
by each of the Company's four most highly compensated executive officers who
served during Fiscal 1997 and whose annual salary and bonus exceeded $100,000,
and by all directors and officers of the Company as a group. All shares were
owned directly with sole voting and dispositive power unless otherwise
indicated.
AMOUNT AND NATURE PERCENT
NAME OF BENEFICIAL OWNER OF BENEFICIAL OWNERSHIP OF CLASS
------------------------------------------ ------------------------- ---------
a) Directors and Officers ...................
Ann Spector Lieff (1)(2)(3) .............. 1,467,658 27.0%
President, Chief Executive
Officer and Director
1666 Northwest 82nd Avenue
Miami, Florida 33126
Rosalind Spector Zacks(1)(3)(4) .......... 1,364,469 25.5%
Vice President and Director
1666 Northwest 82nd Avenue
Miami, Florida 33126
Jeffrey J. Fletcher(3)(5) ................ 155,998 2.9%
Barry J. Gibbons(3)(6) ................... 136,878 2.5%
Arthur H. Hertz(3) ....................... 36,000 *
Richard J. Lampen(3)(7) .................. 23,649 *
Martin W. Spector (8) .................... 105,938 2.1%
All directors and officers as a group
(9 persons including those
(named above)(9) ........................ 3,270,191 55.0%
b) Other Beneficial Owners ..................
Stephen T. Watson(10) .................... 306,000 5.8%
315 Post Road West
Westport, Connecticut 06881
- ----------------
* Represents ownership of less than 1%.
(1) Ms. Lieff and Ms. Zacks have entered into an agreement whereby each has
granted to the other certain first refusal rights with respect to the
Common Stock owned by each of them and certain rights to purchase such
stock in the event of death.
(2) Does not include 2,500 shares owned by Ms. Lieff's husband, as to which
Ms. Lieff disclaims beneficial ownership. Includes 8,300 shares held by
the minor children of Ms. Lieff, and 136,448 shares held in the Spec's
Music, Inc. 401(k) Plan over which Ms. Lieff and Ms. Zacks have shared
voting and investment power in their capacities as trustees of such plan.
(3) This number represents outstanding shares of Common Stock owned by such
person as of the Record Date plus shares which may be purchased under
stock options held by such person and presently exercisable or exercisable
immediately if the Merger is approved by the Company's stockholders, as
follows: Ann Spector Lieff, 148,000 options; Rosalind S. Zacks, 51,200
options; Arthur H. Hertz, 31,000 options; Richard J. Lampen, 22,000
options; Donald A. Molta, 111,000 options; Jeffrey J. Fletcher, 155,998
options; and Barry J. Gibbons, 130,878 options.
(4) Includes 8,300 shares held by the minor children of Ms. Zacks and 136,448
shares held in the Spec's Music, Inc. 401(k) Plan over which Ms. Lieff and
Ms. Zacks have shared voting and investment power in their capacities as
trustees of such plan.
(5) Mr. Fletcher resigned as an officer of the Company effective July 22,
1997. To the Company's knowledge, this number represents the number of
shares of Common Stock beneficially owned by Mr. Fletcher.
(6) Mr. Gibbons resigned as an officer and director of the Company effective
June 23, 1997 and June 30, 1997, respectively. To the Company's knowledge,
this number represents the number of shares of Common Stock beneficially
owned by Mr. Gibbons.
29
(7) Includes 1,649 shares held by Richard J. Lampen as Custodian for Katharine
and Caroline Lampen under the Florida Gift to Minors Act.
(8) Does not include 5,049 shares owned by a trust for which Mr. Spector's
wife, Dorothy J. Spector, acts as trustee, as to which Mr. Spector
disclaims beneficial ownership.
(9) Includes 650,076 shares which may be purchased pursuant to outstanding
stock options which are presently exercisable or exercisable immediately
if the Merger is approved by the Company's stockholders. Also includes the
136,448 shares held in the Spec's Music, Inc. 401(k) Plan over which Ms.
Lieff and Ms. Zacks have shared voting and investment power in their
capacities as trustees of such plan.
(10) Based solely on information contained in a Schedule 13G dated March 2,
1998 filed with the Securities and Exchange Commission. The listed shares
are held by a private investment partnership, an offshore investment
company and several managed accounts, as to all of which Mr. Watson has
sole investment authority.
30
STOCKHOLDER PROPOSALS
If the Merger is not consummated prior to the Company's 1998 Annual
Meeting of Stockholders, as disclosed in the Company's proxy statement for its
1997 Annual Meeting of Stockholders, any proposals of stockholders to be
presented at such meeting must be received by the Company no later than July 6,
1998 for inclusion in the Company's proxy statement relating to such meeting,
subject to the rules and regulations of the Commission.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents, filed by the Company with the Commission under
the Exchange Act, are incorporated by reference into this Proxy Statement:
(a) The Company's Annual Report on Form 10-K for the fiscal year ended
July 31, 1997; and
(b) The Company's Quarterly Reports on Form 10-Q for the quarters ended
October 31, 1997, January 31, 1998 and April 30, 1998.
All documents filed by the Company pursuant to Sections 13(a), 13(c), 14
or 15(d) of the Exchange Act subsequent to the date hereof and prior to the
date of the Special Meeting are hereby incorporated by reference into this
Proxy Statement and deemed a part hereof from the date of filing such
documents.
Any statement contained in a document incorporated by reference herein
shall be deemed to be modified or superseded for purposes of this Proxy
Statement to the extent that a statement contained herein or a later filed
document modifies or supersedes such statement. Any such statement so modified
or superseded shall not be deemed, except as so modified or superseded, to
constitute part of this Proxy Statement.
Any person to whom a copy of this Proxy Statement is delivered may obtain
without charge, upon written or oral request, copies of any of the documents
incorporated herein by reference, with the exception of the exhibits to such
documents (unless such exhibits are specifically incorporated by reference in
such document). Requests for any of these documents should be directed to
Donald A. Molta, Vice President and Chief Financial Officer, Spec's Music,
Inc., 1666 N.W. 82nd Avenue, Miami, Florida 33126, telephone number: (305)
592-7288.
OTHER MATTERS
As of the date of this Proxy Statement, the Board of Directors knows of no
additional matters that will be presented for consideration at the Special
Meeting. Execution of a proxy, however, confers on the designated proxy holders
discretionary authority to vote the shares covered thereby in accordance with
their best judgment on such other business, if any, that may properly come
before the Special Meeting or any adjournment or postponement thereof.
BY ORDER OF THE BOARD OF DIRECTORS
Dorothy J. Spector
SECRETARY
June 30, 1998
31
APPENDIX A
AGREEMENT AND PLAN OF MERGER
AMONG
CAMELOT MUSIC HOLDINGS, INC.,
SM ACQUISITION, INC.
AND
SPEC'S MUSIC, INC.
DATED AS OF JUNE 3, 1998
A-1
TABLE OF CONTENTS
PAGE
----
ARTICLE I THE MERGER .............................................. A-6
1.1 The Merger ................................................... A-6
1.2 Closing ...................................................... A-6
1.3 Effective Time ............................................... A-7
1.4 Effects of the Merger ........................................ A-7
1.5 Articles of Incorporation; Bylaws ............................ A-7
1.6 Directors .................................................... A-7
1.7 Officers ..................................................... A-7
ARTICLE II EFFECT OF THE MERGER ON THE CAPITAL STOCK OF THE
CONSTITUENT CORPORATIONS ........................................ A-7
2.1 Effect on Capital Stock ...................................... A-7
2.2 Stock Option Plans; Other Stock Options ...................... A-8
2.3 Exchange of Certificates ..................................... A-9
ARTICLE III REPRESENTATIONS AND WARRANTIES OF THE COMPANY ......... A-10
3.1 Organization, Standing and Corporate Power ................... A-10
3.2 Subsidiaries ................................................. A-11
3.3 Capital Structure ............................................ A-11
3.4 Authority; Noncontravention; Consents and Approvals .......... A-12
3.5 SEC Documents; Undisclosed Liabilities ....................... A-13
3.6 Information Supplied ......................................... A-13
3.7 Absence of Certain Changes or Events ......................... A-13
3.8 Litigation; Labor Matters; Compliance with Laws .............. A-14
3.9 Employee Matters ............................................. A-14
3.10 Taxes ........................................................ A-17
3.11 Environmental matters ........................................ A-18
3.12 Material Contracts ........................................... A-19
3.13 Brokers; Legal Counsel ....................................... A-20
3.14 Opinion of Financial Advisor ................................. A-20
3.15 Board Recommendation ......................................... A-20
3.16 Required Company Vote ........................................ A-20
3.17 State Takeover Statutes ...................................... A-20
3.18 Intellectual Property; Software .............................. A-21
3.19 Related Party Transactions ................................... A-22
3.20 Permits ...................................................... A-22
3.21 Insurance Policies ........................................... A-22
3.22 Good Title to and Condition of Assets ........................ A-23
3.23 Real Estate .................................................. A-23
3.24 Certain Business Practices ................................... A-25
3.25 Suppliers and Customers ...................................... A-25
3.26 Product Warranties ........................................... A-25
3.27 Sole Representations ......................................... A-25
ARTICLE IV REPRESENTATIONS AND WARRANTIES OF BUYER AND
MERGERCO ........................................................ A-25
4.1 Organization, Standing and Corporate Power ................... A-25
4.2 Subsidiaries ................................................. A-25
4.3 Capital Structure ............................................ A-25
4.4 Authority; Noncontravention; Consents and Approvals .......... A-26
4.5 Brokers ...................................................... A-26
4.6 Financing .................................................... A-26
4.7 Information Supplied ......................................... A-27
4.8 Absence of Certain Changes or Events ......................... A-27
A-2
PAGE
----
4.9 Litigation; Labor Matters; Compliance with Laws .............. A-27
4.10 Sole Representations ......................................... A-27
ARTICLE V COVENANTS RELATING TO CONDUCT OF BUSINESS PRIOR TO
MERGER .......................................................... A-27
5.1 Conduct of Business of the Company ........................... A-27
5.2 Changes in Employment Arrangements ........................... A-29
5.3 Severance .................................................... A-29
5.4 WARN ......................................................... A-30
ARTICLE VI ADDITIONAL AGREEMENTS .................................. A-30
6.1 Preparation of Proxy Statement; Stockholders Meeting ......... A-30
6.2 Access to Information, Confidentiality ....................... A-31
6.3 Reasonable Best Efforts ...................................... A-31
6.4 Indemnification .............................................. A-32
6.5 Public Announcements ......................................... A-33
6.6 No Solicitation .............................................. A-33
6.7 Resignation of Directors ..................................... A-35
6.8 Employee Benefits ............................................ A-35
6.9 Notification of Certain Matters .............................. A-35
6.10 State Takeover Laws .......................................... A-35
6.11 Physical Inventory ........................................... A-36
6.12 Repayment of Indebtedness .................................... A-36
6.13 Severance .................................................... A-36
6.14 Access for Point of Sale Installation ........................ A-36
ARTICLE VII CONDITIONS PRECEDENT .................................. A-36
7.1 Conditions to Each Party's Obligation ........................ A-36
7.2 Conditions to Obligations of the Buyer and MergerCo. ......... A-38
7.3 Conditions to Obligation of the Company ...................... A-38
ARTICLE VIII TERMINATION, AMENDMENT AND WAIVER .................... A-38
8.1 Termination .................................................. A-38
8.2 Effect of Termination ........................................ A-39
8.3 Amendment .................................................... A-40
8.4 Extension; Waiver ............................................ A-40
8.5 Procedure for Termination, Amendment, Extension or Waiver .... A-40
ARTICLE IX GENERAL PROVISIONS ..................................... A-40
9.1 Nonsurvival of Representations and Warranties ................ A-40
9.2 Fees and Expenses ............................................ A-40
9.3 Notices ...................................................... A-41
9.4 Definitions .................................................. A-42
9.5 Interpretation ............................................... A-43
9.6 Counterparts ................................................. A-43
9.7 Entire Agreement; No Third-Party Beneficiaries ............... A-43
9.8 Governing Law ................................................ A-43
9.9 Assignment ................................................... A-43
9.10 Enforcement .................................................. A-43
A-3
TABLE OF DEFINITIONS
DEFINITION PAGE
- ---------------------------------- ----
affiliate ......................................................... A-42
Agreement ......................................................... A-6
Articles of Merger ................................................ A-7
Benefit Plans ..................................................... A-15
business day ...................................................... A-42
Buyer ............................................................. A-6
Camelot Music ..................................................... A-6
Camelot Southeast ................................................. A-6
Certificates ...................................................... A-9
Closing ........................................................... A-7
Closing Date ...................................................... A-7
COBRA ............................................................. A-17
Code .............................................................. A-15
Common Stock ...................................................... A-6
Company ........................................................... A-6
Company Intellectual Property ..................................... A-21
Company Legal Counsel ............................................. A-20
Company Stockholder Approval ...................................... A-6
Consolidated Group ................................................ A-17
Consultant ........................................................ A-32
Consulting Agreement .............................................. A-32
Contracts ......................................................... A-19
Costs ............................................................. A-32
D&O Policy ........................................................ A-33
Diligent Inquiry .................................................. A-18
Disclosure Schedule ............................................... A-11
Dissenting Shares ................................................. A-8
Effective Time .................................................... A-7
Environmental Claim ............................................... A-18
Environmental Laws ................................................ A-19
Environmental Permits ............................................. A-19
ERISA ............................................................. A-15
ERISA Affiliate ................................................... A-17
Exchange Act ...................................................... A-12
Exchange Agent .................................................... A-9
Exchange Fund ..................................................... A-10
Excluded Shares ................................................... A-8
FBCA .............................................................. A-6
Form 10 ........................................................... A-27
GAAP .............................................................. A-13
Governmental Entity ............................................... A-12
Hazardous Materials ............................................... A-19
HSR Act ........................................................... A-12
Indemnified Parties ............................................... A-32
Intellectual Property ............................................. A-21
Inventory ......................................................... A-23
knowledge ......................................................... A-42
Landlord .......................................................... A-32
Lease Amendment ................................................... A-32
Leasehold Premises ................................................ A-23
Leases ............................................................ A-23
A-4
DEFINITION PAGE
- ---------------------------------- ----
Liens ............................................................. A-11
Material .......................................................... A-42
Material Adverse Change ........................................... A-42
Material Adverse Effect ........................................... A-43
Material Contract ................................................. A-19
Material Contracts ................................................ A-19
Material Permits .................................................. A-22
Materially ........................................................ A-42
Merger ............................................................ A-6
Merger Consideration .............................................. A-8
MergerCo .......................................................... A-6
NASDAQ ............................................................ A-32
Owned Properties .................................................. A-23
Permits ........................................................... A-19
Permitted Changes ................................................. A-28
Permitted Encumbrances ............................................ A-24
person ............................................................ A-43
Proceeding ........................................................ A-33
Proprietary Information ........................................... A-21
Proxy Statement ................................................... A-12
Recent SEC Documents .............................................. A-13
SEC ............................................................... A-43
SEC Documents ..................................................... A-13
SEC Financial Statements .......................................... A-13
Section 6.8 Plans ................................................. A-35
Securities Act .................................................... A-12
Selling Supplies .................................................. A-23
Software .......................................................... A-22
Spread ............................................................ A-9
Stock Option Plans ................................................ A-8
Stock Options ..................................................... A-8
Stockholders Meeting .............................................. A-31
Subsidiaries ...................................................... A-11
subsidiary ........................................................ A-43
Surrender Agreement ............................................... A-8
Surviving Corporation ............................................. A-6
Tax Return ........................................................ A-17
Taxes ............................................................. A-17
Termination Fee ................................................... A-41
Transaction Proposal .............................................. A-34
Voting Agreement .................................................. A-6
WARN .............................................................. A-30
Written ........................................................... A-18
Year End Balance Sheet ............................................ A-13
A-5
AGREEMENT AND PLAN OF MERGER
THIS AGREEMENT AND PLAN OF MERGER (this "Agreement") is entered into as of
this 3rd day of June, 1998 by and among Camelot Music Holdings, Inc., a
Delaware corporation (the "Buyer"), SM Acquisition, Inc., a Florida corporation
and wholly owned indirect subsidiary of the Buyer ("MergerCo"), and Spec's
Music, Inc., a Florida corporation (the "Company").
WHEREAS, MergerCo is a wholly owned direct subsidiary of Camelot Southeast
Region, Inc., a Delaware corporation ("Camelot Southeast"), Camelot Southeast
is a wholly owned direct subsidiary of Camelot Music, Inc., a Pennsylvania
corporation ("Camelot Music"), and Camelot Music is a wholly owned direct
subsidiary of the Buyer;
WHEREAS, the respective Boards of Directors of the Company, the Buyer and
MergerCo have determined that the merger of MergerCo with and into the Company
(the "Merger"), upon the terms and subject to the conditions set forth in this
Agreement, would be advisable and in the best interests of their respective
companies and stockholders, and such Boards of Directors have approved the
Merger, pursuant to which each share of common stock, par value $.01 per share,
of the Company ("Common Stock") issued and outstanding immediately prior to the
Effective Time (as defined in Section 1.3) will be converted into the right to
receive cash, other than (a) shares of Common Stock owned, directly or
indirectly, by the Buyer or any subsidiary (as defined in Section 9.4) of the
Buyer and (b) Dissenting Shares (as defined in Section 2. l(d));
WHEREAS, the Merger and this Agreement require the affirmative vote of a
majority of the issued and outstanding shares of Common Stock for the approval
thereof (the "Company Stockholder Approval");
WHEREAS, simultaneously with the execution hereof, certain stockholders of
the Company have executed and delivered to the Buyer and MergerCo a Voting
Agreement of even date herewith (the "Voting Agreement") pursuant to which such
stockholders have agreed to vote for the Merger and the adoption of this
Agreement, and which Voting Agreement has been relied upon by the Buyer and
MergerCo in their decision to execute this Agreement; and
WHEREAS, the Buyer, MergerCo and the Company desire to make certain
representations, warranties, covenants and agreements in connection with the
Merger and also to prescribe various terms of and conditions to the Merger.
NOW, THEREFORE, in consideration of the representations, warranties,
covenants and agreements contained in this Agreement, the parties agree as
follows:
ARTICLE I
THE MERGER
1.1 THE MERGER.
(a) Upon the terms and subject to the conditions set forth in this
Agreement, and in accordance with the Florida Business Corporation Act (the
"FBCA"), MergerCo shall be merged with and into the Company at the Effective
Time. At the Effective Time, the separate existence of MergerCo shall cease,
and the Company shall thereafter continue as the surviving corporation (the
"Surviving Corporation") and shall be a wholly owned indirect subsidiary of the
Buyer.
(b) At the Effective Time, the corporate existence of the Company, with
all its rights, privileges, powers and franchises, shall continue unaffected
and unimpaired by the Merger.
1.2 CLOSING. Unless this Agreement shall have been terminated and the
transactions herein contemplated shall have been abandoned pursuant to Section
8.1 and subject to the satisfaction or
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waiver of the conditions set forth in Article VII, the closing of the Merger
(the "Closing") shall take place at 10:00 a.m., local time, on the second
business day after satisfaction or waiver of the conditions set forth in
Article VII (the "Closing Date"), at the offices of Holland & Knight LLP, 701
Brickell Avenue, Miami, Florida 33131, unless another date, time or place is
agreed to in writing by the parties hereto.
1.3 EFFECTIVE TIME. On the Closing Date, the parties shall cause articles
of merger in substantially the form attached hereto as Exhibit A (the "Articles
of Merger"), executed in accordance with the relevant provisions of the FBCA,
to be delivered to the Department of State of the State of Florida for filing
by the Department as provided in Sections 607.0125 and 607.1105 of the FBCA.
Upon the completion of such filing, or at such other time as may be specified
in such filing, the Merger shall become effective in accordance with the FBCA.
The time and date on which the Merger becomes effective is herein referred to
as the "Effective Time."
1.4 EFFECTS OF THE MERGER. The Merger shall have the effects specified in
the FBCA.
1.5 ARTICLES OF INCORPORATION; BYLAWS.
(a) At the Effective Time and without any further action on the part of
the Company or MergerCo, the Articles of Incorporation of MergerCo, as in
effect immediately prior to the Effective Time, shall be amended to change the
name of the Surviving Corporation to "Spec's Music, Inc.", and, as so amended,
until thereafter further amended as provided therein and under the FBCA, shall
become the Articles of Incorporation of the Surviving Corporation.
(b) At the Effective Time and without any further action on the part of
the Company or MergerCo, the Bylaws of MergerCo, as in effect immediately prior
to the Effective Time, shall become the Bylaws of the Surviving Corporation
until thereafter amended or repealed in accordance with their terms and the
Articles of Incorporation of the Surviving Corporation and as provided under
the FBCA.
1.6 DIRECTORS. The directors of MergerCo at the Effective Time shall, from
and after the Effective Time, be the directors of the Surviving Corporation,
until the earlier of their resignation or removal or until their respective
successors are duly elected and qualified, as the case may be.
1.7 OFFICERS. The officers of MergerCo at the Effective Time shall, from
and after the Effective Time, be the officers of the Surviving Corporation,
until the earlier of their resignation or removal or until their respective
successors are duly elected and qualified, as the case may be.
ARTICLE II
EFFECT OF THE MERGER ON THE CAPITAL STOCK
OF THE CONSTITUENT CORPORATIONS
2.1 EFFECT ON CAPITAL STOCK. As of the Effective Time, by virtue of the
Merger and without any action on the part of any holder of shares of Common
Stock or shares of capital stock of MergerCo:
(a) COMMON STOCK OF MERGERCO. Each share of common stock of MergerCo
issued and outstanding immediately prior to the Effective Time shall be
converted into one share of the common stock, par value $.01 per share, of the
Surviving Corporation.
(b) CANCELLATION OF TREASURY STOCK. Each share of Common Stock that is
owned by the Company or by any wholly owned subsidiary of the Company shall
automatically be canceled and retired and shall cease to exist, and no cash or
other consideration shall be delivered or deliverable in exchange therefor.
(c) CONVERSION OF COMMON STOCK. Except as otherwise provided herein and
subject to Section 2.3, each issued and outstanding share of Common Stock,
other than shares owned by the Buyer, MergerCo
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or any other direct or indirect subsidiary of the Buyer (collectively, the
"Excluded Shares"), and other than Dissenting Shares (as defined in Section
2.1(d)) and treasury stock, shall be converted into the right to receive in
cash from the Company following the Merger an amount equal to $3.30 (the
"Merger Consideration"). Contextually, the term "Merger Consideration" shall
mean the per share amount in reference to the consideration designated on a per
share basis, and otherwise shall refer to the aggregate consideration
represented by the per share amount multiplied by the total number of shares of
Common Stock then outstanding, including Dissenting Shares.
(d) DISSENTING SHARES. Notwithstanding anything in this Agreement to the
contrary, shares of Common Stock issued and outstanding immediately prior to
the Effective Time with respect to which the holder has and exercises the right
to dissent from the Merger and demand payment for such shares in accordance
with Section 607.1302 of the FBCA (or any successor provision) ("Dissenting
Shares") shall not be converted into the right to receive the Merger
Consideration unless such holder fails to perfect or otherwise withdraws,
forfeits or loses such holder's right to such dissent and demand, if any. Such
holder of Dissenting Shares shall have the rights set forth in Sections
607.1301, 607.1302 and 607.1320 of the FBCA, subject to the failure to perfect,
withdrawal, forfeiture or loss of such rights under such sections. If, after
the Effective Time, such holder fails to perfect or withdraws, forfeits or
loses any such right to dissent and demand payment with respect to any such
shares of Common Stock, each such share shall be treated as a share that had
been converted as of the Effective Time into the right to receive the Merger
Consideration in accordance with this Section 2.1. The Company shall give
prompt notice to MergerCo of any notices of election to dissent and demand
payment received by the Company, and MergerCo shall have the right to
participate in and, at MergerCo's reasonable discretion, to direct all
communications, negotiations and proceedings with respect to such demands. At
or before the Effective Time, the Company shall not, except with the prior
written consent of MergerCo, make any payment with respect to, or settle or
offer to settle, any such demands.
(e) CANCELLATION AND RETIREMENT OF EXCLUDED SHARES. Each Excluded Share
issued and outstanding immediately prior to the Effective Time shall, by virtue
of the Merger and without any action on the part of the holder thereof, cease
to be outstanding, shall be canceled and retired without payment of any
consideration therefor and shall cease to exist.
(f) CANCELLATION AND RETIREMENT OF COMMON STOCK. As of the Effective Time,
all shares of Common Stock (other than shares referred to in Section 2.1(b))
issued and outstanding immediately prior to the Effective Time, shall no longer
be outstanding and shall automatically be canceled and retired and shall cease
to exist, and each holder of a certificate representing any such shares of
Common Stock shall, to the extent such certificate represents such shares,
cease to have any rights with respect thereto, except the right to receive the
Merger Consideration applicable thereto, upon surrender of such certificate in
accordance with Section 2.3, and subject to Section 2.1(d).
2.2 STOCK OPTION PLANS; OTHER STOCK OPTIONS.
(a) As soon as practicable following the date of this Agreement, the Board
of Directors of the Company (or, if appropriate, any committee administering
the Stock Option Plans (as defined below)) shall adopt such resolutions or take
such other actions as may be required to cause all outstanding unexpired
options to purchase shares of Common Stock ("Stock Options") that were granted
under the Company's 1986 Incentive Stock Plan, as amended, 1993 Incentive Stock
Plan, 1993 Non-Employee Directors Stock Option Plan and 1996 Non-Employee
Directors Stock Option Plan (collectively, the "Stock Option Plans") to become
fully vested and exercisable immediately prior to, but contingent upon, the
Effective Time. Each Stock Option Plan shall be terminated, cancelled and
discontinued effective at the Effective Time.
(b) The Company shall use its best efforts to obtain prior to the
Effective Time from each holder of any unexpired outstanding Stock Option
(whether granted under a Stock Option Plan or otherwise) an agreement, in
substantially the form attached hereto as Exhibit B (a "Surrender Agreement"),
to surrender as of the Effective Time all Stock Options held by such holder and
outstanding immediately
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prior to the Effective Time, regardless of the exercise price thereof, in
exchange for payment (subject to any applicable withholding taxes), with
respect to each such Stock Option having an exercise price less than the per
share Merger Consideration, in an amount (the "Spread") equal to the product of
(i) the total number of shares of Common Stock subject to such Stock Option and
(ii) the excess of the per share Merger Consideration over the exercise price
per share of Common Stock subject to such Stock Option. Subject to the terms of
the applicable Surrender Agreement, the Spread shall be payable in cash at the
Effective Time to each Stock Option holder who has executed a Surrender
Agreement covering all such holder's Stock Options and delivered such Surrender
Agreement to MergerCo prior to the Effective Time. The Spread shall thereafter
be payable in cash to any remaining holder of Stock Options upon execution of a
Surrender Agreement and delivery thereof to the Company, provided, however,
that this sentence shall not be deemed a waiver of any of the conditions to the
obligations of the Buyer and MergerCo set forth in Section 7.2(i) hereof.
(c) Except as otherwise agreed to in writing by the parties, the Stock
Option Plans and any other plan, program or arrangement providing for the
issuance or grant of any other interest in respect of the capital stock of the
Company or any of its subsidiaries shall terminate as of the Effective Time,
and the Company shall ensure that following the Effective Time no holder of a
Stock Option nor any participant in any Stock Option Plan nor any holder of any
other interest in respect of the capital stock of the Company or any of its
subsidiaries shall have any right thereunder to acquire equity securities of
the Company or its subsidiaries.
(d) The Company hereby represents and warrants that upon taking of the
actions specified above, immediately following the Effective Time, and after
giving effect to the payments described in this Section 2.2, no holder of a
Stock Option nor any participant in any Stock Option Plan nor the holder of any
warrant or option to purchase Common Stock (including, without limitation,
Barry J. Gibbons and Jeffrey J. Fletcher) shall have the right thereunder to
acquire equity securities of the Company, any subsidiary of the Company or any
other benefit.
2.3 EXCHANGE OF CERTIFICATES.
(a) EXCHANGE AGENT. At or before the Effective Time, the Buyer shall
deposit the aggregate Merger Consideration, or cause the aggregate Merger
Consideration to be deposited, with The Bank of New York, which shall act as
exchange agent (the "Exchange Agent") for the benefit of the holders of shares
of Common Stock to be exchanged in accordance with this Article II. Within four
business days after the Effective Time, the Exchange Agent shall mail to each
record holder (other than holders of Excluded Shares), as of the Effective
Time, of an outstanding certificate or certificates that immediately prior to
the Effective Time represented shares of Common Stock (the "Certificates"), a
letter of transmittal and instructions, in substantially the form attached
hereto as Exhibit C, for use in effecting the surrender of the Certificates for
payment.
(b) EXCHANGE PROCEDURES.
(i) After the Effective Time, each holder of an outstanding
Certificate or Certificates shall, upon surrender to the Exchange Agent of
such Certificate or Certificates and acceptance thereof by the Exchange
Agent, be entitled to receive, and the Buyer shall cause the Exchange Agent
to promptly pay, the amount of cash into which such Certificate or
Certificates shall have been converted pursuant to this Agreement.
(ii) After the Effective Time, there shall be no further transfer on
the records of the Company or its transfer agent of Certificates, and if
Certificates are presented to the Company for transfer, they shall be
canceled against delivery of cash. If cash is to be remitted to a person in
a name other than that in which the Certificate surrendered for exchange is
registered, it shall be a condition of such exchange that the Certificate
so surrendered be properly endorsed, with signature guaranteed, or
otherwise in proper form for transfer and that the person requesting such
exchange pay to the Company or its transfer agent any transfer or other
taxes required or establish to the reasonable
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satisfaction of the Company or its transfer agent that such tax has been
paid or is not applicable. Until surrendered as contemplated by this
Section 2.3(b), and subject to Section 2.1(d), each Certificate shall be
deemed at any time after the Effective Time to represent only the right to
receive upon such surrender the Merger Consideration applicable thereto as
contemplated by Section 2.1. No interest shall be paid or shall accrue on
any cash payable as Merger Consideration or in lieu of any fractional
shares of Common Stock.
(iii) In the event that any Certificate shall have been lost, stolen
or destroyed, upon the making of an affidavit of that fact by the person
claiming such Certificate to be lost, stolen or destroyed and, if required
by the Buyer, the posting by such person of a bond in such amount as the
Buyer may reasonably direct as indemnity against any claim that may be made
against the Buyer, MergerCo or the Company with respect to such
Certificate, or the provision of other reasonable assurances requested by
the Buyer, the Exchange Agent shall issue in exchange for such lost, stolen
or destroyed Certificate the Merger Consideration deliverable in respect
thereof pursuant to this Agreement.
(c) NO FURTHER OWNERSHIP RIGHTS IN COMMON STOCK EXCHANGED FOR CASH. All
cash paid upon the surrender for exchange of Certificates in accordance with
the terms of this Article II shall be deemed to have been issued and paid in
full satisfaction of all rights pertaining to the shares of Common Stock
represented by such Certificates.
(d) TERMINATION OF EXCHANGE FUND. Any portion of the Merger Consideration
deposited with the Exchange Agent pursuant to this Section 2.3 (the "Exchange
Fund") that remains undistributed to the holders of the Certificates six months
after the Effective Time shall be delivered to the Company, upon demand, and
any holders of shares of Common Stock prior to the Effective Time who have not
theretofore complied with this Article II shall thereafter look only to the
Company and only as general creditors thereof for payment of their claim for
cash, if any, to which such holders may be entitled.
(e) MERGER CONSIDERATION FOR DISSENTING SHARES. Any portion of the
aggregate Merger Consideration deposited with the Exchange Agent to pay for
Dissenting Shares for which the right to dissent and demand payment pursuant to
Sections 607.1302 and 607.1320 of the FBCA shall have been perfected shall be
returned to the Surviving Corporation, upon demand.
(f) NO LIABILITY. None of the Buyer, MergerCo, the Company or the Exchange
Agent shall be liable to any person in respect of any cash from the Exchange
Fund delivered to a public official pursuant to any applicable abandoned
property, escheat or similar law. If any Certificates have not been surrendered
prior to the earlier of (i) three years after the Effective Time and (ii)
immediately prior to such date on which any cash, if any, in respect of such
Certificate would otherwise escheat to or become the property of any
Governmental Entity (as defined in Section 3.4), any such cash, dividends or
distributions in respect of such Certificate shall, to the extent permitted by
applicable law, become the property of the Company, free and clear of all
claims or interest of any person previously entitled thereto.
(g) INVESTMENT OF EXCHANGE FUND. The Exchange Agent shall invest any cash
included in the Exchange Fund as directed by the Company on a daily basis. Any
interest and other income resulting from such investments shall be paid to the
Company.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
The Company hereby represents and warrants to the Buyer and MergerCo that:
3.1 ORGANIZATION, STANDING AND CORPORATE POWER. Each of the Company and
each of its Subsidiaries (as defined in Section 3.2) is duly organized, validly
existing and in good standing under the laws of the
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jurisdiction in which it is incorporated and has the requisite corporate power
and authority to carry on its business as now being conducted. Each of the
Company and each of its Subsidiaries is duly qualified or licensed to do
business and is in good standing in each jurisdiction in which the nature of
its business or the ownership or leasing of its properties makes such
qualification or licensing necessary, other than in such jurisdictions where
the failure to be so qualified or licensed (individually or in the aggregate)
would not have a Material Adverse Effect (as defined in Section 9.4) with
respect to the Company. Attached as Section 3.1 of the disclosure schedule (the
"Disclosure Schedule") delivered to MergerCo by the Company at the time of
execution of this Agreement are complete and correct copies of the Articles of
Incorporation and By-Laws of the Company, as in effect on the date of this
Agreement. The Company has delivered to MergerCo complete and correct copies of
the articles of incorporation and bylaws (or other comparable organizational
documents) of each of its Subsidiaries, in each case as amended to the date of
this Agreement.
3.2 SUBSIDIARIES. The only direct or indirect subsidiaries of the Company
are those listed in Section 3.2 of the Disclosure Schedule (the
"Subsidiaries"). All the outstanding shares of capital stock of each such
Subsidiary have been validly issued and are fully paid and nonassessable and
are owned (of record and beneficially) by the Company, by another wholly owned
Subsidiary of the Company or by the Company and another such wholly owned
Subsidiary, free and clear of all pledges, claims, liens, charges,
encumbrances, mortgages, adverse claims, restrictions and security interests of
any kind or nature whatsoever (collectively, "Liens"), except as set forth in
Section 3.2 of the Disclosure Schedule. Except for the ownership interests set
forth in Section 3.2 of the Disclosure Schedule, the Company does not own,
directly or indirectly, any capital stock or other ownership interest in any
corporation, partnership, business association, joint venture or other entity.
3.3 CAPITAL STRUCTURE. The authorized capital stock of the Company
consists of (i) 10,000,000 shares of Common Stock, par value $.01 per share,
and (ii) 5,635 shares of preferred stock, par value $1.00 per share. Subject to
any Permitted Changes (as defined in Section 5.1(d)) there are, as of the close
of business on May 29, 1998: (i) 5,300,469 shares of Common Stock issued and
outstanding; (ii) 8,239 shares of Common Stock held in the treasury of the
Company; and (iii) 824,266 shares of Common Stock issuable upon exercise of
outstanding Stock Options. Section 3.3 of the Disclosure Schedule sets forth
the following information with respect to each unexpired outstanding Stock
Option: (1) the number of shares of Common Stock for which such Stock Option is
exercisable; (2) the holder of such Stock Option; (3) the exercise price; (4)
the grant date; and (5) the expiration date. Except as set forth above or in
Section 3.3 of the Disclosure Schedule, no shares of capital stock or other
equity securities of the Company are issued, reserved for issuance or
outstanding. All outstanding shares of capital stock of the Company are, and
all shares that may be issued pursuant to the Stock Option Plans, including any
increases pursuant to existing contractual obligations, and the other Stock
Options will be, when issued, duly authorized, validly issued, fully paid and
nonassessable and not subject to preemptive rights. Except as set forth on
Section 3.3 of the Disclosure Schedule, there are no outstanding bonds,
debentures, notes or other indebtedness or other securities of the Company
having the right to vote (or convertible into, or exchangeable for, securities
having the right to vote) on any matters on which stockholders of the Company
may vote. Except as set forth above or in Section 3.3 of the Disclosure
Schedule, there are no outstanding securities, options, warrants, calls,
rights, commitments, agreements, arrangements or undertakings of any kind to
which the Company or any of its Subsidiaries is a party or by which any of them
is bound obligating the Company or any of its Subsidiaries to issue, deliver or
sell, or cause to be issued, delivered or sold, additional shares of capital
stock or other equity or voting securities of the Company or of any of its
Subsidiaries or obligating the Company or any of its Subsidiaries to issue,
grant, extend or enter into any such security, option, warrant, call, right,
commitment, agreement, arrangement or undertaking. Except as disclosed in
Section 3.3 of the Disclosure Schedule, (i) there are no outstanding
contractual obligations, commitments, understandings or arrangements of the
Company or any of its Subsidiaries to repurchase, redeem or otherwise acquire
or make any payment in respect of any shares of capital stock of the Company or
any of its Subsidiaries and (ii) to the knowledge of the Company, there are no
irrevocable proxies with respect to shares of capital stock of the Company or
any subsidiary of the Company. Section 3.3 of the Disclosure Schedule sets
forth the record and, to the knowledge of the Company, beneficial ownership of,
and voting power
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in respect of, the capital stock of the Company held by the Company's
directors, officers and stockholders owning 5% or more of the outstanding
Common Stock. Except as set forth on Section 3.3 of the Disclosure Schedule,
there are no agreements or arrangements pursuant to which the Company is or
could be required to register shares of Common Stock or other securities under
the Securities Act of 1933, as amended (the "Securities Act") or other
agreements or arrangements with, between or among any security holders of the
Company with respect to securities of the Company.
3.4 AUTHORITY; NONCONTRAVENTION; CONSENTS AND APPROVALS. The Company has
the requisite corporate and other power and authority to enter into this
Agreement and, subject to the Company Stockholder Approval with respect to the
consummation of the Merger, to consummate the transactions contemplated hereby.
The execution and delivery of this Agreement by the Company and the
consummation by the Company of the transactions contemplated hereby have been
duly authorized by the Company's Board of Directors, which constitutes all
necessary corporate action on the part of the Company, subject, in the case of
the Merger, to the Company Stockholder Approval. This Agreement has been duly
executed and delivered by the Company and, subject to the Company Stockholder
Approval in the case of the Merger, constitutes a valid and binding obligation
of the Company, enforceable against the Company in accordance with its terms
subject, as to enforceability, to bankruptcy, insolvency, reorganization and
other laws of general applicability relating to or affecting creditors' rights
and to general principles of equity. Except as disclosed in Section 3.4 of the
Disclosure Schedule, the execution and delivery of this Agreement does not, and
the consummation of the transactions contemplated by this Agreement and
compliance with the provisions hereof will not, conflict with, or result in (a)
any breach or violation of, or default (with or without notice or lapse of
time, or both) under, or right of termination, cancellation, acceleration or
"put", with respect to any obligation or (b) the loss of a benefit or other
right or (c) the creation of any Lien upon any of the properties or assets of
the Company or any of its Subsidiaries, under (i) the Articles of Incorporation
or Bylaws of the Company or the comparable organizational documents of any of
its Subsidiaries, (ii) any loan or credit agreement, note, note purchase
agreement, bond, mortgage, indenture, Lease (as defined in Section 3.23) or
other agreement, instrument, permit, concession, franchise or license
applicable to the Company or any of its Subsidiaries or their respective
properties or assets or (iii) subject to the governmental filings and other
matters referred to in the following sentence, any judgment, order, decree,
statute, law, ordinance, rule, regulation or arbitration award applicable to
the Company or any of its Subsidiaries or their respective properties or
assets, other than, in the case of clauses (i), (ii) and (iii), any such
conflicts, breaches, violations, defaults, rights, losses or Liens that
individually or in the aggregate would not have a Material Adverse Effect with
respect to the Company or would not prevent, hinder or materially delay the
ability of the Company and/or MergerCo to consummate the transactions
contemplated by this Agreement if not cured or waived by the Closing Date. No
consent, approval, order or authorization of, or registration, declaration or
filing with, or notice to, any federal, state, territorial, commonwealth or
local government or governmental authority or agency or any court,
administrative agency or commission or other governmental authority or agency,
domestic or foreign (a "Governmental Entity"), or any other person under any
Lease, Contract (as defined in Section 3.12) or other instrument to which the
Company or any Subsidiary is a party or to which any of its properties is
subject, is required by or with respect to the Company or any of its
Subsidiaries in connection with the execution and delivery of this Agreement by
the Company or the consummation by the Company of the transactions contemplated
hereby, except for (i) the filing of a pre-merger notification and report form
by the Company under the Hart-Scott-Rodino Antitrust Improvements Act of 1976,
as amended (the "HSR Act"), (ii) the filing with the SEC of (x) a proxy
statement relating to the Company Stockholder Approval (such proxy statement as
amended or supplemented from time to time, the "Proxy Statement"), and (y) such
reports under the Securities Exchange Act of 1934, as amended (the "Exchange
Act") as may be required in connection with this Agreement and the transactions
contemplated by this Agreement, (iii) the filing of the Articles of Merger by
the Department of State of the State of Florida and appropriate documents with
the relevant authorities of other states in which the Company is qualified to
do business, and (iv) such other consents, approvals, orders, authorizations,
registrations, declarations, filings or notices as are set forth in Section 3.4
of the Disclosure Schedule.
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3.5 SEC DOCUMENTS; UNDISCLOSED LIABILITIES. The Company has timely filed
all required reports, schedules, forms, statements and other documents with the
SEC since August 1, 1992 (collectively, and in each case including all exhibits
and schedules thereto and documents incorporated by reference therein, as
amended, the "SEC Documents"). As of their respective dates, the SEC Documents
complied in all material respects with the requirements of the Securities Act,
or the Exchange Act, as the case may be, and the rules and regulations of the
SEC promulgated thereunder applicable to such SEC Documents, and none of the
SEC Documents (including any and all financial statements included therein) as
of such dates contained any untrue statement of a material fact or omitted to
state a material fact required to be stated therein or necessary in order to
make the statements therein, in the light of the circumstances under which they
were made, not misleading. Except to the extent revised or superseded by a
subsequent filing with the SEC (a copy of which has been provided to MergerCo
prior to the date of this Agreement), none of the SEC Documents filed by the
Company since August 1, 1997 and prior to the date of this Agreement (the
"Recent SEC Documents"), as of their respective dates, contained any untrue
statement of a material fact or omitted to state any material fact required to
be stated therein or necessary in order to make the statements therein, in the
light of the circumstances under which they were made, not misleading. The
consolidated financial statements of the Company included in the SEC Documents
(the "SEC Financial Statements"), as of their respective dates, complied as to
form in all material respects with applicable accounting requirements and the
published rules and regulations of the SEC with respect thereto, were prepared
in accordance with generally accepted accounting principles ("GAAP") (except,
in the case of unaudited consolidated quarterly statements, as permitted by
Form 10-Q of the SEC) applied on a consistent basis during the periods involved
(except as may be indicated in the notes thereto) and fairly presented the
consolidated financial position of the Company and its consolidated
Subsidiaries as of the dates thereof and the consolidated results of their
operations and cash flows for the periods then ended (subject, in the case of
unaudited quarterly statements, to normal year-end audit adjustments, none of
which, individually or in the aggregate is material). Except as provided for in
the balance sheet contained in the most recent audited financial statements of
the Company included in the Recent SEC Documents (the "Year End Balance Sheet")
or except as disclosed in Section 3.5 of the Disclosure Schedule, neither the
Company nor any Subsidiary has any liabilities or obligations of any nature
(whether accrued, absolute, contingent or otherwise) except (x) liabilities
incurred in the ordinary and usual course of business and consistent with past
practice, (y) liabilities specifically incurred in connection with the
transactions contemplated by this Agreement (including, without limitation,
liabilities to the holders of Dissenting Shares), and (z) other liabilities
which do not exceed $250,000 in the aggregate, exclusive of obligations under
Section 9.2 hereof.
3.6 INFORMATION SUPPLIED. None of the information supplied or to be
supplied by the Company for inclusion or incorporation by reference in the
Proxy Statement will, at the date it is first mailed to the Company's
stockholders or at the time of the Stockholders Meeting (as defined in Section
6.1), contain any untrue statement of a material fact or omit to state any
material fact required to be stated therein or necessary in order to make the
statements therein, in the light of the circumstances under which they are
made, not misleading, except that no representation or warranty is made by the
Company with respect to the information supplied by MergerCo or any affiliate
of MergerCo specifically for inclusion in the Proxy Statement. The Proxy
Statement will comply as to form in all material respects with the requirements
of the Exchange Act and the rules and regulations promulgated thereunder.
3.7 ABSENCE OF CERTAIN CHANGES OR EVENTS. Except as disclosed in the
Recent SEC Documents or on Section 3.7 of the Disclosure Schedule, since the
date of the Year End Balance Sheet, the Company has conducted its business only
in the ordinary course consistent with past practice and there is not and has
not been: (a) any Material Adverse Change with respect to the Company; (b) any
condition, event or occurrence which, either individually or in the aggregate,
would reasonably be expected to have a Material Adverse Effect or give rise to
a Material Adverse Change with respect to the Company; (c) any event that, if
it had taken place following the execution of this Agreement, would not have
been permitted by Section 5.1 without the prior consent of MergerCo; (d) to the
Company's knowledge, any theft with respect to the Company or its Subsidiaries,
other than shrinkage of Inventory (as defined in Section 3.22) occurring in the
ordinary course of business at a rate consistent with the Company's
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experience in the previous 24 months; or (e) any condition, event or occurrence
that would reasonably be expected to prevent, hinder or delay the ability of
the Company to consummate the transactions contemplated by this Agreement.
3.8 LITIGATION; LABOR MATTERS; COMPLIANCE WITH LAWS.
(a) Except as set forth in Section 3.8 of the Disclosure Schedule or as
disclosed in the Recent SEC Documents, there is (i) no suit, action or
proceeding or investigation pending of which the Company has notice or
knowledge and, (ii) to the knowledge of the Company, no suit, action or
proceeding or investigation threatened against the Company, any of its
Subsidiaries, their business or properties that, either individually or in the
aggregate, would reasonably be expected to have a Material Adverse Effect with
respect to the Company or prevent, hinder or delay the ability of the Company
to consummate the transactions contemplated by this Agreement nor is there any
judgment, decree, injunction, rule or order of any Governmental Entity or
arbitrator outstanding against the Company, any of its Subsidiaries, their
business or properties having, or which in the future could have, any such
effect.
(b) Except as disclosed in Section 3.8 of the Disclosure Schedule, (i)
neither the Company nor any of its Subsidiaries is a party to, or bound by, any
collective bargaining agreement, contract or other agreement or understanding
with a labor union or labor organization; (ii) neither the Company nor any of
its Subsidiaries is the subject of any proceeding, of which the Company has
notice or knowledge, asserting that it or any Subsidiary has committed an
unfair labor practice or seeking to compel it to bargain with any labor
organization as to wages or conditions of employment; (iii) there is no strike,
work stoppage or other labor dispute involving the Company or any of its
Subsidiaries pending or, to its knowledge, threatened; (iv) each of the Company
and its Subsidiaries is in compliance with all federal, state or other
applicable laws, domestic or foreign, including the laws of Puerto Rico,
respecting employment and employment practices, terms and conditions of
employment and wages and hours, except for violations or failures so to comply,
if any, that, either individually or in the aggregate, would not reasonably be
expected to have a Material Adverse Effect with respect to the Company; and (v)
except with respect to liabilities incurred at the written request of the
Buyer, neither the Company nor any of its Subsidiaries is liable for any
severance pay, change-of-control payments, or other payments to any employee or
former employee, or any other person, arising from the termination of
employment, or as a result of or in connection with the transactions
contemplated hereunder, or other change in the legal relationship with such
person, or otherwise arising, under any benefit or severance policy, practice,
agreement, plan, or program of the Company or any Subsidiary, nor will the
Company or any Subsidiary have any such liability that exists or arises, or may
be deemed to exist or arise, under any applicable law or otherwise, as a result
of or in connection with the transactions contemplated hereunder or as a result
of the termination by the Company or any Subsidiary of any persons employed by
the Company or any of its Subsidiaries at or prior to the Effective Time.
(c) The ownership and leasing of the assets of and the conduct of the
business of the Company and each of its Subsidiaries have not been in violation
of and comply with all statutes, laws, regulations, ordinances, rules,
judgments, orders, decrees or arbitration awards applicable thereto (including,
without limitation, statutes, laws, regulations and rules relating to
immigration, employment, labor relations and export controls), except for
violations or failures so to comply, if any, that, either individually or in
the aggregate, would not reasonably be expected to have a Material Adverse
Effect with respect to the Company.
3.9 EMPLOYEE MATTERS.
(a) Set forth in Section 3.9 of the Disclosure Schedule is an accurate and
complete list showing the names of all persons employed by the Company or any
Subsidiary who received more than $50,000 in cash compensation in 1997 or who
are expected to receive more than $50,000 in cash compensation in 1998
(including, without limitation, salary, commission and bonus). Such list sets
forth the present salary or hourly wage, 1997 cash compensation (including,
without limitation, salary, commission and bonus) and fringe benefits, of each
such person.
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(b) Section 3.9 of the Disclosure Schedule contains a true and complete
list of each "employee benefit plan" (as defined in Section 3(3) of the
Employee Retirement Income Security Act of 1974, as amended ("ERISA")) and all
other employee benefit plans, contracts, agreements, practices, policies or
arrangements, written or, to the Company's knowledge, oral and whether or not
subject to ERISA, which the Company, or any ERISA Affiliate (as defined below)
sponsors, maintains, contributes to, is a party to or otherwise has or could
have any obligation under, with respect to any current or former officer,
director, employee, leased employee or independent contractor of the Company or
its ERISA Affiliates, as of the Closing Date. Employee benefit plans and all
other employee benefit plans, contracts, agreements, practices, policies or
arrangements, written or oral, are collectively referenced by the term "Benefit
Plans." Without limiting the generality of the foregoing, the term Benefit
Plans includes all employment, noncompetition, management, agency, severance,
incentive, bonus, retention bonus, change-in-control, fringe benefit plans or
consulting arrangements and other similar plans; all stock option, stock
ownership, stock bonus, incentive stock option, stock purchase plans and other
similar plans, policies, or arrangements; all deferred compensation, profit
sharing, gain sharing, retirement, pension and other similar plans; medical
plans, retiree medical plans, cafeteria plans, disability insurance plans, life
insurance plans, dependent care assistance plans, educational assistance plans,
group legal services plans and other similar plans.
With respect to the Benefit Plans, except as requested in writing by an
officer of the Buyer after the date of this Agreement or as set forth in
Section 3.9 of the Disclosure Schedule:
(i) none of the Benefit Plans is a "multiemployer plan" within the
meaning of ERISA nor has the Company ever maintained, contributed to, or
been obligated to contribute to such a Plan;
(ii) none of the Benefit Plans promises or provides retiree medical or
life insurance benefits to any person;
(iii) none of the Benefit Plans or any other agreement with any
employee of the Company or its Subsidiaries provides for payment of a
benefit, the increase of a benefit amount, the payment of a contingent
benefit, or the acceleration of the payment or vesting of a benefit by
reason of the execution of this Agreement or the consummation of the
transactions contemplated by this Agreement;
(iv) each Benefit Plan that is an "employee pension benefit plan"
(within the meaning of Section 3(2) of ERISA), except for plans relating to
deferred compensation which are exempt under sections 201, 301 and 401 of
ERISA, has received a favorable determination letter from the Internal
Revenue Service that it is so qualified under section 401(a) of the
Internal Revenue Code of 1986, as amended ("Code"), each Benefit Plan
subject to Section 1065 of the Puerto Rican Tax Act is qualified under such
section, and no event has occurred that will or could give rise to
disqualification or loss of tax exempt status of any such Benefit Plan or
trust;
(v) each Benefit Plan has been operated in all respects in accordance
with its terms and the requirements of all applicable laws and regulations
except where the failure to do so would not have a Material Adverse Effect
with respect to the Company, the Company and each ERISA Affiliate have
performed all of their material obligations that have become due under all
Benefit Plans including the reporting and disclosure requirements of ERISA,
and all premiums due and payable to the Pension Benefit Guaranty
Corporation have been paid in full;
(vi) neither the Company nor any ERISA Affiliate has liability under
Title IV of ERISA in connection with the termination of, or withdrawal
from, any Benefit Plan;
(vii) the Company has provided to the Buyer or MergerCo (x) true and
complete copies of all Benefit Plans, (y) the most recent annual actuarial
valuation, if any, prepared for each Benefit Plan, and (z) the most recent
annual report (Form 5500), if any, required under ERISA with respect to
each Benefit Plan;
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(viii) no payment that is owed or may become due to any director,
officer, employee, or agent of the Company will be non-deductible to the
Company or subject to tax under Section 280G or Section 4999 of the Code,
respectively, nor will the Company be required to "gross up" or otherwise
compensate any such person because of the imposition of any excise tax on a
payment to such person;
(ix) as of the date hereof, subject to the requirements of Section 412
of the Code or Section 302 of ERISA, no Pension Plan has incurred an
accumulated funding deficiency nor has any sponsor of such a Pension Plan
obtained a funding waiver (as such terms are defined in such applicable
sections and any regulations thereunder) with respect thereto;
(x) neither the Company nor any ERISA Affiliate has engaged in, and
neither the Company nor any Affiliate knows of any other person who or
which has engaged in, any "prohibited transaction" (within the meaning of
Section 406 of ERISA or Section 4975 of the Code, excluding any
transactions which are exempt under Section 408 of ERISA or Section 4975 of
the Code) with respect to any Benefit Plan, which could reasonably be
expected to have a Material Adverse Effect with respect to the Company or
to subject the Buyer or MergerCo to any material liability, and no event
has occurred that will or could subject any Benefit Plan to tax under
Section 511 of the Code;
(xi) no reportable event (as defined in ERISA and the regulations
thereunder, but excluding any such event for which the 30 day notice
requirement has been waived) has occurred or is continuing with respect to
any Benefit Plan;
(xii) there are no actions, suits or claims pending (other than
routine claims for benefits) of which the Company has notice or knowledge,
or, to the knowledge of the Company, any actions, suits or claims (other
than routine claims for benefits) which can reasonably be expected to be
asserted, against the Company with respect to any Benefit Plan or other
plan or arrangement, or against any such Benefit Plan or other plan or the
assets thereof;
(xiii) the Company and each ERISA Affiliate is, and at all relevant
times has been, in compliance with the provisions of COBRA (as defined
below);
(xiv) except as contemplated in Sections 6.8 and 6.13 of this
Agreement, the Company has not taken any action or made any statement,
promise or representation to, or agreement with, any of its employees,
officers or directors that after the Closing the Buyer will continue or
establish any Benefit Plan or other plan or arrangement or provide any
particular benefits or compensation to employees;
(xv) all insurance premiums relating to any Benefit Plan that are due
and payable as of the date of this Agreement have been paid, no insurance
policy or other insured funding medium through which benefits are provided
under any Benefit Plan is subject to any retroactive rate adjustment, loss
sharing arrangement, the payment of additional premiums, or other actual or
contingent liability with respect to any periods prior to the date of this
Agreement, and, to the knowledge of the Company, no insurance company that
provides an insurance or annuity policy or other insured funding medium is
insolvent or has been taken over by any governmental agency that regulates
insurance companies;
(xvi) the Company has the right to amend or terminate, without the
consent of any other person, any Benefit Plan which it maintains and each
Benefit Plan can be amended or terminated after the Closing without any
additional contribution to the Benefit Plan or the payment of any
additional compensation or amount, additional vesting, or the acceleration
of any benefits, except as proscribed by applicable laws or regulations;
(xvii) the Company has never maintained nor ever contributed to a
"defined benefit pension plan" as defined in Section 3(35) of ERISA; and
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(xviii) each "welfare benefit plan" (as defined in Section 3(1) of
ERISA) intended to meet the requirements for tax favored treatment under
Subchapter B of Chapter 1 of the Code meets such requirements and no
welfare benefit plan provides or has provided a "disqualified benefit" (as
such term is defined in Section 4976(b) of the Code).
For purposes of this Agreement, "ERISA Affiliate" shall mean any corporation,
trade or business which controls, is controlled by, or is under common control
with, the Company within the meaning of Sections 414(b), 414(c), 414(m) or
414(o) of the Code or Section 4001(a)(14) of ERISA and "COBRA" shall mean Part
6 of Subtitle B of Title I of ERISA and Section 4980B(f) of the Code.
3.10 TAXES. Except as disclosed in Section 3.10 of the Disclosure
Schedule, the Company and each of its Subsidiaries, and any consolidated,
combined, unitary or aggregate group for Tax purposes of which the Company or
any of its Subsidiaries is or has been a member (a "Consolidated Group") has
timely filed (within permitted extension periods, if applicable) all Tax
Returns required to be filed by it, has paid all Taxes shown thereon to be due
and has provided adequate reserves in its financial statements for any Taxes
that have not been paid, whether or not shown as being due on any Tax Returns.
Except as disclosed in Section 3.10 of the Disclosure Schedule, (i) no claim
for Taxes that are due and payable has become a Lien against the property of
the Company or any of its Subsidiaries or is being asserted against the Company
or any of its Subsidiaries; (ii) no audit of any Tax Return of the Company or
any of its Subsidiaries is being conducted by a Tax authority; (iii) no
extension of the statute of limitations on the assessment of any Taxes has been
granted by the Company or any of its Subsidiaries and is currently in effect
and there are no agreements for the extension or waiver of the time for
assessment of any non-income Taxes relating to the Company or its Subsidiaries
and neither the Company nor any Subsidiary has been requested to enter into any
such agreement or waiver; (iv) all Taxes that the Company or any Subsidiary is
(or was) required by law to withhold or collect have been duly withheld or
collected, and have been timely paid over to the proper authorities to the
extent due and payable; (v) there is no tax sharing arrangement that will
require any payment by the Company or any of its Subsidiaries after the date of
this Agreement; and (vi) neither the Company nor any member of the Consolidated
Group (1) has filed a consent pursuant to Section 341(f) of the Code or agreed
to have Section 341(f)(2) apply to any disposition of a subsection (f) asset
(as such term is defined in Section 341(f) of the Code) owned by a member of
the Consolidated Group, (2) has agreed, or is required, to make any adjustment
under Section 481(a) of the Code by reason of a change in accounting method or
otherwise that will affect the liability of the Consolidated Group for Taxes,
(3) has made an election, or is required, to treat any asset of the
Consolidated Group as owned by another person pursuant to the provisions of
former Section 168(f)(8) of the Code, (4) has participated in an international
boycott as defined in Section 999 of the Code, (5) is now or has ever been a
"foreign person" within the meaning of Section 1445(b)(2) of the Code, (6) is
now or ever been a United States real property holding corporation within the
meaning of Section 897(c)(1)(A)(ii) of the Code, or (7) has made any of the
foregoing elections or is required to apply any of the foregoing rules under
any comparable state or local tax provision. The Company has delivered or
otherwise made available to MergerCo true and complete copies of all Tax
Returns filed by the Company or any Subsidiary in the past three years. As used
herein, "Taxes" shall mean all taxes of any kind, including, without
limitation, those on or measured by or referred to as income, gross receipts,
sales, use, ad valorem, franchise, profits, license, withholding, back-up
withholding, payroll, employment, excise, severance, stamp, occupation,
premium, value added, property or windfall profits taxes, customs, duties or
similar fees, assessments or charges of any kind whatsoever, together with any
interest and any penalties, additions to tax or additional amounts imposed by
any Governmental Entity. As used herein, "Tax Return" shall mean any return,
report or statement required to be filed with any Governmental Entity with
respect to Taxes. Except as set forth on Schedule 3.10, there are no written
or, to its knowledge, oral proposed assessments of Taxes against the Company or
any of its Subsidiaries or written or, to its knowledge, oral proposed
adjustments to any Tax Return filed, pending against the Company or any of its
Subsidiaries, or written or, to its knowledge, oral proposed adjustments to the
manner in which any Tax of the
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Company or any of its Subsidiaries is determined. For purposes of this Section
3.10, "written" means the Company or any Subsidiary has received notice in
writing of such assessment or adjustments or has knowledge of such notice.
3.11 ENVIRONMENTAL MATTERS. Except as disclosed in Section 3.11 of the
Disclosure Schedule, which discloses items of non-compliance that could not,
individually or in the aggregate, reasonably be expected to have a Material
Adverse Effect with respect to the Company:
(a) The Company and its Subsidiaries hold and formerly held, and are, and
have been, in material compliance with, all Environmental Permits, and the
Company and its Subsidiaries are, and have been, otherwise in material
compliance with all applicable Environmental Laws;
(b) None of the Company or its Subsidiaries has received any Environmental
Claim, and none of the Company or its Subsidiaries has knowledge, after
Diligent Inquiry, of any threatened Environmental Claim or of any
circumstances, conditions or events that could reasonably be expected to give
rise to an Environmental Claim, against the Company or any of its Subsidiaries;
(c) To the knowledge of the Company, after Diligent Inquiry, there are no
(i) underground storage tanks, (ii) polychlorinated biphenyls, (iii) asbestos
or asbestos-containing materials, (iv) urea-formaldehyde insulation, (v) sumps,
(vi) surface impoundments, (vii) landfills, (viii) sewers or septic systems or
(ix) Hazardous Materials present at any facility currently owned, leased,
operated or otherwise used or, to the knowledge of the Company, formerly owned,
leased, operated or otherwise used, by the Company or any of its Subsidiaries
that could reasonably be expected to give rise to liability of the Company or
any of its Subsidiaries under any Environmental Laws;
(d) No modification, revocation, reissuance, alteration, transfer, or
amendment of the Environmental Permits, or any review by, or approval of, any
third party of the Environmental Permits is required in connection with the
execution or delivery of this Agreement or the consummation of the transactions
contemplated hereby or the continuation of the business of the Company or its
Subsidiaries following such consummation;
(e) To the knowledge of the Company, after Diligent Inquiry, Hazardous
Materials have not been generated, transported, treated, stored, disposed of,
released or threatened to be released at, on, from or under any of the
properties or facilities currently owned, leased or otherwise used or, to the
knowledge of the Company, formerly owned, leased, operated or otherwise used,
including without limitation for receipt of the Company's wastes, by the
Company or any of its Subsidiaries, in violation of or in a manner or to a
location that could give rise to liability under any Environmental Laws;
(f) The Company and its Subsidiaries have not assumed, contractually or by
operation of law, any liabilities or obligations under any Environmental Laws
that, based on facts and circumstances of which the Company has knowledge,
might reasonably be expected to have a Material Adverse Effect with respect to
the Company.
(g) For purposes of this Agreement, the following terms shall have the
following meanings:
"Diligent Inquiry" means inquiry of (i) the employees of the Company and
each Subsidiary in charge of environmental matters and (ii) such other
individuals or entities whom the officers of the Company reasonably expect,
upon exercise of the degree of diligence that would have been exercised by a
reasonable person in such position, to have knowledge of material environmental
matters affecting the Company or any Subsidiary.
"Environmental Claim" means any written or oral notice, claim, demand,
action, complaint, proceeding, request for information or other communication
by any person alleging liability or potential liability (including without
limitation liability or potential liability for investigatory costs, cleanup
costs, governmental response costs, natural resource damages, property damage,
personal injury, fines or
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penalties) arising out of, relating to, based on or resulting from (i) the
presence, discharge, emission, release or threatened release of any Hazardous
Materials at any location, currently owned, leased, operated or otherwise used,
or, to the knowledge of the Company, formerly owned, leased, operated or
otherwise used, by the Company or any of its Subsidiaries or (ii) circumstances
forming the basis of any violation or alleged violation of any Environmental
Law or Environmental Permit or (iii) otherwise relating to obligations or
liabilities under any Environmental Laws.
"Environmental Permits" means all Permits required under Environmental
Laws.
"Environmental Laws" means all applicable domestic and foreign federal,
state and local statutes, rules, regulations, ordinances, orders, decrees and
common law relating in any manner to contamination, pollution or protection of
human health or the environment, including without limitation the Comprehensive
Environmental Response, Compensation and Liability Act, the Solid Waste
Disposal Act, the Clean Air Act, the Clean Water Act, the Toxic Substances
Control Act, the Occupational Safety and Health Act, the Emergency Planning and
Community-Right-to-Know Act, and the Safe Drinking Water Act, all as amended,
and similar state and local laws.
"Hazardous Materials" means all hazardous or toxic substances, wastes,
materials or chemicals, petroleum (including crude oil or any fraction thereof)
and petroleum products, asbestos and asbestos-containing materials, pollutants,
contaminants and all other materials, substances and forces, including but not
limited to electromagnetic fields, regulated pursuant to, or that could form
the basis of liability under, any Environmental Law.
"Permits" means all permits, licenses, registrations, permissions,
certificates and other authorizations, approvals and consents issued or granted
by any Governmental Entity and obtained by the Company or any of its
Subsidiaries or otherwise required in connection with the conduct or operation
of the Company's or any Subsidiary's business or facilities or the ownership,
lease or possession by the Company or any Subsidiary of any real, personal or
intangible property.
3.12 MATERIAL CONTRACTS. Except as set forth in Section 3.12 of the
Disclosure Schedule or in another Section of the Disclosure Schedule and other
than employee compensation (except for written employment agreements) in the
ordinary course of business consistent with past practice, neither the Company
nor any Subsidiary is a party to or bound by (a) any agreement (including, but
not limited to, employment, advertising, distribution and licensing
agreements), contract, commitment, arrangement, lease (including with respect
to real and personal property), policy, indenture, mortgage, or other
instrument (collectively, "Contracts") that involves the performance of
services or the delivery of goods and/or materials by or to it in an amount or
value in excess of $50,000, (b) any Contract not in the ordinary course of
business relating to expenditures or liabilities in excess of $25,000, (c) any
Contract relating to capital expenditures in excess of $25,000 in the
aggregate, (d) any Contract relating to indebtedness, liability for borrowed
money or the deferred purchase price of property (excluding trade payables in
the ordinary course of business), (e) any loan or advance to (other than
advances to employees in the ordinary course of business in amounts of $1,000
or less to any individual and $10,000 or less in the aggregate), or investment
in, any person, any Contract relating to the making of any such loan, advance
or investment or any Contract involving a sharing of profits, (f) any guarantee
or other contingent liability in respect of any indebtedness or obligation of
any person, (g) any management service, consulting or any other similar type of
Contract, (h) any Contract limiting the ability of the Company or any
Subsidiary to engage in any line of business or to compete with any person, (i)
any warranty, guaranty or other similar undertaking with respect to a
contractual performance extended by the Company or any Subsidiary, (j) any
Contract whereby the Company or any Subsidiary shares services with any third
party, (k) any capital lease or lease of personal property, (l) any Contract
that is or was required to be filed as an exhibit to the SEC Documents or (m)
any amendment, modification or supplement in respect of any of the foregoing
((a)-(m), collectively, the "Material Contracts," provided that the term
"Material Contract" shall not be deemed to include any Contract under which the
Company and each Subsidiary have both no obligation to perform in the future
and no right to the benefits of the future performance of any other person).
Except as otherwise set forth in Section 3.12 of
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the Disclosure Schedule, each Material Contract is valid and binding and in
full force and effect in accordance with its terms and there exists no default,
breach or event of default thereunder or event, occurrence, condition or act
(including the consummation of the transactions contemplated hereby) on the
part of the Company, any Subsidiary or, to the knowledge of the Company, any
other person that, with the giving of notice, the lapse of time or the
happening of any other event or condition, would become a default, breach or
event of default thereunder. The Company or its Subsidiaries have duly
performed their respective obligations under each Material Contract in all
material respects to the extent such obligations have occurred. The Company has
provided or made available to MergerCo true and complete copies of each
Material Contract. Except as set forth in Section 3.12 of the Disclosure
Schedule, no Material Contract relating to borrowed money indebtedness imposes
on the Company or any Subsidiary any penalty, fee or service charge in
connection with the prepayment, repayment or early payment of any indebtedness
thereunder. Other than as disclosed in the most recent balance sheet of the
Company included in the SEC Documents or as set forth in Section 3.12 of the
Disclosure Schedule, no indebtedness for borrowed money of the Company or its
Subsidiaries contains any restriction upon the incurrence of indebtedness for
borrowed money by the Company or any of its Subsidiaries or restricts the
ability of the Company or any of its Subsidiaries to grant any Liens on its
properties or assets.
3.13 BROKERS; LEGAL COUNSEL.
(a) No broker, investment banker, financial advisor or other person, other
than PaineWebber Incorporated, the fees and expenses of which will be paid by
the Company (pursuant to a fee agreement, a copy of which has been provided to
MergerCo), is entitled to any broker's, finder's, financial advisor's or other
similar fee or commission in connection with the transactions contemplated by
this Agreement based upon arrangements made by or on behalf of the Company. The
aggregate fees payable to PaineWebber Incorporated pursuant to such arrangement
shall not exceed $250,000 (plus reasonable expenses).
(b) No legal counsel, other than Holland & Knight LLP, Broad and Cassel
and such other legal counsel as the Company may engage from time to time in
good faith ("Company Legal Counsel"), the fees and expenses of which will be
paid by the Company (pursuant to one or more fee agreements, copies of which
have been provided to MergerCo), is entitled to any legal fees and expenses,
whether contingent or otherwise, in connection with the transaction
contemplated by this Agreement based upon arrangements made by or on behalf of
the Company.
3.14 OPINION OF FINANCIAL ADVISOR. The Board of Directors of the Company
has received the opinion of PaineWebber Incorporated dated the date hereof,
that as of such date "the Merger Consideration to be received in the Merger is
fair from a financial point of view, to the holders of Common Stock," a signed
copy of which opinion has been delivered to the Company. The opinion of the
PaineWebber Incorporated is subject to various conditions and assumptions
contained therein.
3.15 BOARD RECOMMENDATION. The Board of Directors of the Company, at a
meeting duly called and held, has unanimously (a) determined that the Merger
and the other transactions contemplated by this Agreement, taken together, are
fair to, and in the best interests of, the Company and the holders of the
Common Stock, (b) authorized and approved this Agreement, the Merger and the
other transactions contemplated hereby, and (c) resolved to recommend that the
holders of shares of Common Stock approve this Agreement, the Merger and the
other transactions contemplated hereby.
3.16 REQUIRED COMPANY VOTE. The Company Stockholder Approval, being the
affirmative vote of a majority of the issued and outstanding shares of the
Common Stock, is the only vote of the holders of any class or series of the
Company's securities necessary to approve this Agreement, the Merger and the
other transactions contemplated hereby.
3.17 STATE TAKEOVER STATUTES. No state "fair price," "moratorium,"
"control share acquisition" or other similar takeover statute or regulation of
Florida (and, to the knowledge of the Company after due
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inquiry, of Puerto Rico) applies or purports to apply to the Company or any of
its Subsidiaries, or to this Agreement, the Merger, or any of the other
transactions contemplated hereby, except any such statutes or regulations that
are no longer applicable in any respect upon the execution of this Agreement.
Neither the Company nor any of its Subsidiaries has any rights plan or
agreement, preferred stock or similar arrangement that has, or could have, any
of the aforementioned consequences in respect of the transactions contemplated
hereby.
3.18 INTELLECTUAL PROPERTY; SOFTWARE.
(a) Except as set forth in Section 3.18 of the Disclosure Schedule, all
trademarks, service marks, trade names, logos and other designations of goods
or services, copyrights, registrations for any of the foregoing, patents, and
applications for registration or issuance of or any of the foregoing
(collectively, "Intellectual Property") in which the Company or any of its
Subsidiaries has any ownership interest or right, whether direct, indirect,
contractual or otherwise ("Company Intellectual Property"), and all information
relating to the business of the Company or its Subsidiaries, including but not
limited to information relating to products, services, strategies, pricing,
customers, representatives, suppliers, distributors, technology, finances,
employee compensation, computer software and hardware, inventions,
developments, or trade secrets, in which the Company or any of its Subsidiaries
has any ownership interest or right, whether direct, indirect, contractual or
otherwise, or which is in the possession of the Company or its Subsidiaries or
used in connection with or required for the Company's business or any
Subsidiary's business, to the extent such information is not intended to be
disseminated to the public or is otherwise not generally known to competitors
of the Company or its Subsidiaries (collectively "Proprietary Information") is
owned by or licensed to the Company or its Subsidiaries, free and clear of all
Liens. Except as set forth in Section 3.18 of the Disclosure Schedule, the
Company and its subsidiaries have the right to use and transfer all Company
Intellectual Property and Proprietary Information without the consent of or any
payment to any other person. The Company Intellectual Property, Proprietary
Information and intellectual property rights expressly or impliedly licensed to
the Company and its Subsidiaries by suppliers and other parties are sufficient,
to the Company's knowledge, for the conduct of the business of the Company and
its Subsidiaries as now operated.
(b) Section 3.18 of the Disclosure Schedule sets forth a complete and
accurate list of all Company Intellectual Property (including any Intellectual
Property subject to any license or other agreement to which the Company is a
party), and a complete and accurate list of all licenses and contracts relating
to Intellectual Property or Proprietary Information to which the Company or any
of its Subsidiaries is a party or by which the Company, any of its Subsidiaries
or any of their assets is bound. Except as set forth in Section 3.18 of the
Disclosure Schedule, (i) all of the Company Intellectual Property listed in
Section 3.18 of the Disclosure Schedule has been duly registered or issued by
or filed with the appropriate domestic or foreign Governmental Entity; (ii) all
payments and actions required to apply for, obtain, maintain and renew such
Company Intellectual Property in accordance with all applicable laws and
regulations of the appropriate Governmental Entity have been duly and promptly
made and taken; (iii) all Company Intellectual Property issued by any
Governmental Entity and registrations of Company Intellectual Property remain
in full force and effect, and all applications for registration or issuance of
Company Intellectual Property are pending; and (iv) the Company has not
received notice of any event, inquiry, investigation or proceeding threatening
the validity or enforceability of any such Company Intellectual Property.
(c) Except as set forth in Section 3.18 of the Disclosure Schedule, (i) no
other person has an interest in or right or license to use, or the right to
license any other person to use, any of the Company Intellectual Property or
Proprietary Information, (ii) there are no claims or demands of any other
person pertaining to Company Intellectual Property or Proprietary Information;
(iii) no proceedings have been instituted or are pending (with notice served on
the Company) or, to the knowledge of the Company, threatened that challenge the
Company's or any Subsidiary's rights in or to Company Intellectual Property or
Proprietary Information; and (iv) to the knowledge of the Company, none of the
Company Intellectual Property or Proprietary Information is subject to any
outstanding order, decree, ruling, charge, injunction, judgment or stipulation
or is being infringed, misappropriated or misused by another person.
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(d) Neither the activities of, actions of or services performed by the
Company or its Subsidiaries nor, to the knowledge or the Company, the goods or
services currently manufactured, used, sold or otherwise transferred by the
Company or its Subsidiaries, infringe any intellectual property right of any
other person. Except as set forth in Section 3.18 of the Disclosure Schedule,
(i) no action, suit or proceeding is pending (with notice served on the
Company) or, to the knowledge of the Company, threatened that accuses the
Company or any Subsidiary of misappropriating proprietary information or
otherwise infringing the intellectual property rights of any other person; and
(ii) the Company has not received, and is not aware of, any allegation, charge
or claim that any products, processes, activities or apparatus manufactured,
sold, owned or used by the Company or its Subsidiaries infringe any
Intellectual Property of any other party or entity, or any allegation, charge
or claim that the Company or its Subsidiaries have misappropriated or misused
any Proprietary Information of any other person.
(e) Except as set forth in Section 3.18 of the Disclosure Schedule, all
computer programs and software currently being used in the business of the
Company and its Subsidiaries (the "Software") is owned by the Company and its
Subsidiaries or held under valid license agreements. Neither the Company nor
any Subsidiary has licensed anyone to use any of the Software and the Company
has no knowledge of any infringing use of the Software or claim of infringing
use. The Software is sufficient for the conduct of the business of the Company
and its Subsidiaries as now operated.
3.19 RELATED PARTY TRANSACTIONS. Except as set forth in Section 3.19 of
the Disclosure Schedule hereto, no director, officer, partner, employee,
"affiliate" or "associate" (as such terms are defined in Rule 12b-2 under the
Exchange Act) of the Company or any of its Subsidiaries (a) has borrowed any
monies from or has outstanding any indebtedness or other similar obligations to
the Company or any of its Subsidiaries; (b) to the knowledge of the Company,
owns any direct or indirect interest of any kind in, or is a director, officer,
employee, partner, affiliate or associate of, or consultant or lender to, or
borrower from, or has the right to participate in the management, operations or
profits of, any person or entity that is (i) a competitor, supplier, customer,
distributor, lessor, tenant, creditor or debtor of the Company or any of its
Subsidiaries, (ii) engaged in a business related to the business of the Company
or any of its Subsidiaries, or (iii) participating in any transaction to which
the Company or any of its Subsidiaries is a party; or (c) is otherwise a party
to any contract, arrangement or understanding with the Company or any of its
Subsidiaries.
Section 3.20 PERMITS. The Company and its Subsidiaries have all Permits
(as defined in Section 3.11), except for those Permits the failure of which to
have would not, individually or in the aggregate, have a Material Adverse
Effect with respect to the Company ("Material Permits"). Schedule 3.20 of the
Disclosure Schedule contains a complete list of the Material Permits,
indicating which Material Permits require the consent or approval of any third
party as a result of the transactions contemplated by this Agreement. All of
the Permits are in full force and effect. No outstanding written notice or, to
the knowledge of the Company, oral notice of cancellation or termination has
been delivered to the Company or any Subsidiary in connection with any such
Permit nor has any such cancellation or termination been threatened. No
application, action or proceeding for the modification of any such Permits is
pending or, to the knowledge of the Company, threatened that may result in the
revocation of such Permit.
Section 3.21 INSURANCE POLICIES. Schedule 3.21 of the Disclosure Schedule
contains a list of all policies of property, fire and casualty, product
liability, workers compensation and other forms of insurance owned or held by
the Company or its Subsidiaries, together with a list of all outstanding
material claims against any insurer and the amount of the annual premium
payable with respect to each such policy. Each such policy is in full force and
effect. All premiums with respect to the insurance policies listed on Schedule
3.21 that are due and payable prior to the Effective Time have been paid or
will be paid prior to the Effective Time, and no notice of cancellation or
termination has been received by the Company with respect to any such policy.
Except as set forth in Section 3.21 of the Disclosure Schedule, to the
Company's knowledge, there are no pending claims against such insurance by the
Company or any Subsidiary as to which the insurers have denied coverage or
otherwise reserved rights and no issuer of such insurance has filed for
protection under applicable insolvency laws or is otherwise
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in the process of liquidating or has been liquidated. To the Company's
knowledge, neither the Company nor any Subsidiary has been refused any
insurance with respect to its assets or operations during the past five years.
Except as set forth in Section 3.21 of the Disclosure Schedule, as of the date
of this Agreement, since the last renewal date of any insurance policy, there
has not been any increase in the premiums payable pursuant to such policy in an
amount in excess of 10%.
Section 3.22 GOOD TITLE TO AND CONDITION OF ASSETS.
(a) The Company and each Subsidiary has good and marketable title to all
of its properties and assets, whether real, personal or mixed, tangible or
intangible, wherever located, free and clear of any Liens other than Permitted
Encumbrances (as defined in Section 3.23).
(b) Subject to the expiration of useful lives, all machinery, equipment,
tools, supplies, leasehold improvements, furniture and fixtures of the Company
and its Subsidiaries currently in use or necessary for its business are in good
operating condition, normal wear and tear and ordinary repair requirements
excepted.
(c) Except for items that are in the possession or control of suppliers,
(i) the Company's and each Subsidiary's inventory located in their stores,
returns warehouse, distribution center or in transit or otherwise (the
"Inventory") and (ii) the supplies bought for use in the Company's or any
Subsidiary's stores in connection with the operation of their business in the
ordinary course, including, but not limited to, printed material, security tags
and shopping bags ("Selling Supplies"), are in the physical possession of the
Company or a Subsidiary, in transit to or from suppliers of the Company or a
Subsidiary or in transit to the Company's or Subsidiary's stores. Except for
products that are returned or determined to be defective or obsolete in the
ordinary course of business as to which appropriate reserves have been
established, the Inventory and Selling Supplies consist of items that are in
good and merchantable condition and are of a quality presently usable, salable
and rentable consistent with past practice in the ordinary course of business.
Except as set forth in Section 3.22 of the Disclosure Schedule, all of the
Inventory and Selling Supplies is owned by the Company or a Subsidiary and none
of the Inventory or Selling Supplies is held or sold on consignment.
(d) Except as set forth in Section 3.22 of the Disclosure Schedule with
respect to particular suppliers, the Company and its Subsidiaries have the
right to return to their suppliers for refund or credit in accordance with
standard practice in the industry any compact discs, audio tapes, phonograph
records or videocassettes held for sale and constituting Inventory.
Section 3.23 REAL ESTATE.
(a) Except as set forth in Section 3.23 of the Disclosure Schedule,
neither the Company nor any Subsidiary owns any real property or any interest
therein (the "Owned Properties").
(b) Neither the Company nor any Subsidiary holds any leasehold interest in
any real property except as set forth in Section 3.23 of the Disclosure
Schedule (the "Leasehold Premises"). Section 3.23 of the Disclosure Schedule
lists each of the leases and subleases with respect to the Leasehold Premises
or other real property to which the Company or any Subsidiary is a party
("Leases"), and with respect to each Lease sets forth the term thereof, the
base rent payable with respect thereto, any security deposit relating thereto,
the termination date thereof and whether the Company or a Subsidiary has
subleased any part of the leasehold interest thereunder or assigned such Lease.
The Company and each Subsidiary are parties to no leases or subleases of real
property other than the Leases. The Company has heretofore delivered or made
available to the Buyer and MergerCo true and complete copies of all such Leases
including all amendments, modifications and waivers with respect thereto.
Except as otherwise set forth in Section 3.23 of the Disclosure Schedule: each
Lease is in full force and effect; all rents and additional rents due to date
on each Lease have been paid; neither the Company nor any Subsidiary has
received any notice that it is in default under any Lease and, to the knowledge
of the Company, neither the Company nor any Subsidiary is in default under any
Lease; to the knowledge of
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the Company, no landlord is in default of any of its obligations under any
Lease; and, to the knowledge of the Company, there exists no event, occurrence,
condition or act (including the consummation of the transactions contemplated
by this Agreement) that, with the giving of notice, the lapse of time or the
happening of any further event or condition, would become a default by the
Company or any Subsidiary under any Lease. Except as set forth in Section 3.23
of the Disclosure Schedule, the Company or a Subsidiary is currently the lessee
under each of the Leases and may exercise all rights of a lessee under each of
the Leases. Each Lease under which the Company or a Subsidiary was not the
original lessee was validly assigned to the Company or such Subsidiary and any
party that has a right of consent to such assignment and of which the Company
has knowledge after due review of the applicable Lease has consented to such
assignment and any other party having a right of consent to such assignment has
either consented to such assignment or has taken no action inconsistent with
the granting of such consent.
(c) Except as set forth in Section 3.23 of the Disclosure Schedule, the
Company and its Subsidiaries own the Owned Properties and have valid leasehold
interests in the Leasehold Premises, free and clear of any Liens, covenants and
easements or title defects of any nature whatsoever, except for (i) liens for
taxes, and assessments and other governmental charges in the nature of taxes,
not yet due and payable; (ii) liens in respect of taxes, assessments and other
governmental charges being contested in good faith as disclosed in Section 3.23
of the Disclosure Schedule; (iii) mechanics', carriers', workmen's, repairmen's
and other like liens arising or incurred in the ordinary course of business as
to which any related liability or obligation is reflected in the Year End
Balance Sheet or is otherwise disclosed on the Disclosure Schedule; (iv)
inchoate statutory liens that apply generally in favor of commercial landlords;
(v) liens arising from actions or inactions of the landlords of the Leasehold
Premises; and (vi) such imperfections of title, easements, covenants,
rights-of-way, restrictions and encumbrances and zoning, building and other
similar restrictions, if any, as do not interfere with the present use of such
properties or otherwise impair business operations, as used or conducted on the
date hereof (such exceptions referred to in clauses (i) through (vi) above
being collectively referred to herein as "Permitted Encumbrances").
(d) Except as set forth in Section 3.23 of the Disclosure Schedule, the
portions of the buildings located on the Leasehold Premises that are used in
the Company's or any Subsidiary's business and the buildings located on the
Owned Properties are each in good repair and condition, normal wear and tear
excepted, and are in the aggregate sufficient to satisfy the Company's and its
Subsidiaries' business activities as conducted thereat.
(e) Each of the Leasehold Premises and Owned Properties: (i) has direct
access to public roads or access to public roads by means of an access easement
(which access easement is perpetual, in the case of each of the Owned
Properties, and for at least the remaining term of the Lease and any renewal
periods, in the case of each of the Leasehold Premises), such access being
sufficient to satisfy the current normal day-to-day transportation requirements
of the Company's and its Subsidiaries' businesses as presently conducted at
such parcel; and (ii) is served by all utilities in such quantities as are
sufficient to satisfy the current business activities as conducted at such
parcel.
(f) Except as set forth in Section 3.23 of the Disclosure Schedule,
neither the Company nor any Subsidiary has received notice of (i) any
condemnation proceeding with respect to any portion of the Leasehold Premises
or Owned Properties or any access thereto or that any such proceeding is
contemplated by any Governmental Entity; or (ii) any special assessment which
may affect any of the Leasehold Premises or Owned Properties, or that any such
special assessment is contemplated by any Governmental Entity.
(g) Other than the Leasehold Premises and the Owned Properties, no owned
or leased real property is used in connection with the Business.
(h) Except as set forth in Section 3.23 of the Disclosure Schedule,
neither the Company nor any Subsidiary owns or holds, or is obligated under or
a party to, any option, right of first refusal or other
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contractual right to purchase, acquire, sell, lease or dispose of the Owned
Properties or Leasehold Premises or any portion thereof or interest therein or
in any other real property, including, without limitation, under any Lease.
Section 3.24 CERTAIN BUSINESS PRACTICES. Neither the Company, any of its
Subsidiaries, nor to the Company's knowledge any directors, officers, agents or
employees of the Company or any of its Subsidiaries in their capacities as such
(a) has used any funds for unlawful contributions, gifts, entertainment or
other unlawful expenses related to political activity; (b) has made any
unlawful payment to foreign or domestic government officials or employees or to
foreign or domestic political parties or campaigns or violated any provision of
the Foreign Corrupt Practices Act of 1977, as amended; (c) has made any other
payment prohibited by applicable law; or (d) except as set forth in Section
3.24 of the Disclosure Schedule, in the case of the Company, any of its
Subsidiaries or any of its or their officers or any employee listed in Section
3.9 of the Disclosure Schedule in response to Section 3.9(a) hereof, is a party
to or bound by any noncompetition or similar agreement or obligation with any
third party, which restricts its or his or her business practices or ability to
conduct any business in any geographic area.
Section 3.25 SUPPLIERS AND CUSTOMERS. As of the date hereof, the Company
has received no written or, to its knowledge, oral notice from any significant
supplier to or customer of the Company's or any Subsidiary's business
indicating such supplier's or customer's intention to materially and adversely
alter its existing business relationship with the Company or any Subsidiary.
Section 3.26 PRODUCT WARRANTIES. Section 3.26 of the Disclosure Schedule
sets forth complete and accurate copies of the written, and descriptions of all
oral, product warranties and guaranties by the Company or any of its
Subsidiaries currently in effect. None of the salesmen, employees, distributors
or agents of the Company or any of its Subsidiaries is authorized to undertake
obligations to any customer or to other third parties in excess of such
warranties or guaranties and, to the knowledge of the Company, there have not
been any material deviations from such warranties and guaranties.
Section 3.27 SOLE REPRESENTATIONS. The representations and warranties
contained in this Agreement are the sole representations and warranties that
the Company is making in connection with the transactions contemplated herein.
Except as set forth in the Disclosure Schedule, any matter that is set forth in
any Section of this Agreement or the Disclosure Schedule shall be deemed to be
set forth in all Sections of the Disclosure Schedule to which it may be
applicable.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF BUYER AND MERGERCO
Each of Buyer and MergerCo hereby represents and warrants to the Company
that:
4.1 ORGANIZATION, STANDING AND CORPORATE POWER. Buyer and MergerCo are
corporations duly organized, validly incorporated and in good standing in the
States of Delaware and Florida, respectively, and each has the requisite
corporate power and authority to carry on its business as now being conducted.
Each of Buyer and MergerCo is duly qualified or licensed to do business and is
in good standing in each jurisdiction in which the nature of its business or
the ownership or leasing of its properties makes such qualification or
licensing necessary.
4.2 SUBSIDIARIES. MergerCo has no direct or indirect subsidiaries. As of
the date of this Agreement, neither the Buyer nor any subsidiary of the Buyer
owns, directly or indirectly, any shares of Common Stock.
4.3 CAPITAL STRUCTURE. The authorized capital stock of MergerCo consists
of 1,000 shares of common stock, par value $.01 per share, 100 shares of which
have been validly issued and are fully paid and nonassessable.
A-25
4.4 AUTHORITY; NONCONTRAVENTION; CONSENTS AND APPROVALS. Each of Buyer and
MergerCo has all requisite corporate power and authority to enter into this
Agreement and to consummate the transactions contemplated by this Agreement.
The execution and delivery of this Agreement by each of Buyer and MergerCo and
the consummation by each of Buyer and MergerCo of the transactions contemplated
by this Agreement have been duly authorized by all necessary corporate action
on the part of each of Buyer and MergerCo. This Agreement has been duly
executed and delivered by and constitutes a valid and binding obligation of
each of Buyer and MergerCo, enforceable against each of them in accordance with
its terms subject, as to enforceability, to bankruptcy, insolvency,
reorganization and other laws of general application relating to or affecting
creditors' rights and to general principles of equity. Except as disclosed on
Section 4.4 of the Disclosure Schedule, the execution and delivery of this
Agreement does not, and the consummation of the transactions contemplated by
this Agreement and compliance with the provisions of this Agreement will not,
conflict with, or result in (a) any breach or violation of, or default (with or
without notice or lapse of time, or both) under, or give rise to a right of
termination, cancellation or acceleration or "put" with respect to any
obligation or (b) the loss of a benefit, or other right or the creation of any
Lien upon any of the properties or assets of either Buyer or MergerCo, under
(i) the certificate of incorporation or bylaws of either the Buyer or MergerCo,
(ii) any loan or credit agreement, note, bond, mortgage, indenture, lease or
other agreement, instrument, permit, concession, franchise or license
applicable to either the Buyer or MergerCo or its properties or assets or (iii)
subject to the governmental filings and other matters referred to in the
following sentence, any judgment, order, decree, statute, law, ordinance, rule,
regulation or arbitration award applicable to either the Buyer or MergerCo or
its properties or assets, other than, in the case of clauses (ii) and (iii),
any such conflicts, breaches, violations, defaults, rights, losses or Liens
that individually or in the aggregate could not have a Material Adverse Effect
with respect to the Buyer or MergerCo or could not prevent, hinder or
materially delay the ability of MergerCo to consummate the transactions
contemplated by this Agreement. No consent, approval, order or authorization
of, or registration, declaration or filing with, or notice to, any Governmental
Entity or any other person under any agreement, indenture or other instrument
to which the Buyer or MergerCo is a party or to which any of its properties is
subject, is required by or with respect to either the Buyer or MergerCo in
connection with the execution and delivery of this Agreement by either the
Buyer or MergerCo or the consummation by the Buyer and MergerCo of any of the
transactions contemplated by this Agreement, except for (i) the filing of a
pre-merger notification and report form under the HSR Act, (ii) the filing with
the SEC of (y) the Proxy Statement and (z) such reports under the Exchange Act
as may be required in connection with this Agreement and the transactions
contemplated hereby, (iii) the filing of the Articles of Merger by the
Department of State of the State of Florida and appropriate documents with the
relevant authorities of other states in which the Company is qualified to do
business and (iv) such other consents, approvals, orders, authorizations,
registrations, declarations, filings or notices (y) as may be required under
the "takeover" or "blue sky" laws of various states and (z) as are set forth in
Section 4.4 of the Disclosure Schedule.
4.5 BROKERS. No broker, investment banker, financial advisor or other
person, other than Policano & Manzo, L.L.C., the fees and expenses of which
will be paid by the Buyer or MergerCo, is entitled to any broker's, finder's,
financial advisor's or other similar fee or commission in connection with the
transactions contemplated by this Agreement based upon arrangements made by or
an behalf of MergerCo to its affiliates.
4.6 FINANCING. As of the date of this Agreement, the Buyer and MergerCo
have, and at all times through the Effective Time, Buyer and MergerCo will
have, available all the funds necessary to perform their respective obligations
under this Agreement, including without limitation payment in full for all
shares of Common Stock outstanding at the Effective Time, the payment of all
amounts payable under Section 2.2, and the payment of all fees and expenses
payable by the Buyer and Merger Co. The Buyer and MergerCo have provided to the
Company a letter from Camelot Music's lender, dated as of May 29, 1998,
indicating the amount, as of such date, of available funds under Camelot
Music's credit facility, including for purposes of financing the transactions
contemplated by this Agreement. The Buyer has been informed by Camelot Music's
lender that the lender is prepared to consent, subject to definitive
documentation, to the transactions contemplated by this Agreement. The Buyer
and MergerCo agree
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not take any action, and the Buyer agrees to cause its subsidiaries not to take
any action, that would impair the availability at any time through the
Effective Time of the amount of funds necessary to perform their respective
obligations under this Agreement.
4.7 INFORMATION SUPPLIED. None of the information supplied or to be
supplied by MergerCo or its affiliates in writing specifically for inclusion or
incorporation by reference in the Proxy Statement will, at the time the Proxy
Statement is first mailed to the Company's stockholders or at the time of the
Stockholders Meeting, contain any untrue statement of a material fact or omit
to state any material fact required to be stated therein or necessary to make
the statements therein not misleading.
4.8 ABSENCE OF CERTAIN CHANGES OR EVENTS. Except as disclosed in the
Buyer's Registration Statement on Form 10 filed by the Buyer with the SEC as of
February 13, 1998 (the "Form 10"), since January 27, 1998 there is not and has
not been: (i) any Material Adverse Change with respect to the Buyer; (ii) any
condition, event or occurrence which, either individually or in the aggregate,
would reasonably be expected to have a Material Adverse Effect or give rise to
a Material Adverse Change with respect to the Buyer; or (iii) any condition,
event or occurrence that would reasonably be expected to prevent, hinder or
delay the ability of the Buyer to consummate the transactions contemplated by
this Agreement.
4.9 LITIGATION; COMPLIANCE WITH LAWS.
(a) Except as disclosed in the Form 10, there is (i) no suit, action or
proceeding or investigation pending of which the Buyer has notice or knowledge
and, (ii) to the knowledge of the Buyer, no suit, action or proceeding or
investigation threatened against the Buyer, any of its subsidiaries, their
business or properties that, either individually or in the aggregate, would
reasonably be expected to have a Material Adverse Effect with respect to the
Buyer or prevent, hinder or delay the ability of the Buyer to consummate the
transactions contemplated by this Agreement nor is there any judgment, decree,
injunction, rule or order of any Governmental Entity or arbitrator outstanding
against the Buyer, any of its subsidiaries, their business or properties
having, or which in the future could have, any such effect.
(b) The conduct of the business of the Buyer and each of its subsidiaries
has not been in violation of and complies with all statutes, laws, regulations,
ordinances, rules, judgments, orders, decrees or arbitration awards applicable
thereto, except for violations or failures so to comply, if any, that, either
individually or in the aggregate, would not reasonably be expected to have a
Material Adverse Effect with respect to the Buyer.
4.10 SOLE REPRESENTATIONS. The representations and warranties contained in
this Agreement are the sole representations and warranties that the Buyer and
MergerCo are making in connection with the transactions contemplated herein.
Except as set forth in the Disclosure Schedule, any matter that is set forth in
any Section of this Agreement or the Disclosure Schedule shall be deemed to be
set forth in all Sections of the Disclosure Schedule to which it may be
applicable.
ARTICLE V
COVENANTS RELATING TO CONDUCT OF BUSINESS PRIOR TO MERGER
5.1 CONDUCT OF BUSINESS OF THE COMPANY. Except as provided in this
Agreement or as set forth in Section 5.1 of the Disclosure Schedule (without
reference to any matters deemed to be set forth therein under Sections 3.27 or
4.10 of this Agreement) or with the written consent of MergerCo, which consent
shall not be unreasonably withheld, during the period from the date of this
Agreement to the Effective Time (except as otherwise specifically required by
the terms of this Agreement), the Company shall, and shall cause its
Subsidiaries to, act and carry on their respective businesses in the usual,
regular and ordinary course of business consistent with past practice
(including, without limitation, in connection with the collection of accounts
receivable and the incurrence and payment of accounts payable, and
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with pricing and marketing practices and the maintenance of Inventory levels)
and use its and their respective reasonable best efforts to preserve intact
their current business organizations, keep available the services of their
current officers and employees and preserve their relationships with landlords,
customers, suppliers, licensors, licensees, advertisers, distributors, lenders
and others having business dealings with them and to preserve goodwill. Without
limiting the generality of the foregoing, during the period from the date of
this Agreement to the Effective Time, the Company shall not, and shall not
permit any of its Subsidiaries to, without the prior written consent of
MergerCo (which shall not be unreasonably withheld) or except as provided in
this Agreement or as set forth in Section 5.1 of the Disclosure Schedule
(without reference to any matters deemed to be set forth therein under Sections
3.27 or 4.10 of this Agreement):
(a) declare, set aside or pay any dividends on, or make any other
distributions in respect of, any of its capital stock, other than dividends and
distributions by a direct or indirect wholly owned subsidiary of the Company to
its parent in accordance with applicable law;
(b) 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;
(c) purchase, redeem or otherwise acquire any shares of capital stock of
the Company or any of its Subsidiaries or any other securities thereof or any
rights, warrants or options to acquire any such shares or other securities,
except for the acquisition of shares of Common Stock from holders of Stock
Options in full or partial payment of the exercise price payable by such
holders upon exercise of Stock Options outstanding on the date of this
Agreement;
(d) authorize for issuance, issue, grant, deliver, sell, pledge or
otherwise encumber any shares of its capital stock or the capital stock of any
of its Subsidiaries, any other voting securities or any securities convertible
into, or any rights, warrants or options to acquire, any such shares, voting
securities or convertible securities or any other securities or equity
equivalents (including without limitation stock appreciation rights and Stock
Options) (other than the issuance of Common Stock upon the exercise of Stock
Options outstanding on the date of this Agreement and in accordance with their
present terms (such issuances, together with the acquisitions of shares of
Common Stock permitted under clause (c) above, being referred to herein as
"Permitted Changes"));
(e) in the case of the Company, amend its Articles of Incorporation,
By-Laws or other comparable charter or organizational documents;
(f) acquire or agree to acquire by merging or consolidating with, or by
purchasing a substantial portion of the stock or assets of, or by any other
manner, any business or any corporation, partnership, joint venture,
association or other business organization or division thereof material to the
Company;
(g) sell, lease, license, mortgage or otherwise encumber or subject to any
Lien or otherwise dispose of any of its properties or assets, except for sales
of inventory or the use of supplies, in either case in the ordinary course of
business consistent with past practice;
(h) incur any indebtedness for borrowed money or guarantee any such
indebtedness of another person, issue or sell any debt securities or warrants
or other rights to acquire any debt securities of the Company or any of its
Subsidiaries, guarantee any debt securities of another person, enter into any
"keep well" or other agreement to maintain any financial statement condition of
another person or enter into any arrangement having the economic effect of any
of the foregoing, except for short-term borrowings and for lease obligations,
in each case incurred in the ordinary course of business consistent with past
practice;
(i) make any loans, advances or capital contributions to, or investments
in, any other person, other than to the Company or any direct or indirect
wholly owned subsidiary of the Company;
(j) pay, discharge or satisfy any claims (including claims of
stockholders), liabilities or obligations (absolute, accrued, asserted or
unasserted, contingent or otherwise), except for the payment, discharge
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or satisfaction of (i) liabilities or obligations in the ordinary course of
business consistent with past practice or in accordance with their terms as in
effect on the date hereof or (ii) claims settled or compromised to the extent
permitted by Section 5.1(p), or waive, write-off, release, grant, or transfer
any rights of material value or modify or change in any material respect any
existing license, lease, Permit, contract or other document, other than in the
ordinary course of business consistent with past practice;
(k) adopt a plan of complete or partial liquidation or resolutions
providing for or authorizing such a liquidation or a dissolution, merger,
consolidation, restructuring, recapitalization or reorganization;
(l) enter into any collective bargaining agreement;
(m) amend, negotiate the terms of, enter into or renew any lease of real
property, including any Lease, or fail to renew in a timely fashion any Lease
or other lease of real property to which the Company or any Subsidiary is a
party, except after consulting with and in cooperation with the Buyer and on
such terms as the Buyer has approved, which approval shall not be unreasonably
withheld;
(n) enter into any new Material Contract or, except in the ordinary course
of business consistent with past practice, any other Contract;
(o) change any material accounting principle used by it, except to the
extent required by GAAP;
(p) settle or compromise any litigation (whether or not commenced prior to
the date of this Agreement) other than settlements or compromises of litigation
where the amount paid (after giving effect to insurance proceeds actually
received) in settlement or compromise is not material to the Company;
(q) make any capital expenditures outside the ordinary course of business
consistent with past practice;
(r) delay or postpone the payment of accounts payable or any other
liabilities outside the ordinary course of business consistent with past
practice; or
(s) authorize any of, or commit or agree to take any of, the foregoing
actions.
5.2 CHANGES IN EMPLOYMENT ARRANGEMENTS. Neither the Company nor any of its
Subsidiaries shall adopt or amend (except as may be required by law) any bonus,
profit sharing, compensation, stock option, pension, retirement, deferred
compensation, employment or other employee benefit plan, agreement, trust, fund
or other arrangement (including any Benefit Plan or Stock Option Plan) for the
benefit or welfare of any employee, director, independent contractor or former
director, independent contractor or employee (other than increases for
individuals other than officers and directors in the ordinary course of
business consistent with past practice) or increase the compensation or fringe
benefits of any director, employee, independent contractor or former director,
independent contractor or employee (other than increases for individuals other
than officers and directors in the ordinary course of business consistent with
past practice) or pay any benefit not required by any existing plan,
arrangement or agreement.
5.3 SEVERANCE. Except as requested in writing by the Buyer or MergerCo or
as disclosed in Sections 3.8 or 3.9 of the Disclosure Schedule (without
reference to any matters deemed to be disclosed therein under Sections 3.27 or
4.10 of this Agreement), neither the Company nor any of its Subsidiaries shall
grant any new or modified severance, change-of-control or termination
arrangement or increase or accelerate any benefits payable under its severance,
change-of-control or termination pay policies in effect on the date hereof.
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5.4 WARN.
(a) Neither the Company nor any of its Subsidiaries shall effectuate a
"plant closing" or "mass layoff," as those terms are defined in the Worker
Adjustment and Retraining Notification Act of 1988 or similar state law
("WARN"), affecting in whole or in part any site of employment, facility,
operating unit or employee of the Company or any Subsidiary, without the prior
written consent of MergerCo or the Buyer in advance and without complying with
the notice requirements and other provisions of WARN.
(b) Between the date hereof and the Closing Date, the Company, within five
business days of receipt of a written request from the Buyer, shall provide
required notice of the planned discontinuation of operations (a "plant closing"
for purposes of WARN and the Regulations promulgated thereunder), subject to
the occurrence of the Merger, of the Company's headquarters and/or distribution
center, both located in Miami, Florida, as specified in the written request
from the Buyer, effective as of the time specified in the written request from
the Buyer. The Buyer shall deliver to the Company a form of such notice within
one business day after such written request and shall cooperate with the
Company in preparing such notice. The Company shall provide such notice, as
required by WARN, to the following:
(i) each local and international representative(s) of affected employees
or, if there is no such representative at that time, to each
affected employee; and
(ii) the State Dislocated Worker Unit (designated or created under Title
III of the Job Training Partnership Act); and
(iii) the chief elected official of the unit of local government within
which such closing/layoff is to occur.
Notwithstanding any other provision of this Section 5.4(b), the parties
agree that the Company shall not be required to provide the notice described in
this Section 5.4(b) before June 11, 1998. The parties acknowledge that the
Company's failure to provide the notice described in this Section 5.4(b) would
materially adversely affect the ability of the Buyer and the Company to
consummate the transactions contemplated hereby.
ARTICLE VI
ADDITIONAL AGREEMENTS
6.1 PREPARATION OF PROXY STATEMENT; STOCKHOLDERS MEETING.
(a) As promptly as practicable following the date of this Agreement, the
Company shall prepare and file with the SEC the Proxy Statement. The Company
shall use its best efforts to cause the Proxy Statement to be mailed to the
Company's stockholders as promptly as practicable after clearance thereof with
the SEC. If, at any time prior to the Stockholders Meeting, any event, with
respect to the Company, its Subsidiaries, directors, officers, and/or the
Merger or the other transactions contemplated hereby, shall occur, that is
required to be described in the Proxy Statement, the Company shall so describe
such event and, to the extent required by applicable law, shall cause it to be
disseminated to the Company's stockholders.
(b) The Company shall immediately notify MergerCo and its affiliates of
(i) the receipt of any comments from the SEC regarding the Proxy Statement and
(ii) the approval of the Proxy Statement by the SEC. MergerCo shall be given a
reasonable opportunity to review and comment on all filings with the SEC and
all mailings to the Company's stockholders in connection with the Merger prior
to the filing or mailing thereof, and the Company shall, subject to the advice
of counsel, use its best efforts to reflect all such reasonable comments.
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(c) The Company shall, as promptly as practicable following the date of
this Agreement and in consultation with MergerCo, duly call, give notice of,
convene and hold a meeting of its stockholders (the "Stockholders Meeting") for
the purpose of approving this Agreement and the transactions contemplated by
this Agreement. The Company shall, through its Board of Directors, recommend to
its stockholders approval of the foregoing matters and seek to obtain all votes
and approvals thereof by the stockholders (which undertaking shall not require
the Company to engage an outside proxy solicitor), as set forth in Section
3.15; provided, however; that the obligations contained herein shall be subject
to the provisions of Section 6.6 of this Agreement. Subject to the foregoing,
such recommendation, together with a copy of the opinion referred to in Section
3.14, shall be included in the Proxy Statement. The Company shall use its best
efforts to hold such meeting as soon as practicable after the date hereof.
(d) The Company shall cause its transfer agent to make stock transfer
records relating to the Company available to the extent reasonably necessary to
effectuate the intent of this Agreement.
6.2 ACCESS TO INFORMATION; CONFIDENTIALITY.
(a) The Company shall, and shall cause its Subsidiaries, officers,
employees, counsel, financial advisors and other representatives to, afford to
MergerCo, its representatives and its potential financing sources reasonable
access during normal business hours, in a manner initially coordinated with
Donald A. Molta and/or Ann S. Lieff, and thereafter coordinated with those
persons designated by the chief executive officer of the Company, during the
period prior to the Effective Time to its properties, books, contracts,
commitments, personnel and records (including, without limitation, to the
extent available, the work papers of the Company's independent public
accountants) and, during such period, the Company shall, and shall cause its
Subsidiaries, officers, employees and representatives to, furnish promptly to
MergerCo (i) a copy of each report, schedule, registration statement and other
document filed by it during such period pursuant to the requirements of federal
or state securities laws and (ii) all other information concerning its
business, properties, financial condition, operations and personnel as MergerCo
may from time to time reasonably request.
(b) The Company shall, and shall cause its Subsidiaries and its and their
officers, employees, counsel, financial advisors and other representatives to,
afford to Buyer and MergerCo and their authorized representatives (including
counsel, environmental and other consultants) full access during normal
business hours to all properties or facilities currently owned, leased or
otherwise used by the Company or any of its Subsidiaries, their respective
personnel, operations and records as may be necessary to facilitate the
consummation of the transactions contemplated herein, including access to
perform engineering, environmental and workplace surveys and such other
physical inspections as Buyer and MergerCo may reasonably require, including,
without limitation, environmental assessments, air, water or soil testing or
sampling and compliance audits. In furtherance of this Section 6.2(b), the
Company shall provide Buyer and MergerCo access to all environmental reports
and/or data in its possession or control (including reports and/or data
maintained or retained by its environmental consultants), which reports are
relevant to the matters set forth in Section 3.11.
(c) Except as required by law, each of the Company, the Buyer and MergerCo
shall hold, and shall cause its respective directors, officers, employees,
accountants, counsel, financial advisors and other representatives and
affiliates to hold, any nonpublic information in confidence to the extent
required by and in accordance with that certain Confidentiality Agreement,
dated February 16, 1998, by and between the Company and the Buyer, as amended
by that certain letter agreement dated April 6, 1998 between the Company and
the Buyer.
6.3 REASONABLE BEST EFFORTS.
(a) Upon the terms and subject to the conditions set forth in this
Agreement, each of the parties agrees to use its reasonable best efforts to
take, or cause to be taken, all actions, and to do, or cause to be done, and to
assist and cooperate with the other parties in doing, all things necessary,
proper or advisable to consummate and make effective, in the most expeditious
manner practicable, the Merger
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and the other transactions contemplated by this Agreement. The Buyer, MergerCo
and the Company shall use their reasonable best efforts and cooperate with one
another (i) in promptly determining whether any filings are required to be made
or consents, approvals, waivers, licenses, Permits or authorizations are
required to be obtained (or, which if not obtained, would result in a breach or
violation, or an event of default, termination or acceleration of any agreement
or any put right under any agreement) under any applicable law or regulation or
from any governmental authorities or third parties, including parties to
leases, loan agreements or other debt instruments, in connection with the
transactions contemplated by this Agreement, including the Merger, and (ii) in
promptly making any such filings, in furnishing information required in
connection therewith and in timely seeking to obtain any such consents,
approvals, permits or authorizations. Notwithstanding the foregoing, or any
other covenant herein contained, in connection with the receipt of any
necessary approvals under the HSR Act, neither the Company nor any of its
Subsidiaries shall be entitled to divest or hold separate or otherwise take or
commit to take any action that limits the Company's freedom of action with
respect to, or its ability to retain, the business of the Company or any of its
Subsidiaries or any material portions thereof or any of the businesses, product
lines, properties or assets of the Company or any of its Subsidiaries, without
MergerCo's prior written consent.
(b) The Company shall make, subject to the condition that the transactions
contemplated herein actually occur, any undertakings (including undertakings to
make divestitures, provided, in any case, that such divestitures need not
themselves be effective or made until after the transactions contemplated
hereby actually occur) required in order to comply with the antitrust
requirements or laws of any Governmental Entity, including the HSR Act, in
connection with the transactions contemplated by this Agreement; provided that
no such divestiture or undertaking shall be made unless acceptable to MergerCo.
(c) Each of the parties agrees to cooperate with each other in taking, or
causing to be taken, all actions necessary to delist the Common Stock from The
NASDAQ SmallCap Stock Market ("NASDAQ"), provided that, subject to NASDAQ rules
and regulations, such delisting shall not be effective until after the
Effective Time. The parties also acknowledge that it is MergerCo's intent that
Common Stock following the Merger will not be quoted on NASDAQ or listed on any
national securities exchange.
(d) Each of the parties agrees to cooperate with each other in connection
with the Company's negotiation of the terms of, entering into and renewal of
any lease of real property, in accordance with Section 5.1(m).
(e) The Company shall use its reasonable best efforts to enter into a
lease amendment at or prior to the Closing, in substantially the form attached
hereto as Exhibit D, with the landlord (the "Landlord") under that certain
Lease Agreement, dated March 1, 1996, by and between the Martin W. Spector
Irrevocable Trust and the Company (such amendment, the "Lease Amendment").
(f) The Buyer shall use its reasonable best efforts to enter into at the
Closing a consulting and noncompetition agreement with Ann S. Lieff (the
"Consultant"), in substantially the form attached hereto as Exhibit E (such
agreement, the "Consulting Agreement").
6.4 INDEMNIFICATION.
(a) For six years after the Effective Time, the Company and the Buyer
shall indemnify and hold harmless all present and former directors and officers
of the Company and its Subsidiaries ("Indemnified Parties") against all costs,
expenses, judgments, fines, penalties, losses, claims, damages or liabilities,
amounts paid in settlement with the approval of the indemnifying party (which
approval shall not be unreasonably withheld) and reasonable attorneys' fees
(collectively, "Costs") incurred in connection with any threatened, pending or
completed claim, action, suit, proceeding or investigation, whether civil,
criminal, administrative, investigative, governmental or regulatory, or whether
involving an alternative dispute resolution proceeding, or any appeal from any
of the foregoing proceedings
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(collectively, a "Proceeding") arising out of or pertaining to matters existing
or occurring at or prior to the Effective Time, whether threatened, asserted or
claimed prior to, at or after the Effective Time, in each of the above cases to
the fullest extent permitted by their respective articles of incorporation or
bylaws and to the fullest extent permitted by applicable law to the extent such
Costs have not been paid by insurance.
(b) For six years after the Effective Time, the Company and the Buyer
shall pay expenses incurred by any Indemnified Party with respect to any
Proceeding for which indemnification is available under this Section 6.4, as
they are incurred, in advance of the final disposition of any such Proceeding
to the fullest extent permitted by their respective articles of incorporation
or bylaws and to the fullest extent permitted by the FBCA or other applicable
law upon receipt of an undertaking to repay as contemplated by the FBCA.
Without limiting the foregoing, if any Proceeding for which indemnification is
available under this Section 6.4 is brought against any Indemnified Party after
the Effective Time (i) the Indemnified Parties may retain counsel satisfactory
to them and the Buyer; (ii) the Company and the Buyer shall promptly pay all
reasonable fees and expenses of such counsel for the Indemnified Parties as
statements therefor are received; and (iii) the Company and the Buyer shall use
all reasonable efforts to assist in the vigorous defense of any such matter;
provided, however, that neither the Company nor the Buyer shall be liable for
any settlement of any Proceeding effected without their written consent, which
consent shall not be unreasonably withheld. The Indemnified Parties as a group
shall retain only one law firm to represent them with respect to each
Proceeding unless there is, under applicable standards of professional conduct,
a conflict on any issue between the positions of any two or more Indemnified
Parties, in which case the Indemnified Parties may retain more than one law
firm.
(c) For six years after the Effective Time, the Company shall maintain, at
no cost to the individual insureds thereunder, its current directors' and
officers' liability insurance policy (or a policy providing substantially
similar coverage) ("D&O Policy") to the extent that it provides coverage for
events or acts occurring prior to the Effective Time for all persons who are
past, present or future duly elected or appointed directors or officers of the
Company on the date of this Agreement; provided that the Company shall not be
required to spend as an aggregate premium for such D&O Policy more than 175% of
the annual premium for the Company's D&O Policy in effect as of the date of
this Agreement; and provided further that the Company shall nevertheless be
obligated to provide insurance with such policy limit as may be obtained for
such maximum aggregate premium. The failure of the Company to maintain the D&O
Policy contemplated by this Section 6.4(c) for any reason shall not relieve the
Company or the Buyer of any other obligation under this Section 6.4.
(d) The provisions of this Section 6.4 are intended to be for the benefit
of, and shall be enforceable by, each Indemnified Party and his or her heirs
and representatives.
6.5 PUBLIC ANNOUNCEMENTS. Neither MergerCo or the Buyer, on the one hand,
nor the Company, on the other hand, shall issue any press release or public
statement with respect to the transactions contemplated by this Agreement,
including the Merger, without the other party's prior consent, except as may be
required by applicable law, court process or by obligations pursuant to any
listing agreement with NASDAQ. In addition to the foregoing, MergerCo and the
Company shall consult with each other before issuing, and provide each other
the opportunity to review and comment upon, any such press release or other
public statements with respect to such transactions. The parties agree that the
initial press release or releases to be issued with respect to the transactions
contemplated by this Agreement shall be in substantially the form attached
hereto as Exhibit F.
6.6 NO SOLICITATION. From and after the date hereof until the termination
of this Agreement neither the Company or any of its Subsidiaries, nor any of
their respective officers, directors, employees, agents or affiliates
(including, without limitation, any investment banker, attorney or accountant
retained by the Company or any of its affiliates) shall directly or indirectly
initiate, solicit or knowingly encourage (including by way of furnishing
non-public information or assistance), or take any other action to facilitate
knowingly, any inquiries or the making of any proposal that constitutes, or may
reasonably be expected to lead to any Transaction Proposal (as defined below),
or enter into or maintain or continue
A-33
discussions or negotiate with any person or entity in furtherance of any such
inquiries or to obtain a Transaction Proposal or agree to or endorse any
Transaction Proposal or authorize or permit any of its officers, directors or
employees or any of its Subsidiaries or any investment banker, financial
advisor, attorney, accountant or other representative retained by it or any of
its Subsidiaries to take any such action, provided, however, that nothing
contained in this Agreement shall prohibit the Company from (i) furnishing
information to or otherwise responding to any person or entity that makes an
unsolicited, bona fide Transaction Proposal, if, in the written opinion of
outside counsel to the Company, after consulting with outside counsel to the
Buyer and MergerCo, such action is required for the Board of Directors of the
Company to comply with its fiduciary duties under applicable law, (ii) failing
to make or withdrawing or modifying its recommendation referred to in Section
3.15 if there exists a Transaction Proposal and in the written opinion of
outside counsel to the Company, after consulting with outside counsel to the
Buyer and MergerCo, such action is required for the Board of Directors of the
Company to comply with its fiduciary duties under applicable law in connection
with such Transaction Proposal or (iii) making to the Company's stockholders
any recommendation and related filing with the SEC as required by Rules 14e-2
and 14d-9 under the Exchange Act, with respect to any tender offer, or taking
any other legally required action with respect to such tender offer (including,
without limitation, the making of public disclosures as may be necessary or
reasonably advisable under applicable securities laws) if in the written
opinion of outside counsel to the Company, after consulting with outside
counsel to the Buyer and MergerCo, such action is required for the Board of
Directors of the Company to comply with its fiduciary duties under applicable
law; and provided further, however, that, in the event of an exercise of the
Company's or its Board of Director's rights under clauses (i), (ii) or (iii)
above and subject to compliance with the next three sentences hereof,
notwithstanding anything contained in this Agreement to the contrary, such
exercise of rights shall not constitute a breach of this Agreement by the
Company. The Company shall promptly advise MergerCo orally and in writing of
any request for nonpublic information from, or discussions or negotiations
with, any person or entity or of any Transaction Proposal known to it, the
material terms and conditions of such request or Transaction Proposal, and the
identity of the person or entity making such request or Transaction Proposal.
The Company shall promptly inform MergerCo of any material change in the
details (including amendments or proposed amendments) of any such request for
nonpublic information, the contents of any discussions or negotiations or any
material change in such Transaction Proposal. Neither the Board of Directors of
the Company nor any committee thereof shall take any action pursuant to clauses
(ii) or (iii) above until a time that is after the later of (x) the fourth
business day following MergerCo's receipt of written notice advising MergerCo
that the Board of Directors of the Company has received a Transaction Proposal,
specifying the material terms of such Transaction Proposal and identifying the
person making such Transaction Proposal and (y) in the event of any amendment
to the price or any material term of a Transaction Proposal, two business days
following MergerCo's receipt of written notice containing the material terms of
such amendment, including any change in price (it being understood that each
such further amendment to the price or any material terms of a Transaction
Proposal shall necessitate an additional written notice to MergerCo and an
additional two business day period prior to which the Company can take any
action set forth in clauses (ii) or (iii) above). For purposes of this
Agreement, "Transaction Proposal" shall mean any of the following (other than
the transactions between the Company and MergerCo contemplated by this
Agreement) involving the Company or any of its Subsidiaries: (i) any merger,
consolidation, share exchange, recapitalization, business combination, or other
similar transaction; (ii) any sale, lease, exchange, mortgage, pledge, transfer
or other disposition of 10% or more of the assets of the Company and its
Subsidiaries, taken as a whole, in a single transaction or series of related
transactions (unless consented to by MergerCo, which consent shall not be
unreasonably withheld); (iii) any tender offer or exchange offer for, or the
acquisition (or right to acquire) of "beneficial ownership" by any person,
"group" or entity (as such terms are defined under Section 13(d) of the
Exchange Act) of 10% or more of the outstanding shares of Common Stock or the
filing of a registration statement under the Securities Act in connection
therewith; or (iv) any public announcement of a proposal, plan or intention to
do any of the foregoing or any agreement to engage in any of the foregoing.
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6.7 RESIGNATION OF DIRECTORS. Prior to the Effective Time, the Company
shall deliver to MergerCo evidence satisfactory to MergerCo of the resignation
of all directors of the Company, effective at the Effective Time.
6.8 EMPLOYEE BENEFITS.
The Buyer agrees that, for a period of twelve (12) months following the
Effective Time, the Surviving Corporation shall maintain employee benefit plans
and arrangements (directly or in conjunction with the Buyer) that, in the
aggregate, will provide a level of benefits to continuing employees of the
Company and its Subsidiaries substantially comparable in the aggregate to those
provided under the Benefit Plans set forth in Section 6.8 (without reference to
any matters deemed to be set forth therein under Sections 3.27 or 4.10 of this
Agreement) of the Disclosure Schedule ("Section 6.8 Plans") as in effect
immediately prior to the Effective Time (other than discretionary benefits);
provided, however, that the Buyer may cause modifications to be made to the
employee benefit plans and arrangements to the extent necessary to comply with
applicable law or to reflect widespread adjustments in benefits (or costs
thereof) provided to employees under compensation and benefit plans of the
Buyer and its subsidiaries. In addition, the Buyer may change, substitute or
terminate insurance companies, third party administrators, or other providers
of benefits or services associated with the employee benefit plans and may
offer a benefit plan or arrangement which it sponsors in place of a benefit
plan or arrangement which is set forth in Section 6.8 of the Disclosure
Schedule (without reference to any matters deemed to be set forth therein under
Sections 3.27 or 4.10 of this Agreement) including the offering of its
cafeteria plan in place of the cafeteria plan set forth in Section 6.8 of the
Disclosure Schedule. No specific compensation or benefit plans, however, need
be provided. For purposes of determining eligibility and vesting with respect
to all Section 6.8 Plans (except with respect to any defined benefit plans),
the Buyer shall use the employee's hire date with the Company or Subsidiary or
such other date as has been previously determined by the Company or Subsidiary
for credit for prior employment with any ERISA Affiliate of the Company.
Employee benefit plans that provide medical, dental, or life insurance benefits
after the Effective Time to any individual who is an active employee of the
Company or any of its Subsidiaries as of the Effective Time or a dependent of
such an employee shall, with respect to such individuals, waive any waiting
periods, any pre-existing conditions, and any actively-at-work exclusions to
the extent so waived under present policy and shall provide that any expenses
incurred on or before the Effective Time by such individuals shall be taken
into account under such plans for purposes of satisfying applicable deductible,
coinsurance, and maximum out-of-pocket provisions to the extent taken into
account under present policy. Nothing in this Section 6.8 shall prohibit the
Company from terminating the employment of any employee at any time with or
without cause (subject to, and in accordance with the terms of any existing
employment agreements), or shall be construed or applied to restrict the
ability of the Buyer or Surviving Corporation and its Subsidiaries to establish
such types and levels of compensation and benefits as they determine to be
appropriate.
6.9 NOTIFICATION OF CERTAIN MATTERS. The Company shall give prompt notice
to the Buyer and MergerCo and the Buyer and MergerCo shall give prompt notice
to the Company of: (i) the occurrence or non-occurrence of any event, the
occurrence or non-occurrence of which does or would be likely to cause (A) any
representation or warranty contained in this Agreement to be untrue or
inaccurate in any material respect, or (B) any covenant, condition or agreement
contained in this Agreement not to be complied with or satisfied; and (ii) any
failure of the Company on the one hand, or the Buyer or MergerCo on the other
hand, to comply with or satisfy any covenant, condition or agreement to be
complied with or satisfied by the respective party hereunder; provided,
however, that the delivery of any notice pursuant to this Section 6.9 shall not
limit or otherwise affect the remedies available hereunder to the party
receiving such notice.
6.10 STATE TAKEOVER LAWS. If any "fair price," "control share acquisition"
or other takeover statute or other similar statute or regulation shall become
applicable to the transactions contemplated hereby, including the Merger, the
Company and the Buyer, and their respective Boards of Directors, shall use
their reasonable best efforts to grant such approvals and to take such other
actions as are necessary so
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that the transactions contemplated hereby may be consummated as promptly as
practicable on the terms contemplated hereby and shall otherwise use their
reasonable best efforts to eliminate the effects of any such statute or
regulation on the transactions contemplated hereby.
6.11 PHYSICAL INVENTORY. The Company shall cooperate with the Buyer, at
the Buyer's written request, in arranging and scheduling, prior to the Closing
Date, for a nationally recognized inventory service (or such other person as
reasonably requested by the Buyer) to perform one or more physical counts of
the Inventory after the Closing Date at the locations and times requested by
the Buyer.
6.12 REPAYMENT OF INDEBTEDNESS. The Buyer agrees to cause the outstanding
indebtedness of the Company to (a) General Electric Capital Corporation under
the Credit Agreement, dated as of May 22, 1996, between the Company and General
Electric Capital Corporation, as modified by the First Modification of Credit
Agreement, dated October 3, 1997, and (b) to Music Funding I, LLC under the
Credit Agreement, dated as of October 3, 1997, between the Company and Music
Funding I, LLC, to be repaid at the Effective Time, conditioned upon the
occurrence of the Effective Time and the satisfaction or waiver on or prior to
the Closing Date of the conditions set forth in Sections 7.1 and 7.2.
6.13 SEVERANCE. The Company, the Buyer and MergerCo agree that in the
event any headquarters or distribution center employees of the Company are
terminated by the Surviving Corporation without cause within 12 months
following the Effective Time, severance payments shall be made to such
employees in accordance with the severance policy of the Company outlined in
the severance policy term sheet and attachment exchanged between the Buyer and
the Company and dated June 3, 1998, as subsequently formalized in accordance
with this Section 6.13. Within 10 business days of the date of this Agreement,
the Company, the Buyer and MergerCo shall formalize such severance policy on
substantially the terms contained in such term sheet and attachment. The Buyer
and MergerCo agree to comply with such policy, including with the payment of
the severance and transition payments described in such policy.
6.14 ACCESS FOR POINT OF SALE INSTALLATION. Commencing on the date 30
calendar days prior to the anticipated Closing Date, the Company shall, and
shall cause its Subsidiaries and its and their officers, employees and other
representatives to, afford to the Buyer and its authorized representatives and
employees (including information systems consultants and engineers) full access
during normal business hours to all properties or facilities currently owned,
leased or otherwise used by the Company or any of its Subsidiaries in the
retail sale or rental of Inventory as may be necessary to facilitate the
Buyer's installation of cables and other hardware necessary for the
introduction and support of the Buyer's point of sale systems. The parties
agree that (a) such access shall not unreasonably interfere with the Company's
regular conduct of its business at such properties and facilities, (b) such
installation shall be at the Buyer's cost and (c) promptly after the
termination of this Agreement in accordance with its terms, the Buyer shall
cause such properties and facilities to be restored to substantially the same
physical state in which they would have been absent such installation.
ARTICLE VII
CONDITIONS PRECEDENT
7.1 CONDITIONS TO EACH PARTY'S OBLIGATION. The respective obligation of
each party to effect the Merger is subject to the satisfaction or waiver on or
prior to the Closing Date of the following conditions:
(a) COMPANY STOCKHOLDER APPROVAL. The Company Stockholder Approval shall
have been obtained.
(b) HSR ACT. The waiting period (and any extension thereof) applicable to
the Merger under the HSR Act shall have been terminated or shall have expired.
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(c) NO INJUNCTIONS OR RESTRAINTS. No temporary restraining order,
preliminary or permanent injunction or other order issued by any Governmental
Entity or other legal restraint or prohibition shall be in effect preventing or
prohibiting the consummation of the Merger or the other transactions
contemplated by this Agreement; provided, however, that the parties hereto
shall, subject to the last sentence of Section 6.3 (a) hereof, use their best
efforts to have any such injunction, order, restraint or prohibition vacated.
7.2 CONDITIONS TO OBLIGATIONS OF THE BUYER AND MERGERCO. The obligations
of the Buyer and MergerCo to effect the Merger are further subject to the
satisfaction or waiver on or prior to the Closing Date of the following
conditions:
(a) REPRESENTATIONS AND WARRANTIES. Each of the representations and
warranties of the Company and its Subsidiaries contained in this Agreement
shall have been true and correct in all material respects when made and, except
to the extent such representations and warranties speak to an earlier date,
shall be true and correct in all material respects at and as of the Effective
Time, as if made at and as of such time, in each case except as contemplated or
permitted by this Agreement.
(b) PERFORMANCE OF OBLIGATIONS OF THE COMPANY. The Company shall have
performed and fulfilled each of its obligations, covenants and agreements under
this Agreement, including but not limited to its obligations pursuant to
Section 6.6 hereof, except for such failures to perform or fulfill as have not
had and would not, either individually or in the aggregate, have a Material
Adverse Effect with respect to the Company or materially adversely affect the
ability of the Company to consummate the transactions contemplated hereby.
(c) CONSENTS, ETC. MergerCo shall have received evidence, in form and
substance reasonably satisfactory to it, that the Permits, consents, approvals,
authorizations, qualifications and orders of Governmental Entities and all
other third parties identified in Section 3.4 and Section 7.2(c) of the
Disclosure Schedule have been obtained.
(d) NO LITIGATION. There shall not be instituted, pending or threatened by
any Governmental Entity any suit, action or proceeding (or by any other person
any suit, action or proceeding that has a reasonable likelihood of success in
the good faith opinion of the Buyer) (i) challenging or seeking to restrain or
prohibit the consummation of the Merger or any of the other transactions
contemplated by this Agreement or, in the good faith opinion of the Buyer,
materially and adversely affecting the contemplated economic or business
benefits of the transactions contemplated hereby, (ii) seeking to prohibit or
limit the ownership or operation by the Company, any Subsidiary, the Buyer or
any of the Buyer's subsidiaries of a material portion of the business or assets
of the Company and its Subsidiaries or the Buyer and its subsidiaries, taken as
a whole, or to compel the Company or the Buyer to dispose of or hold separate
any material portion of the business or assets of the Company and its
Subsidiaries or the Buyer and its subsidiaries, taken as a whole, in each case
as a result of the Merger or any of the other transactions contemplated by this
Agreement, (iii) seeking to impose limitations on the ability of the Buyer or
MergerCo to acquire or hold, or exercise full rights of ownership of, any
shares of Common Stock, including, without limitation, the right to vote such
shares of Common Stock on all matters properly presented to the stockholders of
the Company or (iv) seeking to prohibit the Buyer or any of its subsidiaries
from effectively controlling in any respect any material portion of the
business or operations of the Company or its Subsidiaries.
(e) NO MATERIAL ADVERSE CHANGE. There shall not have occurred any Material
Adverse Change with respect to the Company since January 31, 1998.
(f) ABSENCE OF CERTAIN RULES AND ORDERS. There shall not be any statute,
rule, regulation, judgment, order or injunction enacted, entered, enforced,
promulgated or deemed applicable to the Merger by any Governmental Entity that
would result in any of the consequences referred to in clauses (i) through (iv)
of Section 7.2(d).
(g) CONSULTING AGREEMENT. The Company and the Consultant shall have
entered into the Consulting Agreement.
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(h) LEASE AMENDMENT. The Company and the Landlord shall have entered into
the Lease Amendment.
(i) SURRENDER AGREEMENTS. Each holder of any unexpired outstanding Stock
Option (whether granted under a Stock Option Plan or otherwise) shall have
executed a Surrender Agreement and delivered such Surrender Agreement to
MergerCo.
(j) DISSENTER CLAIMS. The Company shall not have received notice of
election to dissent and demand payment from the holders of more than 10% of the
issued and outstanding shares of the Common Stock in connection with the
Merger.
(k) OPINION OF COUNSEL. The Company's legal counsel shall have delivered
to the Buyer and MergerCo a written opinion of counsel with respect to (i) the
effectiveness of the Merger, (ii) the due incorporation, valid existence and
good standing of the Company and its Subsidiaries, (iii) the validity, binding
effect and enforceability of this Agreement, the Consulting Agreement and the
Surrender Agreements, and (iv) such other matters as MergerCo may reasonably
request.
(l) COMPANY CERTIFICATE. The Company shall have delivered to the Buyer and
MergerCo a certificate, dated as of the Closing Date and signed on its behalf
by its Chief Executive Officer and its Chief Financial Officer, as to the
satisfaction by it of the conditions set forth in subsections 7.2(a), 7.2(b),
7.2(d), 7.2(e) and 7.2(j).
7.3 CONDITIONS TO OBLIGATION OF THE COMPANY. The obligation of the Company
to effect the Merger is further subject to the satisfaction or waiver on or
prior to the Closing Date of the following conditions:
(a) REPRESENTATIONS AND WARRANTIES. Each of the representations and
warranties of the Buyer and MergerCo contained in this Agreement shall have
been true and correct in all material respects when made and, except to the
extent such representations and warranties speak to an earlier date, shall be
true and correct in all material respects at and as of the Effective Time, as
if made at and as of such time, in each case except as contemplated or
permitted by this Agreement.
(b) PERFORMANCE OF OBLIGATIONS OF THE BUYER AND MERGERCO. The Buyer and
MergerCo shall have performed and fulfilled each of their respective
obligations, covenants and agreements under this Agreement, except for such
failures to perform or fulfill as have not and would not, either individually
or in the aggregate, have a Material Adverse Effect with respect to the Buyer
or materially adversely affect the ability of the Buyer or MergerCo to
consummate the transactions contemplated hereby.
(c) NO LITIGATION. There shall not be instituted, pending or threatened by
any Governmental Entity any suit, action or proceeding (or by any other person
any suit, action or proceeding that has a reasonable likelihood of success in
the good faith opinion of the Company) challenging or seeking to restrain or
prohibit the consummation of the Merger or any of the other transactions
contemplated by this Agreement.
(d) OPINION OF COUNSEL. The Buyer's and MergerCo's legal counsel shall
have delivered to the Company a written opinion of counsel with respect to (i)
the validity, binding effect and enforceability of this Agreement and (ii) such
other matters as the Company may reasonably request.
(e) BUYER AND MERGERCO CERTIFICATE. The Buyer and MergerCo shall have
delivered to the Company certificates, dated as of the Closing Date and signed
on their behalf by their respective Chief Executive Officers and Chief
Financial Officers, as to the satisfaction by them of the conditions set forth
in subsections 7.3(a), 7.3(b) and 7.3(c).
ARTICLE VIII
TERMINATION, AMENDMENT AND WAIVER
8.1 TERMINATION. This Agreement may be terminated and abandoned at any
time prior to the Effective Time, whether before or after approval of matters
presented in connection with the Merger by the stockholders of the Company:
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(a) by mutual written consent of MergerCo and the Company; or
(b) by either MergerCo or the Company if any Governmental Entity shall
have issued an order, decree or ruling or taken any other action permanently
enjoining, restraining or otherwise prohibiting, or if there shall be in effect
any other legal restraint or prohibition preventing or prohibiting, the
consummation of the Merger and such order, decree, ruling or other action shall
have become final and nonappealable (other than due to the failure of the party
seeking to terminate this Agreement to perform its obligations under this
Agreement required to be performed at or prior to the Effective Time); or
(c) by either MergerCo or the Company if the Merger shall not have been
consummated on or before October 15, 1998 (other than due to the failure of the
party seeking to terminate this Agreement to perform its obligations under this
Agreement required to be performed at or prior to the Effective Time); or
(d) by either MergerCo or the Company, if any required approval of the
stockholders of the Company shall not have been obtained by reason of the
failure to obtain the required vote upon a vote held at a duly held meeting of
stockholders or at any adjournment thereof; provided, however, that unless
MergerCo shall otherwise notify the Company within two weeks after such failure
to obtain the required vote, this Agreement shall be deemed to have been
terminated by MergerCo upon the expiration of such two-week period; or
(e) by MergerCo, if the Board of Directors of the Company or any committee
thereof shall have (i) withdrawn, modified or amended in any respect adverse to
the Buyer or MergerCo its approval or recommendation of the Merger, (ii) failed
as soon as practicable to mail the Proxy Statement to its stockholders or
failed to include in such statement such recommendation, (iii) recommended or
approved any Transaction Proposal from a person other than the Buyer, MergerCo
or any of their respective affiliates, (iv) failed to publicly announce, within
10 business days after the occurrence of any publicly announced Transaction
Proposal from a person other than the Buyer, its opposition to such Transaction
Proposal, or amended, modified, or withdrawn its opposition to any Transaction
Proposal in any manner adverse to the Buyer or MergerCo; or (v) resolved to do
any of the foregoing; or
(f) by MergerCo, (i) if the Company shall enter into any agreement with a
third party with respect to a Transaction Proposal or (ii) if a person, group
or entity has acquired after the date hereof 20% or more of the issued and
outstanding shares of Common Stock; or
(g) by the Company upon its entering into a binding agreement with a third
party with respect to a Transaction Proposal, provided that it has complied
with all provisions of this Agreement, including the notice provisions herein,
and that it pays the Termination Fee as provided by and defined in Section 9.2;
or
(h) by MergerCo in the event of a material breach or failure to perform in
any material respect by the Company of any representation, warranty, covenant
or other agreement contained in this Agreement that cannot be or has not been
cured within 20 days after the giving of written notice to the Company; or
(i) by the Company in the event of a material breach or failure to perform
in any material respect by MergerCo or the Buyer of any representation,
warranty, covenant or other agreement contained in this Agreement that cannot
be or has not been cured within 20 days after the giving of written notice to
MergerCo or Buyer.
8.2 EFFECT OF TERMINATION. In the event of termination of this Agreement
by either the Company or MergerCo as provided in Section 8.1, this Agreement
shall forthwith become void and have no effect, without any liability or
obligation on the part of the Buyer, MergerCo or the Company, other than under
the provisions of Section 3.13, Section 4.5, Section 6.2(c), Section 6.14(c),
this Section 8.2,
A-39
Section 9.2 and Section 9.7. Nothing contained in this Section 8.2 shall
relieve any party of any breach of the representations, warranties, covenants
or agreements set forth in this Agreement.
8.3 AMENDMENT. This Agreement way be amended by the parties at any time
before or after any required approval of matters presented in connection with
the Merger by the stockholders of the Company; provided, however, that after
any such approval, there shall be made no amendment that by law requires
further approval by such stockholders without the further approval of such
stockholders. This Agreement may not be amended except by an instrument in
writing signed on behalf of each of the parties.
8.4 EXTENSION; WAIVER. At any time prior to the Effective Time, the
parties may (a) extend the time for the performance of any of the obligations
or other acts of the other parties, (b) waive any inaccuracies in the
representations and warranties contained in this Agreement or in any document
delivered pursuant to this Agreement or (c) subject to the proviso of Section
8.3, waive compliance with any of the agreements or conditions contained in
this Agreement. Any agreement on the part of a party to any such extension or
waiver shall be valid only if set forth in an instrument in writing signed on
behalf of such party. The failure of any party to this Agreement to assert any
of its rights under this Agreement or otherwise shall not constitute a waiver
of such rights.
8.5 PROCEDURE FOR TERMINATION, AMENDMENT, EXTENSION OR WAIVER. A
termination of this Agreement pursuant to Section 8.1, an amendment of this
Agreement pursuant to Section 8.3 or an extension or waiver pursuant to Section
8.4 shall, in order to be effective, require in the case of MergerCo or the
Company, action by its Board of Directors or the duly authorized designee of
its Board of Directors.
ARTICLE IX
GENERAL PROVISIONS
9.1 NONSURVIVAL OF REPRESENTATIONS AND WARRANTIES. None of the
representations and warranties in this Agreement or in any instrument delivered
pursuant to this Agreement shall survive the Effective Time and all such
representations and warranties shall be extinguished on consummation of the
Merger and none of the Company, the Buyer and MergerCo nor any officer,
director or employee or shareholder thereof shall be under any liability
whatsoever with respect to any such representation or warranty after such time.
This Section 9.1 shall not limit any covenant or agreement of the parties that
by its terms contemplates performance after the Effective Time.
9.2 FEES AND EXPENSES.
(a) If any person (other than MergerCo or any of its affiliates) shall
have made, proposed, communicated or disclosed a Transaction Proposal in a
manner that is or otherwise becomes public and this Agreement is terminated,
after such Transaction Proposal shall have been made, proposed, communicated or
disclosed to the Company, pursuant to any of the following provisions:
(i) by the Company pursuant to Section 8.1(g);
(ii) by MergerCo pursuant to Section 8.1(e) or (f)(i); or
(iii) by MergerCo pursuant to Section 8.1(h) due to a breach of or
failure to perform a covenant or agreement, if the breach or
failure to perform that forms the basis of the termination under
Section 8.1(h) was caused or effected by any action, or any
omission where this Agreement would require action, of the
Company or its Subsidiaries or their agents, affiliates or
representatives in connection with such Transaction Proposal;
A-40
then the Company shall, within five business days after such termination of
this Agreement, pay MergerCo a fee of $2,000,000 in cash (the "Termination
Fee"), which amount shall be payable in same day funds. No termination of this
Agreement at a time when a fee is reasonably expected to be payable pursuant to
this Section 9.2(a) shall be effective until such fee is paid. The Company
acknowledges and agrees that a termination of this Agreement under any of the
circumstances referred to in the first sentence of this paragraph would cause
the Buyer and MergerCo to suffer direct and substantial damages, which damages
cannot be determined with reasonable certainty. To compensate the Buyer and
MergerCo for such damages, the Company shall pay MergerCo the Termination Fee,
in the manner referred to above, as liquidated damages. It is specifically
agreed that the amount to be paid pursuant to this Section 9.2(a) represents
liquidated damages and not a penalty.
(b) Except as provided otherwise in paragraph (a) above, all costs and
expenses incurred in connection with this Agreement, and the transactions
contemplated hereby shall be paid by the party incurring such expenses, except
that the Company shall pay all costs and expenses (i) in connection with
printing and mailing the Proxy Statement as well as all SEC filing fees
relating to the transactions contemplated herein and (ii) of obtaining any
consents of any third party, provided that the Buyer shall reimburse the
Company in the amount of such costs and expenses if this Agreement is
terminated as a result of the Buyer's or MergerCo's material breach of this
Agreement. The parties agree that the Buyer shall pay the filing fee required
for the filing of the pre-merger notification and report under the HSR Act and
the fees of the Exchange Agent incurred prior to the Effective Time.
9.3 NOTICES. All notices, requests, claims, demands and other
communications under this Agreement shall be in writing and shall be deemed to
have been effectively given when delivered personally, when dispatched by
electronic facsimile transmission (with receipt thereof electronically
confirmed) or one day after having been sent by overnight courier to the
parties at the following addresses (or at such other address for a party as
shall be specified by like notice):
(a) if to MergerCo or the Buyer, to
Camelot Music Holdings, Inc.
8000 Freedom Avenue, N.W.
North Canton, Ohio 44720
Facsimile: 330-494-8535
Attn: Mr. James E. Bonk
President and Chief Executive Officer
with a copy to:
Calfee, Halter & Griswold LLP
1400 McDonald Investment Center
800 Superior Avenue
Cleveland, Ohio 44114
Facsimile: 216-241-0816
Attn: Thomas F. McKee, Esq.
A-41
(b) if to the Company, to
Spec's Music, Inc.
1666 N.W. 82d Avenue
Miami, Florida 33126 Facsimile:
305-592-9343
Attn: Ms. Ann S. Lieff
President and Chief Executive Officer
with a copy to:
Holland & Knight LLP
701 Brickell Avenue
Miami, Florida 33131
Facsimile: 305-789-7799
Attn: Bruce Jay Colan, Esq.
9.4 DEFINITIONS. For purposes of this Agreement:
(a) an "affiliate" of any person means another person that directly or
indirectly, through one or more intermediaries, controls, is controlled by, or
is under common control with, such first person;
(b) "business day" shall have the meaning assigned such term in Rule
14d-1(e)(6) under the Exchange Act;
(c) "knowledge", with respect to the Company, means (i) the actual
knowledge of the following officers and employees (as well as any of their
successors) of the Company and its Subsidiaries: Ann S. Lieff, Rosalind S.
Zacks and Donald A. Molta, with respect to all matters, and, without
duplication, Beth Fath, with respect to purchasing, marketing and merchandising
matters, Patricia Walker, with respect to human resources, employee benefits
and labor matters, and Melvin Noreiga, with respect to all matters relating to
the Company's Subsidiary D S Latino, Inc., or any of the foregoing (with
respect to a matter within such individual's designated area of knowledge),
(ii) the constructive knowledge of any facts or events of which such officers
and employees, or any of them (with respect to a matter within such
individual's designated area of knowledge), should have been aware had such
officers or employees, or any of them, exercised the degree of diligence that
would have been exercised by a reasonable person in such position, and (iii)
for purposes of this definition, any such officer or employee (with respect to
a matter within such individual's designated area of knowledge) having
knowledge of any occurrence, nonoccurrence, existence or nonexistence of
material facts, circumstances or events that have significance under any law,
standard, requirement or agreement shall be deemed to have actual knowledge of
such significance;
(d) "Material Adverse Change" or "Material Adverse Effect" means, when
used in connection with the Company, any change or effect that either
individually or in the aggregate with all other such changes or effects is
materially adverse to the business, financial condition, prospects or results
of operations of the Company and its Subsidiaries taken as a whole, and the
terms "material" and "materially" shall have correlative meanings; provided,
however, that no Material Adverse Change or Material Adverse Effect shall be
deemed to have occurred as a result solely of any one or more of (i) those
matters described in a separate writing dated the date of this Agreement and
specifically referencing this Section delivered by the Company to the Buyer,
(ii) general conditions affecting generally the industry in which the Company
competes and general market conditions in the United States, or (iii) changes
after the date hereof in the relationship between the Company and any customer
or supplier, so long as any such change is not attributable to or does not
arise from a breach by the Company of any of its representations, warranties or
covenants contained in this Agreement;
A-42
(e) "Material Adverse Change" or "Material Adverse Effect" means, when
used in connection with the Buyer, any change or effect that either
individually or in the aggregate with all other such changes or effects is
materially adverse to the business, financial condition, prospects or results
of operations of the Buyer and its subsidiaries taken as a whole, and the terms
"material" and "materially" shall have correlative meanings; provided, however,
that no Material Adverse Change or Material Adverse Effect shall be deemed to
have occurred as a result solely of any one or more of (i) those matters
described in a separate writing dated the date of this Agreement and
specifically referencing this Section delivered by the Buyer to the Company,
(ii) general conditions affecting generally the industry in which the Buyer
competes and general market conditions in the United States, or (iii) changes
after the date hereof in the relationship between the Buyer and any customer or
supplier, so long as any such change is not attributable to or does not arise
from a breach by the Buyer of any of its representations, warranties or
covenants contained in this Agreement;
(f) "person" means an individual, corporation, partnership, joint venture,
association, trust, unincorporated organization or other entity;
(g) "SEC" means the United States Securities and Exchange Commission; and
(h) a "subsidiary" of any person means another person, an amount of the
voting securities, other voting ownership or voting partnership interests of
which is sufficient to elect at least a majority of its Board of Directors (or
other governing body) or, if there are no such voting interests, 50% or more of
the equity interests of which is owned directly or indirectly by such first
person.
9.5 INTERPRETATION. When a reference is made in this Agreement to a
Section, Exhibit or Schedule, such reference shall be to a Section of, or an
Exhibit or Schedule to, this Agreement unless otherwise indicated. The table of
contents and headings contained in this Agreement are for reference purposes
only and shall not affect in any way the meaning or interpretation of this
Agreement. Whenever the words "include," "includes" or "including" are used in
this Agreement, they shall be deemed to be followed by the words "without
limitation".
9.6 COUNTERPARTS. This Agreement may be executed in one or more
counterparts, all of which shall be considered one and the same agreement, and
shall become effective when one or more counterparts have been signed by each
of the parties and delivered to the other parties.
9.7 ENTIRE AGREEMENT; NO THIRD-PARTY BENEFICIARIES. This Agreement and the
other agreements referred to herein constitute the entire agreement, and
supersede all prior agreements and understandings, both written and oral, among
the parties with respect to the subject matter of this Agreement. This
Agreement, other than Sections 6.4, 6.8 and 6.13 is not intended to confer upon
any person other than the parties any rights or remedies.
9.8 GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY, AND CONSTRUED IN
ACCORDANCE WITH, THE INTERNAL SUBSTANTIVE LAWS OF THE STATE OF FLORIDA,
REGARDLESS OF THE LAWS THAT MIGHT OTHERWISE GOVERN UNDER APPLICABLE PRINCIPLES
OF CONFLICTS OF LAWS.
9.9 ASSIGNMENT. Neither this Agreement nor any of the rights, interests or
obligations under this Agreement shall be assigned, in whole or in part, by
operation of law or otherwise, by any of the parties without the prior written
consent of the other parties; provided, however, that the Buyer or MergerCo
may, without the Company's prior written consent, assign their respective
rights under this Agreement to any financial institution that requires such
assignment in connection with such financial institution's agreement to provide
financing to either the Buyer or MergerCo; provided, further, that this
provision does not create a financing contingency that may relieve the Buyer or
MergerCo of their obligations under this Agreement. Subject to the preceding
sentence, this Agreement shall be binding upon, inure to the benefit of, and be
enforceable by, the parties and their respective successors and assigns.
9.10 ENFORCEMENT. The parties agree that irreparable damage would occur in
the event that any of the provisions of this Agreement were not performed in
accordance with their specific terms or were
A-43
otherwise breached. It is accordingly agreed that the parties shall be entitled
to an injunction or injunctions to prevent breaches of this Agreement and to
enforce specifically the terms and provisions of this Agreement, in addition to
any other remedy at law or in equity to which the parties may be entitled.
IN WITNESS WHEREOF, the Buyer, MergerCo and the Company have caused this
Agreement to be signed by their respective officers thereunto duly authorized,
all as of the date first written above.
SM ACQUISITION, INC.
By: /s/ James E. Bonk
----------------------------------------
Name: James E. Bonk
Title: President and Chief Executive
Officer
SPEC'S MUSIC, INC.
By: /s/ Ann S. Lieff
----------------------------------------
Name: Ann S. Lieff
Title: President and Chief Executive
Officer
CAMELOT MUSIC HOLDINGS, INC.
By: /s/ James E. Bonk
----------------------------------------
Name: James E. Bonk
Title: President and Chief Executive
Officer
A-44
APPENDIX B
[PAINEWEBBER LETTER]
June 3, 1998
Board of Directors
Spec's Music, Inc.
1666 N.W. 82nd Avenue
Miami, Florida 33126
Ladies and Gentlemen:
Spec's Music, Inc. ("Spec's" or the "Company"), Camelot
Music, Inc. ("Buyer") and a wholly owned indirect subsidiary of the
Buyer ("MergerCo") propose to enter into an Agreement and Plan of
Merger (the "Agreement") pursuant to which MergerCo will be merged with
and into the Company (the "Merger"). Following the Merger, each issued
and outstanding share of common stock, par value $.01 per share, of the
Company ("Common Stock") will be converted into the right to receive
$3.30 in cash (the "Merger Consideration"). The Merger is expected to
be considered by the holders of Common Stock at a meeting of the
Company's stockholders to be held as soon as practicable following the
date hereof.
You have asked us whether or not, in our opinion, the Merger
Consideration to be received in the Merger is fair from a financial
point of view, to the holders of Common Stock.
In arriving at the opinion set forth below, we have, among
other things:
(1) Reviewed, among other public information, the Company's
Annual Reports, Forms 10-K and related financial information
for the three fiscal years ended July 31, 1997 and the
Company's Form 10-Q and the related unaudited financial
information for the six months ended January 31, 1998;
(2) Reviewed certain information, including financial forecasts,
relating to the business, earnings, cash flow, assets and
prospects of the Company furnished to us by the Company;
(3) Conducted discussions with members of senior management of
the Company concerning its businesses and prospects;
(4) Reviewed the historical market prices and trading activity
for the Common Stock with those of certain publicly traded
companies which we deemed to be relevant;
B-1
Board of Directors
Spec's Music, Inc.
June 3, 1998
Page 2
(5) Compared the financial position and operating results of the
Company with those of certain publicly traded companies
which we deemed to be relevant;
(6) Compared the proposed financial terms of the Merger with the
financial terms of certain other business combinations which
we deemed to be relevant;
(7) Reviewed a draft of the Agreement dated May 18, 1998; and
(8) Reviewed such other financial studies and analyses and
performed such other investigations and took into account
such other matters as we deemed to be necessary, including
our assessment of regulatory, general economic, market and
monetary conditions.
In preparing our opinion, we have relied on the accuracy and
completeness of all information that was publicly available, supplied
or otherwise communicated to us by or on behalf of the Company, and we
have not assumed any responsibility to independently verify such
information. We have assumed that the financial forecasts examined by
us were reasonably prepared on bases reflecting the best currently
available estimates and good faith judgements of the management of the
Company as to the future performance of the Company. We have also
relied upon assurances of the management of the Company that they are
unaware of any facts that would make the information or financial
forecasts provided to us incomplete or misleading. We have not made an
independent evaluation or appraisal of the assets or liabilities
(contingent or otherwise) of the Company, nor have we been furnished
with any such evaluations or appraisals and have assumed that all
material assets and liabilities (contingent or otherwise, known or
unknown) of the Company are as set forth in its respective financial
statements. Our opinion is based upon regulatory, general economic,
market and monetary conditions existing on the date hereof.
Our opinion is directed to the Board of Directors of the
Company and does not constitute a recommendation to any stockholder of
the Company as to whether or not any such stockholder should approve
the Merger. This opinion does not address the relative merits of the
Merger and other transactions or business strategies discussed by the
Board of Directors of the Company as alternatives to the Merger or the
decision of the Board of Directors of the Company to proceed with the
Merger.
This opinion has been prepared for the use of the Board of
Directors of the Company and shall not be reproduced, summarized,
described or referred to or given to any other person or otherwise made
public without the prior written consent of PaineWebber Incorporated;
provided, however, that this letter may be reproduced in full in the
Proxy
B-2
Board of Directors
Spec's Music, Inc.
June 3, 1998
Page 3
Statement to be filed with the Securities and Exchange Commission in
connection with the Merger.
PaineWebber Incorporated is currently acting as financial
advisor to the Board of Directors of the Company in connection with the
Merger and will receive a fee upon the delivery of this opinion. In the
past, PaineWebber Incorporated and its affiliates have provided
investment banking services to the Company and have received fees for
rendering these services.
In the ordinary course of our business, we may trade the
securities of the Company for our own account and for the accounts of
our customers and, accordingly, may at any time hold long or short
positions in such securities.
On the basis of, and subject to the foregoing, we are of the
opinion that, as of the date hereof, the Merger Consideration to be
received in the Merger is fair from a financial point of view, to the
holders of Common Stock.
Very truly yours,
PAINEWEBBER INCORPORATED
/s/ PAINEWEBBER INCORPORATED
----------------------------
B-3
APPENDIX C
FLORIDA STATUTES
607.1301 DISSENTERS' RIGHTS; DEFINITIONS.--The following definitions apply to
ss. 607.1302 and 607.1320:
(1) "Corporation" means the issuer of the shares held by a dissenting
shareholder before the corporate action or the surviving or
acquiring corporation by merger or share exchange of that
issuer.
(2) "Fair value," with respect to a dissenter's shares, means the
value of the shares as of the close of business on the day prior
to the shareholders' authorization date, excluding any
appreciation or depreciation in anticipation of the corporate
action unless exclusion would be inequitable.
(3) "Shareholders' authorization date" means the date on which the
shareholders' vote authorizing the proposed action was taken,
the date on which the corporation received written consents
without a meeting from the requisite number of shareholders in
order to authorize the action, or, in the case of a merger
pursuant to s. 607.1104, the day prior to the date on which a
copy of the plan of merger was mailed to each shareholder of
record of the subsidiary corporation.
607.1302 RIGHT OF SHAREHOLDERS TO DISSENT.--
(1) Any shareholder of a corporation has the right to dissent from,
and obtain payment of the fair value of his shares in the event
of, any of the following corporate actions:
(a) Consummation of a plan of merger to which the corporation is a
party:
1. If the shareholder is entitled to vote on the merger, or
2. If the corporation is a subsidiary that is merged with its
parent under s. 607.1104, and the shareholders would have
been entitled to vote on action taken, except for the
applicability of s. 607.1104;
(b) Consummation of a sale or exchange of all, or substantially
all, of the property of the corporation, other than in the
usual and regular course of business, if the shareholder is
entitled to vote on the sale or exchange pursuant to s.
607.1202, including a sale in dissolution but not including
a sale pursuant to court order or a sale for cash pursuant
to a plan by which all or substantially all of the net
proceeds of the sale will be distributed to the shareholders
within 1 year after the date of the sale;
(c) As provided in s. 607.0902(11), the approval of a control-share
acquisition;
(d) Consummation of a plan of share exchange to which the
corporation is a party as the corporation the shares of
which will be acquired, if the shareholder is entitled to
vote on the plan;
(e) Any amendment of the articles of incorporation if the
shareholder is entitled to vote on the amendment and if such
amendment would adversely affect such shareholder by:
1. Altering or abolishing any preemptive rights attached to any
of his shares;
2. Altering or abolishing the voting rights pertaining to any of
his shares, except as such rights may be affected by the
voting rights of new shares then being authorized of any
existing or new class or series of shares;
3. Effecting an exchange, cancellation, or reclassification of
any of his shares, when such exchange, cancellation, or
reclassification would alter or abolish his voting rights
or alter his percentage of equity in the corporation, or
effecting a reduction or cancellation of accrued
dividends or other arrearages in respect to such shares;
4. Reducing the stated redemption price of any of his redeemable
shares, altering or abolishing any provision relating to
any sinking fund for the redemption or purchase of any of
his shares, or making any of his shares subject to
redemption when they are not otherwise redeemable;
C-1
5. Making noncumulative, in whole or in part, dividends of any
of his preferred shares which had theretofore been
cumulative;
6. Reducing the stated dividend preference of any of his
preferred shares; or
7. Reducing any stated preferential amount payable on any of his
preferred shares upon voluntary or involuntary liquidation;
or
(f) Any corporate action taken, to the extent the articles of
incorporation provide that a voting or nonvoting shareholder
is entitled to dissent and obtain payment for his shares.
(2) A shareholder dissenting from any amendment specified in paragraph
(1)(e) has the right to dissent only as to those of his shares
which are adversely affected by the amendment.
(3) A shareholder may dissent as to less than all the shares
registered in his name. In that event, his rights shall be
determined as if the shares as to which he has dissented and his
other shares were registered in the names of different
shareholders.
(4) Unless the articles of incorporation otherwise provide, this
section does not apply with respect to a plan of merger or share
exchange or a proposed sale or exchange of property, to the
holders of shares of any class or series which, on the record
date fixed to determine the shareholders entitled to vote at the
meeting of shareholders at which such action is to be acted upon
or to consent to any such action without a meeting, were either
registered on a national securities exchange or designated as a
national market system security on an interdealer quotation
system by the National Association of Securities Dealers, Inc.,
or held of record by not fewer than 2,000 shareholders.
(5) A shareholder entitled to dissent and obtain payment for his
shares under this section may not challenge the corporate action
creating his entitlement unless the action is unlawful or
fraudulent with respect to the shareholder or the corporation.
607.1320 PROCEDURE FOR EXERCISE OF DISSENTERS' RIGHTS.--
(1)(a) If a proposed corporate action creating dissenters' rights under
s. 607.1302 is submitted to a vote at a shareholders' meeting, the
meeting notice shall state that shareholders are or may be entitled to
assert dissenters' rights and be accompanied by a copy of ss.
607.1301, 607.1302, and 607.1320. A shareholder who wishes to assert
dissenters' rights shall:
1. Deliver to the corporation before the vote is taken written
notice of his intent to demand payment for his shares if the
proposed action is effectuated, and
2. Not vote his shares in favor of the proposed action. A proxy
or vote against the proposed action does not constitute such
a notice of intent to demand payment.
(b) If proposed corporate action creating dissenters' rights under
s. 607.1302 is effectuated by written consent without a
meeting, the corporation shall deliver a copy of ss.
607.1301, 607.1302, and 607.1320 to each shareholder
simultaneously with any request for his written consent or,
if such a request is not made, within 10 days after the date
the corporation received written consents without a meeting
from the requisite number of shareholders necessary to
authorize the action.
(2) Within 10 days after the shareholders' authorization date, the
corporation shall give written notice of such authorization or
consent or adoption of the plan of merger, as the case may be,
to each shareholder who filed a notice of intent to demand
payment for his shares pursuant to paragraph (1)(a) or, in the
case of action authorized by written consent, to each
shareholder, excepting any who voted for, or consented in
writing to, the proposed action.
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(3) Within 20 days after giving the notice to him, any shareholder who
elects to dissent shall file with the corporation a notice of
such election, stating his name and address, the number,
classes, and series of shares as to which he dissents, and a
demand for payment of the fair value of his shares. Any
shareholder failing to file such election to dissent within the
period set forth shall be bound by the terms of the proposed
corporate action. Any shareholder filing an election to dissent
shall deposit his certificates for certificated shares with the
corporation simultaneously with the filing of the election to
dissent. The corporation may restrict the transfer of
uncertificated shares from the date the shareholder's election
to dissent is filed with the corporation.
(4) Upon filing a notice of election to dissent, the shareholder shall
thereafter be entitled only to payment as provided in this
section and shall not be entitled to vote or to exercise any
other rights of a shareholder. A notice of election may be
withdrawn in writing by the shareholder at any time before an
offer is made by the corporation, as provided in subsection (5),
to pay for his shares. After such offer, no such notice of
election may be withdrawn unless the corporation consents
thereto. However, the right of such shareholder to be paid the
fair value of his shares shall cease, and he shall be reinstated
to have all his rights as a shareholder as of the filing of his
notice of election, including any intervening preemptive rights
and the right to payment of any intervening dividend or other
distribution or, if any such rights have expired or any such
dividend or distribution other than in cash has been completed,
in lieu thereof, at the election of the corporation, the fair
value thereof in cash as determined by the board as of the time
of such expiration or completion, but without prejudice
otherwise to any corporate proceedings that may have been taken
in the interim, if:
(a) Such demand is withdrawn as provided in this section;
(b) The proposed corporate action is abandoned or rescinded or
the shareholders revoke the authority to effect such action;
(c) No demand or petition for the determination of fair value by a
court has been made or filed within the time provided in
this section; or
(d) A court of competent jurisdiction determines that such
shareholder is not entitled to the relief provided by this
section.
(5) Within 10 days after the expiration of the period in which
shareholders may file their notices of election to dissent, or
within 10 days after such corporate action is effected,
whichever is later (but in no case later than 90 days from the
shareholders' authorization date), the corporation shall make a
written offer to each dissenting shareholder who has made demand
as provided in this section to pay an amount the corporation
estimates to be the fair value for such shares. If the corporate
action has not been consummated before the expiration of the
90-day period after the shareholders' authorization date, the
offer may be made conditional upon the consummation of such
action. Such notice and offer shall be accompanied by:
(a) A balance sheet of the corporation, the shares of which the
dissenting shareholder holds, as of the latest available
date and not more than 12 months prior to the making of such
offer; and
(b) A profit and loss statement of such corporation for the
12-month period ended on the date of such balance sheet or,
if the corporation was not in existence throughout such
12-month period, for the portion thereof during which it was
in existence.
(6) If within 30 days after the making of such offer any shareholder
accepts the same, payment for his shares shall be made within 90
days after the making of such offer or the consummation of the
proposed action, whichever is later. Upon payment of the agreed
value, the dissenting shareholder shall cease to have any
interest in such shares.
C-3
(7) If the corporation fails to make such offer within the period
specified therefor in subsection (5) or if it makes the offer
and any dissenting shareholder or shareholders fail to accept
the same within the period of 30 days thereafter, then the
corporation, within 30 days after receipt of written demand from
any dissenting shareholder given within 60 days after the date
on which such corporate action was effected, shall, or at its
election at any time within such period of 60 days may, file an
action in any court of competent jurisdiction in the county in
this state where the registered office of the corporation is
located requesting that the fair value of such shares be
determined. The court shall also determine whether each
dissenting shareholder, as to whom the corporation requests the
court to make such determination, is entitled to receive payment
for his shares. If the corporation fails to institute the
proceeding as herein provided, any dissenting shareholder may do
so in the name of the corporation. All dissenting shareholders
(whether or not residents of this state), other than
shareholders who have agreed with the corporation as to the
value of their shares, shall be made parties to the proceeding
as an action against their shares. The corporation shall serve a
copy of the initial pleading in such proceeding upon each
dissenting shareholder who is a resident of this state in the
manner provided by law for the service of a summons and
complaint and upon each nonresident dissenting shareholder
either by registered or certified mail and publication or in
such other manner as is permitted by law. The jurisdiction of
the court is plenary and exclusive. All shareholders who are
proper parties to the proceeding are entitled to judgment
against the corporation for the amount of the fair value of
their shares. The court may, if it so elects, appoint one or
more persons as appraisers to receive evidence and recommend a
decision on the question of fair value. The appraisers shall
have such power and authority as is specified in the order of
their appointment or an amendment thereof. The corporation shall
pay each dissenting shareholder the amount found to be due him
within 10 days after final determination of the proceedings.
Upon payment of the judgment, the dissenting shareholder shall
cease to have any interest in such shares.
(8) The judgment may, at the discretion of the court, include a fair
rate of interest, to be determined by the court.
(9) The costs and expenses of any such proceeding shall be determined
by the court and shall be assessed against the corporation, but
all or any part of such costs and expenses may be apportioned
and assessed as the court deems equitable against any or all of
the dissenting shareholders who are parties to the proceeding,
to whom the corporation has made an offer to pay for the shares,
if the court finds that the action of such shareholders in
failing to accept such offer was arbitrary, vexatious, or not in
good faith. Such expenses shall include reasonable compensation
for, and reasonable expenses of, the appraisers, but shall
exclude the fees and expenses of counsel for, and experts
employed by, any party. If the fair value of the shares, as
determined, materially exceeds the amount which the corporation
offered to pay therefor or if no offer was made, the court in
its discretion may award to any shareholder who is a party to
the proceeding such sum as the court determines to be reasonable
compensation to any attorney or expert employed by the
shareholder in the proceeding.
(10) Shares acquired by a corporation pursuant to payment of the agreed
value thereof or pursuant to payment of the judgment entered
therefor, as provided in this section, may be held and disposed
of by such corporation as authorized but unissued shares of the
corporation, except that, in the case of a merger, they may be
held and disposed of as the plan of merger otherwise provides.
The shares of the surviving corporation into which the shares of
such dissenting shareholders would have been converted had they
assented to the merger shall have the status of authorized but
unissued shares of the surviving corporation.
C-4
SPEC'S MUSIC, INC.
1666 NORTHWEST 82ND AVENUE
MIAMI, FLORIDA 33126
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned hereby appoints Martin W. Spector and Dorothy J.
Spector, and each of them, with power of substitution, proxies of the
undersigned, to vote all the shares of common stock of Spec's Music, Inc.
which the undersigned would be entitled to vote at the Special Meeting of the
Stockholders to be held on July 29, 1998, or any adjournments thereof, upon
the matter referred to on the reverse side and, in their discretion, upon any
other business as may come before the meeting.
(CONTINUED, AND TO BE SIGNED ON THE OTHER SIDE.)
/triangle/ FOLD AND DETACH HERE /triangle/
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE PROPOSAL.
Please mark
your votes as
indicated in
this example
[X]
1. APPROVAL OF MERGER
Approval of the Agreement and Plan of Merger pursuant to which
Spec's Music, Inc., will be acquired by Camelot Music Holdings, Inc.
FOR AGAINST ABSTAIN
[ ] [ ] [ ]
This Proxy when properly executed will be voted in the manner
directed herein by the undersigned stockholder. If no direction is made, this
Proxy will be voted FOR the proposal as set forth herein.
The undersigned acknowledges receipt of the Notice of Special Meeting
of Stockholders dated June 30, 1998, and the accompanying Proxy Statement.
Dated:__________________________________ , 1998
_______________________________________________
Signature
Please sign exactly as name appears herein. When shares are held by
joint tenants, both should sign. When signing as attorney, executor,
administrator, trustee or guardian, please give full title as such. If a
corporation, please sign in full corporate name by President or other
authorized officer. If a partnership, please sign in partnership name by
authorized person.
PLEASE MARK, SIGN, DATE AND RETURN THE PROXY CARD PROMPTLY USING THE ENCLOSED
ENVELOPE.
/triangle/ FOLD AND DETACH HERE /triangle/
EXHIBIT INDEX
EXHIBIT DESCRIPTION
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99.1 Report of Deloitte & Touche LLP