-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Nhxbux0uVp+lb1AnszWINlRbLcHEkVVdGMF3D3wH4Teu31JdqcmjBa2TuLdeeQCJ 1N2aRAmPgXNgtc5WbLRZsA== 0001047469-98-021481.txt : 19980522 0001047469-98-021481.hdr.sgml : 19980522 ACCESSION NUMBER: 0001047469-98-021481 CONFORMED SUBMISSION TYPE: SC 14D9 PUBLIC DOCUMENT COUNT: 11 FILED AS OF DATE: 19980521 SROS: NYSE SUBJECT COMPANY: COMPANY DATA: COMPANY CONFORMED NAME: MERCANTILE STORES CO INC CENTRAL INDEX KEY: 0000064923 STANDARD INDUSTRIAL CLASSIFICATION: RETAIL-DEPARTMENT STORES [5311] IRS NUMBER: 510032941 STATE OF INCORPORATION: DE FISCAL YEAR END: 0131 FILING VALUES: FORM TYPE: SC 14D9 SEC ACT: SEC FILE NUMBER: 005-10123 FILM NUMBER: 98629710 BUSINESS ADDRESS: STREET 1: 9450 SEWARD ROAD CITY: FAIRFIELD STATE: OH ZIP: 45014-2230 BUSINESS PHONE: 5138818000 MAIL ADDRESS: STREET 1: 9450 SEWARD ROAD CITY: FAIRFIELD STATE: OH ZIP: 45014 FILED BY: COMPANY DATA: COMPANY CONFORMED NAME: MERCANTILE STORES CO INC CENTRAL INDEX KEY: 0000064923 STANDARD INDUSTRIAL CLASSIFICATION: RETAIL-DEPARTMENT STORES [5311] IRS NUMBER: 510032941 STATE OF INCORPORATION: DE FISCAL YEAR END: 0131 FILING VALUES: FORM TYPE: SC 14D9 BUSINESS ADDRESS: STREET 1: 9450 SEWARD ROAD CITY: FAIRFIELD STATE: OH ZIP: 45014-2230 BUSINESS PHONE: 5138818000 MAIL ADDRESS: STREET 1: 9450 SEWARD ROAD CITY: FAIRFIELD STATE: OH ZIP: 45014 SC 14D9 1 SC 14D9 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ SCHEDULE 14D-9 SOLICITATION/RECOMMENDATION STATEMENT PURSUANT TO SECTION 14(D)(4) OF THE SECURITIES EXCHANGE ACT OF 1934 ------------------------ MERCANTILE STORES COMPANY, INC. (Name of Subject Company) MERCANTILE STORES COMPANY, INC. (Name of Person Filing Statement) COMMON STOCK, PAR VALUE $.14 2/3 PER SHARE (Title of Class of Securities) 587533 10 0 ((CUSIP) Number of Class of Securities) DAVID L. NICHOLS CHIEF EXECUTIVE OFFICER MERCANTILE STORES COMPANY, INC. 9450 SEWARD ROAD FAIRFIELD, OHIO 45016 (513) 881-8000 (Name, Address and Telephone Number of Person Authorized to Receive Notice and Communications on Behalf of the Person Filing Statement) COPY TO: RUSSELL B. RICHARDS, ESQ. KING & SPALDING 191 PEACHTREE STREET ATLANTA, GEORGIA 30303-1763 (404) 572-4600 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- ITEM 1. SECURITY AND SUBJECT COMPANY The name of the subject company is Mercantile Stores Company, Inc., a Delaware corporation (the "Company"), and the address of its principal executive offices is 9450 Seward Road, Fairfield, Ohio 45016. The title of the equity securities to which this Statement relates is the Common Stock, par value $.14 2/3 per share, of the Company (the "Shares"). ITEM 2. TENDER OFFER OF THE BIDDER This Statement relates to a tender offer disclosed in the Tender Offer Statement on Schedule 14D-1, dated May 21, 1998 (the "Schedule 14D-1"), of MSC Acquisitions, Inc., a Delaware corporation (the "Purchaser") and a wholly owned subsidiary of Dillard's, Inc., a Delaware corporation ("Parent"), to purchase all the issued and outstanding Shares at $80.00 per Share (the "Offer Price"), net to the seller in cash (the "Offer"), upon the terms and subject to the conditions set forth in the Offer to Purchase dated May 21, 1998 and the related Letter of Transmittal (which together constitute the "Offer Documents"). The principal executive offices of the Purchaser and Parent are located at 1600 Cantrell Road, Little Rock, Arkansas 72201. The Offer is being made pursuant to an Agreement and Plan of Merger dated as of May 16, 1998 among the Purchaser, Parent and the Company (the "Merger Agreement"), which provides, among other things, for the making of the Offer by the Purchaser and, subject to the conditions and upon the terms of the Merger Agreement, for the subsequent Merger of the Company and the Purchaser (the "Merger"). Stockholders of the Company representing approximately 40% of the issued and outstanding Shares of the Company (the "Locked-Up Stockholders") have contractually agreed, among other things, to tender their Shares in the Offer, provide Parent with an irrevocable proxy and grant an option at the $80.00 Offer Price. ITEM 3. IDENTITY AND BACKGROUND (a) The name and address of the Company, which is the person filing this statement, are set forth above in Item 1. (b) (1) The following describes material contracts, agreements, arrangements or understandings and any actual or potential conflict of interest between the Company or its affiliates and the Company, its executive officers, directors or affiliates: Certain contracts, agreements, arrangements or understandings between the Company and certain of its directors, executive officers or affiliates are described in the sections entitled "Stock Ownership of Certain Beneficial Owners," "Stock Ownership of Management," Management Remuneration," and "Transactions with Management and Others" in the Company's proxy statement dated April 24, 1998 for its 1998 Annual Meeting of Stockholders (the "1998 Proxy Statement"). A copy of such sections of the 1998 Proxy Statement are filed as Exhibit (c)(1) hereto. Certain other contracts, agreements or understandings between the Company and certain of its directors and executive officers are described below: The Compensation Committee approved an Incentive Performance Plan (the "Incentive Plan") on March 14, 1998. The Incentive Plan provides for the award of up to $3 million to five key executives (the "Covered Executives") of the Company. The purpose of the Incentive Plan is to encourage the Covered Executives to use their best efforts to assist the Board to pursue one or more strategic alternatives potentially available to the Company. If the Board pursues such alternatives, the Covered Executives will provide all assistance the Board requests throughout the strategic process, and if a transaction is approved by the Board and is consummated (an "Approved Transaction"), the Covered Executives will continue to provide assistance for a period of ninety days after such consummation. If and when an Approved Transaction is consummated, then it would be the expectation that the Board would elect to pay the full amount authorized under the Plan to the Covered Executives. The awards under the Incentive Plan are in addition to certain payments to which Covered Executives are entitled under certain severance protection agreements (the "Severance Protection Agreements"). If a Covered Executive is terminated following a change of control, the Covered Executive is entitled to receive (i) the Incentive Plan award, (ii) any amount under the Covered Executive's Severance Protection Agreement and (iii) an additional amount sufficient to insure that the Covered Executive receives no more or no less than the Covered Executive would have received if the payments in (i) and (ii) had not been taxable under Section 4999 of the Internal Revenue Code of 1986, as amended (the "Code"). If a Covered Executive voluntarily terminates his employment after a change of control under certain conditions, the Covered Executive is entitled to certain payments equaling at least the amounts in (i) and (ii) in this paragraph. In addition, under the Incentive Plan the Company must in certain events pay a "Gross-Up Payment" (as defined therein) to any covered associate with respect to any payment to be made thereunder, under the Severance Protection Agreements, or in respect of the Company's 1996 Stock Option Plan. (2) The following describes material contracts, agreements, arrangements or understandings and any actual or potential conflict of interest between the Company or its affiliates and the Purchaser, its executive officers, directors or affiliates: In connection with the Offer, (i) the Company has entered into the Merger Agreement with Parent and the Purchaser, (ii) the Locked-up Stockholders and Parent have entered into a Stockholders Agreement, dated as of May 16, 1998 (the "Stockholder Agreement"), (iii) Parent has entered into separate Agreements and Plans of Merger with Minot Mercantile Corporation ("Minot Mercantile") and Woodbank Mills, Inc. ("Woodbank Mills"; individually, and with Minot Mercantile, a "PHC"), respectively, each of which is a personal holding corporation operated by certain of the Locked-Up Stockholders (such agreements, the "PHC Merger Agreements) and (iv) Parent has entered into separate Proxy and Indemnification Agreements with holders of no less than 70% of the outstanding stock of each PHC (such agreements, the "PHC Proxy and Indemnification Agreements"; together with the Stockholders' Agreement and the PHC Merger Agreements, the "Lock-Up Agreements"). A copy of the Merger Agreement, the Stockholders' Agreement, the PHC Merger Agreements and the PHC Proxy and Indemnification Agreements are filed as Exhibits (c)(2), (c)(3), (c)(4), (c)(5),(c)(6) and (c)(7) to this Schedule 14D-9 and are hereby incorporated by reference. The Merger Agreement, the Stockholders' Agreement, the PHC Merger Agreements and the PHC Proxy and Indemnification Agreements are also summarized in Section 11 of the Offer to Purchase and such summaries are incorporated herein by reference. ITEM 4. THE SOLICITATION OR RECOMMENDATION (a)The Company Board of Directors met to consider the proposed structure for a possible business combination with the Purchaser and to consider the terms of the Offer at meetings held on May 12, 13, 14 and 15, 1998. At its meeting held on May 15, 1998, the Company Board determined that the Offer and the Merger were advisable and were fair to and in the best interests of the Company stockholders, approved the Offer and the Merger and agreed to recommend the acceptance of the Offer to the Company's stockholders. A copy of the letter to the stockholders of the Company dated May 21, 1998 from David L. Nichols, Chairman of the Board, containing the recommendation of the Company Board, is filed as Exhibit (a)(1) hereto and is incorporated herein by reference. As set forth in the Purchaser's Offer to Purchase, the Purchaser will purchase Shares tendered prior to the close of the Offer if there are validly tendered and not properly withdrawn prior to the expiration date of the Offer a number of Shares which, together with any Shares owned, directly or indirectly, by the Parent or the Purchaser, constitutes more than 50% of the voting power (determined on a fully-diluted basis), of all securities of the Company entitled to vote generally in the election of directors or in a merger (the "Minimum Condition") and all conditions to the Offer have been satisfied. Stockholders considering not tendering their Shares in order to wait for the Merger should note that the Purchaser is not obligated 2 to purchase any Shares, and can terminate the Offer and the Merger Agreement and not proceed with the Merger, if fewer than a majority of the outstanding Shares are tendered or otherwise acquired, directly or indirectly, by the Parent or the Purchaser prior to the expiration of the Offer or if any of the other Offer Conditions are not satisfied. The Offer is scheduled to expire at 12:00 midnight, New York City time, on Friday, June 19, 1998, unless the Offer is extended. However, so long as the Merger Agreement is in effect and all of the Offer Conditions are satisfied other than the Minimum Condition and the expiration or termination of the waiting period applicable under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amend (the "HSR Act"), then, at the Company's request the Purchaser, at its option, may extend the Offer until the earlier of (1) such time as such conditions are satisfied or waived, and (2) the date chosen by the Company which shall not be later than (x) the Outside Date (as defined herein), or (y) the earliest date on which the Company reasonably believes such condition will be satisfied; provided, that the Company may request further extensions up until the Outside Date if the Offer Conditions involving the HSR Act and the Minimum Condition are still the only Offer Conditions not satisfied unless the Merger Agreement has been terminated. The Outside Date means the latest of (I) 70 days following the date of the Merger Agreement or (II) the date that the condition to the Offer requiring the expiration or termination of any applicable waiting periods under the HSR Act shall have been satisfied for a period of 10 business days; provided that in no event shall the Outside Date be later than January 31, 1999. A copy of the press release issued by the Company announcing the Merger and the Offer is filed as Exhibit (a)(2) hereto and is incorporated herein by reference. (b)During the past several years, the Board of Directors has reviewed the dynamics of the department store industry, the Company's position in the industry and the possible strategic alternatives available to the Company. As a result of this review, various Board members have from time to time had discussions with other department store companies regarding strategic alternatives, including a possible business combination transaction. On Tuesday, February 3, 1998, at a Board of Directors meeting, representatives of Goldman, Sachs & Co. ("Goldman Sachs") made a presentation to the Board regarding the department store industry. Goldman Sachs reviewed positive department store industry dynamics as well as challenges facing the industry. Goldman Sachs also discussed the various strategic alternatives available to industry participants, including internal growth, strategic acquisitions, and a sale to a strategic buyer. The Board requested Goldman Sachs to work with management of the Company to review the strategic alternatives available and report back to the Board of Directors. On Thursday, February 26, 1998, the Board met with representatives of Goldman Sachs who reviewed with the Board various strategic alternatives available to the Company. Goldman Sachs also reviewed the Company's historical and projected operating performance on a stand-alone basis. Goldman Sachs also discussed the risks and benefits of a strategic combination with other companies. Representatives of the Milliken family on the Board indicated that, if the Company determined to pursue a strategic transaction, the Milliken family (which controls directly or indirectly approximately 40% of the Shares) preferred a transaction in which stockholders that so elected would receive stock consideration on a tax-free basis. After a discussion of the strategic alternatives available to the Company, the Board determined it would explore the potential of a strategic combination with certain companies. The Board authorized Goldman Sachs to contact four department store companies and to determine whether such companies would be interested in pursuing a strategic combination with the Company. In early April 1998, Morgan Stanley, the financial advisor to Parent, contacted representatives of the Company to discuss Parent's interest in pursuing a potential acquisition of the Company. In response to the inquiry, representatives of the Company informed Parent that it was not prepared to discuss a potential transaction with Parent at that time. As a result of contacting the four identified companies, Goldman Sachs received, on April 28, 1998, a proposal to acquire the Company from one of the four (the "Initial Bidder"). The Board met on April 30, 3 1998 and May 1, 1998 to discuss the proposal. The Board rejected the proposal, but authorized Goldman Sachs to discuss the proposal with the Initial Bidder and attempt to negotiate an acceptable proposal. On May 4, 1998, representatives of the Milliken family indicated that the Milliken family would consider supporting either a tax-free or a taxable transaction. Goldman Sachs was instructed to communicate this change in circumstances to the four identified companies. In addition, Goldman Sachs was instructed to contact Parent and invite it to submit a definitive proposal to acquire the Company. On May 4, 1998, Goldman Sachs called Morgan Stanley to inform them that the Company was currently engaged in substantive negotiations with a third party with respect to the sale of the Company and that if Parent was interested that the Company would provide Parent with an opportunity to participate in the sale process. On May 7, 1998, the parties concluded that to make a meaningful assessment of the benefits of a potential transaction, Parent would need to review confidential information and on such date the parties entered into the Parent Confidentiality Agreement. On May 8-9, 1998, officers of the Parent and Parent's legal and financial advisors continued Parent's due diligence review of the Company and commenced the review of the Company's nonpublic information in a data room. On May 9, 1998, the executive officers of the Company delivered a management presentation to the executive officers and legal and financial advisors of Parent. On May 12, 1998, Morgan Stanley, on behalf of Parent, informed Goldman Sachs that Parent was prepared to pursue the transaction at $78 per share. On May 13, 1998, representatives of the Company met with representatives of the Initial Bidder to discuss the Initial Bidder's proposal. The Company representatives encouraged the Initial Bidder to submit an improved proposal. On May 14, 1998, the Initial Bidder submitted a revised proposal. On May 14, 1998, the legal advisors to Parent and the Company met to negotiate the terms of the Merger Agreement and the related agreements and the Company encouraged Parent to increase its bid to $80 per Share. Morgan Stanley informed Goldman Sachs that Parent was prepared to offer $80 a share for the Company if it would negotiate a transaction with Parent on an exclusive basis for a period of 48 hours. The Board of Directors determined that the $80 proposal was superior to the revised proposal from the Initial Bidder and agreed to enter into exclusive negotiations with Parent for 48 hours. Representatives of the Company informed the Initial Bidder that the Company was required to cease negotiations with the Initial Bidder regarding a proposal. On May 14-15, 1998, the parties' legal and financial advisors negotiated the terms of the Merger Agreement and related documents. On May 15, 1998, the Board discussed the results of the negotiation and, after considering reports from management and the Company's legal and financial advisors (including Goldman Sachs' financial analysis and its delivery of an oral fairness opinion), the Board of Directors unanimously determined that the Offer and the Merger would be in the best interests of the Company and its stockholders, approved the Offer and the Merger and recommended that stockholders of the Company accept the Offer as set forth above. Following approval of the Board of Directors of the Company and Parent, on May 16, 1998, the Company, Parent and Purchaser entered into the Merger Agreement and the related agreements. In reaching the determinations described above, the Board of Directors of the Company considered a number of factors, including the following: (1) The financial condition, results of operations, business, prospects and strategic objectives of the Company, as well as the risks involved in achieving those prospects and objectives in the department store industry with the current competitive market conditions. The Board believes, 4 on the basis of its familiarity with such matters, that the consideration to be received by the Company stockholders in the transaction fairly reflects the Company's intrinsic value. (2) The projected financial condition, results of operations and prospects of the Company. (3) The industry trend of the last several years of accelerated consolidations in the retail department store industry and the view that this trend would continue to pose a potential strategic risk to the Company. (4) The detailed financial and valuation analyses presented to the Board of Directors by Goldman Sachs. (5) The fact that the $80 per Share to be received by the Company's stockholders in both the Offer and the Merger represents a premium over the closing market price of $73 5/16 per Share on May 15, 1998 (the trading day prior to the announcement of the Merger and a substantial premium over the closing market price of $60 5/8 per Share on February 2, 1998 (the trading day prior to the Goldman Sachs initial presentation of strategic alternatives to the Board). (6) The results of the discussions (described above) held with other parties as to possible transactions, including the fact that Parent's proposal was determined to be superior to the other proposal received by the Company. (7) The oral opinion of Goldman Sachs, subsequently affirmed in writing on May 16, 1998, that, as of such date and based upon and subject to the various considerations set forth in its opinion, the $80 per Share in cash to be received by the holders of Shares, other than Parent and Purchaser in the Offer and the Merger is fair from a financial point of view to such holders. The full text of the written opinion of Goldman Sachs, dated as of May 16, 1998, which sets forth assumptions made, procedures followed, matters considered and limits on the review undertaken, is attached as an exhibit to this statement. The Company's stockholders should read this opinion in its entirety. (8) The relationship of the Offer price to historical market prices of the Shares and to the Company's book value and net asset value per Share. (9) The terms and conditions of the Merger Agreement and the course of the negotiations resulting in the execution thereof (including the terms of the Merger Agreement that permit the Company's Board of Directors, in the exercise of its fiduciary duties and subject to certain conditions, to furnish information to or enter into discussions or negotiations with, any third party that makes an unsolicited bona fide proposal in writing to acquire the Company pursuant to a merger, consolidation, share exchange, purchase of a substantial portion of the assets, business combination or other similar transaction (although the Company is not permitted by the Merger Agreement to initiate, solicit or encourage any third party bids), and under certain circumstances to terminate the Merger Agreement). The Board of Directors noted that the Merger Agreement provides that, under certain circumstances involving a completed or prospective third party transaction, the Company would be obligated to pay the Parent up to $88.3 million. (10) The likelihood that the Offer and Merger would be consummated, including the likelihood of satisfaction of the regulatory approvals required pursuant to, and the other conditions to the Offer and the Merger contained in, the Merger Agreement, the experience, reputation and financial condition of the Parent and the risks to the Company if the Offer and Merger were not consummated. (11) The decision by the Locked-Up Stockholders to enter into the Stockholders' Agreement and other Lock-Up Agreements pursuant to which, among other things, such stockholders have agreed to support the transaction with Parent. (12) The recommendation of the Company's management with respect to the proposed acquisition. 5 Goldman Sachs' opinion is directed only to the fairness of the consideration to be received by the holders of Shares from a financial point of view to such holders and does not constitute a recommendation as to whether or not any holder of Shares should tender his or her shares pursuant to the Offer or as to how any holder of Shares should note with respect to the Merger. The summary of the opinion of Goldman Sachs set forth in this statement is qualified in its entirety by reference to the full text of such opinion. ITEM 5. PERSONS RETAINED, EMPLOYED OR TO BE COMPENSATED Goldman Sachs is acting as the Company's financial advisor in connection with the Offer and the Merger. Pursuant to their agreement with the Company, Goldman Sachs is entitled to a transaction fee of approximately $8.9 million which shall become payable upon consummation of the transactions contemplated by the Merger Agreement. In addition, whether or not the Offer or the Merger is completed, the Company has agreed to reimburse Goldman Sachs periodically for reasonable out-of-pocket expenses, including the fees and disbursements of its counsel, and to indemnify Goldman Sachs against certain expenses and liabilities incurred in connection with its engagement, including liabilities under federal securities laws. Goldman Sachs has previously rendered certain investment banking and financial advisory services to the Company and Parent and certain of its affiliates, for which Goldman Sachs received customary compensation. Goldman Sachs may have other business relationships with the Company or Parent. Goldman Sachs in the course of its normal trading activities, may from time to time effect transactions and hold securities, including derivative securities of the Company or Parent for its own account and for the accounts of customers and, accordingly, may at any time hold a long or short position in such securities. Except as set forth above, neither the Company nor any person acting on its behalf has or currently intends to employ, retain or compensate any person to make solicitations or recommendations to the stockholders of the Company on its behalf with respect to the Offer. ITEM 6. RECENT TRANSACTIONS AND INTENT WITH RESPECT TO SECURITIES (a) No transactions in the Common Stock of the Company have been effected in the past 60 days by the Company or any affiliate or subsidiary of the Company, or, to the best knowledge of the Company, by any executive officer or director of the Company. (b) To the best knowledge of the Company, each executive officer and director of the Company currently intends to tender, pursuant to the Offer, all Shares which are held of record or beneficially owned by such person, except to the extent, if any, that the tender of Shares would subject such officers and directors to liability under Section 16 of the Exchange Act. Certain directors of the Company have entered into the Lock-Up Agreements. ITEM 7. CERTAIN NEGOTIATIONS AND TRANSACTIONS BY THE SUBJECT COMPANY (a) Except as described under Item 3(b), the Company is not engaged in any negotiations in response to the Offer which relate to or would result in: (i) an extraordinary transaction, such as a merger or reorganization, involving the Company or any subsidiary of the Company; (ii) a purchase, sale or transfer of a material amount of assets by the Company or any subsidiary of the Company; (iii) a tender offer for or other acquisition of securities by or of the Company; or (iv) any material change in the present capitalization or dividend policy of the Company. (b) Except as described under Item 4, there are no transactions, board resolutions, agreements in principle, or signed contracts in response to the Offer, other than those described under Item 3(b), which relate to or would result in one or more of the matters referred to in this Item 7. 6 ITEM 8. ADDITIONAL INFORMATION TO BE FURNISHED The information statement attached as Annex I hereto is being furnished in connection with the possible designation by the Purchaser, pursuant to the Merger Agreement, of certain persons to be appointed to the Company's Board of Directors other than at a meeting of the Company's stockholders. ITEM 9. MATERIAL TO BE FILED AS EXHIBITS. The following Exhibits are filed herewith: (a)(1) Recommendation Letter to the Stockholders of the Company, dated May 21, 1998, from David L. Nichols, Chairman of the Board of the Company.* (a)(2) Press Release issued by the Company announcing the Merger and the Offer. (a)(3) Opinion of Goldman Sachs dated May 16, 1998.* (b) None. (c)(1) "Stock Ownership of Certain Beneficial Owners," "Stock Ownership of Management," "Management Remuneration," and "Transactions with Management and Others" sections of the Proxy Statement of the Company filed with the Commission on April 24, 1998. (c)(2) Agreement and Plan of Merger, dated May 16, 1998, by and among the Company, Dillard's, Inc. and MSC Acquisitions, Inc. (c)(3) Stockholders Agreement, dated May 16, 1998, by and between Dillard's, Inc. and certain Company Stockholders. (c)(4) Proxy and Indemnification Agreement, dated May 16, 1998, by and between Dillard's, Inc. and certain stockholders of Woodbank Mills, Inc. (c)(5) Proxy and Indemnification Agreement, dated May 16, 1998, by and between Dillard's, Inc. and certain stockholders of Minot Mercantile Corporation. (c)(6) Agreement and Plan of Merger, dated May 16, 1998, by and among Dillard's, Inc., WMI Acquisition, Inc. and Woodbank Mills, Inc. (c)(7) Agreement and Plan of Merger, dated May 16, 1998, by and among Dillard's, Inc., MMC Acquisition, Inc. and Minot Mercantile Corporation.
- ------------------------ * Included in copies mailed to stockholders. 7 SIGNATURE After reasonable inquiry and to the best of my knowledge and belief, I certify that the information set forth in this statement is true, complete and accurate. MERCANTILE STORES COMPANY, INC. By: /s/ DAVID L. NICHOLS ----------------------------------------- David L. Nichols CHAIRMAN OF THE BOARD AND CHIEF EXECUTIVE OFFICER
Dated: May 21, 1998 8 ANNEX I MERCANTILE STORES COMPANY, INC. 9450 SEWARD ROAD FAIRFIELD, OHIO 45016 ------------------------ INFORMATION STATEMENT PURSUANT TO SECTION 14(f) OF THE SECURITIES EXCHANGE ACT OF 1934 AND RULE 14f-1 THEREUNDER ------------------------ NO VOTE OR OTHER ACTION OF THE COMPANY'S STOCKHOLDERS IS REQUIRED IN CONNECTION WITH THIS INFORMATION STATEMENT. NO PROXIES ARE BEING SOLICITED AND YOU ARE REQUESTED NOT TO SEND THE COMPANY A PROXY ------------------------ This Information Statement is being mailed on or about May 21, 1998, as part of Mercantile Company Stores, Inc.'s (the "Company") Solicitation/Recommendation Statement on Schedule 14D-9 (the "Schedule 14D-9") with respect to the tender offer by MSC Acquisitions, Inc. (the "Purchaser"), a wholly owned subsidiary of Dillard's, Inc. (the "Parent") to the holders of record of the Company's Common Stock, $.14 2/3 par value per share (the "Shares"). Capitalized terms used and not otherwise defined herein shall have the meaning set forth in the Schedule 14D-9. You are receiving this Information Statement in connection with the possible election of persons designated by the Purchaser to a majority of the seats on the Board of Directors of the Company (the "Board"). The Merger Agreement provides that the Purchaser, upon purchase of Shares pursuant to the Offer, and from time to time thereafter, shall be entitled to designate up to such number of directors, rounded to the next whole number, on the Board as will give the Purchaser representation on the Board equal to the product of the total number of directors on the Board (giving effect to the directors to be elected pursuant to the Merger Agreement) multiplied by the percentage that the aggregate number of Shares beneficially owned by the Purchaser or any affiliate of the Purchaser bears to the total number of outstanding Shares then outstanding, and that the Company shall, at such time, promptly take all action necessary to cause the Purchaser designees to be so elected, including either increasing the size of the Board or securing the resignations of incumbent directors, or both. The Merger Agreement further provides that, at such times, the Company will use its reasonable best efforts to cause persons designated by the Purchaser to constitute the same percentage as is on the board of (i) each committee of the Board, (ii) each board of directors of each subsidiary of the Company and (iii) each committee of each such board, in each case only to the extent permitted by law. The Merger Agreement further provides that until the Purchaser acquires a majority of the outstanding shares on a fully diluted basis, the Company will use its reasonable best efforts to ensure that all members of the Board and such boards and committees as of the date of the Merger Agreement who are not employees of the Company shall remain members of the Board and such board and committees. This Information Statement is required by Section 14(f) of the Securities Exchange Act of 1934, as amended, and Rule 14f-1 thereunder. You are urged to read this Information Statement carefully. You are not, however, required to take any action. The Offer to Purchase is scheduled to expire at 12:00 midnight, New York City time, on June 19, 1998, at which time, if all conditions to the Offer have been satisfied or waived, Purchaser has informed the Company that it intends to purchase all of the Shares validly tendered pursuant to the Offer and not properly withdrawn. Purchaser has informed the Company that it currently intends to choose the designees (the "Purchaser Designees") it has a right to designate to the Board pursuant to the Merger Agreement from the directors and executive officers of Parent listed in Schedule I of the Offer to Purchase, a copy of which is being mailed to the stockholders. The information with respect to such directors and officers in Schedule I is hereby incorporated herein by reference in its entirety. As of April 10, 1998, the ages of each such officers and directors are as follows: William Dillard--83; Calvin N. Clyde, Jr.--77; Robert C. Connor--56; Drue Corbusier--51; Will D. David--68; Alex Dillard--48; Mike Dillard--46; William Dillard, II--53; James I. Freeman--48; John Paul Hammerschmidt--75; William B. Harrison, Jr.--54; John H. Johnson--80; E. Ray Kemp--73; Jackson T. Stephens--74; William H. Sutton--67 and Paul J. Schroeder, Jr.--50. It is expected that certain of the Purchaser Designees may assume office at any time following the purchase by Purchaser of a specified minimum number of Shares pursuant to the Offer, which purchase cannot be earlier than June 19, 1998, and that, upon assuming office, the Purchaser Designees will thereafter constitute at least a majority of the Board. This step will be accomplished at a meeting or by written consent of the Board providing that the size of the Board will be increased and/or sufficient numbers of current directors will resign such that, immediately following such action, the number of vacancies to be filled by Purchaser Designees will constitute at least a majority of the available positions on the Board. It is currently not known which of the current directors of the Company will resign. Purchaser has informed the Company that each of the directors and officers listed in Schedule I of the Offer to Purchase has consented to act as a director of the Company, if so designated. None of the executive officers and directors of Parent or Purchaser currently is a director of, or holds any position with, the Company. Except for Jack Stephens, who owns 3600 shares of the Company, the Company has been advised that, to the best knowledge of Parent and Purchaser (and except as contemplated by the Merger Agreement), none of Parent's or Purchaser's other directors or executive officers beneficially owns any equity securities, or rights to acquire any equity securities, of the Company and none has been involved in any transactions with the Company or any of its directors, executive officers, affiliates or associates which are required to be disclosed pursuant to the rules and regulations of the Securities and Exchange Commission (the "SEC") Notwithstanding the above, until the Effective Time the Company shall have at least three directors who were directors as of the date of the Merger Agreement and who are not officers of the Company (the "Independent Directors"). If the number of Independent Directors falls below three, the remaining Independent Directors (or if no Independent Directors remain the other directors) shall be entitled to designate persons who are not officers, stockholders or affiliates of the Company, Parent or Purchaser to fill the vacancies. Following the election of the Purchaser Designees and prior to the Effective Time, the approval of a majority of the Independent Directors or their successors will be required to authorize any amendment, or waiver of any terms or condition, of the Merger Agreement or the Certificate of Incorporation or By-Laws of the Company, any termination of the Merger Agreement by the Company, any extension by the Company of the time for the performance of any of the obligations or other acts of Purchaser or waiver or assertion of any of the Company's rights under the Merger Agreement, the awarding of the $3 million pursuant to the terms of the Company's incentive performance plan, and any other consent or action by the Board of Directors with respect to the Merger Agreement. The terms of the Merger Agreement, a summary of the events leading up to the Offer and the execution of the Merger Agreement and other information concerning the Offer and the Merger are contained in the Offer to Purchase and in the Schedule 14D-9 of the Company with respect to the Offer, copies of which are being delivered to stockholders of the Company contemporaneously herewith. Certain other documents (including the Merger Agreement) were filed with the SEC as exhibits to the Tender Offer Statement on Schedule 14D-1 (the "Schedule 14D-1") of Purchaser and as exhibits to the Schedule 14D-9. The exhibits to the Schedule 14D-1 and the Schedule 14D-9 may be examined at and copies thereof may be obtained from the SEC in the manner set forth in Section 8 of the Offer to Purchase. A-2 No action is required by the stockholders of the Company in connection with the election of the Purchaser Designees to the Board. However, Section 14(f) of the Exchange Act requires the mailing to the Company's stockholders of the information set forth in this Information Statement prior to a change in a majority of the Company's directors otherwise than at a meeting of the Company's stockholders. The information contained in this Information Statement concerning Parent, Purchaser and the Purchaser Designees has been furnished to the Company by such persons, and the Company assumes no responsibility for the accuracy or completeness of such information. The principal executive offices of Parent and Purchaser are located at 1600 Cantrell Road, Little Rock, Arkansas 72201. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT At the close of business on May 15, 1998, there were issued and outstanding 36,887,475 shares of Company Common Stock, excluding Company Common Stock held by the Company, each share being entitled to one vote upon matters to be voted upon at a stockholders meeting. There are no other voting securities outstanding. The table below sets forth certain information as of March 31, 1998 regarding the beneficial ownership of Company Common Stock, excluding Common Stock held by the Company, by (i) each person known by the Company to own beneficially more than 5% of its outstanding shares of Company Common Stock, (ii) each director of the Company, (iii) the five executive officers of the Company named in the Summary Compensation Table and (iv) all executive officers and directors of the Company as a group. STOCK OWNERSHIP OF CERTAIN BENEFICIAL OWNERS The following table sets forth information concerning beneficial owners of more than 5% of the Company's common stock, as reported by such beneficial owners:
NAME AND ADDRESS OF AMOUNT OF COMMON STOCK AND BENEFICIAL OWNER NATURE OF BENEFICIAL OWNERSHIP PERCENT OF CLASS - -------------------------------------- --------------------------------------------------------- ----------------- Minot Mercantile Corporation 10,484,875 28.53 1209 Orange Street Direct Wilmington, Delaware 19801 Minot Mercantile Corporation 14,896,521(2) 40.54 and others joint disclosure(1) Direct and Indirect c/o 1209 Orange Street Wilmington, Delaware 19801 Scudder Kemper Investments, Inc. 3,241,980(3) 8.82 345 Park Avenue New York, NY 10154
- ------------------------ (1) Please see the notes following the Stock Ownership of Management Table for an explanation of this stock ownership. By definition of the Securities and Exchange Commission, the persons involved in this joint disclosure may be deemed to be "beneficial owners" of Purchaserstantial quantities of this stock. Except as otherwise set forth herein, such persons disclaim admission of beneficial ownership of these securities. (2) These shares include the shares reported directly above by Minot Mercantile Corporation and 27,413 shares (.07%) owned by Woodbank Mills, Inc. owner of 49.6% of the common stock of Minot Mercantile Corporation. (3) Based upon information as of December 31, 1997 set forth in a Schedule 13G filing dated February 12, 1998. According to the filing, Scudder Kemper Investments, Inc., a registered investment adviser, has sole and shared voting power with respect to 755,255 and 2,284,830 of such shares, respectively, and sole and shared depositive power with respect to 3,233,850 and 8,130 of such shares, respectively, which are held of record by its clients. A-3 STOCK OWNERSHIP OF MANAGEMENT The following table sets forth information concerning beneficial ownership of Company Common Stock by (i) each director of the Company, (ii) the five executive officers of the Company named in the Summary Compensation Table and (iii) all executive officers and directors of the Company as a group.
AMOUNT OF COMMON STOCK BENEFICIALLY OWNED ------------------------------------------------- PERCENT OF NAME DIRECTLY INDIRECTLY CLASS - --------------------------------------------- ------------------------ ----------------------- --------------- H. Keith H. Brodie, M.D...................... 1,000 none * John A. Herdeg............................... 2,125 none * Thomas J. Malone............................. 600 none * Gerrish H. Milliken.......................... 378,037 (see notes 1 and 11) 1.3 (see note 1) 101,063 (life interest in trusts) Minot K. Milliken............................ 400,119 (see notes 2 and 11) 2.33 (see note 2) 454,536 (life interest in trusts) Roger Milliken............................... 4,220,254 (see notes 3 and 11) 11.81 (see note 3) 121,560 (life interest in trusts) David L. Nichols............................. 7,812 4,658 * (see note 4) Lawrence R. Pugh............................. 500 none * Francis G. Rodgers........................... 2,750 none * Roger K. Smith............................... 75,939 none * (see note 5) Randolph L. Burnette......................... 2,250 5,287 * (see note 6) William A. Carr.............................. 2,462 1,190 * (see note 7) James M. McVicker............................ 5,657 1,690 * (see note 8) Kathryn M. Muldowney......................... 1,000 1,115 * (see note 9) All Directors and Executive Officers......... 4,488,085 10,527,650 40.86 (see note 10)
- ------------------------ * Less than one percent There is included in the above figures, with respect to each director and executive officer listed (and all directors and executive officers as a group) the number of shares, if any, credited to each director's and executive officer's account in the Savings, Profit Sharing and Supplemental Retirement Plan and those held in the name of his or her spouse and their minor children. Each director and executive officer, however, disclaims any admission of beneficial ownership of any securities included herein held in the name of his or her spouse or their minor children. Notes: 1. Gerrish H. Milliken is the beneficial owner of 378,037 shares of the common stock of the Company as a trustee of certain trusts. A-4 2. Minot K. Milliken is the beneficial owner of 400,119 shares of the common stock of the Company as a trustee and an advisor of certain trusts. 3. Roger Milliken is the beneficial owner of 4,220,254 shares of the common stock of the Company as a trustee and an advisor of certain trusts. 4. Includes 5,000 shares which are subject to options presently exercisable or exercisable within 60 days. 5. Roger K. Smith is the beneficial owner of 65,803 shares of the common stock of the Company as a trustee of certain trusts. 6. Reflects 2,250 shares which are subject to options presently exercisable or exercisable within 60 days. 7. Includes 500 shares which are subject to options presently exercisable or exercisable within 60 days. 8. Includes 2,250 shares which are subject to options presently exercisable or exercisable within 60 days. 9. Reflects 1,000 shares which are subject to options presently exercisable or exercisable within 60 days. 10. Includes 12,500 shares which are subject to options presently exercisable or exercisable within 60 days. 11. Minot K. Milliken is the cousin of Roger Milliken and Gerrish H. Milliken, who are brothers. The shares listed as beneficially owned by each of Gerrish H. Milliken, Minot K. Milliken and Roger Milliken include shares listed as beneficially owned by one or both of the other two. The overall figures for all officers and directors as a group and the figures included below in this note eliminate the duplication of numbers and percentages of shares. Each of Gerrish H. Milliken, Minot K. Milliken and Roger Milliken may be deemed to be a controlling person of, and therefore may be deemed to be the beneficial owner of, and to share the power to direct the voting and/or the disposition of, common stock of the Company held by Minot Mercantile Corporation and Woodbank Mills, Inc. Gerrish H. Milliken, Minot K. Milliken and Roger Milliken together with Minot Mercantile Corporation and Woodbank Mills, Inc. owned beneficially a maximum of 14,896,521 shares (40.54%) of the common stock of the Company DIRECTORS AND EXECUTIVE OFFICERS CURRENT AND CONTINUING DIRECTORS. The following table sets forth certain information as of April 24, 1998 with respect to the current directors of the Company: John A. Herdeg--Age 60, Director since 1980. Attorney at Law; member of the Audit Committee; Chairman of the Board of Christiana Bank & Trust Company. Thomas J. Malone--Age 59, Director since 1989. President, Chief Operating Officer and director of Milliken & Company, manufacturer of textile products; member of the Audit Committee. Roger Milliken--Age 82, Director since 1939. Chairman and Chief Executive Officer of Milliken & Company, manufacturer of textile products; member of the Audit, Compensation and Nominating Committees; director of Minot Mercantile Corporation and Woodbank Mills, Inc. (see note 11 to "Stock Ownership of Management"). Francis G. Rodgers--Age 71, Director since 1987. Author and lecturer; former Vice President-Marketing, International Business Machines Corporation; member of the Compensation Committee; A-5 director of Milliken & Company, manufacturer of textile products, and director of Bergen Brunswig Corporation and Dialogic Corp. Gerrish H. Milliken--Age 80, Director since 1951. Director Emeritus of Milliken & Company, manufacturer of textile products; director of Minot Mercantile Corporation and Woodbank Mills, Inc. (see note 11 to "Stock Ownership of Management"). David L. Nichols--Age 56, Director since 1992. Chairman of the Board and Chief Executive Officer of the Company; director of The Andersons, Inc., a diversified agribusiness and retailing company, and the Federal Reserve Bank of Cleveland. Lawrence R. Pugh--Age 65, Director since 1996. Chairman of VF Corporation, apparel manufacturer and marketer; former Chief Executive Officer of VF Corporation; member of the Compensation Committee; director of Milliken & Company, manufacturer of textile products and UNUM Corporation, an insurance company. H. Keith H. Brodie, M.D.--Age 58, Director since 1987. President Emeritus of Duke University; member of the Audit, Compensation and Nominating Committees; director of Milliken & Company, manufacturer of textile products. Minot K. Milliken--Age 82, Director since 1943. Director Emeritus of Milliken & Company, manufacturer of textile products; member of the Compensation Committee; director of Minot Mercantile Corporation and Woodbank Mills, Inc. (see note 11 to "Stock Ownership of Management"). Roger K. Smith--Age 38, Director since 1991. Product Line Marketing Manager, Analog Devices, Inc., manufacturer of semiconductors; member of the Nominating Committee; director of Milliken & Company, manufacturer of textile products. The Board has standing audit, compensation and nominating committees that are composed of directors of the Company. The members of the Audit Committee are H. Keith H. Brodie, M.D., John A. Herdeg, Thomas J. Malone and Roger Milliken. The functions of the Audit Committee include engaging and discharging auditors; reviewing with the auditors and management the Company's policies and procedures with respect to internal auditing, accounting and financial controls; reviewing with the independent auditors, upon completion of their audit, their report or opinion and any recommendations they may have for improving internal accounting controls, choice of accounting principles or management systems; and meeting with the Company's financial staff at least two times a year to discuss internal accounting and auditing procedures. The members of the Compensation Committee are H. Keith H. Brodie, M.D., Minot K. Milliken, Roger Milliken, Lawrence R. Pugh and Francis G. Rodgers. The functions of the Compensation Committee include reviewing the compensation of the Company's executive officers and recommending changes in such compensation. The members of the Nominating Committee are H. Keith H. Brodie, M.D., Roger Milliken and Roger K. Smith. The functions of the Nominating Committee include identifying potential candidates for appointment or election as directors, reviewing and making recommendations regarding the criteria for Board membership and proposing nominees for election at the annual meeting and candidates to fill Board vacancies. During the fiscal year ended January 31, 1997, the Board held a total of eight regularly scheduled meetings, the Audit Committee held two meetings, the Compensation Committee held three meetings and the Nominating Committee held one meeting. Each director attended at least 75% of the Board meetings and meetings of any committee of which he was a member. All directors who are not also officers of the Company receive $16,000 per annum for serving on the Board. All directors receive a standard fee of $3,000 for each board meeting attended and $1,000 for each A-6 Committee meeting attended, plus the payment of expenses incurred in connection therewith. In addition, all members of each Committee receive $3,000 as yearly compensation. EXECUTIVE OFFICERS. Set forth below is the age at March 31, 1998 and certain other information concerning each person, including their principal occupations and positions for the past five years, currently serving as an executive officer of the Company. DAVID L. NICHOLS--Age 56, Chairman of the Board and Chief Executive Officer since 1992. Mr. Nichols serves as director of The Andersons, Inc., a diversified agribusiness and retailing company, and the Federal Reserve Bank of Cleveland. JAMES M. MCVICKER--Age 51, was elected Senior Vice President and Chief Financial Officer in December 1994 (Vice President and Chief Financial Officer in May 1993) and prior to that time was Treasurer or Assistant Treasurer from January 1990. RANDOLPH L. BURNETTE--Age 56, was elected Senior Vice President of Real Estate in April 1997 (Vice President of Real Estate in January 1995 and Vice President of Planning in March 1994) and prior to that time was Director of Merchandise Planning from August 1992. WILLIAM A. CARR--Age 59, was elected Secretary in June 1996 and Treasurer in March 1994 and prior to that time was Controller. KATHRYN M. MULDOWNEY--Age 39, was elected Vice President and Chief Information Officer in December 1996 and prior to that time was Controller from March 1994 and previously was Director of Strategic Planning from March 1993. LOUIS L. RIPLEY--Age 46, was elected Vice President of Human Resources in February 1996 and prior to that time was Director of Human Resources and Management Development from February 1994 and previously was Director of Human Resources. DONALD L. RADCLIFF--Age 43, was elected Controller in December 1996 and prior to that time was Director of Accounting Operations from March 1994 and previously was Manager of Accounting Operations. A-7 EXECUTIVE COMPENSATION The following table sets forth information regarding aggregate cash compensation, stock option awards and other compensation earned by the Company's Chief Executive Officer and the four other most highly compensated executive officers for services rendered in all capacities to the Company and its subsidiaries for the three years ended January 31, 1998. SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION - --------------------------------------------------------------------------------------------------------------------------- FISCAL NUMBER OF YEAR OTHER ANNUAL SHARES UNDERLYING ALL OTHER NAME AND PRINCIPAL POSITION ENDED SALARY BONUS COMPENSATION OPTIONS COMPENSATION(A) - ----------------------------- --------- ---------- ------------- ----------------- ----------------- ---------------- David L. Nichols............. 01/31/98 $ 839,846 $ 409,483 $ 0 20,000 $ 72,935 CHAIRMAN OF THE BOARD........ 02/01/97 $ 799,615 $ 520,749 $ 0 -0- $ 67,788 AND CHIEF EXECUTIVE.......... 02/03/96 $ 725,385 $ 394,311 $ 0 -0- $ 58,925 OFFICER James M. McVicker............ 01/31/98 $ 424,942 $ 188,947 $ 0 9,000 $ 24,500 SENIOR VICE PRESIDENT........ 02/01/97 $ 409,769 $ 242,622 $ 0 -0- $ 23,084 AND CHIEF FINANCIAL.......... 02/03/96 $ 361,038 $ 219,655(b) $ 0 -0- $ 19,833 OFFICER Randolph L. Burnette......... 01/31/98 $ 313,269 $ 140,043 $ 0 9,000 $ 18,013 SENIOR VICE PRESIDENT OF..... 02/01/97 $ 296,538 $ 177,528 $ 0 -0- $ 16,571 REAL ESTATE.................. 02/03/96 $ 274,231 $ 155,306 $ 0 -0- $ 13,672 William W. Carr.............. 01/31/98 $ 255,000 $ 103,424 $ 0 2,000 $ 14,343 TREASURER AND SECRETARY...... 02/01/97 $ 255,000 $ 135,809 $ 0 -0- $ 12,067 02/03/96 $ 263,269 $ 74,025 $ 0 -0- $ 11,275 Kathryn M. Muldowney......... 01/31/98 $ 200,000 $ 81,117 $ 0 4,000 $ 10,956 VICE PRESIDENT AND CHIEF..... 02/01/97 $ 182,116 $ 98,528 $ 0 -0- $ 10,488 INFORMATION OFFICER.......... 02/03/96 $ 140,769 $ 103,862 $ 0 -0- $ 6,925
(a) All Other Compensation is comprised of the Company's matching contributions under the Company's Savings, Profit Sharing and Supplemental Retirement Plan and the Company's Non-Qualified Savings, Profit Sharing and Supplemental Retirement Plan. Also includes $23,000, $24,000, and $21,000 paid to Mr. Nichols for Board of Directors' meetings during the fiscal years ended January 31, 1998, February 1, 1997, and February 3, 1996, respectively. (b) Includes a special bonus in the amount of $25,000 for additional services recognized by the Board of Directors. A-8 OPTION GRANTS TABLE The following table sets forth information regarding options granted during the fiscal year ended January 31, 1998 by the Company to each of the named executive officers:
POTENTIAL REALIZABLE VALUE AT NUMBER OF % OF TOTAL ASSUMED ANNUAL RATES OF STOCK SECURITIES OPTIONS PRICE APPRECIATION FOR OPTION UNDERLYING GRANTED TO EXERCISE OR TERM(B) OPTIONS EMPLOYEES IN BASE PRICE EXPIRATION ------------------------------ GRANTED(A) FISCAL YEAR (PER SHARE) DATE 5% 10% ----------- --------------- ----------- ----------- ------------- --------------- David L. Nichols..................... 20,000 20.94% $ 48.06 4/18/2007 $ 604,494.00 $ 1,531,905.00 James M. McVicker.................... 9,000 9.42% $ 48.06 4/18/2007 $ 272,022.00 $ 689,357.00 Randolph L. Burnette................. 9,000 9.42% $ 48.06 4/18/2007 $ 272,022.00 $ 689,357.00 William A. Carr...................... 2,000 2.09% $ 48.06 4/18/2007 $ 60,449.00 $ 153,191.00 Kathryn M. Muldowney................. 4,000 4.19% $ 48.06 4/18/2007 $ 120,899.00 $ 306,381.00
- ------------------------ (a) One-fourth of these options vested on April 20, 1998, and an additional one-fourth will vest on April 20, 1999, April 18, 2000 and April 18, 2001. A-9 (b) The potential realizable value of the options reported was calculated by assuming 5% and 10% compounded annual rates of appreciation of the common stock from the date of grant of the options until the expiration of the options, based on the market price on the date of grant. These assumed annual rates of appreciation were used in compliance with the rules of the Securities and Exchange Commission and are not intended to forecast future price appreciation of the common stock. FISCAL YEAR END OPTION VALUE TABLE The following table sets forth information regarding the aggregate number and value of options held by the named executive officers as at January 31, 1998. No options were exercised by any of the named executive officers in 1997:
NUMBER OF SHARES UNDERLYING UNEXERCISED OPTIONS VALUE OF UNEXERCISED IN-THE-MONEY OPTIONS AT JANUARY 31, 1998 AT JANUARY 31, 1998(1) -------------------------------- ------------------------------ NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE - ---------------------------------------------------------- ----------------- ------------- --------------- ------------- David L. Nichols.......................................... 0 20,000 $ 0 $ 228,800.00 James M. McVicker......................................... 0 9,000 $ 0 $ 102,960.00 Randolph L. Burnette...................................... 0 9,000 $ 0 $ 102,960.00 William A. Carr........................................... 0 2,000 $ 0 $ 22,880.00 Kathryn M. Muldowney...................................... 0 4,000 $ 0 $ 45,760.00
- ------------------------ (1) The closing price for the Company's common stock on the New York Stock Exchange on January 30, 1998 was $59.50 per share. Value is calculated on the basis of the difference between the respective option exercise prices and $59.50, multiplied by the number of shares of common stock underlying the respective options. REPORT OF THE COMPENSATION COMMITTEE GENERAL. The Compensation Committee of the Board of Directors (the "Committee") is composed of five outside directors. The current members of the Committee are H. Keith H. Brodie, M.D., Minot K. Milliken, Roger Milliken, Lawrence R. Pugh and Francis G. Rodgers. As part of its duties, the Committee reviews and recommends to the Board of Directors compensation levels for the Company's executive officers. The Company's compensation program reflects the philosophy that executive compensation levels should be linked to Company performance and also be competitive within the retail industry. Historically, the Company has structured compensation principally through base annual salary and year-end bonuses. With the adoption of the Company's 1996 Stock Option Plan, the Company's compensation program now includes an equity incentive component. The Committee recognizes that compensation in excess of $1 million paid to the Company's Chief Executive Officer does not presently qualify for deduction by the Company for federal income tax purposes under Section 162(m) of the Internal Revenue Code, but believes that the non-deductible portion is not material. Moreover, the Committee believes that it is important to maintain the flexibility to compensate executive officers in a manner consistent with the stated philosophy of performance-linked and competitive compensation designed to maximize stockholder value, notwithstanding that some portion of such compensation may not be deductible by the Company. BASE SALARIES. Base salaries for the Company's executives are determined by evaluating the responsibilities of the position and the experience of the individual, and by reference to the competitive marketplace. The Company seeks to target base salaries within the median salary level for comparable executive positions. A-10 ANNUAL BONUSES. The Company has a Pay-for-Performance year-end bonus program designed to reward management and other key executives for Company performance. Under the program, bonuses are awarded based upon the achievement of pre-defined Company and business unit performance measurements as determined by the Board. For 1997, with respect to each executive officer named in the SUMMARY COMPENSATION TABLE, bonuses were based on a weighted average performance barometer which included pre-tax store profits, total sales, inventory turnover and operating expense ratios. The bonuses reported in the SUMMARY COMPENSATION TABLE reflect the fact that the weighted average Company performance targets for 1997 were 91.20% achieved. 1996 STOCK OPTION PLAN. The 1996 Stock Option Plan (the "Stock Plan") is intended to enhance the Company's ability to attract and retain employees with valuable ability and experience and to furnish such personnel with incentives to improve operations and increase profits of the Company. In addition, options granted under the Stock Plan align the interests of executives with those of the stockholders, and thus provide the executives with additional incentive to maximize stockholder value. Options grants are made from time to time to executives whose contributions have or are expected to have a significant impact on the Company's long-term performance. The size of previous grants and the number of options held are not determinative of future grants. In 1997 options were granted to all seven of the Company's executive officers. Options are granted at a price equal to the fair market value of the Company's common stock on the date of grant, and, in general, vest in four equal increments over the four year period following the date of grant. COMPENSATION OF THE CHIEF EXECUTIVE OFFICER. The compensation of David L. Nichols, Chairman of the Board and Chief Executive Officer of the Company, is determined in accordance with the criteria set forth above. Mr. Nichols, who does not have an employment contract, received a salary increase in 1997 of approximately 5.0% to keep his salary within the median marketplace salary level for comparable executive positions and based on an evaluation of the other criteria set forth above under "Base Salaries." Mr. Nichols' bonus for 1997 was based upon the performance of the Company. As a participant in the Pay-for-Performance year-end bonus program, Mr. Nichols received a bonus for 1997 of $409,000 based on the achievement of 91.20% of the weighted average Company performance targets. In addition, Mr. Nichols was awarded options to purchase 20,000 shares of the Company's Common Stock under the Stock Plan. H. Keith H. Brodie, M.D. Minot K. Milliken Roger Milliken Lawrence R. Pugh Francis G. Rodgers A-11 PERFORMANCE GRAPH Set forth below is a line graph comparing, over the last five fiscal years, the Company's cumulative total return to stockholders with (i) the Standard & Poor's 500 Composite Stock Price Index and (ii) the Standard & Poor's Retail Department Stores Composite Index. MERCANTILE STORES COMPANY, INC. COMPARISON OF FIVE YEAR CUMULATIVE TOTAL RETURN* FEBRUARY 1, 1993 THROUGH JANUARY 31, 1998 EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
MERCANTILE STOCK S&P RETAIL DEPARTMENT S&P 500 INDEX 1992 100 100 100 1993 116.72 109.96 111.86 1994 133.5 101.07 112.48 1995 146.29 120.31 155.85 1996 155.13 128.02 196.86 1997 192.36 165.56 249.69 1992 1993 1994 1995 1996 1997 Assumes $100 invested on February 1, 1993 in Mercantile common stock, S&P 500 index and S&P Retail Department Stores Composite Index. 1992 1993 1994 1995 1996 1997 *Total return assumes re-investment of dividends.
PENSION PLANS The Company has maintained a noncontributory Pension Plan since 1945 which has been amended from time to time. The Plan is funded through contributions by the Company to the Plan trustee or appreciation of existing Plan assets. All employees (including officers) with one year of employment during which at least 1,000 hours were worked and who meet certain age requirements are participants. Normal retirement eligibility occurs at age 65 for participants in the Plan; however, early retirement at a reduced monthly benefit is available to employees who have reached the age of 60 and have at least 5 years of service (as defined). The retirement benefit is in the form of a level monthly payment for life. The benefit for service from February 1, 1976 to February 3, 1996 was determined based on the addition of .875% of each year's compensation up to the year's Taxable Wage Base (as defined) and 1.375% of compensation above such base up to, since 1989, the maximum annual limitation on compensation. The Plan was amended effective February 4, 1996 to provide pension benefits which are more commensurate with those prevalent in the competitive retail industry. The amendment adjusted the calculation formula benefits earned after February 3, 1996. The new formula includes a 2-tier service breakpoint for calculation purposes. Under the amended Plan, benefits for associates with up to 20 years of enrollment (as defined) are based on (i) .875% of annual compensation up to the year's Taxable Wage A-12 Base, plus (ii) 1.875% of compensation above such base up to a compensation level of twice the Taxable Wage Base, plus (iii) 3.0% of compensation above such doubled Taxable Wage Base up to the maximum annual limitation on compensation ($160,000 during 1997). For associates with more than 20 years of enrollment, benefits are based on (i) 1.0% of annual compensation up the year's Taxable Wage Base, plus (ii) 2.5% of compensation above such base up to a compensation level of twice the Taxable Wage Base, plus (iii) 4.0% of compensation above such doubled Taxable Wage Base up to the maximum annual limitation on compensation. Benefits payable under the noncontributory Pension Plan are subject to maximum limitations under the Code. Payments to each employee, upon retirement, are made from a Trust Fund maintained by the trustee. The estimated annual benefits payable on normal retirement (without regard to maximum limitations under the Code) to the named executive officers are as follows: David L. Nichols, $673,509; James M. McVicker, $470,206; Randolph L. Burnette, $236,635; William A. Carr, $140,281; and Kathryn M. Muldowney, $352,258. The Company also maintains a Nonqualified Salaried Pension Plan to provide benefits to employees in an amount equal to the amount by which an employee's benefits under the Pension Plan were reduced because of limitations imposed on tax exempt plans by the Internal Revenue Code. For the fiscal year ended January 31, 1998, there were charges against the earnings of the Company with respect to such plan for the named executive officers in the aggregate amount of $454,797. SEVERANCE PROTECTION AGREEMENTS The Company has entered into severance protection agreements with each of James M. McVicker, Randolph L. Burnette and Kathryn M. Muldowney (the "Executives") and David L. Nichols (the "CEO"). The agreements are designed to encourage the executives to carry out their duties with the Company in the event of a potential change in control of the Company. The agreements for the Executives provide that if within 24 months following a change in control (as defined in the agreements) of the Company, the Executive's employment is terminated either (i) by the Company or other than cause or disability or, (ii) by the Executive, for good reason, then such Executive will receive, in addition to base salary and bonus accrued through the date of termination, the greater of: (a) 2.99 times annual salary and bonus at the highest rate in effect during the one year period prior to the change in control less the cash compensation paid the Executive for services rendered from the date of change in control to the termination date, or (b) two weeks' compensation for every year of service with the Company at a level equal to salary and bonus at the highest rate in effect during the one year period prior to the change in control. The agreement with the CEO provides that if within 24 months following a change in control of the Company, the CEO's employment is terminated either (i) by the Company for other than cause or disability, or (ii) by the CEO for any reason whatsoever, then the CEO will receive in addition to base salary and bonus accrued through the date of termination, the greater of: (a) $2,997,075, or (b) 2.99 times his annual salary and bonus at the highest rate in effect during the one year period prior to the change in control. In addition, each Executive and the CEO is entitled to: (i) receive all employment benefits for the remainder of, in the case of the Executives, the 24 month period, and in the case of the CEO, the 36 month period, following the change in control; (ii) a lump sum payment equal to the present value of the amount by which retirement benefits would have been larger had, in the case of the Executives, an additional two years, and in the case of the CEO, an additional three years, of credited service been completed; and (iii) legal fees and expenses reasonably incurred in enforcing the agreements. The Code imposes certain excise taxes on, and limits the deductibility of, certain compensatory payments made by a corporation to or for the benefit of certain individuals if such payments are contingent upon certain changes in the ownership or effective control of the corporation or the ownership of a substantial portion of the assets of the corporation provided that such payments to the individual have an aggregate present value in excess of three times the individual's annualized includible compensation for A-13 the base period, as defined in the Code. The agreements for the Executives provide that such severance payments shall be reduced to the extent necessary so that no such payments are subject to the excise tax. The CEO's agreement entitles him to receive an amount sufficient to offset any excise tax payable by the CEO pursuant to the provisions of the Code. SECTION 16(A) BENEFICIAL REPORTING COMPLIANCE Section 16(a) of the Exchange Act requires the Company's officers and directors, and persons who own more than 10% of a registered class of the Company's equity securities, to file initial reports of ownership and reports of changes in ownership (Forms 3, 4 and 5) of Common Stock and other equity securities of the Company with the SEC and the New York Stock Exchange. Officers, directors and greater-than-10% beneficial holders are required by SEC regulation to furnish the Company with copies of all such forms that they file. To the Company's knowledge, based solely on the Company's review of the copies of such reports received by the Company and, if applicable, written representations from certain reporting persons, that no reports on Form 5 were required. The Company believes that during the fiscal year ended December 31, 1997, its officers, directors and greater-than-10% beneficial owners complied with all applicable Section 16(a) filing requirements. A-14 EX-99.(A)(1) 2 LETTER TO STOCKHOLDERS [LOGO] 9450 SEWARD ROAD_-_FAIRFIELD, OHIO 45014-2230 513-881-8000 - FAX 513-881-8689 EXHIBIT (A)(1) Dear Stockholder: I am pleased to inform you that Mercantile Stores Company, Inc. (the "Company"), Dillard's, Inc. ("Dillard's") and MSC Acquisitions, Inc. (the "Purchaser"), a wholly-owned subsidiary of Dillard's, have entered into an Agreement and Plan of Merger (the "Merger Agreement") providing for the acquisition of all of the issued and outstanding shares of the Common Stock, par value $.14 2/3 per share, of the Company at $80.00 cash per share. Pursuant to the Merger Agreement, the Purchaser has today commenced a cash tender offer (the "Offer") for all outstanding shares of Common Stock at a price of $80.00 net per share. The Merger Agreement further provides that, following the Offer, all shares of the Common Stock of the Company which are not acquired through the Offer will be acquired through a merger at the same $80.00 cash price. The Offer is conditioned on, among other things, there being validly tendered and not withdrawn a number of shares of Common Stock which, together with any shares owned, directly or indirectly, by Dillard's or the Purchaser, constitute more than 50% of the voting power (on a fully-diluted basis) of all securities of the Company entitled to vote generally in the election of directors or in a merger. AS MORE FULLY DESCRIBED IN THE ATTACHED SCHEDULE 14D-9, YOUR BOARD OF DIRECTORS HAS UNANIMOUSLY DETERMINED THAT THE MERGER AGREEMENT AND THE TRANSACTIONS CONTEMPLATED THEREBY, INCLUDING THE OFFER AND THE MERGER, ARE ADVISABLE AND ARE FAIR TO AND IN THE BEST INTERESTS OF THE STOCKHOLDERS OF THE COMPANY AND RECOMMENDS THAT HOLDERS OF SHARES ACCEPT THE OFFER AND TENDER THEIR SHARES TO THE PURCHASER. Enclosed for your consideration are copies of the tender offer materials and the Company's Schedule 14D-9, which are being filed today with the Securities and Exchange Commission. These documents should be read carefully. In particular, I call your attention to Item 4 of the enclosed Schedule 14D-9, which describes both the reasons for the Board's recommendation and certain additional factors that stockholders may wish to consider before taking action with respect to the offer. Your Board of Directors believes that the proposed acquisition of the Company by Dillard's is fair and in the best interests of our stockholders. Each executive officer and director of the Company currently intends to tender his or her shares for purchase by Dillard's (except for shares that are subject to certain restrictions) and, if a stockholder vote is required, to vote in favor of the merger. Sincerely, /s/ DAVID L. NICHOLS -------------------------------------- David L. Nichols Chairman of the Board EX-99.(A)(2) 3 PRESS RELEASE EXHIBIT (A)(2) MERCANTILE STORES COMPANY, INC. NEWS RELEASE Bacons - Castner Knott - de Lendrecies - Gayfers - Glass Block - Hennessys - The Jones Store Co. J.B. White - Joslins - Lion - Maison Blanche - McAlpin's - Root's - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- Dillard's Inc. to Purchase Mercantile Stores Company, Inc. NEW YORK--May 18, 1998--Mercantile Stores Company, Inc. (NYSE:MST) has reached an agreement with Dillard's Inc. (NYSE:DDS) to receive a cash tender offer of $80 per share for all of the outstanding common shares of Mercantile Stores Company, Inc., subject to the satisfaction of certain conditions. The total cash acquisition price is approximately $2.9 billion. Mercantile Stores Company, Inc., headquartered in Fairfield, Ohio, operates 103 traditional department stores and 16 home fashion stores in a total of 17 states. Retail sales for the fiscal year ended January 31, 1998, amounted to $3.1 billion. Dillard's Inc., headquartered in Little Rock, Arkansas, is a leading national retailer operating 272 department stores in 27 states. Reported retail sales for the 1997 fiscal year amounted to $6.6 billion. CONTACT: Mercantile Stores Company, Inc. W. A. Carr, 513/881-8121 9450 SEWARD ROAD - FAIRFIELD, OHIO 45014-2230 513-881-8000 - FAX 513-881-8689 EX-99.(A)(3) 4 OPINION OF GOLDMAN SACHS EXHIBIT (a)(3) PERSONAL AND CONFIDENTIAL May 16, 1998 Board of Directors Mercantile Stores Company, Inc. 9450 Seward Road Fairfield, OH 45014 Gentlemen: You have requested our opinion as to the fairness from a financial point of view to the holders of the outstanding shares of Common Stock, par value $.14 2/3 per share (the "Shares"), other than Parent (as defined below) or Purchaser (as defined below) of Mercantile Stores Company, Inc. (the "Company") of the $80.00 per Share in cash to be received by such holders in the Tender Offer and Merger (as defined below) pursuant to the Agreement and Plan of Merger, dated as of May 16, 1998, among Dillard's, Inc. ("Parent"), MSC Acquisitions, Inc., a wholly owned subsidiary of Parent ("Purchaser"), and the Company (the "Agreement"). The Agreement provides for a tender offer for all of the Shares (the "Tender Offer") pursuant to which Purchaser will pay $80.00 per Share in cash for each Share accepted. The Agreement further provides that following completion of the Tender Offer, Purchaser will be merged into the Company (the "Merger") and each outstanding Share (other than Shares already owned by Parent, Purchaser or their subsidiaries) will be converted into the right to receive $80.00 in cash. Goldman, Sachs & Co., as part of its investment banking business, is continually engaged in the valuation of businesses and their securities in connection with mergers and acquisitions, negotiated underwritings, competitive biddings, secondary distributions of listed and unlisted securities, private placements and valuations for estate, corporate and other purposes. We are familiar with the Company having acted as its financial advisor in connection with, and having participated in certain of the negotiations leading to, the Agreement. We also have provided certain investment banking services to Parent from time to time and may provide investment banking services to Parent in the future. Goldman, Sachs, & Co. provides a full range of financial advisory and securities services and, in the course of its normal trading activities, may from time to time effect transactions and hold securities, including derivative securities, of the Company or Parent for its own account and for the accounts of customers. In connection with this opinion, we have reviewed, among other things, the Agreement; the Merger Agreement, dated as of May 16, 1998, among Parent, MMC Acquisition, Inc., a wholly owned subsidiary of Parent and Minot Mercantile Corporation (which owns approximately 28.5% of the Shares); the Merger Agreement, dated as of May 16, 1998, among Parent, WMI Acquisition, Inc., a wholly owned subsidiary of Parent and Woodbank Mills, Inc. (which owns approximately 49.6% of the outstanding common stock of Minot Mercantile Corporation, and 0.1% of the Shares); Annual Reports to Stockholders and Annual Reports on Form 10-K of the Company for the five fiscal years ended January 31, 1998; certain interim reports to stockholders and Quarterly Reports on Form 10-Q of the Company; certain other communications from the Company to its stockholders; and certain internal financial analyses and forecasts for the Company prepared by Company management. We also have held discussions with members of the senior management of the Company regarding the past and current business operations, financial condition and future prospects of the Company. In addition, we have reviewed the reported price and trading activity for the Shares, compared certain financial and stock market information for the Company with similar information for certain other companies the securities of which are publicly traded, reviewed the financial terms of certain recent business combinations in the department store industry specifically and in other industries generally, and performed such other studies and analyses as we considered appropriate. We have relied upon the accuracy and completeness of all of the financial and other information reviewed by us and have assumed such accuracy and completeness for purposes of rendering this opinion. In addition, we have not made an independent evaluation or appraisal of the assets and liabilities of the Company or any of its subsidiaries and we have not been furnished with any such evaluation or appraisal. Our advisory services and the opinion expressed herein are provided for the information and assistance of the Board of Directors of the Company in connection with its consideration of the transaction contemplated by the Agreement and such opinion does not constitute a recommendation as to whether any holder of Shares should tender such Shares in the Tender Offer or as to how any holder of Shares should vote with respect to the Merger. Based upon and subject to the foregoing and based upon such other matters as we consider relevant, it is our opinion that as of the date hereof the $80.00 per Share in cash to be received by the holders of Shares, other than Parent or Purchaser, in the Tender Offer and Merger is fair from a financial point of view to such holders. Very truly yours, GOLDMAN, SACHS & CO. EX-99.(C)(1) 5 SECTIONS OF PROXY STATEMENT EXHIBIT (C)(1) STOCK OWNERSHIP OF CERTAIN BENEFICIAL OWNERS The following table sets forth information concerning beneficial owners of more than 5% of the Company's common stock, as reported by such beneficial owners:
AMOUNT OF COMMON STOCK AND NAME AND ADDRESS OF NATURE OF BENEFICIAL BENEFICIAL OWNER OWNERSHIP PERCENT OF CLASS - ------------------------------------------------------------------ ---------------------------- ----------------- Minot Mercantile Corporation...................................... 10,484,875 28.53 1209 Orange Street Direct Wilmington, Delaware 19801 Minot Mercantile Corporation...................................... 14,896,521 (b) 40.54 and others joint disclosure(a) Direct and Indirect c/o 1209 Orange Street Wilmington, Delaware 19801 Scudder Kemper Investments, Inc................................... 3,241,980 (c) 8.82 345 Park Avenue New York, NY 10154
- ------------------------ (a) Please see the notes following the Stock Ownership of Management Table for an explanation of this stock ownership. By definition of the Securities and Exchange Commission, the persons involved in this joint disclosure may be deemed to be "beneficial owners" of substantial quantities of this stock. Except as otherwise set forth in this proxy statement, such persons disclaim admission of beneficial ownership of these securities. (b) These shares include the shares reported directly above by Minot Mercantile Corporation and 27,413 shares (.07%) owned by Woodbank Mills, Inc., owner of 49.6% of the common stock of Minot Mercantile Corporation. (c) Based upon information as of December 31, 1997 set forth in a Schedule 13G filing dated February 12, 1998. According to its filing, Scudder Kemper Investments, Inc., a registered investment adviser, has sole and shared voting power with respect to 755,255 and 2,284,830 of such shares, respectively, and sole and shared dispositive power with respect to 3,233,850 and 8,130 of such shares, respectively, which are held of record by its clients. STOCK OWNERSHIP OF MANAGEMENT
AMOUNT OF COMMON STOCK BENEFICIALLY OWNED ------------------------------------------------- PERCENT OF NAME DIRECTLY INDIRECTLY CLASS - --------------------------------------------- ------------------------ ----------------------- --------------- H. Keith H. Brodie, M.D...................... 1,000 none * John A. Herdeg............................... 2,125 none * Thomas J. Malone............................. 600 none * Gerrish H. Milliken.......................... 378,037 (see notes 1 and 11) 1.30 (see note 1) 101,063 (life interest in trusts) Minot K. Milliken............................ 400,119 (see notes 2 and 11) 2.33 (see note 2) 454,536 (life interest in trusts) Roger Milliken............................... 4,220,254 (see notes 3 and 11) 11.81 (see note 3) 121,560 (life interest in trusts) David L. Nichols............................. 7,812 4,658 * (see note 4) Lawrence R. Pugh............................. 500 none * Francis G. Rodgers........................... 2,750 none * Roger K. Smith............................... 75,939 none * (see note 5) Randolph L. Burnette......................... 2,250 5,287 * (see note 6) William A. Carr.............................. 2,462 1,190 * (see note 7) James M. McVicker............................ 5,657 1,690 * (see note 8) Kathryn M. Muldowney......................... 1,000 1,115 * (see note 9) All Directors and Executive Officers......... 4,488,085 10,527,650 40.86 (see note 10)
- ------------------------ * Less than one percent There is included in the above figures, with respect to each director and executive officer listed (and all directors and executive officers as a group) the number of shares, if any, credited to each director's and executive officer's account in the Savings, Profit Sharing and Supplemental Retirement Plan and those held in the name of his or her spouse and their minor children. Each director and executive officer, however, disclaims any admission of beneficial ownership of any securities included herein held in the name of his or her spouse or their minor children. Notes: 1. Gerrish H. Milliken is the beneficial owner of 378,037 shares of the common stock of the Company as a trustee of certain trusts. 2. Minot K. Milliken is the beneficial owner of 400,119 shares of the common stock of the Company as a trustee and an advisor of certain trusts. 3. Roger Milliken is the beneficial owner of 4,220,254 shares of the common stock of the Company as a trustee and an advisor of certain trusts. 4. Includes 5,000 shares which are subject to options presently exercisable or exercisable within 60 days. 5. Roger K. Smith is the beneficial owner of 65,803 shares of the common stock of the Company as a trustee of certain trusts. 6. Reflects 2,250 shares which are subject to options presently exercisable or exercisable within 60 days. 7. Includes 500 shares which are subject to options presently exercisable or exercisable within 60 days. 8. Includes 2,250 shares which are subject to options presently exercisable or exercisable within 60 days. 9. Reflects 1,000 shares which are subject to options presently exercisable or exercisable within 60 days. 10. Includes 12,500 shares which are subject to options presently exercisable or exercisable within 60 days. 11. Minot K. Milliken is the cousin of Roger Milliken and Gerrish H. Milliken, who are brothers. The shares listed as beneficially owned by each of Gerrish H. Milliken, Minot K. Milliken and Roger Milliken include shares listed as beneficially owned by one or both of the other two. The overall figures for all officers and directors as a group and the figures included below in this note eliminate the duplication of numbers and percentages of shares. Each of Gerrish H. Milliken, Minot K. Milliken and Roger Milliken may be deemed to be a controlling person of, and therefore may be deemed to be the beneficial owner of, and to share the power to direct the voting and/or the disposition of, common stock of the Company held by Minot Mercantile Corporation and Woodbank Mills, Inc. Gerrish H. Milliken, Minot K. Milliken and Roger Milliken together with Minot Mercantile Corporation and Woodbank Mills, Inc. owned beneficially a maximum of 14,896,521 shares (40.54%) of the common stock of the Company. MANAGEMENT REMUNERATION The Summary Compensation Table below shows compensation earned by or paid to the named executive officers (the Chief Executive Officer and the other four most highly compensated executive officers) for the three years ended January 31, 1998: SUMMARY COMPENSATION TABLE:
ANNUAL COMPENSATION FISCAL ----------------------------------------- NUMBER OF YEAR OTHER ANNUAL SHARES UNDERLYING ALL OTHER NAME AND PRINCIPAL POSITION ENDED SALARY BONUS COMPENSATION OPTIONS COMPENSATION(A) - ---------------------------------- --------- ---------- ---------- ----------------- ----------------- ---------------- David L. Nichols.................. 01/31/98 $ 839,846 $ 409,483 $ 0 20,000 $ 72,935 CHAIRMAN OF THE BOARD 02/01/97 $ 799,615 $ 520,749 $ 0 -0- $ 67,788 AND CHIEF EXECUTIVE 02/03/96 $ 725,385 $ 394,311 $ 0 -0- $ 58,925 OFFICER James M. McVicker................. 01/31/98 $ 424,942 $ 188,947 $ 0 9,000 $ 24,500 SENIOR VICE PRESIDENT 02/01/97 $ 409,769 $ 242,622 $ 0 -0- $ 23,084 AND CHIEF FINANCIAL 02/03/96 $ 361,038 $ 219,655(b) $ 0 -0- $ 19,833 OFFICER Randolph L. Burnette.............. 01/31/98 $ 313,269 $ 140,043 $ 0 9,000 $ 18,013 SENIOR VICE PRESIDENT OF 02/01/97 $ 296,538 $ 177,528 $ 0 -0- $ 16,571 REAL ESTATE 02/03/96 $ 274,231 $ 155,306 $ 0 -0- $ 13,672 William W. Carr................... 01/31/98 $ 255,000 $ 103,424 $ 0 2,000 $ 14,343 TREASURER AND SECRETARY 02/01/97 $ 255,000 $ 135,809 $ 0 -0- $ 12,067 02/03/96 $ 263,269 $ 74,025 $ 0 -0- $ 11,275 Kathryn M. Muldowney.............. 01/31/98 $ 200,000 $ 81,117 $ 0 4,000 $ 10,956 VICE PRESIDENT AND CHIEF 02/01/97 $ 182,116 $ 98,528 $ 0 -0- $ 10,488 INFORMATION OFFICER 02/03/96 $ 140,769 $ 103,862 $ 0 -0- $ 6,925
- ------------------------ (a) All Other Compensation is comprised of the Company's matching contributions under the Company's Savings, Profit Sharing and Supplemental Retirement Plan and the Company's Non-Qualified Savings, Profit Sharing and Supplemental Retirement Plan. Also includes $23,000, $24,000, and $21,000, paid to Mr. Nichols for Board of Directors' meetings during the fiscal years ended January 31, 1998, February 1, 1997, and February 3, 1996, respectively. (b) Includes a special bonus in the amount of $25,000 for additional services recognized by the Board of Directors. OPTION GRANTS TABLE The following table sets forth information regarding options granted during the fiscal year ended January 31, 1998 by the Company to each of the named executive officers:
POTENTIAL REALIZABLE VALUE AT NUMBER OF % OF TOTAL ASSUMED ANNUAL RATES OF STOCK SECURITIES OPTIONS PRICE APPRECIATION FOR OPTION UNDERLYING GRANTED TO EXERCISE OR TERM(B) OPTIONS EMPLOYEES IN BASE PRICE EXPIRATION ------------------------------- GRANTED(A) FISCAL YEAR (PER SHARE) DATE 5% 10% ----------- --------------- ----------- ----------- -------------- --------------- David L. Nichols................... 20,000 20.94% $ 48.06 4/18/2007 $ 604,494.00 $ 1,531,905.00 James M. McVicker.................. 9,000 9.42% $ 48.06 4/18/2007 $ 272,022.00 $ 689,357.00 Randolph L. Burnette............... 9,000 9.42% $ 48.06 4/18/2007 $ 272,022.00 $ 689,357.00 William A. Carr.................... 2,000 2.09% $ 48.06 4/18/2007 $ 60,449.00 $ 153,191.00 Kathryn M. Muldowney............... 4,000 4.19% $ 48.06 4/18/2007 $ 120,899.00 $ 306,381.00
- ------------------------------ (a) One-fourth of these options will vest on April 20, 1998, and an additional one-fourth will vest on April 20, 1999, April 18, 2000 and April 18, 2001. (b) The potential realizable value of the options reported was calculated by assuming 5% and 10% compounded annual rates of appreciation of the common stock from the date of grant of the options until the expiration of the options, based on the market price on the date of grant. These assumed annual rates of appreciation were used in compliance with the rules of the Securities and Exchange Commission and are not intended to forecast future price appreciation of the common stock. FISCAL YEAR END OPTION VALUE TABLE The following table sets forth information regarding the aggregate number and value of options held by the named executive officers as at January 31, 1998. No options were exercised by any of the named executive officers in 1997:
NUMBER OF SHARES UNDERLYING UNEXERCISED OPTIONS VALUE OF UNEXERCISED IN-THE-MONEY OPTIONS AT JANUARY 31, 1998 AT JANUARY 31, 1998(1) -------------------------------- ------------------------------ NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE - ---------------------------------------------------------- ----------------- ------------- --------------- ------------- David L. Nichols.......................................... 0 20,000 $ 0 $ 228,800.00 James M. McVicker......................................... 0 9,000 $ 0 $ 102,960.00 Randolph L. Burnette...................................... 0 9,000 $ 0 $ 102,960.00 William A. Carr........................................... 0 2,000 $ 0 $ 22,880.00 Kathryn M. Muldowney...................................... 0 4,000 $ 0 $ 45,760.00
- ------------------------------ (1) The closing price for the Company's common stock on the New York Stock Exchange on January 30, 1998 was $59.50 per share. Value is calculated on the basis of the difference between the respective option exercise prices and $59.50, multiplied by the number of shares of common stock underlying the respective options. REPORT OF THE COMPENSATION COMMITTEE GENERAL. The Compensation Committee of the Board of Directors (the "Committee") is composed of five outside directors. The current members of the Committee are H. Keith H. Brodie, M.D., Minot K. Milliken, Roger Milliken, Lawrence R. Pugh and Francis G. Rodgers. As part of its duties, the Committee reviews and recommends to the Board of Directors compensation levels for the Company's executive officers. The Company's compensation program reflects the philosophy that executive compensation levels should be linked to Company performance and also be competitive within the retail industry. Historically, the Company has structured compensation principally through base annual salary and year-end bonuses. With the adoption of the Company's 1996 Stock Option Plan, the Company's compensation program now includes an equity incentive component. The Committee recognizes that compensation in excess of $1 million paid to the Company's Chief Executive Officer does not presently qualify for deduction by the Company for federal income tax purposes under Section 162(m) of the Internal Revenue Code, but believes that the non-deductible portion is not material. Moreover, the Committee believes that it is important to maintain the flexibility to compensate executive officers in a manner consistent with the stated philosophy of performance-linked and competitive compensation designed to maximize stockholder value, notwithstanding that some portion of such compensation may not be deductible by the Company. BASE SALARIES. Base salaries for the Company's executives are determined by evaluating the responsibilities of the position and the experience of the individual, and by reference to the competitive marketplace. The Company seeks to target base salaries within the median salary level for comparable executive positions. ANNUAL BONUSES. The Company has a Pay-for-Performance year-end bonus program designed to reward management and other key executives for Company performance. Under the program, bonuses are awarded based upon the achievement of pre-defined Company and business unit performance measurements as determined by the Board. For 1997, with respect to each executive officer named in the SUMMARY COMPENSATION TABLE, bonuses were based on a weighted average performance barometer which included pre-tax store profits, total sales, inventory turnover and operating expense ratios. The bonuses reported in the SUMMARY COMPENSATION TABLE reflect the fact that the weighted average Company performance targets for 1997 were 91.20% achieved. 1996 STOCK OPTION PLAN. The 1996 Stock Option Plan (the "Stock Plan") is intended to enhance the Company's ability to attract and retain employees with valuable ability and experience and to furnish such personnel with incentives to improve operations and increase profits of the Company. In addition, options granted under the Stock Plan align the interests of executives with those of the stockholders, and thus provide the executives with additional incentive to maximize stockholder value. Options grants are made from time to time to executives whose contributions have or are expected to have a significant impact on the Company's long-term performance. The size of previous grants and the number of options held are not determinative of future grants. In 1997 options were granted to all seven of the Company's executive officers. Options are granted at a price equal to the fair market value of the Company's common stock on the date of grant, and, in general, vest in four equal increments over the four year period following the date of grant. COMPENSATION OF THE CHIEF EXECUTIVE OFFICER. The compensation of David L. Nichols, Chairman of the Board and Chief Executive Officer of the Company, is determined in accordance with the criteria set forth above. Mr. Nichols, who does not have an employment contract, received a salary increase in 1997 of approximately 5.0% to keep his salary within the median marketplace salary level for comparable executive positions and based on an evaluation of the other criteria set forth above under "Base Salaries." Mr. Nichols' bonus for 1997 was based upon the performance of the Company. As a participant in the Pay-for-Performance year-end bonus program, Mr. Nichols received a bonus for 1997 of $409,000 based on the achievement of 91.20% of the weighted average Company performance targets. In addition, Mr. Nichols was awarded options to purchase 20,000 shares of the Company's common stock under the Stock Plan. H. Keith H. Brodie, M.D. Minot K. Milliken Roger Milliken Lawrence R. Pugh Francis G. Rodgers PERFORMANCE GRAPH Set forth below is a line graph comparing, over the last five fiscal years, the Company's cumulative total return to shareholders with (i) the Standard & Poor's 500 Composite Stock Price Index and (ii) the Standard & Poor's Retail Department Stores Composite Index. MERCANTILE STORES COMPANY, INC. COMPARISON OF FIVE YEAR CUMULATIVE TOTAL RETURN* FEBRUARY 1, 1993 THROUGH JANUARY 31, 1998 EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
MERCANTILE STOCK S&P RETAIL DEPARTMENT S&P 500 INDEX 1992 100 100 100 1993 116.72 109.96 111.86 1994 133.5 101.07 112.48 1995 146.29 120.31 155.85 1996 155.13 128.02 196.86 1997 192.36 165.56 249.69 1992 1993 1994 1995 1996 1997 Assumes $100 invested on February 1, 1993 in Mercantile common stock, S&P 500 index and S&P Retail Department Stores Composite Index. 1992 1993 1994 1995 1996 1997 *Total return assumes re-investment of dividends.
PENSION PLANS The Company has maintained a noncontributory Pension Plan since 1945 which has been amended from time to time. The Plan is funded through contributions by the Company to the Plan trustee or appreciation of existing Plan assets. All employees (including officers) with one year of employment during which at least 1,000 hours were worked and who meet certain age requirements are participants. Normal retirement eligibility occurs at age 65 for participants in the Plan; however, early retirement at a reduced monthly benefit is available to employees who have reached the age of 60 and have at least 5 years of service (as defined). The retirement benefit is in the form of a level monthly payment for life. The benefit for service from February 1, 1976 to February 3, 1996 was determined based on the addition of .875% of each year's compensation up to the year's Taxable Wage Base (as defined) and 1.375% of compensation above such base up to, since 1989, the maximum annual limitation on compensation. The Plan was amended effective February 4, 1996 to provide pension benefits which are more commensurate with those prevalent in the competitive retail industry. The amendment adjusted the calculation formula benefits earned after February 3, 1996. The new formula includes a 2-tier service breakpoint for calculation purposes. Under the amended Plan, benefits for associates with up to 20 years of enrollment (as defined) are based on (i) .875% of annual compensation up to the year's Taxable Wage Base, plus (ii) 1.875% of compensation above such base up to a compensation level of twice the Taxable Wage Base, plus (iii) 3.0% of compensation above such doubled Taxable Wage Base up to the maximum annual limitation on compensation ($160,000 during 1997). For associates with more than 20 years of enrollment, benefits are based on (i) 1.0% of annual compensation up the year's Taxable Wage Base, plus (ii) 2.5% of compensation above such base up to a compensation level of twice the Taxable Wage Base, plus (iii) 4.0% of compensation above such doubled Taxable Wage Base up to the maximum annual limitation on compensation. SEVERANCE PROTECTION AGREEMENTS The Company has entered into severance protection agreements with each of James M. McVicker, Randolph L. Burnette and Kathryn M. Muldowney (the "Executives") and David L. Nichols (the "CEO"). The agreements are designed to encourage the executives to carry out their duties with the Company in the event of a potential change in control of the Company. The agreements for the Executives provide that if within 24 months following a change in control (as defined in the agreements) of the Company, the Executive's employment is terminated either (i) by the Company or other than cause or disability or, (ii) by the Executive, for good reason, then such Executive will receive, in addition to base salary and bonus accrued through the date of termination, the greater of: (a) 2.99 times annual salary and bonus at the highest rate in effect during the one year period prior to the change in control less the cash compensation paid the Executive for services rendered from the date of change in control to the termination date, or (b) two weeks' compensation for every year of service with the Company at a level equal to salary and bonus at the highest rate in effect during the one year period prior to the change in control. The agreement with the CEO provides that if within 24 months following a change in control of the Company, the CEO's employment is terminated either (i) by the Company for other than cause or disability, or (ii) by the CEO for any reason whatsoever, then the CEO will receive in addition to base salary and bonus accrued through the date of termination, the greater of: (a) $2,997,075, or (b) 2.99 times his annual salary and bonus at the highest rate in effect during the one year period prior to the change in control. In addition, each Executive and the CEO is entitled to: (i) receive all employment benefits for the remainder of, in the case of the Executives, the 24 month period, and in the case of the CEO, the 36 month period, following the change in control; (ii) a lump sum payment equal to the present value of the amount by which retirement benefits would have been larger had, in the case of the Executives, an additional two years, and in the case of the CEO, an additional three years, of credited service been completed; and (iii) legal fees and expenses reasonably incurred in enforcing the agreements. The Code imposes certain excise taxes on, and limits the deductibility of, certain compensatory payments made by a corporation to or for the benefit of certain individuals if such payments are contingent upon certain changes in the ownership or effective control of the corporation or the ownership of a substantial portion of the assets of the corporation provided that such payments to the individual have an aggregate present value in excess of three times the individual's annualized includible compensation for the base period, as defined in the Code. The agreements for the Executives provide that such severance payments shall be reduced to the extent necessary so that no such payments are subject to the excise tax. The CEO's agreement entitles him to receive an amount sufficient to offset any excise tax payable by the CEO pursuant to the provisions of the Code. Directors who are not also officers of the Company receive $16,000 as yearly compensation. All directors receive a standard fee of $3,000 for each board meeting attended and $1,000 for each Committee meeting attended, plus the payment of expenses incurred in connection therewith. In addition, all members of each Committee receive $3,000 as yearly compensation. SECTION 16(A) BENEFICIAL REPORTING COMPLIANCE Section 16(a) of the Exchange Act requires the Company's officers and directors, and persons who own more than 10% of a registered class of the Company's equity securities, to file initial reports of ownership and reports of changes in ownership (Forms 3, 4 and 5) of Common Stock and other equity securities of the Company with the SEC and the New York Stock Exchange. Officers, directors and greater-than-10% beneficial holders are required by SEC regulation to furnish the Company with copies of all such forms that they file. To the Company's knowledge, based solely on the Company's review of the copies of such reports received by the Company and, if applicable, written representations from certain reporting persons, that no reports on Form 5 were required. The Company believes that during the fiscal year ended December 31, 1997, its officers, directors and greater-than-10% beneficial owners complied with all applicable Section 16(a) filing requirements. TRANSACTIONS WITH MANAGEMENT AND OTHERS Milliken & Company, of which Roger Milliken is Chairman and Chief Executive Officer, Thomas J. Malone is President, Chief Operating Officer and a director, Minot K. Milliken and Gerrish H. Milliken are directors emeriti, and H. Keith H. Brodie, M.D., Lawrence R. Pugh, Francis G. Rodgers and Roger K. Smith are directors, is one of the Company's suppliers of some types of merchandise. VF Corporation, of which Lawrence R. Pugh is Chairman of the Board and was formerly the Chief Executive Officer, also supplies the Company with some types of merchandise. Such purchases for resale and use by the Company and its subsidiaries are in the ordinary course of business at competitive prices and amounted to approximately $420,000 in the case of Milliken & Company and $61,955,000 in the case of VF Corporation during the last fiscal year. EX-99.(C)(2) 6 AGREE & PLAN OF MERGER DILLARS/MSC ---------------------------------------------------------- AGREEMENT AND PLAN OF MERGER Among DILLARD'S, INC. MSC ACQUISITIONS, INC. and MERCANTILE STORES COMPANY, INC. Dated as of May 16, 1998 ---------------------------------------------------------- TABLE OF CONTENTS
ARTICLE I THE OFFER ............................ 2 SECTION 1.1 The Offer ................................................... 2 SECTION 1.2 Company Action .............................................. 3 ARTICLE II THE MERGER ............................ 4 SECTION 2.1 The Merger ................................................. 4 SECTION 2.2 Closing; Effective Time .................................... 4 SECTION 2.3 Effects of the Merger ...................................... 4 SECTION 2.4 Certificate of Incorporation; By-Laws ...................... 5 SECTION 2.5 Directors and Officers ..................................... 5 SECTION 2.6 Conversion of Securities ................................... 5 SECTION 2.7 Treatment of Options ....................................... 6 SECTION 2.8 Dissenting Shares and Section 262 Shares ................... 6 SECTION 2.9 Surrender of Shares; Stock Transfer Books .................. 6 ARTICLE III REPRESENTATIONS AND WARRANTIES OF THE COMPANY ....................... 8 SECTION 3.1 Organization and Qualification; Subsidiaries ............... 8 SECTION 3.2 Certificate of Incorporation and By-Laws ................... 8 SECTION 3.3 Capitalization ............................................. 8 SECTION 3.4 Authority Relative to This Agreement ....................... 9 SECTION 3.5 No Conflict; Required Filings and Consents ................. 10 SECTION 3.6 Compliance ................................................. 10 SECTION 3.7 SEC Filings; Financial Statements .......................... 11 SECTION 3.8 Absence of Certain Changes or Events ....................... 11 SECTION 3.9 Absence of Litigation ...................................... 12 SECTION 3.10 Employee Benefit Plans ..................................... 12 SECTION 3.11 Tax Matters ................................................ 14 SECTION 3.12 Offer Documents; Proxy Statement ........................... 14 SECTION 3.13 Environmental Matters ...................................... 15 SECTION 3.14 Real Estate Matters ........................................ 17 SECTION 3.15 Brokers .................................................... 18 ARTICLE IV REPRESENTATIONS AND WARRANTIES OF PARENT AND PURCHASER .............................. 18 SECTION 4.1 Corporate Organization ..................................... 18 SECTION 4.2 Authority Relative to This Agreement ....................... 18
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SECTION 4.3 No Conflict; Required Filings and Consents ................. 18 SECTION 4.4 Offer Documents; Proxy Statement ........................... 19 SECTION 4.5 Brokers .................................................... 20 SECTION 4.6 Funds ...................................................... 20 ARTICLE V CONDUCT OF BUSINESS PENDING THE MERGER .......................... 20 SECTION 5.1 Conduct of Business of the Company Pending the Merger ...... 20 ARTICLE VI ADDITIONAL AGREEMENTS ................................. 22 SECTION 6.1 Stockholders Meeting ....................................... 22 SECTION 6.2 Proxy Statement ............................................ 22 SECTION 6.3 Company Board Representation; Section 14(f) ................ 23 SECTION 6.4 Access to Information; Confidentiality ..................... 24 SECTION 6.5 No Solicitation of Transactions ............................ 25 SECTION 6.6 Employee Benefits Matters .................................. 26 SECTION 6.7 Directors' and Officers' Indemnification and Insurance ..... 27 SECTION 6.8 Postponement of Annual Meeting ............................. 28 SECTION 6.9 Notification of Certain Matters ............................ 28 SECTION 6.10 Further Action; Reasonable Best Efforts .................... 28 SECTION 6.11 Public Announcements ....................................... 29 SECTION 6.12 Disposition of Litigation .................................. 29 ARTICLE VII CONDITIONS OF MERGER ................................. 29 SECTION 7.1 Conditions to Obligation of Each Party to Effect the Merger . 29 ARTICLE VIII TERMINATION, AMENDMENT AND WAIVER ........................... 30 SECTION 8.1 Termination ................................................ 30 SECTION 8.2 Effect of Termination ...................................... 31 SECTION 8.3 Fees and Expenses .......................................... 32 SECTION 8.4 Amendment .................................................. 33 SECTION 8.5 Waiver ..................................................... 33 ARTICLE IX GENERAL PROVISIONS .................................. 33 SECTION 9.1 Non-Survival of Representations, Warranties and Agreements 33 SECTION 9.2 Notices .................................................... 33 SECTION 9.3 Certain Definitions ........................................ 34 SECTION 9.4 Severability ............................................... 35
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SECTION 9.5 Entire Agreement; Assignment ............................... 36 SECTION 9.6 Parties in Interest ........................................ 36 SECTION 9.7 Governing Law .............................................. 36 SECTION 9.8 Headings ................................................... 36 SECTION 9.9 Counterparts ............................................... 36 SECTION 9.10 Knowledge .................................................. 36 SECTION 9.11 Specific Performance ....................................... 36
Annex A - Offer Conditions -iii- AGREEMENT AND PLAN OF MERGER, dated as of May 16, 1998 (this "Agreement"), among DILLARD'S, INC., a Delaware corporation ("Parent"), MSC ACQUISITIONS, INC., a Delaware corporation and a wholly owned subsidiary of Parent ("Purchaser"), and MERCANTILE STORES COMPANY, INC., a Delaware corporation (the "Company"). W I T N E S S E T H : WHEREAS, the Board of Directors of the Company has determined that it is in the best interests of the Company and the stockholders of the Company to enter into this Agreement with Parent and Purchaser, providing for the merger (the "Merger") of Purchaser with the Company in accordance with the General Corporation Law of the State of Delaware ("DGCL"), upon the terms and subject to the conditions set forth herein; WHEREAS, the Board of Directors of Parent and Purchaser have each approved the Merger of Purchaser with the Company in accordance with the DGCL upon the terms and subject to the conditions set forth herein; WHEREAS, concurrently with the execution and delivery of this Agreement, Parent, MMC Acquisition, Inc., a Delaware corporation and a wholly owned subsidiary of Parent ("MMC MergerSub"), and Minot Mercantile Corporation, a Delaware corporation ("Holding Co."), have entered into a merger agreement, dated as of the date hereof (the "Holding Co. Merger Agreement"), pursuant to which MMC MergerSub will be merged with and into Holding Co. (the "Holding Co. Merger"), and Holding Co. shall be the surviving corporation; WHEREAS, concurrently with the execution and delivery of this Agreement, Parent, WMI Acquisition, Inc., a Delaware corporation and a wholly owned subsidiary of Parent ("WMI MergerSub"), and Woodbank Mills, Inc., a Delaware corporation ("Woodbank"), have entered into a merger agreement, dated as of the date hereof (the "Woodbank Merger Agreement"), pursuant to which WMI MergerSub will be merged with and into Woodbank (the "Woodbank Merger"), and Woodbank shall be the surviving corporation; and WHEREAS, concurrently with the execution and delivery of this Agreement, Parent and each of Holding Co., Woodbank, various family trust entities (collectively, the "Related Sellers") have entered into a stockholders' agreement, dated as of the date hereof (the "Stockholders' Agreement"), pursuant to which, among other things, the Related Sellers have granted an option in favor of Parent with respect to the shares of Company Common Stock (as defined herein) respectively held by such persons, subject to the terms and conditions contained therein; NOW, THEREFORE, in consideration of the foregoing and the mutual covenants and agreements herein contained, and intending to be legally bound hereby, Parent, Purchaser and the Company hereby agree as follows: 2 ARTICLE I THE OFFER SECTION 1.1 The Offer. (a) Provided that this Agreement shall not have been terminated in accordance with Section 8.1 and no event shall have occurred and no circumstance shall exist which would result in a failure to satisfy any of the conditions or events set forth in Annex A hereto (the "Offer Conditions"), Purchaser shall, as soon as reasonably practicable after the date hereof (and in any event within five business days from the date of public announcement of the execution hereof), commence an offer (the "Offer") to purchase for cash all of the issued and outstanding shares of Common Stock, par value $.14 2/3 per share (referred to herein as either the "Shares" or "Company Common Stock"), of the Company at a price of $80.00 per Share, net to the seller in cash. The obligation of Purchaser to accept for payment Shares tendered pursuant to the Offer shall be subject only to the satisfaction or waiver by Purchaser of the Offer Conditions. Purchaser expressly reserves the right, in its sole discretion, to waive any such condition (other than the Minimum Condition as defined in the Offer Conditions) and make any other changes in the terms or conditions of the Offer, provided that, unless previously approved by the Company in writing, no change may be made which decreases the price per Share payable in the Offer, changes the form of consideration payable in the Offer (other than by adding consideration), reduces the maximum number of Shares to be purchased in the Offer, modify or amend the Offer Conditions or otherwise amend the Offer in a manner adverse to holders of the Shares. Purchaser covenants and agrees that, subject to the terms and conditions of this Agreement, including but not limited to the Offer Conditions, it will accept for payment and pay for Shares as soon as it is permitted to do so under applicable law; provided that, Purchaser shall have the right, in its sole discretion, to extend the Offer for up to five business days, notwithstanding the prior satisfaction of the Offer, in order to attempt to satisfy the requirements of Section 253 of the DGCL. It is agreed that the Offer Conditions are for the benefit of Purchaser and may be asserted by Purchaser regardless of the circumstances giving rise to any such condition (except for any action or inaction by Purchaser or Parent constituting a breach of this Agreement) or, except with respect to the Minimum Condition, may be waived by Purchaser, in whole or in part at any time and from time to time, in its sole discretion. Purchaser further agrees that the Holding Co. Merger and the Woodbank Merger will not be closed until the Offer Conditions are otherwise satisfied or waived by Purchaser, and immediately prior to the purchase of the Shares by Purchaser pursuant to the Offer. Purchaser agrees that, so long as this Agreement is in effect and all of the Offer Conditions are satisfied other than the conditions to the Offer set forth in clause (h) of Annex A and the Minimum Condition, at the request of the Company the Purchaser, at its option, shall extend the Offer until the earlier of (1) such time as such conditions are satisfied or waived, and (2) the date chosen by the Company which shall not be later than (x) the Outside Date (as defined herein), (y) the earliest date on which the Company reasonably believes such condition will be satisfied; provided, that the Company may request further extensions up until the Outside Date if the Offer Conditions set forth in clause (h) and the Minimum Condition are still the only Offer Condition not satisfied unless this Agreement has been terminated pursuant to the provisions of Article VIII. (b) As soon as reasonably practicable on the date the Offer is commenced, Purchaser shall file a Tender Offer Statement on Schedule 14D-1 (the "Schedule 14D-1") with 3 respect to the Offer with the Securities and Exchange Commission (the "SEC"). The Schedule 14D-1 shall contain an Offer to Purchase and forms of the related letter of transmittal (which Schedule 14D-1, Offer to Purchase and other documents, together with any supplements or amendments thereto, are referred to herein collectively as the "Offer Documents"). Parent and Purchaser agree that the Company and its counsel shall be given an opportunity to review the Schedule 14D-1 before it is filed with the SEC. Parent, Purchaser and the Company each agrees promptly to correct any information provided by it for use in the Offer Documents that shall have become false or misleading in any material respect, and Parent and Purchaser further agree to take all steps necessary to cause the Schedule 14D-1 as so corrected to be filed with the SEC and the other Offer Documents as so corrected to be disseminated to holders of Shares, in each case as and to the extent required by applicable federal securities laws. SECTION 1.2 Company Action. (a) The Company hereby approves of and consents to the Offer and represents and warrants that: (i) its Board of Directors, at a meeting duly called and held on May 15, 1998, has unanimously (A) determined that this Agreement and the transactions contemplated hereby, including the Offer and the Merger, are advisable and are fair to and in the best interests of the holders of Shares, (B) approved this Agreement and the transactions contemplated hereby, including each of the Offer and the Merger, and (C) resolved to recommend that the stockholders of the Company accept the Offer, tender their Shares to Purchaser thereunder and adopt this Agreement; provided, however, that prior to the consummation of the Offer, if the Company's Board of Directors by majority vote shall have determined in good faith, based upon the advice of outside counsel to the Company, that failure to modify or withdraw its recommendation would constitute a breach of the Board's fiduciary duty under applicable law, the Board of Directors may so modify or withdraw its recommendation; and (ii) Goldman, Sachs & Co. (the "Financial Adviser") has delivered to the Board of Directors of the Company its opinion that the consideration to be received by holders of Shares, other than Parent and Purchaser, pursuant to each of the Offer and the Merger is fair to such holders from a financial point of view. The Company has been authorized by the Financial Adviser to permit, subject to prior review and consent by such Financial Adviser, the inclusion of such fairness opinion (or a reference thereto) in the Schedule 14D-9 referred to below and the Proxy Statement referred to in Section 3.12. The Company hereby consents to the inclusion in the Offer Documents of the recommendations of the Company's Board of Directors described in this Section 1.2(a). (b) The Company shall file with the SEC, contemporaneously with the commencement of the Offer pursuant to Section 1.1, a Solicitation/Recommendation Statement on Schedule 14D-9 (together with all amendments and supplements thereto, the "Schedule 14D- 9"), containing the recommendations of the Company's Board of Directors described in Section 1.2(a)(i) and shall promptly mail the Schedule 14D-9 to the stockholders of the Company. The Schedule 14D-9 and all amendments thereto will comply in all material respects with the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and the rules and regulations promulgated thereunder. The Company, Parent and Purchaser each agrees promptly to correct any information provided by it for use in the Schedule 14D-9 that shall have become false or misleading in any material respect, and the Company further agrees to take all steps necessary to cause the Schedule 14D-9 as so corrected to be filed with the SEC and disseminated to holders of Shares, in each case as and to the extent required by applicable federal securities laws. 4 (c) In connection with the Offer, if requested by Purchaser, the Company shall promptly furnish Purchaser with mailing labels, security position listings, any non-objecting beneficial owner lists and any available listings or computer files containing the names and addresses of the record holders of Shares, each as of a recent date, and shall promptly furnish Purchaser with such additional information (including but not limited to updated lists of stockholders, mailing labels, security position listings and non-objecting beneficial owner lists) and such other assistance as Parent, Purchaser or their agents may reasonably require in communicating the Offer to the record and beneficial holders of Shares. Subject to the requirements of law, and except for such steps as are necessary to disseminate the Offer Documents and any other documents necessary to consummate the Offer and the Merger, Parent and each of its affiliates and associates shall hold in confidence the information contained in any of such lists, labels or additional information and, if this Agreement is terminated, shall promptly deliver to the Company all copies of such information then in their possession. ARTICLE II THE MERGER SECTION 2.1 The Merger. Upon the terms and subject to the conditions of this Agreement and in accordance with the DGCL, at the Effective Time (as defined in Section 2.2), Purchaser shall be merged with and into the Company. As a result of the Merger, the separate corporate existence of Purchaser shall cease and the Company shall continue as the surviving corporation of the Merger (the "Surviving Corporation"). At Parent's election, any direct or indirect subsidiary of Parent other than Purchaser may be merged with and into the Company instead of the Purchaser. In the event of such an election, the parties agree to execute an appropriate amendment to this Agreement in order to reflect such election. SECTION 2.2 Closing; Effective Time. Subject to the provisions of Article VII, the closing of the Merger (the "Closing") shall take place in New York City at the offices of Simpson Thacher & Bartlett, 425 Lexington Avenue, New York, New York, as soon as practicable but in no event later than the first business day after the satisfaction or waiver of the conditions set forth in Article VII, or at such other place or at such other date as Parent and the Company may mutually agree. The date on which the Closing actually occurs is hereinafter referred to as the "Closing Date". At the Closing, the parties hereto shall cause the Merger to be consummated by filing this Agreement or a certificate of merger or a certificate of ownership and merger (the "Certificate of Merger") with the Secretary of State of the State of Delaware, in such form as required by and executed in accordance with the relevant provisions of the DGCL (the date and time of the filing of the Certificate of Merger with the Secretary of State of the State of Delaware (or such later time as is specified in the Certificate of Merger) being the "Effective Time"). SECTION 2.3 Effects of the Merger. The Merger shall have the effects set forth in the applicable provisions of the DGCL. Without limiting the generality of the foregoing and subject thereto, at the Effective Time all the property, rights, privileges, immunities, powers and franchises of the Company and Purchaser shall vest in the Surviving Corporation, and all debts, 5 liabilities and duties of the Company and Purchaser shall become the debts, liabilities and duties of the Surviving Corporation. SECTION 2.4 Certificate of Incorporation; By-Laws. (a) At the Effective Time and without any further action on the part of the Company and Purchaser, the Restated Certificate of Incorporation of the Company (as amended, the "Certificate of Incorporation"), as in effect immediately prior to the Effective Time, shall be the certificate of incorporation of the Surviving Corporation until thereafter amended as provided therein and under the DGCL. (b) At the Effective Time and without any further action on the part of the Company and Purchaser, the By-Laws of the Purchaser, as in effect immediately prior to the Effective Time, shall be the By-Laws of the Surviving Corporation and thereafter may be amended or repealed in accordance with their terms or the Certificate of Incorporation of the Purchaser and as provided by law. SECTION 2.5 Directors and Officers. The directors of Purchaser immediately prior to the Effective Time shall be the initial directors of the Surviving Corporation, each to hold office in accordance with the Certificate of Incorporation and By-Laws of the Surviving Corporation (directors of the Company shall tender their resignations effective upon the Effective Time), and the officers of the Company immediately prior to the Effective Time shall be the initial officers of the Surviving Corporation, in each case until their respective successors are duly elected or appointed (as the case may be) and qualified. SECTION 2.6 Conversion of Securities. At the Effective Time, by virtue of the Merger and without any action on the part of Purchaser, the Company or the holders of any of the following securities: (a) Each Share issued and outstanding immediately prior to the Effective Time (other than any Shares to be cancelled pursuant to Section 2.6(b), Shares held by Holding Co. or Woodbank and any Dissenting Shares (as defined in Section 2.8(a)) shall be cancelled, extinguished and converted into the right to receive $80.00 in cash or any higher price that may be paid pursuant to the Offer (the "Merger Consideration") payable to the holder thereof, without interest, upon surrender of the certificate formerly representing such Share in the manner provided in Section 2.9, less any required withholding taxes. (b) Each share of Company Common Stock held in the treasury of the Company and each Share owned by the Company, Parent, Purchaser or any other direct or indirect subsidiary of such persons, in each case immediately prior to the Effective Time, shall be cancelled and retired without any conversion thereof and no payment or distribution shall be made with respect thereto. (c) Each share of common stock of Purchaser issued and outstanding immediately prior to the Effective Time shall be converted into and become one validly issued, fully paid and nonassessable share of common stock of the Surviving Corporation. 6 SECTION 2.7 Treatment of Options. Immediately prior to the Effective Time, the Company shall cause each of the 95,500 outstanding options to purchase Company Common Stock under the Company's 1996 Option Plan as set forth in Schedule 2.7 to the Company Disclosure Letter (an "Option"), whether or not then exercisable or vested, to be cancelled by the Company, and the holder thereof to be entitled to receive at the Effective Time or as soon as practicable thereafter from the Company in consideration for such cancellation an amount in cash equal to the product of (a) the number of Shares previously subject to such Option and (b) the excess, if any, of the Merger Consideration over the exercise price per Share previously subject to such Option (such payment to be net of applicable withholding taxes). SECTION 2.8 Dissenting Shares and Section 262 Shares. (a) Notwithstanding anything in this Agreement to the contrary, shares of Company Common Stock that are issued and outstanding immediately prior to the Effective Time and which are held by stockholders who have not voted in favor of or consented to the Merger and shall have delivered a written demand for appraisal of such shares of Company Common Stock in the time and manner provided in Section 262 of the DGCL and shall not have failed to perfect or shall not have effectively withdrawn or lost their rights to appraisal and payment under the DGCL (the "Dissenting Shares") shall not be converted into the right to receive the Merger Consideration, but shall be entitled to receive the consideration as shall be determined pursuant to Section 262 of the DGCL; provided, however, that if such holder shall have failed to perfect or shall have effectively withdrawn or lost his, her or its right to appraisal and payment under the DGCL, such holder's shares of Company Common Stock shall thereupon be deemed to have been converted, at the Effective Time, into the right to receive the Merger Consideration set forth in Section 2.6(a) of this Agreement, without any interest thereon. (b) The Company shall give Parent (i) prompt notice of any demands for appraisal pursuant to Section 262 received by the Company, withdrawals of such demands, and any other instruments served pursuant to the DGCL and received by the Company and (ii) the opportunity to direct all negotiations and proceedings with respect to demands for appraisal under the DGCL. The Company shall not, except with the prior written consent of Parent or as otherwise required by applicable law, make any payment with respect to any such demands for appraisal or offer to settle or settle any such demands. SECTION 2.9 Surrender of Shares; Stock Transfer Books. (a) Prior to the Effective Time, Purchaser shall designate a bank or trust company to act as agent for the holders of Shares in connection with the Merger (the "Paying Agent") to receive the Merger Consideration to which holders of Shares shall become entitled pursuant to Section 2.6(a). When and as needed, Parent or Purchaser will make available to the Paying Agent sufficient funds to make all payments pursuant to Section 2.9(b). Such funds shall be invested by the Paying Agent as directed by Purchaser or, after the Effective Time, the Surviving Corporation, provided that such investments shall be in obligations of or guaranteed by the United States of America, in commercial paper obligations rated A-1 or P-1 or better by Moody's Investors Service, Inc. or Standard & Poor's Corporation, respectively, or in certificates of deposit, bank repurchase agreements or banker's acceptances of commercial banks with capital exceeding $500 million. Any net profit resulting from, or interest or income produced by, such investments will be payable to the Surviving Corporation or Parent, as Parent directs. 7 (b) Promptly after the Effective Time, the Surviving Corporation shall cause to be mailed to each record holder, as of the Effective Time, of an outstanding certificate or certificates which immediately prior to the Effective Time represented Shares (the "Certificates"), a form of letter of transmittal (which shall specify that delivery shall be effected, and risk of loss and title to the Certificates shall pass, only upon proper delivery of the Certificates to the Paying Agent) and instructions for use in effecting the surrender of the Certificates for payment of the Merger Consideration therefor. Upon surrender to the Paying Agent of a Certificate, together with such letter of transmittal, duly completed and validly executed in accordance with the instructions thereto, and such other documents as may be required pursuant to such instructions, the holder of such Certificate shall be entitled to receive in exchange therefor the Merger Consideration for each Share formerly represented by such Certificate, and such Certificate shall then be cancelled. No interest shall be paid or accrued for the benefit of holders of the Certificates on the Merger Consideration payable upon the surrender of the Certificates. If payment of the Merger Consideration is to be made to a person other than the person in whose name the surrendered Certificate is registered, it shall be a condition of payment that the Certificate so surrendered shall be properly endorsed or shall be otherwise in proper form for transfer and that the person requesting such payment shall have paid any transfer and other taxes required by reason of the payment of the Merger Consideration to a person other than the registered holder of the Certificate surrendered or shall have established to the satisfaction of the Surviving Corporation that such tax either has been paid or is not applicable. (c) At any time following six months after the Effective Time, the Surviving Corporation shall be entitled to require the Paying Agent to deliver to it any funds (including any interest received with respect thereto) which had been made available to the Paying Agent and which have not been disbursed to holders of Certificates, and thereafter such holders shall be entitled to look to the Surviving Corporation (subject to abandoned property, escheat or other similar laws) only as general creditors thereof with respect to the Merger Consideration payable upon due surrender of their Certificates. Notwithstanding the foregoing, neither the Surviving Corporation nor the Paying Agent shall be liable to any holder of a Certificate for Merger Consideration delivered to a public official pursuant to any applicable abandoned property, escheat or similar law. (d) At the Effective Time, the stock transfer books of the Company shall be closed and thereafter there shall be no further registration of transfers of shares of Company Common Stock on the records of the Company. From and after the Effective Time, the holders of Certificates evidencing ownership of Shares outstanding immediately prior to the Effective Time shall cease to have any rights with respect to such Shares except as otherwise provided for herein or by applicable law. 8 ARTICLE III REPRESENTATIONS AND WARRANTIES OF THE COMPANY The Company hereby represents and warrants to Parent and Purchaser that, except as set forth in the letter (the "Company Disclosure Letter") delivered by the Company to Purchaser prior to the date of execution of this Agreement: SECTION 3.1 Organization and Qualification; Subsidiaries. Each of the Company and each of its subsidiaries is a corporation duly organized, validly existing and in good standing under the laws of the jurisdiction of its incorporation and has the requisite corporate power and authority and any necessary governmental approvals to own, lease and operate its properties and to carry on its business as it is now being conducted, except where the failure to be so organized, existing and in good standing or to have such power, authority and governmental approvals is not reasonably likely, individually or in the aggregate, to have a Material Adverse Effect (as defined below) or prevent or materially delay the consummation of the Offer or the Merger. Each of the Company and each of its subsidiaries is duly qualified or licensed as a foreign corporation to do business, and is in good standing, in each jurisdiction where the character of its properties owned, leased or operated by it or the nature of its activities makes such qualification or licensing necessary, except for such failures to be so duly qualified or licensed and in good standing as are not reasonably likely, individually or in the aggregate, to have a Material Adverse Effect. When used in connection with the Company or any of its subsidiaries, the term "Material Adverse Effect" means any change or effect that would be materially adverse to the assets, liabilities, results of operations, financial condition or business of the Company and its subsidiaries taken as a whole, other than, as a result of changes in general economic conditions in the United States. SECTION 3.2 Certificate of Incorporation and By-Laws. The Company has heretofore furnished to Parent a complete and correct copy of the Certificate of Incorporation and the By-Laws of the Company as currently in effect. Such Certificate of Incorporation and ByLaws are in full force and effect and no other organizational documents are applicable to or binding upon the Company. The Company is not in violation of any of the provisions of its Certificate of Incorporation or By-Laws. SECTION 3.3 Capitalization. The authorized capital stock of the Company consists of 36,887,475 shares of Company Common Stock. As of May 16, 1998, (a) 36,748,550 shares of Company Common Stock were issued and outstanding, all of which were validly issued, fully paid and nonassessable and were issued free of preemptive (or similar) rights and (b) 138,925 shares of Company Common Stock were held in the treasury of the Company. Since May 16, 1998, no options to purchase shares of Company Common Stock have been granted and no shares of Company Common Stock have been issued and the total number of Options outstanding as of May 16, 1998 was 95,500. Except (i) as set forth above and (ii) as a result of the exercise of Options outstanding as of May 16, 1998, there are outstanding (A) no shares of capital stock or other voting securities of the Company, (B) no securities of the Company convertible into or exchangeable for shares of capital stock or voting securities of the Company, (C) no options or other rights to acquire from the Company, and no obligation of the Company 9 to issue, any capital stock, voting securities or securities convertible into or exchangeable for capital stock or voting securities of the Company and (D) no equity equivalents, interests in the ownership or earnings of the Company or other similar rights (collectively, "Company Securities"). There are no outstanding obligations of the Company or any of its subsidiaries to repurchase, redeem or otherwise acquire any Company Securities. There are no other options, calls, warrants or other rights, agreements, arrangements or commitments of any character relating to the issued or unissued capital stock of the Company or any of its subsidiaries to which the Company or any of its subsidiaries is a party. All shares of Company Common Stock subject to issuance as aforesaid, upon issuance on the terms and conditions specified in the instruments pursuant to which they are issuable, shall be duly authorized, validly issued, fully paid and nonassessable and free of preemptive (or similar) rights. There are no outstanding contractual obligations of the Company or any of its subsidiaries to provide funds to or make any investment (in the form of a loan, capital contribution or otherwise) in any such subsidiary or any other entity. Each of the outstanding shares of capital stock of each of the Company's subsidiaries is duly authorized, validly issued, fully paid and nonassessable and all such shares are owned by the Company or another wholly owned subsidiary of the Company as set forth in Schedule 3.3 to the Company Disclosure Letter and are owned free and clear of all security interests, liens, claims, pledges, agreements, limitations in voting rights, charges or other encumbrances of any nature whatsoever, except where the failure to own such shares free and clear is not, individually or in the aggregate, reasonably likely to have a Material Adverse Effect. The Company has delivered to Parent prior to the date hereof a list of the subsidiaries and affiliates of the Company which evidences, among other things, the percentage of capital stock or other equity interests owned by the Company, directly or indirectly, in such subsidiaries or associated entities. No entity in which the Company owns, directly or indirectly, less than a 50% equity interest is, individually or when taken together with all such other entities, material to the business of the Company and its subsidiaries taken as a whole other than the Metro North Company. SECTION 3.4 Authority Relative to This Agreement. The Company has all necessary corporate power and authority to execute and deliver this Agreement, to perform its obligations hereunder and to consummate the transactions contemplated hereby. The execution, delivery and performance of this Agreement by the Company and the consummation by the Company of the transactions contemplated hereby have been duly and validly authorized by all necessary corporate action and no other corporate proceedings on the part of the Company are necessary to authorize this Agreement or to consummate the transactions so contemplated (other than, with respect to the Merger, the adoption of this Agreement by the holders of a majority of the outstanding shares of Company Common Stock if and to the extent required by applicable law, and the filing of appropriate merger documents as required by the DGCL). This Agreement has been duly and validly executed and delivered by the Company and, assuming the due authorization, execution and delivery hereof by Parent and Purchaser, constitutes a legal, valid and binding obligation of the Company enforceable against the Company in accordance with its terms. The Board of Directors of the Company has approved this Agreement and the transactions contemplated hereby (including but not limited to the Offer and the Merger and the transactions contemplated by the Holding Co. Merger Agreement, Woodbank Merger Agreement and the Stockholders Agreements and the transactions contemplated by each such agreement) so as to render inapplicable hereto and thereto (a) the limitation on business combinations contained in Section 203 of the DGCL (or any similar provision) and (b) the restriction on "business 10 combinations" with "related persons" contained in Article EIGHTH of the Certificate of Incorporation. As a result of the foregoing actions subject to the applicability of Section 253 of the DGCL, the only vote required to authorize the Merger is the affirmative vote of a majority of the outstanding Shares. SECTION 3.5 No Conflict; Required Filings and Consents. (a) The execution, delivery and performance of this Agreement by the Company do not and will not: (i) conflict with or violate the Certificate of Incorporation or By-Laws of the Company or the equivalent organizational documents of any of its subsidiaries; (ii) assuming that all consents, approvals and authorizations contemplated by clauses (i), (ii) and (iii) of subsection (b) below have been obtained and all filings described in such clauses have been made, conflict with or violate any law, rule, regulation, order, judgment or decree applicable to the Company or any of its subsidiaries or by which its or any of their respective properties are bound or affected; or (iii) result in any breach or violation of or constitute a default (or an event which with notice or lapse of time or both could become a default) or result in the loss of a material benefit under, or give rise to any right of termination, amendment, acceleration or cancellation of, or result in the creation of a lien or encumbrance on any of the properties or assets of the Company or any of its subsidiaries pursuant to, any note, bond, mortgage, indenture, contract, agreement, lease, license, permit, franchise or other instrument or obligation to which the Company or any of its subsidiaries is a party or by which the Company or any of its subsidiaries or its or any of their respective properties are bound or affected, except, in the case of clauses (ii) and (iii), for any such conflicts, violations, breaches, defaults or other occurrences which are not, individually or in the aggregate, reasonably likely to have a Material Adverse Effect. (b) The execution, delivery and performance of this Agreement by the Company and the consummation of the Merger by the Company do not and will not require any consent, approval, authorization or permit of, action by, filing with or notification to, any governmental or regulatory authority, except for (i) applicable requirements, if any, of the Exchange Act and the rules and regulations promulgated thereunder, the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the "HSR Act"), state securities, takeover and "blue sky" laws, (ii) the filing and recordation of appropriate merger or other documents as required by the DGCL and (iii) such consents, approvals, authorizations, permits, actions, filings or notifications the failure of which to make or obtain are not, individually or in the aggregate, reasonably likely to (x) prevent or materially delay the Company from performing its obligations under this Agreement or (y) have a Material Adverse Effect. SECTION 3.6 Compliance. Neither the Company nor any of its subsidiaries is in conflict with, or in default or violation of, (i) any law, rule, regulation, order, judgment or decree applicable to the Company or any of its subsidiaries or by which its or any of their respective properties are bound or affected, or (ii) any note, bond, mortgage, indenture, contract, agreement, lease, license, permit, franchise or other instrument or obligation to which the Company or any of its subsidiaries is a party or by which the Company or any of its subsidiaries or its or any of their respective properties are bound or affected, except for any such conflicts, defaults or violations which are not, individually or in the aggregate, reasonably likely to have a Material Adverse Effect. 11 SECTION 3.7 SEC Filings; Financial Statements. (a) The Company and, to the extent applicable, each of its then or current subsidiaries, has filed all forms, reports, statements and documents required to be filed with the SEC since January 1, 1995 (collectively, the "SEC Reports"), each of which has complied in all material respects with the applicable requirements of the Securities Act of 1933, as amended (the "Securities Act"), and the rules and regulations promulgated thereunder, or the Exchange Act, and the rules and regulations promulgated thereunder, each as in effect on the date so filed. None of the SEC Reports (including but not limited to any financial statements or schedules included or incorporated by reference therein) contained when filed, or (except to the extent revised or superseded by a subsequent filing with the SEC) contains, any untrue statement of a material fact or omitted or omits to state a material fact required to be stated or incorporated by reference therein or necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading. (b) Each of the audited consolidated balance sheets of the Company as of January 31, 1998 and February 1, 1997 and the related statements of consolidated income and retained earnings, and statements of consolidated cash flows for each of the three fiscal years ended January 31, 1998, February 1, 1997 and February 3, 1996, included in its Annual Reports on Form 10-K for the fiscal years ended January 31, 1998, in each case, including any related notes thereto, as filed with the SEC (collectively, the "Company Financial Statements"), has been prepared in accordance with generally accepted accounting principles applied on a consistent basis throughout the periods involved (except as may be indicated in the notes thereto) and fairly presents in all material respects the consolidated financial position of the Company and its subsidiaries at the respective date thereof and the consolidated results of its operations and changes in cash flows for the periods indicated. (c) There are no liabilities of the Company or any of its subsidiaries of any kind whatsoever, whether or not accrued and whether or not contingent or absolute, that are material to the Company and its subsidiaries, taken as a whole, other than (i) liabilities disclosed or provided for in the consolidated balance sheet of the Company and its subsidiaries at January 31, 1998, including the notes thereto, (ii) the SEC Reports, (iii) liabilities incurred on behalf of the Company in connection with this Agreement and the contemplated Merger, and (iv) liabilities incurred in the ordinary course of business consistent with past practice since January 31, 1998, none of which are, individually or in the aggregate, reasonably likely to have a Material Adverse Effect. (d) The Company has heretofore furnished or made available to Parent a complete and correct copy of any amendments or modifications which have not yet been filed with the SEC to agreements, documents or other instruments which previously had been filed by the Company with the SEC pursuant to the Securities Act and the rules and regulations promulgated thereunder or the Exchange Act and the rules and regulations promulgated thereunder. SECTION 3.8 Absence of Certain Changes or Events. Since January 31, 1998, except as contemplated by this Agreement or as disclosed in the SEC Reports filed and publicly available prior to the date of this Agreement or as disclosed in Schedule 3.8 to the Company Disclosure Letter, the Company and its subsidiaries have conducted their businesses only in the 12 ordinary course and in a manner consistent with past practice and, since such date, there has not been: (i) any changes in the assets, liabilities, results of operation, financial condition or business of the Company or any of its subsidiaries having or reasonably likely to have a Material Adverse Effect; (ii) any condition, event or occurrence which, individually or in the aggregate, is reasonably likely to have a Material Adverse Effect; (iii) any damage, destruction or loss (whether or not covered by insurance) with respect to any assets of the Company or any of its subsidiaries which is reasonably likely, individually or in the aggregate, to have a Material Adverse Effect; (iv) any change by the Company in its accounting methods, principles or practices; (v) any revaluation by the Company of any of its material assets, including but not limited to writing down the value of inventory or writing off notes or accounts receivable other than in the ordinary course of business; (vi) any entry by the Company or any of its subsidiaries into any commitment or transactions material to the Company and its subsidiaries taken as a whole (other than commitments or transactions entered into in the ordinary course of business); (vii) any declaration, setting aside or payment of any dividends or distributions in respect of the Shares other than the regular quarterly dividend in the amount of $.32 per share; (viii) any increase in or establishment of any bonus, insurance, severance, deferred compensation, pension, retirement, profit sharing, stock option (including without limitation the granting of stock options, stock appreciation rights, performance awards, or restricted stock awards), stock purchase or other employee benefit plan or agreement or arrangement, or any other increase in the compensation payable or to become payable to any present or former directors, officers or key employees of the Company or any of its subsidiaries, except for increases in base compensation in the ordinary course of business consistent with past practice, or any employment, consulting or severance agreement or arrangement entered into with any such present or former directors, officers or key employees; or (ix) any other action which, if it had been taken after the date hereof, would have required the consent of Parent under Section 5.1. SECTION 3.9 Absence of Litigation. Except as disclosed in the SEC Reports filed and publicly available prior to the date of this Agreement, there are no suits, claims, actions, proceedings or investigations pending or, to the best knowledge of the Company, threatened against the Company or any of its subsidiaries, or any properties or rights of the Company or any of its subsidiaries, before any court, arbitrator or administrative, governmental or regulatory authority or body, that, individually or in the aggregate, is reasonably likely to have a Material Adverse Effect. As of the date hereof, neither the Company nor any of its subsidiaries nor any of their respective properties is or are subject to any order, writ, judgment, injunction, decree, determination or award having, or which, insofar as can be reasonably foreseen, is reasonably likely to have a Material Adverse Effect or prevent or materially delay consummation of the transactions contemplated hereby. SECTION 3.10 Employee Benefit Plans. Except (i) as set forth in the SEC Reports filed and publicly available prior to the date of this Agreement or (ii) as is not, individually or in the aggregate, reasonably likely to have a Material Adverse Effect or prevent or materially delay the consummation of the Offer or the Merger: (a) Schedule 3.10 to the Company Disclosure Letter contains a true and complete list of each "employee benefit plan" (within the meaning of section 3(3) of the Employee Retirement Income Security Act of 1974, as amended ("ERISA"), including, 13 without limitation, multiemployer plans within the meaning of ERISA section 3(37)), stock purchase, stock option, severance, employment, change-in-control, fringe benefit, collective bargaining, bonus, incentive, deferred compensation and all other employee benefit plans, agreements, programs, policies or other arrangements, whether or not subject to ERISA, whether formal or informal, oral or written, legally binding or not, under which any employee or former employee of the Company or any of its subsidiaries, has any present or future right to benefits or under which the Company or any of its subsidiaries has any present or future liability. All such plans, agreements, programs, policies and arrangements shall be collectively referred to as the "Company Plans". (b) With respect to each Company Plan, the Company has delivered or made available to Parent a current, accurate and complete copy (or, to the extent no such copy exists, an accurate description) thereof and, to the extent applicable: (i) any related trust agreement or other funding instrument; (ii) the most recent determination letter, if applicable; (iii) any summary plan description and other written communications by the Company or any of its subsidiaries to their employees concerning the extent of the benefits provided under a Company Plan; and (iv) for the three most recent years (A) the Form 5500 and attached schedules, (B) audited financial statements and (C) actuarial valuation reports. (c) (i) Each Company Plan has been established and administered in accordance with its terms, and in material compliance with the applicable provisions of ERISA, the Internal Revenue Code of 1986, as amended (the "Code"), and other applicable laws, rules and regulations; (ii) each Company Plan which is intended to be qualified within the meaning of Code section 401(a) is so qualified and has received a favorable determination letter as to its qualification, and nothing has occurred, whether by action or failure to act, that would cause the loss of such qualification; (iii) no event has occurred and no condition exists that would subject the Company or any of its subsidiaries, either directly or by reason of their affiliation with any member of their "Controlled Group" (defined as any organization which is a member of a controlled group of organizations within the meaning of Code sections 414(b), (c), (m) or (o)), to any tax, fine, lien or penalty imposed by ERISA, the Code or other applicable laws, rules and regulations; (iv) for each Company Plan with respect to which a Form 5500 has been filed, no material change has occurred with respect to the matters covered by the most recent Form since the date thereof; and (v) no "reportable event" (as such term is defined in ERISA section 4043), "prohibited transaction" (as such term is defined in ERISA section 406 and Code section 4975) or "accumulated funding deficiency" (as such term is defined in ERISA section 302 and Code section 412 (whether or not waived)) has occurred with respect to any Company Plan. (d) With respect to each of the Company Plans that is subject to Title IV of ERISA, as of the Effective Time, the assets of each such Company Plan are at least equal in value to the present value of the accrued benefits (vested and unvested) of the participants in such Company Plan on a termination basis, based on the actuarial methods and assumptions indicated in the most recent actuarial valuation reports. 14 (e) Neither the Company nor any subsidiary is a party to any multiemployer plan within the meaning of section 4001(a)(3) of ERISA or any collective bargaining agreement. (f) With respect to any Company Plan, (i) no actions, suits or claims (other than routine claims for benefits in the ordinary course) are pending or, to the knowledge of the Company, threatened, and (ii) no facts or circumstances exist, to the knowledge of the Company, that could give rise to any such actions, suits or claims. (g) No Company Plan exists that could result in the payment to any present or former employee of the Company or any of its subsidiaries of any money or other property or accelerate or provide any other rights or benefits to any present or former employee of the Company or any of its subsidiaries as a result of the transaction contemplated by this Agreement, whether or not such payment would constitute a parachute payment within the meaning of Code section 280G. SECTION 3.11 Tax Matters. 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 has timely filed all Tax Returns required to be filed by it in the manner provided by law, has paid all Taxes (including interest and penalties) shown thereon to be due and has provided adequate reserves in its financial statements according to generally accepted accounting principles for any Taxes that have not been paid, whether or not shown as being due on any Tax Returns. All such Tax Returns were true, correct and complete in all material respects. Except as has been disclosed to Parent in Schedule 3.11 to the Company Disclosure Letter: (i) no material claim for unpaid Taxes has become a lien or encumbrance of any kind against the property of the Company or any of its subsidiaries or is being asserted against the Company or any of its subsidiaries; (ii) as of the date hereof no audit of any Tax Return of the Company or any of its subsidiaries is being conducted by a Tax authority; and (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. As used herein, "Taxes" shall mean any taxes of any kind, including but not limited to those on or measured by or referred to as income, gross receipts, capital, sales, use, ad valorem, franchise, profits, license, 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 authority. As used herein, "Tax Return" shall mean any return, report or statement required to be filed with any governmental authority with respect to Taxes. SECTION 3.12 Offer Documents; Proxy Statement. Neither the Schedule 14D-9, nor any of the information supplied by the Company for inclusion in the Offer Documents, shall, at the respective times such Schedule 14D-9, the Offer Documents or any amendments or supplements thereto are filed with the SEC or are first published, sent or given to stockholders, as the case may be, 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 were made, not misleading. Neither the proxy statement to be sent to the stockholders of the Company in connection with the Stockholders Meeting (as 15 defined in Section 6.1) or the information statement to be sent to such stockholders, as appropriate (such proxy statement or information statement, as amended or supplemented, is herein referred to as the "Proxy Statement"), shall, at the date the Proxy Statement (or any amendment thereof or supplement thereto) is first mailed to stockholders and at the time of the Stockholders Meeting, if any, and at the Effective Time, be false or misleading with respect to any material fact, or omit to state any material fact required to be stated therein or necessary in order to make the statements made therein, in the light of the circumstances under which they are made, not misleading or necessary to correct any statement in any earlier communication with respect to the solicitation of proxies for the Stockholders Meeting which has become false or misleading. Notwithstanding the foregoing, the Company makes no representation or warranty with respect to any information supplied by Parent or Purchaser or any of their respective representatives which is contained in the Schedule 14D-9 or the Proxy Statement. The Schedule 14D-9 and the Proxy Statement will comply in all material respects as to form with the requirements of the Exchange Act and the rules and regulations promulgated thereunder. SECTION 3.13 Environmental Matters. (a) Except as disclosed in SEC Reports filed and publicly available prior to the date of this Agreement and to the extent that the inaccuracy of any of the following (or the circumstances giving rise to such inaccuracy), individually or in the aggregate, is not reasonably likely to have a Material Adverse Effect or prevent or materially delay consummation of the Offer or the Merger: (i) the Company and its subsidiaries are, and within the period of all applicable statutes of limitation have been, in compliance with all applicable Environmental Laws; (ii) the Company and its subsidiaries hold all Environmental Permits (each of which is in full force and effect) required for any of their current operations and for any property owned, leased, or otherwise operated by any of them, and are, and within the period of all applicable statutes of limitation have been, in compliance with all such Environmental Permits; (iii) no review by, or approval of, any Governmental Authority or other person is required under any Environmental Law in connection with the execution or delivery of this Agreement or the consummation of the transactions contemplated hereby; (iv) neither the Company nor any of its subsidiaries has received any Environmental Claim (as hereinafter defined) against any of them, and the Company has no knowledge of any such Environmental Claim being threatened; (v) to the knowledge of the Company, Hazardous Materials are not present on any property owned, leased, or operated by the Company or any of its subsidiaries, that is reasonably likely to form the basis of any Environmental Claim against any of them; and the Company has no reason to believe that Hazardous Materials are present on any other property that is reasonably likely to form the basis of any Environmental Claim against any of them; 16 (vi) the Company has no knowledge of any material Environment Claim pending or threatened, or of the presence or suspected presence of any Hazardous Materials that is reasonably likely to form the basis of any Environmental Claim, in any case against any person or entity whose liability the Company or any of its subsidiaries has or may have retained or assumed either contractually or by operation of law. or against any real property which the Company or any of its subsidiaries formerly owned, leased, or operated, in whole or in part; and (vii) to the knowledge of the Company, the Company has informed the Parent and the Purchaser of: all material facts which the Company reasonably believes could form the basis of a material Environmental Claim against the Company or any of its subsidiaries arising out of the non-compliance or alleged non-compliance with any Environmental Law, or the presence or suspected presence of Hazardous Materials at any location. (b) For purposes of this Agreement, the terms below shall have the following meanings: "Environmental Claim" means any claim, demand, action, suit, complaint, proceeding, directive, investigation, lien, demand letter, or notice (written or oral) of noncompliance, violation, or liability, by any person or entity asserting liability or potential liability (including without limitation liability or potential liability for enforcement, investigatory costs, cleanup costs, governmental response costs, natural resource damages, property damage, personal injury, fines or penalties) arising out of, based on or resulting from (i) the presence, discharge, emission, release or threatened release of any Hazardous Materials at any location, (ii) circumstances forming the basis of any violation or alleged violation of any Environmental Laws or Environmental Permits, or (iii) otherwise relating to obligations or liabilities under any Environmental Law. "Environmental Laws" means any and all laws, rules, orders, regulations, statutes, ordinances, guidelines, codes, decrees, or other legally enforceable requirement (including, without limitation, common law) of any foreign government, the United States, or any state, local, municipal or other governmental authority, regulating, relating to or imposing liability or standards of conduct concerning protection of human health as affected by the environment or Hazardous Materials (including without limitation employee health and safety) or the environment (including without limitation indoor air, ambient air, surface water, groundwater, land surface, subsurface strata, or plant or animal species). "Environmental Permits" means all permits, licenses, registrations, approvals, exemptions and other filings with or authorizations by any Governmental Authority under any Environmental Law. "Governmental Authority" means any government, any state or other political subdivision thereof and any entity (including, without limitation, a court) exercising 17 executive, legislative, judicial, regulatory or administrative functions of or pertaining to government. "Hazardous Materials" means all hazardous or toxic substances, wastes, materials or chemicals, petroleum (including crude oil or any fraction thereof), petroleum products, asbestos, asbestos-containing materials, pollutants, contaminants, radioactivity, electromagnetic fields and all other materials, whether or not defined as such, that are regulated pursuant to any Environmental Laws or that could result in liability under any applicable Environmental Laws. SECTION 3.14 Real Estate Matters. (a) The Company or its subsidiaries has good, valid, and, in the case of Owned Properties (as defined below), marketable fee title to: (i) all of the material real property and interests in real property owned by the Company or its subsidiaries, except for properties sold or otherwise disposed of in the ordinary course of business (the "Owned Properties"), and (ii) all of the material leasehold estates in all real properties leased by the Company or its subsidiaries, except leasehold interests terminated in the ordinary course of business (the "Leased Properties"; the Owned Properties and Leased Properties being sometimes referred to herein as the "Real Properties"), in each case free and clear of all mortgages, liens, security interests, easements, covenants, rights-of-way, subleases and other similar restrictions and encumbrances ("Encumbrances"), except for Encumbrances which, individually or in the aggregate, are not reasonably likely to have a Material Adverse Effect. (b) Except to the extent that the inaccuracy of any of the following (or the circumstances giving rise to such inaccuracy), individually or in the aggregate, are not reasonably likely to have a Material Adverse Effect: (i) each of the agreements by which the Company has obtained a leasehold interest in each Leased Property (individually, a "Lease" and collectively, the "Leases") is in full force and effect in accordance with its respective terms and the Company or its subsidiary is the holder of the lessee's or tenant's interest thereunder; to the knowledge of the Company, there exists no default under any Lease and no circumstance exists which, with the giving of notice, the passage of time or both, is reasonably likely to result in such a default; the Company and its subsidiaries have complied with and timely performed all conditions, covenants, undertakings and obligations on their parts to be complied with or performed under each of the Leases; the Company and its subsidiaries have paid all rents and other charges to the extent due and payable under the Leases; (ii) there are no leases, subleases, licenses, concessions or any other contracts or agreements granting to any person or entity other than the Company or any of its subsidiaries any right to the possession, use, occupancy or enjoyment of any Real Property or any portion thereof; (iii) the current operation and use of the Real Properties does not violate any statute, law, regulation, rule, ordinance, permit, requirement, order or decree now in effect; the use being made of each Real Property at present is in conformity with the certificate of occupancy issued for such Real Property; (iv) there are no existing, or to the knowledge of the Company, threatened, condemnation or eminent domain proceedings (or proceedings in lieu thereof) affecting the Real Properties or any portion thereof; (v) no default or breach exists under any of the covenants, conditions, restrictions, rights-of-way, or easements, if any, affecting all or any portion of a Real Property, which are to be performed or complied with by the Company or any of its subsidiaries; and (vi) all the buildings, structures, equipment and other tangible 18 assets of the Company (whether owned or leased) are in normal operating condition (normal wear and tear excepted) and are fit for use in the ordinary course of business. (c) Neither the Company nor any of its subsidiaries is obligated under or bound by any option, right of first refusal, purchase contract, or other contractual right to sell or dispose of any Owned Property or any portions thereof or interests therein which property, portions and interests, individually or in the aggregate, are material to the Company and its subsidiaries. SECTION 3.15 Brokers. No broker, finder or investment banker (other than the Financial Adviser) is entitled to any brokerage, finder's or other fee or commission in connection with the transactions contemplated by this Agreement based upon arrangements made by and on behalf of the Company. The Company has heretofore furnished to Parent information concerning the fee which will be payable to the Financial Advisor in connection with the transactions contemplated hereby. ARTICLE IV REPRESENTATIONS AND WARRANTIES OF PARENT AND PURCHASER Parent and Purchaser hereby, jointly and severally, represent and warrant to the Company that: SECTION 4.1 Corporate Organization. Each of Parent and Purchaser is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware and has the requisite corporate power and authority and any necessary governmental authority to own, operate or lease its properties and to carry on its business as it is now being conducted, except where the failure to be so organized, existing and in good standing or to have such power, authority and governmental approvals is not, individually or in the aggregate, reasonably likely to prevent the consummation of the Offer or the Merger. SECTION 4.2 Authority Relative to This Agreement. Each of Parent and Purchaser has all necessary corporate power and authority to enter into this Agreement, to perform its obligations hereunder and to consummate the transactions contemplated hereby. The execution, delivery and performance of this Agreement by each of Parent and Purchaser and the consummation by each of Parent and Purchaser of the transactions contemplated hereby have been duly authorized by all necessary corporate action on the part of Parent and Purchaser other than filing and recordation of appropriate merger documents as required by the DGCL. This Agreement has been duly executed and delivered by Parent and Purchaser and, assuming due authorization, execution and delivery by the Company, constitutes a legal, valid and binding obligation of each such corporation enforceable against such corporation in accordance with its terms. SECTION 4.3 No Conflict; Required Filings and Consents. (a) The execution, delivery and performance of this Agreement by Parent and Purchaser do not and will not: (i) 19 conflict with or violate the respective certificates of incorporation or by-laws of Parent or Purchaser; (ii) assuming that all consents, approvals and authorizations contemplated by clauses (i), (ii) and (iii) of subsection (b) below have been obtained and all filings described in such clauses have been made, conflict with or violate any law, rule, regulation, order, judgment or decree applicable to Parent or Purchaser or by which either of them or their respective properties are bound or affected; or (iii) result in any breach or violation of or constitute a default (or an event which with notice or lapse of time or both could become a default) or result in the loss of a material benefit under, or give rise to any right of termination, amendment, acceleration or cancellation of, or result in the creation of a lien or encumbrance on any of the property or assets of Parent or Purchaser pursuant to, any note, bond, mortgage, indenture, contract, agreement, lease, license, permit, franchise or other instrument or obligation to which Parent or Purchaser is a party or by which Parent or Purchaser or any of their respective properties are bound or affected, except, in the case of clauses (ii) and (iii), for any such conflicts, violations, breaches, defaults or other occurrences which are not, individually or in the aggregate, reasonably likely to prevent or materially delay the consummation of the Offer or the Merger. (b) The execution, delivery and performance of this Agreement by Parent and Purchaser do not and will not require any consent, approval, authorization or permit of, action by, filing with or notification to, any governmental or regulatory authority, except (i) for applicable requirements, if any, of the Exchange Act and the rules and regulations promulgated thereunder, the HSR Act, state securities, takeover and "blue sky" laws, (ii) the filing and recordation of appropriate merger or other documents as required by the DGCL, and (iii) such consents, approvals, authorizations, permits, actions, filings or notifications the failure of which to make or obtain are not, individually or in the aggregate, reasonably likely to prevent the consummation of the Offer or the Merger. SECTION 4.4 Offer Documents; Proxy Statement. The Offer Documents, as filed pursuant to Section 1.1, will not, at the time such Offer Documents are filed with the SEC or are first published, sent or given to stockholders, as the case may be, contain any untrue statement of a material fact or omit to state any material fact required to be stated or incorporated by reference therein or necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading. The information supplied by Parent for inclusion in the Proxy Statement shall not, on the date the Proxy Statement is first mailed to stockholders, at the time of the Stockholders Meeting (as defined in Section 6.1), if any, or at the Effective Time, contain any statement which, at such time and in light of the circumstances under which it shall be made, is false or misleading with respect to any material fact, or shall omit to state a material fact required to be stated therein or necessary in order to make the statements therein not false or misleading or necessary to correct any statement in any earlier communication with respect to the solicitation of proxies for the Stockholders Meeting which has become false or misleading. Notwithstanding the foregoing, Parent and Purchaser make no representation or warranty with respect to any information supplied by the Company or any of its representatives which is contained in or incorporated by reference in any of the foregoing documents or the Offer Documents. The Offer Documents, as amended and supplemented, will comply in all material respects as to form with the requirements of the Exchange Act and the rules and regulations promulgated thereunder. 20 SECTION 4.5 Brokers. No broker, finder or investment banker (other than Morgan Stanley & Co. Incorporated) is entitled to any brokerage, finder's or other fee or commission in connection with the transactions contemplated by this Agreement based upon arrangements made by and on behalf of Parent or Purchaser. SECTION 4.6 Funds. Parent or Purchaser, at the expiration date of the Offer and at the Effective Time, will have the funds necessary to consummate the Offer and the Merger, respectively. ARTICLE V CONDUCT OF BUSINESS PENDING THE MERGER SECTION 5.1 Conduct of Business of the Company Pending the Merger. The Company covenants and agrees that, during the period from the date hereof to the Effective Time, unless Parent shall otherwise agree in writing, the businesses of the Company and its subsidiaries shall be conducted only in, and the Company and its subsidiaries shall not take any action except in, the ordinary course of business and in a manner consistent with past practice; and the Company and its subsidiaries shall each use its reasonable best efforts to preserve substantially intact the business organization of the Company and its subsidiaries, to keep available the services of the present officers, employees and consultants of the Company and its subsidiaries and to preserve the present relationships of the Company and its subsidiaries with customers, suppliers and other persons with which the Company or any of its subsidiaries has significant business relations. By way of amplification and not limitation, neither the Company nor any of its subsidiaries shall, between the date of this Agreement and the Effective Time, directly or indirectly do, or commit to do, any of the following without the prior written consent of Parent: (a) Amend or otherwise change its certificate of incorporation or by-laws or equivalent organizational documents; (b) Issue, deliver, sell, pledge, dispose of or encumber, or authorize or commit to the issuance, sale, pledge, disposition or encumbrance of, (i) any shares of capital stock of any class, or any options, warrants, convertible securities or other rights of any kind to acquire any shares of capital stock, or any other ownership interest (including but not limited to stock appreciation rights or phantom stock), of the Company or any of its subsidiaries (except for the issuance of up to 95,500 shares of Common Stock required to be issued pursuant to the terms of Options outstanding as of May 16, 1998) or (ii) any material assets of the Company or any of its subsidiaries, except for sales of inventory in the ordinary course of business and in a manner consistent with past practice; (c) Declare, set aside, make or pay any dividend or other distribution, payable in cash, stock, property or otherwise, with respect to any of its capital stock (other than regular quarterly dividends consistent with past practice, in an amount not to exceed $.32 per share); 21 (d) Reclassify, combine, split, subdivide or redeem, purchase or otherwise acquire, directly or indirectly, any of its capital stock; (e) (i) Acquire (by merger, consolidation, or acquisition of stock or assets) any corporation, partnership or other business organization or division thereof; (ii) incur any indebtedness for borrowed money (except for drawdowns on the Company's existing credit facility in the ordinary course of business consistent with past practice) or issue any debt securities or assume, guarantee or endorse, or otherwise as an accommodation become responsible for, the obligations of any person, or make any loans, advances or capital contributions to, or investments in, any other person; (iii) enter into any contract or agreement other than in the ordinary course of business consistent with past practice; or (iv) except as set forth in Schedule 5.1(e)(iv) of the Company Disclosure Letter, other than as provided in the Company's capital expenditure budget (a copy of which was provided to Parent) authorize any single capital expenditure which is in excess of $200,000 or capital expenditures which are, in the aggregate, in excess of $1,000,000 for the Company and its subsidiaries taken as a whole; (f) Except to the extent required under existing employee and director benefit plans, agreements or arrangements as in effect on the date of this Agreement, increase the compensation or fringe benefits of any of its directors, officers or employees, except for increases in salary or wages of employees of the Company or its subsidiaries who are not officers of the Company in the ordinary course of business in accordance with past practice, or grant any severance or termination pay not currently required to be paid under existing severance plans to or enter into any employment, consulting or severance agreement or arrangement with any present or former director, officer or other employee of the Company or any of its subsidiaries, or establish, adopt, enter into or amend or terminate any collective bargaining agreement or Company Plan, including, but not limited to, bonus, profit sharing, thrift, compensation, stock option, restricted stock, pension, retirement, deferred compensation, employment, termination, severance or other plan, agreement, trust, fund, policy or arrangement for the benefit of any directors, officers or employees; (g) Except as may be required as a result of a change in law or in generally accepted accounting principles, change any of the accounting practices or principles used by it; (h) Make any material Tax election, change any material method of Tax accounting or settle or compromise any material federal, state, local or foreign Tax liability; (i) Settle or compromise any pending or threatened suit, action or claim which is material or which relates to the transactions contemplated hereby; (j) Adopt a plan of complete or partial liquidation, dissolution, merger, consolidation, restructuring, recapitalization or other reorganization of the Company or any of its subsidiaries not constituting an inactive subsidiary (other than the Merger); 22 (k) Pay, discharge or satisfy any claims, liabilities or obligations (absolute, accrued, asserted or unasserted, contingent or otherwise), other than the payment, discharge or satisfaction (i) in the ordinary course of business and consistent with past practice of liabilities reflected or reserved against in the Company Financial Statements or incurred in the ordinary course of business and consistent with past practice and (ii) of liabilities required to be paid, discharged or satisfied pursuant to the terms of any contract in existence on the date hereof (including, without limitation, benefit plans relating to directors); or (l) Take, or offer or propose to take, or agree to take in writing or otherwise, any of the actions described in Sections 5.1(a) through 5.1(k) or any action which would make any of the representations or warranties of the Company contained in this Agreement untrue and incorrect as of the date when made if such action had then been taken, or would result in any of the conditions set forth in Annex A not being satisfied. ARTICLE VI ADDITIONAL AGREEMENTS SECTION 6.1 Stockholders Meeting. (a) If adoption of this Agreement is required by applicable law, the Company, acting through its Board of Directors, shall in accordance with and subject to applicable law and the Company's Certificate of Incorporation and By-Laws, (i) duly call, give notice of, convene and hold a meeting of its stockholders as soon as practicable following consummation of the Offer for the purpose of adopting this Agreement and the transactions contemplated hereby (the "Stockholders Meeting") and (ii) except if the Board of Directors by majority vote determines in good faith, based on the advice of outside legal counsel to the Company that to do so would constitute a breach of fiduciary duty under applicable law, (A) include in the Proxy Statement the unanimous recommendation of the Board of Directors that the stockholders of the Company vote in favor of the adoption of this Agreement and the written opinion of the Financial Adviser that the consideration to be received by the stockholders of the Company pursuant to the Offer and the Merger is fair to such stockholders and (B) use its reasonable best efforts to obtain the necessary adoption of this Agreement. At the Stockholders Meeting, Parent and Purchaser shall cause all Shares then owned by them and their subsidiaries to be voted in favor of adoption of this Agreement. (b) Notwithstanding the foregoing, in the event that Purchaser shall acquire at least 90% of the outstanding Shares, the Company agrees, at the request of Purchaser, subject to Article VII, to take all necessary and appropriate action to cause the Merger to become effective as soon as reasonably practicable after such acquisition, without a meeting of the Company's stockholders, in accordance with Section 253 of the DGCL. SECTION 6.2 Proxy Statement. If required by applicable law, as soon as practicable following Parent's request, the Company shall file with the SEC under the Exchange Act and the rules and regulations promulgated thereunder, and shall use its reasonable best efforts 23 to have cleared by the SEC, the Proxy Statement with respect to the Stockholders Meeting. Parent, Purchaser and the Company will cooperate with each other in the preparation of the Proxy Statement; without limiting the generality of the foregoing, each of Parent and Purchaser will furnish to the Company the information relating to it required by the Exchange Act and the rules and regulations promulgated thereunder to be set forth in the Proxy Statement. The Company agrees to use its reasonable best efforts, after consultation with the other parties hereto, to respond promptly to any comments made by the SEC with respect to the Proxy Statement and any preliminary version thereof filed by it and cause such Proxy Statement to be mailed to the Company's stockholders at the earliest practicable time. SECTION 6.3 Company Board Representation; Section 14(f). (a) Promptly upon the purchase by Purchaser of Shares pursuant to the Offer, and from time to time thereafter, Purchaser shall be entitled to designate up to such number of directors, rounded up to the next whole number, on the Board of Directors of the Company as shall give Purchaser representation on the Board of Directors equal to the product of the total number of directors on such Board (giving effect to the directors elected pursuant to this sentence and including any vacancies or unfilled newly-created directorships) multiplied by the percentage that the aggregate number of Shares beneficially owned by Purchaser or any affiliate of Purchaser bears to the total number of Shares then outstanding, and the Company shall amend, or cause to be amended its by-laws to provide for each of the matters set forth in this Section 6.3 and shall, at such time, promptly take all action necessary to cause Purchaser's designees to be so elected, including either increasing the size of the Board of Directors or securing the resignations of incumbent directors or both. At such times, the Company will use its reasonable best efforts to cause persons designated by Purchaser to constitute the same percentage as is on the board of (i) each committee of the Board of Directors, (ii) each board of directors of each subsidiary of the Company and (iii) each committee of each such board, in each case only to the extent permitted by law. Until Purchaser acquires a majority of the outstanding Shares on a fully diluted basis, the Company shall use its reasonable best efforts to ensure that all the members of the Board of Directors and such boards and committees as of the date hereof who are not employees of the Company shall remain members of the Board of Directors and such boards and committees. (b) The Company's obligations to appoint designees to its Board of Directors shall be subject to Section 14(f) of the Exchange Act and Rule 14f-1 promulgated thereunder. The Company shall promptly take all actions required pursuant to Section 14(f) and Rule 14f-1 in order to fulfill its obligations under this Section 6.3 and shall include in the Schedule 14D-9 or a separate Rule 14f-1 information statement provided to stockholders such information with respect to the Company and its officers and directors as is required under Section 14(f) and Rule 14f-1 to fulfill its obligations under this Section 6.3. Parent or Purchaser will supply to the Company and be solely responsible for any information with respect to either of them and their nominees, officers, directors and affiliates required by Section 14(f) and Rule 14f-1. (c) In addition to any vote of the Board of Directors required by law, the Certificate of Incorporation or the By-laws of the Company, following the election or appointment of Purchaser's designees pursuant to this Section 6.3 and prior to the Effective Time, the concurrence of a majority of the directors of the Company then in office who are neither designated by Purchaser nor are employees of the Company (the "Disinterested Directors") will 24 be required to authorize any amendment, or waiver of any term or condition, of this Agreement or the Certificate of Incorporation or By-Laws of the Company, any termination of this Agreement by the Company, any extension by the Company of the time for the performance of any of the obligations or other acts of Purchaser or waiver or assertion of any of the Company's rights hereunder, the awarding of the $3 million pursuant to the terms of the Company's incentive performance plan, and any other consent or action by the Board of Directors with respect to this Agreement. Notwithstanding Section 6.3(a) hereof, the number of Disinterested Directors shall be not less than three; provided, however, that, in such event, if the number of Disinterested Directors shall be reduced below three for any reason, the remaining Disinterested Director(s) shall be entitled to designate persons to fill such vacancies who shall be deemed to be Disinterested Directors for purposes of this Agreement, or if no Disinterested Directors then remain, the other directors who were directors prior to the date hereof shall designate three persons to fill such vacancies who shall not be officers, stockholders or affiliates of the Company, Parent or Purchaser, and such persons shall be deemed to be Disinterested Directors for purposes of this Agreement. SECTION 6.4 Access to Information; Confidentiality. (a) From the date hereof to the Effective Time, the Company shall, and shall cause its subsidiaries, officers, directors, employees, auditors and other agents to, afford the officers, employees, auditors and other agents of Parent, and financing sources who shall agree to be bound by the provisions of this Section 6.4 as though a party hereto, complete access, consistent with applicable law, at all reasonable times to its officers, employees, agents, properties, offices, plants and other facilities and to all books and records, and shall furnish Parent and such financing sources with all financial, operating and other data and information as Parent, through its officers, employees or agents, or such financing sources may from time to time reasonably request. Notwithstanding the foregoing, any such investigation or consultation shall be conducted in such a manner as not to interfere unreasonably with the business or operations of the Company or its subsidiaries. (b) As soon as practicable after the date of this Agreement, Company and Parent shall cooperate in good faith to develop a plan (the "Plan") with respect to the communications with their respective employees and the employees of their respective subsidiaries regarding the transactions contemplated by this Agreement. Prior to consummation of the Offer, Parent shall use its reasonable best efforts to coordinate any communications to the Company's employees (including employees of the Company's subsidiaries) through the officers of the Company and in a manner that will not disrupt the operations of the Company. (c) All information obtained by Parent and Purchaser pursuant to this Section 6.4 shall be kept confidential in accordance with the Confidentiality Agreement, dated on or about May 7, 1998 (the "Parent Confidentiality Agreement"), between Parent and the Company; provided, that Parent shall not be prohibited from sharing information with any potential purchaser of assets in connection with the future divestiture of any of the Company's stores or assets. (d) No investigation pursuant to this Section 6.4 shall affect any representations or warranties of the parties herein or the conditions to the obligations of the parties hereto. 25 SECTION 6.5 No Solicitation of Transactions. The Company, its affiliates and their respective officers, directors, employees, representatives and agents shall immediately cease any existing discussions or negotiations, if any, with any parties conducted heretofore with respect to any acquisition or exchange of all or any material portion of the assets of, or any equity interest in, the Company or any of its subsidiaries or any business combination with or involving the Company or any of its subsidiaries. At any time prior to consummation of the Offer, the Company may, directly or indirectly, furnish information and access, in each case only in response to a request for such information or access to any person made after the date hereof which was not encouraged, solicited or initiated by the Company or any of its affiliates or any of its or their respective officers, directors, employees, representatives or agents after the date hereof, pursuant to appropriate confidentiality agreements containing terms and conditions (including standstill provisions) that are no less favorable than the terms and conditions contained in the Parent Confidentiality Agreement, and may participate in discussions and negotiate with such person concerning any merger, sale of assets, sale of shares of capital stock or similar transaction (including an exchange of stock or assets) involving the Company or any subsidiary or division of the Company, in each case (whether furnishing information and access or participating in discussions and negotiations) only if such person has submitted a written proposal to the Board of Directors of the Company relating to any such transaction and the Board by a majority vote determines in good faith, based upon the advice of outside counsel to the Company, that failing to take such action would constitute a breach of the Board's fiduciary duty under applicable law. The Board shall provide a copy of any such written proposal to Parent immediately after receipt thereof, shall notify Parent immediately if any proposal (oral or written) is made and shall in such notice, indicate in reasonable detail the identity of the offeror and the terms and conditions of any proposal and shall keep Parent promptly advised of all developments which could reasonably be expected to culminate in the Board of Directors withdrawing, modifying or amending its recommendation of the Offer, the Merger and the other transactions contemplated by this Agreement. Except as set forth in this Section 6.5, neither the Company or any of its affiliates, nor any of its or their respective officers, directors, employees, representatives or agents, shall, directly or indirectly, encourage, solicit, participate in or initiate discussions or negotiations with, or provide any information to, any corporation, partnership, person or other entity or group (other than Parent and Purchaser, any affiliate or associate of Parent and Purchaser or any designees of Parent or Purchaser) concerning any merger, sale of any material portion or assets, sale of any shares of capital stock or similar transactions (including an exchange of stock or assets) involving the Company or any subsidiary or division of the Company; provided, however, that nothing herein shall prevent the Board from taking, and disclosing to the Company's stockholders, a position contemplated by Rules 14d-9 and 14e-2 promulgated under the Exchange Act with regard to any tender offer; provided, further, that the Board shall not recommend that the stockholders of the Company tender their Shares in connection with any such tender offer unless the Board by majority vote shall have determined in good faith, based upon the advice of outside counsel to the Company, that failing to take such action would constitute a breach of the Board's fiduciary duty under applicable law. The Company agrees not to release any third party from, or waive any provisions of, any confidentiality or standstill agreement to which the Company is a party, unless the Board by majority vote shall have determined in good faith, based upon the advice of outside counsel, that failing to release such third party or waive such provisions would constitute a breach of the fiduciary duties of the Board of Directors under applicable law. 26 SECTION 6.6 Employee Benefits Matters. (a) On and after the Effective Time, Parent shall cause the Surviving Corporation and its subsidiaries to promptly pay or provide when due all compensation and benefits earned through or prior to the Effective Time as provided pursuant to the terms of any compensation arrangements, employment agreements and employee or director benefit plans, programs and policies in existence as of the date hereof for all employees (and former employees) and directors (and former directors) of the Company and its subsidiaries (including all compensation and benefits earned through the Effective Time pursuant to the Company Plans set forth in Schedule 3.10(a) of the Company Disclosure Letter). Parent and the Company agree that the Surviving Corporation and its subsidiaries shall pay promptly or provide when due all compensation and benefits required to be paid pursuant to the terms of any individual agreement with any employee, former employee, director or former director in effect as of the date hereof and disclosed in Schedule 3.10(a) of the Company Disclosure Letter. (b) Except as set forth in Schedule 6.6(b) of the Company Disclosure Letter, Parent shall cause the Surviving Corporation, for the period commencing at the Effective Time and ending on the second anniversary thereof, to provide employee benefits under plans, programs and arrangements which, in the aggregate, will provide benefits to the employees of the Surviving Corporation and its subsidiaries (other than employees covered by a collective bargaining agreement) which are no less favorable in the aggregate than those provided to Parent's similarly situated employees pursuant to the plans, programs and arrangements (other than those related to the equity securities of the Company) of Parent and its subsidiaries in effect on the date hereof and employees covered by collective bargaining agreements shall be provided with such benefits as shall be required under the terms of any applicable collective bargaining agreement; provided, however, that nothing herein shall prevent the amendment or termination of any specific plan, program or arrangement, require that the Surviving Corporation provide or permit investment in the securities of Parent, the Company or the Surviving Corporation or interfere with the Surviving Corporation's right or obligation to make such changes as are necessary to conform with applicable law. Employees of the Surviving Corporation shall be given credit for all service with the Company and its subsidiaries, to the same extent as such service was credited for such purpose by the Company, under each employee benefit plan, program, or arrangement of the Parent in which such employees are eligible to participate for purposes of eligibility and vesting; provided, however, that in no event shall the employees be entitled to any credit to the extent that it would result in a duplication of benefits with respect to the same period of service. (c) If employees of the Surviving Corporation and its subsidiaries become eligible to participate in a medical, dental or health plan of Parent or its subsidiaries, Parent shall cause such plan to (i) waive any preexisting condition limitations for conditions covered under the applicable medical, health or dental plans of the Company and its subsidiaries and (ii) honor any deductible and out-of-pocket expenses incurred by the employees and their beneficiaries under such plans during the portion of the calendar year prior to such participation. (d) Nothing in this Section 6.6 shall require the continued employment of any person or, with respect to clauses (b) and (c) hereof, prevent the Company and/or the Surviving Corporation and their subsidiaries from taking any action or refraining from taking any action 27 which the Company and its subsidiaries prior to the Effective Time, could have taken or refrained from taking. SECTION 6.7 Directors' and Officers' Indemnification and Insurance. (a) The Certificate of Incorporation and By-Laws of the Surviving Corporation shall contain provisions no less favorable with respect to indemnification than are set forth in the Certificate of Incorporation and By-laws of the Company, which provisions shall not be amended, repealed or otherwise modified for a period of six years from the Effective Time in any manner that would adversely affect the rights thereunder of individuals who at the Effective Time were directors, officers or employees of the Company. (b) Parent shall use its reasonable best efforts to cause to be maintained in effect for six years from the Effective Time the current policies of the directors' and officers' liability insurance maintained by the Company (provided that Parent may substitute therefor policies of at least the same coverage containing terms and conditions which are not materially less advantageous) with respect to matters occurring prior to the Effective Time to the extent such insurance is reasonably available. (c) For six years after the Effective Time, Parent agrees that it will or will cause the Surviving Corporation to indemnify and hold harmless each present and former director and officer of the Company, determined as of the Effective Time (the "Indemnified Parties"), against any costs or expenses (including reasonable attorneys' fees), judgments, fines, losses, claims, damages or liabilities (collectively, "Costs") (but only to the extent such Costs are not otherwise covered by insurance and paid) incurred in connection with any claim, action, suit, proceeding or investigation, whether civil, criminal, administrative or investigative (collectively, "Claims"), arising out of or pertaining to matters existing or occurring at or prior to the Effective Time, whether asserted or claimed prior to, at or after the Effective Time, to the fullest extent permitted under applicable law (and Parent shall, or shall cause the Surviving Corporation to, also advance expenses as incurred to the fullest extent permitted under applicable law provided the person to whom expenses are advanced provides an undertaking to repay such advances if it is ultimately determined that such person is not entitled to indemnification). (d) Any Indemnified Party wishing to claim indemnification under Section 6.7(c), upon learning of any such Claim, shall promptly notify Parent thereof, but the failure to so notify shall not relieve Parent of any liability it may have to such Indemnified Party if such failure does not materially prejudice Parent. In the event of any such Claim (whether arising before or after the Effective Time), (i) Parent or the Surviving Corporation shall have the right to assume the defense thereof with counsel reasonably acceptable to the Indemnified Parties and Parent shall not be liable to such Indemnified Parties for any legal expenses of other counsel or any other expenses subsequently incurred by such Indemnified Parties in connection with the defense thereof, except that if Parent or the Surviving Corporation elects not to assume such defense or counsel for the Indemnified Parties advises that there are issues that raise conflicts of interest between Parent or the Surviving Corporation and the Indemnified Parties, the Indemnified Parties may retain counsel satisfactory to them, and Parent or the Surviving Corporation shall pay all reasonable fees and expenses of such counsel for the Indemnified Parties promptly as statements therefor are received; provided, however, that Parent shall be obligated pursuant to 28 this paragraph (d) to pay for only one firm of counsel for all Indemnified Parties in any jurisdiction unless the use of one counsel for such Indemnified Parties would present such counsel with a conflict of interest, (ii) the Indemnified Parties will cooperate in the defense of any such matter and (iii) Parent shall not be liable for any settlement effected without its prior written consent, which consent shall not be unreasonably withheld; and provided, further, that Parent shall not have any obligation hereunder to any Indemnified Party when and if a court of competent jurisdiction shall ultimately determine, and such determination shall have become final, that the indemnification of such Indemnified Party in the manner contemplated hereby is prohibited by applicable law. SECTION 6.8 Postponement of Annual Meeting. The Company shall as soon as possible indefinitely postpone its annual meeting of stockholders currently scheduled for May 27, 1998, and shall take no action unless compelled by legal process to reschedule such annual meeting or to call a special meeting of stockholders of the Company except in accordance with this Agreement unless and until this Agreement has been terminated in accordance with its terms. SECTION 6.9 Notification of Certain Matters. The Company shall give prompt notice to Parent, and Parent shall give prompt notice to the Company, of the occurrence or non-occurrence of (i) any event the occurrence or non-occurrence of which would be likely to cause any representation or warranty contained in this Agreement to be untrue or inaccurate in any material respect and (ii) any failure of the Company, Parent or Purchaser, as the case may be, to comply with or satisfy in any material respect any covenant, condition or agreement to be complied with or satisfied by it 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. SECTION 6.10 Further Action; Reasonable Best Efforts. (a) Upon the terms and subject to the conditions hereof, each of the parties hereto shall use its reasonable best efforts to take, or cause to be taken, all appropriate action, and to do or cause to be done, all things necessary, proper or advisable under applicable laws and regulations to consummate and make effective the transactions contemplated by this Agreement as soon as practicable, including but not limited to (i) cooperation in the preparation and filing of the Offer Documents, the Schedule 14D-9, the Proxy Statement, any required filings under the HSR Act and any amendments to any thereof, (ii) cooperation with respect to consummating the financing for the Offer and the Merger and (iii) using its reasonable best efforts to promptly make all required regulatory filings and applications including, without limitation, responding promptly to requests for further information and to obtain all licenses, permits, consents, approvals, authorizations, qualifications and orders of governmental authorities and parties to contracts with the Company and its subsidiaries and Parent and its subsidiaries as are necessary for the consummation of the transactions contemplated by this Agreement and to fulfill the conditions to the Offer and the Merger. In case at any time after the Effective Time any further action is necessary or desirable to carry out the purposes of this Agreement, the proper officers and directors of each party to this Agreement shall use their reasonable best efforts to take all such necessary action. (b) The Company and Parent each shall keep the other apprised of the status of matters relating to completion of the transactions contemplated hereby, including promptly 29 furnishing the other with copies of notices or other communications received by Parent or the Company, as the case may be, or any of their subsidiaries, from any governmental authority with respect to the Offer or the Merger or any of the other transactions contemplated by this Agreement. The parties hereto will consult and cooperate with one another, and consider in good faith the views of one another in connection with any analyses, appearances, presentations, memoranda, briefs, arguments, opinions and proposals made or submitted by or on behalf of any party hereto in connection with proceedings under or relating to the HSR Act or any other antitrust law. (c) Each party shall timely and promptly make all filings which are required under the HSR Act and Parent shall pay the filing fee. Each party will furnish to the other such necessary information and reasonable assistance as it may request in connection with its preparation of such filings. Each party will supply the other with copies of all correspondence, filings or communications between such party or its representatives and the Federal Trade Commission, the Antitrust Division of the United States Department of Justice or any other governmental agency or authority or members of their respective staffs with respect to this Agreement or the transactions contemplated hereby. SECTION 6.11 Public Announcements. Parent and the Company shall consult with each other before issuing any press release or otherwise making any public statements with respect to the Offer or the Merger and shall not issue any such press release or make any such public statement prior to such consultation, except as may be required by law or any listing agreement with its securities exchange. SECTION 6.12 Disposition of Litigation. (a) The Company agrees that it will not settle any litigation currently pending, or commenced after the date hereof, against the Company or any of its directors by any stockholder of the Company relating to the Offer or this Agreement, without the prior written consent of Parent (which shall not be unreasonably withheld). (b) The Company will not voluntarily cooperate with any third party which has sought or may hereafter seek to restrain or prohibit or otherwise oppose the Offer or the Merger and will cooperate with Parent and Purchaser to resist any such effort to restrain or prohibit or otherwise oppose the Offer or the Merger. ARTICLE VII CONDITIONS OF MERGER SECTION 7.1 Conditions to Obligation of Each Party to Effect the Merger. The respective obligations of each party to effect the Merger shall be subject to the satisfaction at or prior to the Effective Time of the following conditions: (a) If required by the DGCL, this Agreement shall have been adopted by the affirmative vote of the stockholders of the Company by the requisite vote in accordance 30 with the Company's Certificate of Incorporation and the DGCL (which the Company has represented shall be solely the affirmative vote of a majority of the outstanding Shares). (b) No statute, rule, regulation, executive order, decree, ruling, injunction or other order (whether temporary, preliminary or permanent) shall have been enacted, entered, promulgated or enforced by any United States, foreign, federal or state court or governmental authority which prohibits, restrains, enjoins or restricts the consummation of the Merger; provided, however, that prior to invoking this condition each party agrees to comply with Section 6.10. (c) Purchaser shall have purchased Shares pursuant to the Offer. (d) Any waiting period applicable to the Merger under the HSR Act shall have terminated or expired. ARTICLE VIII TERMINATION, AMENDMENT AND WAIVER SECTION 8.1 Termination. This Agreement may be terminated and the Merger contemplated hereby may be abandoned at any time prior to the Effective Time, notwithstanding approval thereof by the stockholders of the Company: (a) By mutual written consent of Parent, Purchaser and the Company; (b) By Parent or the Company if any court of competent jurisdiction or other governmental body located or having jurisdiction within the United States shall have issued a final order, injunction, decree, judgment or ruling or taken any other final action restraining, enjoining or otherwise prohibiting the Offer or the Merger and such order, injunction, decree, judgment, ruling or other action is or shall have become final and nonappealable; provided, however, that prior to invoking this right of termination each party agrees to comply with Section 6.10; (c) By Parent if due to an occurrence or circumstance which resulted in a failure to satisfy any of the Offer Conditions (other than as a result of a breach by Parent or Purchaser of its obligations hereunder), Purchaser shall have (i) terminated the Offer or (ii) failed to pay for Shares pursuant to the Offer on or prior to the Outside Date (as defined below); (d) By the Company if (i) there shall have been a material breach of any covenant or agreement on the part of Parent or the Purchaser contained in this Agreement which materially adversely affects Parent's or Purchaser's ability to consummate (or materially delays commencement or consummation of) the Offer, and which shall not have been cured prior to the earlier of (A) 10 business days following notice of such breach and (B) two business days prior to the date on which the Offer expires, (ii) 31 Purchaser shall have (A) terminated the Offer or (B) failed to pay for Shares pursuant to the Offer on or prior to the Outside Date (unless such failure is caused by or results from the failure of any representation or warranty of the Company to be true and correct in any material respect or the failure of the Company to perform in any material respect any of its covenants or agreements contained in this Agreement) or (iii) prior to the purchase of Shares pursuant to the Offer, any person shall have made a bona fide offer to acquire the Company (A) that the Board of Directors of the Company by majority vote determines in its good faith judgment is more favorable to the Company's stockholders than the Offer and the Merger and (B) as a result of which the Board of Directors by majority vote determines in good faith, based upon the advice of outside counsel, that it is obligated by its fiduciary obligations under applicable law to terminate this Agreement, provided that such termination under this clause (iii) shall not be effective until the Company has made payment of the full fee and expense reimbursement required by Section 8.3; or (e) By Parent prior to the purchase of Shares pursuant to the Offer, if (i) there shall have been a breach of any representation, warranty, covenant or agreement on the part of the Company contained in this Agreement which is reasonably likely to have a Material Adverse Effect, which shall not have been cured prior to the earlier of (A) 10 business days following notice of such breach and (B) two business days prior to the date on which the Offer expires, (ii) the Board shall have withdrawn or modified (including by amendment of the Schedule 14D-9) in a manner adverse to Purchaser its approval or recommendation of the Offer, this Agreement or the Merger or shall have recommended another offer or transaction in accordance with Section 6.5, shall have resolved to effect any of the foregoing, or (iii) the Minimum Condition shall not have been satisfied by the expiration date of the Offer as it may have been extended pursuant hereto and on or prior to such date (A) any person (including the Company but not including Parent or Purchaser) shall have made a public announcement, disclosure or communication to the Company with respect to a Third Party Acquisition or (B) any person (including the Company or any of its affiliates or subsidiaries), other than Parent or any of its affiliates, shall have become (and remain at the time of termination) the beneficial owner of 19.9% or more of the Shares (unless such person shall have tendered and not withdrawn such person's Shares pursuant to the Offer). As used herein, the "Outside Date" shall mean the latest of (I) 70 days following the date hereof or (II) the date that all conditions to the Offer set forth in paragraph (h) of the Offer Conditions, the satisfaction of which involve compliance with or otherwise relate to any United States antitrust or competition laws or regulations (including any enforcement thereof), have been satisfied for a period of 10 business days; provided that in no event shall the Outside Date be later than January 31, 1999. SECTION 8.2 Effect of Termination. In the event of the termination of this Agreement pursuant to Section 8.1, this Agreement shall forthwith become void and there shall be no liability on the part of any party hereto except as set forth in Section 8.3 and Section 9.1; provided, however, that nothing herein shall relieve any party from liability for any wilful breach hereof; provided, further, that the payment of the termination fee set forth in Section 8.3(a)(i) shall be considered with respect to the calculation of any damages resulting from any such wilful breach by the Company. 32 SECTION 8.3 Fees and Expenses. (a) If: (i) Parent terminates this Agreement pursuant to Section 8.1(e)(i) hereof, or if the Company terminates this Agreement pursuant to Section 8.1(d)(ii) hereof under circumstances that would have permitted Parent to terminate this Agreement pursuant to Section 8.1(e)(i) hereof, and within 12 months thereafter, the Company enters into an agreement with respect to a Third Party Acquisition, or a Third Party Acquisition occurs, involving any party (or any affiliate or associate thereof) (x) with whom the Company (or its agents) had any discussions with respect to a Third Party Acquisition, (y) to whom the Company (or its agents) furnished information with respect to or with a view to a Third Party Acquisition or (z) who had submitted a proposal or expressed any interest publicly or to the Company in a Third Party Acquisition, in the case of each of clauses (x), (y) and (z) prior to such termination; or (ii) (A) the Company terminates this Agreement pursuant to 8.1(d)(iii) or (B) the Company terminates this Agreement pursuant to Section 8.1(d)(ii)(B) hereof and at such time Parent would have been permitted to terminate this Agreement under Section 8.1(e)(ii) or (iii) hereof or (C) Parent terminates this Agreement pursuant to Section 8.1(e)(ii) or (iii) hereof; then the Company shall pay to Parent and Purchaser, within one business day following the execution and delivery of such agreement or such occurrence, as the case may be, or simultaneously with any termination contemplated by Section 8.3(a)(ii) above, a fee, in cash, of $88,288,000, provided, however, that the Company in no event shall be obligated to pay more than one such fee with respect to all such agreements and occurrences and such termination. The payment of any expenses pursuant to Section 8.3(b) shall be credited against the payment of any fee pursuant to Section 8.3(a). "Third Party Acquisition" means the occurrence of any of the following events: (i) the acquisition of the Company by merger or similar business combination by any person other than Parent, Purchaser or any affiliate thereof (a "Third Party"); (ii) the acquisition by a Third Party of 20.0% or more of the book or fair market value of the consolidated assets of the Company and its subsidiaries, taken as a whole; or (iii) the acquisition by a Third Party of 20.0% or more of the outstanding Shares. (b) Upon the termination of this Agreement (i) under circumstances in which Parent shall have been entitled to terminate this Agreement pursuant to Section 8.1(e)(i) hereof (whether or not expressly terminated on such basis) or (ii) if any of the representations and warranties of the Company contained in this Agreement were untrue or incorrect in any material respect when made and at the time of termination remained untrue or incorrect in any material respect and such misrepresentation materially adversely affected the consummation (or materially delayed commencement or consummation) of the Offer, then the Company shall reimburse Parent, Purchaser and their affiliates (not later than one business day after submission of statements therefor) for all actual documented out-of-pocket fees and expenses actually incurred by any of them or on their behalf in connection with the Offer and the Merger and the consummation of all transactions contemplated by this Agreement (including, without limitation, 33 fees and disbursements payable to financing sources, investment bankers, counsel to Purchaser or Parent or any of the foregoing, and accountants) up to a maximum amount of $3 million; provided, however, that in no circumstances shall any payment be made under this Section 8.3(b) after a payment has been made under Section 8.3(a). (c) Except as otherwise specifically provided herein, each party shall bear its own expenses in connection with this Agreement and the transactions contemplated hereby. SECTION 8.4 Amendment. Subject to Section 6.3, this Agreement may be amended by the parties hereto by action taken by or on behalf of their respective Boards of Directors at any time prior to the Effective Time; provided, however, that, after adoption of the Agreement by the stockholders of the Company, no amendment may be made which would reduce the amount or change the type of consideration into which each Share shall be converted upon consummation of the Merger. This Agreement may not be amended except by an instrument in writing signed by the parties hereto. SECTION 8.5 Waiver. Subject to Section 6.3, at any time prior to the Effective Time, any party hereto may (a) extend the time for the performance of any of the obligations or other acts of the other parties hereto, (b) waive any inaccuracies in the representations and warranties contained herein or in any document delivered pursuant hereto and (c) waive compliance with any of the agreements or conditions contained herein. Any such extension or waiver shall be valid only if set forth in an instrument in writing signed by the party or parties to be bound thereby. ARTICLE IX GENERAL PROVISIONS SECTION 9.1 Non-Survival of Representations, Warranties and Agreements. The representations, warranties and agreements in this Agreement shall terminate at the Effective Time or upon the termination of this Agreement pursuant to Section 8.1, as the case may be, except that the agreements set forth in Article II, Section 6.6, Section 6.7 and Article IX shall survive the Effective Time and those set forth in Section 6.4, Section 8.3 and Article IX shall survive termination of this Agreement. SECTION 9.2 Notices. All notices, requests, claims, demands and other communications hereunder shall be in writing and shall be given (and shall be deemed to have been duly given upon receipt) by delivery in person, by cable, telecopy, telegram or telex or by registered or certified mail (postage prepaid, return receipt requested) to the respective parties at the following addresses (or at such other address for a party as shall be specified by like notice): 34 if to Parent or Purchaser: Dillard's, Inc. 1600 Cantrell Road Little Rock, Arkansas 72201 Attention: James I. Freeman with additional copies to: Simpson Thacher & Bartlett 425 Lexington Avenue New York, New York 10017 Attention: Alan G. Schwartz, Esq. if to the Company: Mercantile Stores Company 9450 Seward Road Fairfield, Ohio 45016 Attention: David L. Nichols with a copy to: King & Spalding 191 Peachtree Street Atlanta, Georgia 30303 Attention: Russell B. Richards, Esq. with a further copy to: Curtis, Mallet-Prevost, Colt & Mosle 101 Park Avenue, 35th Floor New York, New York 10178 Attention: Jeremiah T. Mulligan, Esq. SECTION 9.3 Certain Definitions. For purposes of this Agreement, the term: "affiliate" of a person means a person that directly or indirectly, through one or more intermediaries, controls, is controlled by, or is under common control with, the first mentioned person; "beneficial owner" with respect to any Shares means a person who shall be deemed to be the beneficial owner of such Shares (i) which such person or any of its affiliates or associates beneficially owns, directly or indirectly, (ii) which such person or any of its affiliates or associates (as such term is defined in Rule 12b-2 of the Exchange Act) has, directly or indirectly, (A) the right to acquire (whether such right is exercisable immediately or subject only to the passage of time), pursuant to any agreement, arrangement or understanding or upon the exercise of consideration rights, exchange 35 rights, warrants or options, or otherwise, or (B) the right to vote pursuant to any agreement, arrangement or understanding or (iii) which are beneficially owned, directly or indirectly, by any other persons with whom such person or any of its affiliates or person with whom such person or any of its affiliates or associates has any agreement, arrangement or understanding for the purpose of acquiring, holding, voting or disposing of any shares; provided, however, that no person nor any affiliate or associate of such person shall be deemed to be the beneficial owner of any securities by reason of a revocable proxy granted for a particular meeting of stockholders, pursuant to a public solicitation of proxies for such meeting, and with respect to which shares neither such person nor any such affiliate or associate is otherwise deemed the beneficial owner. "control" (including the terms "controlled by" and "under common control with") means the possession, directly or indirectly or as trustee or executor, of the power to direct or cause the direction of the management policies of a person, whether through the ownership of stock, as trustee or executor, by contract or credit arrangement or otherwise; "generally accepted accounting principles" shall mean the generally accepted accounting principles set forth in the opinions and pronouncements of the Accounting Principles Board of the American Institute of Certified Public Accountants and statements and pronouncements of the Financial Accounting Standards Board or in such other statements by such other entity as may be approved by a significant segment of the accounting profession in the United States, in each case applied on a basis consistent with the manner in which the audited financial statements for the fiscal year of the Company ended January 31, 1998 were prepared; "person" means an individual, corporation, partnership, association, trust, unincorporated organization, other entity or group (as defined in Section 13(d)(3) of the Exchange Act); and "subsidiary" or "subsidiaries" of the Company, the Surviving Corporation, Parent or any other person means any corporation, partnership, joint venture or other legal entity of which the Company, the Surviving Corporation, Parent or such other person, as the case may be (either alone or through or together with any other subsidiary), owns, directly or indirectly, 50% or more of the stock or other equity interests the holder of which is generally entitled to vote for the election of the board of directors or other governing body of such corporation or other legal entity. SECTION 9.4 Severability. If any term or other provision of this Agreement is invalid, illegal or incapable of being enforced by any rule of law or public policy, all other conditions and provisions of this Agreement shall nevertheless remain in full force and effect so long as the economic or legal substance of the transactions contemplated hereby is not affected in any manner adverse to any party. Upon such determination that any term or other provision is invalid, illegal or incapable of being enforced, the parties hereto shall negotiate in good faith to modify this Agreement so as to effect the original intent of the parties as closely as possible in an acceptable manner to the end that the transactions contemplated hereby are fulfilled to the fullest extent possible. 36 SECTION 9.5 Entire Agreement; Assignment. This Agreement, together with the Stockholders Agreement, Parent Confidentiality Agreement, the Holding Co. Merger Agreement and the Woodbank Merger Agreement, constitutes the entire agreement among the parties with respect to the subject matter hereof and supersedes all prior agreements and undertakings, both written and oral, among the parties, or any of them, with respect to the subject matter hereof. This Agreement shall not be assigned by operation of law or otherwise, except that Parent and Purchaser may assign all or any of their respective rights and obligations hereunder to any direct or indirect wholly owned subsidiary or subsidiaries of Parent, provided that no such assignment shall relieve the assigning party of its obligations hereunder if such assignee does not perform such obligations. SECTION 9.6 Parties in Interest. This Agreement shall be binding upon and inure solely to the benefit of each party hereto, and nothing in this Agreement, express or implied, except for the provisions of Section 6.7, is intended to or shall confer upon any other person any rights, benefits or remedies of any nature whatsoever under or by reason of this Agreement. SECTION 9.7 Governing Law. This Agreement shall be governed by, and construed in accordance with, the laws of the State of Delaware, regardless of the laws that might otherwise govern under applicable principles of conflicts of laws thereof. SECTION 9.8 Headings. The descriptive headings contained in this Agreement are included for convenience of reference only and shall not affect in any way the meaning or interpretation of this Agreement. SECTION 9.9 Counterparts. This Agreement may be executed in one or more counterparts, and by the different parties hereto in separate counterparts, each of which when executed shall be deemed to be an original but all of which taken together shall constitute one and the same agreement. SECTION 9.10 Knowledge. As used in this Agreement, the terms "the best knowledge of the Company", "known to the Company" or words of similar import used herein with respect to the Company shall mean the actual knowledge of any Company Executive, together with the knowledge a reasonable business person would have obtained after making reasonable inquiry and after exercising reasonable diligence with respect to the matters at hand. The "Company Executives" shall consist of David L. Nichols, James M. McVicker, Randolph L. Burnette, Kathryn M. Muldowney and Louis L. Ripley. As used in this Agreement, the terms "the best knowledge of Parent", "known to Parent" or words of similar import used herein with respect to Parent shall mean the actual knowledge of any Parent Executive, together with the knowledge a reasonable business person would have obtained after making reasonable inquiry and after exercising reasonable diligence with respect to the matters at hand. The "Parent Executives" shall consist of the executive officers of Parent as listed in the latest proxy statement or registration statement of Parent filed with the SEC. SECTION 9.11 Specific Performance. The parties agree that irreparable damage would occur in the event that any of the provisions of this Agreement were not performed in 37 accordance with their specific terms or were 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 any court of the United States located in the State of Delaware or in any Delaware state court, this being in addition to any other remedy to which such party is entitled at law or in equity. In addition, each of the parties hereto (i) consents to submit itself to the personal jurisdiction of any Federal court located in the State of Delaware or any Delaware state court in the event any dispute arises out of this Agreement or any of the transactions contemplated by this Agreement, (ii) agrees that it will not attempt to deny or defeat such personal jurisdiction by motion or other request for leave from any such court, (iii) agrees that it will not bring any action relating to this Agreement or any of the transactions contemplated by this Agreement in any court other than a Federal or state court sitting in the State of Delaware, and (iv) consents to service being made through the notice procedures set forth in Section 9.2. 38 IN WITNESS WHEREOF, Parent, Purchaser and the Company have caused this Agreement to be executed as of the date first written above by their respective officers thereunto duly authorized. DILLARD'S, INC. By: /s/ James I. Freeman -------------------------------- Name: James I. Freeman Title: Senior Vice President and Chief Financial Officer MSC ACQUISITIONS, INC. By: /s/ James I. Freeman -------------------------------- Name: James I. Freeman Title: Senior Vice President and Chief Financial Officer MERCANTILE STORES COMPANY, INC. By: -------------------------------- Name: David L. Nichols Title: Chief Executive Officer IN WITNESS WHEREOF, Parent, Purchaser and the Company have caused this Agreement to be executed as of the date first written above by their respective officers thereunto duly authorized. DILLARD'S, INC. By: ---------------------------- Name: Title: MSC ACQUISITIONS, INC. By: ---------------------------- Name: Title: MERCANTILE STORES COMPANY, INC. By: /s/ David L. Nichols ---------------------------- Name: David L. Nichols Title: Chairman of the Board ANNEX A Offer Conditions The capitalized terms used in this Annex A have the meanings set forth in the attached Merger Agreement. Notwithstanding any other provision of the Offer, but subject to the terms and conditions of the Merger Agreement, Purchaser shall not be required to accept for payment or, subject to any applicable rules and regulations of the SEC, including Rule 14e-1(c) under the Exchange Act (relating to Purchaser's obligation to pay for or return tendered Shares promptly after termination or withdrawal of the Offer), pay for any Shares tendered pursuant to the Offer, and may postpone the acceptance for payment or, subject to the restriction referred to above, payment for any Shares tendered pursuant to the Offer, and may amend or terminate the Offer (whether or not any Shares have theretofore been purchased or paid for) to the extent permitted by the Merger Agreement if, (i) at the expiration of the Offer, a number of shares of Company Common Stock which, together with any Shares owned, directly or indirectly, by Parent or Purchaser (including the shares of Company Common Stock to be acquired pursuant to the Holding Co. Merger and Woodbank Merger), constitutes more than 50% of the voting power (determined on a fully-diluted basis), on the date of purchase, of all the securities of the Company entitled to vote generally in the election of directors or in a merger shall not have been validly tendered and not properly withdrawn prior to the expiration of the Offer, the ("Minimum Condition") or (ii) at any time on or after the date of the Merger Agreement and prior to the acceptance for payment of Shares, any of the following conditions occurs or has occurred: (a) there shall have been entered any order, preliminary or permanent injunction, decree, judgment or ruling in any action or proceeding before any court or governmental, administrative or regulatory authority or agency, or any statute, rule or regulation enacted, entered, enforced, promulgated, amended or issued that is applicable to Parent, Purchaser, the Company or any subsidiary or affiliate of Purchaser or the Company or the Offer or the Merger, by any legislative body, court, government or governmental, administrative or regulatory authority or agency that is reasonably likely to have the effect of: (i) making illegal or otherwise directly or indirectly restraining or prohibiting the making of the Offer in accordance with the terms of the Merger Agreement, the acceptance for payment of, or payment for, some of or all the Shares by Purchaser or any of its affiliates or the consummation of the Merger; (ii) prohibiting the ownership or operation of the Company and its subsidiaries by Parent or any of Parent's subsidiaries, (iii) imposing limitations on the ability of Parent, Purchaser or any of Parent's affiliates effectively to acquire or hold or to exercise full rights of ownership of the Shares, including without limitation the right to vote any Shares acquired or owned by Parent or Purchaser or any of its affiliates on all matters properly presented to the stockholders of the Company, including without limitation the adoption of the Merger Agreement or the right to vote any shares of capital stock of any subsidiary directly or indirectly owned by the Company; or (iv) requiring divestiture by Parent or Purchaser or any of their affiliates of any Shares; provided, that prior to invoking this condition each party agrees to comply with Section 6.10. A-1 (b) there shall have occurred any event that is reasonably likely to have a Material Adverse Effect; (c) there shall have occurred (i) any general suspension of trading in, or limitation on prices (other than suspensions or limitations triggered on the New York Stock Exchange by price fluctuations on a trading day) for, securities on any national securities exchange, (ii) a declaration of a banking moratorium or any suspension of payments in respect of banks in the United States, (iii) a commencement of a war or material armed hostilities or other material national calamity directly involving the United States or materially adversely affecting the consummation of the Offer or (v) in the case of any of the foregoing existing at the time of commencement of the Offer, a material acceleration or worsening thereof; (d) (A) the Board of Directors of the Company or any committee thereof shall have withdrawn or modified in a manner adverse to Parent or Purchaser the approval or recommendation of the Offer, the Merger or the Merger Agreement, or approved or recommended any takeover proposal or any other acquisition of Shares other than the Offer, (B) any such person or group shall have entered into a definitive agreement or an agreement in principle with the Company with respect to a tender offer or exchange offer for any Shares or a merger, consolidation or other business combination with or involving the Company or any of its subsidiaries, or (C) the Board of Directors of the Company or any committee thereof shall have resolved to do any of the foregoing; (e) any of the representations and warranties of the Company set forth in the Merger Agreement that are qualified by reference to a Material Adverse Effect shall not be true and correct, or any such representations and warranties that are not so qualified shall not be true and correct in any respect that is reasonably likely to have a Material Adverse Effect, in each case as if such representations and warranties were made at the time of such determination; (f) the Company shall have failed to perform in any material respect any material obligation or to comply in any material respect with any material agreement or material covenant of the Company to be performed or complied with by it under the Merger Agreement; (g) the Merger Agreement shall have been terminated in accordance with its terms or the Offer shall have been terminated with the consent of the Company; (h) any waiting periods under the HSR Act applicable to the purchase of Shares pursuant to the Offer or the Merger shall not have expired or been terminated; or (i) each of the Holding Co. Merger and the Woodbank Merger shall not have been consummated in accordance with the terms of the Holding Co. Merger Agreement and the Woodbank Merger Agreement, respectively; which, in the reasonable judgment of Purchaser with respect to each and every matter referred to above and regardless of the circumstances (except for any action or inaction by Purchaser or A-2 any of its affiliates constituting a breach of the Merger Agreement) giving rise to any such condition, makes it inadvisable to proceed with the Offer or with such acceptance for payment of or payment for Shares or to proceed with the Merger. The foregoing conditions are for the sole benefit of Purchaser and may be asserted by Purchaser regardless of the circumstances giving rise to any such condition (except for any action or inaction by Purchaser or any of its affiliates constituting a breach of the Merger Agreement) or (other than the Minimum Condition) may be waived by Purchaser in whole or in part at any time and from time to time in its sole discretion (subject to the terms of the Merger Agreement). The failure by Purchaser at any time to exercise any of the foregoing rights shall not be deemed a waiver of any such right, the waiver of any such right with respect to particular facts and other circumstances shall not be deemed a waiver with respect to any other facts and circumstances, and each such right shall be deemed an ongoing right that may be asserted at any time and from time to time. A-3 EX-99.(C)(3) 7 STOCKHOLDERS AGREEMENT STOCKHOLDERS' AGREEMENT STOCKHOLDERS' AGREEMENT (this "Agreement"), dated as of May 16, 1998, by and between Dillard's, Inc., a company organized under the laws of Delaware ("Purchaser"), and each of the parties listed on the signature page hereto (individually a "Seller" and collectively, the "Sellers"). RECITALS Concurrently herewith, Purchaser, MSC Acquisitions, Inc., a Delaware corporation and a wholly-owned subsidiary of Purchaser, and Mercantile Stores Company (the "Company"), a Delaware corporation, are entering into an Agreement and Plan of Merger of even date herewith attached hereto (the "Merger Agreement"; capitalized terms used but not defined herein shall have the meanings set forth in the Merger Agreement), pursuant to which Sub agrees to make a tender offer (the "Offer") for all outstanding shares of common stock, $.14 2/3 par value per share (the "Common Stock"), of the Company, at $80 per share (the "Offer Price"), net to the seller in cash, to be followed by a merger (the "Merger") of Sub with and into the Company. As a condition to their willingness to enter into the Merger Agreement and make the Offer, Purchaser and Sub have required that each of the Sellers agree, and each Seller has agreed, among other things, to grant to Purchaser the Option and irrevocable proxy with respect to the number of shares of Common Stock of such Seller set forth opposite such Seller's name on the signature page hereto, together with any additional shares when and if they are acquired (such shares, and any additional shares when and if they are acquired, being referred to herein as the "Shares") on the terms and conditions provided for herein. The Board of Directors of the Company has approved the Purchaser becoming an "interested shareholder" for purposes of Section 203 of the Delaware General Corporation Law and for all purposed under Article Eighth of the Company's Certificate of Incorporation. AGREEMENT To implement the foregoing and in consideration of the mutual agreements contained herein, the parties agree as follows: 1. Option to Purchase Shares. 1.1 Grant of Option. Each Seller hereby grants to Purchaser an irrevocable option (the "Option") to purchase all of the Shares set forth below such Seller's name on the signature page hereto at a purchase price of $80 per share (the "Exercise 2 Price") in cash (subject to adjustment pursuant to Section 7 below) for each Share purchased. 1.2 Exercise of Option. (a) Subject to applicable law (including Rule 10b- 13 under the Securities Exchange Act of 1934, as amended (the "Exchange Act")), the Option may be exercised by Purchaser, in whole or in part, at any time, or from time to time, commencing upon the Exercise Date and prior to the Expiration Date (as hereinafter defined). As used herein, the term "Exercise Date" means the first to occur of any of the following dates: (i) Seller fails to perform any agreement or covenant of Seller contained herein in any material respect; or (ii) the Merger Agreement is terminated and Purchaser is entitled to the payment of a termination fee pursuant to any of the provisions set forth in Section 8.3(a)(ii) of the Merger Agreement. As used herein, the term "Expiration Date" means the first to occur of any of the following dates: (1) the Effective Time (as defined in the Merger Agreement); (2) 12 months after the date of the termination of the Merger Agreement; or (3) written notice of termination of this Agreement by Purchaser to the Seller. (b) In the event Purchaser wishes to exercise the Option, Purchaser shall send a written notice to Seller of its intention to so exercise the Option (a "Notice"), specifying the place, time and date of the closing of such purchase (the "Closing"), which date shall not be less than two business days nor more than five business days from the date on which a Notice is delivered; provided, that the Closing shall be held only if such purchase would not otherwise then violate or cause the violation of, any applicable law or regulations (including, without limitation, the Hart-Scott-Rodino Antitrust Improvements Act of 1976 (the "HSR Act")) or any decree, order or injunction of any governmental agency, authority or court, whether temporary, preliminary or permanent. If the Closing shall be violative of any such laws or rules or any such decree, order or injunction, then such Notice shall be deemed rescinded and of no effect and Purchaser shall send a new Notice at such time as the Closing is not violative of such laws, rules, decrees, orders or injunctions. Notwithstanding the occurrence of such rescission, this Agreement shall remain in full force and effect. 3 (c) At the Closing, Seller shall deliver to Purchaser all of the Shares to be purchased by delivery of a certificate or certificates evidencing such Shares so purchased by Purchaser duly endorsed or with executed blank stock power attached, in either event with signature guaranteed such that registered ownership of the Shares may be registered for transfer on the books of the Company and Purchaser will make payment to Seller of the aggregate Exercise Price for the Shares being purchased upon exercise of the Option in immediately available funds in the amount equal to the Exercise Price multiplied by the number of Shares purchased pursuant to this Section 1. (d) Notwithstanding any of the foregoing, with respect to the Shares held by Minot Mercantile Corporation and Woodbank Mills, Inc. (collectively, the "C Corps"), Purchaser shall form an acquisition subsidiary to acquire such Shares in the form of a merger pursuant to a form of merger agreement reasonably acceptable to the parties, and each party will use its best efforts to consummate the acquisition of such Shares pursuant to the Option by merger. 2. Agreement to Tender. Each Seller hereby agrees to validly tender pursuant to the Offer and not withdraw all Shares; provided, however, the C Corps shall not be obligated to tender the Shares held by each of them because such Shares will be acquired by Merger as contemplated by the Merger Agreement. 3. Irrevocable Proxy. Each Seller hereby irrevocably appoints Purchaser or any designee of Purchaser the lawful agent, attorney and proxy of such shareholder, during the term of this Agreement, to (a) vote the Shares in favor adoption of the Merger Agreement; (b) vote the Shares against any action or agreement that would result in a breach in any material respect of any covenant, representation or warranty or any other obligation or agreement of the Company under the Merger Agreement; and (c) vote the Shares against any action or agreement (other than the Merger Agreement or the transactions contemplated thereby) that would impede, interfere with, delay, postpone or attempt to discourage the Merger or the Offer, including, but not limited to: (i) any extraordinary corporate transaction, such as a merger, consolidation or other business combination involving the Company and its subsidiaries; (ii) a sale or transfer of a material amount of assets of the Company and its subsidiaries or a reorganization, recapitalization or liquidation of the Company and its subsidiaries; (iii) any change in the management or board of directors of the Company, except as otherwise agreed to in writing by Purchaser; (iv) any material change in the present capitalization or dividend policy of the Company; or (v) any other material change in the Company's corporate structure or business. Each Seller intends this proxy to be irrevocable and coupled with an interest and will take such further action or execute such other instruments as may be necessary to effectuate the intent of this proxy and hereby revokes any proxy previously 4 granted by it with respect to the Shares. Each Seller shall not hereafter, unless and until this Agreement terminates pursuant to Section 8.6 hereof, purport to vote (or execute a consent with respect to) such Shares (other than through this irrevocable proxy) or grant any other proxy or power of attorney with respect to any Shares, deposit any Shares into a voting trust or enter into any agreement (other than this Agreement), arrangement or understanding with any person, directly or indirectly, to vote, grant any proxy or give instructions with respect to the voting of such Shares. Notwithstanding anything herein to the contrary, the Sellers may transfer as charitable gifts up to an aggregate of 300,000 Shares. 4. Representations and Warranties. 4.1 Representations and Warranties of Purchaser. Purchaser hereby represents and warrants to each Seller as follows: (a) Due Authorization. The execution and delivery of this Agreement and the consummation of the transactions contemplated hereby have been duly and validly authorized by the Board of Directors of Purchaser, and no other corporate proceedings on the part of Purchaser are necessary to authorize this Agreement or to consummate the transactions contemplated hereby. This Agreement has been duly and validly executed and delivered by Purchaser and constitutes a valid and binding agreement of Purchaser, enforceable against Purchaser in accordance with its terms, except that such enforceability (i) may be limited by bankruptcy, insolvency, moratorium or other similar laws affecting or relating to enforcement of creditors' rights generally and (ii) is subject to general principles of equity. (b) No Conflicts. Except for (i) filings under the HSR Act, if applicable, (ii) the applicable requirements of the Exchange Act and the Securities Act of 1933, as amended (the "Securities Act"), (iii) the applicable requirements of state securities, takeover or Blue Sky laws and (iv) such notifications, filings, authorizing actions, orders and approvals as may be required under other laws, (A) no filing with, and no permit, authorization, consent or approval of, any state, federal or foreign public body or authority is necessary for the execution of this Agreement by Purchaser and the consummation by Purchaser of the transactions contemplated hereby and (B) neither the execution and delivery of this Agreement by Purchaser nor the consummation by Purchaser of the transactions contemplated hereby nor compliance by Purchaser with any of the provisions hereof shall (1) conflict with or result in any breach of any provision of the certificate of incorporation or by-laws (or similar documents) of 5 Purchaser, (2) result in a violation or breach of, or constitute (with or without notice or lapse of time or both) a default (or give rise to any third party right of termination, cancellation, material modification or acceleration) under any of the terms, conditions or provisions of any note, bond, mortgage, indenture, license, contract, agreement or other instrument or obligation to which Purchaser is a party or by which it or any of its properties or assets may be bound or (3) violate any order, writ, injunction, decree, statute, rule or regulation applicable to Purchaser or any of its properties or assets, except in the case of (2) or (3) for violations, breaches or defaults which would not in the aggregate materially impair the ability of Purchaser to perform its obligations hereunder. (c) Good Standing. Purchaser is a corporation duly organized, validly existing and in good standing under the laws of Delaware and has all requisite corporate power and authority to execute and deliver this Agreement. 4.2 Representations and Warranties of Sellers. Each Seller hereby severally and not jointly represents and warrants to Purchaser as follows: (a) Ownership of Shares. Subject to Section 5.3, such Seller is the owner of the Shares set forth below its name and has the power to vote and dispose of such Shares. To Seller's knowledge, such Shares are validly issued, fully paid and nonassessable, with no personal liability attaching to the ownership thereof. Such Seller has good title to the Shares, free and clear of any agreements, liens, adverse claims or encumbrances whatsoever with respect to the ownership of or the right to vote such Shares. (b) Power; Binding Agreement. Such Seller has the legal capacity, power and authority to enter into and perform all of its obligations under this Agreement, except for the approval of the holders of a majority of the stockholders of Minot Mercantile Corporation is required with respect to their obligations under Section 1. The execution, delivery and performance of this Agreement by such Seller will not violate any other agreement to which such Seller is a party including, without limitation, any voting agreement, stockholders agreement or voting trust. This Agreement has been duly and validly authorized, executed and delivered by such Seller and constitutes a valid and binding agreement of such Seller, enforceable against such Seller in accordance with its terms, except that such enforceability (i) may be limited by bankruptcy, insolvency, moratorium or other similar laws affecting or 6 relating to enforcement of creditors' rights generally and (ii) is subject to general principles of equity. (c) No Conflicts. Except for (i) filings under the HSR Act, if applicable, (ii) the applicable requirements of the Exchange Act and the Securities Act, (iii) the applicable requirements of state securities, takeover or Blue Sky laws, (iv) such notifications, filings, authorizing actions, orders and approvals as may be required under other laws, (A) no filing with, and no permit, authorization, consent or approval of, any state, federal or foreign public body or authority is necessary for the execution of this Agreement by such Seller and the consummation by such Seller of the transactions contemplated hereby and (B) neither the execution and delivery of this Agreement by such Seller nor the consummation by such Seller of the transactions contemplated hereby nor compliance by such Seller with any of the provisions hereof shall (1) conflict with or result in any breach of any provision of the certificate of incorporation, by-laws, trust or charitable instruments (or similar documents) of such Seller, (2) result in a violation or breach of, or constitute (with or without notice or lapse of time or both) a default (or give rise to any third party right of termination, cancellation, material modification or acceleration) under any of the terms, conditions or provisions of any note, bond, mortgage, indenture, license, contract, agreement or other instrument or obligation to which such Seller is a party or by which he or any of his properties or assets may be bound or (3) violate any order, writ, injunction, decree, statute, rule or regulation applicable to such Seller or any of his properties or assets, except in the case of (2) or (3) for violations, breaches or defaults which would not in the aggregate materially impair the ability of such Seller to perform his obligations hereunder. 5. Certain Covenants of Sellers. Each Seller hereby covenants and agrees as follows: 5.1 No Solicitation. Such Seller shall not, directly or indirectly, solicit, encourage, participate in or initiate any inquiries or the making of any proposal by any person or entity (other than Purchaser or any affiliate of Purchaser) which constitutes, or may reasonably be expected to lead to, (a) any sale of the Shares or (b) any acquisition or purchase of a material portion of the Company's assets or any equity interest in, or any merger, consolidation or business combination with, the Company or any of its subsidiaries. If such Seller receives an inquiry or proposal with respect to the sale of Shares, then such Seller shall promptly inform Purchaser of the terms and conditions, if any, of such inquiry or proposal and the identity of the person making it. Each Seller will immediately cease and cause to be terminated any existing activities, discussions or 7 negotiations with any parties conducted heretofore with respect to any of the foregoing. 5.2 Restriction on Transfer, Proxies and NonInterference. Each Seller hereby agrees, while this Agreement is in effect, and except as contemplated hereby, not to (a) sell, transfer, pledge, encumber, assign or otherwise dispose of, or enter into any contract, option or other arrangement or understanding with respect to the sale, transfer, pledge, encumbrance, assignment or other disposition of, any of the Shares or (b) grant any proxies, deposit any Shares into a voting trust or enter into a voting agreement with respect to any Shares or (c) take any action that would make any representation or warranty of such Seller contained herein untrue or incorrect or have the effect of preventing or disabling such Seller from performing his obligations under this Agreement. 5.3 Legending of Certificates; Nominees Shares. If requested by Purchaser, each Seller agrees to submit to Purchaser contemporaneously with or promptly following execution of this Agreement all certificates representing the Shares so that Purchaser may note thereon a legend referring to the option, proxy and other rights granted to it by this Agreement. If any of the Shares beneficially owned by such Seller are held of record by a brokerage firm in "street name" or in the name of any other nominee (a "Nominee," and, as to such Shares, "Nominee Shares"), each Seller agrees that, upon written notice by Purchaser requesting it, such Seller will within five days of the giving of such notice execute and deliver to Purchaser a limited power of attorney in such form as shall be reasonably satisfactory to Purchaser enabling Purchaser to require the Nominee to (i) grant to Purchaser an option and irrevocable proxy to the same effect as Sections 1 and 3 hereof with respect to the Nominee Shares held by such Nominee, (ii) tender such Nominee Shares in the Offer pursuant to Section 2 hereof and (iii) submit to Purchaser the certificates representing such Nominee Shares for notation of the above-referenced legend thereon. 5.4 Stop Transfer Order. In furtherance of this Agreement, concurrently herewith, each Seller shall and hereby does authorize the Company's counsel to notify the Company's transfer agent that there is a stop transfer order with respect to all of the Shares (and that this Agreement places limits on the voting and transfer of such shares). 6. Further Assurances. From time to time, at the other party's request and without further consideration, each party hereto shall execute and deliver such additional documents and take all such further action as may be necessary or desirable to consummate the transactions contemplated by this Agreement, including, without limitation, to vest in Purchaser good title to any Shares purchased hereunder. 8 7. Adjustments to Prevent Dilution, Etc. In the event of a stock dividend or distribution, or any change in the Company's Common Stock by reason of any stock dividend, split-up, reclassification, recapitalization, combination or the exchange of shares, the term "Shares" shall be deemed to refer to and include the Shares as well as all such stock dividends and distributions and any shares into which or for which any or all of the Shares may be changed or exchanged. In such event, the amount to be paid per share by Purchaser shall be proportionately adjusted. 8. Miscellaneous. 8.1 Entire Agreement; Assignment. This Agreement (i) constitutes the entire agreement among the parties with respect to the subject matter hereof and supersedes all other prior agreements and understandings, both written and oral, between the parties with respect to the subject matter hereof and (ii) shall not be assigned by operation of law or otherwise, provided that Purchaser may assign its rights and obligations hereunder to any direct or indirect wholly owned parent company or subsidiary of Purchaser, but no such assignment shall relieve Purchaser of its obligations hereunder if such assignee does not perform such obligations. 8.2 Amendments. This Agreement may not be modified, amended, altered or supplemented, except upon the execution and delivery of a written agreement executed by the parties hereto. 8.3 Notices. All notices, requests, claims, demands and other communications hereunder shall be in writing and shall be given (and shall be deemed to have been duly received if so given) by hand delivery, telegram, telex or telecopy, or by mail (registered or certified mail, postage prepaid, return receipt requested) or by any courier service, such as Federal Express, providing proof of delivery. All communications hereunder shall be delivered to the respective parties at the following addresses: If to the Sellers: c/o Ivins Phillips & Barker 1700 Pennsylvania Avenue Washington, D.C. 20006 If to Purchaser: Dillard's, Inc. 1600 Cantrell Road Little Rock, Arkansas 72201 Attention: James Freeman copy to: Simpson Thacher & Bartlett 9 425 Lexington Avenue New York, New York 10017 Attention: Alan G. Schwartz, Esq. or to such other address as the person to whom notice is given may have previously furnished to the others in writing in the manner set forth above. 8.4 Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of Delaware, regardless of the laws that might otherwise govern under applicable principles of conflicts of laws thereof. 8.5 Cooperation as to Regulatory Matters. If so requested by Purchaser, promptly after the date hereof, the Seller will use its reasonable best efforts to cause it and the Company (if required) to make all filings which are required under the HSR Act and applicable requirements and to seek all regulatory approvals required in connection with the transactions contemplated hereby. The parties shall furnish to each other such necessary information and reasonable assistance as may be requested in connection with the preparation of filings and submissions to any governmental agency, including, without limitation, filings under the provisions of the HSR Act. The Seller shall also use its reasonable best efforts to cause the Company to supply Purchaser with copies of all correspondence, filings or communications (or memoranda setting forth the substance thereof) between the Company and its representatives and the Federal Trade Commission, the Department of Justice and any other governmental agency or authority and members of their respective staffs with respect to this Agreement and the transactions contemplated hereby. 8.6 Termination. Except for the provisions of Sections 1 and 5.2 which shall expire on the Expiration Date, this Agreement shall terminate on the earlier of (i) the Effective Time or (ii) the termination of the Merger Agreement in accordance with its terms. 8.7 Specific Performance. Each of the parties hereto recognizes and acknowledges that a breach by it of any covenants or agreements contained in this Agreement will cause the other party to sustain damages for which it would not have an adequate remedy at law for money damages, and therefore, each of the parties hereto agrees that in the event of any such breach the aggrieved party shall be entitled to the remedy of specific performance of such covenants and agreements and injunctive and other equitable relief in addition to any other remedy to which it may be entitled, at law or in equity. 8.8 Counterparts. This Agreement may be executed in two counterparts, each of which shall be deemed to be an 10 original, but both of which shall constitute one and the same Agreement. 8.9 Descriptive Headings. The descriptive headings used herein are inserted for convenience of reference only and are not intended to be part of or to affect the meaning or interpretation of this Agreement. 8.10 Severability. Whenever possible, each provision or portion of any provision of this Agreement will be interpreted in such manner as to be effective and valid under applicable law but if any provision or portion of any provision of this Agreement is held to be invalid, illegal or unenforceable in any respect under any applicable law or rule in any jurisdiction, such invalidity, illegality or unenforceability will not affect any other provision or portion of any provision in such jurisdiction, and this Agreement will be reformed, construed and enforced in such jurisdiction as if such invalid, illegal or unenforceable provision or portion of any provision had never been contained herein. 11 IN WITNESS WHEREOF, the Sellers and Purchaser have caused this Agreement to be duly executed as of the day and year first above written. DILLARD'S, INC. By: /s/ James I. Freeman ------------------------------- Name: James I. Freeman Title: Senior Vice President and Chief Financial Officer [The Sellers listed on the attached signature pages] /s/ Roger Milliken - ------------------------------- Roger Milliken Wilmington Trust Company By: /s/ Carol M. Drummond ------------------------------- Name: Carol M. Drummond Title: Assistant Vice President as the trustees of trusts holding 2,120,485 shares of the common stock, par value $.14 2/3 per share, of Mercantile Stores Company, Inc. Wilmington Trust Company By: /s/ Carol M. Drummond ------------------------------- Name: Carol M. Drummond Title: Assistant Vice President as the trustee of trusts holding 1,654,311 shares of the common stock, par value $.14 2/3 per share, of Mercantile Stores Company, Inc. /s/ Justine VR. Milliken - ------------------------------- Justine VR. Milliken /s/ Minot K. Milliken - ------------------------------- Minot K. Milliken as a majority of the trustees of trusts holding 27,645 shares of the common stock, par value of $.14 2/3 per share, of Mercantile Stores Company, Inc. /s/ Justine VR. Milliken - ------------------------------- Justine VR. Milliken /s/ Gerrish H. Milliken, Jr. - ------------------------------- Gerrish H. Milliken, Jr. /s/ Minot K. Milliken - ------------------------------- Minot K. Milliken as a majority of the trustees of trusts holding 25,065 shares of the common stock, par value $.14 2/3 per share, of Mercantile Stores Company, Inc. Woodbank Mills, Inc. By: /s/ Roger Milliken ------------------------------- Name: Roger Milliken Title: Chairman as the holder of 27,413 shares of the common stock, par value $.14 2/3 per share, of Mercantile Stores Company, Inc. Minot Mercantile Corporation By: /s/ Roger Milliken ------------------------------- Name: Roger Milliken Title: Chairman as the holder of 10,484,875 shares of the common stock, par value $.14 2/3 per share, of Mercantile Stores Company, Inc. /s/ Roger Milliken - ------------------------------- Roger Milliken /s/ Gerrish H. Milliken, Jr. - ------------------------------- Gerrish H. Milliken, Jr. as a majority of the trustees of trusts holding 56,848 shares of the common stock, par value $.14 2/3 per share, of Mercantile Stores Company, Inc. /s/ Roger Milliken - ------------------------------- Roger Milliken /s/ Gerrish H. Milliken, Jr. - ------------------------------- Gerrish H. Milliken, Jr. /s/ Minot K. Milliken - ------------------------------- Minot K. Milliken as a majority of the trustees of trusts holding 258,178 shares of the common stock, par value $.14 2/3 per share, of Mercantile Stores Company, Inc. /s/ Roger Milliken - ------------------------------- Roger Milliken /s/ Minot K. Milliken - ------------------------------- Minot K. Milliken as a majority of the trustees of trusts holding 22,104 shares of the common stock, par value $.14 2/3 per share, of Mercantile Stores Company, Inc. /s/ Gerrish H. Milliken, Jr. - ------------------------------- Gerrish H. Milliken, Jr. /s/ Minot K. Milliken - ------------------------------- Minot K. Milliken as a majority of the trustees of trusts holding 32,419 shares of the common stock, par value $.14 2/3 per share, of Mercantile Stores Company, Inc. EX-99.(C)(4) 8 PROXY & INDEM. AGREE. DILLARDS/WOODBANK PROXY AND INDEMNIFICATION AGREEMENT PROXY AND INDEMNIFICATION AGREEMENT (this "Agreement"), dated as of May 16, 1998, among DILLARD'S, INC., a Delaware corporation ("Parent"), and each of the stockholders of WOODBANK MILLS, INC., a Delaware corporation (the "Company"), that are signatories hereto (each, a "WMI Stockholder"). W I T N E S S E T H : WHEREAS, concurrently with the execution and delivery of this Agreement, Parent, WMI Acquisition, Inc., a Delaware corporation and a wholly owned subsidiary of Parent ("Purchaser"), and the Company have entered into a merger agreement, dated as of the date hereof (the "Merger Agreement"; capitalized terms used but not defined herein shall have the meanings set forth in the Merger Agreement), pursuant to which WMI MergerSub will be merged with and into the Company (the "Merger"), and the Company shall be the surviving corporation; and WHEREAS, as a condition to their willingness to enter into the Merger Agreement and consummate the Merger, Parent and Purchaser have required that each WMI Stockholder agree, and each WMI Stockholder has agreed, among other things, (i) to grant to Parent the irrevocable proxy with respect to all of the Company's common stock, par value $1.00 per share ("Company Common Stock"), owned by such WMI Stockholder, together with any additional shares when and if they are acquired (such shares, and any additional shares when and if they are acquired, being referred to herein as such WMI Stockholder's "Shares" and collectively as the "Shares") on the terms and conditions provided for herein, and (ii) to indemnify and hold harmless Parent and Purchaser, in the manner provided herein, on account of any Losses (as defined herein) arising out of or relating to the Merger Agreement; NOW, THEREFORE, in consideration of the foregoing and the mutual covenants and agreements herein contained, and intending to be legally bound hereby, Parent and each WMI Stockholder hereby agree as follows: 1. Irrevocable Proxy. Each WMI Stockholder hereby irrevocably appoints Parent or any designee of Parent the lawful agent, attorney and proxy of such stockholder, during the term of this Agreement, to (a) vote such WMI Stockholder's Shares in favor of the Merger; (b) vote such WMI Stockholder's Shares against any action or agreement that would result in a breach in any material respect of any covenant, representation or warranty or any other obligation or agreement of the Company under the Merger Agreement; and (c) vote such WMI Stockholder's Shares against any action or agreement (other than the Merger Agreement or the transactions contemplated thereby) that would impede, interfere with, delay, postpone or attempt to discourage the Merger or the Offer, including, but not limited to: (i) any extraordinary corporate transaction, such as a merger, consolidation or other business combination involving the Company; (ii) a sale or transfer of a material amount of assets of the Company or a reorganization, recapitalization or liquidation of the Company; (iii) any change in the management or board of directors of the Company, except as otherwise agreed to in writing by Purchaser; (iv) any material change in the present capitalization or dividend policy of the 2 Company; or (v) any other material change in the Company's corporate structure or business. Each WMI Stockholder intends this proxy to be irrevocable and coupled with an interest and will take such further action or execute such other instruments as may be necessary to effectuate the intent of this proxy and hereby revokes any proxy previously granted by it with respect to the Shares. Each WMI Stockholder shall not hereafter, unless and until this Agreement terminates pursuant to Section 7.6 hereof, purport to vote (or execute a consent with respect to) his Shares (other than through this irrevocable proxy) or grant any other proxy or power of attorney with respect to such Shares, deposit any such Shares into a voting trust or enter into any agreement (other than this Agreement), arrangement or understanding with any person, directly or indirectly, to vote, grant any proxy or give instructions with respect to the voting of such Shares. 2. Representations and Warranties. 2.1 Representations and Warranties of Parent. Parent hereby represents and warrants to the WMI Stockholders as follows: (a) Due Authorization. The execution and delivery of this Agreement and the consummation of the transactions contemplated hereby have been duly and validly authorized by the Board of Directors of Parent, and no other corporate proceedings on the part of Parent are necessary to authorize this Agreement or to consummate the transactions contemplated hereby. This Agreement has been duly and validly executed and delivered by Parent and constitutes a valid and binding agreement of Parent, enforceable against Parent in accordance with its terms, except that such enforceability (i) may be limited by bankruptcy, insolvency, moratorium or other similar laws affecting or relating to enforcement of creditors' rights generally and (ii) is subject to general principles of equity. (b) No Conflicts. Except for (i) filings under the HSR Act, if applicable, (ii) the applicable requirements of the Exchange Act and the Securities Act of 1933, as amended (the "Securities Act"), (iii) the applicable requirements of state securities, takeover or Blue Sky laws and (iv) such notifications, filings, authorizing actions, orders and approvals as may be required under other laws, (A) no filing with, and no permit, authorization, consent or approval of, any state, federal or foreign public body or authority is necessary for the execution of this Agreement by Parent and the consummation by Parent of the transactions contemplated hereby and (B) neither the execution and delivery of this Agreement by Parent nor the consummation by Parent of the transactions contemplated hereby nor compliance by Parent with any of the provisions hereof shall (1) conflict with or result in any breach of any provision of the certificate of incorporation or by-laws (or similar documents) of Parent, (2) result in a violation or breach of, or constitute (with or without notice or lapse of time or both) a default (or give rise to any third party right of termination, cancellation, material modification or acceleration) under any of the terms, conditions or provisions of any note, bond, mortgage, indenture, license, contract, agreement or other instrument or obligation to which Parent is a party or by which it or any of its properties or assets may be bound or (3) violate any order, writ, injunction, decree, statute, rule or regulation applicable to Parent or any of its properties or assets, except in the case of (2) or (3) for violations, 3 breaches or defaults which would not in the aggregate materially impair the ability of Parent to perform its obligations hereunder. (c) Good Standing. Parent is a corporation duly organized, validly existing and in good standing under the laws of Delaware and has all requisite corporate power and authority to execute and deliver this Agreement. 2.2 Representations and Warranties of each WMI Stockholder. Each WMI Stockholder hereby represents and warrants to Parent as follows: (a) Ownership of Shares. Such WMI Stockholder is the owner of his Shares and has the power to vote and dispose of such Shares. To such WMI Stockholder's knowledge, his Shares are validly issued, fully paid and nonassessable, with no personal liability attaching to the ownership thereof. Such WMI Stockholder has good title to his Shares, free and clear of any agreements, liens, adverse claims or encumbrances whatsoever with respect to the ownership of or the right to vote such Shares. (b) Power; Binding Agreement. Such WMI Stockholder has the legal capacity, power and authority to enter into and perform all of its obligations under this Agreement. The execution, delivery and performance of this Agreement by such WMI Stockholder will not violate any other agreement to which such WMI Stockholder is a party including, without limitation, any voting agreement, stockholders agreement or voting trust. This Agreement has been duly and validly authorized, executed and delivered by such WMI Stockholder and constitutes a valid and binding agreement of such WMI Stockholder, enforceable against such WMI Stockholder in accordance with its terms, except that such enforceability (i) may be limited by bankruptcy, insolvency, moratorium or other similar laws affecting or relating to enforcement of creditors' rights generally and (ii) is subject to general principles of equity. (c) No Conflicts. Except for (i) filings under the HSR Act, if applicable, (ii) the applicable requirements of the Exchange Act and the Securities Act, (iii) the applicable requirements of state securities, takeover or Blue Sky laws, (iv) such notifications, filings, authorizing actions, orders and approvals as may be required under other laws, (A) no filing with, and no permit, authorization, consent or approval of, any state, federal or foreign public body or authority is necessary for the execution of this Agreement by such WMI Stockholder and the consummation by such WMI Stockholder of the transactions contemplated hereby and (B) neither the execution and delivery of this Agreement by such WMI Stockholder nor the consummation by such WMI Stockholder of the transactions contemplated hereby nor compliance by such WMI Stockholder with any of the provisions hereof shall (1) conflict with or result in any breach of any provision of the certificate of incorporation, by-laws, trust or charitable instruments (or similar documents) of such WMI Stockholder, (2) result in a violation or breach of, or constitute (with or without notice or lapse of time or both) a default (or give rise to any third party right of termination, cancellation, material modification or acceleration) under any of the terms, conditions or provisions of any note, bond, mortgage, indenture, license, contract, agreement or other instrument or obligation to which such WMI Stockholder is 4 a party or by which such WMI Stockholder or any of his properties or assets may be bound or (3) violate any order, writ, injunction, decree, statute, rule or regulation applicable to such WMI Stockholder or any of his properties or assets, except in the case of (2) or (3) for violations, breaches or defaults which would not in the aggregate materially impair the ability of such WMI Stockholder to perform his obligations hereunder. 3. Certain Covenants of each WMI Stockholder. Each WMI Stockholder hereby covenants and agrees as follows: 3.1 No Solicitation. Such WMI Stockholder shall not, directly or indirectly, solicit, encourage, participate in or initiate any inquiries or the making of any proposal by any person or entity (other than Parent or any affiliate of Parent) which constitutes, or may reasonably be expected to lead to, (a) any sale of the Shares or (b) any acquisition or purchase of a material portion of the Company's assets or any equity interest in, or any merger, consolidation or business combination with, the Company. If any WMI Stockholder receives an inquiry or proposal with respect to the sale of Shares, then such WMI Stockholder shall promptly inform Parent of the terms and conditions, if any, of such inquiry or proposal and the identity of the person making it. Each WMI Stockholder will immediately cease and cause to be terminated any existing activities, discussions or negotiations with any parties conducted heretofore with respect to any of the foregoing. 3.2 Restriction on Transfer, Proxies and Non-Interference. Each WMI Stockholder hereby agrees, while this Agreement is in effect, and except as contemplated hereby, not to (a) sell, transfer, pledge, encumber, assign or otherwise dispose of, or enter into any contract, option or other arrangement or understanding with respect to the sale, transfer, pledge, encumbrance, assignment or other disposition of, any of his Shares or (b) grant any proxies, deposit any of his Shares into a voting trust or enter into a voting agreement with respect to any of his Shares or (c) take any action that would make any representation or warranty of such WMI Stockholder contained herein untrue or incorrect or have the effect of preventing or disabling such WMI Stockholder from performing his obligations under this Agreement. 4. Further Assurances. From time to time, at the other party's request and without further consideration, each party hereto shall execute and deliver such additional documents and take all such further action as may be necessary or desirable to consummate the transactions contemplated by this Agreement. 5. Adjustments to Prevent Dilution, Etc. In the event of a stock dividend or distribution, or any change in the Company Common Stock by reason of any stock dividend, split-up, recapitalization, combination or the exchange of shares, the term "Shares" shall be deemed to refer to and include the Shares as well as all such stock dividends and distributions and any shares into which or for which any or all of the Shares may be changed or exchanged. 6. Indemnification. 6.1 General Indemnification. Each WMI Stockholder (collectively, the "Indemnifying Party"), jointly and severally, indemnifies, defends and holds Parent, Purchaser 5 and Surviving Corporation and their respective directors, officers, employees and affiliates (collectively, the "Indemnified Party") harmless from any and all liabilities, damages, expenses, losses or other claims (including, without limitation, reasonable attorneys' fees and expenses) ("Losses"), directly or indirectly, suffered or paid that arise out of or relate to (i) the failure of any representation or warranty made by (A) the Company under the Merger Agreement or (B) any WMI Stockholder hereunder, in each case to be true and correct in all respects as of the date of this Agreement and as of the Closing Date, (ii) any breach by (A) the Company of any of its covenants or agreements contained in the Merger Agreement and (B) any WMI Stockholder of any of its covenants or agreements contained herein, and (iii) the Company's business, operations or conduct at any time on or prior to the Closing Date, including, without limitation, any and all Taxes imposed on the Company in respect of periods on or prior to the Closing Date; provided that, the aggregate amount of the Holdback Amount (as defined in Section 1.6 of the Merger Agreement) shall be applied to the payment of any Losses prior to any recourse to any Indemnifying Party's indemnity hereunder. 6.2 Indemnification Procedures. If any indemnifiable claim is asserted by any third party against or sought to be collected from any Indemnified Party, such Indemnified Party shall promptly notify the Indemnifying Party of such claim and the amount or the estimated amount thereof to the extent then feasible (which estimate shall not be conclusive of the final amount of such claim); provided, however, that failure to give such notification shall not affect the indemnification provided hereunder except to the extent the Indemnifying Party shall have been actually prejudiced as a result of such failure. The Indemnifying Party shall have 20 days after receipt of such notice to assume the conduct and control, through counsel reasonably acceptable to the Indemnified Party and at the expense of the Indemnifying Party, of the settlement or defense thereof; provided that the Indemnifying Party shall permit the Indemnified Party to participate in such settlement or defense through counsel chosen by the Indemnified Party so long as the fees and expenses of such counsel are borne by the Indemnified Party. So long as the Indemnifying Party is reasonably contesting any such claim in good faith, the Indemnified Party shall not pay or settle any such claim; provided that the Indemnified Party may pay or settle any such claim if the Indemnified Party waives its right to indemnification hereunder in respect of such claim. If the Indemnifying Party does not notify the Indemnified Party within 20 days after the receipt of the Indemnified Party's notice of a claim of indemnity hereunder that it elects to undertake the defense thereof, the Indemnified Party shall have the right to contest, pay or settle the claim but shall not thereby waive any right to indemnity therefor pursuant to this Agreement. The Indemnifying Party shall not, except with the consent of the Indemnified Party, enter into any settlement that does not include as an unconditional term thereof the unconditional release of the Indemnified Party from all liability with respect to the related claim. The obligations to indemnify and hold harmless pursuant to this Section 6 shall survive the consummation of the transactions contemplated hereby. 7. Miscellaneous. 7.1 Entire Agreement; Assignment. This Agreement, together with the Merger Agreement, (i) constitutes the entire agreement among the parties with respect to the subject matter hereof and supersedes all other prior agreements and understandings, both written and oral, between the parties with respect to the subject matter hereof and (ii) shall not be assigned by 6 operation of law or otherwise, provided that Parent may assign its rights and obligations hereunder to any direct or indirect wholly owned parent company or subsidiary of Parent, but no such assignment shall relieve Parent of its obligations hereunder if such assignee does not perform such obligations. 7.2 Amendments. This Agreement may not be modified, amended, altered or supplemented, except upon the execution and delivery of a written agreement executed by the parties hereto. 7.3 Notices. All notices, requests, claims, demands and other communications hereunder shall be in writing and shall be given (and shall be deemed to have been duly received if so given) by hand delivery, telegram, telex or telecopy, or by mail (registered or certified mail, postage prepaid, return receipt requested) or by any courier service, such as Federal Express, providing proof of delivery. All communications hereunder shall be delivered to the respective parties at (i) in the case of any WMI Stockholder, c/o Ivins Phillips & Barker, 1700 Pennsylvania Avenue, Washington, D.C. 20006, and (ii) in the case of Parent, the following address: if to Parent: Dillard's, Inc. 1600 Cantrell Road Little Rock, Arkansas 72201 Attention: James I. Freeman with a copy to: Simpson Thacher & Bartlett 425 Lexington Avenue New York, New York 10017 Attention: Alan G. Schwartz, Esq. or to such other address as the person to whom notice is given may have previously furnished to the others in writing in the manner set forth above. 7.4 Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of Delaware, regardless of the laws that might otherwise govern under applicable principles of conflicts of laws thereof. 7.5 Cooperation as to Regulatory Matters. If so requested by Parent, promptly after the date hereof, each WMI Stockholder will use its reasonable best efforts to cause it and the Company (if required) to make all filings which are required under the HSR Act and applicable requirements and to seek all regulatory approvals required in connection with the transactions contemplated hereby. The parties shall furnish to each other such necessary information and reasonable assistance as may be requested in connection with the preparation of filings and submissions to any governmental agency, including, without limitation, filings under the provisions of the HSR Act. Each WMI Stockholder shall also use its reasonable best efforts 7 to cause the Company to supply Parent with copies of all correspondence, filings or communications (or memoranda setting forth the substance thereof) between the Company and its representatives and the Federal Trade Commission, the Department of Justice and any other governmental agency or authority and members of their respective staffs with respect to this Agreement and the transactions contemplated hereby. 7.6 Termination. Except for the provisions of Section 6 which shall remain in effect indefinitely, this Agreement shall terminate on the earlier of (i) the Effective Time or (ii) the termination of the Merger Agreement in accordance with its terms. 7.7 Specific Performance. Each of the parties hereto recognizes and acknowledges that a breach by it of any covenants or agreements contained in this Agreement will cause the other party to sustain damages for which it would not have an adequate remedy at law for money damages, and therefore, each of the parties hereto agrees that in the event of any such breach the aggrieved party shall be entitled to the remedy of specific performance of such covenants and agreements and injunctive and other equitable relief in addition to any other remedy to which it may be entitled, at law or in equity. 7.8 Counterparts. This Agreement may be executed in one or more counterparts, each of which shall be deemed to be an original, but all of which taken together shall constitute one and the same Agreement. 7.9 Descriptive Headings. The descriptive headings used herein are inserted for convenience of reference only and are not intended to be part of or to affect the meaning or interpretation of this Agreement. 7.10 Severability. Whenever possible, each provision or portion of any provision of this Agreement will be interpreted in such manner as to be effective and valid under applicable law but if any provision or portion of any provision of this Agreement is held to be invalid, illegal or unenforceable in any respect under any applicable law or rule in any jurisdiction, such invalidity, illegality or unenforceability will not affect any other provision or portion of any provision in such jurisdiction, and this Agreement will be reformed, construed and enforced in such jurisdiction as if such invalid, illegal or unenforceable provision or portion of any provision had never been contained herein. 8 IN WITNESS WHEREOF, Parent and each WMI Stockholder have caused this Agreement to be duly executed as of the day and year first above written. DILLARD'S, INC. By: /s/ James I. Freeman ---------------------------------- Name: James I. Freeman Title: Chief Financial Officer WMI STOCKHOLDERS (listed on next page) /s/ Roger Milliken - ---------------------------------- Roger Milliken Wilmington Trust Company By: /s/ Carol M. Drummond ------------------------------ Name: Carol M. Drummond Title: Assistant Vice President as the trustees of trusts holding 6,440 shares of the common stock, par value $1.00 per share, of Woodbank Mills, Inc. /s/ Roger Milliken - ---------------------------------- Roger Milliken /s/ Gerrish H. Milliken, Jr. - ---------------------------------- Gerrish H. Milliken, Jr. as a majority of the trustees of trusts holding 26,300 shares of the common stock, par value $1.00 per share, of Woodbank Mills, Inc. /s/ Roger Milliken - ---------------------------------- Roger Milliken /s/ Minot K. Milliken - ---------------------------------- Minot K. Milliken as a majority of the trustees of trusts holding 47,400 shares of the common stock, par value $1.00 per share, of Woodbank Mills, Inc. /s/ Justine VR. Milliken - ---------------------------------- Justine VR. Milliken /s/ Minot K. Milliken - ---------------------------------- Minot K. Milliken as a majority of the trustees of trusts holding 51,000 shares of the common stock, par value $1.00 per share, of Woodbank Mills, Inc. /s/ Roger Milliken - ---------------------------------- Roger Milliken /s/ Gerrish H. Milliken - ---------------------------------- Gerrish H. Milliken, Jr. /s/ Minot K. Milliken - ---------------------------------- Minot K. Milliken as a majority of the trustees of trusts holding 16,300 shares of the common stock, par value $1.00 per share, of Woodbank Mills, Inc. EX-99.(C)(5) 9 PROXY & INDEM. AGREE. DILLARDS/MERCANTILE PROXY AND INDEMNIFICATION AGREEMENT PROXY AND INDEMNIFICATION AGREEMENT (this "Agreement"), dated as of May 16, 1998, among DILLARD'S, INC., a Delaware corporation ("Parent"), and each of the stockholders of MINOT MERCANTILE CORPORATION, a Delaware corporation (the "Company"), that are signatories hereto (each, a "MMC Stockholder"). W I T N E S S E T H : - - - - - - - - - - - WHEREAS, concurrently with the execution and delivery of this Agreement, Parent, MMC Acquisition, Inc., a Delaware corporation and a wholly owned subsidiary of Parent ("Purchaser"), and the Company have entered into a merger agreement, dated as of the date hereof (the "Merger Agreement"; capitalized terms used but not defined herein shall have the meanings set forth in the Merger Agreement), pursuant to which MMC MergerSub will be merged with and into the Company (the "Merger"), and the Company shall be the surviving corporation; and WHEREAS, as a condition to their willingness to enter into the Merger Agreement and consummate the Merger, Parent and Purchaser have required that each MMC Stockholder agree, and each MMC Stockholder has agreed, among other things, (i) to grant to Parent the irrevocable proxy with respect to all of the Company's common stock, par value $5.00 per share ("Company Common Stock"), owned by such MMC Stockholder, together with any additional shares when and if they are acquired (such shares, and any additional shares when and if they are acquired, being referred to herein as such MMC Stockholder's "Shares" and collectively as the "Shares") on the terms and conditions provided for herein, and (ii) to indemnify and hold harmless Parent and Purchaser, in the manner provided herein, on account of any Losses (as defined herein) arising out of or relating to the Merger Agreement; NOW, THEREFORE, in consideration of the foregoing and the mutual covenants and agreements herein contained, and intending to be legally bound hereby, Parent and each MMC Stockholder hereby agree as follows: 1. Irrevocable Proxy. Each MMC Stockholder hereby irrevocably appoints Parent or any designee of Parent the lawful agent, attorney and proxy of such stockholder, during the term of this Agreement, to (a) vote such MMC Stockholder's Shares in favor of the Merger and, if applicable, in favor of Parent's exercise of its option under the Company's Stockholder's Agreement; (b) vote such MMC Stockholder's Shares against any action or agreement that would result in a breach in any material respect of any covenant, representation or warranty or any other obligation or agreement of the Company under the Merger Agreement; and (c) vote such MMC Stockholder's Shares against any action or agreement (other than the Merger Agreement or the transactions contemplated thereby) that would impede, interfere with, delay, postpone or attempt to discourage the Merger or the Offer, including, but not limited to: (i) any extraordinary corporate transaction, such as a merger, consolidation or other business combination involving the Company; (ii) a sale or transfer of a material amount of assets of the Company or a reorganization, recapitalization or liquidation of the Company; (iii) any change in the management or board of directors of the Company, except as otherwise agreed to in writing by 2 Purchaser; (iv) any material change in the present capitalization or dividend policy of the Company; or (v) any other material change in the Company's corporate structure or business. Each MMC Stockholder intends this proxy to be irrevocable and coupled with an interest and will take such further action or execute such other instruments as may be necessary to effectuate the intent of this proxy and hereby revokes any proxy previously granted by it with respect to the Shares. Each MMC Stockholder shall not hereafter, unless and until this Agreement terminates pursuant to Section 7.6 hereof, purport to vote (or execute a consent with respect to) his Shares (other than through this irrevocable proxy) or grant any other proxy or power of attorney with respect to such Shares, deposit any such Shares into a voting trust or enter into any agreement (other than this Agreement), arrangement or understanding with any person, directly or indirectly, to vote, grant any proxy or give instructions with respect to the voting of such Shares. 2. Representations and Warranties. 2.1 Representations and Warranties of Parent. Parent hereby represents and warrants to the MMC Stockholders as follows: (a) Due Authorization. The execution and delivery of this Agreement and the consummation of the transactions contemplated hereby have been duly and validly authorized by the Board of Directors of Parent, and no other corporate proceedings on the part of Parent are necessary to authorize this Agreement or to consummate the transactions contemplated hereby. This Agreement has been duly and validly executed and delivered by Parent and constitutes a valid and binding agreement of Parent, enforceable against Parent in accordance with its terms, except that such enforceability (i) may be limited by bankruptcy, insolvency, moratorium or other similar laws affecting or relating to enforcement of creditors' rights generally and (ii) is subject to general principles of equity. (b) No Conflicts. Except for (i) filings under the HSR Act, if applicable, (ii) the applicable requirements of the Exchange Act and the Securities Act of 1933, as amended (the "Securities Act"), (iii) the applicable requirements of state securities, takeover or Blue Sky laws and (iv) such notifications, filings, authorizing actions, orders and approvals as may be required under other laws, (A) no filing with, and no permit, authorization, consent or approval of, any state, federal or foreign public body or authority is necessary for the execution of this Agreement by Parent and the consummation by Parent of the transactions contemplated hereby and (B) neither the execution and delivery of this Agreement by Parent nor the consummation by Parent of the transactions contemplated hereby nor compliance by Parent with any of the provisions hereof shall (1) conflict with or result in any breach of any provision of the certificate of incorporation or by-laws (or similar documents) of Parent, (2) result in a violation or breach of, or constitute (with or without notice or lapse of time or both) a default (or give rise to any third party right of termination, cancellation, material modification or acceleration) under any of the terms, conditions or provisions of any note, bond, mortgage, indenture, license, contract, agreement or other instrument or obligation to which Parent is a party or by which it or any of its properties or assets may be bound or 3 (3) violate any order, writ, injunction, decree, statute, rule or regulation applicable to Parent or any of its properties or assets, except in the case of (2) or (3) for violations, breaches or defaults which would not in the aggregate materially impair the ability of Parent to perform its obligations hereunder. (c) Good Standing. Parent is a corporation duly organized, validly existing and in good standing under the laws of Delaware and has all requisite corporate power and authority to execute and deliver this Agreement. 2.2 Representations and Warranties of each MMC Stockholder. Each MMC Stockholder hereby represents and warrants to Parent as follows: (a) Ownership of Shares. Such MMC Stockholder is the owner of his Shares and has the power to vote and dispose of such Shares. To such MMC Stockholder's knowledge, his Shares are validly issued, fully paid and nonassessable, with no personal liability attaching to the ownership thereof. Such MMC Stockholder has good title to his Shares, free and clear of any agreements, liens, adverse claims or encumbrances whatsoever with respect to the ownership of or the right to vote such Shares. (b) Power; Binding Agreement. Such MMC Stockholder has the legal capacity, power and authority to enter into and perform all of its obligations under this Agreement. The execution, delivery and performance of this Agreement by such MMC Stockholder will not violate any other agreement to which such MMC Stockholder is a party including, without limitation, any voting agreement, stockholders agreement or voting trust. This Agreement has been duly and validly authorized, executed and delivered by such MMC Stockholder and constitutes a valid and binding agreement of such MMC Stockholder, enforceable against such MMC Stockholder in accordance with its terms, except that such enforceability (i) may be limited by bankruptcy, insolvency, moratorium or other similar laws affecting or relating to enforcement of creditors' rights generally and (ii) is subject to general principles of equity. (c) No Conflicts. Except for (i) filings under the HSR Act, if applicable, (ii) the applicable requirements of the Exchange Act and the Securities Act, (iii) the applicable requirements of state securities, takeover or Blue Sky laws, (iv) such notifications, filings, authorizing actions, orders and approvals as may be required under other laws, (A) no filing with, and no permit, authorization, consent or approval of, any state, federal or foreign public body or authority is necessary for the execution of this Agreement by such MMC Stockholder and the consummation by such MMC Stockholder of the transactions contemplated hereby and (B) neither the execution and delivery of this Agreement by such MMC Stockholder nor the consummation by such MMC Stockholder of the transactions contemplated hereby nor compliance by such MMC Stockholder with any of the provisions hereof shall (1) conflict with or result in any breach of any provision of the certificate of incorporation, by-laws, trust or charitable instruments (or similar documents) of such MMC Stockholder, (2) result in a violation or breach of, or constitute (with or without notice or lapse of time or both) a default (or give rise to any third party right of termination, cancellation, material modification or acceleration) under 4 any of the terms, conditions or provisions of any note, bond, mortgage, indenture, license, contract, agreement or other instrument or obligation to which such MMC Stockholder is a party or by which such MMC Stockholder or any of his properties or assets may be bound or (3) violate any order, writ, injunction, decree, statute, rule or regulation applicable to such MMC Stockholder or any of his properties or assets, except in the case of (2) or (3) for violations, breaches or defaults which would not in the aggregate materially impair the ability of such MMC Stockholder to perform his obligations hereunder. 3. Certain Covenants of each MMC Stockholder. Each MMC Stockholder hereby covenants and agrees as follows: 3.1 No Solicitation. Such MMC Stockholder shall not, directly or indirectly, solicit, encourage, participate in or initiate any inquiries or the making of any proposal by any person or entity (other than Parent or any affiliate of Parent) which constitutes, or may reasonably be expected to lead to, (a) any sale of the Shares or (b) any acquisition or purchase of a material portion of the Company's assets or any equity interest in, or any merger, consolidation or business combination with, the Company. If any MMC Stockholder receives an inquiry or proposal with respect to the sale of Shares, then such MMC Stockholder shall promptly inform Parent of the terms and conditions, if any, of such inquiry or proposal and the identity of the person making it. Each MMC Stockholder will immediately cease and cause to be terminated any existing activities, discussions or negotiations with any parties conducted heretofore with respect to any of the foregoing. 3.2 Restriction on Transfer, Proxies and Non-Interference. Each MMC Stockholder hereby agrees, while this Agreement is in effect, and except as contemplated hereby, not to (a) sell, transfer, pledge, encumber, assign or otherwise dispose of, or enter into any contract, option or other arrangement or understanding with respect to the sale, transfer, pledge, encumbrance, assignment or other disposition of, any of his Shares or (b) grant any proxies, deposit any of his Shares into a voting trust or enter into a voting agreement with respect to any of his Shares or (c) take any action that would make any representation or warranty of such MMC Stockholder contained herein untrue or incorrect or have the effect of preventing or disabling such MMC Stockholder from performing his obligations under this Agreement. 4. Further Assurances. From time to time, at the other party's request and without further consideration, each party hereto shall execute and deliver such additional documents and take all such further action as may be necessary or desirable to consummate the transactions contemplated by this Agreement. 5. Adjustments to Prevent Dilution, Etc. In the event of a stock dividend or distribution, or any change in the Company Common Stock by reason of any stock dividend, split-up, recapitalization, combination or the exchange of shares, the term "Shares" shall be deemed to refer to and include the Shares as well as all such stock dividends and distributions and any shares into which or for which any or all of the Shares may be changed or exchanged. 6. Indemnification. 5 6.1 General Indemnification. Each MMC Stockholder (collectively, the "Indemnifying Party"), jointly and severally, indemnifies, defends and holds Parent, Purchaser and Surviving Corporation and their respective directors, officers, employees and affiliates (collectively, the "Indemnified Party") harmless from any and all liabilities, damages, expenses, losses or other claims (including, without limitation, reasonable attorneys' fees and expenses) ("Losses"), directly or indirectly, suffered or paid that arise out of or relate to (i) the failure of any representation or warranty made by (A) the Company under the Merger Agreement or (B) any MMC Stockholder hereunder, in each case to be true and correct in all respects as of the date of this Agreement and as of the Closing Date, (ii) any breach by (A) the Company of any of its covenants or agreements contained in the Merger Agreement and (B) any MMC Stockholder of any of its covenants or agreements contained herein, and (iii) the Company's business, operations or conduct at any time on or prior to the Closing Date, including, without limitation, any and all Taxes imposed on the Company in respect of periods on or prior to the Closing Date; provided that, the aggregate amount of the Holdback Amount (as defined in Section 1.6 of the Merger Agreement) shall be applied to the payment of any Losses prior to any recourse to any Indemnifying Party's indemnity hereunder. 6.2 Indemnification Procedures. If any indemnifiable claim is asserted by any third party against or sought to be collected from any Indemnified Party, such Indemnified Party shall promptly notify the Indemnifying Party of such claim and the amount or the estimated amount thereof to the extent then feasible (which estimate shall not be conclusive of the final amount of such claim); provided, however, that failure to give such notification shall not affect the indemnification provided hereunder except to the extent the Indemnifying Party shall have been actually prejudiced as a result of such failure. The Indemnifying Party shall have 20 days after receipt of such notice to assume the conduct and control, through counsel reasonably acceptable to the Indemnified Party and at the expense of the Indemnifying Party, of the settlement or defense thereof; provided that the Indemnifying Party shall permit the Indemnified Party to participate in such settlement or defense through counsel chosen by the Indemnified Party so long as the fees and expenses of such counsel are borne by the Indemnified Party. So long as the Indemnifying Party is reasonably contesting any such claim in good faith, the Indemnified Party shall not pay or settle any such claim; provided that the Indemnified Party may pay or settle any such claim if the Indemnified Party waives its right to indemnification hereunder in respect of such claim. If the Indemnifying Party does not notify the Indemnified Party within 20 days after the receipt of the Indemnified Party's notice of a claim of indemnity hereunder that it elects to undertake the defense thereof, the Indemnified Party shall have the right to contest, pay or settle the claim but shall not thereby waive any right to indemnity therefor pursuant to this Agreement. The Indemnifying Party shall not, except with the consent of the Indemnified Party, enter into any settlement that does not include as an unconditional term thereof the unconditional release of the Indemnified Party from all liability with respect to the related claim. The obligations to indemnify and hold harmless pursuant to this Section 6 shall survive the consummation of the transactions contemplated hereby. 6 7. Miscellaneous. 7.1 Entire Agreement; Assignment. This Agreement, together with the Merger Agreement, (i) constitutes the entire agreement among the parties with respect to the subject matter hereof and supersedes all other prior agreements and understandings, both written and oral, between the parties with respect to the subject matter hereof and (ii) shall not be assigned by operation of law or otherwise, provided that Parent may assign its rights and obligations hereunder to any direct or indirect wholly owned parent company or subsidiary of Parent, but no such assignment shall relieve Parent of its obligations hereunder if such assignee does not perform such obligations. 7.2 Amendments. This Agreement may not be modified, amended, altered or supplemented, except upon the execution and delivery of a written agreement executed by the parties hereto. 7.3 Notices. All notices, requests, claims, demands and other communications hereunder shall be in writing and shall be given (and shall be deemed to have been duly received if so given) by hand delivery, telegram, telex or telecopy, or by mail (registered or certified mail, postage prepaid, return receipt requested) or by any courier service, such as Federal Express, providing proof of delivery. All communications hereunder shall be delivered to the respective parties at (i) in the case of any MMC Stockholder, c/o Ivins Phillips & Barker, 1700 Pennsylvania Avenue, Washington, D.C. 20006, and (ii) in the case of Parent, the following address: if to Parent: Dillard's, Inc. 1600 Cantrell Road Little Rock, Arkansas 72201 Attention: James I. Freeman with a copy to: Simpson Thacher & Bartlett 425 Lexington Avenue New York, New York 10017 Attention: Alan G. Schwartz, Esq. or to such other address as the person to whom notice is given may have previously furnished to the others in writing in the manner set forth above. 7.4 Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of Delaware, regardless of the laws that might otherwise govern under applicable principles of conflicts of laws thereof. 7 7.5 Cooperation as to Regulatory Matters. If so requested by Parent, promptly after the date hereof, each MMC Stockholder will use its reasonable best efforts to cause it and the Company (if required) to make all filings which are required under the HSR Act and applicable requirements and to seek all regulatory approvals required in connection with the transactions contemplated hereby. The parties shall furnish to each other such necessary information and reasonable assistance as may be requested in connection with the preparation of filings and submissions to any governmental agency, including, without limitation, filings under the provisions of the HSR Act. Each MMC Stockholder shall also use its reasonable best efforts to cause the Company to supply Parent with copies of all correspondence, filings or communications (or memoranda setting forth the substance thereof) between the Company and its representatives and the Federal Trade Commission, the Department of Justice and any other governmental agency or authority and members of their respective staffs with respect to this Agreement and the transactions contemplated hereby. 7.6 Termination. Except for the provisions of Section 6 which shall remain in effect indefinitely, this Agreement shall terminate on the earlier of (i) the Effective Time or (ii) the termination of the Merger Agreement in accordance with its terms. 7.7 Specific Performance. Each of the parties hereto recognizes and acknowledges that a breach by it of any covenants or agreements contained in this Agreement will cause the other party to sustain damages for which it would not have an adequate remedy at law for money damages, and therefore, each of the parties hereto agrees that in the event of any such breach the aggrieved party shall be entitled to the remedy of specific performance of such covenants and agreements and injunctive and other equitable relief in addition to any other remedy to which it may be entitled, at law or in equity. 7.8 Counterparts. This Agreement may be executed in one or more counterparts, each of which shall be deemed to be an original, but all of which taken together shall constitute one and the same Agreement. 7.9 Descriptive Headings. The descriptive headings used herein are inserted for convenience of reference only and are not intended to be part of or to affect the meaning or interpretation of this Agreement. 7.10 Severability. Whenever possible, each provision or portion of any provision of this Agreement will be interpreted in such manner as to be effective and valid under applicable law but if any provision or portion of any provision of this Agreement is held to be invalid, illegal or unenforceable in any respect under any applicable law or rule in any jurisdiction, such invalidity, illegality or unenforceability will not affect any other provision or portion of any provision in such jurisdiction, and this Agreement will be reformed, construed and enforced in such jurisdiction as if such invalid, illegal or unenforceable provision or portion of any provision had never been contained herein. 8 IN WITNESS WHEREOF, Parent and each MMC Stockholder have caused this Agreement to be duly executed as of the day and year first above written. DILLARD'S, INC. By: /s/ James I. Freeman --------------------------------------- Name: James I. Freeman Title: Chief Financial Officer MMC STOCKHOLDERS (listed on next page) Woodbank Mills, Inc. By: /s/ Roger Milliken ------------------ Name: Roger Milliken Title: Chairman as the holder of 139,000 shares of the common stock, par value $5.00 per share, of Minot Mercantile Corporation /s/ Roger Milliken ------------------ Roger Milliken /s/ Gerrish H. Milliken, Jr. ------------------------ Gerrish H. Milliken, Jr. /s/ Minot K. Milliken ----------------- Minot K. Milliken as a majority of the trustees of trusts holding 32,646 shares of the common stock, par value $5.00 per share, of Minot Mercantile Corporation /s/ Roger Milliken ------------------ Roger Milliken /s/ Gerrish H. Milliken, Jr. ------------------------ Gerrish H. Milliken, Jr. as a majority of the trustees of trusts holding 43,680 shares of the common stock, par value $5.00 per share, of Minot Mercantile Corporation /s/ Roger Milliken ------------------ Roger Milliken /s/ Minot K. Milliken ----------------- Minot K. Milliken as a majority of the trustees of trusts holding 5,660 shares of the common stock, par value $5.00 per share, of Minot Mercantile Corporation EX-99.(C)(6) 10 AGREE. & PLAN OF MERGER DILLARDS/WMI/WOODBANK ---------------------------------------------------------- AGREEMENT AND PLAN OF MERGER Among DILLARD'S, INC. WMI ACQUISITION, INC. and WOODBANK MILLS, INC. Dated as of May 16, 1998 ---------------------------------------------------------- TABLE OF CONTENTS ARTICLE I THE MERGER ........................... 2 SECTION 1.1 The Merger ................................................. 2 SECTION 1.2 Closing; Effective Time .................................... 2 SECTION 1.3 Effects of the Merger ...................................... 2 SECTION 1.4 Certificate of Incorporation; By-Laws ...................... 2 SECTION 1.5 Directors and Officers ..................................... 3 SECTION 1.6 Conversion of Securities ................................... 3 SECTION 1.7 Dissenting Shares and Section 262 Shares ................... 4 SECTION 1.8 Surrender of Shares; Stock Transfer Books .................. 5 ARTICLE II REPRESENTATIONS AND WARRANTIES OF THE COMPANY ................... 6 SECTION 2.1 Corporate Organization; Subsidiaries and Employees ......... 6 SECTION 2.2 Certificate of Incorporation and By-Laws ................... 6 SECTION 2.3 Capitalization ............................................. 7 SECTION 2.4 Authority Relative to This Agreement ....................... 7 SECTION 2.5 No Conflict; Required Filings and Consents ................. 7 SECTION 2.6 Compliance ................................................. 8 SECTION 2.7 Limited Operations; Financial Statements; No Undisclosed Liabilities .............................................. 8 SECTION 2.8 Absence of Litigation ...................................... 9 SECTION 2.9 Tax Matters ................................................ 9 SECTION 2.10 Investment Company ......................................... 10 SECTION 2.11 Brokers .................................................... 10 ARTICLE III REPRESENTATIONS AND WARRANTIES OF PARENT AND PURCHASER ................................. 10 SECTION 3.1 Corporate Organization ..................................... 10 SECTION 3.2 Authority Relative to This Agreement ....................... 10 SECTION 3.3 No Conflict; Required Filings and Consents ................. 10 SECTION 3.4 Brokers .................................................... 11 SECTION 3.5 Funds ...................................................... 11 ARTICLE IV CONDUCT PENDING THE CLOSING; ADDITIONAL AGREEMENTS .................... 11 SECTION 4.1 Conduct of Business of the Company Pending the Merger ...... 11 SECTION 4.2 Stockholders Meeting ....................................... 13 -i- SECTION 4.3 No Solicitation; Affirmation of Covenants in Stockholders' Agreement .................................................. 13 SECTION 4.4 Access to Information; Confidentiality ..................... 13 SECTION 4.5 Notification of Certain Matters ............................ 14 SECTION 4.6 Further Action; Reasonable Best Efforts .................... 14 SECTION 4.7 Public Announcements ....................................... 14 ARTICLE V CONDITIONS OF MERGER .................................. 15 SECTION 5.1 Conditions to Obligation of Each Party to Effect the Merger 15 SECTION 5.2 Additional Conditions to Obligation of Parent and Purchaser to Effect the Merger ....................................... 15 SECTION 5.3 Additional Conditions to Obligation of the Company to Effect the Merger ................................................. 16 ARTICLE VI TERMINATION, AMENDMENT AND WAIVER .......................... 16 SECTION 6.1 Termination ................................................ 16 SECTION 6.2 Effect of Termination ...................................... 17 SECTION 6.3 Amendment .................................................. 17 SECTION 6.4 Waiver ..................................................... 17 ARTICLE VII GENERAL PROVISIONS .................................. 17 SECTION 7.1 Survival of Representations, Warranties and Agreements ..... 17 SECTION 7.2 Notices .................................................... 17 SECTION 7.3 Certain Definitions ........................................ 19 SECTION 7.4 Severability ............................................... 19 SECTION 7.5 Entire Agreement; Assignment ............................... 19 SECTION 7.6 Parties in Interest ........................................ 19 SECTION 7.7 Fees and Expenses .......................................... 20 SECTION 7.8 Governing Law .............................................. 20 SECTION 7.9 Headings ................................................... 20 SECTION 7.10 Counterparts ............................................... 20 Schedule 1.6(d) - Schedule of Cash Equivalents -ii- AGREEMENT AND PLAN OF MERGER, dated as of May 16, 1998 (this "Agreement"), among DILLARD'S, INC., a Delaware corporation ("Parent"), WMI ACQUISITION, INC., a Delaware corporation and a wholly owned subsidiary of Parent ("Purchaser"), and WOODBANK MILLS, INC., a Delaware corporation (the "Company"). W I T N E S S E T H : WHEREAS, the Board of Directors of the Company has determined that it is in the best interests of the Company and the stockholders of the Company to enter into this Agreement with Parent and Purchaser, providing for the merger (the "Merger") of Purchaser with the Company in accordance with the General Corporation Law of the State of Delaware ("DGCL"), upon the terms and subject to the conditions set forth herein; WHEREAS, the Board of Directors of Parent and Purchaser have each approved the Merger of Purchaser with the Company in accordance with the DGCL upon the terms and subject to the conditions set forth herein; WHEREAS, concurrently with the execution and delivery of this Agreement, Parent, MSC Acquisition, Inc., a Delaware corporation and a wholly owned subsidiary of Parent ("MSC MergerSub"), and Mercantile Stores Company, Inc., a Delaware corporation ("MSC"), have entered into a merger agreement, dated as of the date hereof (the "MSC Merger Agreement"), pursuant to which MSC MergerSub has agreed to make a tender offer (the "Offer") for all outstanding shares of common stock, $.14 2/3 par value per share (the "MSC Common Stock"), of MSC, at $80.00 per share, or any higher price that may be paid pursuant to the Offer (the "Offer Price"), net to the seller in cash, subject to the offer condition contained therein (the "Offer Conditions"), to be followed by a merger (the "MSC Merger") of MSC MergerSub with and into MSC, with MSC as the surviving corporation; WHEREAS, concurrently with the execution and delivery of this Agreement, Parent, MMC Acquisition, Inc., a Delaware corporation and a wholly owned subsidiary of Parent ("MMC MergerSub"), and Minot Mercantile Corporation, a Delaware corporation ("MMC"), have entered into a merger agreement, dated as of the date hereof (the "MMC Merger Agreement"), pursuant to which MMC MergerSub will be merged with and into MMC (the "MMC Merger"), and MMC shall be the surviving corporation; WHEREAS, concurrently with the execution and delivery of this Agreement, holders of not less than 70% of all of the holders (the "WMI Stockholders") of the Company's common stock, par value $1.00 per share (referred to herein as the "Shares" or "Company Common Stock"), have executed and delivered an agreement (the "Proxy and Indemnification Agreement"), pursuant to which (i) the WMI Stockholders have granted Parent an irrevocable proxy to vote their Shares in favor of the adoption of this Agreement and the Merger at the Stockholders Meeting (as defined herein), and (ii) the WMI Stockholders have agreed to indemnify Parent and Purchaser in respect of any and all claims resulting from the Merger, in each case, subject to the terms and conditions contained therein; and WHEREAS, concurrently with the execution and delivery of this Agreement, Parent and each of the Company, MMC and certain affiliated stockholders of MSC (collectively, 2 the "Related Sellers") have entered into a stockholders' agreement, each dated as of the date hereof (each, a "Stockholders' Agreement"), pursuant to which, among other things, each Related Seller has granted an option in favor of Parent with respect to the shares of Company Common Stock respectively held by such person, subject to the terms and conditions contained therein; NOW, THEREFORE, in consideration of the foregoing and the mutual covenants and agreements herein contained, and intending to be legally bound hereby, Parent, Purchaser and the Company hereby agree as follows: ARTICLE I THE MERGER SECTION 1.1 The Merger. Upon the terms and subject to the conditions of this Agreement and in accordance with the DGCL, at the Effective Time (as defined in Section 1.2), Purchaser shall be merged with and into the Company. As a result of the Merger, the separate corporate existence of Purchaser shall cease and the Company shall continue as the surviving corporation of the Merger (the "Surviving Corporation"). At Parent's election, any direct or indirect subsidiary of Parent other than Purchaser may be merged with and into the Company instead of the Purchaser. In the event of such an election, the parties agree to execute an appropriate amendment to this Agreement in order to reflect such election. SECTION 1.2 Closing; Effective Time. Subject to the provisions of Article V, the closing of the Merger (the "Closing") shall take place in New York City at the offices of Simpson Thacher & Bartlett, 425 Lexington Avenue, New York, New York, as soon as practicable but in no event later than the first business day after the satisfaction or waiver of the conditions set forth in Article V, or at such other place or at such other date as Parent and the Company may mutually agree. The date on which the Closing actually occurs is hereinafter referred to as the "Closing Date". At the Closing, the parties hereto shall cause the Merger to be consummated by filing this Agreement or a certificate of merger or a certificate of ownership and merger (the "Certificate of Merger") with the Secretary of State of the State of Delaware, in such form as required by and executed in accordance with the relevant provisions of the DGCL (the date and time of the filing of the Certificate of Merger with the Secretary of State of the State of Delaware (or such later time as is specified in the Certificate of Merger) being the "Effective Time"). SECTION 1.3 Effects of the Merger. The Merger shall have the effects set forth in the applicable provisions of the DGCL. Without limiting the generality of the foregoing and subject thereto, at the Effective Time all the property, rights, privileges, immunities, powers and franchises of the Company and Purchaser shall vest in the Surviving Corporation, and all debts, liabilities and duties of the Company and Purchaser shall become the debts, liabilities and duties of the Surviving Corporation. SECTION 1.4 Certificate of Incorporation; By-Laws. (a) At the Effective Time and without any further action on the part of the Company and Purchaser, the Certificate of Incorporation of the Company, as in effect immediately prior to the Effective Time, shall be 3 amended and restated so as to read in its entirety in the form set forth in Exhibit A hereto and, as so amended, until thereafter and further amended as provided therein and under the DGCL, it shall be the Certificate of Incorporation of the Surviving Corporation following the Merger. (b) At the Effective Time and without any further action on the part of the Company and Purchaser, the By-Laws of Purchaser, as in effect immediately prior to the Effective Time, shall be the By-Laws of the Surviving Corporation and thereafter may be amended or repealed in accordance with their terms or the Certificate of Incorporation of the Purchaser and as provided by law. SECTION 1.5 Directors and Officers. The directors and officers of Purchaser immediately prior to the Effective Time shall be the initial directors and officers of the Surviving Corporation, each to hold office in accordance with the Certificate of Incorporation and By-Laws of the Surviving Corporation. SECTION 1.6 Conversion of Securities. At the Effective Time, by virtue of the Merger and without any action on the part of Purchaser, the Company or the holders of any of the following securities: (a) Each share of the Company Common Stock, issued and outstanding immediately prior to the Effective Time (other than any Shares to be cancelled pursuant to Section 1.6(b) and any Dissenting Shares (as defined in Section 1.7(a)) shall be cancelled, extinguished and converted into the right to receive an amount (the "Merger Consideration") calculated as follows: (i) the Aggregate Value of Company Assets (as defined in Section 1.6(d) below) immediately prior to the Effective Time divided by (ii) the aggregate number of shares of Company Common Stock issued and outstanding immediately prior to the Effective Time. The Merger Consideration shall be payable to the holder of each Share, without interest, upon surrender of the certificate formerly representing such Share in the manner provided in Section 1.8, less any required withholding taxes. (b) Each share of Company Common Stock held in the treasury of the Company and each Share owned by the Company, Parent, Purchaser or any other direct or indirect subsidiary of such persons, in each case immediately prior to the Effective Time, shall be cancelled and retired without any conversion thereof and no payment or distribution shall be made with respect thereto. (c) Each share of common stock of Purchaser issued and outstanding immediately prior to the Effective Time shall be converted into and become one validly issued, fully paid and nonassessable share of identical common stock of the Surviving Corporation. (d) "Aggregate Value of Company Assets" means an amount equal to (i) the product of (A) the aggregate number of outstanding shares of MSC Common Stock directly owned by MMC immediately prior to the "Effective Time" (under and as defined in the MMC Merger Agreement), (B) the Offer Price and (C) a fraction, the numerator 4 of which is the aggregate number of outstanding shares of MMC common stock directly owned by the Company and the denominator of which is all of the outstanding shares of MMC common stock, in each case, immediately prior to the "Effective Time" (under and as defined in the MMC Merger Agreement), plus (ii) the product of (A) the aggregate number of outstanding shares of MSC Common Stock directly owned by the Company immediately prior to the Effective Time and (B) the Offer Price, plus (iii) the aggregate amount of Net Assets (as defined below). "Net Assets" means the amount by which the Company's assets exceeds its liabilities, each of which will be calculated from the Closing Balance Sheet (as defined below). Attached hereto as Schedule 1.6(d) is a list of all of assets and liabilities of the Company as of the date hereof. (e) "Closing Balance Sheet" means a balance sheet of the Company reflecting its assets and liabilities as of Closing, as prepared by the Company and delivered to Parent, for its review and consent, no later than 15 days prior to Closing. Parent shall, within five days of its receipt of the Closing Balance Sheet, complete its review thereof and identify to the Company any items with which Parent does not agree. Parent and the Company will promptly attempt to resolve in good faith any disagreement as to items contained on the Closing Balance Sheet. The Company will, as promptly as practicable after the date hereof, undertake to liquidate and/or sell all of its investments and other assets (other than its shares of MSC Common Stock and MMC common stock) so that the Company's assets, as reflected on the Closing Balance Sheet, will consist solely of cash and short-term, highly liquid cash equivalents (with maturities of seven days or less). The Closing Balance Sheet will set forth, in reasonable detail and specificity (with notes where appropriate), all of the Company's assets and liabilities as of the Closing, including without limitation all tax liabilities incurred on account of any liquidations or sales of the Company's investments or other assets and all liabilities, fees and expenses owing to the Company's advisors. The amount of cash and cash equivalents that are held back to cover the Company's liabilities, as identified on the Closing Balance Sheet, is referred to as the "Holdback Amount". The Holdback Amount will be applied by Parent and Purchaser to pay, upon presentment of proper invoices, to any post-Closing fees, expenses, liabilities and other obligations of the Company. (f) Promptly following the date on which all of the Company's liabilities that were identified on the Closing Balance Sheet, together with all outstanding "Losses" under and as defined in the Proxy and Indemnification Agreement, have been paid in full, any remaining Holdback Amount shall be released to the Paying Agent (as hereinafter defined) for distribution to the former holders of the Shares. SECTION 1.7 Dissenting Shares and Section 262 Shares. (a) Notwithstanding anything in this Agreement to the contrary, shares of Company Common Stock that are issued and outstanding immediately prior to the Effective Time and which are held by stockholders who have not voted in favor of or consented to the Merger and shall have delivered a written demand for appraisal of such shares of Company Common Stock in the time and manner provided in Section 262 of the DGCL and shall not have failed to perfect or shall not have effectively withdrawn or lost their rights to appraisal and payment under the DGCL (the "Dissenting Shares") shall not be converted into the right to receive the Merger Consideration, but shall be 5 entitled to receive the consideration as shall be determined pursuant to Section 262 of the DGCL; provided, however, that if such holder shall have failed to perfect or shall have effectively withdrawn or lost his, her or its right to appraisal and payment under the DGCL, such holder's shares of Company Common Stock shall thereupon be deemed to have been converted, at the Effective Time, into the right to receive the Merger Consideration set forth in Section 1.6(a) of this Agreement, without any interest thereon. (b) The Company shall give Parent (i) prompt notice of any demands for appraisal pursuant to Section 262 received by the Company, withdrawals of such demands, and any other instruments served pursuant to the DGCL and received by the Company and (ii) the opportunity to direct all negotiations and proceedings with respect to demands for appraisal under the DGCL. The Company shall not, except with the prior written consent of Parent or as otherwise required by applicable law, make any payment with respect to any such demands for appraisal or offer to settle or settle any such demands. Pursuant to the Proxy and Indemnification Agreement, the WMI Stockholders shall indemnify, defend and hold harmless Parent and Purchaser against any and all liabilities, damages, expenses, losses or other claims that are paid in respect of any Dissenting Shares (including reasonable attorneys' fees and expenses) in excess of the aggregate Merger Consideration that would otherwise have been payable in respect of such Dissenting Shares pursuant to Section 1.6(a). SECTION 1.8 Surrender of Shares; Stock Transfer Books. (a) Prior to the Effective Time, Purchaser shall designate a bank or trust company to act as agent for the holders of Shares in connection with the Merger (the "Paying Agent") to receive the Merger Consideration to which holders of Shares shall become entitled pursuant to Section 1.6(a). When and as needed, Parent or Purchaser will make available to the Paying Agent sufficient funds to make all payments pursuant to Section 1.8(b). Such funds shall be invested by the Paying Agent as directed by Purchaser or, after the Effective Time, the Surviving Corporation, provided that such investments shall be in obligations of or guaranteed by the United States of America, in commercial paper obligations rated A-1 or P-1 or better by Moody's Investors Service, Inc. or Standard & Poor's Corporation, respectively, or in certificates of deposit, bank repurchase agreements or banker's acceptances of commercial banks with capital exceeding $500 million. Any net profit resulting from, or interest or income produced by, such investments will be payable to the Surviving Corporation or Parent, as Parent directs. (b) Promptly after the Effective Time, the Surviving Corporation shall cause to be mailed to each record holder, as of the Effective Time, of an outstanding certificate or certificates which immediately prior to the Effective Time represented Shares (the "Certificates"), a form of letter of transmittal (which shall specify that delivery shall be effected, and risk of loss and title to the Certificates shall pass, only upon proper delivery of the Certificates to the Paying Agent) and instructions for use in effecting the surrender of the Certificates for payment of the Merger Consideration therefor. Upon surrender to the Paying Agent of a Certificate, together with such letter of transmittal, duly completed and validly executed in accordance with the instructions thereto, and such other documents as may be required pursuant to such instructions, the holder of such Certificate shall be entitled to receive in exchange therefor the Merger Consideration for each Share formerly represented by such Certificate, and such Certificate shall then be cancelled. No interest shall be paid or accrued for the benefit of holders of the 6 Certificates on the Merger Consideration payable upon the surrender of the Certificates. If payment of the Merger Consideration is to be made to a person other than the person in whose name the surrendered Certificate is registered, it shall be a condition of payment that the Certificate so surrendered shall be properly endorsed or shall be otherwise in proper form for transfer and that the person requesting such payment shall have paid any transfer and other taxes required by reason of the payment of the Merger Consideration to a person other than the registered holder of the Certificate surrendered or shall have established to the satisfaction of the Surviving Corporation that such tax either has been paid or is not applicable. (c) At any time following six months after the Effective Time, the Surviving Corporation shall be entitled to require the Paying Agent to deliver to it any funds (including any interest received with respect thereto) which had been made available to the Paying Agent and which have not been disbursed to holders of Certificates, and thereafter such holders shall be entitled to look to the Surviving Corporation (subject to abandoned property, escheat or other similar laws) only as general creditors thereof with respect to the Merger Consideration payable upon due surrender of their Certificates. Notwithstanding the foregoing, neither the Surviving Corporation nor the Paying Agent shall be liable to any holder of a Certificate for Merger Consideration delivered to a public official pursuant to any applicable abandoned property, escheat or similar law. (d) At the Effective Time, the stock transfer books of the Company shall be closed and thereafter there shall be no further registration of transfers of shares of Company Common Stock on the records of the Company. From and after the Effective Time, the holders of Certificates evidencing ownership of Shares outstanding immediately prior to the Effective Time shall cease to have any rights with respect to such Shares except as otherwise provided for herein or by applicable law. ARTICLE II REPRESENTATIONS AND WARRANTIES OF THE COMPANY The Company hereby represents and warrants to Parent and Purchaser that: SECTION 2.1 Corporate Organization; Subsidiaries and Employees. (a) The Company is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware and has the requisite corporate power and authority and any necessary governmental approvals to own, lease and operate its properties and to carry on its business as it is now being conducted. The Company is not qualified or licensed as a foreign corporation to do business in any jurisdiction. When used in connection with the Company, the term "Material Adverse Effect" means any change or effect that would be materially adverse to the assets, liabilities, results of operations, financial condition or business of the Company. (b) The Company has no subsidiaries and no employees. 7 SECTION 2.2 Certificate of Incorporation and By-Laws. The Company has heretofore furnished to Parent a complete and correct copy of the Certificate of Incorporation and the By-Laws of the Company as currently in effect. Such Certificate of Incorporation and ByLaws are in full force and effect and no other organizational documents are applicable to or binding upon the Company. The Company is not in violation of any of the provisions of its Certificate of Incorporation or By-Laws. SECTION 2.3 Capitalization. The authorized capital stock of the Company consists of 188,200 shares of Company Common Stock, of which (a) 188,200 shares of Company Common Stock are issued and outstanding, all of which are validly issued, fully paid and nonassessable and have been issued free of preemptive (or similar) rights, and (b) no shares of Company Common Stock are held in the treasury of the Company. Except as set forth above, there are outstanding (i) no shares of capital stock or other voting securities of the Company, (ii) no securities of the Company convertible into or exchangeable for shares of capital stock or voting securities of the Company, (iii) no options or other rights to acquire from the Company, and no obligation of the Company to issue, any capital stock, voting securities or securities convertible into or exchangeable for capital stock or voting securities of the Company and (iv) no equity equivalents, interests in the ownership or earnings of the Company or other similar rights (collectively, "Company Securities"). There are no outstanding obligations of the Company or any of its subsidiaries to repurchase, redeem or otherwise acquire any Company Securities. There are no other options, calls, warrants or other rights, agreements, arrangements or commitments of any character relating to the issued or unissued capital stock of the Company to which the Company is a party. There are no outstanding contractual obligations of the Company to provide funds to or make any investment (in the form of a loan, capital contribution or otherwise) in any other entity and, except for the shares of MSC Common Stock, the Company has no other direct or indirect equity interests in any other person. SECTION 2.4 Authority Relative to This Agreement. The Company has all necessary corporate power and authority to execute and deliver this Agreement, to perform its obligations hereunder and to consummate the transactions contemplated hereby. The execution, delivery and performance of this Agreement by the Company and the consummation by the Company of the transactions contemplated hereby have been duly and validly authorized by all necessary corporate action and no other corporate proceedings on the part of the Company are necessary to authorize this Agreement or to consummate the transactions so contemplated (other than, with respect to the Merger, the adoption of this Agreement by the holders of a majority of the outstanding shares of Company Common Stock and the filing of appropriate merger documents as required by the DGCL). This Agreement has been duly and validly executed and delivered by the Company and, assuming the due authorization, execution and delivery hereof by Parent and Purchaser, constitutes a legal, valid and binding obligation of the Company enforceable against the Company in accordance with its terms. As a result of the foregoing actions, the only vote required to authorize the Merger is the affirmative vote of a majority of the outstanding Shares. SECTION 2.5 No Conflict; Required Filings and Consents. (a) The execution, delivery and performance of this Agreement by the Company do not and will not: (i) conflict with or violate the Certificate of Incorporation or By-Laws of the Company or the equivalent 8 organizational documents of any of its subsidiaries; (ii) assuming that all consents, approvals and authorizations contemplated by clauses (i), (ii) and (iii) of subsection (b) below have been obtained and all filings described in such clauses have been made, conflict with or violate any law, rule, regulation, order, judgment or decree applicable to the Company or any of its subsidiaries or by which its or any of their respective properties are bound or affected; or (iii) result in any breach or violation of or constitute a default (or an event which with notice or lapse of time or both could become a default) or result in the loss of a material benefit under, or give rise to any right of termination, amendment, acceleration or cancellation of, or result in the creation of a lien or encumbrance on any of the properties or assets of the Company or any of its subsidiaries pursuant to, any note, bond, mortgage, indenture, contract, agreement, lease, license, permit, franchise or other instrument or obligation to which the Company or any of its subsidiaries is a party or by which the Company or any of its subsidiaries or its or any of their respective properties are bound or affected, except, in the case of clauses (ii) and (iii), for any such conflicts, violations, breaches, defaults or other occurrences which are not, individually or in the aggregate, reasonably likely to have a Material Adverse Effect. (b) The execution, delivery and performance of this Agreement by the Company and the consummation of the Merger by the Company do not and will not require any consent, approval, authorization or permit of, action by, filing with or notification to, any governmental or regulatory authority, except for (i) applicable requirements, if any, of the Hart- Scott-Rodino Antitrust Improvements Act of 1976, as amended (the "HSR Act"), state securities, takeover and "blue sky" laws, (ii) the filing and recordation of appropriate merger or other documents as required by the DGCL and (iii) such consents, approvals, authorizations, permits, actions, filings or notifications the failure of which to make or obtain are not, individually or in the aggregate, reasonably likely to (x) prevent or materially delay the Company from performing its obligations under this Agreement or (y) have a Material Adverse Effect. SECTION 2.6 Compliance. The Company is not in conflict with, or in default or violation of, (i) any law, rule, regulation, order, judgment or decree applicable to the Company or by which its properties are bound or affected, or (ii) any note, bond, mortgage, indenture, contract, agreement, lease, license, permit, franchise or other instrument or obligation to which the Company is a party or by which the Company or its properties are bound or affected, except for any such conflicts, defaults or violations which are not, individually or in the aggregate, reasonably likely to have a Material Adverse Effect. SECTION 2.7 Limited Operations; Financial Statements; No Undisclosed Liabilities. (a) The Company operates solely as a "personal holding corporation" within the meaning of Section 542 of the Internal Revenue Code of 1986, as amended (the "Code"). Except for (i) this Agreement and the transactions contemplated hereby, (ii) activities related to maintaining its corporate existence and (iii) activities related to the Company's ownership of the shares of MSC Common Stock and other investments (including, without limitation, the investment and reinvestment of proceeds received on account of such investments and distributions to the Company's stockholders), the Company has not engaged in any business activities of any type or kind whatsoever or entered into any agreements or arrangements with any person. The legal name of the Company is as set forth in this Agreement. The Company has no trade names, fictitious names, assumed names or "doing business as" names. 9 (b) The Company has not incurred, directly or indirectly, any liabilities, commitments, or obligations of any kind whatsoever, whether or not accrued and whether or not contingent or absolute, other than liabilities disclosed in Schedule 2.7(b) of the Company Disclosure Letter. (c) The Company has delivered to Parent true and correct copies of the Company's audited balance sheets for the prior three fiscal years and the related statements of consolidated income and retained earnings, and statements of consolidated cash flows for each of the last three fiscal years, including any related notes thereto (collectively, the "Company Financial Statements"). The Company Financial Statements have been prepared in accordance with generally accepted accounting principles applied on a consistent basis throughout the periods involved (except as may be indicated in the notes thereto) and fairly present in all material respects the financial position of the Company at the respective date thereof and the results of its operations and changes in cash flows for the periods indicated. SECTION 2.8 Absence of Litigation. There are no suits, claims, actions, proceedings or investigations pending or, to the best knowledge of the Company, threatened against the Company or any of its subsidiaries, or any properties or rights of the Company or any of its subsidiaries, before any court, arbitrator or administrative, governmental or regulatory authority or body. As of the date hereof, neither the Company nor any of its subsidiaries nor any of their respective properties is or are subject to any order, writ, judgment, injunction, decree, determination or award. SECTION 2.9 Tax Matters. The Company has, or will have, (i) filed all Tax Returns and reports required to be filed by it prior to the Closing Date (taking into account extensions), (ii) paid or accrued all Taxes due and payable for all taxable years or periods ending on or prior to the Closing Date, and (iii) paid or accrued all Taxes for which a notice of assessment or collection has been received (other than amounts being contested in good faith by appropriate proceedings). All such Tax Returns are complete and correct in all material respects. Neither the Internal Revenue Service (the "IRS") nor any other Taxing authority has asserted any claim for Taxes, or is threatening to assert any claims for Taxes, against the Company. The Company has withheld or collected and paid over to the appropriate Taxing authorities all Taxes required by law to be withheld or collected and paid over to such Taxing authorities. The Company has not made an election under Section 341(f) of the Code. There are no liens for Taxes upon any of the assets of the Company (other than liens for Taxes that are not yet due or that are being contested in good faith by appropriate proceedings). No extension of the statute of limitations on the assessment of any Taxes has been granted by the Company and is currently in effect. As used herein, "Taxes" shall mean any taxes of any kind, including but not limited to those on or measured by or referred to as income, gross receipts, capital, sales, use, ad valorem, franchise, profits, license, 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 authority. As used herein, "Tax Return" shall mean any return, report or statement required to be filed with any governmental authority with respect to Taxes. 10 SECTION 2.10 Investment Company. The Company is not an "investment company" or a company controlled by an "investment company" within the meaning of the Investment Company Act of 1940, as amended, or is exempt from all provisions of such act. SECTION 2.11 Brokers. No broker, finder or investment banker is entitled to any brokerage, finder's or other fee or commission in connection with the transactions contemplated by this Agreement based upon arrangements made by and on behalf of the Company (other than Goldman, Sachs & Co.'s engagement as financial advisor on behalf of MSC). ARTICLE III REPRESENTATIONS AND WARRANTIES OF PARENT AND PURCHASER Parent and Purchaser hereby, jointly and severally, represent and warrant to the Company that: SECTION 3.1 Corporate Organization. Each of Parent and Purchaser is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware and has the requisite corporate power and authority and any necessary governmental authority to own, operate or lease its properties and to carry on its business as it is now being conducted, except where the failure to be so organized, existing and in good standing or to have such power, authority and governmental approvals is not, individually or in the aggregate, reasonably likely to prevent the consummation of the Merger. SECTION 3.2 Authority Relative to This Agreement. Each of Parent and Purchaser has all necessary corporate power and authority to enter into this Agreement, to perform its obligations hereunder and to consummate the transactions contemplated hereby. The execution, delivery and performance of this Agreement by each of Parent and Purchaser and the consummation by each of Parent and Purchaser of the transactions contemplated hereby have been duly authorized by all necessary corporate action on the part of Parent and Purchaser other than filing and recordation of appropriate merger documents as required by the DGCL. This Agreement has been duly executed and delivered by Parent and Purchaser and, assuming due authorization, execution and delivery by the Company, constitutes a legal, valid and binding obligation of each such corporation enforceable against such corporation in accordance with its terms. SECTION 3.3 No Conflict; Required Filings and Consents. (a) The execution, delivery and performance of this Agreement by Parent and Purchaser do not and will not: (i) conflict with or violate the respective certificates of incorporation or by-laws of Parent or Purchaser; (ii) assuming that all consents, approvals and authorizations contemplated by clauses (i), (ii) and (iii) of subsection (b) below have been obtained and all filings described in such clauses have been made, conflict with or violate any law, rule, regulation, order, judgment or decree applicable to Parent or Purchaser or by which either of them or their respective properties are bound or affected; or (iii) result in any breach or violation of or constitute a default (or an 11 event which with notice or lapse of time or both could become a default) or result in the loss of a material benefit under, or give rise to any right of termination, amendment, acceleration or cancellation of, or result in the creation of a lien or encumbrance on any of the property or assets of Parent or Purchaser pursuant to, any note, bond, mortgage, indenture, contract, agreement, lease, license, permit, franchise or other instrument or obligation to which Parent or Purchaser is a party or by which Parent or Purchaser or any of their respective properties are bound or affected, except, in the case of clauses (ii) and (iii), for any such conflicts, violations, breaches, defaults or other occurrences which are not, individually or in the aggregate, reasonably likely to prevent or materially delay the consummation of the Merger. (b) The execution, delivery and performance of this Agreement by Parent and Purchaser do not and will not require any consent, approval, authorization or permit of, action by, filing with or notification to, any governmental or regulatory authority, except (i) for applicable requirements, if any, of the Exchange Act and the rules and regulations promulgated thereunder, the HSR Act, state securities, takeover and "blue sky" laws, (ii) the filing and recordation of appropriate merger or other documents as required by the DGCL, and (iii) such consents, approvals, authorizations, permits, actions, filings or notifications the failure of which to make or obtain are not, individually or in the aggregate, reasonably likely to prevent the consummation of the Merger. SECTION 3.4 Brokers. No broker, finder or investment banker (other than Morgan Stanley & Co. Incorporated) is entitled to any brokerage, finder's or other fee or commission in connection with the transactions contemplated by this Agreement based upon arrangements made by and on behalf of Parent or Purchaser. SECTION 3.5 Funds. Parent or Purchaser, at the expiration date of the Offer and at the Effective Time, will have the funds necessary to consummate the Merger. ARTICLE IV CONDUCT PENDING THE CLOSING; ADDITIONAL AGREEMENTS SECTION 4.1 Conduct of Business of the Company Pending the Merger. The Company covenants and agrees that, during the period from the date hereof to the Effective Time, unless Parent shall otherwise agree in writing and except as otherwise expressly contemplated by this Agreement, the Company shall not (i) engage in any business activities of any type or kind whatsoever or enter into any agreements or arrangements with any person, except as otherwise contemplated pursuant to this Agreement and (ii) incur, directly or indirectly, any liabilities, commitments, or obligations of any kind whatsoever, whether or not accrued and whether or not contingent or absolute. By way of amplification and not limitation, the Company shall not, between the date of this Agreement and the Effective Time, directly or indirectly do, or commit to do, any of the following without the prior written consent of Parent: (a) Amend or otherwise change its certificate of incorporation or by-laws; 12 (b) Issue, deliver, sell, pledge, dispose of or encumber, or authorize or commit to the issuance, sale, pledge, disposition or encumbrance of, (i) any shares of capital stock of any class, or any options, warrants, convertible securities or other rights of any kind to acquire any shares of capital stock, or any other ownership interest (including but not limited to stock appreciation rights or phantom stock), of the Company or (ii) any assets of the Company; (c) Declare, set aside, make or pay any dividend or other distribution, payable in cash, stock, property or otherwise, with respect to any of its capital stock; (d) Reclassify, combine, split, subdivide or redeem, purchase or otherwise acquire, directly or indirectly, any of its capital stock; (e) (i) Acquire (by merger, consolidation, or acquisition of stock or assets) any corporation, partnership or other business organization or division thereof, or otherwise form or commit to form any subsidiary; (ii) incur any indebtedness for borrowed money or issue any debt securities or assume, guarantee or endorse, or otherwise as an accommodation become responsible for, the obligations of any person, or make any loans, advances or capital contributions to, or investments in, any other person; (iii) enter into any contract or agreement other than in the ordinary course of business consistent with past practice; or (iv) authorize any capital expenditures of any nature whatsoever; (f) Hire, appoint or engage, or commit to hire, appoint or engage, any director, officer, employee, consultant or other advisor, or otherwise pay or commit to pay any compensation, fringe benefits or severance or other termination benefits to any such persons, other than the engagement of any agent by the Company in connection with the liquidation and/or sale of the Company's assets and investments in the manner contemplated herein; (g) Make any Tax election, change any method of Tax accounting or settle or compromise any federal, state, local or foreign Tax liability; (h) Settle or compromise any pending or threatened suit, action or claim; (i) Adopt a plan of complete or partial liquidation, dissolution, merger, consolidation, restructuring, recapitalization or other reorganization of the Company (other than the Merger); or (j) Take, or offer or propose to take, or agree to take in writing or otherwise, any of the actions described in Sections 4.1(a) through 4.1(i) or any action which would make any of the representations or warranties of the Company contained in this Agreement untrue and incorrect as of the date when made if such action had then been taken. Notwithstanding anything contained in this Section 4.1, the Company shall be entitled to liquidate and/or sell all or any of its investments and other assets (other than its MSC 13 Common Stock and MMC common stock) and/or declare and pay dividends to its stockholders (other than of its MSC Common Stock or MMC common stock), so long as the Closing Balance Sheet accurately reflects the results of any such liquidation, sale and/or dividend. SECTION 4.2 Stockholders Meeting. Promptly following the date hereof, the Company, acting through its Board of Directors, shall in accordance with and subject to applicable law and the Company's Certificate of Incorporation and By-Laws, duly call, give notice of, convene and hold a meeting of its stockholders for the purpose of adopting this Agreement and the transactions contemplated hereby (the "Stockholders Meeting"). The Company's Board of Directors shall include, in any notice to stockholders of the Stockholders Meeting, the unanimous recommendation of the Board of Directors that the stockholders of the Company vote in favor of the adoption of this Agreement and use its reasonable best efforts to obtain the necessary adoption of this Agreement. At the Stockholders Meeting, Parent and Purchaser shall cause all Shares subject to the WMI Stockholders' proxy under the Proxy and Indemnification Agreement to be voted in favor of adoption of this Agreement. SECTION 4.3 No Solicitation; Affirmation of Covenants in Stockholders' Agreement. (a) The Company shall not, and the Company shall cause all of its directors, agents, affiliates and associates to not, directly or indirectly, solicit, encourage, participate in or initiate any inquiries or the making of any proposal by any person or entity (other than Parent or any affiliate of Parent) which constitutes, or may reasonably be expected to lead to, (i) any sale of the Shares or (ii) any acquisition or purchase of any of the Company's assets or any equity interest in, or any merger, consolidation or business combination with, the Company. If the Company receives an inquiry or proposal with respect to the sale of Shares, then the Company shall promptly inform Parent of the terms and conditions, if any, of such inquiry or proposal and the identity of the person making it. The Company and its directors, agents, affiliates and associates will immediately cease and cause to be terminated any existing activities, discussions or negotiations with any parties conducted heretofore with respect to any of the foregoing. (b) The Company affirms and agrees that it shall comply in all respects with the covenants set forth in its Stockholders' Agreement, including without limitation the covenants set forth in Section 5 thereof. SECTION 4.4 Access to Information; Confidentiality. From the date hereof to the Effective Time, the Company shall, and shall cause its officers, directors and other agents to, afford the officers, employees, auditors and other agents of Parent, and financing sources who shall agree to be bound by the provisions of this Section 4.4 as though a party hereto, complete access, consistent with applicable law, at all reasonable times to all books and records of the Company, and shall furnish Parent and such financing sources with all financial, operating and other data and information as Parent, through its officers, employees or agents, or such financing sources may from time to time reasonably request. All information obtained by Parent and Purchaser pursuant to this Section 4.4 shall be kept confidential in accordance with the Confidentiality Agreement, dated on or about May 7, 1998 (the "Parent Confidentiality Agreement"), between Parent and MSC. No investigation pursuant to this Section 4.4 shall affect any representations or warranties of the parties herein or the conditions to the obligations of the parties hereto. 14 SECTION 4.5 Notification of Certain Matters. The Company shall give prompt notice to Parent, and Parent shall give prompt notice to the Company, of the occurrence or non-occurrence of (i) any event the occurrence or non-occurrence of which would be likely to cause any representation or warranty contained in this Agreement to be untrue or inaccurate in any material respect and (ii) any failure of the Company, Parent or Purchaser, as the case may be, to comply with or satisfy in any material respect any covenant, condition or agreement to be complied with or satisfied by it hereunder; provided, however, that the delivery of any notice pursuant to this Section 4.5 shall not limit or otherwise affect the remedies available hereunder to the party receiving such notice. SECTION 4.6 Further Action; Reasonable Best Efforts. (a) Upon the terms and subject to the conditions hereof, each of the parties hereto shall use its reasonable best efforts to take, or cause to be taken, all appropriate action, and to do or cause to be done, all things necessary, proper or advisable under applicable laws and regulations to consummate and make effective the transactions contemplated by this Agreement as soon as practicable, including but not limited to (i) cooperation in the preparation and filing of any required filings under the HSR Act and any amendments to any thereof and (ii) using its reasonable best efforts to promptly make all required regulatory filings and applications including, without limitation, responding promptly to requests for further information and to obtain all licenses, permits, consents, approvals, authorizations, qualifications and orders of governmental authorities and any other third parties as are necessary for the consummation of the transactions contemplated by this Agreement and to fulfill the conditions to the Merger. In case at any time after the Effective Time any further action is necessary or desirable to carry out the purposes of this Agreement, the proper officers and directors of each party to this Agreement shall use their reasonable best efforts to take all such necessary action. (b) The Company and Parent each shall keep the other apprised of the status of matters relating to completion of the transactions contemplated hereby, including promptly furnishing the other with copies of notices or other communications received by Parent or the Company, as the case may be, or any of their subsidiaries, from any governmental authority with respect to the Merger or any of the other transactions contemplated by this Agreement. The parties hereto will consult and cooperate with one another, and consider in good faith the views of one another in connection with any analyses, appearances, presentations, memoranda, briefs, arguments, opinions and proposals made or submitted by or on behalf of any party hereto in connection with proceedings under or relating to the HSR Act or any other antitrust law. SECTION 4.7 Public Announcements. Parent and the Company shall consult with each other before issuing any press release or otherwise making any public statements with respect to the Merger and shall not issue any such press release or make any such public statement prior to such consultation, except as may be required by law or any listing agreement with its securities exchange. 15 ARTICLE V CONDITIONS OF MERGER SECTION 5.1 Conditions to Obligation of Each Party to Effect the Merger. The respective obligations of each party to effect the Merger shall be subject to the satisfaction (or, in the case of Section 5.1(d) below, the waiver, to the extent available, by Parent) at or prior to the Effective Time of the following conditions: (a) This Agreement shall have been adopted by the affirmative vote of the stockholders of the Company by the requisite vote in accordance with the Company's Certificate of Incorporation and the DGCL (which the Company has represented shall be solely the affirmative vote of a majority of the outstanding Shares). (b) No statute, rule, regulation, executive order, decree, ruling, injunction or other order (whether temporary, preliminary or permanent) shall have been enacted, entered, promulgated or enforced by any United States, foreign, federal or state court or governmental authority which prohibits, restrains, enjoins or restricts the consummation of the Merger, the Offer or the MSC Merger. (c) Any waiting period applicable to the Merger under the HSR Act shall have terminated or expired. (d) All of the Offer Conditions, other than the consummation of the Merger, shall have been satisfied and MSC MergerSub shall have determined to purchase the shares of MSC Common Stock pursuant to the Offer; provided that, if the MSC Merger Agreement is terminated under circumstances in which Parent is entitled to the payment of the fees set forth in Section 8.3(a)(ii) of the MSC Merger Agreement, Parent (in its sole and absolute discretion) shall be entitled to waive the satisfaction of the conditions in this Section 5.1(d). SECTION 5.2 Additional Conditions to Obligation of Parent and Purchaser to Effect the Merger. The obligations of Parent and Purchaser to effect the Merger shall be subject to the satisfaction (or waiver) at or prior to the Effective Time of the following conditions: (a) The Company shall have performed in all material respects all covenants and agreements required to be performed by it under this Agreement at or prior to the Closing Date. (b) The representations and warranties made herein by the Company shall have been true and correct in all material respects on the date of this Agreement and as of the Effective Time, except to the extent that any such representation or warranty is made as of a specified date, in which case such representation or warranty shall have been true and correct as of such date. 16 (c) Each of (i) the Stockholder's Agreement of the Company (and the Stockholder's Agreements for each other Related Seller), and (ii) the Proxy and Indemnification Agreement shall continue to be in full force and effect, with no amendments or other changes thereto. SECTION 5.3 Additional Conditions to Obligation of the Company to Effect the Merger. The obligations of the Company to effect the Merger shall be subject to the satisfaction (or waiver) at or prior to the Effective Time of the following conditions: (a) Parent and Purchaser shall have performed in all material respects all of their respective covenants and agreements required to be performed by them under this Agreement at or prior to the Closing Date. (b) The representations and warranties made herein by Parent and Purchaser shall have been true and correct in all material respects on the date of this Agreement and as of the Effective Time, except to the extent that any such representation or warranty is made as of a specified date, in which case such representation or warranty shall have been true and correct as of such date. ARTICLE VI TERMINATION, AMENDMENT AND WAIVER SECTION 6.1 Termination. This Agreement may be terminated and the Merger contemplated hereby may be abandoned at any time prior to the Effective Time: (a) By mutual written consent of Parent, Purchaser and the Company; (b) By Parent or the Company if any court of competent jurisdiction or other governmental body located or having jurisdiction within the United States shall have issued a final order, injunction, decree, judgment or ruling or taken any other final action restraining, enjoining or otherwise prohibiting the Merger, the Offer or the MSC Merger and such order, injunction, decree, judgment, ruling or other action is or shall have become final and nonappealable; (c) By Parent if due to an occurrence or circumstance which resulted in a failure to satisfy any of the Offer Conditions (other than as a result of a breach by Parent or MSC MergerSub of its obligations under the MSC Merger Agreement), MSC MergerSub shall have (i) terminated the Offer or (ii) failed to pay for shares of MSC Common Stock pursuant to the Offer on or prior to the Outside Date (as defined in the MSC Merger Agreement); (d) By the Company if (i) the MSC Merger Agreement is terminated and (ii) Parent is no longer entitled to the payment of the fees set forth in Section 8.3(a)(ii) of the MSC Merger Agreement; or 17 (e) By Parent prior to the purchase of shares of MSC Common Stock pursuant to the Offer, if (i) there shall have been a breach of any representation, warranty, covenant or agreement on the part of the Company contained in this Agreement which is reasonably likely to have a Material Adverse Effect, which shall not have been cured prior to the earlier of (A) 10 business days following notice of such breach and (B) two business days prior to the date on which the Offer expires, or (ii) the MSC Merger Agreement is terminated. SECTION 6.2 Effect of Termination. In the event of the termination of this Agreement pursuant to Section 6.1, this Agreement shall forthwith become void and there shall be no liability on the part of any party hereto except as set forth in Section 7.1; provided, however, that nothing herein shall relieve any party from liability for any wilful breach hereof. SECTION 6.3 Amendment. This Agreement may be amended by the parties hereto by action taken by or on behalf of their respective Boards of Directors at any time prior to the Effective Time; provided, however, that no amendment may be made which would reduce the amount or change the type of consideration into which each Share shall be converted upon consummation of the Merger without the redelivery by the Company's stockholders of a stockholders' consent thereto. This Agreement may not be amended except by an instrument in writing signed by the parties hereto. SECTION 6.4 Waiver. At any time prior to the Effective Time, any party hereto may (a) extend the time for the performance of any of the obligations or other acts of the other parties hereto, (b) waive any inaccuracies in the representations and warranties contained herein or in any document delivered pursuant hereto and (c) waive compliance with any of the agreements or conditions contained herein. Any such extension or waiver shall be valid if set forth in an instrument in writing signed by the party or parties to be bound thereby. ARTICLE VII GENERAL PROVISIONS SECTION 7.1 Survival of Representations, Warranties and Agreements. (a) Except as set forth in Section 7.1(b), all representations, warranties and agreements contained in this Agreement shall terminate and be extinguished at the Effective Time or the earlier date of termination of this Agreement pursuant to Section 6.1. (b) Notwithstanding Section 7.1(a), (i) the covenants and agreements made by the parties in this Agreement which by their terms contemplate performance after the Effective Time (or after termination) shall survive the Effective Time (or such termination) until fully performed, and (ii) the representations and warranties of the Company contained herein shall survive the Effective Time indefinitely. SECTION 7.2 Notices. All notices, requests, claims, demands and other communications hereunder shall be in writing and shall be given (and shall be deemed to have 18 been duly given upon receipt) by delivery in person, by cable, telecopy, telegram or telex or by registered or certified mail (postage prepaid, return receipt requested) to the respective parties at the following addresses (or at such other address for a party as shall be specified by like notice): if to Parent or Purchaser: Dillard's, Inc. 1600 Cantrell Road Little Rock, Arkansas 72201 Attention: James I. Freeman with a copy to: Simpson Thacher & Bartlett 425 Lexington Avenue New York, New York 10017 Attention: Alan G. Schwartz, Esq. if to the Company: c/o Ivins Phillips & Barker 1700 Pennslyvania Avenue Washington, D.C. 20006 Attention: Stuart Dunn, Esq. with a copy to: King & Spalding 191 Peachtree Street Atlanta, Georgia 30303 Attention: Russell B. Richards, Esq. with a further copy to: Morris, Nichols, Arsht & Tunnel 1201 N. Market Street Wilminton, Delaware 19801 Attention: Andrew M. Johnston, Esq. 19 SECTION 7.3 Certain Definitions. For purposes of this Agreement, the term: "affiliate" of a person means a person that directly or indirectly, through one or more intermediaries, controls, is controlled by, or is under common control with, the first mentioned person; "control" (including the terms "controlled by" and "under common control with") means the possession, directly or indirectly or as trustee or executor, of the power to direct or cause the direction of the management policies of a person, whether through the ownership of stock, as trustee or executor, by contract or credit arrangement or otherwise; "person" means an individual, corporation, partnership, association, trust, unincorporated organization, other entity or group (as defined in Section 13(d)(3) of the Exchange Act); and "subsidiary" or "subsidiaries" of any person means any corporation, partnership, joint venture or other legal entity of which such person (either alone or through or together with any other subsidiary), owns, directly or indirectly, 50% or more of the stock or other equity interests the holder of which is generally entitled to vote for the election of the board of directors or other governing body of such corporation or other legal entity. SECTION 7.4 Severability. If any term or other provision of this Agreement is invalid, illegal or incapable of being enforced by any rule of law or public policy, all other conditions and provisions of this Agreement shall nevertheless remain in full force and effect so long as the economic or legal substance of the transactions contemplated hereby is not affected in any manner adverse to any party. Upon such determination that any term or other provision is invalid, illegal or incapable of being enforced, the parties hereto shall negotiate in good faith to modify this Agreement so as to effect the original intent of the parties as closely as possible in an acceptable manner to the end that the transactions contemplated hereby are fulfilled to the fullest extent possible. SECTION 7.5 Entire Agreement; Assignment. This Agreement, together with the Stockholders Agreements, Parent Confidentiality Agreement, the MSC Merger Agreement, the MMC Merger Agreement and the Proxy and Indemnification Agreement, constitutes the entire agreement among the parties with respect to the subject matter hereof and supersedes all prior agreements and undertakings, both written and oral, among the parties, or any of them, with respect to the subject matter hereof. This Agreement shall not be assigned by operation of law or otherwise, except that Parent and Purchaser may assign all or any of their respective rights and obligations hereunder to any direct or indirect wholly owned subsidiary or subsidiaries of Parent, provided that no such assignment shall relieve the assigning party of its obligations hereunder if such assignee does not perform such obligations. SECTION 7.6 Parties in Interest. This Agreement shall be binding upon and inure solely to the benefit of each party hereto, and nothing in this Agreement, express or implied, is intended to or shall confer upon any other person any rights, benefits or remedies of any nature whatsoever under or by reason of this Agreement. 20 SECTION 7.7 Fees and Expenses. Except as otherwise specifically provided herein, in the MSC Merger Agreement and in the Proxy and Indemnification Agreement, whether or not the transactions contemplated hereby are consummated, all costs and expenses incurred in connection with this Agreement and the transactions contemplated hereby will be paid by the party incurring such costs and expenses. SECTION 7.8 Governing Law. This Agreement shall be governed by, and construed in accordance with, the laws of the State of Delaware, regardless of the laws that might otherwise govern under applicable principles of conflicts of laws thereof. SECTION 7.9 Headings. The descriptive headings contained in this Agreement are included for convenience of reference only and shall not affect in any way the meaning or interpretation of this Agreement. SECTION 7.10 Counterparts. This Agreement may be executed in one or more counterparts, and by the different parties hereto in separate counterparts, each of which when executed shall be deemed to be an original but all of which taken together shall constitute one and the same agreement. 21 IN WITNESS WHEREOF, Parent, Purchaser and the Company have caused this Agreement to be executed as of the date first written above by their respective officers thereunto duly authorized. DILLARD'S, INC. By: /s/ James I. Freeman --------------------------------- Name: James I. Freeman Title: Chief Financial Officer WMI ACQUISITION, INC. By: /s/ James I. Freeman --------------------------------- Name: James I. Freeman Title: WOODBANK MILLS, INC. By: /s/ Roger Milliken --------------------------------- Name: Roger Milliken Title: Chairman EX-99.(C)(7) 11 AGREE. & PLAN OF MERGER DILLARDS/MMC/MERCANTILE ---------------------------------------------------------- AGREEMENT AND PLAN OF MERGER Among DILLARD'S, INC. MMC ACQUISITION, INC. and MINOT MERCANTILE CORPORATION Dated as of May 16, 1998 ---------------------------------------------------------- TABLE OF CONTENTS ----------------- ARTICLE I THE MERGER .......................... 2 SECTION 1.1 The Merger ................................................ 2 SECTION 1.2 Closing; Effective Time ................................... 2 SECTION 1.3 Effects of the Merger ..................................... 2 SECTION 1.4 Certificate of Incorporation; By-Laws ..................... 3 SECTION 1.5 Directors and Officers .................................... 3 SECTION 1.6 Conversion of Securities .................................. 3 SECTION 1.7 Dissenting Shares and Section 262 Shares .................. 4 SECTION 1.8 Surrender of Shares; Stock Transfer Books ................. 5 ARTICLE II REPRESENTATIONS AND WARRANTIES OF THE COMPANY ............. 6 SECTION 2.1 Corporate Organization; Subsidiaries and Employees ........ 6 SECTION 2.2 Certificate of Incorporation and By-Laws .................. 6 SECTION 2.3 Capitalization ............................................ 7 SECTION 2.4 Authority Relative to This Agreement ...................... 7 SECTION 2.5 No Conflict; Required Filings and Consents ................ 7 SECTION 2.6 Compliance ................................................ 8 SECTION 2.7 Limited Operations; Financial Statements; No Undisclosed Liabilities ............................................... 8 SECTION 2.8 Absence of Litigation ..................................... 9 SECTION 2.9 Tax Matters ............................................... 9 SECTION 2.10 Investment Company ........................................ 9 SECTION 2.11 Brokers ................................................... 10 ARTICLE III REPRESENTATIONS AND WARRANTIES OF PARENT AND PURCHASER ............................... 10 SECTION 3.1 Corporate Organization .................................... 10 SECTION 3.2 Authority Relative to This Agreement ...................... 10 SECTION 3.3 No Conflict; Required Filings and Consents ................ 10 SECTION 3.4 Brokers ................................................... 11 SECTION 3.5 Funds ..................................................... 11 ARTICLE IV CONDUCT PENDING THE CLOSING; ADDITIONAL AGREEMENTS ........ 11 SECTION 4.1 Conduct of Business of the Company Pending the Merger ..... 11 SECTION 4.2 Stockholders Meeting ...................................... 13
-i- SECTION 4.3 No Solicitation; Affirmation of Covenants in Stockholders' Agreement ................................................. 13 SECTION 4.4 Access to Information; Confidentiality .................... 13 SECTION 4.5 Notification of Certain Matters ........................... 13 SECTION 4.6 Further Action; Reasonable Best Efforts ................... 14 SECTION 4.7 Public Announcements ...................................... 14 ARTICLE V CONDITIONS OF MERGER ............................ 14 SECTION 5.1 Conditions to Obligation of Each Party to Effect the Merger 14 SECTION 5.2 Additional Conditions to Obligation of Parent and Purchaser to Effect the Merger ..................................... 15 SECTION 5.3 Additional Conditions to Obligation of the Company to Effect the Merger ............................................... 16 ARTICLE VI TERMINATION, AMENDMENT AND WAIVER ......................... 16 SECTION 6.1 Termination ............................................... 16 SECTION 6.2 Effect of Termination ..................................... 17 SECTION 6.3 Amendment ................................................. 17 SECTION 6.4 Waiver .................................................... 17 ARTICLE VII GENERAL PROVISIONS ................................. 17 SECTION 7.1 Survival of Representations, Warranties and Agreements .... 17 SECTION 7.2 Notices ................................................... 17 SECTION 7.3 Certain Definitions ....................................... 18 SECTION 7.4 Severability .............................................. 19 SECTION 7.5 Entire Agreement; Assignment .............................. 19 SECTION 7.6 Parties in Interest ....................................... 19 SECTION 7.7 Fees and Expenses ......................................... 19 SECTION 7.8 Governing Law ............................................. 19 SECTION 7.9 Headings .................................................. 20 SECTION 7.10 Counterparts .............................................. 20 Schedule 1.6(d) - Current Schedule of Assets and Liabilities Exhibit A - Certificate of Incorporation of Surviving Corporation
-ii- AGREEMENT AND PLAN OF MERGER, dated as of May 16, 1998 (this "Agreement"), among DILLARD'S, INC., a Delaware corporation ("Parent"), MMC ACQUISITION, INC., a Delaware corporation and a wholly owned subsidiary of Parent ("Purchaser"), and MINOT MERCANTILE CORPORATION, a Delaware corporation (the "Company"). W I T N E S S E T H : - - - - - - - - - - WHEREAS, the Board of Directors of the Company has determined that it is in the best interests of the Company and the stockholders of the Company to enter into this Agreement with Parent and Purchaser, providing for the merger (the "Merger") of Purchaser with the Company in accordance with the General Corporation Law of the State of Delaware ("DGCL"), upon the terms and subject to the conditions set forth herein; WHEREAS, the Board of Directors of Parent and Purchaser have each approved the Merger of Purchaser with the Company in accordance with the DGCL upon the terms and subject to the conditions set forth herein; WHEREAS, concurrently with the execution and delivery of this Agreement, Parent, MSC Acquisition, Inc., a Delaware corporation and a wholly owned subsidiary of Parent ("MSC MergerSub"), and Mercantile Stores Company, Inc., a Delaware corporation ("MSC"), have entered into a merger agreement, dated as of the date hereof (the "MSC Merger Agreement"), pursuant to which MSC MergerSub has agreed to make a tender offer (the "Offer") for all outstanding shares of common stock, $.14 2/3 par value per share (the "MSC Common Stock"), of MSC, at $80.00 per share, or any higher price that may be paid pursuant to the Offer (the "Offer Price"), net to the seller in cash, subject to the offer condition contained therein (the "Offer Conditions"), to be followed by a merger (the "MSC Merger") of MSC MergerSub with and into MSC, with MSC as the surviving corporation; WHEREAS, concurrently with the execution and delivery of this Agreement, Parent, WMI Acquisition, Inc., a Delaware corporation and a wholly owned subsidiary of Parent ("WMI MergerSub"), and Woodbank Mills, Inc., a Delaware corporation ("Woodbank"), have entered into a merger agreement, dated as of the date hereof (the "Woodbank Merger Agreement"), pursuant to which WMI MergerSub will be merged with and into Woodbank (the "Woodbank Merger"), and Woodbank shall be the surviving corporation; WHEREAS, concurrently with the execution and delivery of this Agreement, holders of not less than 70% of all of the holders (the "MMC Stockholders") of the Company's common stock, par value $5.00 per share (referred to herein as the "Shares" or "Company Common Stock"), have executed and delivered an agreement (the "Proxy and Indemnification Agreement"), pursuant to which (i) the MMC Stockholders have granted Parent an irrevocable proxy to vote their Shares in favor of the adoption of this Agreement and the Merger at the Stockholders Meeting (as defined herein), and (ii) the MMC Stockholders have agreed to indemnify Parent and Purchaser in respect of any and all claims resulting from the Merger, in each case, subject to the terms and conditions contained therein; and 2 WHEREAS, concurrently with the execution and delivery of this Agreement, Parent and each of the Company, Woodbank and certain affiliated stockholders of MSC (collectively, the "Related Sellers") have entered into a stockholders' agreement, each dated as of the date hereof (each, a "Stockholders' Agreement"), pursuant to which, among other things, each Related Seller has granted an option in favor of Parent with respect to the shares of Company Common Stock respectively held by such person, subject to the terms and conditions contained therein; NOW, THEREFORE, in consideration of the foregoing and the mutual covenants and agreements herein contained, and intending to be legally bound hereby, Parent, Purchaser and the Company hereby agree as follows: ARTICLE I THE MERGER SECTION 1.1 The Merger. Upon the terms and subject to the conditions of this Agreement and in accordance with the DGCL, at the Effective Time (as defined in Section 1.2), Purchaser shall be merged with and into the Company. As a result of the Merger, the separate corporate existence of Purchaser shall cease and the Company shall continue as the surviving corporation of the Merger (the "Surviving Corporation"). At Parent's election, any direct or indirect subsidiary of Parent other than Purchaser may be merged with and into the Company instead of the Purchaser. In the event of such an election, the parties agree to execute an appropriate amendment to this Agreement in order to reflect such election. SECTION 1.2 Closing; Effective Time. Subject to the provisions of Article V, the closing of the Merger (the "Closing") shall take place in New York City at the offices of Simpson Thacher & Bartlett, 425 Lexington Avenue, New York, New York, as soon as practicable but in no event later than the first business day after the satisfaction or waiver of the conditions set forth in Article V, or at such other place or at such other date as Parent and the Company may mutually agree. The date on which the Closing actually occurs is hereinafter referred to as the "Closing Date". At the Closing, the parties hereto shall cause the Merger to be consummated by filing this Agreement or a certificate of merger or a certificate of ownership and merger (the "Certificate of Merger") with the Secretary of State of the State of Delaware, in such form as required by and executed in accordance with the relevant provisions of the DGCL (the date and time of the filing of the Certificate of Merger with the Secretary of State of the State of Delaware (or such later time as is specified in the Certificate of Merger) being the "Effective Time"). SECTION 1.3 Effects of the Merger. The Merger shall have the effects set forth in the applicable provisions of the DGCL. Without limiting the generality of the foregoing and subject thereto, at the Effective Time all the property, rights, privileges, immunities, powers and franchises of the Company and Purchaser shall vest in the Surviving Corporation, and all debts, liabilities and duties of the Company and Purchaser shall become the debts, liabilities and duties of the Surviving Corporation. 3 SECTION 1.4 Certificate of Incorporation; By-Laws. (a) At the Effective Time and without any further action on the part of the Company and Purchaser, the Certificate of Incorporation of the Company, as in effect immediately prior to the Effective Time, shall be amended and restated so as to read in its entirety in the form set forth in Exhibit A hereto and, as so amended, until thereafter and further amended as provided therein and under the DGCL, it shall be the Certificate of Incorporation of the Surviving Corporation following the Merger. (b) At the Effective Time and without any further action on the part of the Company and Purchaser, the By-Laws of Purchaser, as in effect immediately prior to the Effective Time, shall be the By-Laws of the Surviving Corporation and thereafter may be amended or repealed in accordance with their terms or the Certificate of Incorporation of the Purchaser and as provided by law. SECTION 1.5 Directors and Officers. The directors and officers of Purchaser immediately prior to the Effective Time shall be the initial directors and officers of the Surviving Corporation, each to hold office in accordance with the Certificate of Incorporation and By-Laws of the Surviving Corporation. SECTION 1.6 Conversion of Securities. At the Effective Time, by virtue of the Merger and without any action on the part of Purchaser, the Company or the holders of any of the following securities: (a) Each share of the Company Common Stock, issued and outstanding immediately prior to the Effective Time (other than any Shares to be cancelled pursuant to Section 1.6(b), any Shares held by Woodbank and any Dissenting Shares (as defined in Section 1.7(a)) shall be cancelled, extinguished and converted into the right to receive an amount (the "Merger Consideration") calculated as follows: (i) the Aggregate Value of Company Assets (as defined in Section 1.6(d) below) immediately prior to the Effective Time divided by (ii) the aggregate number of shares of Company Common Stock issued and outstanding immediately prior to the Effective Time. The Merger Consideration shall be payable to the holder of each Share, without interest, upon surrender of the certificate formerly representing such Share in the manner provided in Section 1.8, less any required withholding taxes. (b) Each share of Company Common Stock held in the treasury of the Company and each Share owned by the Company, Parent, Purchaser or any other direct or indirect subsidiary of such persons, in each case immediately prior to the Effective Time, shall be cancelled and retired without any conversion thereof and no payment or distribution shall be made with respect thereto. (c) Each share of common stock of Purchaser issued and outstanding immediately prior to the Effective Time shall be converted into and become one validly issued, fully paid and nonassessable share of identical common stock of the Surviving Corporation. 4 (d) "Aggregate Value of Company Assets" means an amount equal to (i) the product of (A) the aggregate number of outstanding shares of MSC Common Stock, directly owned by the Company immediately prior to the Effective Time, and (B) the Offer Price, plus (ii) the aggregate amount of Net Assets (as defined below). "Net Assets" means the amount by which the Company's assets exceeds its liabilities, each of which will be calculated from the Closing Balance Sheet (as defined below). Attached hereto as Schedule 1.6(d) is a list of all of assets and liabilities of the Company as of the date hereof. (e) "Closing Balance Sheet" means a balance sheet of the Company reflecting its assets and liabilities as of Closing, as prepared by the Company and delivered to Parent, for its review and consent, no later than 15 days prior to Closing. Parent shall, within five days of its receipt of the Closing Balance Sheet, complete its review thereof and identify to the Company any items with which Parent does not agree. Parent and the Company will promptly attempt to resolve in good faith any disagreement as to items contained on the Closing Balance Sheet. The Company will, as promptly as practicable after the date hereof, undertake to liquidate and/or sell all of its investments and other assets (other than its shares of MSC Common Stock) so that the Company's assets, as reflected on the Closing Balance Sheet, will consist solely of cash and short-term, highly liquid cash equivalents (with maturities of seven days or less). The Closing Balance Sheet will set forth, in reasonable detail and specificity (with notes where appropriate), all of the Company's assets and liabilities as of the Closing, including without limitation all tax liabilities incurred on account of any liquidations or sales of the Company's investments or other assets and all liabilities, fees and expenses owing to the Company's advisors. The amount of cash and cash equivalents that are held back to cover the Company's liabilities, as identified on the Closing Balance Sheet, is referred to as the "Holdback Amount". The Holdback Amount will be applied by Parent and Purchaser to pay, upon presentment of proper invoices, to any post-Closing fees, expenses, liabilities and other obligations of the Company. (f) Promptly following the date on which all of the Company's liabilities that were identified on the Closing Balance Sheet, together with all outstanding "Losses" under and as defined in the Proxy and Indemnification Agreement, have been paid in full, any remaining Holdback Amount shall be released to the Paying Agent (as hereinafter defined) for distribution to the former holders of the Shares. SECTION 1.7 Dissenting Shares and Section 262 Shares. (a) Notwithstanding anything in this Agreement to the contrary, shares of Company Common Stock that are issued and outstanding immediately prior to the Effective Time and which are held by stockholders who have not voted in favor of or consented to the Merger and shall have delivered a written demand for appraisal of such shares of Company Common Stock in the time and manner provided in Section 262 of the DGCL and shall not have failed to perfect or shall not have effectively withdrawn or lost their rights to appraisal and payment under the DGCL (the "Dissenting Shares") shall not be converted into the right to receive the Merger Consideration, but shall be entitled to receive the consideration as shall be determined pursuant to Section 262 of the DGCL; provided, however, that if such holder shall have failed to perfect or shall have effectively 5 withdrawn or lost his, her or its right to appraisal and payment under the DGCL, such holder's shares of Company Common Stock shall thereupon be deemed to have been converted, at the Effective Time, into the right to receive the Merger Consideration set forth in Section 1.6(a) of this Agreement, without any interest thereon. (b) The Company shall give Parent (i) prompt notice of any demands for appraisal pursuant to Section 262 received by the Company, withdrawals of such demands, and any other instruments served pursuant to the DGCL and received by the Company and (ii) the opportunity to direct all negotiations and proceedings with respect to demands for appraisal under the DGCL. The Company shall not, except with the prior written consent of Parent or as otherwise required by applicable law, make any payment with respect to any such demands for appraisal or offer to settle or settle any such demands. Pursuant to the Proxy and Indemnification Agreement, the MMC Stockholders shall indemnify, defend and hold harmless Parent and Purchaser against any and all liabilities, damages, expenses, losses or other claims that are paid in respect of any Dissenting Shares (including reasonable attorneys' fees and expenses) in excess of the aggregate Merger Consideration that would otherwise have been payable in respect of such Dissenting Shares pursuant to Section 1.6(a). SECTION 1.8 Surrender of Shares; Stock Transfer Books. (a) Prior to the Effective Time, Purchaser shall designate a bank or trust company to act as agent for the holders of Shares in connection with the Merger (the "Paying Agent") to receive the Merger Consideration to which holders of Shares shall become entitled pursuant to Section 1.6(a). When and as needed, Parent or Purchaser will make available to the Paying Agent sufficient funds to make all payments pursuant to Section 1.8(b). Such funds shall be invested by the Paying Agent as directed by Purchaser or, after the Effective Time, the Surviving Corporation, provided that such investments shall be in obligations of or guaranteed by the United States of America, in commercial paper obligations rated A-1 or P-1 or better by Moody's Investors Service, Inc. or Standard & Poor's Corporation, respectively, or in certificates of deposit, bank repurchase agreements or banker's acceptances of commercial banks with capital exceeding $500 million. Any net profit resulting from, or interest or income produced by, such investments will be payable to the Surviving Corporation or Parent, as Parent directs. (b) Promptly after the Effective Time, the Surviving Corporation shall cause to be mailed to each record holder, as of the Effective Time, of an outstanding certificate or certificates which immediately prior to the Effective Time represented Shares (the "Certificates"), a form of letter of transmittal (which shall specify that delivery shall be effected, and risk of loss and title to the Certificates shall pass, only upon proper delivery of the Certificates to the Paying Agent) and instructions for use in effecting the surrender of the Certificates for payment of the Merger Consideration therefor. Upon surrender to the Paying Agent of a Certificate, together with such letter of transmittal, duly completed and validly executed in accordance with the instructions thereto, and such other documents as may be required pursuant to such instructions, the holder of such Certificate shall be entitled to receive in exchange therefor the Merger Consideration for each Share formerly represented by such Certificate, and such Certificate shall then be cancelled. No interest shall be paid or accrued for the benefit of holders of the Certificates on the Merger Consideration payable upon the surrender of the Certificates. If payment of the Merger Consideration is to be made to a person other than the person in whose 6 name the surrendered Certificate is registered, it shall be a condition of payment that the Certificate so surrendered shall be properly endorsed or shall be otherwise in proper form for transfer and that the person requesting such payment shall have paid any transfer and other taxes required by reason of the payment of the Merger Consideration to a person other than the registered holder of the Certificate surrendered or shall have established to the satisfaction of the Surviving Corporation that such tax either has been paid or is not applicable. (c) At any time following six months after the Effective Time, the Surviving Corporation shall be entitled to require the Paying Agent to deliver to it any funds (including any interest received with respect thereto) which had been made available to the Paying Agent and which have not been disbursed to holders of Certificates, and thereafter such holders shall be entitled to look to the Surviving Corporation (subject to abandoned property, escheat or other similar laws) only as general creditors thereof with respect to the Merger Consideration payable upon due surrender of their Certificates. Notwithstanding the foregoing, neither the Surviving Corporation nor the Paying Agent shall be liable to any holder of a Certificate for Merger Consideration delivered to a public official pursuant to any applicable abandoned property, escheat or similar law. (d) At the Effective Time, the stock transfer books of the Company shall be closed and thereafter there shall be no further registration of transfers of shares of Company Common Stock on the records of the Company. From and after the Effective Time, the holders of Certificates evidencing ownership of Shares outstanding immediately prior to the Effective Time shall cease to have any rights with respect to such Shares except as otherwise provided for herein or by applicable law. ARTICLE II REPRESENTATIONS AND WARRANTIES OF THE COMPANY The Company hereby represents and warrants to Parent and Purchaser that: SECTION 2.1 Corporate Organization; Subsidiaries and Employees. (a) The Company is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware and has the requisite corporate power and authority and any necessary governmental approvals to own, lease and operate its properties and to carry on its business as it is now being conducted. The Company is not qualified or licensed as a foreign corporation to do business in any jurisdiction. When used in connection with the Company, the term "Material Adverse Effect" means any change or effect that would be materially adverse to the assets, liabilities, results of operations, financial condition or business of the Company. (b) The Company has no subsidiaries and no employees. SECTION 2.2 Certificate of Incorporation and By-Laws. The Company has heretofore furnished to Parent a complete and correct copy of the Certificate of Incorporation and the By-Laws of the Company as currently in effect. Such Certificate of Incorporation and By- 7 Laws are in full force and effect and no other organizational documents are applicable to or binding upon the Company. The Company is not in violation of any of the provisions of its Certificate of Incorporation or By-Laws. SECTION 2.3 Capitalization. The authorized capital stock of the Company consists of 280,300 shares of Company Common Stock, of which (a) 280,300 shares of Company Common Stock are issued and outstanding, all of which are validly issued, fully paid and nonassessable and have been issued free of preemptive (or similar) rights, and (b) no shares of Company Common Stock are held in the treasury of the Company. Except as set forth above, there are outstanding (i) no shares of capital stock or other voting securities of the Company, (ii) no securities of the Company convertible into or exchangeable for shares of capital stock or voting securities of the Company, (iii) no options or other rights to acquire from the Company, and no obligation of the Company to issue, any capital stock, voting securities or securities convertible into or exchangeable for capital stock or voting securities of the Company and (iv) no equity equivalents, interests in the ownership or earnings of the Company or other similar rights (collectively, "Company Securities"). There are no outstanding obligations of the Company or any of its subsidiaries to repurchase, redeem or otherwise acquire any Company Securities. There are no other options, calls, warrants or other rights, agreements, arrangements or commitments of any character relating to the issued or unissued capital stock of the Company to which the Company is a party. There are no outstanding contractual obligations of the Company to provide funds to or make any investment (in the form of a loan, capital contribution or otherwise) in any other entity and, except for the shares of MSC Common Stock, the Company has no other direct or indirect equity interests in any other person. SECTION 2.4 Authority Relative to This Agreement. The Company has all necessary corporate power and authority to execute and deliver this Agreement, to perform its obligations hereunder and to consummate the transactions contemplated hereby. The execution, delivery and performance of this Agreement by the Company and the consummation by the Company of the transactions contemplated hereby have been duly and validly authorized by all necessary corporate action and no other corporate proceedings on the part of the Company are necessary to authorize this Agreement or to consummate the transactions so contemplated (other than, with respect to the Merger, the adoption of this Agreement by the holders of a majority of the outstanding shares of Company Common Stock and the filing of appropriate merger documents as required by the DGCL). This Agreement has been duly and validly executed and delivered by the Company and, assuming the due authorization, execution and delivery hereof by Parent and Purchaser, constitutes a legal, valid and binding obligation of the Company enforceable against the Company in accordance with its terms. As a result of the foregoing actions, the only vote required to authorize the Merger is the affirmative vote of a majority of the outstanding Shares. SECTION 2.5 No Conflict; Required Filings and Consents. (a) The execution, delivery and performance of this Agreement by the Company do not and will not: (i) conflict with or violate the Certificate of Incorporation or By-Laws of the Company or the equivalent organizational documents of any of its subsidiaries; (ii) assuming that all consents, approvals and authorizations contemplated by clauses (i), (ii) and (iii) of subsection (b) below have been obtained and all filings described in such clauses have been made, conflict with or violate any 8 law, rule, regulation, order, judgment or decree applicable to the Company or any of its subsidiaries or by which its or any of their respective properties are bound or affected; or (iii) result in any breach or violation of or constitute a default (or an event which with notice or lapse of time or both could become a default) or result in the loss of a material benefit under, or give rise to any right of termination, amendment, acceleration or cancellation of, or result in the creation of a lien or encumbrance on any of the properties or assets of the Company or any of its subsidiaries pursuant to, any note, bond, mortgage, indenture, contract, agreement, lease, license, permit, franchise or other instrument or obligation to which the Company or any of its subsidiaries is a party or by which the Company or any of its subsidiaries or its or any of their respective properties are bound or affected, except, in the case of clauses (ii) and (iii), for any such conflicts, violations, breaches, defaults or other occurrences which are not, individually or in the aggregate, reasonably likely to have a Material Adverse Effect. (b) The execution, delivery and performance of this Agreement by the Company and the consummation of the Merger by the Company do not and will not require any consent, approval, authorization or permit of, action by, filing with or notification to, any governmental or regulatory authority, except for (i) applicable requirements, if any, of the Hart- Scott-Rodino Antitrust Improvements Act of 1976, as amended (the "HSR Act"), state securities, takeover and "blue sky" laws, (ii) the filing and recordation of appropriate merger or other documents as required by the DGCL and (iii) such consents, approvals, authorizations, permits, actions, filings or notifications the failure of which to make or obtain are not, individually or in the aggregate, reasonably likely to (x) prevent or materially delay the Company from performing its obligations under this Agreement or (y) have a Material Adverse Effect. SECTION 2.6 Compliance. The Company is not in conflict with, or in default or violation of, (i) any law, rule, regulation, order, judgment or decree applicable to the Company or by which its properties are bound or affected, or (ii) any note, bond, mortgage, indenture, contract, agreement, lease, license, permit, franchise or other instrument or obligation to which the Company is a party or by which the Company or its properties are bound or affected, except for any such conflicts, defaults or violations which are not, individually or in the aggregate, reasonably likely to have a Material Adverse Effect. SECTION 2.7 Limited Operations; Financial Statements; No Undisclosed Liabilities. (a) The Company operates solely as a "personal holding corporation" within the meaning of Section 542 of the Internal Revenue Code of 1986, as amended (the "Code"). Except for (i) this Agreement and the transactions contemplated hereby, (ii) activities related to maintaining its corporate existence and (iii) activities related to the Company's ownership of the shares of MSC Common Stock and other investments (including, without limitation, the investment and reinvestment of proceeds received on account of such investments and distributions to the Company's stockholders), the Company has not engaged in any business activities of any type or kind whatsoever or entered into any agreements or arrangements with any person. The legal name of the Company is as set forth in this Agreement. The Company has no trade names, fictitious names, assumed names or "doing business as" names. 9 (b) The Company has not incurred, directly or indirectly, any liabilities, commitments, or obligations of any kind whatsoever, whether or not accrued and whether or not contingent or absolute, other than liabilities disclosed in Schedule 1.6(d) hereto. (c) The Company has delivered to Parent true and correct copies of the Company's audited balance sheets for the prior three fiscal years and the related statements of consolidated income and retained earnings, and statements of consolidated cash flows for each of the last three fiscal years, including any related notes thereto (collectively, the "Company Financial Statements"). The Company Financial Statements have been prepared in accordance with generally accepted accounting principles applied on a consistent basis throughout the periods involved (except as may be indicated in the notes thereto) and fairly present in all material respects the financial position of the Company at the respective date thereof and the results of its operations and changes in cash flows for the periods indicated. SECTION 2.8 Absence of Litigation. There are no suits, claims, actions, proceedings or investigations pending or, to the best knowledge of the Company, threatened against the Company or any of its subsidiaries, or any properties or rights of the Company or any of its subsidiaries, before any court, arbitrator or administrative, governmental or regulatory authority or body. As of the date hereof, neither the Company nor any of its subsidiaries nor any of their respective properties is or are subject to any order, writ, judgment, injunction, decree, determination or award. SECTION 2.9 Tax Matters. The Company has, or will have, (i) filed all Tax Returns and reports required to be filed by it prior to the Closing Date (taking into account extensions), (ii) paid or accrued all Taxes due and payable for all taxable years or periods ending on or prior to the Closing Date, and (iii) paid or accrued all Taxes for which a notice of assessment or collection has been received (other than amounts being contested in good faith by appropriate proceedings). All such Tax Returns are complete and correct in all material respects. Neither the Internal Revenue Service (the "IRS") nor any other Taxing authority has asserted any claim for Taxes, or is threatening to assert any claims for Taxes, against the Company. The Company has withheld or collected and paid over to the appropriate Taxing authorities all Taxes required by law to be withheld or collected and paid over to such Taxing authorities. The Company has not made an election under Section 341(f) of the Code. There are no liens for Taxes upon any of the assets of the Company (other than liens for Taxes that are not yet due or that are being contested in good faith by appropriate proceedings). No extension of the statute of limitations on the assessment of any Taxes has been granted by the Company and is currently in effect. As used herein, "Taxes" shall mean any taxes of any kind, including but not limited to those on or measured by or referred to as income, gross receipts, capital, sales, use, ad valorem, franchise, profits, license, 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 authority. As used herein, "Tax Return" shall mean any return, report or statement required to be filed with any governmental authority with respect to Taxes. 10 SECTION 2.10 Investment Company. The Company is not an "investment company" or a company controlled by an "investment company" within the meaning of the Investment Company Act of 1940, as amended, or is exempt from all provisions of such act. SECTION 2.11 Brokers. No broker, finder or investment banker is entitled to any brokerage, finder's or other fee or commission in connection with the transactions contemplated by this Agreement based upon arrangements made by and on behalf of the Company (other than Goldman, Sachs & Co.'s engagement as financial advisor on behalf of MSC). ARTICLE III REPRESENTATIONS AND WARRANTIES OF PARENT AND PURCHASER Parent and Purchaser hereby, jointly and severally, represent and warrant to the Company that: SECTION 3.1 Corporate Organization. Each of Parent and Purchaser is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware and has the requisite corporate power and authority and any necessary governmental authority to own, operate or lease its properties and to carry on its business as it is now being conducted, except where the failure to be so organized, existing and in good standing or to have such power, authority and governmental approvals is not, individually or in the aggregate, reasonably likely to prevent the consummation of the Merger. SECTION 3.2 Authority Relative to This Agreement. Each of Parent and Purchaser has all necessary corporate power and authority to enter into this Agreement, to perform its obligations hereunder and to consummate the transactions contemplated hereby. The execution, delivery and performance of this Agreement by each of Parent and Purchaser and the consummation by each of Parent and Purchaser of the transactions contemplated hereby have been duly authorized by all necessary corporate action on the part of Parent and Purchaser other than filing and recordation of appropriate merger documents as required by the DGCL. This Agreement has been duly executed and delivered by Parent and Purchaser and, assuming due authorization, execution and delivery by the Company, constitutes a legal, valid and binding obligation of each such corporation enforceable against such corporation in accordance with its terms. SECTION 3.3 No Conflict; Required Filings and Consents. (a) The execution, delivery and performance of this Agreement by Parent and Purchaser do not and will not: (i) conflict with or violate the respective certificates of incorporation or by-laws of Parent or Purchaser; (ii) assuming that all consents, approvals and authorizations contemplated by clauses (i), (ii) and (iii) of subsection (b) below have been obtained and all filings described in such clauses have been made, conflict with or violate any law, rule, regulation, order, judgment or decree applicable to Parent or Purchaser or by which either of them or their respective properties are bound or affected; or (iii) result in any breach or violation of or constitute a default (or an 11 event which with notice or lapse of time or both could become a default) or result in the loss of a material benefit under, or give rise to any right of termination, amendment, acceleration or cancellation of, or result in the creation of a lien or encumbrance on any of the property or assets of Parent or Purchaser pursuant to, any note, bond, mortgage, indenture, contract, agreement, lease, license, permit, franchise or other instrument or obligation to which Parent or Purchaser is a party or by which Parent or Purchaser or any of their respective properties are bound or affected, except, in the case of clauses (ii) and (iii), for any such conflicts, violations, breaches, defaults or other occurrences which are not, individually or in the aggregate, reasonably likely to prevent or materially delay the consummation of the Merger. (b) The execution, delivery and performance of this Agreement by Parent and Purchaser do not and will not require any consent, approval, authorization or permit of, action by, filing with or notification to, any governmental or regulatory authority, except (i) for applicable requirements, if any, of the Exchange Act and the rules and regulations promulgated thereunder, the HSR Act, state securities, takeover and "blue sky" laws, (ii) the filing and recordation of appropriate merger or other documents as required by the DGCL, and (iii) such consents, approvals, authorizations, permits, actions, filings or notifications the failure of which to make or obtain are not, individually or in the aggregate, reasonably likely to prevent the consummation of the Merger. SECTION 3.4 Brokers. No broker, finder or investment banker (other than Morgan Stanley & Co. Incorporated) is entitled to any brokerage, finder's or other fee or commission in connection with the transactions contemplated by this Agreement based upon arrangements made by and on behalf of Parent or Purchaser. SECTION 3.5 Funds. Parent or Purchaser, at the expiration date of the Offer and at the Effective Time, will have the funds necessary to consummate the Merger. ARTICLE IV CONDUCT PENDING THE CLOSING; ADDITIONAL AGREEMENTS SECTION 4.1 Conduct of Business of the Company Pending the Merger. The Company covenants and agrees that, during the period from the date hereof to the Effective Time, unless Parent shall otherwise agree in writing and except as otherwise expressly contemplated by this Agreement, the Company shall not (i) engage in any business activities of any type or kind whatsoever or enter into any agreements or arrangements with any person, except as otherwise contemplated pursuant to this Agreement and (ii) incur, directly or indirectly, any liabilities, commitments, or obligations of any kind whatsoever, whether or not accrued and whether or not contingent or absolute. By way of amplification and not limitation, the Company shall not, between the date of this Agreement and the Effective Time, directly or indirectly do, or commit to do, any of the following without the prior written consent of Parent: (a) Amend or otherwise change its certificate of incorporation or by-laws; 12 (b) Issue, deliver, sell, pledge, dispose of or encumber, or authorize or commit to the issuance, sale, pledge, disposition or encumbrance of, (i) any shares of capital stock of any class, or any options, warrants, convertible securities or other rights of any kind to acquire any shares of capital stock, or any other ownership interest (including but not limited to stock appreciation rights or phantom stock), of the Company or (ii) any assets of the Company; (c) Declare, set aside, make or pay any dividend or other distribution, payable in cash, stock, property or otherwise, with respect to any of its capital stock; (d) Reclassify, combine, split, subdivide or redeem, purchase or otherwise acquire, directly or indirectly, any of its capital stock; (e) (i) Acquire (by merger, consolidation, or acquisition of stock or assets) any corporation, partnership or other business organization or division thereof, or otherwise form or commit to form any subsidiary; (ii) incur any indebtedness for borrowed money or issue any debt securities or assume, guarantee or endorse, or otherwise as an accommodation become responsible for, the obligations of any person, or make any loans, advances or capital contributions to, or investments in, any other person; (iii) enter into any contract or agreement other than in the ordinary course of business consistent with past practice; or (iv) authorize any capital expenditures of any nature whatsoever; (f) Hire, appoint or engage, or commit to hire, appoint or engage, any director, officer, employee, consultant or other advisor, or otherwise pay or commit to pay any compensation, fringe benefits or severance or other termination benefits to any such persons, other than the engagement of any agent by the Company in connection with the liquidation and/or sale of the Company's assets and investments in the manner contemplated herein; (g) Make any Tax election, change any method of Tax accounting or settle or compromise any federal, state, local or foreign Tax liability; (h) Settle or compromise any pending or threatened suit, action or claim; (i) Adopt a plan of complete or partial liquidation, dissolution, merger, consolidation, restructuring, recapitalization or other reorganization of the Company (other than the Merger); or (j) Take, or offer or propose to take, or agree to take in writing or otherwise, any of the actions described in Sections 4.1(a) through 4.1(i) or any action which would make any of the representations or warranties of the Company contained in this Agreement untrue and incorrect as of the date when made if such action had then been taken. Notwithstanding anything contained in this Section 4.1, the Company shall be entitled to liquidate and/or sell all or any of its investments and other assets (other than its MSC 13 Common Stock) and/or declare and pay dividends to its stockholders (other than of its MSC Common Stock), so long as the Closing Balance Sheet accurately reflects the results of any such liquidation, sale and/or dividend. SECTION 4.2 Stockholders Meeting. Promptly following the date hereof, the Company, acting through its Board of Directors, shall in accordance with and subject to applicable law and the Company's Certificate of Incorporation and By-Laws, duly call, give notice of, convene and hold a meeting of its stockholders for the purpose of adopting this Agreement and the transactions contemplated hereby (the "Stockholders Meeting"). The Company's Board of Directors shall include, in any notice to stockholders of the Stockholders Meeting, the unanimous recommendation of the Board of Directors that the stockholders of the Company vote in favor of the adoption of this Agreement and use its reasonable best efforts to obtain the necessary adoption of this Agreement. At the Stockholders Meeting, Parent and Purchaser shall cause all Shares subject to the MMC Stockholders' proxy under the Proxy and Indemnification Agreement to be voted in favor of adoption of this Agreement. SECTION 4.3 No Solicitation; Affirmation of Covenants in Stockholders' Agreement. (a) The Company shall not, and the Company shall cause all of its directors, agents, affiliates and associates to not, directly or indirectly, solicit, encourage, participate in or initiate any inquiries or the making of any proposal by any person or entity (other than Parent or any affiliate of Parent) which constitutes, or may reasonably be expected to lead to, (i) any sale of the Shares or (ii) any acquisition or purchase of any of the Company's assets or any equity interest in, or any merger, consolidation or business combination with, the Company. If the Company receives an inquiry or proposal with respect to the sale of Shares, then the Company shall promptly inform Parent of the terms and conditions, if any, of such inquiry or proposal and the identity of the person making it. The Company and its directors, agents, affiliates and associates will immediately cease and cause to be terminated any existing activities, discussions or negotiations with any parties conducted heretofore with respect to any of the foregoing. (b) The Company affirms and agrees that it shall comply in all respects with the covenants set forth in its Stockholders' Agreement, including without limitation the covenants set forth in Section 5 thereof. SECTION 4.4 Access to Information; Confidentiality. From the date hereof to the Effective Time, the Company shall, and shall cause its officers, directors and other agents to, afford the officers, employees, auditors and other agents of Parent, and financing sources who shall agree to be bound by the provisions of this Section 4.4 as though a party hereto, complete access, consistent with applicable law, at all reasonable times to all books and records of the Company, and shall furnish Parent and such financing sources with all financial, operating and other data and information as Parent, through its officers, employees or agents, or such financing sources may from time to time reasonably request. All information obtained by Parent and Purchaser pursuant to this Section 4.4 shall be kept confidential in accordance with the Confidentiality Agreement, dated on or about May 7, 1998 (the "Parent Confidentiality Agreement"), between Parent and MSC. No investigation pursuant to this Section 4.4 shall affect any representations or warranties of the parties herein or the conditions to the obligations of the parties hereto. 14 SECTION 4.5 Notification of Certain Matters. The Company shall give prompt notice to Parent, and Parent shall give prompt notice to the Company, of the occurrence or non-occurrence of (i) any event the occurrence or non-occurrence of which would be likely to cause any representation or warranty contained in this Agreement to be untrue or inaccurate in any material respect and (ii) any failure of the Company, Parent or Purchaser, as the case may be, to comply with or satisfy in any material respect any covenant, condition or agreement to be complied with or satisfied by it hereunder; provided, however, that the delivery of any notice pursuant to this Section 4.5 shall not limit or otherwise affect the remedies available hereunder to the party receiving such notice. SECTION 4.6 Further Action; Reasonable Best Efforts. (a) Upon the terms and subject to the conditions hereof, each of the parties hereto shall use its reasonable best efforts to take, or cause to be taken, all appropriate action, and to do or cause to be done, all things necessary, proper or advisable under applicable laws and regulations to consummate and make effective the transactions contemplated by this Agreement as soon as practicable, including but not limited to (i) cooperation in the preparation and filing of any required filings under the HSR Act and any amendments to any thereof and (ii) using its reasonable best efforts to promptly make all required regulatory filings and applications including, without limitation, responding promptly to requests for further information and to obtain all licenses, permits, consents, approvals, authorizations, qualifications and orders of governmental authorities and any other third parties as are necessary for the consummation of the transactions contemplated by this Agreement and to fulfill the conditions to the Merger. In case at any time after the Effective Time any further action is necessary or desirable to carry out the purposes of this Agreement, the proper officers and directors of each party to this Agreement shall use their reasonable best efforts to take all such necessary action. (b) The Company and Parent each shall keep the other apprised of the status of matters relating to completion of the transactions contemplated hereby, including promptly furnishing the other with copies of notices or other communications received by Parent or the Company, as the case may be, or any of their subsidiaries, from any governmental authority with respect to the Merger or any of the other transactions contemplated by this Agreement. The parties hereto will consult and cooperate with one another, and consider in good faith the views of one another in connection with any analyses, appearances, presentations, memoranda, briefs, arguments, opinions and proposals made or submitted by or on behalf of any party hereto in connection with proceedings under or relating to the HSR Act or any other antitrust law. SECTION 4.7 Public Announcements. Parent and the Company shall consult with each other before issuing any press release or otherwise making any public statements with respect to the Merger and shall not issue any such press release or make any such public statement prior to such consultation, except as may be required by law or any listing agreement with its securities exchange. 15 ARTICLE V CONDITIONS OF MERGER SECTION 5.1 Conditions to Obligation of Each Party to Effect the Merger. The respective obligations of each party to effect the Merger shall be subject to the satisfaction (or, in the case of Section 5.1(d) below, the waiver, to the extent available, by Parent) at or prior to the Effective Time of the following conditions: (a) This Agreement shall have been adopted by the affirmative vote of the stockholders of the Company by the requisite vote in accordance with the Company's Certificate of Incorporation and the DGCL (which the Company has represented shall be solely the affirmative vote of a majority of the outstanding Shares). (b) No statute, rule, regulation, executive order, decree, ruling, injunction or other order (whether temporary, preliminary or permanent) shall have been enacted, entered, promulgated or enforced by any United States, foreign, federal or state court or governmental authority which prohibits, restrains, enjoins or restricts the consummation of the Merger, the Offer or the MSC Merger. (c) Any waiting period applicable to the Merger under the HSR Act shall have terminated or expired. (d) All of the Offer Conditions, other than the consummation of the Merger, shall have been satisfied and MSC MergerSub shall have determined to purchase the shares of MSC Common Stock pursuant to the Offer; provided that, if the MSC Merger Agreement is terminated under circumstances in which Parent is entitled to the payment of the fees set forth in Section 8.3(a)(ii) of the MSC Merger Agreement, Parent (in its sole and absolute discretion) shall be entitled to waive the satisfaction of the conditions in this Section 5.1(d). (e) The Woodbank Merger shall have been consummated. SECTION 5.2 Additional Conditions to Obligation of Parent and Purchaser to Effect the Merger. The obligations of Parent and Purchaser to effect the Merger shall be subject to the satisfaction (or waiver) at or prior to the Effective Time of the following conditions: (a) The Company shall have performed in all material respects all covenants and agreements required to be performed by it under this Agreement at or prior to the Closing Date. (b) The representations and warranties made herein by the Company shall have been true and correct in all material respects on the date of this Agreement and as of the Effective Time, except to the extent that any such representation or warranty is made as of a specified date, in which case such representation or warranty shall have been true and correct as of such date. 16 (c) Each of (i) the Stockholder's Agreement of the Company (and the Stockholder's Agreements for each other Related Seller), and (ii) the Proxy and Indemnification Agreement shall continue to be in full force and effect, with no amendments or other changes thereto. SECTION 5.3 Additional Conditions to Obligation of the Company to Effect the Merger. The obligations of the Company to effect the Merger shall be subject to the satisfaction (or waiver) at or prior to the Effective Time of the following conditions: (a) Parent and Purchaser shall have performed in all material respects all of their respective covenants and agreements required to be performed by them under this Agreement at or prior to the Closing Date. (b) The representations and warranties made herein by Parent and Purchaser shall have been true and correct in all material respects on the date of this Agreement and as of the Effective Time, except to the extent that any such representation or warranty is made as of a specified date, in which case such representation or warranty shall have been true and correct as of such date. ARTICLE VI TERMINATION, AMENDMENT AND WAIVER SECTION 6.1 Termination. This Agreement may be terminated and the Merger contemplated hereby may be abandoned at any time prior to the Effective Time: (a) By mutual written consent of Parent, Purchaser and the Company; (b) By Parent or the Company if any court of competent jurisdiction or other governmental body located or having jurisdiction within the United States shall have issued a final order, injunction, decree, judgment or ruling or taken any other final action restraining, enjoining or otherwise prohibiting the Merger, the Offer or the MSC Merger and such order, injunction, decree, judgment, ruling or other action is or shall have become final and nonappealable; (c) By Parent if due to an occurrence or circumstance which resulted in a failure to satisfy any of the Offer Conditions (other than as a result of a breach by Parent or MSC MergerSub of its obligations under the MSC Merger Agreement), MSC MergerSub shall have (i) terminated the Offer or (ii) failed to pay for shares of MSC Common Stock pursuant to the Offer on or prior to the Outside Date (as defined in the MSC Merger Agreement); (d) By the Company if (i) the MSC Merger Agreement is terminated and (ii) Parent is no longer entitled to the payment of the fees set forth in Section 8.3(a)(ii) of the MSC Merger Agreement; or 17 (e) By Parent prior to the purchase of shares of MSC Common Stock pursuant to the Offer, if (i) there shall have been a breach of any representation, warranty, covenant or agreement on the part of the Company contained in this Agreement which is reasonably likely to have a Material Adverse Effect, which shall not have been cured prior to the earlier of (A) 10 business days following notice of such breach and (B) two business days prior to the date on which the Offer expires, or (ii) the MSC Merger Agreement is terminated. SECTION 6.2 Effect of Termination. In the event of the termination of this Agreement pursuant to Section 6.1, this Agreement shall forthwith become void and there shall be no liability on the part of any party hereto except as set forth in Section 7.1; provided, however, that nothing herein shall relieve any party from liability for any wilful breach hereof. SECTION 6.3 Amendment. This Agreement may be amended by the parties hereto by action taken by or on behalf of their respective Boards of Directors at any time prior to the Effective Time; provided, however, that no amendment may be made which would reduce the amount or change the type of consideration into which each Share shall be converted upon consummation of the Merger without the redelivery by the Company's stockholders of a stockholders' consent thereto. This Agreement may not be amended except by an instrument in writing signed by the parties hereto. SECTION 6.4 Waiver. At any time prior to the Effective Time, any party hereto may (a) extend the time for the performance of any of the obligations or other acts of the other parties hereto, (b) waive any inaccuracies in the representations and warranties contained herein or in any document delivered pursuant hereto and (c) waive compliance with any of the agreements or conditions contained herein. Any such extension or waiver shall be valid if set forth in an instrument in writing signed by the party or parties to be bound thereby. ARTICLE VII GENERAL PROVISIONS SECTION 7.1 Survival of Representations, Warranties and Agreements. (a) Except as set forth in Section 7.1(b), all representations, warranties and agreements contained in this Agreement shall terminate and be extinguished at the Effective Time or the earlier date of termination of this Agreement pursuant to Section 6.1. (b) Notwithstanding Section 7.1(a), (i) the covenants and agreements made by the parties in this Agreement which by their terms contemplate performance after the Effective Time (or after termination) shall survive the Effective Time (or such termination) until fully performed, and (ii) the representations and warranties of the Company contained herein shall survive the Effective Time indefinitely. SECTION 7.2 Notices. All notices, requests, claims, demands and other communications hereunder shall be in writing and shall be given (and shall be deemed to have 18 been duly given upon receipt) by delivery in person, by cable, telecopy, telegram or telex or by registered or certified mail (postage prepaid, return receipt requested) to the respective parties at the following addresses (or at such other address for a party as shall be specified by like notice): if to Parent or Purchaser: Dillard's, Inc. 1600 Cantrell Road Little Rock, Arkansas 72201 Attention: James I. Freeman with a copy to: Simpson Thacher & Bartlett 425 Lexington Avenue New York, New York 10017 Attention: Alan G. Schwartz, Esq. if to the Company: c/o Ivins Phillips & Barker 1700 Pennslyvania Avenue Washington, D.C. 20006 Attention: Stuart Dunn, Esq. with a copy to: King & Spalding 191 Peachtree Street Atlanta, Georgia 30303 Attention: Russell B. Richards, Esq. with a further copy to: Morris, Nichols, Arsht & Tunnel 1201 N. Market Street Wilminton, Delaware 19801 Attention: Andrew M. Johnston, Esq. SECTION 7.3 Certain Definitions. For purposes of this Agreement, the term: "affiliate" of a person means a person that directly or indirectly, through one or more intermediaries, controls, is controlled by, or is under common control with, the first mentioned person; "control" (including the terms "controlled by" and "under common control with") means the possession, directly or indirectly or as trustee or executor, of the power to direct or cause the direction of the management policies of a person, whether through the ownership of stock, as trustee or executor, by contract or credit arrangement or otherwise; 19 "person" means an individual, corporation, partnership, association, trust, unincorporated organization, other entity or group (as defined in Section 13(d)(3) of the Exchange Act); and "subsidiary" or "subsidiaries" of any person means any corporation, partnership, joint venture or other legal entity of which such person (either alone or through or together with any other subsidiary), owns, directly or indirectly, 50% or more of the stock or other equity interests the holder of which is generally entitled to vote for the election of the board of directors or other governing body of such corporation or other legal entity. SECTION 7.4 Severability. If any term or other provision of this Agreement is invalid, illegal or incapable of being enforced by any rule of law or public policy, all other conditions and provisions of this Agreement shall nevertheless remain in full force and effect so long as the economic or legal substance of the transactions contemplated hereby is not affected in any manner adverse to any party. Upon such determination that any term or other provision is invalid, illegal or incapable of being enforced, the parties hereto shall negotiate in good faith to modify this Agreement so as to effect the original intent of the parties as closely as possible in an acceptable manner to the end that the transactions contemplated hereby are fulfilled to the fullest extent possible. SECTION 7.5 Entire Agreement; Assignment. This Agreement, together with the Stockholders Agreements, Parent Confidentiality Agreement, the MSC Merger Agreement, the Woodbank Merger Agreement and the Proxy and Indemnification Agreement, constitutes the entire agreement among the parties with respect to the subject matter hereof and supersedes all prior agreements and undertakings, both written and oral, among the parties, or any of them, with respect to the subject matter hereof. This Agreement shall not be assigned by operation of law or otherwise, except that Parent and Purchaser may assign all or any of their respective rights and obligations hereunder to any direct or indirect wholly owned subsidiary or subsidiaries of Parent, provided that no such assignment shall relieve the assigning party of its obligations hereunder if such assignee does not perform such obligations. SECTION 7.6 Parties in Interest. This Agreement shall be binding upon and inure solely to the benefit of each party hereto, and nothing in this Agreement, express or implied, is intended to or shall confer upon any other person any rights, benefits or remedies of any nature whatsoever under or by reason of this Agreement. SECTION 7.7 Fees and Expenses. Except as otherwise specifically provided herein, in the MSC Merger Agreement and in the Proxy and Indemnification Agreement, whether or not the transactions contemplated hereby are consummated, all costs and expenses incurred in connection with this Agreement and the transactions contemplated hereby will be paid by the party incurring such costs and expenses. SECTION 7.8 Governing Law. This Agreement shall be governed by, and construed in accordance with, the laws of the State of Delaware, regardless of the laws that might otherwise govern under applicable principles of conflicts of laws thereof. 20 SECTION 7.9 Headings. The descriptive headings contained in this Agreement are included for convenience of reference only and shall not affect in any way the meaning or interpretation of this Agreement. SECTION 7.10 Counterparts. This Agreement may be executed in one or more counterparts, and by the different parties hereto in separate counterparts, each of which when executed shall be deemed to be an original but all of which taken together shall constitute one and the same agreement. 21 IN WITNESS WHEREOF, Parent, Purchaser and the Company have caused this Agreement to be executed as of the date first written above by their respective officers thereunto duly authorized. DILLARD'S, INC. By: /s/ James I. Freeman -------------------------------------- Name: James I. Freeman Title: Chief Financial Officer MMC ACQUISITION, INC. By: /s/ James I. Freeman -------------------------------------- Name: James I. Freeman Title: MINOT MERCANTILE CORPORATION By: /s/ Roger Milliken -------------------------------------- Name: Roger Milliken Title: Chairman -----END PRIVACY-ENHANCED MESSAGE-----