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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): February 17, 1999
CD Warehouse, Inc.
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(Exact name of registrant as specified in its charter)
Delaware
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(State or other jurisdiction of incorporation)
000-21887 73-1504999
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(Commission File Number) (I.R.S. Employer Identification No.)
1204 Sovereign Row, Oklahoma City, OK 73108
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(Address of principal executive offices) (Zip Code)
(405) 949-2422
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(Registrant's telephone, including area code)
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ITEM 2. ACQUISITION OR DISPOSITION OF ASSETS.
Pursuant to an Asset Purchase Agreement between Compact Discs Management,
Inc., a wholly owned subsidiary of Registrant, Music Trader, Inc. ("Seller"),
Jeffrey D. Clark and Debbi McGill-Clark, dated February 22, 1999, Registrant has
purchased substantially all of the assets related to Seller's retail music
business, conducted through 16 stores in San Diego, California and surrounding
areas under the name "Music Trader."
The acquisition was consummated on February 22, 1999. The Registrant
intends to operate the 16 stores as company-owned stores within its "CD
Warehouse" franchise system. The purchase price and sales terms of the
transaction were arrived at through arms' length negotiations. The total
purchase price for the assets was $4,000,000, comprised of $3,000,000 in cash
and $1,000,000 in common stock of the Registrant. The number of shares of
Registrant's common stock issued to Seller, 84,745, was determined by dividing
$1,000,000 by the average of the closing prices of the common stock, as quoted
by Nasdaq, for the five trading days preceding the closing. Pursuant to the
terms of the Asset Purchase Agreement, Seller was granted certain "piggyback"
registration rights with respect to the 84,745 shares issued in connection with
the transaction. The cash portion of the purchase price was comprised of funds
provided under a secured loan agreement entered into with Bank One, Oklahoma,
N.A. in conjunction with the acquisition. There is no material relationship
between the Seller and Registrant or any of its affiliates, or with any
director, officer or associate of any director or officer of the registrant.
ITEM 5. OTHER EVENTS.
On February 17, 1999, the Registrant entered into a $7 million credit
facility (the "Credit Facility") with Bank One, Oklahoma, N. A. ("Bank One").
on February 22, 1999, the Registrant utilized $3 million of the Credit Facility
to fund the cash portion of the purchase price paid to acquire substantially all
of the assets of Music Trader, Inc., described under "ITEM 2-ACQUISITION OR
DISPOSITION OF ASSETS." Amounts borrowed under the Credit Facility, which
consists of a $5 million term loan maturing on April 1, 2002 and a $2 million
line of credit maturing on April 1, 2000, bear interest at a variable rate per
annum equal to Bank One's "National Prime Rate" as in effect from time to time.
On February 23, 1999, the Registrant issued a press release announcing its
1998 earnings.
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS.
(a) Financial Statements of Businesses Acquired. Not applicable.
(None of the conditions specified in the definition of
"significant
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subsidiary" in Rule 1-02(w) of Regulation S-X exceeds 20
percent.)
(b) Pro Forma Financial Information. Not applicable.
(c) Exhibits. The following exhibits are filed with this Report:
2.1 Asset Purchase Agreement dated February 22, 1999, by and
among Compact Discs Management, Inc., Music Trader, Inc.,
Jeffrey D. Clark and Debbi McGill-Clark.
5.1 Loan Agreement dated February 17, 1999, between CD
Warehouse, Inc. and Bank One, Oklahoma, N. A.
99.1 Press Release dated February 23, 1999, announcing
acquisition of Music Trader stores.
99.2 Press Release dated February 23, 1999, announcing 1998
earnings.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
CD WAREHOUSE, INC.
(Registrant)
Date: February 24, 1999 BY:/s/ JERRY W. GRIZZLE
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Jerry W. Grizzle,
President and Chief Executive
Officer
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Exhibit 2.1
ASSET PURCHASE AGREEMENT
THIS ASSET PURCHASE AGREEMENT (this "Agreement") is made and entered into
as of the 22nd day of February, 1999, by and among MUSIC TRADER, INC., a
California corporation with its principal office located at 8593 Hydra Lane, San
Diego, California 92126 ("Seller"); JEFFREY D. CLARK, an individual and 50%
stockholder of Seller with his principal address at 8593 Hydra Lane, San Diego,
California 92126; DEBBI MCGILL-CLARK, an individual and 50% stockholder of
Seller with her principal address at 8593 Hydra Lane, San Diego, California
92126 (JEFFREY D. CLARK and DEBBI MCGILL-CLARK herein collectively referred to
as "Clark"); and COMPACT DISC MANAGEMENT, INC., a Delaware corporation with its
principal office located at 1204 Sovereign Row, Oklahoma City, Oklahoma 73108
("Buyer").
WHEREAS, Seller is engaged in the business ("Business") of buying, selling
and trading new and used audio compact discs through the 17 retail outlets
identified on SCHEDULE 1 hereto (collectively, the "Music Trader Stores"); and
WHEREAS, Seller desires to sell to Buyer, and Buyer desires to buy from
Seller, substantially all of the assets of the Business.
NOW THEREFORE, in consideration of the mutual representations, warranties,
covenants and agreements and upon the terms and subject to the conditions
hereinafter set forth, the parties hereby agree as follows:
ARTICLE I
TERMS OF PURCHASE AND SALE
1.1 Purchase and Sale of Assets. Subject to and upon the terms and
conditions contained herein, at the Closing (as defined in Section 9.1), Seller
will sell, transfer, assign, convey and deliver to Buyer, and Buyer will
purchase, accept and acquire from Seller, free and clear of all liens, claims,
security interests and encumbrances of any nature, except for the security
interests set forth on SCHEDULE 3.2 ("Encumbrances"), all of the following
properties and assets (whether real or personal, tangible or intangible) of
Seller related to the Business (collectively, the "Assets") Such assets are to
be accepted by Buyer "as-is," "where-is" without warranty by Seller as to
condition, intended use or value:
(a) Inventory. all of the Seller's inventory of new and used audio
compact discs (the "Inventory");
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(b) Intellectual Property Rights. All of Seller's right, title and
interest in and to the name "Music Trader," trademarks, patents, trade
names, service marks, copyrights, processes, trade secrets, proprietary and
technical information, know-how, other trade rights and other intangible
assets, together with all right to, and applications and licenses for, any
of the foregoing and relating to the Business (the "Intellectual Property
Rights"), with respect to which Seller agrees to execute, if required,
separate assignments of the forgoing suitable for recording at the U.S.
Patent and Trademark Office, the various Secretaries of State and any other
applicable Agency;
(c) Business Records. All information of Seller, except Seller's
bookkeeping and accounting records, with respect to ( copies of which will
be provided to Buyer), and all of Seller's records relating to, the
Business and the Music Trader Stores, including, without limitation,
customer lists, vendor lists, and sales literature and promotional
materials, together with all manuals, documents, records, files, computer
tapes or discs, or other media on or in which the same may be evidenced or
documented;
(d) Software. All software programs, source and object codes,
computer printouts, data bases and related items created, originated or
modified by Seller and relating to the Assets or to the Business;
(e) Furniture and Equipment. The furniture, equipment, files and
other assets currently located at the Music Trader Stores; and
(f) Other Assets. All equipment and tangible personal property of
the Music Trader Stores, including, without limitation,
furniture and leasehold improvements, rights under leases
listed on SCHEDULE 3.7 underlying the Music Trader Stores
("Leases"), and rights under any other contracts listed on
SCHEDULE 3.7 underlying the Music Trader Stores ("Contracts").
1.2 Excluded Assets. It is understood that the Assets shall not include
the following assets specified in Section 1.2(a) through (f), below
(collectively, the "Excluded Assets")
(a) Cash. Cash of Seller;
(b) Vehicles. The following vehicles, title to which is in the
name of Seller:
Year/Make VIN California Plate No.
1997 Plymouth 1P4GP44R6VB440371 3VWT449
1995 Dodge 1B4GH44R4SX576902 3LFB716
1987 GMC 2GDHG31K1H4505443 4E34779
1987 GMC 2GDHG31K6H4505972 4E34728
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1994 Plymouth 2P4GH2532RR652400 3JWZ085
(c) Home Office Equipment. The office equipment maintained in
Clark's home, for which he will provide Buyer a complete inventory.
(d) Assets Relating to Movie Trader Store. All of the Seller's
assets relating to the retail business conducted at the "Movie Trader"
store located at 1225 Garnet Avenue, San Diego, California (the "Movie
Trader Store"), including (i) inventories of movies, laser discs, DVDs,
video games and cassettes; (ii) all equipment and tangible personal
property of the Movie Trader Store, including, without limitation,
furniture and leasehold improvements, rights under the lease underlying the
Movie Trader Store, and rights under any other contracts related to the
Movie Trader Store; and (iii) all of Seller's right, title and interest in
and to the name "Movie Trader," trademarks, patents, trade names, service
marks, copyrights, processes, trade secrets, proprietary and technical
information, know-how, other trade rights and other intangible assets,
together with all right to, and applications and licenses for, any of the
foregoing relating to such name; provided, however, Seller agrees that the
business conducted by the Movie Trader Store after the Closing of this
Agreement shall not include the retail purchase or sale of audio compact
discs or be, in any way, except as specifically permitted by this
Agreement, competitive with the business conducted by Buyer as of the date
of this Agreement.
(e) Other Leased Space. Seller's rights under the leases
underlying the rental space at Kobey's Swap Meet, the Sports Arena, San
Diego, California, and at Kobey's Market Place, Chula Vista, California
(collectively, the "Kobey Leases"); provided, however, no business
conducted by Seller at the Kobey Leases shall include the retail purchase
or sale of audio compact discs. JEFFREY D. CLARK shall be permitted to
perform in-store promotions with artist presentations at the Kobey Leases,
provided, however, any such conduct or activity shall not be permitted if
it relates in any way to the retail sale of audio compact discs. Seller and
Clark agree that, with respect to any business conducted by them at the
Kobey Leases pursuant to this Section 1.2(e), each of them shall be bound
by the provisions of Section 5.7 for the later of (i) two years subsequent
to the termination or cessation of Seller's or Clark's business thereat, or
(ii) the period specified in Section 5.7.
(f) Assets Relating to the "Huge Secret" Record Label. All of the
Seller's assets relating to the business conducted by Clark under the "Huge
Secret" record label (the "Record Label"), including (i) all musical and
recording equipment and other tangible personal property relating to
recordings of JEFFREY D. CLARK under such label; (ii) all of Clark's and/or
the Record Label's right, title and interest in and to the name "Huge
Secret," trademarks, patents, trade names, service marks, copyrights,
processes, trade secrets, proprietary and technical information, know-how,
other trade rights and other intangible assets, together with all right to,
and applications and licenses for, any of the foregoing relating to such
name; including Clark's and/or the Record Label's right, title and interest
in audio recordings made or to be made by JEFFREY D. CLARK; provided,
however, Seller and Clark agree that except for sale of compact discs and
memorabilia at
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live band performances in which Jeffery D. Clark performs, the business
conducted by the Record Label after the Closing of this Agreement shall not
include the retail purchase or sale of audio compact discs or be, in any
way, except as specifically permitted by this Agreement, competitive with
the business conducted by Buyer as of the date of this Agreement. Seller
and Clark agree that, with respect to any business conducted by them under
the Record Label pursuant to this Section 1.2(f), each of them shall be
bound by the provisions of Section 5.7 for the later of (i) two years
subsequent to the termination or cessation of Seller's or Clark's business
under the Record Label, or (ii) the period specified in Section 5.7.
(g) Accounts Receivable/Payable. Seller and Clark shall retain all
receivables/payables notwithstanding the lease obligations and utilities.
The receivables include amounts due as credits or accounts receivable from
Pacific Coast One-Stop and Tony Higuera and others in the aggregate which
do not exceed $12,000.00.
1.3 Treatment of Certain Obligations. The term "Existing Payables"
means all of Seller's accounts payable outstanding as of 12:01 a.m. on the day
preceding the Closing Date (as defined hereinafter). The term "Assumed
Obligations" means all of Seller's obligations with respect to the Assets
arising or accruing after the Closing Date and, specifically, shall not include
(a) the Existing Payables, or (b) any obligation for performance or obligation
or liability of Seller for default or nonperformance under any contracts
underlying the Assets and arising prior to the Closing Date. At Closing, Buyer
will assume the Assumed Obligations pursuant to an assignment and assumption
agreement acceptable to Buyer and Seller (the "Assignment and Assumption
Agreement") effective as of the Closing Date. Buyer will not assume or have any
responsibility, however, with respect to any other obligation or liability of
the Seller not specifically included within the Assumed Obligations.
1.4 Transfer and Conveyance. Seller shall execute and deliver to Buyer
at the Closing a (i) bill of sale (the "Bill of Sale"); (ii) the Assignment and
Assumption Agreement; (iii) assignment of Intellectual Property Rights (the
"Assignment of Intellectual Property Rights"), in each case in substantially the
forms attached hereto as Exhibits A, B and C, respectively; and (iv) all such
other assignments, endorsements and instruments of transfer as shall be
necessary or appropriate to carry out the intent of this Agreement and as shall
be sufficient to vest in Buyer title to all of the Assets and all right, title
and interest of Seller thereto. Buyer shall execute and deliver to Seller at
the Closing the Assignment and Assumption Agreement.
1.5 Other Agreements. At the Closing, Buyer and Seller shall execute
and deliver the following additional agreements (collectively, the "Other
Agreements"):
(a) Supply Contract. The parties agree to execute and deliver at
Closing a Supply Contract, substantially in the form of Exhibit D hereto,
pursuant to which Buyer shall agree to purchase, at the store locations of
the Music Trader Stores, VHS movies and
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laser discs ("Movie Inventory"), which Movie Inventory Seller agrees to
purchase from Buyer at Buyer's cost plus 10%.
(b) Software License Agreement. The parties agree to execute and
deliver at Closing a Software License Agreement, substantially in the form
of Exhibit E hereto, pursuant to which Buyer shall agree to grant to Seller
a limited, nonexclusive license to use certain retail software developed by
Buyer (the "Retail Software") at Seller's Movie Trader Store, in
consideration of (i) the payment by Seller of a licensing fee to be equal
to 5% of gross sales of Seller attributable to Seller's Movie Trader Store
and a (ii) right of first refusal granted to Buyer with respect to any
proposed sale or transfer of the business conducted by the Movie Trader
Store; provided, however, the parties expressly agree that (i)the limited
license granted under the Software License Agreement shall not be deemed
the grant by Buyer of any right to operate as a franchisee of Buyer under
either the "CD Warehouse" franchise system or the "Disc Go Round" franchise
system; and (ii) the software thus licensed shall not, in any way, be used
to compete with the business of Buyer or its franchisees.
(c) Jeffrey D Clark Employment Agreement. JEFFREY D. CLARK and
Buyer agree to execute and deliver at Closing an employment agreement (the
"Jeffrey D Clark Employment Agreement"), substantially in the form of
Exhibit F hereto, and containing the following terms:
(i) JEFFREY D. CLARK's employment shall be for a primary
term of five (5) years, with a base salary of $100,000 per annum;
(ii) For the first 12 months of the primary term of the
Jeffrey D Clark Employment Agreement, JEFFREY D. CLARK shall (A)
have such day-to-day duties in the operation, management and growth
of the Music Trader Stores as may be defined by Buyer from time to
time, but specifically including, for such 12-month period, the
training and transitioning of a suitable replacement to assume the
operational and management duties of JEFFREY D. CLARK, and (B) have
the authority to employ at the Music Trader Stores, during such 12-
month period, John McKellar, Ryan Ballew, Dawn Whiting, Debbi Clark,
and Elizabeth Patton (collectively, the "Employees"); provided,
however, the total compensation package for each of the Employees is
approved by Buyer prior to the Closing Date (which compensation
package shall provide benefits commensurate to those provided to
other employees of Buyer of the same or similar position and
responsibilities) and set forth in a schedule to the Jeffrey D Clark
Employment Agreement.
(iii) During the remaining 48 months of the primary term of
the Jeffrey D Clark Employment Agreement, JEFFREY D. CLARK shall be
responsible for
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the conduct of special projects, as may be requested by Buyer from
time to time, and shall report directly to the President of Buyer;
and
(iv) JEFFREY D. CLARK shall be provided (A) health insurance
benefits consistent with those offered to other
employees of Buyer at the level of Vice-President, and
(B) a bonus in the amount of $50,000, payable April 1,
2000, provided that 1999 annual sales relating to the
Music Trader Stores reflect an increase of not less
than 5% from 1998 annual sales relating thereto.
ARTICLE II
PURCHASE PRICE
2.1 Purchase Price. The purchase price (the "Purchase Price") for
the Assets shall be FOUR MILLION DOLLARS ($4,000,000), payable at the
Closing as follows:
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(a) Cash, in immediately available funds, of $3,000,000;
and
(b) $1,000,000 in common stock of CD Warehouse, Inc.,
parent of Buyer. The number of shares of Buyer's common stock, par
value $.01 per share (the "Common Stock") to be issued to Seller
will be determined by dividing $1,000,000 by the lesser of (i) the
average of the closing prices of the Common Stock, as quoted by
Nasdaq, for the five trading days preceding the Closing; or, (ii)
the price at which the Common Stock on the Business Day next
preceding the Closing. Seller will be entitled to register all of
such shares for sale or distribution in the event that CD Warehouse,
Inc. files (or causes to be filed) a registration statement on Form
S-3 with the United States Securities and Exchange Commission
relating to any offering of Buyer's Common Stock, subject to such
conditions and quantitative limitations as any underwriter of the
Common Stock so offered may reasonably require.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF SELLER
Each of Seller and Clark, jointly and severally, hereby represents and
warrants as follows:
3.1 Due Organization and Qualification. Seller is a California
corporation duly organized, validly existing and in good standing under the laws
of the State of California which has all requisite corporate power and authority
to own or lease its properties and to carry on its business as it is presently
being operated and in the place where such properties are owned or leased and
such business is conducted.
3.2 Title. Seller has, and upon conveyance of the Assets to Buyer by
Seller at the Closing, Buyer will acquire and hold, good and marketable title in
fee simple to all Assets, free and clear of any and all Encumbrances, except as
set forth on SCHEDULE 3.2.
3.3 Inventory. Set forth on SCHEDULE 3.3 is a description of all the
Inventory, which consists of current items of a quality and quantity that are
usable or marketable in the ordinary course of the business of Seller, and items
not usable in the business of Seller have been written down in value in
accordance with the normal business practice of Seller to estimated net
realizable market values.
3.4 Physical Properties. Set forth on SCHEDULE 3.4 is a description
of (i) all office furniture, equipment and supplies owned and to be conveyed by
Seller and (ii) all physical properties (other than the types of properties
referred to in (i) above), real, personal or mixed, owned and to be conveyed by
Seller and included among the Assets. Seller enjoys peaceable possession of all
properties owned or leased by it.
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3.5 Intellectual Property Rights. Set forth on SCHEDULE 3.5 is a list
of all Intellectual Property Rights, which Intellectual Property Rights comprise
all such rights used by Seller and Clark in connection with the operation of the
Business. Except as disclosed on SCHEDULE 3.5, and to the best of Seller's and
Clark's knowledge, Seller has a protectable interest in the Intellectual
Property Rights, and none of the products, activities or operations of Seller
infringe, involve or have resulted in (i) infringement of, or (ii) any claim of
infringement of, any patent or patent application, trade name, trademark or
service mark registration or application, common law trademark or trade dress
rights, copyright or copyright registration or application of any other person,
firm or corporation; and no proceedings have been instituted, are pending, or,
to the knowledge of Seller or Clark threatened, which challenge the rights of
Seller in respect thereof. Except as disclosed on SCHEDULE 3.5, and to the best
of Seller's or Clark's knowledge, none of the Intellectual Property Rights are
being infringed by the products, activities, operations, trade names,
trademarks, service marks, trade dress rights or copyrights of any other person
or persons and none are subject to any outstanding order, judgment decree,
stipulation or agreement restricting the use thereof. Seller has not given and
is not bound by an agreement of indemnification for patent, trade name, service
mark, trademark or copyright infringement as to any property produced, used or
sold by it.
3.6 Compliance with Laws. Except as disclosed on SCHEDULE 3.6, Seller
(i) has complied with all laws, regulations, licensing requirements and orders
applicable to its business or personnel the breach or violation of which could
have a material adverse effect on said business, (ii) has filed with the proper
authorities all statements and reports required by the laws, regulations,
licensing requirements and orders to which it or any of its employees (because
of their activities on behalf of their employer) is subject, and (iii) possesses
all necessary licenses, franchises, permits and governmental authorizations to
conduct its business in the manner in which and in the jurisdictions and places
where such business is now conducted. Set forth on SCHEDULE 3.6 is a list of
all material licenses, franchises, permits and governmental authorizations and
all applications pending before any agency or authority for the issuance of any
licenses, franchises, permits or governmental authorizations or the renewal
thereof.
3.7 Contracts. Set forth on SCHEDULE 3.7 is a list of all material
contracts, leases, arrangements, and commitments (whether oral or written) by
which any of the Assets are directly affected or are bound, including, without
limitation, all leases underlying the Music Trader Stores. Except as set forth
in SCHEDULE 3.7, neither Seller nor any of the Assets is a party to or is bound
or affected by any contract, lease, arrangement or commitment (whether oral or
written) relating to: (i) the employment of any person other than personnel
employed at will by Seller in the ordinary course of its business at rates of
compensation and on terms consistent with past business practice; (ii)
collective bargaining with, or any representation of any employees by, any labor
union or association; (iii) the acquisition of services, supplies, equipment or
other personal property involving more than $5,000 or which is not terminable by
Seller upon not more than 30 days' notice without obligation on the part of
Seller; (iv) the purchase or sale of real property; (v)
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distribution, agency or construction; (vi) lease of real or personal property as
lessor or lessee or sublessor or sublessee; (vii) lending or advancing of funds
(other than the Receivables); (viii) borrowing of funds or receipt of credit
(other than the Payables); (ix) incurring of any obligation or liability (except
for the Payables); (x) the sale of personal property; and (xi) any matter or
transaction not in the ordinary course of the business of Seller or inconsistent
with past business practice of Seller.
3.8 Contract Defaults. Except as disclosed on SCHEDULE 3.7 or in other
written communications between Seller and Clark or Buyer, Seller is not in
default in any material respect under any of the Contracts, the Contracts are
legal, valid and binding obligations of the respective parties thereto in
accordance with their terms and have not been amended, no defenses, offsets or
counterclaims thereto have been asserted or may be made by any party thereto
other than Seller, and Seller has waived no substantial rights thereunder.
3.9 Litigation. Set forth on SCHEDULE 3.9 is a list of all actions,
suits, proceedings, investigations or grievances pending against Seller or, to
the best of Seller or Clark's knowledge threatened against Seller, Seller's
business or any property or rights of Seller, at law or in equity or admiralty
or before or by and court or federal, state municipal or other governmental
department, commission, board, bureau, agency or instrumentality, domestic or
foreign (each an "Agency"). To the best of Seller's or Clark's knowledge, none
of the actions, suits, proceedings or investigations listed on SCHEDULE 3.9
either (i) results or would, if adversely determined, result in any material
adverse change in the business, operations or assets or the condition, financial
or otherwise, or results of operations of Seller or (ii) affects or would, if
adversely determined, affect the right or ability of Seller to carry on its
business substantially as now conducted. Seller is not subject to any
continuing court or Agency order, writ, injunction or decree applicable
specifically to the Assets, the business operations of Seller or employees of
Seller, or in default with respect to any order, writ, injunction or decree of
any court or Agency with respect to the Assets, its business, operations or
employees.
3.10 Corporate Power and Authority. The execution, delivery and
performance of this Agreement by Seller, and all other agreements executed in
connection herewith, and the consummation by it of the transactions contemplated
hereby and thereby, have been duly authorized by all requisite corporate action
and no further action or approval is required in order to permit Seller and
Clark to consummate the transactions contemplated hereby and thereby. This
Agreement constitutes, and all other agreements by and among the parties, when
executed and delivered in accordance with the terms thereof, will constitute the
legal, valid and binding obligations of Seller and Clark, enforceable in
accordance with their terms (subject, as to the enforcement of remedies, to
applicable bankruptcy, insolvency, reorganization, moratorium and similar laws
affecting creditors' rights from time to time in effect). Seller has full
power, authority and legal right to enter into this Agreement, and all other
agreements by and among the parties, and to consummate the transactions
contemplated hereby and thereby. The making and
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performance of this Agreement, and all other agreements by and among the
parties, and the consummation of the transactions contemplated hereby and
thereby in accordance with the terms hereof and thereof will not (i) conflict
with the certificate of incorporation or bylaws of Seller, (ii) result in any
breach or termination of, or constitute a default under, or constitute an event
which with notice or lapse of time, or both, would become a default under, or
result in the creation of any Encumbrance upon any of the Assets under, or
create any rights of termination, cancellation or acceleration in any person
under, any contract, lease, arrangement or commitment, or violate any order,
writ, injunction or decree, to which Seller or Clark is a party, by which any of
the Assets, business or operations of Seller may be bound or affected or under
which any of the Assets, business or operations of Seller receive benefits,
(iii) result in the loss or adverse modification of any material license,
franchise, permit or other authorization granted to or otherwise held by Seller
or otherwise used in connection with the operation of the Business or (iv)
result in the violation of any provision of law applicable to Seller, the
violation of which could have a material adverse effect upon the Assets,
business or operations of Seller.
3.11 Collective Bargaining. Seller is not a party to any collective
bargaining agreements with respect to any employees or Seller, and there are no
labor disturbances, or any threats thereof, with respect to the Business.
3.12 Employee Benefits. Seller has no "employee welfare benefit plan" or
"employee pension benefit plan" as those terms are defined by the Employee
Retirement Income Security Act of 1974, as amended. There are no multi-employer
employee benefit plans in effect with respect to employees of Seller.
3.13 True, Correct and Complete Information. The information furnished
to Buyer by Seller and Clark prior to or on the date of this Agreement and in
any Schedule referred to herein is true, correct and complete in all material
respects. Such information states all material facts required to be stated
therein or with respect thereto or necessary to make the statements therein or
with respect thereto, in light of the circumstances under which such statements
are made, true correct and complete.
3.14 Availability of Documents. Seller has made available for inspection
by Buyer, at the offices of Seller, true, correct and complete copies of its
certificate of incorporation and bylaws and all contracts, leases, arrangements,
commitments and documents referred to herein or in any Schedule referred to
herein, in each case together with all amendments and supplements thereto.
3.15 Consents. No consent, approval, authorization or order of any
court, Agency or any other person is required in order to permit Seller to
consummate the transactions contemplated by this Agreement.
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3.16 Financial Condition and Result of Operations. Seller has previously
delivered to Buyer true, correct and complete copies of the balance sheet of
Seller as of December 31, 1998 and the related statements of operations and cash
flows for the year then ended. (the "Financial Statements"). The Financial
Statements, together with the notes thereto, (i) are in accordance with the
books and records and accounting methods of Seller, (ii) present the financial
position and results of operations of seller as of the dates and for the periods
indicated, and (iii) have been prepared in accordance with generally accepted
accounting principles consistently applied throughout the period involved (1998)
except as noted therein.
3.17 Insurance. Set forth on SCHEDULE 3.17 is a brief description of all
policies of fire, casualty, liability and other forms of insurance and all
fidelity bonds held by Seller and relating to the Assets.
3.18 Taxes. Except as disclosed on SCHEDULE 3.18, Seller has duly filed
all federal, state, county, local and other excise, franchise, property,
payroll, income, capital stock, sales and use and other tax returns which are
required to be filed by it and such returns are true, correct and complete in
all respects. Seller has paid all taxes that have become due or have been
assessed against it and all taxes, penalties and interest that any taxing
authority has proposed or asserted to be owing. All tax liabilities to which
the properties of Seller may have been subjected have been discharged except for
taxes assessed but not yet payable. There are no tax claims presently being
asserted against Seller and Seller knows of no basis for any such claim. Seller
has not granted any extension to any taxing authority of the limitation period
during which any tax liability may be asserted thereby.
3.19 Absence of Certain Changes or Events. Except as provided on
SCHEDULE 3.19, since December 31, 1998, Seller has not (i) suffered any
extraordinary losses or waived any rights of substantial value; (ii) amended its
certificate of incorporation or bylaws; (iii) made any change in its mode of
management or any change in its method of operation or method of accounting;
(iv) made or become obligated to make any capital expenditures other than such
expenditures or commitments not exceeding $5,000 in the aggregate; (v)
experienced or suffered any adverse change in its business, operations or assets
(whether or not covered by insurance) condition, financial or otherwise, or
results of operations; (vi) entered into any transaction, except in the ordinary
course of its business consistent with past business practice; (vii) received
any notice of any claim asserted against it by any Agency which could have a
material adverse effect on the business or financial condition of Seller; or
(viii) incurred or agreed to incur any material obligation outside the ordinary
course of business which has not heretofore been disclosed in writing to Buyer.
3.20 Broker's and Finder's Fees. Seller has not made any agreement with
any person, or taken any action which would cause any person, to become entitled
to an agent's, broker's or finder's fee or commission in connection with the
transactions contemplated by this Agreement.
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ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF BUYER
Buyer hereby makes the following representations and warranties to Seller
and Clark.
4.1 Due Organization and Qualification. Buyer is a corporation duly
organized, validly existing and in good standing under the laws of the State of
Delaware, and has all requisite corporate power and authority to own or lease
its properties and to carry on its business as it is presently being operated
and in the place where such properties are owned or leased and such business is
conducted.
4.2 Corporate Power and Authority. The execution, delivery and
performance of this Agreement by Buyer, and all other agreements referred to
herein or executed in connection herewith, and the consummation by it of the
transactions contemplated hereby and thereby, have been duly authorized by all
requisite corporate action and no further action or approval is required in
order to permit Buyer to consummate the transactions contemplated hereby and
thereby. This Agreement constitutes, and all other agreements by and among the
parties, when executed and delivered in accordance with the terms thereof, will
constitute, the legal, valid and binding obligations of Buyer, enforceable in
accordance with their terms (subject, as to the enforcement of remedies, to
applicable bankruptcy, insolvency, reorganization, moratorium and similar laws
affecting creditors' rights from time to time in effect). Buyer has full power,
authority and legal right to enter into this Agreement and all other agreements
by and among the parties and to consummate the transactions contemplated hereby
and thereby. The making and performance of this Agreement, and all other
agreements by and among the parties and the consummation of the transactions
contemplated hereby and thereby in accordance with the terms hereof and thereof
will not (i) conflict with the certificate of incorporation or by bylaws of
Buyer, (ii) result in any breach or termination of, or constitute a default
under, or constitute an event which with notice or lapse of time, or both, would
become a default under, or result in the creation of any Encumbrance upon any
asset of Buyer under, or create any rights of termination, cancellation or
acceleration in any person under, any contract, lease, arrangement or
commitment, or violate any order, writ, injunction or decree, to which Buyer is
a party or by which Buyer or its assets, business or operations may be bound or
affected or under which Buyer or its assets, business or operations receive
benefits, (ii) result in the loss or adverse modification of any material
license, franchise, permit or other authorization granted to or otherwise held
by Buyer which is material to the business or financial condition of Buyer or
(iv) result in the violation of any provisions of law applicable to Buyer, the
violation of which could have a material adverse effect upon the business,
operations or assets of Buyer.
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4.3 Consents. No consent, approval, authorization or order of any
court, Agency or any other person is required in order to permit Buyer to
consummate the transactions contemplated by this Agreement.
4.4 Litigation. There is no pending or, to the best of Buyer's
knowledge, threatened litigation in any court or any proceeding before any
Agency (i) in which it is sought to restrain, prohibit, invalidate or obtain
damages in respect of the consummation of the purchase and sale of the Assets or
the other transactions contemplated hereby, (ii) which could, if adversely
determined, result in any material adverse change in the business, operations or
assets or the condition, financial or otherwise, or results of operations of
Buyer or (iii) which could, if adversely determined, have a material adverse
effect on the right or ability of Buyer to carry on its business substantially
as now conducted.
4.5 Compliance with Laws. Buyer (i) has complied with all laws,
regulations, licensing requirements and orders applicable to its business the
breach or violation of which could have a material adverse effect on said
business, (ii) has filed with the proper authorities all statements and reports
required by the laws, regulations, licensing requirements and order to which it
is subject and (iii) possesses all necessary licenses, franchises, permits and
governmental authorizations to conduct its business in the manner in which and
in the jurisdictions and places where such business is now conducted.
ARTICLE V
COVENANTS OF SELLER AND CLARK
Each of Seller and Clark, jointly and severally, hereby covenants and
agrees with Buyer as follows:
5.1 Affirmative Covenants. Prior to the Closing Date (as hereinafter
defined), Seller will operate its Business in the usual, regular and ordinary
course of business consistent with past business practices, and will use its
best efforts to (i) preserve intact its business organization and the Assets;
(ii) maintain its properties, machinery and equipment in good operating
condition and repair; (iii) continue all existing policies of insurance (or
comparable insurance) in full force and effect up to and including the Closing
Date (and will not cancel any such issuance or take (or fail to take) any action
that would enable the insurers under such policies to avoid liability for claims
arising out of any occurrence on or prior to the Closing Date without the prior
written consent of Buyer); (iv) use its best efforts to preserve its present
relationships with lending and other financial institutions, suppliers,
customers, and franchisees; and (v) maintain its books, accounts and records in
the usual, regular and ordinary manner on a basis consistently applied.
5.2 Negative Covenants. Prior to the Closing Date Seller will operate
its Business in the usual, regular and ordinary course of business consistent
with the past business practices, and
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will not, without the prior written consent of Buyer: (i) make any increase in
the compensation payable or to become payable by it to any employee or
contribute or make any commitment to contribute or represent that it will
contribute any amounts to any bonus or other employee benefit plan for employees
of Seller except as required by law or by the terms of any such plan in the
ordinary course of business; (ii) make any amendment to its certificate of
incorporation, bylaws or other organizational documents; (iii) make any material
change in the character of its Business; (iv) incur any obligation or liability
(fixed or contingent) except in the ordinary course of business; (v) discharge
or satisfy any Encumbrance or pay any obligation or liability (fixed or
contingent) other than in the ordinary course of business; (vi) mortgage,
pledge, transfer or otherwise dispose of or subject to any Encumbrance any of
the Assets, except in the ordinary course of business; (vii) acquire any assets
or properties, except in the ordinary course of business; (viii) cancel or
compromise any material debt or claim that comprises a part of the assets to be
transferred to Buyer; (ix) waive or release any rights of material value that
comprise a part of the assets to be transferred to Buyer; (x) transfer, grant or
terminate contract, lease, arrangement or commitment rights under any
concessions, leases, licenses, agreements, patents, patent licenses, inventions,
trademarks, trade names, service marks, trade dress or copyrights or
registrations or licenses thereof or applications therefore or with respect to
any know-how or other proprietary or trade rights; (xi) modify or change in any
material respect or terminate any Contract; (xii) undertake any material
borrowing of any nature whatsoever other than in the ordinary course of
business; (xiii) make any loans or extensions of credit, except in the ordinary
course of business; (xiv) make or become obligated to make any capital
expenditures or enter into commitments therefor exceeding $5,000; and (xv) sell,
discount or otherwise dispose of any Receivables.
5.3 Access to Properties and Records. Each of Seller and Clark will
keep Buyer advised of all material developments relevant to the consummation of
the transactions contemplated hereby and will cooperate fully in permitting
Buyer to make a full investigation of the Business, properties, financial
condition and investments of Seller during regular business hours and upon
reasonable notice and in bringing about the consummation of the transactions
contemplated hereby. Seller will, during regular business hours and upon
reasonable notice, afford to Buyer and its representatives full access to the
offices, buildings, real properties, machinery and equipment, inventory and
supplies, records, files, books of account, tax returns, agreements and
commitments, partnership record books and personnel of Seller. Seller will,
upon request by Buyer, request Sellers independent accountant to afford to Buyer
and its representatives access to the working papers for all compilations of the
Financial Statements. Seller will furnish to Buyer all such further information
concerning the business and affairs of Seller as Buyer may reasonably request.
Seller will update by amendment or supplement each of the Schedules referred to
herein and any other disclosure in writing from Seller required by this
Agreement to be disclosed in writing by Seller to Buyer promptly upon any change
in the information set forth in such Schedules or other disclosures, and Seller
hereby represents and warrants that such Schedules and such written disclosures,
as so amended or supplemented, shall be true, correct and
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complete as of the date or dates thereof; provided, however, that the inclusion
of any information in any such amendment or supplement, not included in the
original Schedule or other disclosure at or prior to the date of this Agreement,
shall not limit or impair any right which Buyer might otherwise have respecting
the representations or warranties of Seller continued in this Agreement. No
investigation pursuant to this Section 5.3 shall affect any representations or
warranties or the conditions to the obligations of Buyer to consummate the
transactions contemplated hereby. In the event of the termination of this
Agreement, Buyer will deliver to Seller all documents, work papers and other
material (including copies thereof) obtained by Buyer or on its behalf from
Seller as a result of this Agreement or in connection herewith, whether so
obtained before or after the execution hereof and, if the transactions
contemplated hereby are not consummated, Buyer will hold such information in
strictest confidence and will not use or disclose, or permit any other person or
entity to use or disclose, such information until such time as such information
is otherwise publicly available.
5.4 Approvals of Third Parties. As soon as practicable after the date
hereof, Seller will use its best efforts to secure all necessary consents,
approvals and clearances of third parties that shall be required to consummate
the transactions contemplated hereby.
5.5 Notices. Seller will timely give all notices required to be given
relating to the transactions contemplated hereby, including without limitation,
any notices required or requested to be given to all creditors and claimants
against Seller. Seller shall terminate its employees prior to the hiring of
such employees by Buyer.
5.6 Access to Books and Records. Seller agrees to provide Buyer, its
accountants, counsel and other representatives, during normal business hours and
upon reasonable notice, for a period of six years after the Closing Date, access
to the books, records, income tax returns, contracts and other underlying data
and the documentation of Seller relating to the period prior to the Closing Date
and to make available to Buyer personnel of Seller in Buyer's review thereof for
the purpose of enabling them to determine and calculate any tax liabilities in
connection with the Assets. Seller agrees that, for such six-year period, it
will preserve and keep intact all such books and records.
5.7 Covenant Not to Compete. Except as contemplated and provided
pursuant to (a) Sections 1.2(d), (e) and (f) of this Agreement, and (b) the
Jeffrey D Clark Employment Agreement by and between JEFFREY D. CLARK and Buyer
to be entered into at the Closing, each of Clark and Seller covenants and agrees
that he, she or it, as the case may be, will not, at any time during which
buyer operates stores of the general nature of the acquired stores, from the
Closing Date, (i) directly or indirectly, in or pertaining to any location of
the acquired stores or within a reasonable market radius thereof, own, manage,
operate, join, control or participate in the ownership, management, operation or
control of, any business which, or any businesses organization any part of
which, engages in the business of buying, selling or trading of new
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and/or used audio compact discs, including, without limitation, the selling of
franchises which engage in the business of buying, selling or trading of new
and/or used audio compact discs of the type and kind and sold by Seller in the
United States, except as a franchisee of Buyer or an affiliate of Buyer or owner
of up to 5% of the outstanding common stock of a corporation so engaged, or (ii)
directly or indirectly own, manage, operate, join, control or participate in the
ownership, management, operation or control of, any business which, or any
business organization any part of which, engages in the businesses of buying,
selling or trading audio compact discs via the "Internet," "America on Line,"
"CompuServe" or any other "on-line" computer communication networks, except as a
franchisee of the Buyer. Additionally, seller agrees not compete, as defined
above, at any location for a period ending 2 years from the date of termination
of the Jeffery D. Clark Employment Agreement. The remedy at law for any breach
or attempted breach by Seller or Clark of the provisions of this Section 5.7
will be inadequate and Buyer shall be entitled to temporary or permanent
injunctive relief against any breach or attempted breach of such provision
without the necessity of posting bond or proving actual damages. It is the
express intention of the parties hereto to comply with all laws that may be
applicable to this Section 5.7. Should any restriction contained in this Section
5.7 be found to exceed in duration or scope the restriction permitted by law, it
is expressly agreed that the covenant not to compete contained in this Section
5.7 may be reformed or modified by the final judgment of a court of competent
jurisdiction to reflect a lawful and enforceable duration or scope. If any one
or more of the provisions contained in this Section 5.7 shall for any reason be
held to be invalid, illegal or unenforceable in any respect, such invalidity,
illegality or unenforceability shall not affect any other provision of this
Agreement, but any inconsistency in the provisions of this Agreement shall be
construed as if such invalid, illegal or unenforceable provision had never been
contained herein. The terms and conditions of this Section 5.7 will be governed
by and construed in accordance with the laws of the State of Delaware; the
foregoing clause will not, however, affect the forum or venue of any dispute
resolution proceeding arising in connection with this Agreement or any other
term or condition of this Agreement whatsoever.
5.8 Change of Corporate Name. Seller agrees to execute and deliver to
Buyer, on or before the Closing, such documents suitable for filing in the State
of California as are necessary to change Seller's corporate name to a name other
than "Music Trader, Inc.".
ARTICLE VI
COVENANTS OF BUYER
Buyer hereby covenants and agrees with Seller and Clark as follows:
6.1 Furnishing of Information. Buyer will keep Seller advised of all
material developments relevant to the consummation of the transactions
contemplated hereby and will cooperate fully with Seller in bringing about the
consummation of the transactions contemplated hereby. In the event of the
termination of this Agreement, Seller will deliver to the Buyer all
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documents, work papers and other material (including copies thereof) obtained by
Seller or on its behalf from Buyer as a result of this Agreement or in
connection herewith, whether so obtained before or after the execution hereof
and, if the transactions contemplated hereby are not consummated, Seller will
hold such information in confidence until such time as such information is
otherwise publicly available.
6.2 Approvals of Third Parties. As soon as practicable after the date
hereof, Buyer will use its best efforts to secure all necessary consents,
approvals and clearances of third parties that shall be required to enable it to
consummate the transactions contemplated hereby and will otherwise use its best
efforts to cause the consummation of such transactions in accordance with the
terms and conditions of this Agreement.
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6.3 Buyer's Best Efforts. Buyer will use its best efforts, acting in
good faith, to cause the consummation of the transactions contemplated by this
Agreement in accordance with their terms and conditions.
6.4 Retention of Records. For a period of six years after the Closing,
Buyer will retain all books and records that Buyer receives from Seller. During
such period, Seller and its representatives will have access to all such books
and records during normal business hours. Buyer will, upon request of Seller or
Clark, furnish to Seller or Clark, without charge, copies of any such books or
records.
ARTICLE VII
CONDITIONS TO OBLIGATIONS OF BUYER
The obligations of Buyer hereunder shall be subject to the satisfaction of
each of the following conditions precedent on or prior to the Closing Date,
except such conditions as Buyer may waive in writing.
7.1 Representations and Warranties of Seller and Clark. All of the
representations and warranties of Seller and Clark contained in this Agreement
and in any Schedule from Seller and Clark were true and correct when made, and
shall be true and correct in all material respects on and as of the Closing Date
with the same force and effect as though such representations and warranties had
been made on and as of the Closing Date.
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7.2 Covenants of Seller and Clark. All of the covenants and agreements
herein on the part of Seller and Clark to be complied with or performed on or
before the Closing Date shall have been fully complied with and performed.
7.3 Certificate of Seller and Clark. There shall be delivered to Buyer
certificates dated as of the Closing Date and signed by each of Clark and Seller
to the effect set forth in Sections 7.1 and 7.2, which certificate shall have
the effect of a representation and warranty made by Seller and Clark on and as
of the Closing Date.
7.4 No Casualty Losses. The Assets shall not have suffered any
destruction or damage by fire, explosion or other casualty or any taking by
eminent domain which has materially impaired the operation of the Assets or
otherwise had a material adverse effect upon the Business conducted by Seller.
7.5 Seller's Pre-Tax Income. The Pre-tax income of Seller ($136,433),
as reflected on the Financial Statements, is less than 20% of the 1998
consolidated pre-tax income of Buyer, as reflected on Buyer's audited financial
statements for the 1998 fiscal year.
7.6 Certificate of Authorities. Seller shall have furnished to Buyer
(i) a certificate of the Secretary of State of the State of California, dated as
of a date not more than five (5) days prior to the Closing Date, attesting to
the organization and good standing of Seller, (ii) a true, correct, and complete
copy of Seller's certificate of incorporation and bylaws and all amendments
thereto, and (iii) a copy, certified by an authorized officer of Seller, of
resolutions duly adopted by the board of directors and stockholders of Seller
duly authorizing the transactions contemplated in this Agreement.
7.7 Litigation. At the Closing Date, there shall not be pending or
threatened any litigation in any court or any proceeding before any Agency, (i)
in which it is sought to restrain, invalidate, set aside or obtain damages in
respect of the consummation of the purchase and sale of the Assets or the other
transactions contemplated hereby, (ii) which could, if adversely determined,
result in any material adverse change in the Business, operations or Assets or
the condition, financial, or otherwise, or results of operations of Seller,
(iii) which could, if adversely determined, have a material adverse effect on
the right or ability of Seller to carry on its Business as now conducted or (iv)
as a result of which, in the reasonable judgment of Buyer, Buyer would be
deprived of the material benefits of its ownership of the Assets.
7.8 Due Diligence.
(a) (i) Buyer shall have completed its "due diligence" review
of the Assets, books, records, files, contracts, leases, arrangements,
commitments, documents, tax returns, business operations, financial
statements, offices, buildings, and any other items or matter that Buyer
deems relevant which pertain to the Business
<PAGE>
or the transactions contemplated hereby, including a review of the 1998
year-end inventory at the Music Trader Stores, and (ii) the results of such
due diligence review shall be acceptable, in all respects, to Buyer, in its
sole discretion.
(b) All actions, proceedings, instruments and documents required to
carry out this Agreement or incidental thereto and all other
related matters shall have been satisfactory to Day, Edwards,
Federman, Propester & Christensen, P.C., counsel for Buyer.
7.9 Opinion of Seller's Counsel. Buyer shall have received an opinion
of counsel for Seller, dated the Closing Date to the effect that: (i) the
Seller is a corporation duly organized, validly existing and in good standing
under the laws of the State of California and is duly qualified as a foreign
corporation and in good standing in each jurisdiction in which the ownership of
its properties, the employment of its personnel or the conduct of its business
requires it to be so qualified; (ii) each of Seller and Clark has full power,
authority and legal right to enter into this Agreement and all other agreements
by and among the parties and to consummate the transactions contemplated hereby
and thereby; (iii) all necessary corporate action required to be taken by Seller
to approve this Agreement and all other agreements by and among the parties and
the transactions contemplated hereby and thereby and to authorize execution and
delivery of this Agreement and all other agreements by and among the parties and
the performance by Seller and Clark of their respective obligations hereunder
and thereunder, have been duly and properly taken, and no further action or
approval is required in order to permit Seller or Clark to consummate the
transactions contemplated by this Agreement and all other agreements by and
among the parties; (iv) this Agreement and all other agreements contemplated
hereby or executed in connection herewith by and among the parties have been
duly executed and delivered by Seller and Clark and are legal, valid and binding
obligations of Seller and Clark enforceable in accordance with their terms and
(v) subject to the conditions and exceptions of counsel, the Contracts being
sold and assigned by Seller to Buyer hereby are legal, valid and binding
obligations of the parties.
7.10 No Material Adverse Changes. There shall not have occurred (i) any
material adverse change in the Business or the operations of the Music Trader
Stores or the Assets or (ii) any material loss or damage to any of the Assets
(whether or not covered by insurance) of Seller. Buyer shall receive a
certificate from Seller and Clark, dated as of the Closing Date and in form and
substance satisfactory to Buyer, as to fulfillment of the conditions set forth
in this Section 7.9.
7.11 Consents. Seller shall have obtained all orders, approvals or
consents of third parties, including without limitation, any consents or
approvals deemed necessary by counsel to Buyer that shall be required to
consummate the transactions contemplated hereby, including, without limitation,
any landlord's consents.
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7.12 Deliverables. Each of Seller and Clark shall have duly executed and
delivered to Buyer the Bill of Sale, the Assignment and Assumption Agreement,
the Assignment of Intellectual Property Rights, the Other Agreements, the
documents refereed to in Section 5.8 here, and such other agreements, documents
and instruments as Buyer shall have reasonably requested in order to more fully
effectuate the transactions contemplated by this Agreement.
7.13 Further Assurances. Seller and Clark shall take all such further
action as may be reasonably requested by Buyer in order to effectuate the
consummation of the transactions contemplated by this Agreement. If Buyer shall
reasonably determine that any further conveyance, assignment or other document
or any further action is necessary to vest in it full title to the Assets,
Seller and Clark shall cause the appropriate person or entity to execute and
deliver all such instruments and take all such action as Buyer may reasonably
determine to be necessary.
ARTICLE VIII
CONDITIONS TO OBLIGATIONS OF SELLER AND CLARK
The obligations of Seller and Clark to cause the sale of the Assets and the
other transactions contemplated hereby to occur at Closing shall be subject to
the satisfaction on or prior to the Closing Date of all of the following
conditions, except such conditions as Seller and Clark may waive in writing:
8.1 Representations and Warranties of Buyer. All of the representations
and warranties of Buyer contained in this Agreement and in any
Schedule or other disclosure in writing from Buyer shall have been
true and correct when made, and shall be true and correct in all
material respects on and as of the Closing Date with the same force
and effect as though such representations and warranties had been
made on and as of the Closing Date.
8.2 Covenants of Buyer. All of the covenants and agreements herein on
the part of the Buyer to be complied with or performed on or before
the Closing Date shall have been fully complied with and performed.
8.3 Buyer's Certificate. There shall be delivered to Seller and Clark a
certificate dated as of the Closing Date and signed by the President
or a Vice President of Buyer to the effect set forth in Sections 8.1
and 8.2, which certificate shall have the effect of a representation
and warranty made by Buyer on and as of the Closing Date.
8.4 Certificates of Authorities. Buyer shall have furnished to Seller
(i) a certificate of the Secretary of State of Delaware, dated as of
a date not more than five (5) days prior to the Closing Date,
attesting to the organization and good standing of Buyer,
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(ii) a copy, certified by the Secretary of State of Delaware as of a
date not more than five (5) days prior to the Closing Date, of
Buyer's Certificate of Incorporation and all amendments thereto,
(iii) a copy, certified by the Secretary of Buyer of the Bylaws of
Buyer, as amended and in effect at the Closing Date and (iv) a copy,
certified by an authorized officer of Buyer, of resolutions duly
adopted by the Board of Directors of Buyer duly authorizing the
transactions contemplated in this Agreement.
8.5 Opinion of Counsel to Buyer. Seller shall have received an opinion
from, counsel for Buyer, dated the Closing Date to the effect that: (i) Buyer
is a corporation duly organized, validly existing and in good standing under the
laws of the State of Delaware; (ii) Buyer has full power, authority and legal
right to enter into this Agreement and all other agreements by and among the
parties and to consummate the transactions contemplated hereby and thereby;
(iii) the execution and delivery of this Agreement and all other agreements by
and among the parties and the performance by Buyer of its obligations hereunder
and thereunder, have been fully authorized by all requisite corporate action,
and no further action or approval is required in order to permit Buyer to
consummate the transactions contemplated by this Agreement and all other
agreements by and among the parties; (iv) this Agreement and all other
agreements contemplated hereby or executed in connection herewith by and among
the parties have been duly executed and delivered by Buyer and are legal, valid
and binding obligations of Buyer enforceable in accordance with their terms.
8.6 Deliverables. Buyer shall have duly executed and delivered to
Seller the Assignment and Assumption Agreement, the Other Agreements and such
other agreements, documents and instruments as Seller shall have reasonably
requested in order to more fully effectuate the transactions contemplated by
this Agreement.
ARTICLE IX
DATE AND PLACE OF CLOSING
9.1 Date and Place of Closing. Subject to satisfaction or waiver of the
conditions to the obligations of the parties, the purchase and sale of the
Assets pursuant to this Agreement shall be consummated at a closing (the
"Closing") to be held in the offices of Muns, Wagner, Anastopulos & Lynn at 701
B Street, Suite 1601, San Diego, CA 92101-8115 or such other place as is
mutually agreed to by the parties, at 10:00 A.M. on February 22, 1999 (the
"Closing Date"). Title to the Assets shall pass from Seller to Buyer as of
12:01 A.M., Oklahoma City, Oklahoma time, on the day following the Closing Date.
<PAGE>
ARTICLE X
CLOSING
10.1 Seller's and Clark's Performance. At the Closing, concurrently with
performance by Buyer of its obligations to be performed at the Closing:
(a) Conveyances. Seller shall execute and deliver to Buyer, in
form and substance acceptable to Buyer (i) the Bill of Sale; (ii) the
Assignment and Assumption Agreement; (iii) the Assignment of Intellectual
Property Rights; and (iv) all other assignments, endorsements and
instruments of transfer as shall be necessary or appropriate to carry out
the intent of this Agreement and as shall be sufficient to vest in Buyer
title to all of the Assets and all right, title and interest of Seller
thereto. If requested by Buyer, such documents shall be in form suitable
for recording.
(b) Other Agreements. Seller shall execute and deliver to Buyer,
in form and substance acceptable to Buyer, the Supply Contract and the
Software License Agreement, and JEFFREY D. CLARK shall execute and deliver
to Buyer, in form and substance acceptable to Buyer, the Jeffrey D Clark
Employment Agreement.
(c) Records. Seller shall deliver to Buyer all documents,
agreements, reports, books, records and accounts pertaining specifically to
the Assets which are in Seller's possession, including without limitation
any and all files and documents relating to any litigation described in
SCHEDULE 3.9.
(d) Certificates. Seller and Clark shall execute and deliver the
certificates referred to in Section 7.3.
(e) Indemnification Pledge Agreement. Seller shall execute and
deliver the Indemnification Pledge Agreement (the "Pledge Agreement")
required by Section 11.7.
(f) Revised Inventory. Seller shall deliver revised and updated
schedules of SCHEDULES 3.3 (Inventory), 3.21 (Payables) and any other
Schedules that must be updated or revised pursuant to Section 5.3.
(g) Certificates of Authorities. Seller shall deliver to Buyer the
certificates of authority referred to in Section 7.6 no later than February
25, 1999.
(h) Opinion of Seller's and Clark's Counsel. Seller and Clark
shall deliver to Buyer the opinion of their counsel, dated the Closing
Date, as to the matters specified in Section 7.9.
(i) Consents. Seller shall deliver to Buyer the consents and
approvals required by Section 7.10.
<PAGE>
(j) Other Actions. Seller and Clark shall take all such other
steps as may be necessary or appropriate to put Buyer in actual and
complete ownership and possession of the Assets.
10.2 Buyer's Performance. At the Closing, concurrently with the
performance by Seller of its obligations to be performed at the Closing:
(a) Cash Portion of the Purchase Price. Buyer shall deliver to
Seller the cash amount specified in Section 2.1(a), by certified or bank
cashier's check or wire transfer;
(b) Stock Portion of the Purchase Price. Buyer shall deliver to
Seller a stock certificate or certificates for the shares of Common Stock
specified in Section 2.1(b), which certificate or certificates shall bear a
legend restricting the transferability of the shares represented by such
certificate without registration under the Securities Act of 1933 or an
opinion of counsel acceptable to Buyer that such registration is not
required.
(c) Delivery of Assignment Assumption Agreement and Other
Agreements. Buyer shall execute and deliver to Seller the Assignment and
Assumption Agreement and the Other Agreements.
(d) Opinion of Buyer's Counsel. Buyer shall deliver the opinion of
counsel, dated the Closing Date, as to the matters specified in Section
8.5.
(e) Certificates. Buyer shall execute and deliver the certificate
referred to in Section 8.3.
10.3 Further Actions. In addition to the foregoing, Buyer and Seller
agree as follows:
(a) Further Action by Seller. At any time and from time to time,
at or after the Closing, upon request of Buyer, Seller and Clark shall do,
execute, acknowledge and deliver or shall cause to be done, executed,
acknowledged and delivered all such further acts, deeds, assignments,
transfers, conveyances, powers of attorney and assurances as may reasonably
be required in order to vest in and confirm to Buyer full and complete
title to, possession of, and the right to use and enjoy, the Assets.
(b) Further Action by Buyer. At any time and from time to time, at
or after the Closing, upon request of Seller, Buyer shall do, execute,
acknowledge and deliver or shall cause to be done, executed, acknowledged
and delivered all such further acts and assurances as may reasonably be
required in order to better assure and confirm to Seller the assumption by
Buyer of the obligations to render performance
<PAGE>
which are to be assumed by Buyer pursuant to this Agreement.
ARTICLE XI
SURVIVAL AND INDEMNIFICATION
11.1 Survival. All representations, warranties, covenants and agreements
made in the Agreement shall survive and shall not be extinguished by the Closing
or any investigation made by or on behalf of any party hereto.
11.2 Buyer's Losses. Each of Seller and Clark hereby agree, jointly and
severally subject to Section 11.5 below, to indemnify Buyer and save and hold
Buyer harmless from, against, for and in respect of any and all damages
(including, without limitation, amounts paid in settlement with Seller's
consent), losses, obligations, liabilities, liens, deficiencies, costs and
expenses, including, without limitation, reasonable attorneys' fees and other
costs and expenses incident to any suit, action, investigation, claim or
proceeding (hereinafter referred to collectively as "Buyer's Losses"), including
without limitation, any and all of Buyer's Losses suffered, sustained, incurred
or required to be paid by Buyer by reason of (i) the breach by Seller or Clark
of any provisions of this Agreement, including any representation or warranty
made by Seller in or pursuant to this Agreement being untrue or incorrect in any
material respect; (ii) any material failure by Seller to observe or perform its
covenants and agreements set forth in this Agreement; (iii) any liability for
product warranties or defective products arising from sales of Inventory sold by
Seller prior to the closing date; or (iv) any failure by Seller to satisfy and
discharge any other liability or obligation not expressly assumed by Buyer
pursuant to this Agreement.
11.3 Employee Compensation and Benefits. Each of Seller and Clark hereby
agrees, jointly and severally, to indemnify and hold Buyer harmless from and
against any and all claims made by employees of Seller, regardless of when made,
for workmen's compensation, medical insurance, disability, vacation, severance,
sick benefits or other compensation arrangements to the extent the same are
based on injury sickness occurring prior to the Closing Date or based on
employment service rendered to Seller prior the Closing Date.
11.4 Seller's Losses. Buyer agrees, subject to Section 11.5 below, to
indemnify Seller and Clark and save and hold Seller and Clark harmless from,
against, for and in respect of any and all damages (including, without
limitation, amounts paid in settlement with Buyer's consent), losses,
obligations, liabilities, claims, deficiencies, cost and expenses, including,
without limitation, reasonable attorneys' fees and other costs and expenses
incident to any suit, action, investigation, claim or proceeding (hereinafter
referred to collectively as "Seller's Losses") suffered, sustained, incurred or
required to be paid by Seller by reason of (i) any representation or warranty
made by Buyer in or pursuant to this Agreement being untrue or incorrect in any
material respect; (ii) any material failure by Buyer to observe or perform its
covenants and agreements set forth in this Agreement; (iii) any liability for
product warranties or defective
<PAGE>
products arising from sales of Inventory sold by Buyer after the Closing Date;
(iv) any failure by Buyer to satisfy and discharge any liability or obligation
expressly assumed by Buyer pursuant to this Agreement; or (v) any and all claims
made by employees of Buyer for workmen's compensation, medical insurance,
disability, vacation, severance, sick benefits or other compensation
arrangements to the extent the same are based on injury or sickness occurring
after the Closing Date or based on employment service rendered to Buyer after
the Closing Date.
11.5 Notice of Loss. Notwithstanding anything herein contained Buyer,
Seller and Clark shall not have any liability under the indemnity provisions of
this Agreement with respect to a particular matter unless a notice setting forth
in reasonable detail the breach which is asserted has been given to the
Indemnifying Party (hereafter defined) and, in addition, if such matter arises
out of a suit, action, investigation or proceeding, such notice is given
promptly after the Indemnified Party (hereafter defined) shall have been given
notice of the commencement of a suit, action, investigation or proceeding. With
respect to Buyer's Losses and claims of employees pursuant to Section 11.2,
hereof, Seller shall be the Indemnifying Party and Buyer shall be the
Indemnified Party. With respect to Seller's Losses, Buyer shall be the
Indemnifying Party and Seller shall be the Indemnified Party.
11.6 Right to Defend. Upon receipt of notice of any suit, action,
investigation, claim or proceeding for which indemnification might be claimed by
an Indemnified Party, the Indemnifying Party shall be entitled promptly to
defend, contest or otherwise protect against such suit, action, investigation,
claim or proceeding or its own cost and expense, including the right to invoke
any arbitration proceeding available in the dispute. The Indemnified Party
shall have the right, but not the obligation, to participate at its own expense
in a defense thereof by counsel of its own choosing, but the Indemnifying Party
shall be entitled to control the defense unless the Indemnified party has
relieved the Indemnifying Party from liability with respect to the particular
matter or the Indemnifying Party fails to assume defense of the matter. In the
event the Indemnifying Party shall fail to defend, contest or otherwise protect
in a timely manner against any such suit, action, investigation, claim or
proceeding, the Indemnified Party shall have the right, but not the obligation,
to defend, contest or otherwise protect against the same and make any compromise
or settlement thereof and recover the entire cost thereof from the Indemnifying
party including reasonable attorneys' fees, disbursements and all amounts paid
as a result of such suit, action, investigation, claim or proceeding or the
compromise or settlement thereof. However, if the Indemnifying Party undertakes
the defense of such matters, the Indemnified Party shall to be entitled to
recover from the Indemnifying Party any legal or other expenses substantially
incurred by the Indemnifying party in connection with the defense thereof other
than the reasonable costs of investigation undertaken by the Indemnified Party
with the prior written consent of the Indemnifying Party.
11.7 Indemnification Pledge Agreement. At closing, Seller will grant
Buyer a security interest in the shares of the Common Stock acquired by Seller
pursuant to section 2.1 (b). After
<PAGE>
six (6) months from the date of closing, the security interest will terminate as
to 25% of such shares not otherwise foreclosed or subject to a then existing
claim, and will terminate in increments equal to twenty-five percent (25%) of
the stock initially pledged on each succeeding six (6) month anniversary of the
closing, upon the terms and condition set forth in the Indemnification Pledge
Agreement attached hereto as Exhibit G. Additionally, Buyer agrees to include
said shares for "piggy-back" registration on the form S-3 registration next
filed after the closing date which registration shall be completed on or before
September 30, 1999.
11.8 Request to Allocate Responsibility. Buyer and Seller agree that if
they are jointly named as parties after Closing in any suit, claim or proceeding
by a past, existing or purported franchisee of Buyer or Seller that they will
jointly request that the arbitrator, panel of arbitrators or court specify in
their judgment or order in the event that any liability is determined as to the
Buyer and Seller whether the liability is attributable to an act, omission or
occurrence before or after the Closing Date or if the liability is attributable
to acts, omissions or occurrences both before and after the Closing Date the
proportionate degree of fault and damages reflected in the judgment or order,
attributable to the Buyer or Seller.
ARTICLE XII
POST-CLOSING COVENANTS
12.1 Transition Period. Seller and Clark shall use good-faith efforts
for a period of up to one hundred eighty (180) days after the Closing to
cooperate and assist Buyer in connection with the operations of the Business and
the Assets purchased by Buyer under this Agreement.
12.2 Payment of Unpaid Receivables. Each of Seller and Clark hereby
agree, jointly and severally, to pay Buyer an amount equal to the outstanding
balance of the Receivables that have not been paid in full within ninety (90)
days of the Closing Date. Buyer shall assign all of its rights, title and
interest in such Receivables to Seller.
12.3 Non-Solicitation.
(a) Each of Buyer and Seller agrees that, for a period of two (2)
years from the Closing Date, or two (2) years from the date of termination
of this Agreement, whichever occurs first, it will not knowingly, as a
result of information obtained hereunder or otherwise obtained in
connection with the transactions contemplated hereunder:
(i) other than Buyer's acquisition of the Business
contemplated by the terms of this Agreement, divert or attempt to
divert any business or customer of the other party to this
Agreement, or
<PAGE>
(ii) except for Buyer's employment of Clark or the possible
employment by Buyer of other existing employees of the Music Trader
Stores, employ or attempt to employ any employee of the other party
to this Agreement; provided, however, Movie Trader, in its
discretion, may employ former employees of Buyer or Seller who have
terminated their relationship with either Buyer or Seller without
the encouragement of Seller or Music Trader.
(b) The remedy at law for any breach or attempted breach by a party
of the provisions of this Section 12.3 will be inadequate and the non-
breaching party shall be entitled to temporary or permanent injunctive
relief against any breach or attempted breach of such provision without the
necessity of posting bond or proving actual damages. It is the express
intention of the parties hereto to comply with all laws, which may be
applicable to this Section 12.3. If any one or more of the provisions
contained in this Section 12.3 shall for any reason be held to be invalid,
illegal or unenforceable in any respect, such invalidity, illegality or
unenforceability shall not affect any other provision of this Agreement,
but any inconsistency in the provisions of this Agreement shall be
construed as if such invalid, illegal or unenforceable provision had never
been contained herein. The terms and conditions of this Section 12.3 will
be governed by and construed in accordance with the laws of the State of
Delaware; the foregoing clause will not, however, affect the forum or venue
of any dispute resolution proceeding arising in connection with this
Agreement or any other term or condition of this Agreement whatsoever.
ARTICLE XIII
TERMINATION
13.1 Termination. This Agreement may be terminated and abandoned at any
time on or prior to the Closing Date.
(a) By the mutual consent in writing of Buyer and Seller;
(b) By Buyer in writing if any of the material conditions to the
obligations of Buyer contained herein shall not have been satisfied or, if
unsatisfied, waived as of the Closing Date.
(c) By Seller in writing if any of the material conditions to the
obligations of Seller contained herein shall not have been satisfied or, if
unsatisfied, waived as of the Closing Date.
(d) By Buyer, Seller or Clark in writing if the Closing shall not
have occurred by [March 30, 1999], except that no party shall have the
right to terminate this Agreement if the failure to close shall be the
result of such party's failure to perform, in any material respect, its
obligations hereunder.
<PAGE>
13.2 No Further Force or Effect. In the event of termination and
abandonment of this Agreement pursuant to the provisions of Section 13.1, this
Agreement shall be of no further force or effect, except for the last sentences
of Sections 5.3 and 6.1, and the provisions of Section 14.1, which shall not be
affected by termination of this Agreement.
ARTICLE XIV
MISCELLANEOUS
14.1 Expenses. Except as otherwise expressly provided herein, Seller and
Buyer shall each pay their own expenses in connection with the preparation of
this Agreement, and the consummation of the transactions contemplated hereby,
including, without limitation, fees of its own counsel, auditors and other
experts, whether or not such transactions be consummated.
14.2 Entire Agreement. This Agreement, together with the Schedules and
other agreements contemplated herein, constitutes the entire contract and shall
supersede all prior agreements and understandings, both written and oral,
between the parties hereto with respect to the subject matter hereof and no
party shall be liable or bound to the other in any manner by any representations
or warranties except as specifically set forth herein or in any Schedule hereto
or agreement executed in connection herewith or expressly required to be made or
delivered pursuant thereto.
14.3 Successors and Assigns. The terms and conditions of this Agreement
shall inure to the benefit of and be binding upon the respective successors and
assigns of the parties hereto. Nothing in this Agreement, express or implied,
is intended to confer upon any party, other than the parties and their
respective successors and assigns, any rights, remedies, obligations or
liabilities under or by reason of such agreements.
14.4 Identical Counterparts. This Agreement may be executed in one or
more counterparts, each of which shall for all purposes be deemed to be an
original and all of which shall constitute the same instrument, but only one of
which need be produced.
14.5 Headings. The headings of the paragraphs and subparagraphs of this
Agreement are inserted for convenience only and shall not be deemed to
constitute part of this Agreement or to affect the construction hereof.
14.6 Use of Certain Terms. As used in this Agreement, the words
"herein," "hereof" and "hereunder" and other words of similar import refer to
this Agreement as a whole and not to any particular paragraph, subparagraph or
other subdivision.
14.7 Modification and Waiver. Any of the terms or conditions of this
Agreement may be waived in writing at any time, whether before or after action
thereon by the party which is
<PAGE>
entitled to the benefits thereof; and this Agreement may be modified or amended
at any time, whether before or after action thereon by the parties. No
supplement, modification or amendment of this Agreement shall be binding unless
executed in writing by all of the parties hereto. No waiver of any of the
provisions of this Agreement shall be deemed or shall constitute a waiver of any
other provision hereof (whether or not similar) nor shall such waiver constitute
a continuing waiver.
14.8 Other Remedies. Except as otherwise provided herein, any and all
remedies expressly conferred upon a party will be deemed cumulative with and not
exclusive of any other remedy conferred hereby or by law on such party, and the
exercise of any one remedy will not preclude the exercise of any other.
14.9 Notices. All notices, consents, requests, instructions, approvals
and/or communications provided for herein, shall be validly given, made or
served if in writing and delivered personally or sent by registered or certified
mail, return receipt requested, postage prepaid, addressed as follows:
(i) If to Seller: Music Trader, Inc.
Attn: Jeffrey D. Clark, President
8593 Hydra Lane
San Diego, CA 92126
with copy to: Muns, Wagner, Anastopulos & Lynn
Attn: Ed Muns, Attorney
701 B Street, Suite 1601
San Diego, CA 92101-8115
(ii) If to Buyer: Compact Discs Management, Inc.
Attn: Gary Johnson, President
1204 Sovereign Row
Oklahoma City, OK 73108
with copies to: Bruce W. Day, Esq.
Day, Edwards, Federman, Christensen &
Propester, P.C.
210 Park Avenue
29th Floor Oklahoma Tower
Oklahoma City, Oklahoma 73102
CD Warehouse, Inc.
Attn: Michael E. Chionopoulos
<PAGE>
Vice President & General Counsel
1204 Sovereign Row
Oklahoma City, OK 73108
The designation of the person to be so notified or the address of such person
for the purposes of such notice may be changed from time to time by a similar
notice. Any notice which is delivered personally in the manner provided herein
shall be deemed to have been duly given to the party to whom it is directed upon
actual receipt by such party (or its agent for notices hereunder). Any notice
which is addressed and mailed in the manner herein provided shall be
conclusively presumed to have been duly given to the party to which it is
addressed at the close of business, local time of the recipient, on the third
business day after the day it is so placed in the mail.
14.10 Governing Law. This Agreement will be construed and enforced in
accordance with and governed by the laws of the State of Delaware, without
regard to conflict of law principles. This Agreement will not be construed for
or against a party merely because that party prepared it, but will at all times
be construed according to its fair meaning.
14.11 No Agent's Fees. Buyer represents to Seller, and Seller represents
to Buyer, that there is no agent's broker's or finder's fees or commission
payable or that will be payable in connection with the transactions contemplated
hereby by virtue of or resulting from any action or agreement by it. Buyer
hereby agrees to indemnify and hold harmless Seller, and Seller agrees to
indemnify and hold harmless Buyer, from and against any claim, demand,
liability, loss, cost or expense (including reasonable attorneys' fees and
expenses) on account of or in connection with any agent's, broker's or finder's
fees or commissions payable or alleged to be payable in connection with this
Agreement or the transactions contemplated hereby virtue of or resulting from
any action or agreement on the part of such indemnifying party.
14.12 Binding Arbitration. Except as provided in Section 5.7 and Section
12.3 of this Agreement, each party to this Agreement agrees that any dispute or
controversy arising between any of the parties to this agreement, or any person
or entity in privity therewith, out of the transactions effected and
relationships created pursuant to this Agreement and each other agreement
created in connection herewith, including any dispute or controversy regarding
the formation, terms, or construction of this Agreement, regardless of kind or
character, must be resolved through binding arbitration. Each party to this
Agreement agrees to submit such dispute or controversy to arbitration before the
American Arbitration Association (the "Association") in Oklahoma City, Oklahoma,
and further agrees to be bound by the determination of an arbitration panel
consisting of three (3) persons. If demand for arbitration is made, each party
will have the right to select one independent arbitrator. If the party upon whom
the demand for arbitration is served fails to select an arbitrator within twenty
days, then the Association may select a second arbitrator upon application by
either party. The two arbitrators shall select a third arbitrator. If the two
arbitrators fail to select a third arbitrator within twenty days, the third
arbitrator may be
<PAGE>
selected and appointed by the Association upon application by either party. The
arbitrators' decision concerning the claim, controversy or dispute, including
allocation among the parties of costs and expenses associated with the
arbitration, shall be final and binding on the parties and judgment on the award
may be entered in any court of competent jurisdiction. Any party to this
Agreement may bring an action, including a summary or expedited proceeding, to
compel arbitration of any such dispute or controversy in a court of competent
jurisdiction and, further, may seek provisional or ancillary remedies including
temporary or injunctive relief in connection with such dispute or controversy in
a court of competent jurisdiction, provided that the dispute or controversy is
ultimately resolved through binding arbitration conducted in accordance with the
terms and conditions of this section.
14.13 Sales Tax. Buyer shall pay 50% and Seller shall pay 50% of any
California sales taxes associated with the transactions described herein, which
total amount is estimated at $12,000.00.
IN WITNESS WHEREOF, each of the parties hereto has caused this Agreement to
be signed in counterparts all as of the date first above written.
SELLER:
-------
MUSIC TRADER, INC.
BY:/s/ Jeffrey D. Clark
-------------------------------------
Jeffrey D. Clark, President
CLARK:
------
JEFFREY D. CLARK
/s/ Jeffrey D. Clark
----------------------------------------
Jeffrey D. Clark
DEBBI MCGILL-CLARK
/s/ Debbi McGill Clark
----------------------------------------
Debbi McGill- Clark
<PAGE>
BUYER:
------
COMPACT DISCS MANAGEMENT, INC.
By:/s/ Gary D. Johnson
-------------------------------------
Gary Johnson, President
<PAGE>
Exhibit 5.1
LOAN AGREEMENT
THIS AGREEMENT is made effective as of February 17, 1999, by and between CD
WAREHOUSE, INC., a Delaware corporation ("Borrower") and BANK ONE, OKLAHOMA,
N.A., a national banking association ("Bank").
WITNESSETH:
WHEREAS, the Borrower and the Bank have agreed to certain extensions of
credit by the Bank to the Borrower in the form of a revolving loan and an
advancing term loan in the aggregate maximum principal amount of $7,000,000.00,
as evidenced by certain promissory notes described herein; and
WHEREAS, the Borrower will use the proceeds of the loans to: (i) acquire
Music Trader, Inc. and Norwalk Distributors, Inc.; (ii) support current assets;
and (iii) other general corporate purposes; and
WHEREAS, the Borrower desires to secure its obligations under this Loan
Agreement and the promissory notes with certain property of the Borrower
pursuant to the terms and conditions of this Agreement and other loan and
security documents as described herein.
NOW, THEREFORE, in consideration of the mutual covenants and agreements
contained, the parties hereto agree to the following terms and conditions:
1. DEFINITIONS. As used in this Agreement, the following terms with their
initial letters capitalized shall have the following meanings except where the
context otherwise requires:
"Account(s)" shall mean all accounts receivable, contract rights,
franchise agreements, notes, drafts, acceptances, general intangibles, chattel
paper and other forms of obligations and receivables owing to Borrower arising
out of or in connection with Borrower's business, including such as may arise
out of the sale, lease or other disposition at any time and from time to time of
Inventory, whether now owned or hereafter acquired, and any right to payment for
goods sold or leased or for services rendered and the Proceeds thereof, together
with all other forms of accounts as may be defined or determined under the
Uniform Commercial Code whether such Accounts now exist or are hereinafter
acquired.
"Advancing Loan" means an advancing term loan in the principal amount
of $5,000,000.00 as evidenced by the Advancing Note described herein.
"Advancing Note" means a Promissory Note in the principal amount of
$5,000,000.00 dated even date herewith, made by the Borrower and payable to the
order of the Bank, together with all renewals, extensions, modifications and
substitutions thereto and thereof.
<PAGE>
-2-
"Agreement" shall mean this Loan Agreement, as the same may from time
to time be amended, supplemented or modified.
"Borrower" shall mean CD Warehouse, Inc. and its successors.
"Borrowing Base" shall mean an amount equal to: (a) 70% of all
Eligible Domestic Accounts; plus (b) 60% of Eligible International Accounts,
limited to 30% of the total Borrowing Base; plus (c) 40% of all Eligible
Inventory (all as determined monthly by the Bank as reflected in the financial
statements of Borrower); minus (d) all principal and accrued and unpaid interest
amounts outstanding under the Advancing Loan.
"Business Day" shall mean any day other than a Saturday or Sunday or
other holiday on which commercial banks are open for business with the public in
Oklahoma City, Oklahoma.
"Chattel Paper" shall mean any right to payment for a monetary
obligation, together with all other forms of chattel paper as may be defined or
determined under the Uniform Commercial Code.
"Collateral" means all of the Borrower's right, title and interest in
and to: (i) all Accounts, Inventory, Chattel Paper, Documents, Equipment, Goods,
Instruments and General Intangibles and any and all other assets of Borrower,
together with all Proceeds; (ii) all Franchise Agreements and all Proceeds
thereof, and (iii) the Key-Man Insurance and all Proceeds thereof.
"Cost of Goods Sold" is determined under GAAP.
"Current Assets" shall mean all of the current assets of the Borrower,
as determined in accordance with GAAP.
"Current Liabilities" shall mean all of the current liabilities of the
Borrower, as determined in accordance with GAAP; provided however, all funded
debt of the Borrower shall be included in the amount of Current Liabilities
notwithstanding the accounting treatment prescribed by GAAP.
"Debt" means, as to any person, all indebtedness, liabilities and
obligations of such person, determined in accordance with GAAP, including all
contingent and indirect obligations and liabilities.
"Documents" means all forms of documents as may be defined or
determined under the Uniform Commercial Code.
"Eligible Domestic Accounts" means all Accounts owing to Borrower in
United States dollar denominations from Account debtors of the Borrower
domiciled in
<PAGE>
-3-
the United States, determined from the time such Eligible Domestic Accounts come
into existence until they are collected in full, except for:
(i) any Account which is aged more than three (3) times its
normal selling terms, or in any event over ninety (90) days past due from
the date of invoice ;
(ii) any Account from a debtor that is an officer, employee,
director, agent or shareholder of the Borrower, or where an Account debtor
is a subsidiary of, the parent of, related to or affiliated with the
Borrower, or has common shareholders, officers or directors with the
Borrower, unless approved by the Bank in writing;
(iii) any Account not arising from a bona fide outright sale of
goods or performance of services, or where the Account holder does not have
possession or has not delivered to the Bank shipping and delivery receipts
evidencing shipment of the goods, and if representing services, the
services have not been fully performed for the Account debtor;
(iv) any Account which is subject to any claim, set-off,
allowance or adjustment by the Account debtor or any counterclaim,
including but not limited to any claim, set-off, allowance or adjustment
based upon any violation of or failure to comply with any applicable
federal or state consumer law;
(v) any Account where an Account debtor has returned any of
the goods from the sale of which the claim arose, or any partial payment
has been made thereon;
(vi) any Account subject to any assignment, claim, lien or
security interest of any character, or subject to any attachment, levy,
garnishment or other judicial process, except the security interest of the
Bank;
(vii) any Account arising in the ordinary course of business
where a notice of bankruptcy, insolvency or adverse change in the financial
condition of the Account debtor has been received;
(viii) any Account evidenced by a judgment, an Instrument or
Chattel Paper;
(ix) any Account where the Account debtor is the United States
or any department, agency or instrumentality of the United States, or any
city, town, municipality or division thereof,
(x) any Account that the Bank has reasonably determined is
unsatisfactory;
(xi) with respect to any Account which exceeds twenty percent
(20%) of the total Accounts, any such excess portion of said Account; and
(xii) all Accounts of any Account debtor who has more than five
percent (5%) of its total Accounts past due more than sixty (60) days from
date of first billing.
<PAGE>
-4-
"Eligible International Accounts" means all Accounts owing to
Borrower in United States dollar denominations from Account debtors of the
Borrower domiciled in countries which are members of the European Economic
Community ("International Account Debtors"), determined from the time such
Eligible International Accounts come into existence until they are collected in
full, as approved by the Bank, except for:
(i) any Account which is aged more than three (3) times its
normal selling terms, or in any event over ninety (90) days past due from
the date of invoice;
(ii) any Account from an International Account Debtor that is
an officer, employee, director, agent or shareholder of the Borrower, or
where an International Account Debtor is a subsidiary of, the parent of,
related to or affiliated with the Borrower, or has common shareholders,
officers or directors with the Borrower, unless approved by the Bank in
writing;
(iii) any Account not arising from a bona fide outright sale of
goods or performance of services, or where the Account holder does not have
possession or has not delivered to the Bank shipping and delivery receipts
evidencing shipment of the goods, and if representing services, the
services have not been fully performed for the International Account
Debtor;
(iv) any Account which is subject to any claim, set-off,
allowance or adjustment by the International Account Debtor or any
counterclaim, including but not limited to any claim, set-off, allowance or
adjustment based upon any violation of or failure to comply with any
applicable foreign, federal or state consumer law;
(v) any Account where an International Account Debtor has
returned any of the goods from the sale of which the claim arose, or any
partial payment has been made thereon;
(vi) any Account subject to any assignment, claim, lien or
security interest of any character, or subject to any attachment, levy,
garnishment or other judicial process, except the security interest of the
Bank;
(vii) any Account arising in the ordinary course of business
where a notice of bankruptcy, insolvency or adverse change in the financial
condition of the International Account Debtor has been received;
(viii) any Account evidenced by a judgment, an Instrument or
Chattel Paper;
(ix) any Account that the Bank has reasonably determined is
unsatisfactory;
(x) with respect to any Account which exceeds twenty percent
(20%) of the total Accounts, any such excess portion of said Account; and
<PAGE>
-5-
(xi) all Accounts of any International Account Debtor who has
more than five percent (5%) of its total Accounts past due more than sixty
(60) days from date of first billing.
"Eligible Inventory" means all Inventory unconditionally owned by the
Borrower, except for:
(i) Inventory subject to a purchase money security interest
(as that term is defined in the Uniform Commercial Code) of a third party;
(ii) Inventory acquired by the Borrower later than 180 days
from the date of determination as Eligible Inventory, and;
(iii) Inventory' determined by the Bank to be otherwise
unsatisfactory as Eligible Inventory.
"Environmental Laws" means all federal, state and local laws, rules,
regulations, ordinances, and consent decrees relating to health, safety,
hazardous substances, and environmental matters applicable to Borrower's
business and facilities. Such laws and regulations include, but are not limited
to, the Resource Conservation and Recovery Act, Comprehensive Environmental
Response; Compensation and Liability Act; Toxic Substances Control Act; Clean
Water Act; Clean Air Act; Comprehensive Environmental Response, Compensation and
Liability Information System; all state and federal superlien and environmental
cleanup programs; and all other applicable environmental laws and regulations of
all applicable jurisdictions.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended, together with all regulations issued pursuant thereto.
"Events of Default" shall have that meaning provided in Section 8
hereof.
"Equipment" means all tools, equipment, machinery, appliances,
building materials, supplies, furniture, fixtures, furnishings, business
records, goods to become fixtures and all other similar tangible personal
property of every kind now owned by Borrower or hereafter acquired, together
with all other forms of equipment and fixtures as may be defined or determined
under the Uniform Commercial Code.
"Fixed Charge Ratio" means: (A) the sum of: (i) Net Income, after
taxes, plus (ii) depreciation and amortization expenses, plus (iii) interest
expense, plus (iii) rent and operating lease expense, minus (iv) capital
expenditures, minus (v) dividends and distributions, minus (vi) nonrecurring and
extraordinary income items; all for the twelve (12) months immediately preceding
the determination date, divided by (13)the sum of (i) the current portion of
long term debt and capitalized lease obligations, as determined under GAAP, plus
(ii) interest expense, plus (iii) rent and operating lease expense; all for the
twelve (12) months immediately preceding the determination date. Notwithstanding
the foregoing, the Fixed Charge Ratio for the quarterly periods ending December
31, 1999, shall be calculated using the financial information in (A) and (B)
above on a quarterly basis instead of a prior twelve month basis.
<PAGE>
-6-
"Franchise Agreements" shall mean any and all franchise agreements,
contracts, contract rights, documents, licenses, general intangibles, chattel
paper and other forms of rights in favor of Borrower and obligations owing to
Borrower arising out of or in connection with any franchise arrangement with any
franchisee or other party, and any right to any royalty or other payments
thereunder, whether now existing or hereafter incurred.
"GAAP" means the generally accepted accounting principles, practices
and procedures, set forth by the Accounting Principles Board and the American
Institute of Certified Public Accountants and the Financial Accounting Standards
Board, which are applicable as of the date of the end of the fiscal quarter
immediately preceding such date of determination.
"General Intangibles" means any personal property, including things
in action, other than Goods, Accounts, Chattel Paper, Documents, Equipment,
Instruments, Inventory and money, including any and all patents, trademarks,
copyrights and other intellectual property, whether now owned or hereafter
acquired, together with all other forms of general intangibles as may be defined
or determined under the Uniform Commercial Code.
"Goods" shall include all things which are movable at the time a
security interest attaches or which are fixtures (12A 0.8. (S)9-313), together
with all other forms of goods as may be defined or determined under the Uniform
Commercial Code, whether now owned or hereafter acquired, but does not include
money, Documents, Instruments, Accounts, Chattel Paper or General Intangibles,
but does include (i) "Equipment" if they are used or bought for use primarily in
business or if the goods are not included in the definition of Inventory,
together with all other forms of equipment as may be defined or determined under
the Uniform Commercial Code; and (ii) "'Inventory" if they are held by a person
who holds them for sale or lease or to be furnished under contracts of service
or if he has so furnished them, or if they are raw materials, work in process,
or materials used or consumed in a business, together with all other forms of
inventory as may be defined or determined under the Uniform Commercial Code.
"Instrument" shall mean a negotiable instrument, defined in 12A 0.8.
(S)3-104, or a security, defined in 12A O.S. (S)8-102, or any other writing
which evidences a right to the payment of money and is not itself a security
agreement or lease and is a type of which is in the ordinary course of business
transferred by delivery with any necessary endorsement or assignment, together
with all other forms of instruments as may be defined or determined under the
Uniform Commercial Code, whether now owned or hereafter acquired.
"Inventory" means all inventory, raw materials, finished goods, work-
in-process and all other personal property of whatever nature now or hereafter
owned and which are held for sale or lease or are furnished or to be furnished
under contracts of service, together with all other forms of inventory as may be
defined or determined under the Uniform Commercial Code, whether now owned or
hereafter acquired.
<PAGE>
-7-
"Inventory Turnover Days" is defined as: (i) the Inventory balance,
divided by Cost of Goods Sold for the Inventory, times (ii) 365.
"Key-Man Insurance" shall mean that certain key-man life insurance
policy with American States Life Insurance Company (Policy #__________________)
insuring the life of Jerry W. Grizzle in the amount of $2,000,000.00 and naming
Borrower as the beneficiary.
"Lien" means any lien, mortgage, security interest, tax lien, pledge,
encumbrance, conditional sale or title retention arrangement, or any other
interest in property designed to secure the repayment of Debt, whether arising
by agreement or under any statute or law, or otherwise.
"Loans" means the loans contemplated by this Agreement and described
in Section 2 hereof and evidenced by the Notes.
"Loan Documents" collectively means this Agreement, the Notes, all
security agreements, assignments and financing statements securing the Loans,
and all other promissory notes, guaranties, agreements and all other documents,
agreements, certificates and instruments executed and delivered in connection
with the Loans described herein and any renewals, amendments, supplements or
modifications thereof or thereto.
"Material Adverse Effect" means any set of circumstances or events
which (i) could have an adverse effect upon the validity, performance or
enforceability of this Agreement or any other Loan Documents, (ii) could be
material and adverse to the financial condition or business operations of the
Borrower, (iii) could materially impair the ability of the Borrower to perform
its obligations under this Agreement or any other Loan Documents or any other
contract, agreement or obligation to which the Borrower is a party, or (iv)
constitutes an Event of Default.
"Maximum Principal Amount" means a principal amount equal to the
lesser of (i) $2,000,000.00, or (ii) the amount of the Borrowing Base.
"National Prime Rate" shall mean that fluctuating annual rate of
interest recognized by the Bank, from time to time (whether or not charged or
published), as the "National Prime Rate."
"Net Income" shall have the meaning of such term under GAAP.
"Notes" shall mean, collectively the Revolving Note and Advancing
Note, and all renewals, extensions, modifications and substitutions thereto and
therefor.
"PBGC" means the Pension Benefit Guaranty Corporation and any
successor to all or any of its functions under ERISA.
<PAGE>
-8-
"Permitted Debt" means (i) any accounts payable, taxes, insurance,
operating expenses and all other general and administrative expenses of the
Borrower incurred in the normal course of Borrower's business operations,
including real property lease agreements, (ii) all indebtedness of the Borrower
to the Bank, and (iii) any intercompany indebtedness incurred for the purpose of
purchasing Inventory, with all such obligations in (i), (ii) and (iii) being in
amounts and of the types as are consistent with those identified in the latest
financial statements of the Borrower.
"Permitted Liens" mean any Lien attaching to property of the Borrower
for the purpose of: (i) securing a purchase money security interest in Inventory
of the Borrower; or (ii) securing any indebtedness of the Borrower to the Bank.
"Proceeds" means: (i) all amounts, sums, revenues and income which
become payable from any of the Collateral (including any after-acquired
properties); (ii) whatever is received upon the sale, exchange, collection or
other disposition of the Collateral or Proceeds; and (iii) all "proceeds" as
defined or determined under the Uniform Commercial Code. An Instrument payable
by reason of loss or damage to the Collateral is Proceeds.
"Regulation D" means Regulation D of the Board of Governors of the
Federal Reserve System, as in effect from time to time.
"Regulation U" means Regulation U of the Board of Governors of the
Federal Reserve System, as in effect from time to time.
"Regulation X" means Regulation X promulgated by the Board of
Governors of the Federal Reserve System, as in effect from time to time.
"Request for Advance" means a completed request for cash advances in
the form of Exhibit "A" hereto.
"Revolving Loan" means a revolving loan in the principal amount of
$2,000,000.00 as evidenced by the Revolving Note described herein.
"Revolving Note" means a Promissory Note in the principal amount of
$2,000,000.00 dated effective April 1, 1999, made by the Borrower and payable to
the order of the Bank, together with all renewals, extensions, modifications and
substitutions thereto and thereof
"Tangible New Worth" is defined as total stockholders' equity, minus
intangible assets, as such terms are defined under GAAP.
"Uniform Commercial Code" means the Uniform Commercial Code of the
State of Oklahoma (12A O.S. (S)9-101 et. seq.), as amended from time to time.
1.1 Other Definitional Provisions.
<PAGE>
-9-
(a) All terms defined in this Agreement shall have the above-
defined meanings when used in the Notes or any Loan Document, certificate,
report or other document made or delivered pursuant to this Agreement,
unless the context shall otherwise require.
(b) Unless otherwise specified herein, all accounting terms
shall be interpreted in accordance with GAAP.
(c) Defined terms used herein in the singular shall include
the plural and vice versa.
(d) The words "hereof", "herein", "hereunder" and similar
terms when used in this Agreement shall refer to this Agreement as a whole
and not to any particular provision of this Agreement.
2. LOAN TERMS. Subject to the terms and conditions hereof, and the terms
and conditions of the Loan Documents, the Bank agrees to extend credit to the
Borrower and the Borrower agrees to such extensions of credit from the Bank,
which credit will be evidenced by the Notes, on the following conditions:
2.1 Revolving Loan. Subject to the terms and conditions hereof, and
the terms and conditions of the Loan Documents, the Bank agrees to extend credit
to the Borrower, and the Borrower agrees to such extensions of credit from the
Bank, in the amount of the Maximum Principal Amount, together with interest
thereon as described herein, which will be evidenced by the Revolving Note. This
credit will be in the form of a revolving line of credit which Borrower may
borrow, repay and reborrow in accordance with the terms and conditions of this
Agreement and the Revolving Note.
2.1.1 Principal. The outstanding principal amount of the
Revolving Note shall not exceed the Maximum Principal Amount.
2.1.2 Interest on Revolving Note. The outstanding principal
amount of the Revolving Note shall bear interest per annum, accrued from
the date of disbursement, at a rate of interest equal to the National Prime
Rate, as such rate may change from time to time hereafter. Each change in
the per annum interest rate charged hereunder shall become effective,
without notice (which notice is hereby waived), on the date of such change.
As of the effective date hereof, the National Prime Rate is seven and
three-quarter percent (7.75%) per annum and the initial rate hereunder is
seven and three-quarter percent (7.75%) per annum. The Bank may, from time
to time, extend credit to anyone at rates of interest varying from, and
having no relationship to the National Prime Rate. The interest rate
described above shall be calculated on the basis of actual number of days
elapsed, but computed as if each calendar year consisted of a 365 day year.
<PAGE>
-10-
2.1.3 Repayment of Revolving Note. During the term of the
Revolving Note, monthly payments of the accrued interest on the outstanding
principal balance of the Revolving Note, together with any principal amount
in excess of the Maximum Principal Amount, shall be due and payable
beginning May 1, 1999, and continuing thereafter on the first day of each
and every month and at maturity. The Revolving Note shall mature on April
1, 2000, at which time all outstanding and unpaid principal and all accrued
and unpaid interest thereon shall be immediately due and payable.
2.1.4 Advances on Revolving Note. Advances under the Revolving
Note will be made from time to time prior to the maturity date thereof upon
Borrower's request; provided however, the aggregate principal amount at any
one time outstanding on the Revolving Note shall not exceed the Maximum
Principal Amount. All advances on the Revolving Note shall be made in
accordance with this Agreement and the Bank shall not be obligated to make
an advance on the Revolving Note if (i) an Event of Default shall exist
under this Agreement at the time of a requested advance, or (ii) the amount
of such advance and all other outstanding advances made by the Bank to
Borrower under the Revolving Note would exceed the Maximum Principal
Amount.
Borrower may request a an advance orally, but must deliver to the
Bank within twenty four (24) hours of such oral request, a written
confirmation of the request for an advance in the form of a Request for
Advance signed by an authorized officer of Borrower and a signed Borrowing
Base certificate described in Section 6.1.2 hereof indicating sufficient
credit availability under the Revolving Note. Each oral request shall be
deemed a representation, warranty, acknowledgment and agreement by Borrower
as to the matters which are required to be contained in the written
requests. Subject to the limitations on advances contained above, the Bank
shall deposit the amount of such advance in a designated account of
Borrower maintained at the Bank on the same business day as any request is
received by 2:00 p.m. on such date, or on the next business day, if such
request is received later than 2:00 p.m. All amounts advanced to Borrower
shall be evidenced by the Revolving Note.
2.1.5 Nonuse Fee. The Borrower shall pay to the Bank on the
first day of each calendar quarter, beginning July 1, 1999, a nonuse fee in
an amount equal to one-quarter of one percent (0.25%) per annum of the
daily average of the unused principal amount of the Revolving Note for the
immediately preceding calendar quarter.
2.2 Advancing Loan. The Bank will extend credit to Borrower in the
principal amount of $5,000,000.00, together with interest thereon as described
herein, which will be evidenced by Advancing Note. This credit will be in the
form of a term loan in accordance with the terms and conditions of this
Agreement and the Advancing Note.
<PAGE>
-11-
2.2.1 Principal of Advancing Note. The outstanding principal
amount of Advancing Note shall not exceed $5,000, 000. 00.
2.2.2 Interest on Advancing Note. The outstanding principal
amount of the Advancing Note shall bear interest per annum, at a rate of
interest equal to the National Prime Rate, as such rate may change from
time to time hereafter. Each change in the per annum interest rate charged
hereunder shall become effective, without notice (which notice is hereby
waived), on the date of such change. As of the effective date hereof, the
National Prime Rate is seven and three-quarter percent (7.75%) per annum
and the initial rate hereunder is seven and three-quarter percent (7.75%)
per annum. The Bank may, from time to time, extend credit to anyone at
rates of interest varying from, and having no relationship to the National
Prime Rate. The interest rate described above shall be calculated on the
basis of actual number of days lapsed, but computed as if each calendar
year consisted of a 365 day year.
2.2.3 Repayment of Advancing Note. During the term of the
Advancing Note, monthly payments of accrued interest shall be due and
payable on March 1, 1999 and April 1, 1999, and monthly payments of
principal and accrued interest shall be due and payable thereafter in the
amount of $100,784.80, beginning on May 1, 1999 and continuing thereafter
on the first day of each and every month through maturity. The Advancing
Note shall mature on April 1, 2002, at which time all outstanding and
unpaid principal and all accrued and unpaid interest thereon shall be
immediately due and payable.
2.2.4 Prepayments. The Advancing Note may be prepaid in whole
or in part at any time without premium or penalty. Any such prepayment
shall be applied first to accrued and unpaid interest and then to principal
in inverse order of payments due. The Bank shall have no obligation to
readvance any amount prepaid under Advancing Note.
2.3 Payments. The principal of and interest on the Notes shall be
payable in lawful money of the United States of America, in immediately
available funds, at the principal office of the Bank in Oklahoma City, Oklahoma.
All such payments shall be made not later than 2:00 p.m., Oklahoma City time, on
the date due, and funds received for principal payments on the Notes after such
hour on any day shall be treated for all purposes of this Agreement as having
been received on the next succeeding Business Day in Oklahoma City. If any
payment made by the Borrower under this Agreement or the Notes is to be made on
a day not a Business Day, such payment shall be made on the next succeeding
Business Day and such extension of time will in such case be included in
computing interest, if any, in connection with such payment.
2.4 Default Interest. While any Event of Default exists hereunder or
under the Notes or any of the Loan Documents, which has not been cured as
provided in
<PAGE>
-12-
this Agreement, in lieu of the interest rate provided herein and in the Notes,
all sums owing by Borrower to Bank in connection with the Loans shall bear
interest at the rate equal to five percent (5%) per annum in excess of the
National Prime Rate, accrued from the date of the Event of Default but after any
applicable grace period to cure said Event of Default as is provided for herein,
to the date on which such Event of Default is cured.
3. CONDITIONS OF LENDING. The obligation of the Bank to perform this
Agreement and to extend the Loans as described herein is subject to the
performance of the following conditions precedent:
3.1 Loan Documents. This Agreement, the Notes, the other Loan
Documents, and all other documents required by the Bank shall have been duly
executed, acknowledged (where appropriate) and delivered to the Bank, all in
form and substance satisfactory to the Bank. All of the Loan Documents which
require filing or recordation for the perfection of Liens on the Collateral
shall be properly filed or recorded in all appropriate recording offices and the
Borrower shall have reimbursed the Bank for all costs, including reasonable
attorney's fees not to exceed $3,500.00, pertaining thereto.
3.2 Underwriting Fee. A fee in the amount of $10,000.00 shall
have been paid to the Bank.
3.3 Information. The Borrower shall have furnished to the Bank such
financial statements and other information as the Bank shall have requested,
including but not limited to, a draft copy of the Borrower's December 31, 1998
financial statements, provided the Borrower agrees to provide the Bank with
audited financial statements no later than April 30, 1999.
3.4 No Default. Representations and Warranties. No Events of Default
shall have occurred and be continuing under this Agreement or the Loan
Documents. All representations and warranties contained herein shall be true and
correct.
3.5 Authority. The Borrower shall have delivered to the Bank such
resolutions and other documents reasonably required to authorize the execution,
delivery and performance of the Loan Documents, all in form and substance
satisfactory to the Bank, together with certified copies of the Borrower's
Certificate of Incorporation (and amendments), Bylaws (and amendments),
Certificate of Good Standing from the State of Delaware, and Certificate of
Foreign Qualification and Good Standing Certificate from the State of Oklahoma.
3.6 Incumbency Certificate. The Bank shall have received a
certificate from an officer of Borrower which shall certify the names of the
persons authorized to sign the Loan Documents to be executed by such person and
the other documents or certificates to be delivered by such person pursuant to
the Loan Documents, together with the true signatures of each persons. Bank may
conclusively rely on the certificates until Bank shall receive a further
certificate from an officer of the Borrower canceling or
<PAGE>
amending the prior certificate and submitting the signatures of the persons
named in such further certificate.
3.7 Litigation. The Bank shall have received a Litigation
Certificate in the form of Exhibit "B" attached hereto, signed by an authorized
officer of Borrower stating that no litigation, investigation or proceeding
before or by an arbitrator or court is continuing or threatened against Borrower
or the Collateral (i) with respect to this Agreement, the Notes, any other Loan
Documents, or any of the transactions contemplated hereby or thereby, or (ii)
which could have a Material Adverse Effect on Borrower. Bank shall also receive
either (a) a summary and analysis of all litigation in which Borrower is
involved or (b) an opinion of counsel, in form and substance acceptable to Bank,
to the effect that no litigation in which Borrower is involved would, in the
event of an adverse determination, have a Material Adverse Effect.
3.8 UCC Information. The Bank shall have received and reviewed
copies of UCC Title Searches for Borrower from such jurisdictions as the Bank
may determine, and all Liens of any party on the Collateral as evidenced by such
information shall have been released to the satisfaction of the Bank.
3.9 Insurance. Borrower shall have provided to the Bank,
endorsements to all insurance policies of Borrower described in Section 4.16
hereof, which endorsements shall name the Bank as an additional insured to the
extent of the Bank's interest in the Collateral.
3.10 Expenses. The Borrower shall have paid all of the Bank's costs
and expenses, including reasonable fees of legal counsel not to exceed
$3,500.00, incurred in the negotiation and preparation of the Loan Documents and
in closing and perfecting the rights of the Bank under the Loan Documents.
3.11 Certification of Eligible Domestic Accounts and Eligible
International Accounts. The Bank shall have received and approved an initial
list of all Eligible Domestic Accounts and Eligible International Accounts from
Borrower, which list will include appropriate agings of the Eligible Domestic
Accounts and Eligible International Accounts, certified as true and correct by
an authorized party for Borrower and in form satisfactory to the Bank.
3.12 Acquisition Information. The Bank shall have received and
approved such information regarding the Borrower's proposed acquisition of Music
Trader, Inc. and Norwalk Distributors, Inc., including, but not limited to: (i)
all purchase agreements, assumption agreements, appraisals and evaluations; (ii)
confirmation of purchase prices and, sources and uses of funds; (iii) inventory
observation report of Music Trader, Inc. by independent auditors; (iv) audited
financial statements of Norwalk Distributors, Inc.
3.13 Eligible Inventory List. The Bank shall have received and
approved an initial list from Borrower of the respective locations where all
Eligible
<PAGE>
-14-
Inventory is located and identifies the amount of new and used compact discs at
each such location.
3.14 Key-Man Insurance. The Key-Man Insurance policy shall have
been issued and delivered to the Bank.
4. REPRESENTATIONS AND WARRANTIES. To induce the Bank to extend the
Loans and enter into this Agreement, the Borrower represents and warrants to the
Bank during the term of the Loans and any and all renewals and extensions
thereof, as follows:
4.1 Existence. The Borrower is duly organized, validly existing, and
in good standing under the law of its state of organization, and are authorized
to do business in all jurisdictions in which their ownership of property and
transaction of business legally requires such authorization, and Borrower has
full power, authority, and legal right to own its property and transact business
as presently transacted or proposed to be transacted.
4.2 Authority. The execution, delivery and performance of the Loan
Documents by the Borrower is within the power of the Borrower, has been duly
authorized, is not in contravention of law or the terms of the Borrower's
certificates of incorporation or other organizational documents, or of any
indenture, agreement or undertaking to which the Borrower is a party or by which
it is bound.
4.3 Governmental Authorization. The execution, delivery, and
performance by the Borrower of this Agreement requires no approval of or
filing with any governmental authority.
4.4 Binding Effect. This Agreement and the Loan Documents, when duly
executed and delivered, will constitute legal, valid, and binding obligations of
the Borrower, fully enforceable in accordance with their respective terms,
except as enforcement may be limited by bankruptcy, insolvency, reorganization,
moratorium or similar laws or equitable principles relating to or limiting
creditor's rights generally.
4.5 Financial Condition. Subject to any limitations stated therein
or in connection therewith, all balance sheets, earnings statements, and other
financial data which have been or may hereafter be furnished to the Bank to
induce the Bank to enter into this Agreement or otherwise in connection
herewith, including such financial information provided pursuant to Section
3.12, do or shall fairly represent the financial condition of the Borrower as of
the dates and the results of operations for the periods for which the same are
furnished, are, or shall be at the time the same are so furnished, accurate and
correct in all material respects and complete insofar as completeness may be
necessary to give the Bank a true and accurate knowledge of the respective
subject matter involved, and no material adverse change in the financial
condition of the Borrower, Norwalk Distributors, Inc. or Music Trader, Inc.
shall have occurred since the dates of such financial information provided to
the Bank herein.
<PAGE>
-15-
4.6 Litigation. Except as described in the Litigation Certificate
attached hereto as Exhibit "B", there is no action, suit, investigation or
proceeding pending, or to the knowledge of Borrower threatened against Borrower
or any of the Collateral, which would have a Material Adverse Effect on the
Borrower's or the Bank's rights in the Collateral.
4.7 Taxes. The Borrower has filed all tax returns which are
required to be filed and has paid all taxes due pursuant to such returns or
pursuant to any assessment received by the Borrower. This provision, however,
does not preclude the Borrower from filing proper extensions or protesting by
proper procedure any tax, assessment or penalty.
4.8 Permits. The Borrower has all licenses, permits, certificates,
consents and franchises, and all necessary filings associated thereto have been
made, in order to carry on its business as now being conducted and to own or
lease and operate its properties as now owned, leased or operated. All such
licenses, permits, certificates, consents, and franchises are valid and
subsistent, and the Borrower is not in violation thereof to the extent such
violation would cause a Material Adverse Effect.
4.9 Title to Collateral and No Liens. All of the Collateral is free
and clear of all Liens, except for Permitted Liens, and the Borrower has good
and defensible title to such Collateral.
4.10 Full Disclosure. Except as otherwise disclosed to Bank in
writing prior to the execution of this Agreement, there is no material fact that
Borrower has not disclosed to Bank which could have a Material Adverse Effect on
the properties, business, prospects or condition (financial or otherwise) of
Borrower. Neither the financial statements referenced in Section 4.5 hereof, nor
any certificate or statement delivered herewith or heretofore by Borrower to
Bank in connection with the negotiations of this Agreement, contains any untrue
statement of a material fact or omits to state any material fact necessary to
keep the statements contained herein or therein from being misleading which
would have a Material Adverse Effect.
4.11 Use of Proceeds Margin Stock. The proceeds of the Loans will be
used by the Borrower solely for the purposes described herein. None of such
proceeds will be used for the purpose of purchasing or carrying any "margin
stock" as defined in Regulation U or Regulation X, or for the purpose of
reducing or retiring any Debt which was originally incurred to purchase or carry
a margin stock or for any other purpose which might constitute this transaction
a "purpose credit" within the meaning of such Regulation U or Regulation X.
Borrower is not engaged in the business of extending credit for the purpose of
purchasing or carrying margin stocks. Borrower has not taken or will not take
any action which might cause the Notes or any of the other Loan Documents,
including this Agreement, to violate Regulation U or Regulation X, or any other
regulations of the Board of Governors of the Federal Reserve System or to
violate Section 8 of the Securities Exchange Act of 1934 or any rule or
regulation thereunder, in
<PAGE>
-16-
each case as now in effect or as the same may hereinafter be in effect. The
Borrower does not own margin stock.
4.12 Principal Office, Etc. The principal office, chief executive
office and principal place of business of Borrower is 1204 Sovereign Row,
Oklahoma City, 73108. Borrower maintains its principal records and books at such
address. The Collateral is located at such locations as stated by Borrower
pursuant to Section 3.13 hereof.
4.13 ERISA. Borrower is in compliance with all ERISA requirements
and interpretations with respect to any employee benefit plan of the Borrower
and has not incurred any liability to PBGC with respect to any such plan.
4.14 Compliance With Law. Borrower is not in violation of any law,
rule, regulation, order or decree which is applicable to Borrower or its
properties the result of which could have a Material Adverse Effect.
4.15 Casualties. Neither the business nor the property of Borrower
are currently affected by any environmental hazard, fire, explosion, accident,
strike, lockout or other labor dispute, drought, storm, hail, earthquake,
embargo, act of God or other casualty (whether or not covered by insurance),
which could have a Material Adverse Effect.
4.16 Insurance. The Collateral is insured in accordance with the
coverage set forth in Exhibit "C" hereto, with the Bank as an additional insured
to the extent of its interest therein. There has been no receipt of any notice
from any insurer indicating that coverage or premium rates will be materially
changed in the future with respect to the Collateral or indicating that the
Collateral may not qualify for continued coverage with respect to any such
insurance. Borrower is in full compliance with all such insurance contracts and
the same are in full force and effect and are enforceable in accordance with
their terms.
4.17 Hazardous Substances. To the best of Borrower's knowledge, all
environmental permits, certificates, licenses, approvals, registrations and
authorizations required under all Environmental Laws in connection with the
business of Borrower have been obtained. No unremedied notice, citation, summons
or order has been issued, no unremedied complaint has been filed, no unremedied
penalty has been assessed and, to the best of Borrower's knowledge, no
investigation or review is pending or threatened by any governmental entity with
respect to any generation, treatment, storage, recycling, transportation or
disposal of any hazardous or toxic or polluting substance or waste (including
petroleum products and radioactive materials) generated or used ("Hazardous
Substances") by Borrower which would have a Material Adverse Effect.
4.18 No Event of Default. No Event of Default has occurred and is
continuing.
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4.19 Survival of Representations. All of the representations and
warranties made by the Borrower herein will survive the delivery of the Loan
Documents and any renewal and extension of the Loans hereunder. All statements
contained in any certificate or other instrument delivered by or on behalf of
the Borrower under or pursuant to this Agreement or in connection with the
transactions contemplated hereby shall constitute representations and warranties
made by the Borrower hereunder as applicable.
5. SECURITY. The Loans shall be secured by first and prior Liens on the
Collateral in favor of the Bank pursuant to the Loan Documents, subject only to
such other exceptions or other liens or encumbrances as may be consented to by
the Bank in writing. From time to time during the term of this Agreement, the
Bank may reasonably require Borrower to execute and deliver other and further
Loan Documents to confirm and further secure the interest of the Bank in the
Collateral, which Borrower agrees they will so execute and deliver upon request.
6. AFFIRMATIVE COVENANTS. Until payment in full of the Loans, the
Borrower agrees, unless the Bank shall otherwise consents in writing, to perform
or cause to be performed the following agreements:
6.1 Financial Statements and Information.
6.1.1 Quarterly Financial Statements. Borrower shall
furnish to Bank, within forty-five (45) days after the close of each
calendar quarter, complete copies of Borrower's financial statements,
including balance sheets and income statements, as of the close of such
quarter, prepared internally by Borrower and in form satisfactory to the
Bank in accordance with GAAP applied on a consistent basis.
6.1.2 Monthly Borrowing Base and Other Reports. Within
twenty (20) business days after the end of each calendar month, Borrower
shall execute and deliver to the Bank a Borrowing Base Certificate in the
form of Exhibit "E" attached hereto and shall provide the Bank with
Accounts aging reports and Inventory reports in form acceptable to the Bank
6.1.3 Quarterly Compliance Certificate. Borrower shall
furnish to the Bank, within forty-five (45) days after the close of each
calendar quarter, an executed Compliance Certificate in the form of Exhibit
"D" attached hereto.
6.1.4 Lease Summary. The Borrower shall provide the Bank a list
of least obligations within forty-five (45) days from the date hereof. In
the event the Borrower's lease obligations shall change during the term of
this Agreement from those indicated on the list of lease obligations of the
Borrower provided to the Bank above and from the most recent list of lease
obligations of the Borrower provided to the Bank under this Section, the
Borrower shall furnish to the Bank, within forty-five (45) days after the
close of the calendar quarter in
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which such change in the lease obligations occurred an updated detailed
summary of all future real estate lease and rental obligations of Borrower.
6.1.5 Audited Annual Financial Statements. For the year ending
December 31, 1999, and annually thereafter, the Borrower shall furnish to
Bank, within ninety (90) days after the close of such year, complete copies
of the Borrower's audited annual financial statements, including balance
sheet, income statement and statement of sources and uses of funds with
accompanying notes and schedules, as of the close of such year, prepared by
accountants acceptable to the Bank and in form satisfactory to the Bank in
accordance with GAAP applied on a consistent basis. All such audited
financial statements shall be unqualified.
6.1.6 SEC Filings. Borrower shall furnish to Bank, within
forty-five (45) days after the close of each calendar quarter, complete
copies of Borrower's Form l0-Q as filed with the Securities and Exchange
Commission ("SEC"), and within ninety (90) days after the close of each
fiscal year of Borrower, complete copies of Borrower's Form 10-K as filed
with the SEC.
6.1.7 Annual Budget and Capital Expenditures. Borrower shall
furnish to the Bank, within thirty (30) days after the close of its fiscal
year, complete copies of Borrower's annual budget for the upcoming fiscal
year, including a capital expenditures budget. Notwithstanding the above
thirty (30) day requirement, the Borrower shall deliver to the Bank the
Borrower's 1999 annual budget on or before April 15, 1999.
6.1.8 Field Audit. On or about July 1 of each year, the Bank
shall have the right, but not the obligation, to conduct annual field
audits of the books and records of the Borrower in accordance with Section
6.8 hereof, at the sole cost and expense of the Bank.
6.1.9 Other Financial Statements. The Borrower shall also
furnish to the Bank such other information concerning the financial affairs
of the Borrower as the Bank might reasonably request.
6.2 Taxes. All taxes, assessments, governmental charges and levies
imposed on the Borrower and its assets, income and profits will be paid prior to
the date on which penalties attach thereto; PROVIDED, HOWEVER, that the Borrower
will not be required to pay any such charge which is being contested in good
faith by proper proceedings and the imposition of such charge would not have a
Material Adverse Effect on the Borrower.
6.3 Additional Assurances. The Borrower shall execute, acknowledge
and deliver to the Bank such instruments, documents, and any other items in a
form acceptable to Bank as the Bank may reasonably require, in good faith, in
order to more fully carry out the transactions contemplated herein.
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6.4 Performance of Obligations. The Borrower shall pay the Notes
according to the reading, tenor and effect thereof, and Borrower will do and
perform every act and discharge all obligations provided herein or in any Loan
Document to be performed and discharged or as contemplated hereby, at the time
or times and in the manner specified.
6.5 Expenses The Borrower shall pay all costs and expenses required
to satisfy the conditions of this Agreement. Without limitation of the
generality of the foregoing, Borrower will pay: (i) all of the reasonable fees
and expenses of counsel employed by the Bank in connection with preparing the
loan documentation not to exceed $3,500.00; provided that such limitation on
fees and expenses of counsel shall not pertain to any fees and expenses of
counsel incurred as the result of amending or modifying the terms and conditions
of any loan documents after the date hereof; (ii) all of the fees, expenses and
costs of perfecting the Liens on the Collateral; (iii) all reasonable costs and
expenses of Bank (including, without limitation, the reasonable attorneys' fees
of Bank's legal counsel) incurred by Bank in connection with the preservation
and enforcement of this Agreement, the Notes, and/or the other Loan Documents;
and (iv) all reasonable costs and expenses, including any reasonable fees and
expenses of counsel employed by the Bank, in regard to any litigation arising
out of or relating to this transaction and all other reasonable costs, fees and
expenses involved in the enforcement or defense of this Agreement, the Loan
Documents or any instrument executed pursuant hereto.
6.6 Existence. The Borrower shall take all necessary actions to
preserve the Borrower's existence and its right to conduct business in the
applicable jurisdictions; to obtain and retain all material approvals, consents,
permits, licenses and certificates from all applicable governmental authorities;
to comply with all valid and applicable statutes, rules and regulations; and to
continue to conduct its business in substantially the same manner as such
business is now conducted or anticipated to be conducted.
6.7 Litigation. The Borrower shall notify the Bank at any time of
any action, suit, investigation or proceeding pending or threatened against the
Borrower which may have a Material Adverse Effect.
6.8 Books and Records: Access. Subject to the limitations afforded
as a result of the attorney/client privilege, Borrower shall give any
representative of Bank reasonable access during normal business hours to, and
permit such representative to examine, copy or make excerpts from, any and all
books, records and documents m the possession of Borrower and relating to the
Borrower's affairs, and to inspect any of the properties of Borrower. The
Borrower shall maintain complete and accurate books and records of its
transactions in accordance with good accounting practices.
6.9 Compliance with Law. Borrower shall comply with all applicable
laws, rules, regulations, and all orders of any court or tribunal applicable to
the Borrower or any of its property, business operations or transactions, a
breach of which could have a Material Adverse Effect.
<PAGE>
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6.10 Insurance. Borrower shall maintain, or cause to be maintained,
in full force and effect during the term of the Loans the insurance described in
Exhibit "C". Borrower shall deliver or cause to be delivered to the Bank (i)
contemporaneously with the execution hereof, copies of the policies evidencing
such insurance or certificates evidencing such policies, and (ii) copies of all
renewal policies, or certificates evidencing such policies, at least fourteen
days before the expiration of each expiring policy. Borrower shall promptly
notify the Bank in writing of the occurrence of any loss or damage to the
Collateral that is covered by the insurance policies. All policies of insurance
required hereunder shall contain an endorsement or agreement by the insurer that
any loss shall be payable in accordance with the terms of such policy
notwithstanding any act or negligence of Borrower which might otherwise result
in the forfeiture of said insurance. All property damage policies of insurance
shall insure Bank's interest in the Collateral as a secured party and all
liability insurance policies shall name Bank as an additional insured as its
interest may appear. All such policies shall contain a provision that such
policies will not be canceled or materially amended, which term shall include
any reduction in the scope or the limits of coverage, without at least twenty
(20) days' prior written notice to Bank. All policies of insurance required
hereunder shall be issued by companies having a Best's rating of at least A:XII,
and shall be in amounts specified herein or otherwise satisfactory to Bank.
6.11 Key-Man Insurance. Borrower shall maintain in full force and
effect the Key-Man Insurance throughout the term of the Loans.
6.12 Authorizations and Approvals. Borrower shall promptly obtain,
from time to time at its own expense, all such governmental licenses,
authorizations, consents, permits and approvals which may be required or
necessary in the Borrower's business or with respect to its assets and
properties if the failure to obtain the same could have a Material Adverse
Effect.
6.13 Other Businesses and Investments. Borrower shall obtain the
Bank's prior written approval before entering into or otherwise engaging in any
business, or investing in any entity, other than currently conducted and owned
by the Borrower on the date hereof.
6.14 ERISA Compliance. Borrower shall (i) at all times, make prompt
payment of all contributions required under all employee benefit plans and as
required to meet the minimum funding standard set forth in ERISA with respect to
its plans, (ii) notify Bank immediately of any fact, including, but not limited
to, any reportable event arising in connection with any of its plans, which
might constitute grounds for termination thereof by the PBGC or for the
appointment appropriate United States District Court of a trustee to administer
such plan, together with a statement, if requested by Bank, as to the reason
therefor and the action, if any, proposed to be taken with respect thereto, and
(iii) furnish to Bank, upon its request, such additional information concerning
any of its plans as may be reasonably requested.
<PAGE>
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6.15 Banking Accounts. Borrower shall establish and maintain its
corporate operating banking account with the Bank and shall establish such
control and administrative devices with respect to such account as the Bank may
reasonably request. Such account shall be used by Borrower for depositing all
payments and other revenues received under any of the Franchise Agreements.
6.16 Maintenance of Collateral. Borrower will do all things
necessary to maintain, preserve, protect and keep all the Collateral in good
condition, and make all necessary and proper repairs, renewals and replacements
thereto so that the business anticipated by Borrower through the ownership,
operation or use of the Collateral can be performed and conducted at all times.
6.17 Accounting Firm Annual Audit. The Borrower shall be audited
annually by an independent accounting big six accounting firm acceptable to the
Bank.
7. NEGATIVE COVENANTS. Until payment in full of the Loans, the Borrower
shall not, unless the Bank shall otherwise consent in writing, violate or cause
to be violated the following:
7.1 Limitation on Debt. The Borrower shall not incur, create,
contract, assume, have outstanding, guarantee or otherwise be or become directly
or indirectly, liable in respect of any Debt, except Permitted Debt.
7.2 Limitation on Liens. Borrower shall not create, incur, permit or
suffer to exist any Lien upon any of the Collateral, except Permitted Liens.
7.3 Liquidation: Merger: Consolidation: Change of Name. Borrower
will not liquidate or discontinue its normal operations with an intention to
liquidate and will not merge or consolidate with any corporation, firm or
partnership, or change its corporate name.
7.4 Fixed Coverage Ratio. The Borrower shall not permit its Fixed
Charge Ratio, calculated as of the end of each fiscal quarter, to be less than:
(i) 1.10:1 from the date hereof through June 30, 1999, inclusive; (ii) 1.15:1
from July 1, 1999 through December 31, 1999, inclusive; (iii) 1.20:1 from
January 1, 2000 through March 31, 2000, inclusive; (iv) 1.25:1 from April 1,
2000 through June 30, 2000, inclusive; (v) 1.35:1 from July 1, 2000 through
December 31, 2000, inclusive; (vi) 1.50:1 from January 1, 2001 through the
remaining term of this Agreement.
7.5 Tangible Net Worth. Borrower shall not permit its Tangible Net
Worth to be less than an amount equal to the sum of: (i) $11,000,000.00, plus
(ii) fifty percent (50%) of the Net Income, excluding losses, of Borrower
realized after the date of this Agreement, plus (iii) seventy-five percent (75%)
of the net cash proceeds from any stock or equity issuances of the Borrower
occurring after December 31, 1998. Tangible Net Worth shall be calculated
quarterly as of the last day of each calendar quarter, beginning March 31, 1999.
<PAGE>
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7.6 Current Ratio. The Borrower shall not permit its ratio of
Current Assets to Current Liabilities to be less than 1.25 to 1.0.
7.7 Inventory Turnover Days. Borrower shall not permit its Inventory
Turnover Days to be more than 120 days, as calculated annually on the
anniversary of this Agreement.
7.8 Capital Expenditures. Borrower shall not expend or incur more
than $800,000.00 in the aggregate during any calendar year for capital
expenditures, including capitalized leases, unless approved by the Bank, which
such approval shall not be unreasonably withheld, provided that upon an Event of
Default, Borrower shall not expend or incur any amounts for capital
expenditures, including capitalized leases, until such time as such Event of
Default is cured to the satisfaction of the Bank as provided herein.
7.9 Dividends and Distributions. Borrower shall not declare or pay
any cash or stock dividends or make any other distributions of cash, stock or
property to its shareholders, if, an Event of Default exists or, as a result of
such cash or stock dividends or other distributions of cash, stock or property,
an Event of Default would occur.
7.10 Change of Business. The Borrower shall not change or otherwise
discontinue its primary lines of business from those existing on the date
hereof.
7.11 Sale or Disposition of Collateral. Borrower shall not sell,
assign, dispose or otherwise transfer any of the Collateral to any other person
or entity, except Inventory in the ordinary course of business and for fair
consideration. The Borrower may sell, assign, dispose or otherwise transfer
assets, other than Collateral, to other persons or entities in an aggregate
amount not to exceed $100,000.00 during any fiscal year of the Borrower unless
otherwise approved by the Bank, which such approval shall not be unreasonably
withheld.
7.12 Stock Redemptions and Repurchases. The Borrower shall not
redeem, retire or repurchase any of its shares of capital stock or cause its
subsidiaries' to redeem, retire or repurchase any of its shares of capital
stock, if an Event of Default exists or, as a result of such redemption,
retirement or repurchase, an Event of Default would occur.
7.13 Affiliated Transactions. The Borrower shall not enter into any
transaction for goods, loans, advances, extensions of credit, services or
otherwise with any employee, director or shareholder of the Borrower, or any
related or affiliated entity or interest of such employee, director or
shareholder of the Borrower, unless such transactions are bona fide transactions
for fair consideration. Notwithstanding the above restriction on loans and
extensions of credit, the Borrower may loan and extend credit to CD Warehouse
Finance Company ("Finance"), provided that the aggregate amount
<PAGE>
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outstanding under all loans and extensions of credit from the Borrower to
Finance shall not exceed $3,000,000.00 at anytime.
7.14 Subordinated Debt. Any and all obligations of the Borrower to
any shareholder of the Borrower, or any subsidiary of the Borrower
("Subordinated Debt"), shall be subordinated to the payment of the Loans
pursuant to subordination agreements satisfactory to the Bank. In the sole
discretion of the Bank, the Bank may allow payment of either principal or
interest, or both, on the Subordinated Debt, but only if no Event of Default
hereunder exists.
7.15 Sale and Leaseback. The Borrower shall not, and shall not
permit any of the subsidiaries to, enter into any arrangement with any person or
other entity (including, without limitation, any insurance company, bank or
trustee) pursuant to which Borrower or subsidiaries will lease, as lessee, any
property which it owned as of the date hereof and which it sold, transferred or
otherwise disposed of to such other person or entity.
7.16 Change of Management. The Borrower shall not change its senior
management from that in effect on the date hereof.
8. EVENTS OF DEFAULT. The following shall constitute Events of
Default hereunder and under each of the Loans Documents:
8.1 Nonpayment of Notes. Default in payment when due of any
principal or interest due and owing on the Notes.
8.2 Other Nonpayment. Default in payment when due of any amount
payable to the Bank under the terms of this Agreement, the Loan Documents or any
other obligation or agreement between the Borrower and the Bank, whether now
existing or hereafter incurred, including but not limited to all the obligations
of the Borrower to the Bank as set forth in that certain Loan Agreement between
the Borrower.
8.3 Third Party Nonpayment. Default in payment when due of any
amount owed to any party other than the Bank on any Debt of Borrower in an
aggregate amount of $50,000.00 or any of the Subordinated Debt, provided that
the default in the payment of Debt shall not include such Debt which the
Borrower in good faith and in a manner satisfactory to Bank contests, or defends
collection of such Debt in legal proceedings which operate to prevent the
validity or collection of the Debt.
8.4 Breach of Covenants. A material default by the Borrower in the
performance or observance of any covenant or agreement contained in this
Agreement, the Loan Documents, or any agreement in connection therewith, or
under the terms of any other instrument delivered to the Bank in connection with
this Agreement.
8.5 Representations and Warranties. Any representation or warranty
herein, or any representation, statement, certificate, schedule or report made
or furnished
<PAGE>
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to the Bank on behalf of the Borrower proves to be false or erroneous in any
material respect at the time of making thereof or any warranty ceases to be
complied with in any material respect.
8.6 Insolvency. The Borrower shall: (i) apply for or consent to the
appointment of a receiver, trustee or liquidator of their respective properties;
(ii) admit in writing their inability to pay debts as they mature; (iii) make a
general assignment for the benefit of creditors; or (iv) any material part of
their assets or properties shall be placed in the hands of a receiver, trustee
or other officers or representatives of a court or of creditors.
8.7 Voluntary Bankruptcy. The Borrower shall be adjudged bankrupt or
any voluntary proceeding shall be instituted by Borrower in insolvency or
bankruptcy or for readjustment, extension or composition of debts or for any
other relief of debtors.
8.8 Involuntary Bankruptcy. Any involuntary proceeding shall be
instituted against Borrower in insolvency or for readjustment, extension, or
composition of debts, which proceeding is not dismissed within sixty (60) days
after the filing of the commencement of the same.
8.9 Creditor's Proceedings. Entry by any court of a final judgment
against Borrower, or the institution of any levy, attachment, garnishment or
charging order against the Borrower, which has a Material Adverse Effect.
9. OPPORTUNITY TO CURE. In the event the Borrower shall cure or
cause to be cured the foregoing Events of Default within ten (10) Business Days
with respect to Events of Default in Sections 8.1 and 8.2 and within thirty (30)
Business Days with respect to Events of Default in Sections 8.3, 8.4, 8.5 and
8.9, after mailing notice to the Borrower, the parties shall be restored to
their respective rights and obligations under this Agreement as if no such Event
or Events of Default had occurred. The Borrower shall have no right to cure any
Event of Default in Sections 8.6 through 8.8.
10. REMEDIES. Upon the occurrence of any Event of Default, which
has not been timely cured pursuant to Section 9 above, the Bank may, at its
option:
10.1 Acceleration of Notes. Declare the Notes and all sums
outstanding pursuant to the Loan Documents to be immediately due and payable,
whereupon the same will be forthwith due and payable, and the Bank will be
entitled to proceed to selectively and successively enforce the Bank's rights
under the Loan Documents or any other instrument delivered to the Bank in
connection with this Agreement.
10.2 Accelerate Other Indebtedness. The Bank may declare all other
indebtedness and obligations of the Borrower owing to the Bank to be immediately
due and payable.
<PAGE>
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10.3 Exercise Other Rights. The Bank may (i) terminate any of the
Bank's obligations hereunder, including the obligation to make any advance, (ii)
reduce any claim to judgment, (iii) exercise any right of offset including the
Set-Off as provided in Section 10.4 hereof, (iv) without notice of default or
demand except as otherwise provided herein, pursue and enforce any of the Bank's
rights and remedies under the Loan Documents, or otherwise provided under or
pursuant to any applicable law or agreement, provided, however, that if any
Event of Default specified in Sections 8.7 or 8.8 shall occur, the Loans shall
thereupon become due and payable concurrently therewith, without any further
action by the Bank and without presentment, demand, protest, notice of default,
notice of acceleration or of intention to accelerate or other notice of any
kind, all of which Borrower hereby expressly waives, or (v) exercise any other
remedy at law or in equity.
10.4 Right of Set-Off. Borrower hereby grants to Bank the right of
set-off ("Set-Off") without notice or demand to or upon Borrower, (any such
notice and/or demand being hereby waived by Borrower) to secure repayment of the
Loans, regardless of whether Bank shall have made any demand therefor and
whether all or any part of the Loans are or may be unmatured, upon any and all
moneys, securities or other property of Borrower and the proceeds therefrom, now
or hereafter held or received by or in transit to Bank, or any of its agents,
from or for the account of Borrower, whether for safe keeping, custody, pledge,
transmission, collection or otherwise, and also upon any and all deposits
(general or special) and credits of Borrower, and any and all claims of Borrower
against Bank at any time existing.
10.5 Cross-Default. A default by Borrower in this Agreement, any of
the Notes or any of the Loan Documents shall constitute a default under all such
agreements and obligations.
10.6 Waiver of Default. By an instrument in writing, the Bank may
waive any Event of Default which shall have occurred and any of the consequences
of such Event of Default, and, in such event, the Bank and the Borrower will be
restored to their respective former positions, rights and obligations hereunder.
Any Event of Default so waived will for all purposes of this Agreement be deemed
to have been cured and not to be continuing; but no such waiver will extend to
any subsequent or other Event of Default or impair any consequence of such
subsequent or other Event of Default.
11. GENERAL CONDITIONS. The following conditions shall be applicable
throughout the term of this Agreement:
11.1 Strict Compliance. If any action or failure to act by Borrower
violates any covenant or obligation of Borrower contained herein, then such
violation shall not be excused by the fact that such action or failure to act
would otherwise be required or permitted by any covenant (or exception to any
covenant) other than the covenant violated.
<PAGE>
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11.2 Participations in Loans and Notes. Bank may sell participations
in all or any part of the Loans made by it to one or more banks or other
entities. Bank may furnish any information concerning Borrower in the possession
of Bank from time to time to participants (including prospective participants).
Bank may provide to its participants on a timely basis copies of all financial
statements and other documents furnished to it under the provisions of Section
6. Bank shall use reasonable efforts to notify Borrower of the identity of the
purchaser and amount of any participation, but failure to give said notice shall
have no effect on the participation, this Agreement or the other Loan Documents.
11.3 Waiver; Modification. No failure to exercise, and no delay in
exercising, on the part of Bank, any right hereunder or under any Loan Document
shall operate as a waiver thereof, nor shall any single or partial exercise
thereof preclude any other or further exercise thereof or the exercise of any
other right. The rights of Bank hereunder and under the Loan Documents shall be
in addition to all other rights provided by law. No modification or waiver of
any provision of this Agreement, the Notes or any Loan Documents, nor consent to
departure therefrom, shall be effective unless in writing and no such consent or
waiver shall extend beyond the particular case and purpose involved. No notice
or demand given in any case shall constitute. a waiver of the right to take
other action in the same, similar or other instances without such notice or
demand.
11.4 Notices. Any notices or other communications required or
permitted to be given by this Agreement or any other documents and instruments
referred to herein must be (i) given in writing (the references to "in writing"
elsewhere in this Agreement are for emphasis and are not a way of limitation of
the generality of the requirement that notices or other communications shall be
in writing), and (ii) be personally delivered or mailed by prepaid mail or
overnight courier, or by telex or telecopy delivered or transmitted to the party
to whom such notice or communication is directed, to the address of such party
as follows:
To Borrower: CD WAREHOUSE, INC.
1204 Sovereign Row
Oklahoma City, Oklahoma 73108
Attn: Jerry W. Grizzle
To Bank: BANK ONE, OKLAHOMA, N.A.
100 North Broadway
Oklahoma City, Oklahoma 73102
Attn: Mary Lynn McManus
Any such notice or other communication shall be deemed to have been given on the
day three days after it is mailed by prepaid certified or registered mail, one
working day after sent by over night courier, or on the day it is personally
delivered as aforesaid or, if transmitted by telex or telecopy or fax machine,
on the working day that such notice is transmitted as aforesaid, and otherwise
when actually received. Any party may, for purposes of the Loan
<PAGE>
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Documents, change its address, telex number, fax number or the person to whom a
notice or other communication is marked to the attention of, by giving notice of
such change to the other parties pursuant hereto.
11.5 Governing Law. This Agreement has been prepared, is being
executed and delivered in the State of Oklahoma, and the substantive laws of
such state and the applicable federal laws of the United States of America shall
govern the validity, construction, enforcement and interpretation of this
Agreement and all of the Loan Documents, except as otherwise may be provided for
in the respective Loan Documents.
11.6 Choice of Forum. Any suit, action or proceeding against
Borrower with respect to this Agreement, the Notes or any Loan Documents or any
judgment entered by any court in respect thereof, may be brought in the courts
of the State of Oklahoma, County of Oklahoma, or in the United States courts
located in Oklahoma County, State of Oklahoma as Bank in its sole discretion may
elect and Borrower hereby submits to the non-exclusive jurisdiction of such
courts for the purpose of any such Suit, action or proceeding. Borrower hereby
irrevocably waive any objections which Borrower may now or hereafter have to the
laying of venue of any suit, action or proceeding arising out of or relating to
this Agreement or any Loan Document brought in the courts located in the State
of Oklahoma, County of Oklahoma, and hereby further irrevocably waive any claim
that any such suit, action or proceeding brought in any such court has been
brought in an inconvenient forum.
11.7 Invalid Provisions. If any provision of any Loan Document is
held to be legal, invalid or unenforceable under present or future laws during
the term of this Agreement, such provision shall be fully severable; such Loan
Document shall be construed and enforced as if such illegal, invalid or
unenforceable provision had never comprised a part of such Loan Document; and
the remaining provisions of such Loan Document shall remain in full force and
effect and shall not be affected by the illegal, invalid or unenforceable
provisions or by its severance from such Loan Document. Furthermore, in lieu of
each such illegal, invalid or unenforceable provision there shall be added as
part of such Loan Document a provision mutually agreeable to Borrower and Bank
as similar in terms to such illegal, invalid or unenforceable provisions as may
be possible and still be legal, valid and enforceable.
11.8 Nonliability of Bank. The relationship between Borrower and
Bank is, and shall at all times remain, solely that of borrower and lender, and
Bank neither undertakes nor assumes any responsibility or duty to Borrower to
review, inspect, supervise, pass judgment upon, or inform Borrower of any matter
in connection with any phase of Borrower's business, operations, or condition,
financial or otherwise. Borrower shall rely entirely upon their own judgment
with respect to such matters, and any review, inspection, supervision, exercise
of judgment, or information supplied to Borrower by Bank in connection with any
such matter is for the protection of Bank, and neither Borrower nor any third
party are entitled to rely thereon.
<PAGE>
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11.9 Binding Effect. The Loan Documents shall be binding upon and
inure to the benefit of Borrower and Bank and their respective successors,
assigns and legal representatives; provided, however, that Borrower may not,
without the prior written consent of Bank, assign any rights, powers, duties or
obligations thereunder.
11.10 Headings. Section headings are for convenience of reference
only and shall in no way affect the interpretation of this Agreement.
11.11 No Third-Party Beneficiary. The parties do not intend the
benefits of this Agreement to inure to any third party, nor shall this Agreement
be construed to make or render Bank liable to any materialman, supplier,
contractor, subcontractor, purchaser or lessee of any property owned by
Borrower, or for debts or claims accruing to any such persons against Borrower.
Notwithstanding anything contained herein or in the Notes or in any other Loan
Document, or any conduct or course of conduct by any or all of the parties
hereto, before or after signing this Agreement or any other Loan Document, shall
be construed as creating any right, claim or cause of action against Bank, or
any of its officers, directors, agents or employees, in favor of any
materialman, supplier, contractor, subcontractor, purchaser or lessee of any
property owned by Borrower, nor to any other person or entity.
11.12 Multiple Counterparts. This Agreement may be executed in any
number of counterparts, all of which taken together shall constitute one and the
same agreement, and any of the parties hereto may execute this Agreement by
signing any such counterpart.
11.13 Contrary Provisions. The terms and conditions of this
Agreement shall govern and control any and all contrary provisions of the other
Loan Documents.
11.14 No Oral Agreements. THIS WRITTEN LOAN AGREEMENT REPRESENTS THE
FINAL AGREEMENT BETWEEN THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF
PRIOR, CONTEMPORANEOUS, OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES. THERE ARE
NO UNWRITTEN ORAL AGREEMENTS OF THE PARTIES.
11.15 Usury. Under no circumstances (and notwithstanding any other
provision of this Agreement, the Notes or any other Loan Document) shall the
interest charged, collected, or contracted for on this Agreement, the Notes or
any other Loan Document exceed the maximum rate permitted by applicable law. If
any part of this Agreement or the Notes cannot be enforced, this fact will not
affect the rest of this Agreement or the Notes, as applicable. In particular,
this section means (among other things) that Borrower does not agree or intend
to pay, and Lender does not agree or intend to contract for, charge, collect,
take, reserve or receive (collectively referred to herein as "charge or
collect"), any amount in the nature of interest or in the nature of a fee for
the Loans, which would in any way or event (including demand, prepayment, or
acceleration) cause Bank to charge or collect more for the Loans than the
maximum Bank would be permitted to charge or collect by federal law or the law
of the State of
<PAGE>
-29-
Oklahoma. Any such excess interest or unauthorized fee shall, instead of
anything stated to the contrary, be applied first to reduce the principal
balance of the Loans and when the principal has been paid in full, be refunded
to Borrower. The right to accelerate maturity of sums due under this Agreement
or the Notes does not include the right to accelerate any interest which has not
otherwise accrued on the date of such acceleration, and Bank does not intend to
charge or collect any unearned interest in the event of acceleration. All sums
paid or agreed to be paid to Bank for the use, forbearance or detention of sums
due hereunder shall, to the extent permitted by applicable law, be amortized,
prorated, allocated and spread throughout the full term of the Loans evidenced
by this Agreement and the Notes until payment in full so that the rate or amount
of interest on account of the Loans evidenced hereby does not exceed the
applicable usury ceiling. Bank may delay or forgo enforcing any of its rights or
remedies under this Agreement, the Notes or any other Loan Document without
losing them.
11.16 JURY WAIVER. THE BORROWER AND BANK BY ITS ACCEPTANCE HEREOF)
HEREBY VOLUNTARILY, KNOWINGLY, IRREVOCABLY AND UNCONDITIONALLY WMVE ANY RIGHT TO
HAVE A JURY PARTICIPATE IN RESOLVING ANY DISPUTE (WHETHER BASED UPON CONTRACT,
TORT OR OTHERWISE) BETWEEN OR AMONG THE BORROWER AND BANK ARISING OUT OF OR IN
ANY WAY RELATED TO THIS AGREEMENT, AND OTHER RELATED LOAN DOCUMENTS, OR ANY
RELATIONSHIP BETWEEN BANK AND THE BORROWER. THIS PROVISION IS A MATERIAL
INDUCEMENT TO BANK TO PROVIDE THE FINANCING DESCRIBED HEREIN OR IN THE OTHER
LOAN DOCUMENTS.
11.17 Arbitration. Bank and Borrower agree that upon the written
demand of either party, whether made before or after the institution of any
legal proceedings, but prior to the rendering of any judgment in that
proceeding, all disputes, claims and controversies between them, whether
individual, joint, or class in nature, arising from this Agreement, the Note,
any Loan Document or otherwise, including without limitation contract disputes
and tort claims, shall be resolved by binding arbitration pursuant to the
Commercial Rules of the American Arbitration Association ("AAA"). Any
arbitration proceeding held pursuant to this arbitration provision shall be
conducted in Oklahoma City, Oklahoma, or at any other place selected by mutual
agreement of the parties. No act to take or dispose of any Collateral shall
constitute a waiver of this arbitration agreement or be prohibited by this
arbitration agreement. This arbitration provision shall not limit the right of
either party during any dispute, claim or controversy to seek, use, and employ
ancillary, or preliminary rights and/or remedies, judicial or otherwise, and any
such action shall not be deemed an election of remedies. Such remedies include,
without limitation, obtaining injunctive relief or a temporary restraining
order, invoking a power of sale under any deed of trust or mortgage, obtaining a
writ of attachment or imposition of a receivership, or exercising any rights
relating to personal property, including exercising the right of set-off or
taking or disposing of such property with or without judicial process pursuant
to the Uniform Commercial Code. Any disputes, claims or controversies concerning
the lawfulness or reasonableness of an act, or exercise of any right or remedy
concerning any Collateral, including any claim to rescind, reform, ---
<PAGE>
-30-
or otherwise modify any agreement relating to the Collateral, shall also be
arbitrated; provided, however that no arbitrator shall have the right or the
power to enjoin or restrain any act of either party. Judgment upon any award
rendered by any arbitrator may be entered in any court having jurisdiction. The
statute of limitations, estoppel, waiver, laches and similar doctrines which
would otherwise be applicable in an action brought by a party shall be
applicable in any arbitration proceeding, and the commencement of an arbitration
proceeding shall be deemed the commencement of any action for these purposes.
The Federal Arbitration Act (Title 9 of the United States Code) shall apply to
the construction, interpretation, and enforcement of this arbitration provision.
IN WITNESS WHEREOF, the undersigned have executed this Agreement as of
day and year first above written.
"BORROWER" CD WAREHOUSE, INC.,
a Delaware Corporation
By: /s/ Jerry W. Grizzle
--------------------
Jerry W. Grizzle, President
BANK ONE, OKLAHOMA, N.A.,
a national banking association
By:/s/ Mary Lynn McManus
---------------------
Mary Lynn McManus,
Vice President
<PAGE>
Exhibit 99.1
FOR IMMEDIATE RELEASE,
CONTACT:
Doyle E. Motley Bob Schu
Senior Vice President Desmond Towey & Associates
& Chief Financial Officer (212) 888-7600
CD Warehouse, Inc.
(405) 949-2422
CD WAREHOUSE, INC. ACQUIRES 16 INDEPENDENT
STORES IN SAN DIEGO, CALIFORNIA
OKLAHOMA CITY, OK--February 23, 1998 CD Warehouse, Inc. (NASDAQ SmallCap:
CDWI) announced the acquisition of 16 independent retail music stores in San
Diego, California. The stores were acquired by Compact Disc Management, Inc., a
wholly owned subsidiary of CD Warehouse, Inc. that has the responsibility for
all Company store operations. The stores, operating under the trade name of
Music Trader, were acquired from Jeff and Debbi Clark for $4 million. The
purchase price was paid with $3 million in cash and $1 million in CD Warehouse,
Inc. common stock.
Jerry W. Grizzle, the Company's Chairman and CEO, stated, "We could not be
more pleased with this acquisition. Jeff and Debbi started in a flea market and
have grown their business to 16 stores that produced $7.4 million in revenue in
1998. This acquisition, combined with our purchased in June of 1998 of the Disc
Go Round concept, positions us for a substantial expansion effort in California.
Jeff Clark has been retained by the Company to use his expertise and knowledge
of the California market to expand the CD Warehouse/Music Trader concept
throughout that state."
To finance the acquisition, the Company entered into a $7.0 million credit
facility with Bank One, Oklahoma, N.A. (Bank One). The credit facility consists
of a $5.0 million term loan and a $2.0 million line of credit. The total
facility will bear interest at a variable rate per annum equal to Bank One's
"National Prime Rate." $3.0 million of the term loan will be used to fund the
acquisition of Music Trader.
As of December 31, 1998, the Company franchised and/or operated 314 retail
music stores in 40 states, the District of Columbia, Canada, England, France,
Guatemala and Venezuela under the names "CD Warehouse," "Disc Go Round," and "CD
Exchange." CD Warehouse Inc., system stores buy, sell and trade pre-owned CD's
with their customers. CD Warehouse Inc., system stores sell a full complement
of new release CD's, DVD and Video Games.
Statements made in this press release, other than those concerning
historical information, should be considered forward-looking and subject to
various risks and uncertainties. Such forward-looking statements are made based
on management's belief as well as assumptions made by, and information currently
available to, management pursuant to the "safe harbor" provisions of the Private
Securities Litigation Reform Act of 1995. The Company's actual results may
differ materially from the results anticipated in these forward-looking
statements as a result of a variety of factors.
# # #
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<PAGE>
Exhibit 99.2
FOR IMMEDIATE RELEASE,
CONTACT:
Doyle E. Motley Bob Schu
Senior Vice President Desmond Towey
& Chief Financial Officer Desmond Towey & Associates
CD Warehouse, Inc. (212) 888-7600
(405) 949-2422
CD WAREHOUSE, INC. MORE THAN DOUBLES PROFIT
ON 50% INCREASE IN SYSTEM-WIDE SALES
Same Store Sales Up 16%
OKLAHOMA CITY, OK--February 23, 1998 CD Warehouse, Inc. (NASDAQ SmallCap:
CDWI) announced the Company's net income for the year ended December 31, 1998,
was $775,000, an increase of 101% above the $386,000 in 1997. For the three
months ended December 31, 1998, the Company's net income was $308,000, an
increase of 89% above the $163,000 for the same period in 1997. System-wide
sales for 1998 were $54,845,000 compared to $36,495,000 for 1997, a 50%
increase. System-wide sales for the fourth quarter of 1998 were $16,906,000, a
48% increase over the fourth quarter of 1997. In June of 1998, the Company
acquired the Disc Go Round concept from Grow Biz International. All reported
same store and system-wide sales figures relate strictly to the CD Warehouse
branded stores. Earnings per share for 1998 were $0.27 compared to $0.23 in
1997. This is most significant in that there were 2.9 average million shares
outstanding in 1998 vs. 1.7 average million shares in 1997.
The increase in the Company's system-wide sales is attributable to the
development of new stores and the same store sales increases for those stores
opened during the same period in 1997. The Company ended 1998 with 314 stores
in operation compared to 150 at the end of 1997. Of the 314 stores operating at
December 31, 1998, 128 stores were operating under the Disc Go Round trademark.
Same store sales for the fourth quarter of 1998 increased 20% and year-to-date
same store sales increased 16%.
The increase in the Company's royalty revenue is attributable to the
addition of the new franchise stores, the increase in same store sales and the
addition of the Disc Go Round concept stores. Royalty revenue for 1998 was
$2,827,000 an increase of 103%, compared to $1,394,000, for the same period in
1997. Royalty revenue for the fourth quarter of 1998 was $987,000, a 112%
increase over the $465,000 for the fourth quarter of 1997. Total revenues for
the Company were $15,262,000 for 1998, compared to $9,089,000 for 1997, a 68%
increase. Total revenues for the fourth quarter of 1998 were $5,341,000 an
increase of 93% over the $2,771,000 for 1997.
Jerry W. Grizzle, the Company's Chairman and CEO, stated, "1998 represents
another great year for CD Warehouse. When you look at the year's performance,
it is difficult not to be pleased. We achieved a 50% increase in system-wide
sales, a 16% increase in same store sales, an over 100% increase in the number
of stores in our system and over 100% increase in net income. We generated
almost as much net income in the fourth quarter of 1998 as we did the entire
year of 1997. When we started our affiliation with the CD Warehouse system in
1997, we had 113 stores. After finalizing the acquisition, we closed 13 stores
for non-performance. The remaining 100 stores have seen their same store sales
increase 30% over the last two years. The system has grown from 100 to 314
stores. System-wide sales have grown over 100% and net income has increased
341% over the same two-year period. Stockholders equity has grown over 300%
from $5,350,000 immediately after our public offering in January of 1997 to
-1-
<PAGE>
$21,769,000 at December 31, 1998. As I stated earlier, how can you not be
pleased with the results?"
CD Warehouse, Inc. franchises and operates retail music stores in 41
states, Canada, England, France, Guatemala and Venezuela under the names "CD
Warehouse," "Disc Go Round," and "CD Exchange." CD Warehouse Inc., system
stores buy, sell and trade pre-owned CD's with their customers. CD Warehouse
Inc., system stores sell a full complement of new release CD's, DVD and Video
Games.
Statements made in this press release, other than those concerning
historical information, should be considered forward-looking and subject to
various risks and uncertainties. Such forward-looking statements are made based
on management's belief as well as assumptions made by, and information currently
available to, management pursuant to the "safe harbor" provisions of the Private
Securities Litigation Reform Act of 1995. The Company's actual results may
differ materially from the results anticipated in these forward-looking
statements as a result of a variety of factors.
FOURTH QUARTER ENDED
DECEMBER 31, 1998 1998 1997 $ CHANGE % CHANGE
---- ---- -------- --------
SYSTEM-WIDE SALES $16,905,937 $11,393,978 $ 5,511,959 48.38%
SAME STORE SALES $12,686,791 $10,533,570 $ 2,153,221 20.44%
STORE COUNT 314 150 164 109.33%
TOTAL REVENUE $ 5,340,782 $ 2,770,653 $ 2,570,129 92.76%
ROYALTY REVENUE $ 986,763 $ 464,735 $ 522,028 112.33%
NET INCOME $ 307,914 $ 163,444 $ 144,470 88.39%
NET INCOME PER SHARE -
BASIC $ 0.09 $ 0.09 $ - 0.00%
NET INCOME PER SHARE -
DILUTED $ 0.08 $ 0.09 $ (0.01) -11.11%
SHARES USED IN
COMPUTATION - BASIC 3,550,550 1,820,000 $ 1,730,550 95.09%
SHARES USED IN
COMPUTATION - DILUTED 3,797,386 1,820,000 $ 1,977,386 108.65%
YEAR ENDED
DECEMBER 31, 1998 1998 1997 $ CHANGE % CHANGE
---- ---- -------- --------
SYSTEM-WIDE SALES $54,845,432 $36,494,857 $18,350,575 50.28%
SAME STORE SALES $33,764,365 $29,011,389 $ 4,752,976 16.38%
STORE COUNT 314 150 164 109.33%
TOTAL REVENUE $15,261,903 $ 9,089,046 $ 6,172,857 67.91%
ROYALTY REVENUE $ 2,827,205 $ 1,393,717 $ 1,433,488 102.85%
NET INCOME $ 775,352 $ 386,199 $ 389,153 100.77%
NET INCOME PER SHARE -
BASIC $ 0.27 $ 0.23 $ 0.04 17.39%
NET INCOME PER SHARE -
DILUTED $ 0.25 $ 0.23 $ 0.02 8.70%
SHARES USED IN
COMPUTATION - BASIC 2,923,090 1,714,790 $ 1,208,300 70.46%
SHARES USED IN
COMPUTATION - DILUTED 3,136,485 1,714,790 $ 1,421,695 82.91%
# # #
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