<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 8, 1998
REGISTRATION NO. 333-51015
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 1
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
TWEETER HOME ENTERTAINMENT GROUP, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
------------------------
<TABLE>
<S> <C> <C>
DELAWARE 5731 04-3417513
(STATE OR OTHER JURISDICTION (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
OF INCORPORATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NO.)
</TABLE>
------------------------
40 HUDSON ROAD
CANTON, MASSACHUSETTS 02021
(781) 830-3000
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
------------------------
JOSEPH MCGUIRE, CHIEF FINANCIAL OFFICER
TWEETER HOME ENTERTAINMENT GROUP, INC.
40 HUDSON ROAD
CANTON, MASSACHUSETTS 02021
(781) 830-3000
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
------------------------
COPIES OF COMMUNICATIONS TO:
<TABLE>
<S> <C>
KITT SAWITSKY, ESQ. EDWIN L. MILLER, JR., ESQ.
DANIEL R. AVERY, ESQ. TESTA, HURWITZ & THIBEAULT, LLP
GOULSTON & STORRS, P.C. 125 HIGH STREET
400 ATLANTIC AVENUE BOSTON, MASSACHUSETTS 02110
BOSTON, MASSACHUSETTS 02110
</TABLE>
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this Registration Statement.
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [ ]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
check the following box. [ ]
------------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
==============================================================================================================================
PROPOSED MAXIMUM PROPOSED MAXIMUM AMOUNT OF
TITLE OF EACH CLASS OF AMOUNT TO BE OFFERING PRICE PER AGGREGATE OFFERING REGISTRATION
SECURITIES TO BE REGISTERED REGISTERED(1) SHARE(2) PRICE(2) FEE(3)
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, $.01 par value 3,116,500 Shares $17.00 $52,980,500 $16,055
==============================================================================================================================
</TABLE>
(1) Includes 406,500 shares that the Underwriters have the right to purchase
from the Company to cover over-allotments, if any.
(2) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(a) under the Securities Act of 1933.
(3) Previously paid by the Registrant upon its initial filing of this
Registration Statement.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
================================================================================
<PAGE> 2
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
SUBJECT TO COMPLETION
JUNE 8, 1998
2,710,000 SHARES
TWEETER HOME ENTERTAINMENT GROUP, INC.
[TWEETER LOGO] [BRYN MAWR LOGO] [HI FI BUYS LOGO]
COMMON STOCK
------------------------
Of the 2,710,000 shares of Common Stock of Tweeter Home Entertainment
Group, Inc. (the "Company") offered hereby, 2,200,000 shares are being offered
by the Company and 510,000 shares are being offered by the Selling Stockholders
(including 259,856 shares which are being sold upon exercise of warrants which
the Underwriters are acquiring from certain Selling Stockholders). The Company
will not receive any proceeds from the sale of shares by the Selling
Stockholders. See "Principal and Selling Stockholders." Upon completion of the
Offering, the Company's current stockholders, including certain Selling
Stockholders, will own approximately 55.4% of the Company's Common Stock and
will continue to be able to influence significantly the affairs of the Company.
See "Risk Factors -- Control by Existing Stockholders" and "Principal and
Selling Stockholders." It is currently estimated that the initial public
offering price will be between $15.00 and $17.00 per share. Application has been
made for quotation of the Common Stock on the Nasdaq National Market under the
symbol "TWTR."
------------------------
THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK.
SEE "RISK FACTORS" COMMENCING ON PAGE 8.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
====================================================================================================================
PRICE UNDERWRITING PROCEEDS PROCEEDS TO
TO DISCOUNTS AND TO SELLING
PUBLIC COMMISSIONS(1) COMPANY (2) STOCKHOLDERS
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Per Share................. $ $ $ $
- --------------------------------------------------------------------------------------------------------------------
Total (3)................. $ $ $ $
====================================================================================================================
</TABLE>
(1) See "Underwriting" for information relating to indemnification of the
Underwriters.
(2) Before deducting expenses payable by the Company estimated at $900,000.
(3) The Company has granted the Underwriters a 30-day option to purchase up to
406,500 additional shares of Common Stock, solely to cover over-allotments,
if any. To the extent that the option is exercised, the Underwriters will
offer the additional shares at the Price to Public shown above. If the
option is exercised in full, the total Price to Public, Underwriting
Discounts and Commissions and Proceeds to Company will be $ ,
$ and $ , respectively. See "Underwriting."
------------------------
The shares of Common Stock are offered by the several Underwriters, subject
to prior sale, when, as and if delivered to and accepted by them, and subject to
the right of the Underwriters to reject any order in whole or in part. It is
expected that delivery of the shares of Common Stock will be made at the offices
of BT Alex. Brown Incorporated, Baltimore, Maryland, on or about ,
1998.
BT ALEX. BROWN
PAINEWEBBER INCORPORATED
DAIN RAUSCHER WESSELS
A DIVISION OF DAIN RAUSCHER
INCORPORATED
THE DATE OF THIS PROSPECTUS IS , 1998.
<PAGE> 3
DESCRIPTION OF INSIDE FRONT COVER PAGE GRAPHICS:
The graphics on the inside front cover page consist of one photograph
headed by a solid field with inset text heading and three different logos, which
solid field heading and photograph are located in the top of two thirds of the
page.
The photograph (without solid field heading) measures approximately 7.675
inch (width) by 5.25 inch (length). The solid field heading measures
approximately 7.675 inch (width) by 1.875 inch (length) (based on an 8.5 inch by
11 inch page). The entire graphic is centered from side-to-side. The text in the
solid field heading reads "Tweeter Home Entertainment Group." Below the text
heading are the three logos from left to right as follows:
1. "Tweeter, etc.;"
2. "Bryn Mawr Stereo & Video;" and
3. "HiFi Buys."
The photograph is a store-deep perspective showing general store layout and
product displays with a checkout counter in the foreground where three employees
are assisting customers.
DESCRIPTION OF INSIDE FRONT COVER FOLDOUT INSERT GRAPHICS
The graphics on the inside front cover foldout insert consist of eight
photographs of various sizes which approximately measure from 1.75 inch (width)
by 1.75 inch (length) up to 4 inch (width) by 2.75 inch (length) (based on an 11
inch by 17 inch page), overlapping three black, 0.25 inch-high horizontal lines
with inset white text, equally vertically spaced, the first of which is
approximately 2.25 inch from the top of the page.
Beginning at the top third of the page, there are two photographs
overlapping the first horizontal line, one showing the exterior of a Tweeter
etc. store and one showing the showroom of the same. The text on the first
horizontal line to which these two photographs relate reads "23 Tweeter
Locations in New England."
In the second third of the page there are two photographs overlapping the
second horizontal line, one showing the exterior of a Bryn Mawr Stereo & Video
store and one showing the showroom of the same. The text on the second
horizontal line to which these two photographs relate reads "18 Bryn Mawr Stereo
& Video Locations in the Mid-Atlantic."
In the bottom third of the page there are two photographs overlapping the
third horizontal line, one showing the exterior of a HiFi Buys store and one
showing a car stereo showroom. The text on the third horizontal line to which
these two photographs relate reads "10 HiFi Buys Locations in Greater Atlanta."
Below the third horizontal line are two photographs, side-by-side, with
0.375 inch black borders, the left of which shows a large screen television, the
right of which shows a home theater room in a Company store. Above these two
photographs is the caption "Products on the Cutting Edge."
The insert has text centered at the bottom of the left half of the insert
reading "Automatic Price Protection(SM)."
DESCRIPTION OF INSIDE BACK COVER PAGE GRAPHICS:
The back cover page graphics consist of three geographic maps which measure
approximately 3.125 inch (width) by 2.75 inch (length) (based on an 8.5 inch by
11 inch page) vertically aligned to the left side of the page, three logos with
captions vertically aligned in the top-right quadrant of the page, and a fourth
geographic map, unbordered, measures approximately 2.5 inch (width) by
<PAGE> 4
3.875 inch (length) (based on an 8.5 inch by 11 inch page) in the bottom-right
quadrant of the page.
The three vertically aligned geographic maps on the left side of the page
depict the regions of the U.S.A. in which the Company has stores. Gray dots mark
store locations and states in which the Company stores are located are offset by
white fill in each of the maps the following order from top to bottom:
1. Connecticut, Massachusetts, New Hampshire and Rhode Island;
2. Delaware, Maryland, New Jersey and Pennsylvania; and
3. Georgia.
The three logos vertically aligned in the top-right quadrant of the page
read from top to bottom with captions centered below each (shown in parentheses
below) as follows:
1. "Tweeter, etc. (23 Locations);"
2. "Bryn Mawr Stereo & Video (18 Locations);" and
3. "HiFi Buys (10 Locations)."
The unbordered geographic map in the bottom-right quadrant of the page is a
composite of the other three geographic maps described above, depicting coastal
states (plus West Virginia and Vermont) from Georgia to New Hampshire, Gray dots
mark store locations and states in which Company stores are located are offset
by white fill.
CERTAIN PERSONS PARTICIPATING IN THE OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK.
SPECIFICALLY, THE UNDERWRITERS MAY OVER-ALLOT IN CONNECTION WITH THE OFFERING
AND MAY BID FOR AND PURCHASE SHARES OF THE COMMON STOCK IN THE OPEN MARKET. FOR
A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."
WHERE USED IN THIS REGISTRATION STATEMENT, REFERENCES TO "MID TO HIGH-END"
PRODUCTS OR THE LIKE MEAN, WHEN REFERRING TO AUDIO PRODUCTS, PRODUCTS PRIMARILY
IN THE $200 TO $4,000 RETAIL PRICE RANGE, AND WHEN REFERRING TO VIDEO PRODUCTS,
PRODUCTS PRIMARILY IN THE $500 TO $5,000 RETAIL PRICE RANGE.
"TWEETER ETC.," "TWEETER," "BRYN MAWR STEREO," "BRYN MAWR," "HIFI BUYS,"
"AUTOMATIC PRICE PROTECTION" AND "WISE BUYS" ARE SERVICE MARKS OF THE COMPANY.
SEE "BUSINESS -- INTELLECTUAL PROPERTY."
<PAGE> 5
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and consolidated financial statements and notes thereto appearing
elsewhere in this Prospectus.
THE COMPANY
The Company is a specialty retailer of mid to high-end audio and video
consumer electronics products. The Company operates 51 stores under the Tweeter,
Bryn Mawr and HiFi Buys names in the New England, Mid-Atlantic and Atlanta,
Georgia markets, respectively. The Company's stores feature an extensive
selection of home and car audio systems and components, portable audio
equipment, and home video products, including large screen televisions, DVD
players, digital satellite systems, video cassette recorders and camcorders. The
Company differentiates itself by focusing on consumers who seek audio and video
products with advanced features, functionality and performance, and does not
offer personal computers or home office equipment. The Company seeks to build
name recognition and customer loyalty by combining quality products and
knowledgeable sales associates with a high level of service and competitive
prices. The Company has been recognized as the "Consumer Electronics Retailer of
the Year" in both 1996 and 1997 by Audio Video International Magazine and as the
fastest growing consumer electronics retailer in the United States in 1997 by
the TWICE Consumer Electronics Retail Registry.
The Company's goal is to become the nation's leading specialty retailer of
high quality audio and video products to its targeted customer base. To achieve
this objective, the Company has implemented an operating model that includes (i)
a deep merchandise selection focused on mid to high-end audio and video
products, including limited distribution products which accounted for
approximately 43% of sales for the six months ended March 31, 1998, (ii)
exceptional customer service based upon relationship and knowledge-based selling
that is critical to higher-end products, (iii) every day competitive pricing
featuring the Company's patented Automatic Price Protection program and (iv) a
dynamic and inviting retail environment.
The Company believes that the quality and knowledge of its sales associates
is critical to its success and represents a significant competitive advantage.
Sales consultants initially receive six weeks of intensive classroom training
and five to fifteen days of additional training per year, both in the store and
at the Company's regional training centers. The Company's relationship selling
model encourages sales associates to promote a comfortable, trusting, low
pressure sales environment that engenders long term customer loyalty. An
integral part of the Company's relationship selling model is its Automatic Price
Protection program. This program is designed to remove pricing concerns from the
purchase decision and allows customers and the sales staff to focus on product
functionality, performance and quality. Under the Automatic Price Protection
program, if a customer purchases a consumer electronics product from one of the
Company's stores and a competitor within 25 miles of the store advertises a
lower price within 30 days, the Company automatically sends a check to the
customer for the difference without requiring the customer to request the
payment. The Company believes that the success of its operating model is
evidenced by the fact that approximately 40% of the customers who purchased from
Tweeter stores in the six months ended March 31, 1998 had previously purchased
products from the Company during the prior two fiscal years.
The Company's store prototype is 10,000 square feet with brightly painted
interiors, often in pastel colors, and many stores exhibit hand painted murals
and other decorative artwork. Unlike many competitors whose stores contain
large, open spaces, the Company's stores feature individual sound rooms with
practical displays which allow customers to sample and compare the features and
functions of products in various combinations. The sound rooms are intended to
architecturally and acoustically resemble a home or car environment so the
customer can hear and see how products will perform. Each store contains a
traditional television wall, and many stores contain a movie
3
<PAGE> 6
theater room complete with theater-style seats to showcase home theater
products. Some stores display a car on the selling floor which features a
state-of-the-art car stereo system.
The Company believes that the consumer electronics industry is large,
growing and fragmented with significant consolidation opportunities. According
to Company estimates, retail sales of audio and video products were expected to
reach approximately $30 billion in 1997. The Company also estimates that between
1990 and 1997, the audio and video segments expanded at a compound annual growth
rate of 2.3%. The Company believes that new technologies such as digital
television present the possibility for accelerated growth. The expansion of
large format national chains has created competitive pressures for smaller
specialty stores that may be successfully differentiated but lack an adequate
scale of operations or purchasing power to operate on a stand-alone basis. The
Company believes that these regional specialty operators provide acquisition
opportunities for the Company.
The Company has developed an aggressive growth strategy (i) to open new
stores in current regional markets and relocate certain stores to more favorable
sites and (ii) to selectively pursue acquisitions in new regional markets and
achieve operating improvements by converting the acquired company to its core
operating model and leverage distribution, marketing and corporate
infrastructure. The Company currently intends to open five stores in fiscal
1998, three of which have been opened as of March 31, 1998, and to relocate two
other stores. In fiscal 1999, the Company intends to open 15 stores. The Company
has demonstrated its acquisition and integration capability through its purchase
of Bryn Mawr Radio & Television Centre, Inc. in May 1996 (the "Bryn Mawr
Acquisition") and HiFi Buys Incorporated in May 1997 (the "HiFi Buys
Acquisition"). To support its acquisition strategy, the Company obtained equity
investments in fiscal 1996 of $10.6 million, net of issuance costs, from a group
of investors led by Weston Presidio and Advent International (the "1996
Investors"). In May 1997, the Company raised an additional $21.5 million, net of
issuance costs, comprised of preferred stock and subordinated debt, from the
1996 Investors and several additional investors, including PNC Capital Corp.
THE BRYN MAWR ACQUISITION
In May 1996, the Company acquired the 13 store Bryn Mawr chain located in
the Mid-Atlantic market for $8.7 million, including acquisition costs. The
Company implemented strategic initiatives within the acquired stores focused on
increasing sales and store contribution. Specifically, the Company (i) increased
advertising expenditures during the quarter following the acquisition and
refocused advertising to emphasize radio, television and direct marketing rather
than print, (ii) implemented the Company's every day competitive pricing and
Automatic Price Protection programs, (iii) initiated a substantial sales
associate training program to improve product knowledge and enhance relationship
selling skills and (iv) focused the sales staff on higher margin products,
particularly audio products. These initiatives enabled the Company to generate
comparable store sales increases at Bryn Mawr of 36.9% during the period from
June 1, 1996 through September 30, 1996 as compared to the same period of the
prior year, 4.7% during fiscal 1997 and 15.0% during the six months ended March
31, 1998. On a pro forma basis assuming completion of the Bryn Mawr Acquisition
as of October 1, 1995, store contribution for Bryn Mawr improved to 6.8% in
fiscal 1997 from 3.1% in fiscal 1996.
THE HIFI BUYS ACQUISITION
In May 1997, the Company acquired the 10 store HiFi Buys chain located in
the greater Atlanta, Georgia market for $19.7 million, including acquisition
costs. Following the acquisition, the Company implemented strategic objectives
designed to increase store contribution by combining a planned decrease in
revenues with an increase in gross margin and a substantial decrease in
operating expenses. Specifically, the Company (i) adjusted the merchandise mix
to increase the
4
<PAGE> 7
proportion of mid and high-end products and reduce the number of lower margin
introductory products, (ii) altered store employee compensation to reduce the
emphasis on promotional sales and focus incentives on gross margin and store
contribution, (iii) reduced marketing expenditures and shifted marketing
emphasis from promotional advertising toward the Company's traditional
relationship selling and every day competitive price message, (iv) converted the
advertising program to emphasize electronic advertising and direct mail
marketing as opposed to print media (v) implemented the Automatic Price
Protection program and (vi) eliminated $2.4 million in overhead costs. As a
result, comparable store sales decreased 29.9% during the period from the
acquisition through September 30, 1997 and decreased 13.1% during the six months
ended March 31, 1998. At the same time, on a pro forma basis assuming completion
of the HiFi Buys Acquisition as of October 1, 1996, store contribution improved
to 10.6% in the six months ended March 31, 1998 from 8.0% in the same period for
the prior year.
The Company was organized as a Massachusetts corporation in 1972 and was
reorganized as a Delaware holding company in June, 1998 (the "Reorganization").
The Company's principal executive offices are located at 40 Hudson Road, Canton,
Massachusetts 02021. The Company's telephone number is (781) 830-3000.
THE OFFERING
<TABLE>
<S> <C>
Common Stock offered by the Company................. 2,200,000 shares
Common Stock offered by the Selling Stockholders.... 510,000 shares
-------------------
Total.......................................... 2,710,000 shares
Common Stock to be outstanding after the Offering... 6,082,690 shares(1)
Use of proceeds..................................... To repay indebtedness and other
general corporate purposes. See "Use
of Proceeds."
Proposed Nasdaq National Market symbol.............. TWTR
</TABLE>
- ---------------
(1) Excludes 511,808 shares of Common Stock issuable upon exercise of warrants
outstanding after the date of the Offering, with a weighted average exercise
price of $2.13 per share. Also excludes 845,059 shares of Common Stock
issuable upon exercise of options outstanding at the date of this
Prospectus, with a weighted average exercise price of $3.97 per share. See
Notes 6 and 11 of Notes to Consolidated Financial Statements of the Company,
"Capitalization," "Description of Capital Stock" and "Management -- Stock
Plans."
Unless otherwise indicated, all information in this Prospectus assumes or
gives effect to: (i) no exercise of the over-allotment option granted by the
Company to the Underwriters; (ii) the exercise of warrants to purchase 259,856
shares of Common Stock which will be sold by certain Selling Stockholders in the
Offering; and (iii) the automatic conversion of all outstanding shares of the
Company's Series A Preferred Stock and Series B Preferred Stock (the "Preferred
Stock") into an aggregate of 2,566,561 shares of Common Stock, each upon the
consummation of the Offering. Unless the context requires otherwise, the term
"Company" refers collectively to Tweeter Home Entertainment Group, Inc., a
Delaware corporation, its predecessors and its subsidiaries.
5
<PAGE> 8
SUMMARY FINANCIAL AND OPERATING DATA
(IN THOUSANDS, EXCEPT PER SHARE AND NUMBER OF STORES DATA)
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
FISCAL YEAR ENDED SEPTEMBER 30, MARCH 31,
------------------------------------------------ ------------------
1993 1994 1995 1996(1) 1997(2) 1997 1998
------- ------- ------- ------- -------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Total revenue................................ $38,200 $47,401 $60,121 $80,607 $132,525 $60,583 $129,129
Gross profit................................. 13,007 16,489 20,954 28,791 46,210 21,402 44,849
Income from operations....................... 10 1,344 2,238 1,953 2,053 2,692 8,798
Interest expense............................. 631 426 629 617 1,808 513 1,610
------- ------- ------- ------- -------- ------- --------
Income before taxes.......................... (621) 918 1,609 1,336 245 2,179 7,188
Income tax expense (benefit)................. -- -- (174) (453) 99 876 2,875
------- ------- ------- ------- -------- ------- --------
Net income (loss)............................ $ (621) $ 918 $ 1,783 $ 1,789 $ 146 $ 1,303 $ 4,313
======= ======= ======= ======= ======== ======= ========
Pro forma income tax expense (benefit)
(actual in 1997 and 1998)(3)............... (248) 371 661 550 99 876 2,875
Pro forma net income (loss) before accretion
of preferred stock dividends............... $ (373) $ 547 $ 948 $ 786 $ 146 $ 1,303 $ 4,313
======= ======= ======= ======= ======== ======= ========
Pro forma net income (loss) available to
common shareholders........................ $ (373) $ 547 $ 948 $ (250) ($ 2,010) $ 401 $ 2,729
======= ======= ======= ======= ======== ======= ========
Pro forma diluted earnings (loss) per
share...................................... $ (0.11) $ 0.16 $ 0.28 $ (0.13) $ (1.20) $ 0.23 $ 0.93
======= ======= ======= ======= ======== ======= ========
Weighted average diluted shares
outstanding(4)............................. 3,371 3,371 3,371 1,940 1,673 1,715 4,616
======= ======= ======= ======= ======== ======= ========
Supplemental pro forma diluted earnings per
common share(5)............................ $ 0.25 $ 0.77
======== ========
OTHER STORE DATA:
Store contribution(6)........................ $ 2,738 $ 3,985 $ 5,550 $ 6,798 $ 10,642 $ 6,605 $ 14,641
Stores open at beginning of period........... 13 14 16 18 33 33 47
New stores................................... 1 2 2 2 4 2 3
Relocated stores............................. 0 1 1 1 1 1 2
Closed stores................................ 0 0 0 0 0 0 0
Acquired stores.............................. 0 0 0 13 10 0 0
Stores open at end of period................. 14 16 18 33 47 35 50
COMPARABLE STORE SALES DATA:(7)
Tweeter...................................... 2.8% 11.2% 12.5% 1.6% -4.5% -7.7% 31.1%
Bryn Mawr.................................... 36.9% 4.7% 9.0% 15.0%
HiFi Buys.................................... -29.9% -13.1%
Consolidated................................. 2.8% 11.2% 12.5% 5.6% -7.2% -2.3% 8.2%
</TABLE>
<TABLE>
<CAPTION>
MARCH 31, 1998
-----------------------------------------
ACTUAL PRO FORMA(8) AS ADJUSTED(9)
------- ------------ --------------
<S> <C> <C> <C>
BALANCE SHEET DATA:
Working capital........................................... $16,283 $16,283 $ 16,283
Total assets.............................................. 84,676 84,676 84,369
Long term debt, excluding current portion................. 31,308 31,308 979
Redeemable convertible preferred stock.................... 22,174 -- --
Stockholder's equity (deficit)............................ (2,939) 19,235 49,657
</TABLE>
- ---------------
(1) Includes results of the Bryn Mawr Acquisition from May 13, 1996, which was
accounted for using the purchase method. See Note 10 of Notes to the
Consolidated Financial Statements of the Company.
(2) Includes results of the HiFi Buys Acquisition from May 30, 1997, which was
accounted for using the purchase method. See Note 10 of Notes to the
Consolidated Financial Statements of the Company.
(3) The Company operated as an S corporation through November 1995 and was not
subject to federal and certain state corporate income taxes. In connection
with the recapitalization that occurred on November 26, 1995, the Company
revoked its S election, and became subject to taxation as a C corporation,
effective October 1, 1995. The pro forma information has been computed as if
the Company were subject to Federal and all applicable state income taxes
for each of the periods presented, assuming the Company had been taxed as a
C corporation. The Company actually recorded an income tax benefit of
$174,000 and $453,000 for the fiscal years ended September 30, 1995 and
1996, respectively.
6
<PAGE> 9
(4) Weighted average shares outstanding includes Series A Convertible Preferred
Stock and Series B Convertible Preferred Stock (the "Preferred Stock"), when
dilutive, and also takes into account nominal issuances of certain warrants
in 1997 for all periods presented and dilutive potential common shares
(common stock options and warrants), where applicable.
(5) Supplemental pro forma diluted earnings per common share is based on pro
forma net income (loss) available to common shareholders, increased to give
effect to the HiFi Buys Acquisition as if it had occurred on October 1, 1996
and the reduction in interest costs of $1,014,000 for the fiscal year ended
September 30, 1997 and $918,000 for the six months ended March 31, 1998 (net
of the applicable income taxes), which would have resulted assuming the
application of a portion of the net proceeds from the Offering were used to
repay certain indebtedness of the Company (See "Use of Proceeds"). It also
assumes conversion of Preferred Stock as of October 1, 1996, thus
eliminating Preferred Stock dividends of approximately $2,157,000 and
$1,584,000 for the year ended September 30, 1997 and the six months ended
March 31, 1998, respectively. The denominator of the equation also reflects
the issuance of new common shares and the conversion of the Preferred Stock
to common shares.
(6) Refers to gross profit after deducting selling expenses including labor,
advertising, store level operations and pre-opening expenses. Store
contribution is presented to provide additional information about the
Company and is commonly used as a performance measurement by retail
companies. Store contribution should not be considered in isolation or as a
substitute for operating income, cash flow from operating activities and
other income or cash flow data prepared in accordance with generally
accepted accounting principles, or as a measure of the Company's
profitability or liquidity. There can be no assurance that the Company's
calculation of store contribution is comparable to similarly titled items
reported by other companies.
(7) Stores are included in the comparable store base after they are in operation
for 12 full months. Acquired stores are included if the store was open for
12 full months as of the date of acquisition and the related figures are
based on the acquired company's financial statements. Relocated stores are
excluded from the comparable store base until they have completed 12 full
months of operation from the date the store was reopened after relocation.
(8) Represents actual data pro forma to give effect to the conversion of all the
outstanding shares of Preferred Stock into 2,566,561 shares of common stock.
(9) Represents pro forma data as adjusted to give effect to the sale of
2,200,000 shares of Common Stock offered by the Company at an assumed
initial public offering price of $16.00 per share (after deducting
underwriting discounts and commission and estimated offering expenses), the
application of the estimated net proceeds therefrom and the writeoff of
approximately $307,000 of deferred financing costs in connection with the
repayment of the 1997 Notes issued in connection with the HiFi Buys
Acquisition and the accretion of debt discount of approximately $292,000.
See "Capitalization" and "Use of Proceeds."
7
<PAGE> 10
RISK FACTORS
In addition to the other information contained in this Prospectus, the
following factors should be considered carefully in evaluating an investment in
the shares of Common Stock offered hereby. This Prospectus contains certain
forward-looking statements that involve risks and uncertainties. When used in
this Prospectus, the terms "anticipates," "expects," "estimates," "believes,"
"intends" and similar terms as they relate to the Company or management are
intended to identify such forward-looking statements. The Company's actual
results could differ materially from the results discussed in such
forward-looking statements. Factors that could cause or contribute to such a
difference include, but are not limited to, those set forth below and elsewhere
in this Prospectus.
RISKS ASSOCIATED WITH GROWTH
The Company's success will depend in large part on its ability to open, or
acquire through strategic acquisitions, new stores in both existing and new
geographic markets and to operate those stores on a profitable basis. The
opening of additional stores in existing markets could result in lower net sales
at the Company's existing stores in that market, and the opening of additional
stores in new geographic markets could present competitive and merchandising
challenges different from those currently or previously faced by the Company
within its existing geographic markets. In addition, the Company may incur
higher costs related to advertising, administration and distribution as it
enters new markets.
The Company's growth strategy is dependent upon a number of factors,
including the identification and acquisition of suitable sites and the
negotiation of acceptable leases for such sites, the identification of existing
audio and video consumer electronics retailers appropriate for strategic
acquisition by the Company and the successful consummation of such acquisitions,
the obtaining of consents, including government consents, permits and licenses,
needed to complete such acquisitions and operate such additional sites, the
hiring, training and retention of skilled personnel, the availability of
adequate management and financial resources, the adaptation of the Company's
distribution and other operational and management systems to an expanded network
of stores, the ability and willingness of the Company's vendors to supply the
Company on a timely basis at competitive prices, continued consumer demand for
the Company's products at levels that can support acceptable profit margins, and
other factors, many of which are beyond the control of the Company. There can be
no assurance that the Company will be successful with respect to any of these
factors in particular or that the Company will be successful in opening or
acquiring new stores on a schedule consistent with the Company's business plan,
if at all, or that such newly opened or acquired stores will achieve sales and
profitability levels comparable to existing stores, if they are profitable at
all, or that the Company will improve its overall market position and
profitability as a result.
In addition, the Company's rapid expansion through the opening or
acquisition of new stores will place significant demands on the Company's
management, resources, operations and information systems, and the Company will
be required to expend significant effort and additional resources to ensure the
continuing adequacy of its financial controls, operating procedures, information
systems, product purchasing and distribution systems and employee training
programs. In addition, the Company will need to attract and retain additional
qualified personnel, including new store managers. Further, the Company's
continued growth will depend on its ability to increase sales in its existing
stores. There can be no assurance that the Company will be successful in any of
these efforts, and, as a result, there can be no assurance that the Company will
achieve its planned expansion or that any new stores will be effectively
integrated into the Company's existing operations. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources" and "Business -- Growth Strategy."
8
<PAGE> 11
RISKS ASSOCIATED WITH ACQUISITIONS
The Company has completed two acquisitions and is continuing to integrate
the acquired stores and to convert those stores to its operating model. There
can be no assurance that the Company will be able to integrate such stores
without significant delay or expense. For example, comparable store sales within
the stores acquired by the Company as part of the HiFi Buys Acquisition have
decreased since the consummation of the HiFi Buys Acquisition. Although the
Company will consider strategic acquisitions of other retail chains in the audio
and video consumer electronics industry, there can be no assurance that suitable
acquisition candidates will be identified, that acquisitions can be consummated
or that new stores acquired through such acquisitions can be operated profitably
or integrated successfully into the Company's operations. Previously acquired
stores have had, and newly acquired stores may have, different merchandising,
advertising, store format and operating approaches from those of the Company,
and the Company's success in integrating such stores will depend on its ability
to effect significant changes in the operations of such stores to conform to the
Company's approach in these areas. There can be no assurance that the Company
will be successful in effecting such changes without an adverse effect on the
revenues or profitability of such stores. In addition, future acquisitions by
the Company could result in potentially dilutive issuances of equity securities,
the incurrence of debt and contingent liabilities and amortization expenses
related to goodwill and other intangible assets, all of which could materially
adversely affect the Company.
POTENTIAL NEED FOR ADDITIONAL FINANCING
The Company intends to finance the opening and acquisition of new stores
during the next two years with a portion of the proceeds from the Offering, cash
flow from operations and borrowings. The average cash investment, including
pre-opening expenses for tenant fit-out, demonstration and inventory (net of
payables), required to open a store is estimated by the Company to be
approximately $855,000. However, there can be no assurance that the actual cost
of opening a store will not be significantly greater than such current
estimates, and the Company may be required to seek additional debt and/or equity
financing in order to fund its continued expansion through 1999 and beyond.
There can be no assurance that such additional financing will be available on
terms acceptable to the Company, if at all. In addition, the Company's ability
to incur additional indebtedness or issue equity or debt securities could be
limited by covenants in present and future loan agreements and debt instruments.
Additional issuances of equity by the Company may result in dilution to the
Company's stockholders.
DEPENDENCE ON KEY PERSONNEL
The success of the Company will be dependent upon the active involvement of
senior management personnel, particularly Samuel J. Bloomberg, the Company's
Chief Executive Officer and Chairman of the Board, and Jeffrey Stone, the
Company's President and Chief Operating Officer. The loss of the full-time
services of Messrs. Stone or Bloomberg or other members of senior management
could have a material adverse effect on the Company's results of operations and
financial condition. Except for employment contracts with Messrs. Stone and
Bloomberg, and with Joseph McGuire, the Chief Financial Officer and Chief
Information Officer of the Company, and David Ginsburg, a regional Vice
President of the Company, the Company does not have employment agreements with
any members of its senior management team. The Company currently maintains
key-man life insurance on the lives of Messrs. Bloomberg and Stone in the
amounts of $1,000,000 and $5,000,000, respectively. See "Business -- Business
Strategy" and "Management."
RISKS ASSOCIATED WITH COMPETITION
The retail consumer electronics industry is highly competitive. The Company
currently competes against a diverse group of retailers, including several
national and regional large format merchandisers and superstores, such as
Circuit City and Best Buy, which sell, among other products, audio and video
consumer electronic products similar and often identical to those sold by the
9
<PAGE> 12
Company. The Company also competes in particular markets with a substantial
number of retailers that specialize in one or more types of consumer electronic
products sold by the Company. Certain of these competitors have substantially
greater financial resources than the Company that may increase their ability to
purchase inventory at lower costs or to initiate and sustain predatory price
competition. In addition, the large format stores are continuing to expand their
geographic markets, and such expansion may increase price competition within
those markets. In this regard, the Company understands that Best Buy has
announced its intention to enter the New England market in 1998. A number of
different competitive factors could have a material adverse effect on the
Company's results of operations and financial condition, including increased
operational efficiencies of competitors, competitive pricing strategies,
expansion by existing competitors, entry by new competitors into markets in
which the Company is currently operating or the adoption by existing competitors
of innovative store formats or retail sales methods. See "Business -- Industry."
SEASONAL AND QUARTERLY FLUCTUATIONS IN SALES
Like many retailers, the Company's business is materially impacted by
seasonal shopping patterns. The fourth calendar quarter, which is the Company's
first fiscal quarter and which includes the December holiday shopping period,
has historically contributed, and is expected to continue to represent, a
substantial portion of the Company's operating income for its entire fiscal
year. As a result, any factors negatively affecting the Company during such
calendar quarter of any year, including adverse weather or unfavorable economic
conditions, would have a material adverse effect on the Company's results of
operations for the entire year. More generally, the Company's quarterly results
of operations also may fluctuate based upon such factors as the timing of new
store openings and new store acquisitions, the amount of store pre-opening
expenses, the amount of net sales contributed by new and existing stores, the
mix of consumer electronic products sold in its stores and profitability of
sales of particular products and other competitive factors. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Seasonality and Quarterly Results."
FLUCTUATIONS IN COMPARABLE STORE SALES
A number of factors have historically affected, and will continue to
affect, the Company's comparable store sales results including, among other
factors, competition, general regional and national economic conditions,
consumer trends, changes in the Company's product mix, timing of promotional
events, new product introductions and the Company's ability to execute its
business strategy effectively. The Company does not expect comparable store
sales to increase at historical rates, and there can be no assurance that
comparable store sales will not decrease in the future. Changes in the Company's
comparable store sales results could cause the price of the Common Stock to
fluctuate substantially. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
LACK OF GEOGRAPHICAL DISPERSION
The Company currently operates 51 stores, of which 23 are operated under
the Tweeter name in the New England market, 18 are operated under the Bryn Mawr
name in the Mid-Atlantic market, and 10 are operated under the HiFi Buys name in
the Atlanta, Georgia market. The lack of wider geographical dispersion of the
Company's current stores makes the Company vulnerable to adverse events in these
markets, including weather, regional competition or unfavorable regional
economic conditions. See "Business -- Store Format and Operations."
CHANGES IN CONSUMER DEMAND AND PREFERENCES
The Company's success depends on its ability to anticipate and respond in a
timely manner to consumer demand and preferences regarding audio and video
consumer electronics products and changes in such demand and preferences.
Consumer spending patterns, particularly discretionary
10
<PAGE> 13
spending for products such as those marketed by the Company, are affected by,
among other things, prevailing economic conditions. In addition, demand for
audio and video consumer electronics products is often stimulated by or
dependent upon the periodic introduction and availability of new products and
technologies at price levels which generate wide consumer interest. Also, many
products which incorporate the newest technologies, such as DVD and
high-definition television, are subject to significant technological and pricing
limitations and to the actions and cooperation of third parties such as
television broadcasters or movie distributors. There can be no assurance that
these products or other new products will ever achieve widespread consumer
acceptance. Furthermore, the introduction or expected introduction of new
products or technologies may have a depressing effect on sales of existing
products and technologies. Significant deviations from the projected demand for
products sold by the Company would have a materially adverse effect on the
Company's results of operations and financial condition, either from lost sales
or lower margins due to the need to mark down excess inventory. Any sustained
failure by the Company to identify and respond to changes in consumer demand and
preferences would have a material adverse effect on the Company's results of
operations and financial condition. See "Business -- Industry," "-- Business
Strategy" and "-- Merchandise."
DEPENDENCE ON SUPPLIERS
The Company's business and its growth strategy are dependent to a
significant degree upon its suppliers, particularly its brand-name suppliers of
stereo and video equipment such as Sony, Mitsubishi, Yamaha, Boston Acoustics
and Panasonic. The Company does not have any supply agreements or exclusive
arrangements with any vendors, and ordering of Company inventory typically
occurs through the issuance of individual purchase orders to vendors. In
addition, the Company relies heavily on a relatively small number of suppliers.
The Company's two largest suppliers accounted for approximately 37% of the
Company's sales during the six months ended March 31, 1998. The loss of any of
these key vendors or the failure by the Company to establish and maintain
relationships with these or other vendors could have a material adverse effect
on the Company's results of operations and financial condition and expansion.
The Company believes it currently has adequate supply sources, but there can be
no assurance, especially given the Company's growth strategy, that the Company
will be able to acquire sufficient quantities or an appropriate mix of consumer
electronic products at acceptable prices or at all. Specifically, the
establishment of additional stores in existing markets and the penetration of
new markets is dependent to a significant extent on the willingness and ability
of vendors to supply those additional stores, of which there can be no
assurance. As the Company continues to open or acquire new stores, the inability
or unwillingness of suppliers to supply some or all of their products to the
Company at acceptable prices in one or more markets could have a material
adverse effect on the Company's results of operations and financial condition.
See "Business -- Purchasing and Inventory."
INVENTORY PURCHASED FROM FOREIGN VENDORS
The Company purchases a significant portion of its inventory from overseas
vendors, particularly vendors headquartered in Japan. Changes in trade
regulations, currency fluctuations or other factors may increase the cost of
items purchased by the Company from foreign vendors or create shortages of such
items, which could in turn have a material adverse effect on the Company's
results of operations and financial condition. Conversely, significant
reductions in the cost of such items in U.S. dollars may cause a significant
reduction in retail price levels of those products and may limit or eliminate
the Company's ability to successfully differentiate itself from other
competitors, thereby resulting in an adverse effect on the Company's sales,
margin or competitive position. See "Business -- Purchasing and Inventory."
11
<PAGE> 14
MEMBERSHIP IN BUYING GROUP
The Company is a member of the Progressive Retailers Organization ("PRO"),
a volume buying group currently comprised of 14 consumer electronics retailers
located throughout the country, which provides its members with market
information and negotiates purchase terms with vendors on behalf of its members.
There can be no assurance that any future termination of the Company's
membership in this group would not have a material adverse effect on the
Company's results of operations and financial condition. In addition, rebates
paid to the Company by product manufacturers through this group depend on the
sales volumes achieved by the group's other members, as well as the Company, and
therefore decreased sales performance by these other members could reduce the
amounts of such rebates payable to the Company, which could in turn have a
material adverse effect on the Company's results of operations and financial
condition. See "Business -- Purchasing and Inventory."
INTELLECTUAL PROPERTY
The Company's "Tweeter etc." and "Bryn Mawr Stereo" service marks have been
registered with the United States Patent and Trademark Office. The Company has
not registered the "HiFi Buys" service mark and is aware that other consumer
electronics retailers use the name "HiFi Buys" outside the Company's current
geographical markets. The Company has submitted applications for registration of
certain other of its service marks, which applications are currently pending.
There can be no assurance that the Company will be able to successfully register
such service marks. In addition, there can be no assurance that any service
mark, whether registered or unregistered, or any patent will be effective to
protect the Company's intellectual property rights, or that infringement or
invalidity claims by third parties will not be asserted in the future or that
such assertions, if proven to be true, would not have a material adverse effect
on the Company's results of operations and financial condition. See
"Business -- Intellectual Property."
PLANNED RELOCATION OF COMPANY HEADQUARTERS
The Company plans to relocate to a new facility that will serve as its
corporate headquarters and New England regional distribution and service center
in the summer of 1998. The Company's corporate, financial, administrative and
marketing staff will be based at that relocated facility. The Company's
principal data processing and computer facility is located elsewhere. There can
be no assurance that such relocation will not result in a disruption to the
Company's operations. See "Business -- Properties" "Business -- Purchasing and
Inventory."
CONTROL BY EXISTING STOCKHOLDERS
Upon completion of the Offering, the Company's current stockholders will
own approximately 55.4% of the Company's outstanding Common Stock. As a result,
those parties will continue to be able to influence significantly the affairs of
the Company if they were to act together. See "Principal and Selling
Stockholders."
EFFECT OF CERTAIN CHARTER AND BY-LAW PROVISIONS; ANTI-TAKEOVER PROVISIONS
The Company's Amended and Restated Certificate of Incorporation, as in
effect immediately following the consummation of the Offering (the "Charter")
and the Company's Amended and Restated By-laws, as in effect immediately
following the consummation of the Offering (the "By-laws"), as well as certain
provisions of Delaware General Corporation Law, contain provisions which may
deter, discourage or make more difficult a change in control of the Company,
even if such a change in control would be in the interest of a significant
number of Company stockholders or if such change in control would provide such
stockholders with a substantial premium for their shares over then current
market prices. For example, under the Charter, the Board of Directors of the
Company is authorized to issue one or more classes of Preferred Stock, having
such designations,
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<PAGE> 15
rights and preferences as may be determined by the Board, and such issuances
may, among other things, have an adverse effect on the rights of holders of
Common Stock.
Stockholders of the Company have no right to take action by written consent
and are not permitted to call special meetings of stockholders. Any amendment of
the By-laws by the stockholders or certain provisions of the Charter requires
the affirmative vote of at least 75% of the shares of voting stock then
outstanding. The Charter also provides for the staggered election of directors
to serve for one, two and three-year terms, and for successive three-year terms
thereafter, subject to removal only for cause upon the vote of not less than 75%
of the shares of Common Stock represented at a stockholders' meeting. See
"Description of Capital Stock -- Delaware Law and Certain Charter and By-law
Provisions; Anti-Takeover Effects."
In addition, the Company will adopt, effective upon the consummation of the
Offering, a Stockholder Rights Plan. Under the terms of the Stockholder Rights
Plan, in general, if a person or group acquires more than 15% of the outstanding
shares of Common Stock (an "Acquiring Person"), all other stockholders of the
Company would have the right to purchase securities from the Company at a
discount to such securities' fair market value, thus causing substantial
dilution to the holdings of the Acquiring Person. The Stockholder Rights Plan
may inhibit a change in control and, therefore, could adversely affect the
stockholders' ability to realize a premium over the then-prevailing market price
for the Common Stock in connection with such a transaction. See "Description of
Capital Stock -- Stockholder Rights Plan."
SHARES ELIGIBLE FOR FUTURE SALE
The Company and its existing stockholders holding all of the Company's
outstanding capital stock prior to the Offering have agreed pursuant to lock-up
agreements (the "Lock-up Agreements") with the Underwriters, with certain
exceptions, not to sell, offer or contract to sell, sell short, engage in
certain hedging transactions with respect to, or otherwise dispose of any shares
of Common Stock for a period of 180 days after the date of this Prospectus (the
"Lock-up Period"), without the prior written consent of BT Alex. Brown
Incorporated. Following the Offering, the Company will have outstanding
6,082,690 shares of Common Stock. Of such shares, the 2,710,000 shares offered
hereby will be freely tradable by those persons who are not affiliates of the
Company and all of the remaining outstanding shares will be subject to Lock-up
Agreements for the duration of the Lock-up Period. Upon expiration of the
Lock-up Period, approximately 3,372,690 additional shares will be available for
sale in the public market, subject to the provisions of Rule 144 under the
Securities Act of 1933, as amended. As of the date of the Offering,
approximately 845,059 shares of Common Stock were issuable pursuant to options
under the Company's stock plans and 511,808 shares of Common Stock were issuable
upon the exercise of warrants. All shares issuable upon exercise of options are
subject either to Lock-up Agreements or to a lock-up period of 120 days pursuant
to the Company's stock option agreements. All shares issuable upon the exercise
of warrants are subject to Lock-up Agreements. In addition, the holders of
approximately 3,884,498 shares of Common Stock will have certain rights to
registration of their shares under the Securities Act. Sales of substantial
amounts of Common Stock in the public market following the Offering, or the
perception that such sales could occur, could have a material adverse effect on
the market price of the Common Stock after the Offering. See "Description of
Capital Stock" and "Shares Eligible for Future Sale."
NO PRIOR PUBLIC TRADING MARKET; VOLATILITY
Prior to the Offering, there has been no public market for the Common
Stock, and there can be no assurance that an active public market for the Common
Stock will develop or be sustained after the Offering. The initial public
offering price of the Common Stock will be determined by negotiations between
the Company and the representatives of the Underwriters. See "Underwriting" for
a discussion of the factors to be considered in determining the initial public
offering price. The initial public offering price may not necessarily be
indicative of the market price of the Common
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<PAGE> 16
Stock after the Offering, which may be highly volatile. Factors such as
announcements of fluctuations in the Company's or its competitors' operating
results and market conditions for retail industry stocks in general could have a
material adverse effect on the market price of the Common Stock after the
Offering.
YEAR 2000 COMPLIANCE
The Company currently utilizes several computer software systems which will
require modification or upgrading to accommodate the "Year 2000" changes needed
for correct recording of dates in the year 2000 and beyond. The Company believes
that all such systems can be changed by the end of 1999, and does not expect the
cost of the changes to be material to the Company's financial condition or
results of operations. The Company does not currently have any information
concerning the compliance status of its suppliers. Any failure by the Company's
significant suppliers to successfully achieve Year 2000 compliance could have a
material adverse effect on the Company's results of operations and financial
condition. See "Business -- Information Systems."
DIVIDEND POLICY
The Company does not anticipate paying any cash dividends on the Common
Stock for the foreseeable future. In addition, it is likely that any future
lending arrangements, including the lending arrangements currently under
discussion between the Company and its existing lender, will prohibit or limit
the payment of cash dividends. See "Use of Proceeds" and "Dividend Policy."
DILUTION
Investors participating in the Offering will incur immediate and
substantial dilution in the amount of $10.93 per share (assuming an initial
public offering price of $16.00 per share). To the extent that currently
outstanding options or warrants to purchase Common Stock are exercised, there
will be further dilution. See "Dilution."
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<PAGE> 17
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 2,200,000 shares of
Common Stock offered hereby are estimated to be $31,836,000 ($37,884,720 if the
Underwriters' over-allotment option is exercised in full), assuming an initial
public offering price of $16.00 per share and after deducting the estimated
underwriting discounts and commissions and expenses payable by the Company. The
Company will use all or substantially all of such proceeds to repay existing
indebtedness. Specifically, the Company intends to repay (i) approximately $14.1
million in outstanding indebtedness under its existing Credit Agreement with
BankBoston, N.A. (the "Credit Facility"); (ii) approximately $15.0 million in
outstanding indebtedness under the Senior Subordinated Promissory Notes dated
May 30, 1997 issued in connection with the HiFi Buys Acquisition (the "1997
Notes"); (iii) approximately $1.0 million in outstanding indebtedness under the
Senior Subordinated Note dated November 28, 1995 issued in connection with a
recapitalization pursuant to which the Company repurchased Common Stock from
certain of its stockholders (the "Redemption Note") plus a one-time payment of
approximately $814,000 due to these stockholders upon the consummation of the
Offering; and (iv) approximately $900,000 to repay outstanding indebtedness
under the Subordinated Note dated June 1, 1997 issued in connection with the
HiFi Buys Acquisition (the "HiFi Buys Note"). Any remaining net proceeds will be
used for general working capital purposes.
The Credit Facility matures on May 30, 2000 and bears interest at a
floating rate of interest based on the lender's base rate or LIBOR. The 1997
Notes mature on May 30, 2004 and bear interest at a rate of 12.0%. The
Redemption Note matures on December 31, 1998 and bears interest at an effective
rate of 10.8%. The HiFi Buys Note matures on June 1, 2000 and bears interest at
a rate of 9.5%. The Company has received a commitment letter from BankBoston,
N.A., as agent for itself and other potential lenders (collectively, the "New
Credit Lenders") to provide a new credit facility in the amount of $30.0 million
effective upon consummation of the Offering (the "New Credit Facility") which
will be used first to refinance any remaining indebtedness under the Credit
Facility after application of proceeds of the Offering. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."
Pending use as described above, any remaining net proceeds of the Offering
will be invested in investment-grade, interest-bearing instruments. The Company
will not receive any proceeds from the sale of Common Stock by the Selling
Stockholders.
DIVIDEND POLICY
Following the Offering, the Company does not anticipate paying any cash
dividends and intends to retain any earnings to finance expansion. Payment of
future dividends, if any, will depend upon the Company's results of operations,
financial condition, cash requirements and other factors deemed relevant by the
Company's Board of Directors. The Company's current Credit Facility contains,
and any future credit agreements, including the New Credit Facility, may
contain, restrictions on the payment of dividends by the Company.
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<PAGE> 18
CAPITALIZATION
The following table sets forth the pro forma capitalization of the Company
as of March 31, 1998, (i) on an actual basis; (ii) on a pro forma basis to
reflect the Reorganization and the automatic conversion of all outstanding
Preferred Stock into 2,566,561 shares of Common Stock upon the consummation of
the Offering and (iii) on a pro forma basis as adjusted to reflect the exercise
of warrants to purchase 259,856 shares of Common Stock upon the consummation of
the Offering and the application of the estimated net proceeds from the sale of
2,200,000 shares of Common Stock offered by the Company hereby assuming an
initial public offering price of $16.00 per share. This table should be read in
conjunction with the Company's Consolidated Financial Statements and the notes
thereto appearing elsewhere in this Prospectus.
<TABLE>
<CAPTION>
MARCH 31, 1998
-----------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
------- --------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
Short-term debt:
Current portion of long-term debt......................... $ 400 $ 400 $ --
======= ======= =======
Long-term debt:
Note payable to bank...................................... 15,100 15,100 979
Subordinated debt......................................... 16,208 16,208 --
------- ------- -------
Total long-term debt................................ $31,308 $31,308 $ 979
------- ------- -------
Redeemable convertible preferred stock:
Series A Convertible Preferred Stock, $.01 par value;
authorized, 4,000,000 shares; 1,700,136 shares issued
and outstanding, actual; no shares outstanding pro forma
and as adjusted (liquidation preference, $14,432,999 as
of March 31, 1998, actual).............................. 14,433 -- --
Series B Convertible Preferred Stock, $.01 par value;
authorized, 4,000,000 shares; 866,425 shares issued and
outstanding, actual; no shares outstanding pro forma and
as adjusted (liquidation preference $7,741,248 as of
March 31, 1998, actual)................................. 7,741 -- --
------- ------- -------
$22,174 $ -- $ --
------- ------- -------
Stockholders' equity:
Preferred Stock, $.01 par value, 10,000,000 shares
authorized(1), no shares issued and outstanding actual,
pro forma and as adjusted............................... $ -- $ -- $ --
Common stock, $.01 par value, 30,000,000 shares
authorized(1); 2,755,202 shares issued actual; 5,321,763
shares issued pro forma and 7,521,763 shares issued as
adjusted(2)............................................. 28 53 75
Additional paid-in capital................................ (2,732) 19,417 51,231
Retained earnings(3)(4)................................... 1,347 1,347 387
Note receivable from officer.............................. (32) (32) (32)
Treasury stock, 1,698,929 shares at cost actual and pro
forma and 1,439,073 shares as adjusted(3)(5)............ (1,550) (1,550) (2,003)
------- ------- -------
Total stockholders' equity (deficit).................... (2,939) 19,235 49,658
------- ------- -------
Total capitalization................................ $50,543 $50,543 $50,637
======= ======= =======
</TABLE>
- ---------------
(1) Reflects an increase in authorized shares to be effected prior to the
consummation of the Offering.
(2) Excludes 511,808 shares of Common Stock issuable upon exercise of warrants
outstanding at the date of this Prospectus, with a weighted average exercise
price of $2.13 per share. Also excludes 845,059 shares of Common Stock
issuable upon exercise of options outstanding at the date of this
Prospectus, with a weighted average exercise price of $3.97 per share. See
Notes 6 and 11 of Notes to Consolidated Financial Statements of the Company,
"Description of Capital Stock" and "Management -- Stock Plans."
(3) Assumes the exercise of warrants to purchase 259,856 shares of Common Stock
which the Company intends to issue from Treasury Stock.
(4) As adjusted reflects the writeoff of approximately $307,000 of deferred
financing costs in connection with the 1997 Notes and the accretion of debt
of approximately $292,000. See -- "Use of Proceeds."
(5) As adjusted reflects the impact of the $813,517 contingency payment due to
the holder of the Redemption Note upon consummation of the Offering. See
"Use of Proceeds."
16
<PAGE> 19
DILUTION
The net tangible book value of the Company's Common Stock at March 31, 1998
was a deficit of approximately $1.0 million, or approximately ($.28) per share
of Common Stock, after giving effect to the conversion of all outstanding
Preferred Stock. Net tangible book value per share is determined by dividing the
net tangible book value of the Company (total assets less goodwill and total
liabilities) by the number of outstanding shares of Common Stock (including
Preferred Stock). After giving effect to the sale of the shares of Common Stock
by the Company in the Offering, assuming an initial public offering price of
$16.00 per share and after deducting the estimated underwriting discounts and
commissions and expenses payable by the Company, the pro forma net tangible book
value of the Company as of March 31, 1998 would have been $30.8 million or $5.07
per share. This represents an immediate increase in pro forma net tangible book
value of $5.35 per share to existing stockholders and an immediate dilution to
new investors of $10.93 per share. The following table illustrates the per share
dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share............. $16.00
------
Net tangible book value per share as of March 31, 1998.... (.28)
Increase per share attributable to new investors.......... 5.35
-------
Pro forma net tangible book value per share after the
Offering.................................................. 5.07
------
Dilution per share to new investors(1)...................... $10.93
======
</TABLE>
- ---------------
(1) If all outstanding options and warrants at March 31, 1998 to acquire 845,059
and 511,808 shares of Common Stock, respectively, were exercised, in
addition to the Underwriters' exercise of their over-allotment option, the
pro forma net tangible book value per share after the Offering would be
$4.14, resulting in an immediate dilution of $11.86 per share to new
investors.
The following table summarizes on a pro forma basis as of March 31, 1998,
the differences between existing stockholders and new investors with respect to
the number of shares of Common Stock purchased from the Company, the total
consideration paid and the average price paid per share before deducting
estimated underwriting discounts and commissions and offering expenses payable
by the Company, assuming (i) the automatic conversion of the outstanding shares
of Preferred Stock into 2,566,561 shares of Common Stock and (ii) the exercise
of warrants to purchase 259,856 shares of Common Stock, each upon the
consummation of the Offering:
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
------------------- --------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
--------- ------- ----------- ------- ---------------
<S> <C> <C> <C> <C> <C>
Existing
stockholders(1)....... 3,882,690 63.8% $16,430,813 31.8% $ 4.23
New investors........... 2,200,000 36.2% $35,200,000 68.2% $16.00
--------- ----- ----------- -----
Total......... 6,082,690 100% $51,630,813 100%
========= ===== =========== =====
</TABLE>
- ---------------
(1) Of this amount, 510,000 shares will be sold in the Offering by Selling
Stockholders. Also, 259,856 of these shares will be issued upon the exercise
of existing warrants which will be sold by certain Selling Stockholders in
the Offering. Sales by Selling Stockholders in this Offering will reduce the
number of shares of Common Stock held by existing stockholders to 3,372,690,
or approximately 55.4% and will increase the number of shares held by new
investors to 2,710,000, or approximately 44.6% of the total number of shares
of Common Stock outstanding after the Offering. See "Principal and Selling
Stockholders."
The computations in the tables set forth above exclude 511,808 shares of
Common Stock issuable upon exercise of warrants outstanding at the date of this
Prospectus with a weighted average exercise price of $2.13 per share, and
exclude 845,059 shares of Common Stock issuable upon exercise of options
outstanding at the date of this Prospectus with a weighted average exercise
price of $3.97 per share. To the extent any of these warrants and options are
exercised, there will be further dilution to new investors and the percentage
ownership of new investors will decrease. See Notes 6 and 11 of Notes to
Consolidated Financial Statements of the Company, "Capitalization," "Description
of Capital Stock," and "Management -- Stock Plans."
17
<PAGE> 20
SELECTED CONSOLIDATED FINANCIAL AND OPERATING DATA
(IN THOUSANDS, EXCEPT PER SHARE AND NUMBER OF STORES DATA)
Set forth below is selected financial and operating data for, and as of the
end of, each of the five years ended September 30, 1997, and for the six months
ended March 31, 1997 and March 31, 1998, respectively. The selected statement of
operations and balance sheet data for each of the five years ended September 30,
1997 have been derived from financial statements of the Company, which have been
audited by its independent auditors. The balance sheets as of September 30,
1996, September 30, 1997 and March 31, 1998, and the related statements of
income, stockholders' equity (deficit), and cash flows for each of the three
years in the period ended September 30, 1997 and the six month period ended
March 31, 1998, and the audit report thereon, are included elsewhere in this
Prospectus. The financial data for the six months ended March 31, 1997 has been
derived from unaudited financial statements of the Company and reflect all
adjustments, consisting only of normal recurring accruals, that the Company
considers necessary for a fair presentation of the financial position and
results of operations for this period. The information set forth below should be
read in conjunction with "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the Company's Consolidated Financial
Statements and the Notes thereto included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
FISCAL YEARS ENDED SEPTEMBER 30, MARCH 31,
------------------------------------------------ -------------------------
1993 1994 1995 1996(1) 1997(2) 1997 1998
------- ------- ------- ------- -------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Total revenue........................ $38,200 $47,401 $60,121 $80,607 $132,525 $60,583 $129,129
Cost of sales........................ 25,193 30,912 39,167 51,816 86,315 39,181 84,280
------- ------- ------- ------- -------- ------- --------
Gross profit....................... $13,007 $16,489 $20,954 $28,791 $ 46,210 $21,402 $ 44,849
Selling expenses..................... 10,269 12,504 15,404 21,993 35,568 14,797 30,208
Corporate, general and administrative
expenses........................... 2,663 2,576 3,247 4,716 8,102 3,793 5,387
Amortization of goodwill............. 65 65 65 129 487 120 456
------- ------- ------- ------- -------- ------- --------
Income from operations............. $ 10 $ 1,344 $ 2,238 $ 1,953 $ 2,053 $ 2,692 $ 8,798
Interest expense..................... 631 426 629 617 1,808 513 1,610
------- ------- ------- ------- -------- ------- --------
Income before taxes.................. $ (621) $ 918 $ 1,609 $ 1,336 $ 245 $ 2,179 $ 7,188
Income tax expense (benefit)......... -- -- (174) (453) 99 876 2,875
------- ------- ------- ------- -------- ------- --------
Net income (loss).................... $ (621) $ 918 $ 1,783 $ 1,789 $ 146 $ 1,303 $ 4,313
======= ======= ======= ======= ======== ======= ========
Basic earnings (loss) per share...... $ (0.18) $ 0.27 $ 0.53 $ 0.39 $ (1.20) $ 0.24 $ 1.63
======= ======= ======= ======= ======== ======= ========
Diluted earnings (loss) per share.... $ (0.18) $ 0.27 $ 0.53 $ 0.38 $ (1.20) $ 0.23 $ 0.93
======= ======= ======= ======= ======== ======= ========
Pro forma income tax expense
(benefit) (actual in 1997 and
1998)(3)........................... (248) 371 661 550 99 876 2,875
Pro forma net income (loss) before
accretion of preferred stock
dividends.......................... $ (373) $ 547 $ 948 $ 786 $ 147 $ 1,303 $ 4,313
======= ======= ======= ======= ======== ======= ========
Pro forma net income (loss) available
to common shareholders............. $ (373) $ 547 $ 948 $ (250) $ (2,010) $ 401 $ 2,729
======= ======= ======= ======= ======== ======= ========
Pro forma diluted earnings (loss) per
share(4)........................... $ (0.11) $ 0.16 $ 0.28 $ (0.13) $ (1.20) $ 0.23 $ 0.93
======= ======= ======= ======= ======== ======= ========
Weighted average dilutive shares
outstanding(4)..................... 3,371 3,371 3,371 1,940 1,673 1,715 4,616
======= ======= ======= ======= ======== ======= ========
Supplemental pro forma diluted
earnings per common share(5)....... $ 0.25 $ 0.77
======== ========
OTHER STORE DATA:
Store contribution(6)................ $ 2,738 $ 3,985 $ 5,550 $ 6,798 $ 10,642 $ 6,605 $ 14,641
Stores open at beginning of period... 13 14 16 18 33 33 47
New stores........................... 1 2 2 2 4 2 3
Relocated stores..................... 0 1 1 1 1 1 2
Closed stores........................ 0 0 0 0 0 0 0
Acquired stores...................... 0 0 0 13 10 0 0
Stores open at end of period......... 14 16 18 33 47 35 50
BALANCE SHEET DATA:
Working capital...................... $ 1,617 $ 835 $ 1,590 $ 1,897 $ 11,857 $ 2,281 $ 16,283
Total assets......................... 9,367 12,562 15,162 38,619 78,688 42,107 84,676
Long term debt, excluding current
portion............................ 9,057 7,955 8,705 10,700 30,875 9,975 31,308
Redeemable convertible preferred..... -- -- -- 11,597 20,591 12,496 22,174
Stockholder's equity (deficit)....... (5,039) (4,122) (2,457) (3,984) (5,669) (3,580) (2,939)
</TABLE>
(footnotes following Other Store Data)
18
<PAGE> 21
OTHER STORE DATA
(IN THOUSANDS, EXCEPT OPERATING DATA)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
FISCAL YEARS ENDED SEPTEMBER 30, MARCH 31,
----------------------------------------------- ---------------------
1993 1994 1995 1996 1997 1997 1998
------- ------- ------- ------- ------- ----------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
TWEETER DATA:
Total revenue.................. $38,200 $47,401 $60,121 $68,577 $74,049 $40,801 $54,690
Store contribution(3).......... 2,738 3,985 5,550 7,089 6,338 4,558 7,178
Store contribution margin...... 7.2% 8.4% 9.2% 10.3% 8.6% 11.2% 13.1%
Stores open at beginning of
period....................... 13 14 16 18 20 20 22
New stores..................... 1 2 2 2 2 2 1
Relocated stores............... 0 1 1 1 1 1 2
Closed stores.................. 0 0 0 0 0 0 0
Stores open at end of period... 14 16 18 20 22 22 23
BRYN MAWR DATA:
Total revenue.................. $12,030 $35,432 $19,782 $28,359
Store contribution(3).......... (291) 2,414 2,047 2,589
Store contribution margin...... -2.4% 6.8% 10.4% 9.1%
Stores open at beginning of
period....................... 0 13 13 15
New stores..................... 0 2 0 2
Relocated stores............... 0 0 0 0
Closed stores.................. 0 0 0 0
Acquired stores................ 13 0 0 0
Stores open at end of period... 13 15 13 17
HIFI BUYS DATA:
Total revenue.................. $23,044 $46,080
Store contribution(3).......... 1,890 4,874
Store contribution margin...... 8.2% 10.6%
Stores open at beginning of
period....................... 0 10
New stores..................... 0 0
Relocated stores............... 0 0
Closed stores.................. 0 0
Acquired stores................ 10 0
Stores open at end of period... 10 10
CONSOLIDATED DATA:
Corporate, general and
administrative expenses...... $ 2,663 $ 2,576 $ 3,247 $ 4,716 $ 8,102 $ 3,793 $ 5,420
Amortization of goodwill....... 65 65 65 129 487 120 423
------- ------- ------- ------- ------- ------- -------
Income from operations......... $ 10 $ 1,344 $ 2,238 $ 1,953 $ 2,053 $ 2,692 $ 8,798
======= ======= ======= ======= ======= ======= =======
COMPARABLE STORE SALES DATA:(7)
Tweeter........................ 2.8% 11.2% 12.5% 1.6% -4.5% -7.7% 31.1%
Bryn Mawr...................... 36.9% 4.7% 9.0% 15.0%
HiFi Buys...................... -29.9% -13.1%
Consolidated................... 2.8% 11.2% 12.5% 5.6% -7.2% -2.3% 8.2%
</TABLE>
- ---------------
(1) Includes results of the Bryn Mawr Acquisition from May 13, 1996, which was
accounted for using the purchase method. See Note 10 of Notes to the
Consolidated Financial Statements of the Company.
(2) Includes results of the HiFi Buys Acquisition from May 30, 1997, which was
accounted for using the purchase method. See Note 10 of Notes to the
Consolidated Financial Statements of the Company.
(3) The Company operated as an S corporation through November 1995 and was not
subject to federal and certain state corporate income taxes. In connection
with the recapitalization that occurred on November 26, 1995, the Company
revoked its S election, and became subject to taxation as a C corporation.
The pro forma information has been computed as if the Company were subject
to Federal and all applicable state income taxes for each of the periods
presented, assuming the Company had been taxed as a C corporation. The
Company recorded an income tax benefit of $173,000 and $453,000 for the
fiscal years ended September 30, 1995 and 1996, respectively.
19
<PAGE> 22
(4) Weighted average shares outstanding includes Preferred Stock, when dilutive,
and also takes into account nominal issuances of certain warrants in 1997
for all periods presented and dilutive potential common shares (common stock
options and warrants), where applicable.
(5) Supplemental pro forma diluted earnings per common share is based on pro
forma net income (loss) available to common shareholders, increased to give
effect to the HiFi Buys Acquisition as if it had occurred on October 1, 1996
and the reduction in interest costs of $1,014,000 for the fiscal year ended
September 30, 1997 and $918,000 for the six months ended March 31, 1998 (net
of the applicable income taxes), which would have resulted assuming the
application of a portion of the net proceeds from the Offering were used to
repay certain indebtedness of the Company (See "Use of Proceeds"). It also
assumes conversion of Preferred Stock as of October 1, 1996, thus
eliminating Preferred Stock dividends of approximately $2,157,000 and
$1,584,000 for the year ended September 30, 1997 and the six months ended
March 31, 1998, respectively. The denominator of the equation also reflects
the issuance of new common shares and the conversion of the Preferred Stock
to common shares.
(6) Refers to gross profit after deducting selling expenses including labor,
advertising, store level operations and pre-opening expenses. Store
contribution is presented to provide additional information about the
Company and is commonly used as a performance measurement by retail
companies. Store contribution should not be considered in isolation or as a
substitute for operating income, cash flow from operating activities and
other income or cash flow data prepared in accordance with generally
accepted accounting principles, or as a measure of the Company's
profitability or liquidity. There can be no assurance that the Company's
calculation of store contribution is comparable to similarly titled items
reported by other companies.
(7) Stores are included in the comparable store base after they are in operation
for 12 full months. Acquired stores are included if the store was open for
12 full months as of the date of acquisition and the related figures are
based on the acquired company's financial statements. Remodeled or relocated
stores are excluded from the comparable store base until they have completed
12 full months of operation from the date the remodeling was completed, or
re-opened after relocation.
20
<PAGE> 23
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
The Company is a specialty retailer of mid to high-end audio and video
consumer electronics under the Tweeter, Bryn Mawr and HiFi Buys names. The
Company opened its first Tweeter store in New England in 1972. Over 26 years,
the Company has refined its retail concept to meet the needs of consumers
seeking brand name products with advanced features, functionality and
performance which the Company sells through its highly trained,
relationship-driven sales force. The Company believes that its effective
merchandising and superior customer service has enabled it to generate
substantial customer loyalty. Approximately 40% of customers who purchased from
Tweeter stores in the six months ended March 31, 1998 had previously purchased
products from the Company within the prior two fiscal years.
In 1995, the Company adopted an aggressive growth strategy (i) to open new
stores in current regional markets and relocate certain stores to more favorable
sites and (ii) to selectively pursue acquisitions in new regional markets and
achieve operating improvements by converting the acquired company to the
Company's core operating model and leveraging distribution, marketing and
corporate infrastructure. To support this growth strategy, the Company obtained
equity investments in fiscal 1996 of approximately $10.6 million, net of
issuance costs, from a group of investors led by Weston Presidio and Advent
International (the "1996 Investors"). In May 1996, the Company completed the
Bryn Mawr Acquisition. In May 1997, the Company raised an additional $21.5
million, net of issuance costs, comprised of $6.8 million of equity and $14.7
million of subordinated debt from the 1996 Investors and a new group of
investors, including PNC Capital Corp. The proceeds were used primarily to
finance the HiFi Buys Acquisition. Both acquisitions were accounted for by the
purchase method of accounting. By December 31, 1997, the Company had grown to 50
stores.
The Company seeks to increase sales, profitability and asset productivity
at acquired companies by converting them to the Company's standard operating
model with enhanced training for sales personnel, superior customer service,
improved merchandising focused on higher-end audio and video products and more
stringent operating controls. The Company has aggressively expanded its
corporate infrastructure over the past two years to support anticipated higher
levels of growth, including expanding its management team with the addition of
senior financial, information systems and buying personnel. Enhancements were
also made to its management information systems with the addition of a new
mainframe and operating platform, and to its distribution and administrative
infrastructure to enable the Company to support all three regions on an
integrated basis.
Prior to their acquisition by the Company, both Bryn Mawr and HiFi Buys
operated at substantially lower store contribution margins than the Company's
existing operations. Consequently, the Company's results were adversely impacted
in fiscal 1996 and 1997 following each of these acquisitions as the Company
converted acquired stores to its operating model. The impact was exacerbated by
the timing of the acquisitions that resulted in the peak, holiday sales period
being excluded from the operations of the acquired stores during the year of the
acquisition.
BRYN MAWR
Subsequent to the Bryn Mawr Acquisition, the Company implemented a variety
of strategic initiatives to convert Bryn Mawr to its core operating model. These
initiatives were primarily focused on increasing sales and gross margin, rather
than reducing operating expenses, in order to improve store contribution. These
initiatives included: (i) increasing advertising expenditures during the quarter
following the acquisition and refocusing advertising to emphasize radio,
television and direct marketing rather than print, (ii) implementing the
Company's every day competitive pricing and Automatic Price Protection programs,
(iii) initiating a substantial sales associate training
21
<PAGE> 24
program to improve product knowledge and enhance relationship selling skills and
(iv) focusing the sales staff on higher margin products, particularly audio
products.
Primarily as a result of these initiatives, comparable store sales
increased 36.9% at Bryn Mawr during the period from the acquisition, May 13,
1996, through September 30, 1996 versus the same period for the prior year.
Comparable store sales at Bryn Mawr increased 4.7% during fiscal 1997 and 15.0%
during the six months ended March 31, 1998. On a pro forma basis, assuming the
completion of the Bryn Mawr Acquisition as of October 1, 1995, store
contribution increased to 6.8% in fiscal 1997 from 3.1% in fiscal 1996. Bryn
Mawr store contribution margin fell to 9.1% in the six months ended March 31,
1998 from 10.4% in the prior year period primarily due to preopening expenses
incurred to open two new stores in the six months ended March 31, 1998 as well
as start up sales levels at those two stores and two additional stores opened in
May and June of 1997. The Company incurred preopening expenses of approximately
$68,900 in connection with the two stores opened in the six months ended March
31, 1998. Excluding preopening expenses, store contribution margin for the 13
stores open throughout both periods rose to 10.8% in the six months ended March
31, 1998.
The following table sets forth total revenues in thousands and store
contribution as a percentage of total revenues for Bryn Mawr on a stand-alone
basis:
<TABLE>
<CAPTION>
PRO FORMA SIX MONTHS ENDED
12 MONTHS ENDED 12 MONTHS ENDED -------------------------------
SEPTEMBER 30, 1996(1) SEPTEMBER 30, 1997 MARCH 31, 1997 MARCH 31, 1998
--------------------- ------------------ -------------- --------------
<S> <C> <C> <C> <C>
Total revenue............ $33,525 $35,432 $19,782 $28,359
Store contribution....... 3.1% 6.8% 10.4% 9.1%
</TABLE>
- ---------------
(1) The pro forma results are presented as if the Bryn Mawr Acquisition had
occurred on October 1, 1995 and reflect the results of Bryn Mawr for a
period under prior ownership. The pro forma results are based upon available
information from the prior owner's financial statements and certain
assumptions that the Company believes are reasonable under the
circumstances. The pro forma results are not necessarily indicative of what
the Company's results would have been for the period had the Company
completed the Bryn Mawr Acquisition as of the date indicated.
HIFI BUYS
As with the Bryn Mawr Acquisition, the Company initiated a series of
strategic initiatives subsequent to the HiFi Buys Acquisition. In contrast to
Bryn Mawr, these initiatives combined a planned decrease of revenue with a
planned increase in gross margin and a substantial decrease in operating
expenses to generate increased store contribution. Specifically, the Company (i)
adjusted the merchandise mix to increase the proportion of mid and high-end
products and reduce the number of lower margin introductory products, (ii)
altered store employee compensation to reduce the emphasis on promotional sales
and focus incentives on gross margin and store contribution, (iii) reduced
marketing expenditures and shifted marketing emphasis from promotional
advertising toward the Company's traditional relationship selling and every day
competitive price message, (iv) converted the advertising program to emphasize
electronic advertising and direct mail marketing as opposed to print media, (v)
implemented the Automatic Price Protection program and (vi) eliminated $2.4
million of overhead by centralizing accounting, purchasing and other support
infrastructure.
Primarily as a result of these initiatives, the Company experienced a
planned decline in comparable store sales of 29.9% during the period from the
acquisition, May 30, 1997, through September 30, 1997 versus the same period for
the prior year. In addition to the elimination of lower-end items from the
product mix and reduced advertising, the comparable store sales decline was
exacerbated by a relatively high sales level during June to September 1996 due
to the Olympic Games in Atlanta. Comparable store sales declined 13.1% in the
six months ended March 31, 1998 at HiFi Buys, and the Company expects such
declines to continue through at least the quarter ended December 31, 1998 as it
implements its operating strategy. Pro forma for the HiFi Buys Acquisition
22
<PAGE> 25
as of October 1, 1996, store contribution improved to 10.6% in the six months
ended March 31, 1998 from 8.0% in the prior year period.
The following table sets forth total revenues in thousands and store
contribution as a percentage of total revenues for HiFi Buys on a stand-alone
basis:
<TABLE>
<CAPTION>
PRO FORMA
SIX MONTHS ENDED SIX MONTHS ENDED
MARCH 31, 1997(1) MARCH 31, 1998
----------------- -----------------
<S> <C> <C>
Total revenue................................... $52,450 $46,080
Store contribution.............................. 8.0% 10.6%
</TABLE>
- ---------------
(1) The pro forma results are presented as if the HiFi Buys Acquisition had
occurred on October 1, 1996 and reflect the results of HiFi Buys for a
period under prior ownership. The pro forma results are based upon available
information from the prior owner's financial statements and certain
assumptions that the Company believes are reasonable under the
circumstances. The pro forma results are not necessarily indicative of what
the Company's results would have been for the period had the Company
completed the HiFi Buys Acquisition as of the date indicated.
RESULTS OF OPERATIONS
The following table is derived from Selected Financial Data and sets forth,
for the periods indicated, the actual amounts, in thousands, of certain income
and expense items and their percentages relative to total revenue:
<TABLE>
<CAPTION>
FISCAL YEARS ENDED SIX MONTHS ENDED
SEPTEMBER 30, MARCH 31,
--------------------------- -------------------------
1995 1996 1997 1997 1998
----- ----- ----- ----------- -----------
<S> <C> <C> <C> <C> <C>
Total revenue............................................. 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of sales............................................. 65.1% 64.3% 65.1% 64.7% 65.3%
Gross profit............................................ 34.9% 35.7% 34.9% 35.3% 34.7%
Selling expenses.......................................... 25.6% 27.3% 26.8% 24.4% 23.4%
Corporate, general and administrative expenses............ 5.4% 5.9% 6.1% 6.3% 4.2%
Amortization of goodwill.................................. 0.1% 0.2% 0.4% 0.2% 0.3%
----- ----- ----- ----- -----
Income from operations.................................. 3.7% 2.4% 1.5% 4.4% 6.8%
Interest expense.......................................... 1.0% 0.8% 1.4% 0.8% 1.2%
----- ----- ----- ----- -----
Income before income taxes................................ 2.7% 1.7% 0.2% 3.6% 5.6%
Income tax expense (benefit).............................. -0.3% -0.6% 0.1% 1.4% 2.2%
----- ----- ----- ----- -----
Net income................................................ 3.0% 2.2% 0.1% 2.2% 3.3%
===== ===== ===== ===== =====
</TABLE>
SIX MONTHS ENDED MARCH 31, 1998 AS COMPARED TO SIX MONTHS ENDED MARCH 31, 1997
Total Revenue. Total revenue includes delivered sales, completed service
center work orders, insurance replacement and corporate sales. Total revenue
increased $68.5 million, or 113.1%, to $129.1 million in the six months ended
March 31, 1998 from $60.6 million for the six months ended March 31, 1997. The
increase was mainly comprised of $46.1 million from the HiFi Buys Acquisition,
$7.9 million from other new stores, and $13.5 million comparable store sales
growth. Comparable store sales increased by 8.2%, made up of a 31.1% increase at
Tweeter, a 15.0% increase at Bryn Mawr and a planned 13.1% decrease at HiFi
Buys. The exit from the New England market of certain competing retail chains
has had a favorable impact on comparable store sales at Tweeter, while the
increase at Bryn Mawr primarily resulted from the conversion to the Company's
operating model. The decrease in HiFi Buys comparable store sales was primarily
due to the planned elimination of entry level products and a decrease in
associated promotional advertising.
Gross Profit. Cost of sales includes merchandise, net delivery costs,
distribution costs, purchase discounts and vendor volume rebates. Cost of sales
increased $45.1 million, or 115.1%, to $84.3 million in the six months ended
March 31, 1998 from $39.2 million in the six months ended March 31, 1997. Gross
profit increased $23.4 million, or 109.6%, to $44.8 million in the six months
ended March 31, 1998 from $21.4 million for the six months ended March 31, 1997.
The gross margin decreased to 34.7% of total revenues in the six months ended
March 31, 1998 from 35.3% for
23
<PAGE> 26
the prior year period. The decrease was primarily due to the inclusion of HiFi
Buys' insurance replacement and corporate sales business, which operates at a
lower margin than the Company's core retail product sales. The insurance
replacement business provides merchandise replacement services for the customers
of major insurance companies and also includes a corporate sales department that
sells in bulk quantity to institutions such as hospitals and hotels.
Additionally, this business acts as an order fulfillment house for catalog
companies. For the six months ended March 31, 1998, insurance replacement
revenues were $5.9 million with a gross margin of 14.7%. This was offset by an
increase in volume-related vendor rebates. Excluding the HiFi Buys insurance
replacement and corporate sales business, gross margin for the Company would
have been 35.6%. Gross margin increased at Tweeter and Bryn Mawr in the six
months ended March 31, 1998 over the prior year period.
Selling Expenses. Selling expenses include the compensation of store
personnel, occupancy, store level depreciation, advertising, preopening expenses
and bank fees and exclude corporate overhead. Selling expenses increased $15.4
million, or 104.1%, to $30.2 million in the six months ended March 31, 1998 from
$14.8 million for the six months ended March 31, 1997. The increase was
principally associated with advertising, commissions related to increased sales,
fees related to third party private label credit card promotions, rent and
personnel costs associated with the stores acquired in the HiFi Buys
Acquisition. As a percentage of total revenue, selling expenses declined to
23.4% for the six months ended March 31, 1998 from 24.4% in the prior year
period. This decline was primarily the result of increased revenue at Tweeter
and the inclusion of the HiFi Buys stores which have lower advertising expenses
as a percentage of revenue than the Company's other stores due to their
concentration in the Atlanta, Georgia market. Also, the HiFi Buys insurance
replacement business generates significant revenues with reduced store level
expenses.
Corporate, General and Administrative Expenses. Corporate, general and
administrative expenses include the costs of purchasing, accounting, information
systems, human resources, training, executive officers and related support
functions. Corporate, general and administrative expenses for the six months
ended March 31, 1998 increased 42.0% to $5.4 million from $3.8 million for the
six months ended March 31, 1997. As a percentage of total revenue, corporate,
general and administrative expenses decreased to 4.2% for the six months ended
March 31, 1998 from 6.3% for the prior year period as the Company benefited from
a larger sales base. The Company believes that corporate, general and
administrative expenses as a percentage of total revenue in future comparable
periods will be consistent with the results achieved during the most recent six
months.
Amortization of Goodwill. Amortization of goodwill increased to $455,913
for the six months ended March 31, 1998 from $119,562 for the six months ended
March 31, 1997. This increase is attributable to the additional goodwill
recorded in connection with the HiFi Buys Acquisition.
Interest Expense. Interest expense increased to $1.6 million for the six
months ended March 31, 1998 from $513,520 for the six months ended March 31,
1996 due primarily to the increased debt incurred to fund the HiFi Buys
Acquisition.
Income Taxes. For a discussion of changes in the Company's effective tax
rate, see Note 9 to Consolidated Financial Statements of the Company.
FISCAL YEAR ENDED SEPTEMBER 30, 1997 AS COMPARED TO FISCAL YEAR ENDED
SEPTEMBER 30, 1996
Total Revenue. Total revenue increased $51.9 million, or 64.4%, to $132.5
million in fiscal 1997 from $80.6 million in fiscal 1996. The increase was due
to $23.0 million in revenues associated with the HiFi Buys Acquisition as well
as a full year of revenue from stores acquired in May 1996 in the Bryn Mawr
Acquisition. Additionally comparable store sales increased 4.7% at the Company's
Bryn Mawr stores. Total revenue increased 8.0% at the Tweeter stores, all of
which came from new stores as comparable store sales decreased 4.5% during
fiscal 1997 versus the prior year. The Company believes that the decline in
comparable store sales was due to general weakness in the consumer electronics
industry and a less effective marketing campaign for the first half of the
fiscal year.
24
<PAGE> 27
Gross Profit. Cost of sales increased $34.5 million, or 66.6%, to $86.3
million in fiscal 1997 from $51.8 million in fiscal 1996. Gross profit increased
$17.4 million, or 60.5%, to $46.2 million in fiscal 1997 from $28.8 million in
fiscal 1996. Gross margin declined to 34.9% in fiscal 1997 from 35.7% in fiscal
1996. The decline was due to the impact of the gross margin at HiFi Buys, which
was lower than the gross margin at the Tweeter and Bryn Mawr stores. The Company
also incurred lower gross margin at Tweeter due to a reduction in vendor rebates
resulting from lower than expected sales volume and an increase in the
percentage of lower margin video products sold. Gross margin increased at Bryn
Mawr as the Company converted the stores to its operating model.
Selling Expenses. Selling expenses increased $13.6 million, or 61.7%, to
$35.6 million in fiscal 1997 from $22.0 million in fiscal 1996. As a percentage
of total revenue, selling expenses decreased to 26.8% in fiscal 1997 from 27.3%
in fiscal 1996. The improvement in selling expenses as a percentage of revenue
is a result of having the Bryn Mawr stores for the full year including the peak
holiday selling season.
Corporate, General and Administrative Expenses. Corporate, general and
administrative expenses increased $3.4 million, or 71.8%, to $8.1 million in
fiscal 1997 from $4.7 million in fiscal 1996. The increase was the result of
investment in corporate infrastructure including the addition of purchasing,
accounting and information systems staff in conjunction with the Bryn Mawr and
HiFi Buys acquisitions and the Company's accelerated growth strategy. As a
percentage of total revenue, corporate general and administrative expenses
increased to 6.1% in fiscal 1997 from 5.9% in fiscal 1996 due to lower than
anticipated sales and the timing of the HiFi Buys Acquisition.
Amortization of Goodwill. Amortization of goodwill increased to $487,084
for fiscal 1997 from $129,273 for fiscal 1996. This increase is attributable to
the additional goodwill recorded in connection with the HiFi Buys Acquisition,
as well as a full year of goodwill amortization from the Bryn Mawr Acquisition.
Interest Expense. Interest expense for fiscal 1997 increased $1.2 million
to $1.8 million in fiscal 1997 from $616,879 in fiscal 1996. This increase was
due to the issuance of the $15.0 million senior subordinated notes, the proceeds
of which were used for the HiFi Buys Acquisition, as well as increased
borrowings on the Company's revolving line of credit. As a percentage of total
revenue, interest expense increased to 1.4% in fiscal 1997 from 0.8% in fiscal
1996.
Income Taxes. For a discussion of changes in the Company's effective tax
rate see Note 9 to Consolidated Financial Statements of the Company.
FISCAL YEAR ENDED SEPTEMBER 30, 1996 AS COMPARED TO FISCAL YEAR ENDED
SEPTEMBER 30, 1995
Total Revenue. Total revenue increased $20.5 million, or 34.1%, to $80.6
million in fiscal 1996 from $60.1 million in fiscal 1995. Approximately $12.0
million of the increase was due to the inclusion of a partial year of revenues
associated with the Bryn Mawr Acquisition. Revenue increased $8.5 million, or
14.1%, at the Tweeter stores, principally due to revenue from new stores.
Comparable store sales increased 1.6% at the Tweeter stores due primarily to the
general weakness of the consumer electronics industry. Comparable store sales
increased 36.9% at the Bryn Mawr stores following the Bryn Mawr Acquisition.
Gross Profit. Cost of sales increased $12.6 million, or 32.3%, to $51.8
million in fiscal 1996 from $39.2 million in fiscal 1995. Gross profit increased
$7.8 million, or 37.4%, to $28.8 million in fiscal 1996 from $21.0 million in
fiscal 1996. Gross margin increased to 35.7% in fiscal 1996 from 34.9% in fiscal
1995 principally due to the vendor rebates earned from the increased volume and
the leveraging of distribution costs.
Selling Expenses. Selling expenses increased $6.6 million, or 42.8%, to
$22.0 million in fiscal 1996 from $15.4 million in fiscal 1995. As a percentage
of sales, selling expenses increased to 27.3% in fiscal 1996 from 25.6% in
fiscal 1995. The increase was due to the continued growth in the number of
Tweeter stores, as well as the timing of the Bryn Mawr Acquisition.
25
<PAGE> 28
Corporate, General and Administrative Expenses. Corporate, general and
administrative expenses increased $1.5 million, or 45.3% to $4.7 million in
fiscal 1996 from $3.2 million in fiscal 1995. The increase was due to investment
in infrastructure to support the Company's growth strategy including additions
to its purchasing, training and accounting staff. The Company also entered into
an operating lease for new information systems equipment. As a percentage of
total revenue, corporate, general and administrative expense increased to 5.9%
in fiscal 1996 from 5.4% in fiscal 1995. In addition to investment in
infrastructure, the Company incurred expenses in anticipation of and following
the Bryn Mawr Acquisition, while not benefiting from inclusion of revenue from
the acquired stores during the peak holiday selling season.
Amortization of Goodwill. Amortization of goodwill increased to $129,273
for fiscal 1996 from $65,268 for fiscal 1995. This increase is attributable to
the additional goodwill recorded in connection with the Bryn Mawr Acquisition.
Interest Expense. Interest expense remained constant at $616,879 in fiscal
1996 and $628,700 in fiscal 1995. Interest expense as a percentage of total
revenues decreased to 0.8% in fiscal 1996 from 1.0% in fiscal 1995 as the
Company leveraged expenses over a larger revenue base.
Income Taxes. For a discussion of changes in the Company's effective tax
rate see Note 9 to Consolidated Financial Statements of the Company.
SEASONALITY AND QUARTERLY RESULTS
The Company's business is subject to seasonal variations. Historically, the
Company has realized a significant portion of its total revenue and net income
for the year during the first and fourth fiscal quarters, with a majority of net
income for such quarters realized in the first fiscal quarter. Due to the
importance of the holiday shopping season, any factors negatively impacting the
holiday selling season could have a material adverse effect on the Company's
financial condition and results of operations. The Company's quarterly results
of operations may also fluctuate significantly due to a number of factors,
including the timing of new store openings and acquisitions and unexpected
changes in volume-related rebates from manufacturers. In addition, operating
results may be negatively affected by increases in merchandise costs, price
changes in response to competitive factors and unfavorable local, regional or
national economic developments that result in reduced consumer spending.
The following tables set forth certain quarterly financial data in
thousands and percentages of total revenue for the ten quarters ended March 31,
1998. The quarterly information is unaudited but has been prepared on the same
basis as the audited financial statements included elsewhere in this Prospectus.
In the opinion of management, all necessary adjustments (consisting only of
normal recurring adjustments) have been included to present fairly the unaudited
quarterly results when read in conjunction with the Consolidated Financial
Statements of the Company and Notes thereto included elsewhere in this
Prospectus. The results of operations for any quarter are not necessarily
indicative of the results for any future period. See "Risk
Factors -- Seasonality and Quarterly Fluctuations."
26
<PAGE> 29
<TABLE>
<CAPTION>
THREE MONTHS ENDED
----------------------------------
DECEMBER 31, MARCH 31,
1997 1998
--------------- ---------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Total revenue.................. $74,617 100.0% $54,512 100.0%
Cost of sales.................. 49,236 66.0% 35,044 64.3%
------- ----- ------- -----
Gross profit................. 25,381 34.0% 19,468 35.7%
Selling expenses............... 16,390 22.0% 13,818 25.3%
Corporate, general and
administrative expenses...... 2,617 3.5% 2,771 5.1%
Amortization of goodwill....... 221 0.3% 235 0.4%
------- ----- ------- -----
Income from operations....... 6,153 8.2% 2,644 4.9%
Interest expense............... 865 1.2% 745 1.4%
------- ----- ------- -----
Income before income taxes..... 5,288 7.0% 1,899 3.5%
Income tax expense............. 2,115 2.8% 760 1.4%
------- ----- ------- -----
Net income..................... $ 3,173 4.2% $ 1,139 2.1%
======= ===== ======= =====
Stores open at beginning of
period....................... 47 50
New stores..................... 3 0
Relocated stores............... 2 0
Closed stores.................. 0 0
Acquired stores................ 0 0
Stores open at end of period... 50 50
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED
------------------------------------------------------------------------
DECEMBER 31, MARCH 31, JUNE 30, SEPTEMBER 30,
1996 1997 1997(1) 1997(1)
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Total revenue.................. $34,988 100.0% $25,595 100.0% $28,211 100.0% $43,731 100.0%
Cost of sales.................. 22,688 64.8% 16,493 64.4% 18,552 65.8% 28,582 65.4%
------- ----- ------- ----- ------- ----- ------- -----
Gross profit................. 12,300 35.2% 9,102 35.6% 9,659 34.2% 15,149 34.6%
Selling expenses............... 7,927 22.7% 6,870 26.8% 8,160 28.9% 12,611 28.8%
Corporate, general and
administrative expenses...... 1,775 5.0% 2,018 8.0% 2,069 7.4% 2,240 5.1%
Amortization of goodwill....... 60 0.2% 60 0.2% 122 0.4% 245 0.6%
------- ----- ------- ----- ------- ----- ------- -----
Income (loss) from
operations................. 2,538 7.3% 154 0.6% (692) -2.5% 53 0.1%
Interest expense............... 274 0.8% 239 0.9% 473 1.7% 822 1.9%
------- ----- ------- ----- ------- ----- ------- -----
Income (loss) before income
taxes........................ 2,264 6.5% (85) -0.3% (1,165) -4.2% (769) -1.8%
Income tax expense (benefit)... 914 2.6% (38) -0.1% (467) -1.7% (310) -0.7%
------- ----- ------- ----- ------- ----- ------- -----
Net income (loss).............. $ 1,350 3.9% $ (47) -0.2% $ (698) -2.5% $ (459) -1.1%
======= ===== ======= ===== ======= ===== ======= =====
Stores open at beginning of
period....................... 33 35 35 47
New stores..................... 2 0 2 0
Relocated stores............... 0 1 0 0
Closed stores.................. 0 0 0 0
Acquired stores................ 0 0 10 0
Stores open at end of period... 35 35 47 47
</TABLE>
27
<PAGE> 30
<TABLE>
<CAPTION>
THREE MONTHS ENDED
---------------------------------------------------------------------
DECEMBER 31, MARCH 31, JUNE 30, SEPTEMBER 30,
1995 1996 1996(2) 1996(2)
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Total revenue..................... $22,991 100.0% $15,640 100.0% $18,004 100.0% $23,972 100.0%
Costs of sales.................... 14,718 64.0% 9,905 63.3% 11,446 63.6% 15,747 65.7%
------- ------- ------- -------
Gross profit.................... 8,273 36.0% 5,735 36.7% 6,558 36.4% 8,225 34.3%
Selling expenses.................. 4,917 21.4% 4,367 27.9% 5,698 31.6% 7,011 29.2%
Corporate, general and
administrative expenses......... 793 3.4% 854 5.5% 1,418 7.9% 1,651 6.9%
Amortization of goodwill.......... 16 0.1% 16 0.1% 32 0.2% 65 0.3%
------- ----- ------- ----- ------- ----- ------- -----
Income (loss) from operations... 2,547 11.1% 498 3.2% (590) -3.3% (502) -2.1%
Interest expense.................. 155 0.7% 108 0.7% 125 0.7% 229 1.0%
------- ----- ------- ----- ------- ----- ------- -----
Income (loss) before income
taxes........................... 2,392 10.4% 390 2.5% (715) -4.0% (731) -3.1%
Income tax expense (benefit)(3)... (26) -0.1% 160 1.0% (292) 1.6% (295) -1.2%
------- ----- ------- ----- ------- ----- ------- -----
Net income (loss)................. $ 2,418 10.5% $ 230 1.5% $ (423) -2.4% $ (436) -1.9%
======= ===== ======= ===== ======= ===== ======= =====
Stores open at beginning of
period.......................... 18 19 19 32
New stores........................ 1 0 0 1
Relocated stores.................. 0 1 0 0
Closed stores..................... 0 0 0 0
Acquired stores................... 0 0 13 0
Stores open at end of period...... 19 19 32 33
</TABLE>
- ---------------
(1) Includes results of the HiFi Buys Acquisition from May 30, 1997, which was
accounted for using the purchase method.
(2) Includes results of the Bryn Mawr Acquisition from May 13, 1996, which was
accounted for using the purchase method.
(3) The Company operated as an S Corporation through November 1995 and was not
subject to federal and certain state corporate income taxes. In connection
with the recapitalization that occurred on November 26, 1995, the Company
revoked its S election and became subject to taxation as a C Corporation,
effective October 1, 1995. This resulted in a deferred tax benefit of $1.0
million, which was recorded in the three months ended December 31, 1995.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash needs are primarily for working capital to support its
inventory requirements, selling and administrative expenses and capital
expenditures, pre-opening expenses and beginning inventory for new or relocated
stores. Additionally, the Company pursues an active acquisition strategy, and
capital needs arise as acquisition opportunities are pursued.
Historically, the Company's primary sources of financing have been net cash
from operations and borrowings under the Credit Facility. The Company's
acquisitions have also been funded through the sale of equity or subordinated
notes. At March 31, 1998 and March 31, 1997, the Company's working capital was
$16.3 million and $2.3 million, respectively. Cash provided by operations was
$1.8 million for the six months ended March 31, 1998, as compared to a use of
$400,000 in cash from operations in the six months ended March 31, 1997. This
increase is a result of $4.3 million in net income and an increase in accounts
payable and accrued expenses of $2.4 million, offset by increases in inventory
of $4.3 million and accounts receivable of $1.9 million.
At September 30, 1997 and September 30, 1996, working capital was $11.9
million and $1.9 million, respectively. During fiscal 1997, cash used in
operations was $6.2 million, principally due to a $6.5 million increase in
inventory and a $1.3 million increase in accounts receivable. These increases
were primarily due to the opening of new stores and relocation of existing
stores. Cash generated by operations in fiscal 1996 and 1995 was $500,000 and
$2.1 million, respectively. In these years, $2.4 million and $300,000,
respectively, was used to increase inventory levels.
Net cash used in investing activities during the six months ended March 31,
1998 and March 31, 1997 was approximately $1.3 million and $1.4 million,
respectively. During fiscal 1997, net cash used
28
<PAGE> 31
in investing activities was $23.5 million, including $19.5 million for the HiFi
Buys Acquisition. In addition, the Company used $4.0 million of cash in capital
expenditures, mainly to open four new stores and relocate one store. During
fiscal 1996, net cash used in investing activities was $11.2 million. Of that
amount, $8.4 million was used in the Bryn Mawr Acquisition and $2.9 million was
used to purchase property and equipment mainly associated with the opening of
two new stores and the relocation of one store. On March 25, 1998 the Company
entered into a purchase and sale agreement for a facility in Massachusetts that
will serve as its new corporate headquarters, service center and distribution
center in Massachusetts. The Company expects the purchase price and related
building improvements to be approximately $5.3 million, and expects to finance
the purchase with a mortgage of $4.0 million. There are no other material
commitments for capital expenditures other than new store openings and
remodeling or relocating existing stores in the next 12 months. Capital
expenditures for new store openings and for remodeling or relocation of existing
stores currently averages $855,100.
In connection with a redemption of Common Stock from certain stockholders
of the Company and the Bryn Mawr Acquisition in fiscal 1996, the Company sold
shares of preferred stock for net proceeds of approximately $10.6 million and
issued the $1.0 million Redemption Note to its redeeming stockholders. In
connection with the HiFi Buys Acquisition in fiscal 1997, the Company sold
shares of preferred stock for net proceeds of approximately $6.8 million, issued
$15.0 million of 1997 Notes and issued the $1.2 million HiFi Buys Note, in
addition to increasing the borrowing limit under its Credit Facility. See Notes
6 and 11 to the Consolidated Financial Statements of the Company and "Certain
Transactions." At March 31, 1998, the Company had outstanding approximately
$15.1 million under its Credit Facility, approximately $1.0 million under the
Redemption Note, approximately $15.0 million under the 1997 Notes and
approximately $900,000 under the HiFi Buys Note. Substantially all of such
indebtedness will be paid in full upon the consummation of the Offering.
The Credit Facility currently has a maximum availability of $20.0 million
and a maturity date of June 1, 2000, and is secured by the inventory of the
Company and certain other assets. The Company intends to obtain the New Credit
Facility, in the amount of $30.0 million, effective upon the consummation of the
Offering. The New Credit Facility will be used to refinance any remaining
indebtedness under the Credit Facility (after application of proceeds of the
Offering) and for general working capital and other corporate purposes.
The Company has received a commitment letter (the "Commitment Letter") from
the New Credit Lenders to provide the New Credit Facility. The Commitment Letter
contemplates a three-year $30.0 million revolving line of credit in favor of the
Company, secured by assets of the Company (including pledges of stock in certain
affiliates). At the Company's election, interest accrues on borrowings at either
(i) the higher of BankBoston's Base Rate or the Federal Funds rate plus 0.50% or
(ii) the London Interbank Offered Rate ("LIBOR") plus an Applicable Margin
varying from 100 to 175 basis points. Interest, but not principal, is payable
during the term of the loan. The credit agreement will contain various financial
covenants, including a maximum ratio of debt to EBITDA (as defined therein),
cash flow and interest coverage tests, and a minimum net worth test, and also
will provide for limitations on other indebtedness, liens, capital expenditures,
mergers, payment of dividends, and certain other matters. The Commitment Letter
provides that the closing of the New Credit Facility is conditioned upon certain
events, including due diligence and final approval and completion of mutually
satisfactory loan documentation.
The Company believes that the net proceeds that it will receive from the
Offering, together with the cash expected to be generated from operations and
available borrowings under the New Credit Facility, will be sufficient to
finance its working capital and capital expenditure requirements, exclusive of
acquisitions, for at least the next 12 months.
29
<PAGE> 32
IMPACT OF INFLATION
Management does not believe that inflation has had a material adverse
effect on the Company's results of operations. However, the Company cannot
predict accurately the effect of inflation on future operating results.
RECENT ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board (FASB) recently issued Statement
of Financial Accounting Standards (SFAS) No. 128, "Earnings per Share," SFAS No.
130, "Reporting Comprehensive Income," SFAS No. 131, "Disclosures about Segments
of an Enterprise and Related Information," and SFAS No. 132, "Employer's
Disclosures About Pensions and Other Post Retirement Benefits".
SFAS No. 128 changes the method of calculating earnings per share and is
effective for interim and annual periods ending after December, 1997. It
requires a dual presentation of basic and diluted earnings per share. The
Company adopted SFAS No. 128 during fiscal year 1998. The Company had not
previously reported earnings per share as it was not a public company.
SFAS Nos. 130, 131 and 132 will be implemented during fiscal year 1999.
Management does not expect that the adoption of these statements will have a
material impact on the consolidated financial statements.
30
<PAGE> 33
BUSINESS
OVERVIEW
The Company is a specialty retailer of mid to high-end audio and video
consumer electronics products. The Company operates 51 stores under the Tweeter,
Bryn Mawr and HiFi Buys names in the New England, Mid-Atlantic and Atlanta,
Georgia markets, respectively. The Company's stores feature an extensive
selection of home and car audio systems and components, portable audio
equipment, and home video products including large screen televisions, DVD
players, digital satellite systems, video cassette recorders and camcorders. The
Company differentiates itself by focusing on consumers who seek audio and video
products with advanced features, functionality and performance, and does not
offer personal computers or home office equipment. The stores display products
in an inviting retail environment averaging 10,000 square feet and are staffed
with attentive, knowledgeable sales personnel. The Company seeks to build
customer loyalty by combining a high level of service with competitive prices
backed by its patented Automatic Price Protection program. The Company has been
recognized as the "Consumer Electronics Retailer of the Year" in 1996 and 1997
by Audio Video International Magazine and the fastest growing consumer
electronics retailer in the United States in 1997 by the TWICE Consumer
Electronics Retail Registry.
The Company opened its first store in 1972 in Boston under the Tweeter
name, and over the next two decades grew exclusively through new store openings
in New England, expanding to 18 stores by 1995. In 1995, the Company adopted an
aggressive growth strategy (i) to open new stores in its existing regional
markets and relocate certain stores to more favorable sites and (ii) to
selectively pursue acquisitions in new regional markets and achieve operating
improvements by converting acquired stores to the Company's core operating model
and leveraging distribution, marketing and corporate infrastructure. The Company
completed the Bryn Mawr Acquisition in May 1996 and the HiFi Buys Acquisition in
May 1997.
INDUSTRY
According to Company estimates, retail sales of audio and video products
were expected to reach approximately $30 billion in 1997. The Company also
estimates that between 1980 and 1997, the audio and video segment expanded at a
compound annual growth rate of 4.3%, with faster growth of 5.6% from 1980 to
1990 due to new product introductions, including compact disc players and video
cassette recorders, and more modest growth of 2.3% between 1990 and 1997 as
product categories matured.
The Company believes that the following trends in the consumer electronics
industry create significant opportunities for a specialty retailer of audio and
video products such as the Company:
POSITIONING OF LARGE FORMAT, HIGH VOLUME RETAILERS
In the 1990s, consumer electronics retailing has become increasingly
dominated by large format stores, including superstores and mass merchandisers.
These stores typically rely on high sales volumes by marketing a wide variety of
products to a broad segment of consumers, with an emphasis on introductory level
products. Many of these retailers have sought to capitalize on the growth of
certain product categories within the overall consumer electronics industry,
including personal computers, software, home office equipment and
telecommunications equipment, which the Company believes has contributed to a
decrease in emphasis by those stores on audio and video products. According to
Company estimates, audio and video products accounted for 31% of total sales of
consumer electronic products in 1997 versus 44% in 1990. The Company believes
that because of their emphasis on high volume across broad product categories,
these large format stores are unable to match the product knowledge, service and
shopping environment of a specialty audio and video retailer such as the
Company.
31
<PAGE> 34
CONSOLIDATION OF CONSUMER ELECTRONICS RETAILERS
The retail consumer electronics industry is highly fragmented, and the
Company estimates that the two largest superstore chains accounted for less than
25% of the total sales attributable to the 100 largest retailers in 1996. The
Company believes that the expansion of large format chains has precipitated
consolidation of the industry during the 1990s by placing competitive pressure
on (i) regional broadline consumer electronics retailers with strategies
undifferentiated from consumer electronics superstores and mass merchandisers,
and (ii) smaller specialty retailers that may be successfully differentiated but
which operate at a disadvantage due to limited scale, media inefficiencies,
reduced purchasing power and lack of management depth. The Company believes that
regional specialty retailers with strong consumer name recognition represent
attractive acquisition candidates and that the smaller or weaker specialty
retailers will continue to face significant competitive pressures, thereby
providing opportunities for retailers with scale advantages to increase market
share.
ADVENT OF NEW TECHNOLOGIES
Growth in the audio and video consumer electronics market has historically
been accelerated by the introduction of new products based on technological
innovations. For example, the proliferation of video cassette recorders and
compact disc players helped to accelerate growth in the 1980s. The Company
believes that a new generation of technology offers the prospect of increased
industry sales with the introduction of digital video products such as DVD
players and high definition televisions, as well as direct broadcast satellite
systems and internet-ready televisions. According to statistics provided by DVD
Video Group, approximately 500,000 DVD players were shipped within the first
year after the product's release in March 1997, and over 1,000,000 players are
projected to be shipped in 1998. The Company believes that specialty retailers
with sales personnel capable of understanding and communicating the benefits of
technologically advanced products to consumers are well positioned to capture
the increased sales that may result should such products achieve market
acceptance.
BUSINESS STRATEGY
The Company's goal is to become the leading specialty retailer of high
quality audio and video products. The key elements of the Company's business
strategy are as follows:
EXTENSIVE SELECTION OF MID TO HIGH-END AUDIO AND VIDEO PRODUCTS
The Company concentrates on mid to high-end audio and video consumer
electronics products. This focus differentiates it from larger format
superstores and mass merchandisers, which offer a broad array of consumer
electronics and non-electronics products with a higher emphasis on products
priced at introductory price levels. The Company's emphasis on higher-end
products positions it attractively to manufacturers seeking to sell more
advanced or limited distribution products as part of their distribution
strategy. Limited distribution products accounted for 43% of product sales for
the Company for the six months ended March 31, 1998. As a result of its
higher-end product focus, a historical early adopter customer base and its
extensively trained sales force, the Company is often among the earliest
retailers to offer new product innovations on behalf of manufacturers. In
addition, the Company believes that its focused product offering allows for
higher gross margin opportunities, appeals to a more service-conscious consumer
and results in enhanced brand awareness of its regional names.
EXCEPTIONAL CUSTOMER SERVICE
The Company believes that the quality and knowledge of its sales associates
is critical to its success and represents a significant competitive advantage.
The Company's relationship selling model encourages sales associates to promote
a comfortable, trusting, low pressure environment. The Company provides its new
sales associates with five weeks of intensive classroom training, and
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<PAGE> 35
all sales associates receive five to fifteen days of additional training per
year, both at the store and at the Company's regional training centers. The
sales force receives technical product and sales training prior to the Company's
introduction of significant new products. The Company believes that the success
of its operating model has enabled it to engender long term customer loyalty.
Approximately 40% of customers who purchased from Tweeter stores in the six
months ended March 31, 1998 had previously purchased products from the Company
during the prior two fiscal years.
DYNAMIC, INVITING STORES
The Company's stores display products in a dynamic and inviting setting
intended to encourage the customer to view and hear products in sound rooms
architecturally and acoustically designed to simulate the customer's home or car
environment. The store prototype is brightly painted, often in pastel colors,
with many stores exhibiting hand-painted murals and other decorative artwork.
Innovative and interactive product displays enable customers to sample and
compare a variety of products. Each store contains a television wall displaying
an extensive selection of televisions and related products, and many stores
contain a movie theater room, complete with theater-style seats, which showcases
the Company's home theater products.
EVERY DAY COMPETITIVE PRICING
The Company utilizes an "every day competitive pricing" strategy with fixed
prices clearly marked on its products. Store managers regularly visit local
competitors to ensure that the Company's pricing remains competitive within the
store's local market. In addition, all product sales are backed by the Company's
patented Automatic Price Protection program. Under this program, if a customer
purchases a consumer electronics product from one of the Company's stores and a
competitor within 25 miles of the store advertises a lower price within 30 days
of purchase, the Company automatically sends a check to the customer for the
difference without requiring the customer to request the payment. The Automatic
Price Protection program is designed to remove pricing concerns from the
purchase decision and, as a result, allows customers and the sales staff to
focus on product functionality, performance and quality.
GROWTH STRATEGY
The Company's growth strategy is (i) to open new stores in current regional
markets and relocate certain stores to more favorable sites and (ii) to
selectively pursue acquisitions in new regional markets and achieve operating
improvements by converting the acquired company to its core operating model and
leveraging distribution, marketing and corporate infrastructure.
NEW STORES
The Company intends to open new stores and relocate a limited number of
stores within existing markets in order to increase penetration and leverage
regional advertising, distribution, and operating efficiencies. During fiscal
1997, the Company opened two Tweeter stores and two Bryn Mawr stores, and
relocated one Tweeter store. The Company currently intends to open five stores
in fiscal 1998, comprised of two at Tweeter and three at Bryn Mawr, and to
relocate two additional stores. Four of the five new stores planned for fiscal
1998 have been opened as of June 1, 1998. The Company intends to open 15 stores,
and to relocate three stores, in fiscal 1999. The Company believes that its Bryn
Mawr Acquisition and HiFi Buys Acquisition have provided it with platforms from
which to open new stores within and around their respective markets.
STRATEGIC ACQUISITIONS
The Company believes that it has obtained, and can continue to obtain,
significant benefits from the consummation of strategic acquisitions of existing
specialty retailers with a similar product mix
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<PAGE> 36
and strong consumer reputation in geographic markets in which the Company does
not currently operate. The Company believes that it can leverage the performance
of an acquisition candidate by (i) applying its sales management and sales
incentive strategies, (ii) adjusting the product mix to be compatible with its
emphasis on higher margin audio and video products, (iii) applying its
advertising and marketing strategies and programs, including Automatic Price
Protection and every day competitive pricing, (iv) implementing its relationship
selling and customer service philosophies and (v) utilizing its purchasing and
distribution capabilities and administrative infrastructure.
The Company believes that acquisition opportunities are created by the
fragmented nature of the consumer electronics industry, the limited exit
strategies available to owners of local and regional specialty retailers, the
competitive pressures presented by larger format superstores and mass
merchandisers on those retailers, and the difficulties faced by local and
regional specialty retailers in raising capital necessary to support inventory,
advertising or expansion. The Company believes that it is a well positioned
consolidator because the Company (i) is known within the industry as a leading
specialty retailer, (ii) utilizes a store size and concept which can be readily
adapted to acquired stores, (iii) has successfully consummated two strategic
acquisitions, (iv) has developed an operational, administrative and marketing
infrastructure with the proven capability to successfully integrate
acquisitions, (v) enjoys experienced and proven senior management, having an
average of 13 years of tenure with the Company and (vi) would seek to offer
employment and managerial opportunities within the consolidated enterprise to
qualified employees of the acquired retailer.
RECENT ACQUISITIONS
ACQUISITION OF BRYN MAWR
In May 1996, the Company completed the Bryn Mawr Acquisition. Like the
Tweeter stores, the Bryn Mawr stores enjoyed considerable name recognition and
targeted similar service-oriented customers. Since the Bryn Mawr stores offered
a product mix similar to the Tweeter stores, the Company consummated the Bryn
Mawr Acquisition with the goal of realizing increased revenues and store
contribution through the application of the Company's established operational
strategies to the acquired stores. Towards that goal, the Company adopted a
series of strategic initiatives including (i) increasing advertising
expenditures during the quarter following the acquisition and refocusing
advertising to emphasize radio, television and direct marketing rather than
print, (ii) implementing the Company's every day competitive pricing and
Automatic Price Protection programs, (iii) initiating a substantial sales
associate training program to improve product knowledge and enhance relationship
selling skills and (iv) focusing the sales staff on higher margin products,
particularly audio products.
ACQUISITION OF HIFI BUYS
In May 1997, the Company completed the HiFi Buys Acquisition. Like Tweeter
and Bryn Mawr, HiFi Buys had created a strong reputation among consumers as a
specialty retailer of high quality audio and video products. The HiFi Buys
stores, at an average size of 15,000 square feet, are larger than the average
Tweeter or Bryn Mawr stores. However, the HiFi Buys stores carried a broader
product mix, including more entry level product offerings and marketed heavily
through promotional newspaper advertising. The Company's integration strategy in
the HiFi Buys Acquisition has been to increase store contribution by converting
the HiFi Buys product mix to one compatible with the Company's and managing a
planned decrease in sales while increasing gross margin and reducing operating
expenses. Specifically, following the HiFi Buys Acquisition, the Company (i)
adjusted the merchandise mix to increase the proportion of mid and high-end
products and reduce the number of lower margin introductory products, (ii)
altered store employee compensation to reduce the emphasis on promotional sales
and focus incentives on gross margin and store contribution, (iii) reduced
marketing expenditures and shifted marketing emphasis from promotional
advertising toward the Company's traditional relationship selling and every day
competitive
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<PAGE> 37
pricing strategy, (iv) converted the advertising program to emphasize electronic
advertising and direct mail marketing as opposed to print media, (v) implemented
the Automatic Price Protection program and (vi) eliminated $2.4 million of
overhead by centralizing accounting, purchasing and other support
infrastructure.
STORE FORMAT AND OPERATIONS
STORE FORMAT
The Company currently operates 51 stores, comprised of 23 Tweeter stores in
New England, 18 Bryn Mawr stores in the Mid-Atlantic market, and 10 HiFi Buys
stores in the greater Atlanta, Georgia market. While the Company's stores vary
in size, the current prototype is 10,000 square feet, with approximately 70% of
square footage devoted to selling space. Many stores utilize mezzanine level
storage space to reduce occupancy expense.
The Company's store concept is intended to combine the comfort of the home
environment with practical displays enabling consumers to sample and compare the
features and functions of products in various combinations. The store prototype
is brightly painted, often in pastel colors, with many stores exhibiting hand
painted murals and other decorative artwork. Unlike many of the stores of the
Company's competitors, which contain large, open spaces in which many different
audio and video products are tested and sampled, the Company's stores feature
individual sound rooms. The sound rooms are intended to architecturally and
acoustically resemble a home or car environment to enable the customer to see
and hear how products will perform, and allow the customer to listen to and
compare various combinations of receivers, CD players, tape decks and speakers.
In addition, each store contains a traditional television wall displaying an
extensive selection of televisions and related products, and many stores contain
a movie theater room, complete with theater-style seats, which showcases the
Company's home theater products. Other displays, such as the "big red button,"
allow the customer to change, by pushing a button, mono television sound into a
five speaker or surround sound experience. Each store also features a camcorder
gallery which allows customers to sample different camcorders and shoot videos
of their children within the adjacent children's play area. Some stores display
a car on the selling floor which features a state-of-the-art car stereo system
and serves to exhibit the Company's installation capabilities. Most stores
provide car stereo installation through on-premises installation bays.
STORE OPERATIONS
Stores are typically staffed with a store manager, an assistant manager, 12
sales associates and two mobile electronics installers. The Company provides new
sales associates with five weeks of intensive classroom training, and all sales
associates receive five to fifteen days of additional training per year, both at
the store and at the Company's regional training centers. The sales force
receives technical product and sales training prior to the introduction of
significant new products. Most stores are open seven days a week.
STORE ECONOMICS
The Company believes that it benefits from attractive store level
economics. The average investment by the Company for the eight new stores opened
in the 24 months ended March 31, 1998, including leasehold improvements,
equipment, the cost of inventory (net of payables), and preopening expenses was
$855,000. The average net sales and store level cash flow, which excludes any
preopening expenses, allocated corporate overhead, depreciation and interest,
but includes occupancy expense and advertising, for the 12 months ended March
31, 1998 was $3,389,000 and $317,000, respectively, for stores owned by the
Company throughout the period.
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<PAGE> 38
SITE SELECTION
The Company's stores average approximately 10,000 square feet and are
typically located in free-standing buildings or strip shopping centers within
high traffic shopping areas. New store sites are selected on the basis of
several factors, including physical location, demographic characteristics of the
local market, proximity to competitors, access to highways or other major
roadways and available lease terms. The Company looks for co-tenants, such as
bookstores, that are likely to draw customers who would otherwise be targeted by
the Company within the site's relevant market and believes that close proximity
to large format competitors is a positive factor due to increased customer
traffic. All of the Company's stores are leased.
Set forth below is a table summarizing the locations, opening years, and
years of relocation where specified, of the Company's stores as of March 31,
1998:
<TABLE>
<CAPTION>
TWEETER BRYN MAWR HIFI BUYS
- ---------------------------- --------------------------------- ----------------------------
YEAR OPENED/ YEAR OPENED/ YEAR OPENED/
LOCATION RELOCATED LOCATION RELOCATED LOCATION RELOCATED
-------- ------------ -------- ------------ -------- ------------
<S> <C> <C> <C> <C> <C>
Boston, MA 1972 Bryn Mawr, PA 1946 Norcross, GA 1990
Cambridge, MA 1974 / Maple Shade, NJ 1978 Alpharetta, GA 1991
1998 Abington, PA 1981 Athens, GA 1991
Newton, MA 1976 / Allentown, PA 1982 Buckhead, GA 1993
1995 Montgomeryville, PA 1984 Southlake, GA 1993
Burlington, MA 1978 / Wilmington, DE 1985 / Tucker, GA 1993
1996 1992 Kennesaw, GA 1995
Dedham, MA 1980 Harrisburg, PA 1986 / Smyrna, GA 1995
Framingham, MA 1983 1994 Northlake, GA 1995
Hyannis, MA 1983 / Wilmington, DE 1987 Gwinnett, GA 1996
1994 Allentown, PA 1987
New London, CT 1985 / Baltimore, MD 1990
1998 Timonium, MD 1990
Hanover, MA 1986 King of Prussia, PA 1995
Danbury, CT 1986 / Glen Burnie, MD 1995
1997 Princeton, NJ 1997
Seekonk, MA 1988 Lancaster, PA 1997
Warwick, RI 1989 Reading, PA 1997
Newington, CT 1990 York, PA 1997
Avon, CT 1993 Deptford, NJ 1998
Peabody, MA 1993
Manchester, NH 1994
Salem, NH 1994
Boston, MA 1995
Milford, CT 1995
Holyoke, MA 1996
Portsmouth, NH 1996
Nashua, NH 1996
Attleboro, MA 1997
</TABLE>
MERCHANDISE
The Company's stores feature home and car audio systems and components,
video products such as large screen televisions, digital satellite systems,
video cassette recorders, camcorders, DVD players and other consumer electronics
products such as cellular phones and portable audio equipment. The Company
offers custom home and car stereo installation services and provides warranty
and non-warranty repair services through all of its stores. The Company also
offers insurance replacement services to insurance companies, providing
replacement products to policyholders of such companies. Additionally, the
Company has a corporate sales division which markets
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<PAGE> 39
and sells Company products to businesses, institutions and other organizations.
The Company's emphasis on mid to high-end products enables it to offer limited
distribution products and to be among the earliest retailers to offer new
product innovations on behalf of manufacturers. Limited distribution products
accounted for 43% of the Company's sales during the six months ended March 31,
1998.
The Company stocks products from over 75 vendors, including Adcom, Aiwa,
Alpine, Bose, Boston Acoustics, Denon, Eclipse, Kenwood, Klipsch, Mirage,
Mitsubishi, Monster Cable, Panasonic, Pioneer, ProScan, Rockford Fosgate, Sony
and Yamaha. The Company seeks to manage its product mix to maximize gross
margin. Historically, the Company's video products have yielded lower gross
margin than audio products. Total sales of video products have increased at
rates faster than the increases in audio product sales during the last several
years as a result of the increased consumer interest in big screen televisions.
Accordingly, the Company has adopted a "Sell Audio with Video" strategy in order
to enhance overall gross margin through increases in sales of higher margin
audio products.
The table below sets forth the approximate percentages of revenues for each
of the Company's primary product categories for its fiscal years ended September
30, 1996 and September 30, 1997 and for the six months ended March 31, 1997 and
March 31, 1998. The percentage of revenues represented by each product category
may be affected by, among other factors, competition, economic conditions,
consumer trends, the introduction into the market of new products, changes in
the Company's product mix, and the timing of marketing events. The percentages
are also impacted by acquisitions of stores offering a different product mix. In
particular, the increase in the percentage of revenue represented by video
products in the year ended September 30, 1997 and six months ended March 31,
1998 versus the prior year periods was primarily driven by the inclusion of
stores acquired in the HiFi Buys Acquisition. Video products represent a greater
percentage of revenues at HiFi Buys than at the other Company stores. The
historical percentages set forth below may not be indicative of revenue
percentages for future periods:
PERCENTAGE OF REVENUES
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED SIX MONTHS ENDED SIX MONTHS ENDED
PRODUCT CATEGORY SEPTEMBER 30, 1996 SEPTEMBER 30, 1997 MARCH 31, 1997 MARCH 31, 1998
- ----------------------- ------------------ ------------------ ---------------- ----------------
<S> <C> <C> <C> <C>
Audio Equipment(1)..... 35% 33% 37% 31%
Video Equipment(2)..... 36% 36% 38% 41%
Mobile Equipment and
Other(3)............. 29% 31% 25% 28%
</TABLE>
- ---------------
(1) Includes speakers, cassette decks, receivers, turntables, compact disc
players, mini disc players, amplifiers, preamplifiers, and portable audio
equipment.
(2) Includes video cassette players, camcorders, televisions, projection
televisions, DVD players, and satellite dishes.
(3) Includes car decks, amplifiers and speakers, car security products,
navigation equipment, cellular phones, audio and video accessories, and
extended performance guaranties.
PURCHASING AND INVENTORY
The Company's purchasing and inventory control functions are based at its
executive offices in Canton, Massachusetts. Purchasing decisions are made by the
Company's buying team, which has primary responsibility for product selection,
stocking levels and pricing. This process is facilitated by the Company's
information systems which analyze stocking levels and product sell-through. The
purchasing group continuously reviews new and existing products with a view
towards maintaining a wide range of high quality, brand-name consumer
electronics products within the Company's product mix. In order to remain
current with new and developing products, the Company regularly hosts
presentations by its major suppliers.
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<PAGE> 40
In addition to making direct purchases, the Company is a member of PRO, a
volume-buying group of 14 specialty electronics retailers across the country.
This affiliation often provides the Company with opportunities to obtain
additional vendor rebates, product discounts and promotional products. The
Company is not obligated to make purchases through PRO. The Company's President
serves on the Board of Directors of PRO.
The Company sources products from more than 75 vendors, the largest of whom
accounted for 24% of fiscal 1997 purchases. The Company does not maintain long
term commitments or exclusive contracts with any particular vendor, but instead
considers numerous factors, including price, credit terms, distribution, quality
and compatibility with the Company's existing product mix, when making
purchasing decisions. The Company utilizes a sophisticated automatic
replenishment system for store inventory, maintaining stock levels and
minimizing total dollars invested in inventory. The Company believes that its
relationship with its large vendors is excellent and that its focused
merchandising and high degree of customer service makes it an important
distribution channel for its suppliers, particularly for the introduction of new
products.
The Company distributes products to stores through three regional
distribution and service centers. The Canton, Massachusetts facility is
approximately 32,000 square feet and currently serves as the Company's
headquarters and distribution and service center for the Tweeter stores. The
Company will be relocating this facility to a new 80,000 square foot facility
two miles from its existing facility in August 1998. The King of Prussia,
Pennsylvania distribution center is approximately 50,000 square feet and
services the Bryn Mawr stores. The Atlanta, Georgia facility is approximately
80,000 square feet and services the HiFi Buys stores. The Company believes that
these facilities are sufficient to handle the Company's planned expansion
through at least the year 2000.
ADVERTISING AND MARKETING
The Company targets consumers seeking informed advice concerning product
selection and system integration of audio and video consumer electronics
products. The Company's marketing strategy differs from its major competitors in
that it relies substantially on electronic media, primarily radio, and an
extensive direct marketing effort. The Company believes advertising on specific
radio stations and at specific times allows it the flexibility to tailor its
marketing message. The Company's radio advertising campaigns seek to generate
name recognition and to reinforce identification of the Company as a source of
high quality products at competitive prices, staffed with a knowledgeable,
attentive sales force. This radio strategy is complemented with television
advertisements and, less frequently, with print advertisements. The specific
allocation of the Company's committed advertising dollars among the various
types of advertising media is reviewed from time to time by Company management
and, if necessary, adjusted to reflect the Company's assessment of advertising
results and market conditions.
The Company also relies on a sophisticated direct marketing campaign to its
customers. The Company has developed a comprehensive database marketing program
to attempt to match past customer purchasing history to the next logical
purchase option for that customer. For example, the Company has distributed
direct mail regarding surround sound products to customers who recently
purchased large screen televisions. The Company also distributes an
award-winning 100 page Buyer's Guide three times a year and a smaller catalog
nine times per year. Management believes that its relatively inexpensive direct
mail activities leverage and complement its general media advertising campaigns.
The Company believes that its commitment to providing competitive pricing
on its products is a critical component of its marketing and advertising
strategy. In 1993, the Company abandoned its promotional marketing approach and
adopted an every day competitive pricing strategy, with fixed prices clearly
marked on its products. Store managers regularly visit the local competition to
ensure the store's pricing remains competitive. At the same time, the Company's
competitive prices are backed by its Automatic Price Protection program. Under
the Automatic Price Protection program, if
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<PAGE> 41
a customer purchases a consumer electronics product from one of the Company's
stores and a competitor within 25 miles of that store advertises a lower price
within 30 days of the customer's purchase, the Company automatically sends a
check to the customer for the difference. Unlike other price guarantee programs
in place within the industry, the refund process does not require the customer
to call or return to the store to request a price match refund. The Automatic
Price Protection program is intended to be hassle-free, customer friendly and
viewed as a reflection of the Company's commitment to customer service. Most
recently, in fiscal 1997, the Company began its "Wise Buys" program. Under this
program, the Company's buyers identify special, reduced-priced items, often
closeouts or last year's top-of-the-line models, which are purchased from the
manufacturer and offered to the consumer at a substantial discount from the
original retail price. The Company believes that the pricing of the Wise Buys
items represents substantial value to the consumer with little or no negative
impact to gross margin. The Company's advertisements frequently describe or
refer to the Automatic Price Protection and Wise Buys programs.
INFORMATION SYSTEMS
The Company utilizes a sophisticated, fully integrated mainframe-based
management information system which updates after every transaction, and is
accessible on a real-time basis to Company management, sales associates and
product buyers. Extensive sales reporting and sales tracking is provided
real-time on screen to store managers and individual sales associates which
tracks category sales and benchmarks key sales data for the Company. This system
enables management and store managers to review sales volume, gross margin and
product mix on a per store or per sales associate basis, allows for the viewing
of open orders, inventory value and mix, and tracks sales by product category,
by sales associate and by store. The Company provides ongoing training and
support in the use of this system and compensates and benchmarks the store
managers based upon this information.
The Company currently utilizes several software systems which will require
modification or upgrading to accommodate the "Year 2000" changes needed for
correct recording of dates in the year 2000 and beyond. The Company believes
that all such systems can be changed by the end of 1999 and does not expect the
cost of such changes to be material to the Company's financial condition or
results of operations. The Company does not, however, currently have any
information concerning Year 2000 compliance status of its suppliers. See "Risk
Factors -- Year 2000 Compliance."
EMPLOYEES
As of March 15, 1998, the Company had 979 employees, comprised of 910
full-time and 69 part-time employees. None of the Company's employees are
covered by collective bargaining agreements, and the Company believes its
relations with its employees are good. See "Risk Factors -- Dependence on Key
Personnel."
INTELLECTUAL PROPERTY
The Company's "Tweeter etc." and "Bryn Mawr Stereo" service marks have been
registered with the United States Patent and Trademark Office. The Company has
not registered the "HiFi Buys" service mark. The Company has submitted
applications for registration of certain other of its service marks, which
applications are currently pending. See "Risk Factors -- Intellectual Property."
PROPERTIES
In addition to the Company's stores, all of which are leased, the Company
also leases three distribution and office facilities in Canton, Massachusetts,
King of Prussia, Pennsylvania, and Atlanta, Georgia, with lease terms expiring
in 2001, 2011 and 2008, respectively. On March 25, 1998 the Company entered into
a purchase and sale agreement for a facility in Canton, Massachusetts that will
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<PAGE> 42
serve as its new corporate headquarters, service and distribution center in
Massachusetts. The Company expects the purchase price and related building
improvements to be approximately $5.3 million, and expects to finance the
purchase with a mortgage of $4.0 million.
LITIGATION
From time to time, the Company is involved in litigation in the ordinary
course of the Company's business. In the opinion of management, no such
litigation is likely to have a material adverse effect on the Company's results
of operations or financial condition.
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<PAGE> 43
MANAGEMENT
EXECUTIVE OFFICERS, DIRECTORS AND KEY EMPLOYEES
The following table sets forth certain information with respect to
executive officers, directors and certain other key employees of the Company
immediately following the Offering:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
EXECUTIVE OFFICERS AND DIRECTORS
Samuel Bloomberg................. 46 Chairman, Chief Executive Officer and Director
Jeffrey Stone.................... 41 President, Chief Operating Officer, Treasurer and
Director
Joseph McGuire................... 37 Vice President, Chief Financial Officer and Chief
Information Officer
Jeffrey Bloomberg(1)............. 51 Director
Matthew Bronfman(2).............. 38 Director
Michael Cronin(1)(2)............. 44 Director
Steven Fischman.................. 57 Director
KEY EMPLOYEES
Roy Bertalotto................... 45 Vice President, New Store Development
Linda Christman.................. 43 Vice President, Human Resources
David Ginsburg................... 47 Vice President, Southeastern Region
Dori Ginsburg.................... 40 Vice President, Insurance Replacement
Albert Gordon.................... 38 Vice President, Operations and Corporate Finance
Noah Herschman................... 35 Vice President, Marketing
Bernard Sapienza................. 35 Vice President, Purchasing
Paul Shindler.................... 42 Vice President, Training
</TABLE>
- ---------------
(1) Member of Audit Committee.
(2) Member of Compensation Committee.
Samuel Bloomberg is a co-founder of the Company and has served as director
and/or officer since its inception. Mr. Bloomberg has been Chief Executive
Officer of the Company since September 1983 and Chairman of the Board since
1986. Mr. Bloomberg is the brother of Jeffrey Bloomberg.
Jeffrey Stone has served as President and Chief Operating Officer,
Treasurer and director of the Company since October 1990. From 1987 to 1990 Mr.
Stone served as the Executive Vice President of Bread & Circus, a specialty
natural foods supermarket chain and from 1983 to 1987 served as Vice President
of Human Resources and Training for Scandinavian Design, a specialty furniture
retailer. Mr. Stone is a Director of PRO, the buying group of specialty consumer
electronics retailers of which the Company is a member.
Joseph McGuire has been a Vice President, Chief Financial Officer and Chief
Information Officer of the Company since May 1996. Prior to joining the Company,
Mr. McGuire was the Chief Financial Officer of Bryn Mawr Radio & Television
Centre, Inc. from 1987 to 1996.
Jeffrey Bloomberg has served as director of the Company in 1972 and from
1992 to the present. From 1994 to the present, Mr. Bloomberg has also served as
President of Bloomberg Associates, Inc., an investment banking company. Prior to
that, from 1985 to 1993, Mr. Bloomberg served as Senior Managing Director at
Bear Stearns & Co., Inc., specializing in corporate finance and mergers and
acquisitions. Mr. Bloomberg is the brother of Samuel Bloomberg.
Matthew Bronfman has served as director of the Company since 1989. In 1990
Mr. Bronfman served as director, and from 1991 to 1994 Mr. Bronfman served as
Chairman and Chief Executive
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<PAGE> 44
Officer of Sterling Cellular Holdings, L.P., a private cellular telephone
company. From 1994 to the present, Mr. Bronfman founded and has served as
Chairman and Chief Executive Officer of Perfumes Isabell, a fragrance and gift
company.
Michael Cronin has served as director of the Company since November, 1995.
From 1991 to the present Mr. Cronin has served as Managing Partner of Weston
Presidio Capital. Mr. Cronin also serves as director of Tekni-plex, Inc. and
Casella Waste Systems, Inc.
Steven Fischman will serve as a director of the Company commencing upon the
closing of the Offering. Since 1992, Mr. Fischman has been the President of New
England Development ("NED"), a regional mall developer based in New England.
Since 1996, Mr. Fischman has also served as Vice-Chairman of WellsPark Group
Limited Partnership, a mall management company formed by NED and an unrelated
partner. Prior to joining NED, Mr. Fischman was a director and shareholder in
the Boston law firm of Goulston & Storrs, P.C., which firm is counsel to the
Company. Mr. Fischman is also Chairman of the Board of Trustees of
Newton-Wellesley Hospital.
Roy Bertalotto has served as Vice President, New Store Development of the
Company since 1992. Prior to that, Mr. Bertalotto served as a District Sales
Manager from 1986 to 1988 and as Regional Vice President, Sales for eight
southern New England stores from 1988 to 1992.
Linda Christman has served as Vice President, Human Resources of the
Company since 1997. Prior to that time, she served as the Director of Human
Resources since 1987.
David Ginsburg has served as Vice President, Southeastern Region of the
Company since May 1997. Prior to joining the Company, Mr. Ginsburg served as a
Vice President of HiFi Buys Incorporated.
Dori Ginsburg has served as Vice President, Insurance Replacement of the
Company since May 1997. Prior to joining the Company, Ms. Ginsburg served as
Vice President, Insurance Replacement of HiFi Buys Incorporated.
Albert Gordon has served as Vice President, Operations and Corporate
Finance of the Company since 1995. From 1990 to 1994, Mr. Gordon served as Chief
Financial Officer of Boston Publishing Co., Inc. From 1987 to 1991, Mr. Gordon
held several management positions at The Westwood Group, a restaurant holding
company, most recently as Vice President of Marketing and as Chief Financial
Officer of its catalog business. From 1981 to 1983 Mr. Gordon served on the
audit staff at KPMG Peat Marwick and from 1985 to 1987 Mr. Gordon was a member
of brand management at Procter & Gamble.
Noah Herschman has served as Vice President, Marketing of the Company since
1994. Prior to that, Mr. Herschman served as a Senior Product Buyer and
Marketing Director from 1990 to 1994 and served as a sales consultant for the
Company from 1988 to 1990.
Bernard Sapienza has served as Vice President, Purchasing of the Company
since 1994. Prior to that, from 1989 to 1994, Mr. Sapienza served as a Senior
Product Buyer of the Company.
Paul Shindler has served as Vice President, Training of the Company since
1994. Prior to that, Mr. Shindler served as Regional Vice President of Sales for
the northern region and Training Director of the Company from 1991 to 1994 and
served in various sales and training capacities for the Company from 1977 to
1987.
BOARD COMPOSITION
REORGANIZATION OF BOARD
The Company currently has five directors, comprised of Samuel Bloomberg,
Jeffrey Stone, Jeffrey Bloomberg, Mathew Bronfman and Michael Cronin. Mr. Cronin
has been appointed to the Board pursuant to the terms of the Company's
outstanding Preferred Stock, which will be converted into Common Stock effective
upon consummation of the Offering. Mr. Fischman will become a
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director upon the closing of the Offering. Effective upon the consummation of
the Offering, the Board of Directors will be reorganized by dividing the Board
into three staggered classes consisting of two Class I directors (Messrs.
Bronfman and Fischman), two Class II directors (Messrs. Samuel Bloomberg and
Cronin) and two Class III directors (Messrs. Stone and Jeffrey Bloomberg). The
initial terms of the three classes will expire in 1999, 2000 and 2001,
respectively. Beginning in 1999, directors of each class will be chosen for
three-year terms upon the expiration of their current terms and each year one
class of directors will be elected by Company stockholders. The Company believes
that classification of the Board of Directors will help facilitate continuity
and stability of the Company's business strategies and policies as determined by
the Board of Directors. Holders of Common Stock will have no right to cumulative
voting in the election of directors. Consequently, at each annual meeting of
stockholders, the holders of a majority of the Common Stock will be able to
elect all of the successors of the class of directors whose terms expire at that
meeting.
AUDIT COMMITTEE
The Audit Committee of the Board of Directors makes recommendations
concerning the engagement of independent public accountants, reviews the plans
for and results of the audit engagement with the independent public accountants,
approves professional services provided by the independent public accountants
and review the adequacy of the Company's internal accounting controls. The Audit
Committee consists of Jeffrey Bloomberg and Michael Cronin.
COMPENSATION COMMITTEE
The Compensation Committee of the Board of Directors establishes and
implements compensation policies and programs for the Company's executive
officers and exercises all powers of the Board of Directors in connection with
the Company's incentive compensation and benefit plans. The Compensation
Committee of the Board consists of Mathew Bronfman and Michael Cronin. In
January 1996, the members of the Board of Directors who were not members of the
Compensation Committee approved the grant to Mathew Bronfman of non-qualified
stock options to purchase 107,584 shares of the Company's Common Stock at an
exercise price of $1.524 per share. Such options, by their terms, were fully
vested on the date of grant.
DIRECTORS' COMPENSATION
The Company pays each director $1,875 per quarter, provided such director
attends the meetings of the directors scheduled for such quarter. All directors
are reimbursed for reasonable expenses incurred in attending meetings. Upon the
consummation of the Offering and upon each subsequent election or re-election,
each director who is not also an employee or affiliate of the Company will be
granted options exercisable into 1,750 shares of Common Stock, with an exercise
price equal to fair market value of the Common Stock at the date of grant
pursuant to the 1998 Plan. See "Management -- Stock Plans."
43
<PAGE> 46
EXECUTIVE COMPENSATION
The following table sets forth the compensation earned by the Company's
Chief Executive Officer and each of the other executive officers of the Company
(the "Named Executives") for services rendered in all capacities to the Company
during the fiscal year ended September 30, 1997:
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
------------
ANNUAL COMPENSATION(1) SECURITIES
------------------------------------ UNDERLYING
OTHER ANNUAL OPTIONS ALL OTHER
NAME AND PRINCIPAL POSITION SALARY BONUS COMPENSATION(2) (#) COMPENSATION(3)
- --------------------------- -------- ------- --------------- ------------ ---------------
<S> <C> <C> <C> <C> <C>
Samuel Bloomberg.......... $204,876 $20,000 $1,960 66,240 $65,818
Chairman and Chief
Executive Officer
Jeffrey Stone............. $204,037 $20,000 $1,448 48,610 $ 5,288
President and Chief
Operating Officer
Joseph McGuire............ $150,244 $ 5,300 $ 466 2,624 --
Vice President, Chief
Financial Officer and
Chief Information Officer
</TABLE>
- ---------------
(1) The compensation described in this table does not include medical, group
life insurance or other benefits received by the Named Executives which are
available generally to all salaried employees of the Company.
(2) Represents amounts contributed by the Company under the Company's 401(k)
Plan to the accounts of the Named Executives.
(3) Represents amount distributed to cover personal tax liability from the
Company's prior status as a Subchapter 'S' corporation for federal income
tax purposes. On November 25, 1995, as part of a recapitalization, the
Company elected to be treated as a 'C' corporation for federal income tax
purposes.
The following table sets forth information relating to grants of stock
options made during the fiscal year ended September 30, 1997 to each of the
Named Executives under the Company's existing stock option plan:
OPTION GRANTS IN FISCAL 1997
<TABLE>
<CAPTION>
PERCENT OF
NUMBER OF TOTAL OPTIONS GRANT
SECURITIES GRANTED TO EXERCISE DATE
UNDERLYING EMPLOYEES IN PRICE EXPIRATION PRESENT
NAME OPTIONS GRANTED FISCAL YEAR PER SHARE DATE VALUE(1)
---- --------------- ------------- --------- ---------- --------
<S> <C> <C> <C> <C> <C>
Samuel Bloomberg.......... 13,350 5.7% $7.10 2007 $ 267
52,890 22.7 $8.08 2007 1,058
------ ---- ------
66,240 28.4% $1,325
Jeffrey Stone............. 13,350 5.7% $6.46 2007 $ 267
35,260 15.2 $7.24 2007 705
------ ---- ------
48,610 20.9% $ 972
Joseph McGuire............ 2,624 1.1% $7.24 2007 $ 52
</TABLE>
- ---------------
(1) The fair value of each stock option granted in fiscal 1997 under the
Company's existing stock option plan was estimated on the date of grant
using the Black-Scholes option pricing model assuming an expected volatility
of 55%, a risk-free interest rate of 6%, an expected life of 4 years and no
dividend payments. See Note 11 of Notes to Consolidated Financial Statements
of the Company.
44
<PAGE> 47
The following table sets forth certain information regarding stock option
exercises during the fiscal year ended September 30, 1997 and stock options held
at such year end by the Named Executives. No options were exercised during such
fiscal year by the Named Executives.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
VALUE OF UNEXERCISED
NUMBER OF SECURITIES IN-THE-MONEY
UNDERLYING UNEXERCISED OPTIONS
OPTIONS AT FISCAL YEAR-END AT FISCAL YEAR-END
EXERCISABLE/ EXERCISABLE/
NAME UNEXERCISABLE UNEXERCISABLE
- ---- -------------------------- --------------------
<S> <C> <C>
Samuel Bloomberg.............................. 208,916/0 $2,526,691/0
Jeffrey Stone................................. 114,978/0 $1,343,651/0
Joseph McGuire................................ 8,397/15,220 $110,187/188,265
</TABLE>
EMPLOYMENT AGREEMENTS
The summaries of the various employment agreements set forth below are
qualified in their entirety by reference to such agreements, which are exhibits
to the Registration Statement of which this Prospectus is a part.
BLOOMBERG AND STONE AGREEMENTS
Effective upon the consummation of the Offering, the Company will enter
into five-year employment agreements with Samuel Bloomberg, to serve as Chairman
of the Board and Chief Executive Officer of the Company, and with Jeffrey Stone,
to serve as President and Chief Operating Officer of the Company (the
"Employment Agreements"). The Employment Agreements provide that Messrs.
Bloomberg and Stone will each receive a base salary of $300,000 per year through
September 30, 1998, $325,000 from October 1, 1998 to September 30, 1999, and
thereafter at the annual rate of at least $325,000, plus such increases as may
be determined by the Compensation Committee of the Board of Directors. Each of
Messrs. Bloomberg and Stone will have the opportunity to earn incentive bonuses
based upon certain performance criteria, to be determined by the Compensation
Committee, and the opportunity to receive stock options and other incentive
awards under the Company's 1998 Stock Option and Incentive Plan.
The Employment Agreements provide for continued employment until
termination by either party. The Company, however, may terminate either
Employment Agreement with or without cause at any time. If either executive's
employment is terminated by the Company without cause, the Company is obligated
to pay the respective executive an amount equal to such executive's unvested
accrued benefits under any stock option plan, incentive plan or retirement plan
plus severance pay calculated as follows: (i) if the executive is terminated in
during the first three years of the agreement, he will receive an amount equal
his annual base salary in effect in the year of termination for three years
following termination; (ii) if the executive is terminated in the fourth year,
he will receive an amount equal to two times his annual base salary in effect in
the year of termination for two years following termination; and (iii) if the
executive is terminated in the fifth or any subsequent year of the agreement, he
will receive an amount equal to his annual base salary in the year of
termination. The Employment Agreements also provide that if the Company and
Messrs. Bloomberg and Stone do not renew the Agreements upon expiration, the
Company may elect to pay such executives two years severance in exchange for a
two-year non-competition arrangement.
MCGUIRE EMPLOYMENT AGREEMENT
Effective upon the consummation of the Offering the Company will enter into
an employment agreement with Joseph McGuire to serve as Chief Financial Officer
and Chief Information Officer of
45
<PAGE> 48
the Company. Under the terms of this three-year agreement, Mr. McGuire will earn
a base annual salary of $185,000 and will have the opportunity to earn yearly
incentive bonuses based on performance criteria (determined by the Compensation
Committee). Mr. McGuire is also entitled to receive stock options and other
incentive awards under the Company's stock option and incentive plans. The
Company may elect, upon the expiration and non-renewal of the agreements, to pay
Mr. McGuire two years of severance pay in exchange for a two-year
non-competition agreement from Mr. McGuire. If Mr. McGuire's employment is
terminated by the Company without cause, the Company is obligated to pay Mr.
McGuire an amount equal to his base salary in the year of termination, and shall
permit his options and incentives to continue to vest for one year following
termination.
INSURANCE
The Company intends to obtain a directors' and officers' liability
insurance policy in the aggregate amount of $5.0 million. The directors' and
officers' insurance will insure the (i) directors and officers of the Company
from any claim arising out of an alleged wrongful act by the directors and
officers in their respective capacities as directors and officers and (ii)
Company to the extent that it has indemnified a director or officer for such
loss.
STOCK PLANS
1995 STOCK OPTION PLAN
On November 28, 1995, the Company adopted its 1995 Stock Option Plan (the
"1995 Stock Option Plan"). The 1995 Stock Option Plan allowed the Company to
issue (i) options to purchase Common Stock which qualify as incentive stock
options ("ISOs") under Section 422A(b) of the Internal Revenue Code of 1986 to
Company employees and (ii) options to purchase Common Stock which do not qualify
as ISOs ("Non-Qualified Options") to directors, officers, employees and
consultants of the Company. Payment of the exercise price may be made in cash,
shares of Common Stock, a combination of cash or stock or by any other method
approved by the Board or the Compensation Committee. Options are not assignable
or transferable except by will or the laws of descent and distribution. On June
1, 1998, the Board of Directors of the Company voted to terminate the 1995 Stock
Option Plan effective on, and subject to, the consummation of the Offering. As
of the date of this Prospectus, the Company had outstanding under the 1995 Stock
Option Plan ISOs exercisable into 737,475 shares of Common Stock and
Non-Qualified Options exercisable into 107,584 shares of Common Stock.
1998 STOCK OPTION AND INCENTIVE PLAN
The Company adopted the 1998 Stock Option and Incentive Plan (the "1998
Plan") on June 1, 1998 to provide incentives to attract and retain executive
officers, directors, key employees and consultants. The summary of the 1998 Plan
set forth below is qualified in its entirety by reference to the 1998 Plan,
which is included as an exhibit to the Registration Statement of which this
Prospectus is a part.
The aggregate number of shares of Common Stock issuable under the 1998 Plan
is equal to 19.6% of the total shares of Common Stock that will be issued and
outstanding, on a fully diluted basis, upon completion of the Offering. In
addition, the number of shares of Common Stock issuable under the 1998 Plan will
increase, on each anniversary date of the adoption of the 1998 Plan, to that
number of shares equal to the lesser of (i) 2% of the total number of shares of
Common Stock that are issued and outstanding on a fully diluted basis on each
such anniversary date or (ii) 150,000 shares of Common Stock. As options granted
under the 1998 Plan are exercised, the number of shares represented by such
previously outstanding options will again become available for issuance under
the 1998 Plan up to a maximum of 100,000 shares of Common Stock annually.
The 1998 Plan will expire five years following its adoption. Awards made
thereunder and outstanding at the expiration of the 1998 Plans will survive in
accordance with their terms.
46
<PAGE> 49
The 1998 Plan will be administered by the Compensation Committee of the
Board of Directors, and will allow the Company to issue one or more of the
following: stock options (ISOs and non-qualified options), restricted stock
awards, stock appreciation rights, common stock in lieu of certain cash
compensation, dividend equivalent rights, performance shares and performance
units (collectively, "Plan Awards").
In any plan year, no more than 25% of the shares reserved for issuance
under the 1998 Stock Plan, may be used for Plan Awards consisting of restricted
stock. All grants of restricted stock under the 1998 Stock Plan will be subject
to vesting over seven years, subject, however, at the Administrator's
discretion, to acceleration of vesting upon the achievement of specified
performance goals.
The 1998 Plan will also provide for the grant or issuance of Plan Awards to
directors of the Company who are not employees of the Company. These options
will vest over a period of three years; provided such non-employee director is
not removed before the end of his or her term.
On June 1, 1998, the Board of Directors authorized the grant of options
("June 1998 Options") under the 1998 Plan, exercisable for a total of 209,988
shares of Common Stock, to certain officers, directors and employees of the
Company, including a grant of options to purchase 23,038 shares of Common Stock
to Samuel Bloomberg, a grant of options to purchase 29,000 shares of Common
Stock to Jeffrey Stone, a grant of options to purchase 8,000 shares of Common
Stock to Joseph McGuire and grant of options to purchase 1,750 shares of Common
Stock to each of Jeffrey Bloomberg, Matthew Bronfman, Michael Cronin and Steven
Fischman.
All such June 1998 Options will be granted upon the consummation of the
Offering, and the exercise price for all such June 1998 Options will be the
initial public offering price for the Common Stock.
INCENTIVE BONUS PLAN
The Company maintains an Incentive Bonus Plan (the "Bonus Plan") for its
senior employees and executives, pursuant to which cash bonuses may be paid to
such employees and executives based on achievement of pre-established
performance criteria. The Compensation Committee of the Board of Directors
administers the Bonus Plan, and determines the applicable performance criteria
and amounts issuable under this Plan on an annual basis.
47
<PAGE> 50
PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of the Company's Common Stock as of the date of this Prospectus and as
adjusted to reflect the sale by the Company and the Selling Stockholders of the
shares of Common Stock offered hereby (assuming no exercise of the Underwriters'
over-allotment option), by (i) each person (or group of affiliated persons)
known by the Company to be the beneficial owner of more than 5% of the
outstanding Common Stock (assuming conversion of all outstanding Preferred Stock
and the exercise of warrants to purchase 259,856 shares of Common Stock), (ii)
each of the Company's Named Executives and directors, (iii) all of the Company's
executive officers and directors as a group and (iv) the Selling Stockholders.
Except as otherwise indicated in the footnotes to this table, the Company
believes that the persons named in this table have sole voting and investment
power with respect to all the shares of Common Stock indicated.
<TABLE>
<CAPTION>
Shares Number of
Beneficially Owned Shares Shares
Prior to the Being Beneficially Owned
Offering(1) Offered After the Offering(1)
------------------- --------- ---------------------
Name of Beneficial Owner:(2) Number Percent Number Number Percent
---------------------------- --------- ------- --------- ---------- --------
<S> <C> <C> <C> <C> <C>
Advent International Group(3).............. 883,871 22.7% -- 883,871 14.6%
Weston Presidio Offshore Capital C.V.(4)... 646,558 16.7 -- 646,558 10.6
PNC Capital Corp(5)........................ 457,403 11.2 -- 457,403 7.3
Exeter Venture Management Corp.(6)......... 333,632 8.6 333,632 -- *
BNP Venture Holding Corp.(7)............... 286,401 7.4 -- 286,401 4.7
Seacoast Capital Partners, L.P.(8)......... 209,855 5.2 50,000 159,855 2.6
Samuel Bloomberg(9)........................ 912,362 22.3 85,119 827,243 13.1
Jeffrey Stone(10).......................... 321,618 8.0 16,473 305,145 4.9
Joseph McGuire(11)......................... 12,595 * -- 12,595 *
Jeffrey Bloomberg(12)...................... 291,059 7.5 17,478 273,581 4.5
Matthew Bronfman(13)....................... 112,143 2.8 -- 112,143 1.8
Michael Cronin(14)......................... 646,558 16.7 -- 646,558 10.6
Armin Biller(15)........................... 14,529 * 7,298 7,231 *
All executive officers and directors as a
group (6 persons)(16).................... 2,296,335 52.9% 119,070 2,177,265 33.3%
</TABLE>
- ---------------
* Less than 1%.
(1) Includes the number of shares and percentage ownership represented by such
shares determined to be beneficially owned by a person in accordance with
the rules of the Securities and Exchange Commission. The number of shares
beneficially owned by a person includes shares of Common Stock that are
subject to (a) options held by that person that are currently exercisable
or exercisable within 60 days of the date of this Prospectus or (b)
warrants that are currently exercisable or that will be exercisable upon
consummation of the Offering. Such exercisable options and warrants are
described in the footnotes to this table for each such person. Such shares,
however, are not deemed outstanding for the purposes of computing the
percentage ownership of each other person.
(2) Unless otherwise specified, the address of all persons who are executive
officers or directors of the Company is in care of the Company, 40 Hudson
Road, Canton, Massachusetts 02021.
(3) Includes 642,040 shares held by Global Private Equity II Limited
Partnership (including 12,281 shares issuable upon exercise of outstanding
warrants) and 241,831 shares held by Advent Direct Investment Program
Limited Partnership (including 4,627 shares issuable upon exercise of
outstanding warrants). Its address is 101 Federal Street, Boston,
Massachusetts 02110.
(4) Includes 11,832 shares issuable upon exercise of outstanding warrants. Its
address is One Federal Street, Boston, Massachusetts 02110.
(5) Includes 209,855 shares issuable upon exercise of outstanding warrants. Its
address is One PNC Plaza, Pittsburgh, Pennsylvania 15222.
(6) Includes 166,816 shares held by Exeter Venture Lenders, L.P. (including
104,928 shares issuable upon exercise of outstanding warrants) and 166,816
shares held by Exeter Equity Partners, L.P. (including 104,928 shares
issuable upon exercise of outstanding warrants). The 333,632 shares sold by
Exeter Venture Management Corp. include 166,816
48
<PAGE> 51
shares sold by Exeter Venture Lenders, L.P. and 166,816 shares sold by
Exeter Equity Partners, L.P. Its address is 10 East 53rd Street, New York,
New York 10022.
(7) Includes 3,383 shares issuable upon exercise of outstanding warrants. Its
address is Banexi/12 Rue Chauchat, 75009 Paris, France.
(8) Consists of 209,855 shares issuable upon exercise of outstanding warrants.
Its address is 55 Ferncroft Road, Danvers, Massachusetts 01923.
(9) Includes 48,912 shares held, in the aggregate, by the Samuel Bloomberg
Family Trusts for the benefit of Mr. Bloomberg's children and 24,774 shares
held by Carolina Bloomberg, the wife of Mr. Bloomberg. Carolina Bloomberg's
24,774 shares include 313 shares issuable upon exercise of outstanding
warrants. Mr. Bloomberg expressly disclaims beneficial ownership of the
shares held by the Samuel Bloomberg Family Trusts and Carolina Bloomberg.
Also includes 208,916 shares subject to options granted by the Company to
Mr. Bloomberg exercisable within 60 days of the date of this Prospectus.
The 85,119 shares sold by Mr. Bloomberg include 17,234 shares sold by
Carolina Bloomberg and 16,182 shares sold, in the aggregate, by the Samuel
Bloomberg Family Trusts. After the Offering, Carolina Bloomberg will hold
7,540 shares (including 313 shares issuable upon the exercise of warrants)
and the Samuel Bloomberg Family Trusts will hold, in the aggregate, 32,730
shares.
(10) Includes 26,240 shares held by trusts for the benefit of Mr. Stone's
children. Mr. Stone expressly disclaims beneficial ownership of these
shares. Also includes 114,978 shares subject to options granted by the
Company to Mr. Stone exercisable within 60 days of the date of this
Prospectus.
(11) Includes 12,595 shares subject to options granted by the Company
exercisable within 60 days of the date of this Prospectus.
(12) Includes 8,083 shares held, in the aggregate, by trusts for the benefit of
Mr. Bloomberg's children. Mr. Bloomberg expressly disclaims beneficial
ownership of these shares. Also includes 48,912 shares held, in the
aggregate, by the Samuel Bloomberg Family Trusts, of which Mr. Bloomberg is
a trustee. Mr. Bloomberg expressly disclaims beneficial ownership of these
shares. Also includes 6,560 shares subject to options granted by the
Company to Mr. Bloomberg exercisable within 60 days of the date of this
Prospectus and 609 shares issuable upon exercise of outstanding warrants.
The 17,478 shares sold by Mr. Bloomberg include 16,182 shares sold, in the
aggregate, by the Samuel Bloomberg Family Trusts. After the Offering, the
Samuel Bloomberg Family Trusts will hold, in the aggregate, 32,730 shares.
(13) Includes 107,584 shares subject to options granted by the Company
exercisable within 60 days of the date of this Prospectus and 84 shares
issuable upon exercise of outstanding warrants.
(14) Includes shares held by Weston Presidio Offshore Capital C.V. ("Weston
Presidio"). See Note 4 above. Mr. Cronin is a general partner of WP Capital
Management, L.P., the general partner of Weston Presidio, and as such, may
be deemed to share voting and investment power with respect to all shares
held by Weston Presidio. Mr. Cronin expressly disclaims beneficial
ownership of these shares, except to the extent of his pecuniary interest
therein.
(15) Includes 313 shares issuable upon exercise of outstanding warrants.
(16) See Notes 9 through 14 above.
49
<PAGE> 52
CERTAIN TRANSACTIONS
CERTAIN FINANCING TRANSACTIONS
On November 28, 1995, the Company sold an aggregate of 911,787 shares of
its Series A Preferred Stock in a private venture capital financing at a price
of $6.46 per share. Among the purchasers in the initial closing of this
financing were Weston Presidio Offshore Capital, C.V. and BNP Venture Holding
Corp., each 5% stockholders of the Company, and Matthew Bronfman and Jeffrey
Bloomberg, directors of the Company, and Armin Biller and Harriet Bloomberg,
family members of directors and executive officers of the Company. In connection
with such transaction, Bloomberg Associates, Inc., of which Jeffrey Bloomberg, a
director of the Company, is President, received $150,000 in consulting fees in
connection with a capital restructuring of the Company. At the same time, the
Company repurchased its outstanding Common Stock of the Company then held by
Matthew Bronfman (a director of the Company) and certain of his family members,
for approximately $550,000 in cash and a $1.0 million subordinated promissory
note accruing interest at an effective rate of 10.8% per annum (the "Redemption
Note"). The Redemption Note must be repaid in full upon the closing of the
Offering, together with an additional payment of approximately $814,000 due to
such redeeming stockholders upon the consummation of the Offering.
On May 13, 1996, in connection with the Bryn Mawr Acquisition, the Company
sold an additional 788,349 shares of Series A Preferred Stock for net proceeds
of $5.1 million to Advent Direct Investment Program Limited Partnership and
Global Private Equity II Limited Partnership, each a 5% stockholder of the
Company, and to Carolina Bloomberg, the spouse of Samuel Bloomberg.
On March 7, 1997, and in connection with a $2.0 million bridge loan from a
predecessor of BankBoston, the Company's existing lender ("BankBoston"), the
Company entered into a Warrant and Debenture Commitment with certain of its
stockholders including Global Private Equity II Limited Partnership, Weston
Presidio Offshore Capital, C.V., Advent Direct Investment Program Limited
Partnership, BNP Venture Holding Corp., Jeffrey Bloomberg, Matthew Bronfman,
Carolina Bloomberg, Harriet Bloomberg and Armin Biller. Pursuant to the terms of
the Warrant and Debenture Commitment, the participating stockholders agreed,
upon a put by BankBoston or at the request of the Company, to purchase 10%
Convertible Debentures in an aggregate amount of $2.0 million (the
"Debentures"). In consideration for this obligation, the Company issued to the
participating stockholders warrants to purchase 37,138 shares of Common Stock at
an exercise price of $6.46 per share. The Debentures were never issued because
the bridge loan was paid in full on May 30, 1997.
On May 30, 1997, in connection with the HiFi Buys Acquisition, the Company
sold an aggregate of 866,425 shares of its Series B Preferred Stock to
additional and existing investors at $8.08 per share. Among such investors were
Weston Presidio Offshore Capital, C.V., Advent Direct Investment Program Limited
Partnership, BNP Venture Holding Corp., PNC Capital Corp, Jeffrey Bloomberg,
Matthew Bronfman, Carolina Bloomberg and Harriet Bloomberg. At the same time,
the Company issued $15 million in Senior Subordinated Notes (the "Senior Notes")
and detachable warrants to purchase an aggregate of up to 629,566 shares of
Common Stock with an exercise price of $.002 per share to PNC Capital Corp,
Seacoast Capital Partners, L.P., Exeter Venture Lenders, L.P., and Exeter Equity
Partners, L.P. (the "Exeter Entities"), each a 5% stockholder of the Company.
Each of PNC Capital Corp and Seacoast Capital Partners, L.P. holds $5.0 million
of the Senior Notes and warrants to purchase 209,856 shares of Common Stock, and
each of the Exeter Entities holds $2.5 million of the Senior Notes and Warrants
to purchase 104,928 shares of Common Stock. Each Exeter Entity is selling all
104,928 shares of Common Stock issuable upon exercise of such warrants as a
Selling Stockholder in the Offering. Seacoast Capital Partners, L.P. is selling
50,000 shares of Common Stock issuable upon partial exercise of its warrants as
a Selling Stockholder in the Offering.
50
<PAGE> 53
OTHER TRANSACTIONS AND RELATIONSHIPS
In May 1996, in connection with the Bryn Mawr Acquisition, the Company
entered into a consulting agreement with Fred Lokoff, the former owner of Bryn
Mawr and a former director of the Company. This consulting agreement was amended
as of April 23, 1997 and currently has a term of four years (the "Consulting
Period") expiring May 2000. Pursuant to the amended agreement, the Company is
obligated to pay Mr. Lokoff out-of-pocket expenses plus a monthly payment of
$20,833 for each month during the first year of the Consulting Period, and
$4,167 for each month during years three and four of the Consulting Period. The
Company also entered into a 15 year lease of its King of Prussia, Pennsylvania
distribution facility with an affiliate of Mr. Lokoff and agreed to sublease a
portion in this distribution facility back to another affiliate of Mr. Lokoff at
no rental charge. During fiscal 1997, the Company paid approximately $276,000 in
total rent under such lease.
The Company leases space for its Crystal Mall store in Waterford,
Connecticut from an affiliate of NED. This mall is managed by WellsPark Group
Limited Partnership. Steven Fischman, who will serve as director of the Company
commencing upon the consummation of the Offering, is the President of NED and
the Vice Chairman of WellsPark Group Limited Partnership. The Company paid such
lessor $167,043 in rent and related charges during fiscal 1997, and $204,594 in
rent and related charges in fiscal 1998 through May 31, 1998.
51
<PAGE> 54
DESCRIPTION OF CAPITAL STOCK
Effective upon the consummation of the Offering, the authorized capital
stock of the Company will consist of 30,000,000 shares of Common Stock, $.01 par
value, and 10,000,000 shares of Preferred Stock, $.01 par value. Prior to the
Offering, there were outstanding an aggregate of 1,700,136 shares of Series A
Preferred Stock and 866,425 shares of Series B Preferred Stock which will
automatically convert into an aggregate of 2,566,561 shares of Common Stock upon
the consummation of the Offering. In addition, prior to the Offering, there were
outstanding warrants to purchase an aggregate of 771,664 shares of Common Stock
at a weighted average exercise price of $1.42. Of these, warrants to purchase
259,856 shares of Common Stock will be exercised immediately prior to the
closing of the Offering and these shares will be sold by Selling Stockholders in
the Offering.
The following summary description of the Company's capital stock is not
intended to be complete and is qualified in its entirety by reference to the
provisions of applicable law and to the Company's Amended and Restated
Certificate of Incorporation (the "Charter") and Amended and Restated By-laws
(the "By-laws"), filed as exhibits to the Registration Statement of which this
Prospectus is a part. The Charter and By-laws will be effective upon the
consummation of the Offering.
COMMON STOCK
Holders of Common Stock are entitled to one vote for each share held on all
matters submitted to a vote of stockholders and do not have cumulative voting
rights. Accordingly, holders of a majority of the shares of Common Stock
entitled to vote in any election of directors may elect all of the directors
standing for election. Holders of Common Stock are entitled to receive ratably
such dividends, if any, as may be declared by the Board of Directors out of
funds legally available therefor, subject to any preferential dividend rights of
outstanding Preferred Stock which the Company may designate and issue in the
future. Upon the liquidation, dissolution or winding up of the Company, the
holders of Common Stock are entitled to receive ratably the net assets of the
Company available after the payment of all debts and other liabilities and
subject to the prior rights of any outstanding Preferred Stock. Holders of
Common Stock have no preemptive, subscription, redemption or conversion rights.
The outstanding shares of Common Stock are, and the shares offered by the
Company in the Offering will be, when issued and paid for, fully paid and
nonassessable. The rights, preferences and privileges of holders of Common Stock
are subject to, and may be adversely affected by, the rights of the holders of
shares of any series of Preferred Stock which the Company may designate and
issue in the future.
PREFERRED STOCK
Under the terms of the Charter, the Board of Directors is authorized,
subject to any limitations prescribed by law, without stockholder approval, to
issue shares of Preferred Stock in one or more series. Each such series of
Preferred Stock shall have such rights, preferences, privileges and
restrictions, including voting rights, dividend rights, conversion rights,
redemption privileges and liquidation preferences, as shall be determined by the
Board of Directors. The purpose of authorizing the Board of Directors to issue
Preferred Stock and determine its rights and preferences is to eliminate delays
associated with a stockholder vote on specific issuances. The issuance of
Preferred Stock, while providing desirable flexibility in connection with
possible acquisitions and other corporate purposes, could have the effect of
making it more difficult for a third party to acquire, or of discouraging a
third party from acquiring, a majority of the outstanding voting stock of the
Company. The Company has no present plans to issue any shares of Preferred
Stock, but the Company will, effective upon the consummation of the Offering,
authorize and reserve shares of Series A Junior Preferred Stock for issuance in
connection with the Rights Plan discussed below. See "Risk Factors -- Effect of
Certain Charter and By-law Provisions; Antitakeover Provisions."
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<PAGE> 55
DELAWARE LAW AND CERTAIN CHARTER AND BY-LAW PROVISIONS; ANTI-TAKEOVER EFFECTS
The Company is subject to the provisions of Section 203 of the Delaware
General Corporation Law (the "DGCL"). Subject to certain exceptions, Section 203
prohibits a publicly-held Delaware corporation from engaging in a "business
combination" with an "interested stockholder" for a period of three years after
the date of the transaction in which the person became an interested
stockholder, unless the interested stockholder attained such status with the
approval of the Board of Directors or the business combination is approved in a
prescribed manner, or certain other conditions are satisfied. A "business
combination" includes mergers, asset sales and other transactions resulting in a
financial benefit to the interested stockholder. Subject to certain exceptions,
an "interested stockholder" is a person who, together with affiliates and
associates, owns, or within three years did own, 15% or more of the
corporation's voting stock.
The By-laws provide that (i) the number of directors shall be determined
from time to time by resolution adopted by a majority of the Board of Directors,
(ii) vacancies on the Board of Directors must be filled by the Board unless and
until filled by the stockholders, and (iii) directors may be removed only for
cause by the vote of the holders of at least 75% of the shares then entitled to
vote at an election of directors.
The By-laws provide for a classified Board of Directors consisting of three
classes of directors having staggered terms of three years each, with each of
the classes being as nearly equal as possible. A single class of directors will
be elected each year at the Company's annual meeting of stockholders. Subject to
transition provisions, each director elected at each such meeting will serve for
a term ending on the date of the third annual meeting of stockholders after his
election and until his successor has been elected and duly qualified. See
"Management -- Board Composition."
The Charter empowers the Board of Directors, when considering a tender
offer or merger or acquisition proposal, to take into account any factors that
the Board of Directors determines to be relevant, including, without limitation,
(i) the interests of the Company's stockholders, including the possibility that
these interests might be best served by the continued independence of the
Company, (ii) whether the proposed transaction might violate federal or state
laws, (iii) not only the consideration being offered in the proposed
transaction, in relation to the then current market price for the outstanding
capital stock of the Company, but also the market price for the capital stock of
the Company over a period of years, the estimated price that might be achieved
in a negotiated sale of the Company as a whole or in part or through orderly
liquidation, the premiums over market price for the securities of other
corporations in similar transactions, current political, economic and other
factors bearing on securities prices and the Company's financial condition and
future prospects, and (iv) the social, legal and economic effects upon
employees, suppliers, customers, creditors and others having similar
relationships with the Company, upon the communities in which the Company
conducts its business and upon the economy of the state, region and nation.
Under the By-laws, special meetings of the stockholders may be called only
by 51% of the Board of Directors then in office, or by the Chairman of the Board
or the Chief Executive Officer, and only matters set forth in the notice calling
any such meeting may be considered at the meeting. The Charter provides that
stockholder actions must be taken at a meeting at which a quorum of stockholders
is present in person or by proxy and that stockholders will not be entitled to
take action by written consent in lieu of a meeting. The By-laws provide that
the Board of Directors may postpone a scheduled stockholders' meeting, and the
Chairman of the Board may adjourn a stockholders' meeting even if a quorum is
present. Nominations for election to the Board of Directors may be made either
by the Board or by holders of at least 1% of the issued and outstanding voting
shares of the Company who have held such stock for at least one year.
Stockholder nominations of director nominees who are not nominated by the Board
of Directors must be submitted to the Secretary of the Company not less than 120
days prior to the date when the Corporation first mailed to the stockholders its
proxy statement for the previous year's annual meeting.
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<PAGE> 56
The foregoing provisions could have the effect of delaying until the next
annual stockholders meeting stockholder actions which are favored by the holders
of a majority of the then outstanding voting securities of the Company. These
provisions may also discourage another person or entity from making a tender
offer for the Company's Common Stock, because such person or entity, even if it
acquired a majority of the outstanding voting securities of the Company, would
be able to take action as a stockholder (such as electing new directors or
approving a merger) only at a duly called stockholders' meeting, and not by
written consent.
The DGCL provides generally that the affirmative vote of a majority of the
shares entitled to vote on any matter is required to amend a corporation's
certificate of incorporation or by-laws, unless a corporation's certificate of
incorporation or by-laws, as the case may be, requires a greater percentage. The
Charter requires the affirmative vote of the holders of at least 75% of the
outstanding voting stock of the Company to amend or repeal any of the foregoing
Charter provisions. A 75% vote of stockholders is required for the stockholders
to adopt, amend or repeal any By-law provisions. The By-laws may also be amended
or repealed by a majority vote of the Board of Directors subject to any
limitations set forth in the By-laws.
STOCKHOLDER RIGHTS PLAN
The Company's Board of Directors will adopt, effective upon the
consummation of the Offering, a Stockholder Rights Plan (the "Rights Plan"). The
adoption of the Rights Plan by the Board is likely to make it more difficult for
a third party to acquire the Company or large portions of its Common Stock. Set
forth below is a general summary of the Rights Plan. Such summary is qualified
in its entirety by reference to the Rights Plan, a copy of which is included as
an exhibit to the Registration Statement of which this Prospectus is a part.
One preferred stock purchase right (a "Right") will be distributed, by way
of dividend for each outstanding share of Common Stock, to stockholders of
record as of a day prior to the effectiveness of the Registration Statement of
which this Prospectus is a part (the "Record Date"). In addition, one Right will
automatically attach to each share of Common Stock issued between the Record
Date and the Distribution Date (as hereinafter defined). Each Right entitles the
holder thereof to purchase one one-thousandth of one share (each, a "Unit") of
the Company's Series A Junior Participating Cumulative Preferred Stock, $.01 par
value (the "Junior Preferred Stock") at a cash purchase price per Unit of $100,
subject to adjustment. The Rights and their exercise price will be adjusted to
take into account certain dilutive events.
The Junior Preferred Stock shall rank prior and senior to the Common Stock
with respect to dividends and distributions but junior to any series or class of
Preferred Stock that is designated as senior to the Junior Preferred Stock. The
holders of the Junior Preferred Stock shall be entitled to receive quarterly
dividends when, as and if declared by the Board of Directors, commencing on the
first day of March, June, September or December occurring after the first
issuance of a share or fraction of a share of the Junior Preferred Stock, in an
amount per share equal to the greater of (i) $1.00, or (ii) 1,000 times the
aggregate per share amount of all dividends declared on the Common Stock.
Dividends shall accrue and be cumulative but shall not accrue interest. Except
as otherwise provided by law or set forth below, the holders of shares of Junior
Preferred Stock shall vote together with the Common Stock, and any other capital
stock of the Company having general voting rights, as one class. Each share of
Junior Preferred Stock shall entitle the holder thereof to 1,000 votes on all
matters submitted to a vote.
Whenever dividends payable on any shares of Junior Preferred Stock shall be
in arrears in an amount equal to two full quarterly dividends (whether or not
declared and whether or not consecutive), the holders of the Junior Preferred
Stock, voting separately as a single class, shall have the right to elect two
directors of the Company at a special meeting of the stockholders or at the
Company's next annual meeting of stockholders and at each subsequent annual
meeting of stockholders. In such event, the size of the Board shall be increased
accordingly and the vacancies
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<PAGE> 57
created thereby shall be filled by the vote of the holders of the Junior
Preferred Stock. Such election right shall terminate at such time as all arrears
in dividends shall have been paid or declared and set apart for payment,
whereupon the terms of office of all Junior Preferred Directors shall terminate.
Upon the earlier to occur of (i) the tenth calendar day after the
announcement that an "Acquiring Person" has acquired beneficial ownership of
more than 15% of the outstanding shares of Common Stock (such date being the
"Stock Acquisition Date"), or (ii) the tenth business day following the
announcement of a tender offer or exchange offer that, upon consummation, would
result in a person or group becoming the beneficial owner of more than 15% of
the outstanding shares of Common Stock (such date being the "Tender Offer
Date"); the rights shall separate from the Common Stock and become exercisable
(such earlier date of the Stock Acquisition Date and the Tender Offer Date being
the "Distribution Date"). An "Acquiring Person" shall be defined as a person or
group of affiliated or associated persons that has acquired more than 15% of the
outstanding shares of Common Stock, but shall not be deemed to include any
underwriters in their capacities as such. No person who is a stockholder of the
Company immediately prior to the consummation of the Offering will be an
Acquiring Person unless that person acquires beneficial ownership of both (i)
more than 20% of the outstanding Common Stock (other than Common Stock issuable
upon exercise of stock options granted under an incentive plan approved by the
Board of Directors), and (ii) a greater percentage of the then outstanding
Common Stock than the percentage held by such person as of the consummation of
the Offering.
At any time after a Distribution Date, the Board may, in its discretion,
exchange all or any part of the then outstanding and exercisable Rights for
shares of Common Stock or Units of Junior Preferred Stock. The exchange ratio
shall be one share of Common Stock or one Unit of Junior Preferred Stock for
each Right. However, the Board will not have the authority to effect such an
exchange after any person becomes the beneficial owner of 50% or more of the
Common Stock of the Company. The Rights may be redeemed in whole but not in
part, at a price of $0.001 per Right by the Board of Directors only until the
earlier of (i) the tenth calendar year after a Distribution Date, or (ii) the
expiration date of the Rights Plan. The Board in its sole discretion may amend
the Rights Plan until a Distribution Date. After a Distribution Date, the Board
may make certain amendments to the Rights Agreement but none that will adversely
affect the interests of Rights holders.
LIMITATION OF LIABILITY AND INDEMNIFICATION
The Charter contains certain provisions permitted under the DGCL relating
to the liability of directors. These provisions eliminate a director's personal
liability for monetary damages resulting from a breach of fiduciary duty, except
in certain circumstances involving certain wrongful acts, such as (i) for any
breach of the director's duty of loyalty to the Company or its stockholders,
(ii) for acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law, (iii) under Section 174 of the DGCL or
(iv) for any transaction from which the director derives an improper personal
benefit. These provisions do not limit or eliminate the rights of the Company or
any stockholder to seek non-monetary relief, such as an injunction or
rescission, in the event of a breach of a director's fiduciary duty. These
provisions will not alter a director's liability under federal securities laws.
The Charter also contains provisions indemnifying the directors and officers of
the Company to the fullest extent permitted by the DGCL. The Company believes
that these provisions will assist the Company in attracting and retaining
qualified individuals to serve as directors.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Company's Common Stock is
BankBoston, N.A.
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<PAGE> 58
SHARES ELIGIBLE FOR FUTURE SALE
Prior to the Offering, there has been no public market for the Common Stock
and there can be no assurances with respect to the effect, if any, that public
sales of shares or the availability of shares will have on the market price of
the Common Stock prevailing from time to time. Sales of substantial amounts of
Common Stock in the public market following the Offering, or the perception that
such sales may occur, could adversely affect the market price of the Common
Stock and could impair the Company's future ability to obtain capital through an
offering of equity securities. See "Risk Factors -- Shares Eligible for Future
Sale."
As of March 31, 1998, the Company had outstanding 3,882,690 shares of
Common Stock (assuming conversion of all outstanding Preferred Stock into an
aggregate of 2,566,561 shares of Common Stock and the exercise of warrants to
purchase 259,856 shares of Common Stock) held of record by 23 stockholders. Upon
completion of the Offering, the Company will have 6,082,690 shares of Common
Stock outstanding (assuming no exercise of outstanding options or warrants other
than warrants exercisable into 259,856 shares of Common Stock being sold by a
Selling Stockholder in the Offering, but assuming conversion of all outstanding
Preferred Stock into 2,566,561 shares of Common Stock, each of which will occur
upon consummation of the Offering). Of these outstanding shares, the 2,710,000
shares of Common Stock being sold in the Offering will be freely tradable
without restriction or further registration under the Securities Act, except for
shares acquired by an "affiliate" or "affiliates" of the Company (as that term
is used in Rule 144 promulgated under the Securities Act, "Affiliate" or
"Affiliates"), which may generally only be sold in compliance with the
limitations of Rule 144 as described below.
SALES OF RESTRICTED SHARES
The remaining 3,372,690 shares of Common Stock were issued and sold by the
Company prior to the Offering in private transactions and therefore constitute
"restricted securities" under Rule 144. As a result, such shares may not be
resold unless they are registered under the Securities Act or are sold pursuant
to an applicable exemption from registration, such as Rule 144. The Company and
its existing stockholders holding all of the Preferred Stock and Common Stock
outstanding immediately prior to the Offering have agreed pursuant to lock-up
agreements ("Lock-Up Agreements") not to sell, offer or contract to sell, sell
short, engage in certain hedging transactions or otherwise dispose of, with
certain exceptions, any shares of Common Stock for a period of 180 days after
the date of this Prospectus without the prior written consent of BT Alex. Brown
Incorporated. See "Underwriting."
In general, under Rule 144 as currently in effect, a stockholder (or
stockholders whose shares are aggregated) who has beneficially owned
"restricted" shares (as defined under Rule 144) for at least one year is
entitled to sell, within any three-month period, a number of shares that does
not exceed the greater of (i) one percent of the then outstanding shares of
Common Stock or (ii) the average weekly trading volume of the Common Stock
reported through the Nasdaq Stock Market during the four calendar weeks
preceding the date on which notice of the sale is filed with the Securities and
Exchange Commission. Sales under Rule 144 are subject to certain manner of sale
provisions, notice requirements and the availability of current public
information about the Company. In addition, a stockholder who is not deemed an
Affiliate at any time during the 90 days preceding a sale and who has
beneficially owned his shares for at least two years, is entitled to sell such
shares under Rule 144(k) without regard to volume limitations, manner of sale
provisions, notice requirements or the availability of current public
information concerning the Company.
OPTIONS
The Company has granted options to purchase an aggregate of 845,059 shares
of Common Stock to certain directors, officers and employees pursuant to the
1995 Stock Option Plan and, upon the consummation of the Offering, will grant
options to purchase 209,988 shares of Common Stock to
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<PAGE> 59
certain directors, officers and employees pursuant to the 1998 Plan. All shares
issuable upon exercise of options are subject to Lock-up Agreements or to a
lock-up period of 120 days pursuant to the Company's stock option agreements.
WARRANTS
As of the date of this Prospectus, warrants to purchase an aggregate of
511,808 shares of Common Stock were outstanding, at an average weighted exercise
price of $2.13 per share, excluding warrants to purchase 259,856 shares which
will be exercised and sold in the Offering. All of these warrants were issued by
the Company between March 7, 1997 and May 30, 1997. All of the shares issuable
pursuant to such warrants are subject to Lock-up Agreements.
REGISTRATION RIGHTS
The Company has entered into registration rights agreements with certain of
its stockholders owning an aggregate of 3,884,498 shares of Common Stock, which
provide those stockholders with prescribed rights, subject to certain conditions
and limitations, to require the Company to register the sale of shares of Common
Stock held by such stockholders under the Securities Act or to include such
shares in a registered offering being effected by the Company for its own
account. Copies of such registration rights agreements are included as exhibits
to the Registration Statement of which this Prospectus is a part. All of the
shares entitled to the benefits of such registration rights agreements are
subject to Lock-up Agreements.
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<PAGE> 60
UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement, the
Underwriters named below (the "Underwriters"), through their Representatives, BT
Alex. Brown Incorporated, PaineWebber Incorporated and Dain Rauscher Wessels, a
division of Dain Rauscher Incorporated ("Dain Rauscher Wessels") have severally
agreed to purchase from the Company and the Selling Stockholders the following
respective numbers of shares of Common Stock at the initial public offering
price less the underwriting discounts and commissions set forth on the cover
page of this Prospectus:
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITER SHARES(1)
----------- -----------
<S> <C>
BT Alex. Brown Incorporated.................................
PaineWebber Incorporated....................................
Dain Rauscher Wessels.......................................
-----------
Total............................................. 2,710,000
===========
</TABLE>
- ---------------
(1) Includes 259,856 shares being sold upon the exercise of warrants which the
Underwriters are acquiring from certain Selling Stockholders.
The Underwriting Agreement provides that the obligations of the
Underwriters are subject to certain conditions precedent and that the
Underwriters will purchase all shares of the Common Stock offered hereby if any
of such shares are purchased.
The Company and the Selling Stockholders have been advised by the
Representatives of the Underwriters that the Underwriters propose to offer the
shares of Common Stock to the public at the initial public offering price set
forth on the cover page of this Prospectus and to certain dealers at such price
less a concession not in excess of $ per share. The Underwriters may
allow, and such dealers may reallow, a concession not in excess of $
per share to certain other dealers. After the initial public offering, the
public offering price and other selling terms may be changed by the
Representatives of the Underwriters.
The Company has granted to the Underwriters an option, exercisable not
later than 30 days after the date of this Prospectus, to purchase up to 406,500
additional shares of Common Stock at the public offering price less the
underwriting discounts and commissions set forth on the cover page of this
Prospectus. To the extent that the Underwriters exercise such option, each of
the Underwriters will have a firm commitment to purchase approximately the same
percentage thereof that the number of shares of Common Stock to be purchased by
it shown in the above table bears to 2,710,000, and the Company will be
obligated, pursuant to the option, to sell such shares to the Underwriters. The
Underwriters may exercise such option only to cover over-allotments made in
connection with the sale of Common Stock offered hereby. If purchased, the
Underwriters will offer such additional shares on the same terms as those on
which the 2,710,000 shares are being offered.
The Company and Selling Shareholders have agreed to indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act of 1933, as amended.
Shareholders of the Company, holding in the aggregate 3,298,892 shares of
Common Stock and warrants to purchase 510,869 shares of Common Stock, have
agreed not to offer, sell or otherwise dispose of any such Common Stock for a
period of 180 days after the date of this Prospectus without the prior written
consent of BT Alex. Brown Incorporated. BT Alex. Brown Incorporated. See "Shares
Eligible for Future Sale."
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<PAGE> 61
In connection with the Offering, the Underwriters may purchase and sell the
Common Stock in the open market in accordance with Regulation M under the
Exchange Act. These transactions may include over-allotment and stabilizing
transactions and purchases to cover syndicate short positions created in
connection with the Offering. Stabilizing transactions consist of certain bids
or purchases for the purpose of preventing or retarding a decline in the market
price of the Common Stock; and syndicate short positions involve the sale by the
Underwriters of a greater number of shares of Common Stock than they are
required to purchase from the Selling Shareholders in the Offering. The
Underwriters also may impose a penalty bid, whereby selling concessions allowed
to syndicate members or other broker-dealers in respect of the securities sold
in the Offering for their account may be reclaimed by the syndicate if such
securities are repurchased by the syndicate in stabilizing or covering
transactions. These activities may stabilize or maintain or otherwise affect the
market price of the Common Stock, which may be higher than the price that might
otherwise prevail in the open market. The Underwriters are not required to
engage in these activities, and may end any of these activities at any time.
These transactions may be effected on the Nasdaq National Market, in the
over-the-counter market or otherwise.
The Representatives of the Underwriters have advised the Company that the
Underwriters do not intend to confirm sales to any accounts over which they
exercise discretionary authority.
Prior to the Offering, there has been no public market for the Common Stock
of the Company. Consequently, the initial public offering price for the Common
Stock will be determined by negotiation between the Company and the
Representatives of the Underwriters. Among the factors to be considered in such
negotiations are prevailing market conditions, the results of operations of the
Company in recent periods, the market capitalization and stages of development
of other companies which the Company and the Representatives of the Underwriters
believed to be comparable to the Company, estimates of the business potential of
the Company, the present state of the Company's development and other factors
deemed relevant.
LEGAL MATTERS
An opinion will be delivered by Goulston & Storrs, P.C., Boston,
Massachusetts, to the effect that the shares of Common Stock being offered
hereby will, when issued as contemplated by this Prospectus, be validly issued,
fully paid and non-assessable. Effective upon the closing of the Offering, Kitt
Sawitsky will serve as Secretary of the Company and Daniel Avery will serve as
Assistant Secretary of the Company. Mr. Sawitsky and Mr. Avery are both
directors and shareholders of Goulston & Storrs, P.C., counsel to the Company.
Certain legal matters related to the Offering will be passed upon for the
Underwriters by Testa, Hurwitz & Thibeault, LLP, Boston, Massachusetts.
EXPERTS
The consolidated financial statements of the Company as of September 30,
1996 and 1997, for each of the years in the three-year period ended September
30, 1997, and for the six month period ended March 31, 1998 included in this
Prospectus have been audited by Deloitte & Touche LLP, independent auditors, as
set forth in their report thereon appearing elsewhere herein, and are included
in reliance upon such report of Deloitte & Touche LLP given upon the authority
of said firm as experts in accounting and auditing.
The financial statements of HiFi Buys Incorporated for the years ended
December 31, 1996, 1995 and 1994, included in this Prospectus have been audited
by Deloitte & Touche LLP, independent auditors, as set forth in their report
thereon appearing elsewhere herein, and are included in reliance upon such
report of Deloitte & Touche LLP given upon the authority of said firm as experts
in accounting and auditing.
The combined financial statements of Bryn Mawr Radio and Television Centre,
Inc. and affiliate for the year ended August 31, 1995, included in this
Prospectus have been audited by Deloitte &
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<PAGE> 62
Touche LLP, independent auditors, as set forth in their report thereon appearing
elsewhere herein, and are included in reliance upon such report of Deloitte &
Touche LLP given upon the authority of said firm as experts in accounting and
auditing.
ADDITIONAL INFORMATION
A Registration Statement on Form S-1 under the Securities Act relating to
the Common Stock offered hereby has been filed by the Company with the
Securities and Exchange Commission (the "Commission") in Washington, D.C. This
Prospectus does not contain all of the information set forth in the Registration
Statement and the exhibits and schedules thereto, certain portions having been
omitted from this Prospectus in accordance with the rules and regulations of the
Commission. Statements contained in this Prospectus concerning the contents of
any contract or any other document referred to are not necessarily complete;
reference is made in each instance to the copy of such contract or document
filed as an exhibit to the Registration Statement, each such statement being
qualified in all respects by such reference. For further information with
respect to the Company and the Common Stock offered hereby, reference is made to
such Registration Statement, the exhibits thereto and the financial statements,
notes and schedules filed as a part thereof. The Registration Statement may be
inspected and copied at the public reference facilities maintained by the
Commission at 450 Fifth Street, N.W., Washington, DC 20549, and at the
Commission's regional offices located at Seven World Trade Center, New York, NY
10048 and at 500 West Madison Street, Chicago, Illinois 60661. Copies of such
materials, including the Registration Statement, can be obtained from the Public
Reference Section of the Commission, 450 Fifth Street, N.W., Washington, DC
20549 at prescribed rates. The Commission also maintains a World Wide Web site
that contains reports, proxy and information statements, and other information
regarding registrants that file electronically with the Commission. The site and
this Registration Statement may be accessed at http://www.sec.gov.
The Company intends to furnish its stockholders with annual reports
containing financial statements certified by its independent accountants and
make available quarterly reports containing unaudited financial information for
the first three quarters of each fiscal year.
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<PAGE> 63
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
TWEETER HOME ENTERTAINMENT GROUP, INC.
Independent Auditors' Report.............................. F-2
Consolidated Balance Sheets as of September 30, 1996 and
1997 and March 31, 1998................................ F-3
Consolidated Statements of Income for the Years Ended
September 30, 1995, 1996 and 1997, and the Six Months
Ended March 31, 1997 (unaudited) and March 31, 1998.... F-4
Consolidated Statements of Stockholders' Equity (Deficit)
for the Years Ended September 30, 1995, 1996 and 1997,
and the Six Months Ended March 31, 1998................ F-5
Consolidated Statements of Cash Flows for the Years Ended
September 30, 1995, 1996 and 1997, and the Six Months
Ended March 31, 1997 (unaudited) and March 31, 1998.... F-6
Notes to Consolidated Financial Statements................ F-7
PRO FORMA CONDENSED CONSOLIDATED FINANCIAL INFORMATION
(unaudited)............................................ F-23
HIFI BUYS INCORPORATED
Independent Auditors' Report.............................. F-26
Statements of Operations for the Years Ended December 31,
1996, 1995 and 1994 and the Three Months Ended March
31, 1997 (unaudited) and March 31, 1996 (unaudited).... F-27
Statements of Cash Flows for the Years Ended December 31,
1996, 1995 and 1994 and the Three Months Ended March
31, 1997 (unaudited) and March 31, 1996 (unaudited).... F-28
Notes to Financial Statements............................. F-29
BRYN MAWR RADIO AND TELEVISION CENTRE, INC.
Independent Auditors' Report.............................. F-32
Combined Statement of Operations for the Year Ended August
31, 1995 and the Six Months Ended February 29, 1996
(unaudited) and the Six Months Ended February 28, 1995
(unaudited)............................................ F-33
Combined Statement of Cash Flows for the Year Ended August
31, 1995 and the Six Months Ended February 29, 1996
(unaudited) and the Six Months Ended February 28, 1995
(unaudited)............................................ F-34
Notes to Financial Statements............................. F-35
</TABLE>
F-1
<PAGE> 64
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
Tweeter Home Entertainment Group, Inc.
We have audited the accompanying consolidated balance sheets of Tweeter
Home Entertainment Group, Inc. as of September 30, 1996 and 1997 and March 31,
1998, and the related statements of income, stockholders' equity (deficit), and
cash flows for each of the three years in the period ended September 30, 1997
and the six month period ended March 31, 1998. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of the Company as of September 30, 1996 and
1997 and March 31, 1998, and the results of its operations and its cash flows
for each of the three years in the period ended September 30, 1997 and the six
month period ended March 31, 1998 in conformity with generally accepted
accounting principles.
/s/ DELOITTE & TOUCHE LLP
Boston, Massachusetts
June 5, 1998
F-2
<PAGE> 65
TWEETER HOME ENTERTAINMENT GROUP, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
PRO FORMA
YEARS ENDED SIX MONTHS SIX MONTHS
SEPTEMBER 30, ENDED ENDED
------------------------- MARCH 31, MARCH 31,
1996 1997 1998 1998
----------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................. $ 438,607 $ 1,156,837 $ 1,138,808
Accounts receivable, net of allowance for doubtful
accounts of $440,000 at September 30, 1996, $631,000 at
September 30, 1997 and $600,000 at March 31, 1998
(unaudited)............................................. 2,791,993 5,472,779 7,396,312
Inventory................................................. 15,352,307 31,160,043 35,471,117
Deferred tax assets....................................... 596,454 1,220,481 1,276,020
Prepaid expenses and other current assets................. 308,867 822,904 649,138
----------- ----------- -----------
Total current assets................................ 19,488,228 39,833,044 45,931,395
PROPERTY AND EQUIPMENT -- Net............................... 13,490,304 17,967,504 17,889,050
DEFERRED TAX ASSET.......................................... 754,464 59,397 108,605
OTHER ASSETS -- Net......................................... -- 331,870 496,970
GOODWILL -- Net............................................. 4,886,287 20,496,115 20,249,636
----------- ----------- -----------
TOTAL............................................... $38,619,283 $78,687,930 $84,675,656
=========== =========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt......................... $ -- $ 400,000 $ 400,000
Amount due to bank........................................ 1,880,743 4,948,702 4,044,346
Accounts payable.......................................... 11,252,458 11,456,967 7,378,773
Accrued expenses.......................................... 3,138,991 8,392,505 14,866,368
Customer deposits......................................... 851,089 1,255,024 1,629,154
Deferred warranty revenue................................. 468,418 1,509,481 1,329,757
----------- ----------- -----------
Total current liabilities........................... 17,591,699 27,962,679 29,648,398
----------- ----------- -----------
LONG-TERM DEBT:
Note payable to bank...................................... 9,700,000 14,500,000 15,100,000
Subordinated debt......................................... 1,000,000 16,387,816 16,207,614
----------- ----------- -----------
Total long-term debt................................ 10,700,000 30,887,816 31,307,614
----------- ----------- -----------
OTHER LONG-TERM LIABILITIES:
Rent related accruals..................................... 2,063,887 2,421,082 2,670,423
Deferred warranty......................................... 650,750 2,175,577 1,555,710
Other long-term liabilities............................... -- 318,780 258,720
----------- ----------- -----------
Total other long-term liabilities................... 2,714,637 4,915,439 4,484,853
Total liabilities................................... 31,006,336 63,765,934 65,440,865
----------- ----------- -----------
COMMITMENTS AND CONTINGENCIES (Note 8)
REDEEMABLE CONVERTIBLE PREFERRED STOCK:
Series A Convertible Preferred Stock, $.01 par value;
authorized, 4,000,000 shares; 1,700,136 shares issued
and outstanding in 1998, 1997 and 1996 (liquidation
preference, $14,432,999 as of March 31, 1998); no shares
outstanding pro forma in 1998........................... 11,596,868 13,399,386 14,432,999 $ --
Series B Convertible Preferred Stock, $.01 par value;
authorized, 4,000,000 shares; 866,425 shares issued and
outstanding in 1998 and 1997 (liquidation preference
$7,741,248 as of March 31, 1998); no shares outstanding
pro forma in 1998....................................... -- 7,191,221 7,741,248 --
----------- ----------- ----------- -----------
11,596,868 20,590,607 22,174,247 --
----------- ----------- ----------- -----------
STOCKHOLDERS' EQUITY (DEFICIT):
Preferred Stock, $.01 par value, 10,000,000 shares
authorized, no shares issued and outstanding actual and
pro forma...............................................
Common stock, $.01 par value, authorized: 30,000,000
shares; 2,755,202 shares issued in 1996, 1997 and 1998
(5,321,763 shares issued pro forma in 1998)............. 27,552 27,552 27,552 53,218
Additional paid-in capital................................ (3,057,683) (2,732,300) (2,732,300) 19,416,281
Retained earnings (deficit)............................... 627,727 (1,382,346) 1,346,809 1,346,809
Note receivable from officer.............................. (31,500) (31,500) (31,500) (31,500)
----------- ----------- ----------- -----------
Total............................................... (2,433,904) (4,118,594) (1,389,439) 20,784,808
Less treasury stock: 1,698,929 shares at cost............. (1,550,017) (1,550,017) (1,550,017) (1,550,017)
----------- ----------- ----------- -----------
Total stockholders' equity (deficit)................ (3,983,921) (5,668,611) (2,939,456) $19,234,791
----------- ----------- ----------- -----------
TOTAL............................................... $38,619,283 $78,687,930 $84,675,656
=========== =========== ===========
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE> 66
TWEETER HOME ENTERTAINMENT GROUP, INC.
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30, SIX MONTHS ENDED MARCH 31,
------------------------------------------ ---------------------------
1995 1996 1997 1997 1998
------------ ------------ ------------ ------------ ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Total revenue.................. $ 60,121,370 $ 80,606,727 $132,525,037 $ 60,582,539 $129,129,712
Cost of sales.................. 39,167,031 51,816,041 86,314,918 39,180,469 84,280,356
------------ ------------ ------------ ------------ ------------
Gross profit................... 20,954,339 28,790,686 46,210,119 21,402,070 44,849,356
Selling expenses............... 15,404,513 21,993,070 35,567,940 14,797,225 30,207,653
Corporate, general and
administrative expenses...... 3,246,443 4,715,697 8,102,190 3,792,702 5,387,351
Amortization of goodwill....... 65,268 129,273 487,084 119,562 455,913
------------ ------------ ------------ ------------ ------------
Income from operations......... 2,238,115 1,952,646 2,052,905 2,692,581 8,798,439
Interest expense............... 628,700 616,879 1,807,660 513,520 1,610,446
------------ ------------ ------------ ------------ ------------
Income before income taxes..... 1,609,415 1,335,767 245,245 2,179,061 7,187,993
Income tax expense (benefit)... (173,498) (453,448) 98,962 876,337 2,875,198
------------ ------------ ------------ ------------ ------------
NET INCOME..................... $ 1,782,913 $ 1,789,215 $ 146,283 $ 1,302,724 $ 4,312,795
============ ============ ============ ============ ============
Accretion of preferred stock... -- 1,035,942 2,156,356 901,261 1,583,640
------------ ------------ ------------ ------------ ------------
Net income (loss) available to
common shareholders.......... 1,782,913 753,273 (2,010,073) 401,463 2,729,155
============ ============ ============ ============ ============
Basic earnings (loss) per
share........................ $ 0.53 $ 0.39 $ (1.20) $ 0.24 $ 1.63
============ ============ ============ ============ ============
Weighted average shares
outstanding.................. 3,371,435 1,940,272 1,672,506 1,672,506 1,672,506
============ ============ ============ ============ ============
Diluted earnings (loss) per
share........................ $ 0.53 $ 0.38 $ (1.20) $ 0.23 $ 0.93
============ ============ ============ ============ ============
Weighted average shares
outstanding.................. 3,371,435 1,983,137 1,672,506 1,714,911 4,615,999
============ ============ ============ ============ ============
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE> 67
TWEETER HOME ENTERTAINMENT GROUP, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL RETAINED NOTE TREASURY STOCK
------------------- PAID-IN EARNINGS RECEIVABLE -----------------------
SHARES AMOUNT CAPITAL (DEFICIT) FROM OFFICER SHARES AMOUNT
--------- ------- ----------- ----------- ------------ --------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, OCTOBER 1, 1994...... 2,755,202 $27,552 $ -- $(4,117,777) $(31,500) $ --
Net income.................. -- 1,782,913
Subchapter S
distributions............. -- (118,615)
--------- ------- ----------- ----------- -------- --------- -----------
BALANCE, SEPTEMBER 30, 1995... 2,755,202 27,552 -- (2,453,479) (31,500) -- --
Treasury stock acquired..... -- 1,698,929 (1,550,017)
Reclassification of
undistributed losses upon
Subchapter S revocation... (3,057,683) 3,057,683
Subchapter S
distributions............. -- (729,750)
Accretion of Series A
Convertible Preferred
Stock..................... -- (1,035,942)
Net income.................. -- 1,789,215
--------- ------- ----------- ----------- -------- --------- -----------
BALANCE, SEPTEMBER 30, 1996... 2,755,202 27,552 (3,057,683) 627,727 (31,500) 1,698,929 (1,550,017)
Issuance of warrants in
connection with
subordinated debt
offering.................. -- 325,383
Accretion of Series A
Convertible Preferred
Stock..................... -- (1,802,520)
Accretion of Series B
Convertible Preferred
Stock..................... -- (353,836)
Net income.................. -- 146,283
--------- ------- ----------- ----------- -------- --------- -----------
BALANCE, SEPTEMBER 30, 1997... 2,755,202 27,552 (2,732,300) (1,382,346) (31,500) 1,698,929 (1,550,017)
Accretion of Series A
Convertible Preferred
Stock..................... -- (1,033,613)
Accretion of Series B
Convertible Preferred
Stock..................... -- (550,027)
Net income.................. -- 4,312,795
--------- ------- ----------- ----------- -------- --------- -----------
BALANCE, MARCH 31, 1998....... 2,755,202 $27,552 $(2,732,300) $ 1,346,809 $(31,500) 1,698,929 $(1,550,017)
========= ======= =========== =========== ======== ========= ===========
<CAPTION>
TOTAL
STOCKHOLDERS'
EQUITY
(DEFICIT)
-------------
<S> <C>
BALANCE, OCTOBER 1, 1994...... $(4,121,725)
Net income.................. 1,782,913
Subchapter S
distributions............. (118,615)
-----------
BALANCE, SEPTEMBER 30, 1995... (2,457,427)
Treasury stock acquired..... (1,550,017)
Reclassification of
undistributed losses upon
Subchapter S revocation...
Subchapter S
distributions............. (729,750)
Accretion of Series A
Convertible Preferred
Stock..................... (1,035,942)
Net income.................. 1,789,215
-----------
BALANCE, SEPTEMBER 30, 1996... (3,983,921)
Issuance of warrants in
connection with
subordinated debt
offering.................. 325,383
Accretion of Series A
Convertible Preferred
Stock..................... (1,802,520)
Accretion of Series B
Convertible Preferred
Stock..................... (353,836)
Net income.................. 146,283
-----------
BALANCE, SEPTEMBER 30, 1997... (5,668,611)
Accretion of Series A
Convertible Preferred
Stock..................... (1,033,613)
Accretion of Series B
Convertible Preferred
Stock..................... (550,027)
Net income.................. 4,312,795
-----------
BALANCE, MARCH 31, 1998....... $(2,939,456)
===========
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE> 68
TWEETER HOME ENTERTAINMENT GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED SEPTEMBER 30, MARCH 31,
----------------------------------------- -------------------------
1995 1996 1997 1997 1998
----------- ------------ ------------ ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income........................................... $ 1,782,913 $ 1,789,215 $ 146,283 $ 1,302,724 $ 4,312,795
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization...................... 950,132 1,383,235 2,798,404 1,099,537 1,928,655
Loss on disposal of equipment...................... 63,467 -- 18,845 --
Deferred income tax provision (benefit)............ (173,498) (1,177,420) 71,040 58,683 (104,747)
Changes in operating assets and liabilities, net of
effects from acquisition of businesses:
Increase in accounts receivable.................. (286,912) (631,945) (1,251,986) (1,071,793) (1,923,533)
Increase in inventory............................ (306,172) (2,411,139) (6,534,336) (2,226,461) (4,311,074)
(Increase) decrease in prepaid expenses and other
current assets................................. (2,512) (250,391) (277,537) 29,738 (231,810)
Increase (decrease) in accounts payable and
accrued expenses............................... (399,485) 848,630 (936,490) 521,238 2,395,675
Increase (decrease) in customer deposits......... 422,184 (329,713) (242,565) 5,038 374,130
Increase in deferred rent........................ 29,867 1,441,315 357,195 139,597 249,341
Decrease in deferred warranty revenue............ -- (157,113) (710,610) (254,465) (799,591)
Increase (decrease) in other liabilities......... -- -- 318,780 -- (60,060)
----------- ------------ ------------ ----------- -----------
Net cash provided by (used in) operating
activities................................... 2,079,984 504,674 (6,242,977) (396,164) 1,829,781
----------- ------------ ------------ ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment................... (2,620,885) (2,865,784) (3,972,465) (1,404,026) (1,343,454)
Proceeds from sale of property and equipment......... 19,614 -- -- -- --
Acquisition of business; net of cash deferred........ -- (8,368,208) (19,539,800) -- --
----------- ------------ ------------ ----------- -----------
Net cash used in investing activities.......... (2,601,271) (11,233,992) (23,512,265) (1,404,026) (1,343,454)
----------- ------------ ------------ ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Amount due to bank................................... 333,270 390,000 3,067,959 498,544 (904,356)
Proceeds from bridge loan............................ -- -- -- 2,000,000 --
Proceeds from long-term borrowings, net of debt issue
costs.............................................. 1,400,000 1,994,594 20,668,128 5,950,000 600,000
Payments of debt..................................... (850,000) (100,000) (6,675,000) (200,000)
Subchapter S distributions........................... (118,615) (729,750) -- -- --
Issuance of preferred stock.......................... -- 10,560,926 6,837,385 -- --
Treasury stock acquired.............................. -- (1,550,017) -- -- --
----------- ------------ ------------ ----------- -----------
Net cash provided by (used in) financing
activities................................... 764,655 10,665,753 30,473,472 1,773,544 (504,356)
----------- ------------ ------------ ----------- -----------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS....... 243,368 (63,565) 718,230 (26,646) (18,029)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR........... 258,804 502,172 438,607 438,607 1,156,837
----------- ------------ ------------ ----------- -----------
CASH AND CASH EQUIVALENTS, END OF YEAR................. $ 502,172 $ 438,607 $ 1,156,837 $ 411,961 $ 1,138,808
=========== ============ ============ =========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest........................................... $ 602,643 $ 538,718 $ 1,538,077 $ 522,647 $ 1,880,120
=========== ============ ============ =========== ===========
Taxes.............................................. $ -- $ 860,541 $ 358,000 $ 355,000 $ 1,080,496
=========== ============ ============ =========== ===========
</TABLE>
See notes to consolidated financial statements.
F-6
<PAGE> 69
TWEETER HOME ENTERTAINMENT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED SEPTEMBER 30, 1995, 1996 AND 1997
AND SIX MONTHS ENDED MARCH 31, 1997 AND 1998
(UNAUDITED WITH RESPECT TO THE SIX-MONTH PERIOD ENDED MARCH 31, 1997)
1. BUSINESS OF THE COMPANY
New England Audio Co., Inc. ("NEA") was organized as a Massachusetts
corporation in 1972. On June 1, 1998 NEA effected a 1 for 1.524 reverse stock
split. On June 5, 1998 NEA was reorganized as a Delaware holding company,
whereby all of the holders of capital stock, options, and warrants of NEA
exchanged their NEA securities for identical securities of Tweeter Home
Entertainment Group, Inc., a Delaware corporation ("TWEETER"), on a 1 for 1
basis. All share data in these consolidated financial statements reflect the
impact of the reverse stock split and the reorganization. The consolidated
financial statements include the accounts of NEA, the wholly owned subsidiary of
TWEETER, and NEA Delaware Inc., a Delaware corporation, the wholly owned
subsidiary of NEA (collectively referred to as the "Company"). As discussed in
Note 11, the redeemable convertible preferred stock will automatically convert
into 2,566,561 shares of common stock upon the completion of an initial public
offering. The accompanying pro forma balance sheet gives effect to this
conversion as if it had occurred on March 31, 1998.
The Company sells home audio, video, entertainment and electronic products
through a chain of 50 retail stores in New England, Mid-Atlantic and Atlanta,
Georgia markets. The Company operates under the names "Tweeter, Etc.," "Bryn
Mawr Stereo & Video" and "HiFi Buys." The Company operates in a single business
segment of retailing audio and video consumer electronic products.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION -- The accompanying consolidated statements of income
and cash flows for the six months ended March 31, 1997 are unaudited. In the
opinion of management, these financial statements have been prepared on the same
basis as the audited consolidated financial statements and include all
adjustments consisting only of normal recurring adjustments necessary for the
fair presentation, in accordance with generally accepted accounting principles,
of financial data for such periods. The results of operations and cash flows for
the six months ended March 31, 1997 and 1998 are not necessarily indicative of
results that would be expected for a full year. The data disclosed in these
notes to the consolidated financial statements for the six month period ended
March 31, 1997 is also unaudited.
CASH AND CASH EQUIVALENTS -- The Company considers all highly liquid
instruments purchased with maturities of three months or less to be cash
equivalents for balance sheet and cash flow statement purposes.
INVENTORIES -- Inventories, which consist primarily of goods for resale,
are stated at the lower of cost (average cost basis) or market.
PROPERTY AND EQUIPMENT -- Property and equipment are stated at cost.
Depreciation and amortization are computed by the straight-line method over the
estimated useful lives of the respective assets. Amortization of improvements to
leased properties is based upon the remaining terms of the leases or the
estimated useful lives of such improvements, whichever is shorter. Furniture and
fixtures are depreciated between three and seven years. Automobiles and trucks
are depreciated over three years. Leasehold interests are amortized over the
remaining life of the leases.
GOODWILL -- Goodwill and other acquisition costs are being amortized on a
straight-line basis over periods from 15 to 25 years.
F-7
<PAGE> 70
TWEETER HOME ENTERTAINMENT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED SEPTEMBER 30, 1995, 1996 AND 1997
AND SIX MONTHS ENDED MARCH 31, 1997 AND 1998
(UNAUDITED WITH RESPECT TO THE SIX-MONTH PERIOD ENDED MARCH 31, 1997)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
OTHER ASSETS -- Other assets include deferred financing costs that are
being amortized over the term of the financing, using the straight-line method,
which approximates the interest method.
FAIR MARKET VALUE OF FINANCIAL INSTRUMENTS -- The fair value of the
Company's assets and liabilities which constitute financial instruments as
defined in Statement of Financial Accounting Standards ("SFAS") No. 107,
"Disclosure about Fair Value of Financial Instruments," approximates their
recorded value.
LONG-LIVED ASSETS -- On an ongoing basis, the Company evaluates the
carrying value of its long-lived assets based upon estimated future undiscounted
cash flows relying on a number of factors, including operating results, business
plans and certain economic projections. In addition, the Company's evaluation
considers nonfinancial data such as changes in the operating environment,
competitive information, market trends and business relationships.
ACCOUNTING FOR ESTIMATES -- In the process of preparing its consolidated
financial statements, the Company estimates the appropriate carrying value of
certain assets and liabilities that are not readily apparent from other sources.
The primary estimates underlying the Company's consolidated financial statements
include allowances for potential bad debts, obsolete inventory, goodwill, the
useful lives of its long-lived assets, the recoverability of deferred tax assets
and other matters. Management bases its estimates on certain assumptions, which
they believe are reasonable in the circumstances, and do not believe that any
change in those assumptions in the near term would have a significant effect on
the consolidated financial position or results of operations. Actual results
could differ from these estimates.
REVENUE RECOGNITION -- Revenue from merchandise sales is recognized upon
shipment or delivery of goods. Service revenue is recognized when the repair
service is completed.
EXTENDED WARRANTY SERVICE CONTRACTS -- Except as noted in the following
paragraphs, the Company offers extended warranty service contracts on behalf of
an unrelated third party on most of its products. These contracts are on a
nonrecourse basis to the Company. The Company includes revenue from the sale of
extended warranty contracts in net sales and records as cost of goods sold the
amounts due to the third party for the cost for such contracts at the time of
sale as the earnings process has been completed.
AUTOMATIC PRICE PROTECTION -- Under this program, if a customer purchases a
consumer electronics product from one of the Company's stores and a competitor
within 25 miles of the store advertises a lower price within 30 days, the
Company automatically sends a check to the customer for the difference. The
Company records the cost of its Automatic Price Protection policy to costs of
goods sold, and carries a reserve based on management's estimate of future
liability under the program.
DEFERRED WARRANTY REVENUE -- On May 13, 1996 the Company acquired
substantially all of the assets, and assumed some of the liabilities, of Bryn
Mawr Radio and Television, Inc. and affiliate ("Bryn Mawr"). Bryn Mawr sold
extended warranty contracts beyond the normal manufacturer's warranty period,
usually with terms of coverage (including the manufacturer's warranty period)
between 12 and 60 months. All revenue from the sale of extended warranty
contracts sold through July 31, 1996 was deferred and the revenue is being
amortized on a straight-line basis over the contract period. All costs related
to the contracts are charged to expense when incurred. On
F-8
<PAGE> 71
TWEETER HOME ENTERTAINMENT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED SEPTEMBER 30, 1995, 1996 AND 1997
AND SIX MONTHS ENDED MARCH 31, 1997 AND 1998
(UNAUDITED WITH RESPECT TO THE SIX-MONTH PERIOD ENDED MARCH 31, 1997)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
August 1, 1996, the Company changed Bryn Mawr's warranty sales to a third-party
provider, in conformance with the Company's practice of selling extended
warranties. As part of the purchase, the Company assumed the liability for the
deferred warranty on Bryn Mawr's books as of the transaction date, and the sales
that continued through July 31, 1996.
On May 30, 1997 the Company acquired certain assets and assumed certain
liabilities of HiFi Buys, Inc. ("HiFi Buys"). HiFi Buys sold extended warranty
contracts beyond the normal manufacturer's warranty period, usually with terms
of coverage (including the manufacturer's warranty period) between 12 and 60
months. All revenue from the sale of extended warranty contracts sold through
August 7, 1997 was deferred and the revenue is being amortized on a
straight-line basis over the contract period. Sales commission costs related to
the contracts were also deferred and the cost is being amortized on a
straight-line basis over the contract period. On August 8, 1997, the Company
changed HiFi Buys' warranty sales to a third-party provider, in conformance with
the Company's practice of selling extended warranties. As part of the purchase,
the Company assumed the liability for the deferred warranty on HiFi Buys' books
as of the transaction date, and the sales that continued through August 7, 1997.
INCOME TAXES -- Effective September 1, 1987, the stockholders elected to
have the Company taxed as an S Corporation for federal and certain state
corporate income tax purposes.
As part of a recapitalization that occurred on November 28, 1995, the
Company revoked the election made by it under Section 1362(a) of the Internal
Revenue Code. Upon revocation, the Corporation was changed from tax treatment as
an S Corporation to tax treatment as a C Corporation. As such, the Company
became responsible for federal and certain state income taxes which were
formerly the responsibilities of its stockholders.
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes."
Under SFAS No. 109, deferred tax liabilities or assets are recognized for the
estimated tax effects of temporary differences between the financial reporting
and tax bases of assets and liabilities and for loss carryforwards based on
enacted tax laws and rates.
STORE OPENING COSTS -- Costs of noncapital nature incurred prior to store
openings are expensed as incurred.
STOCK-BASED COMPENSATION -- The Company, for the purposes of presentation
in its financial statements, follows the precepts set forth in Accounting
Principles Board Opinion No. 25 for computing compensatory aspects of
stock-based compensation. In compliance with SFAS No. 123, "Accounting for
Stock-Based Compensation," the Company has disclosed the required Pro Forma
effect on net income in Note 11.
DEFERRED RENT AND RENTAL EXPENSE -- Minimum rent expense is recorded using
the straight-line method over the related lease term. The difference between
current payments required and rent expense is reflected as deferred rent.
ADVERTISING -- Net costs for advertising, including electronic media,
newspaper, buyer's guides and catalogs, which are expensed as incurred, amounted
to $1,402,310, $2,574,340 and $3,561,573 for the years ended September 30, 1995,
1996 and 1997, respectively, and $1,437,306 and $2,397,219 for the six-month
periods ended March 31, 1997 and 1998, respectively.
F-9
<PAGE> 72
TWEETER HOME ENTERTAINMENT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED SEPTEMBER 30, 1995, 1996 AND 1997
AND SIX MONTHS ENDED MARCH 31, 1997 AND 1998
(UNAUDITED WITH RESPECT TO THE SIX-MONTH PERIOD ENDED MARCH 31, 1997)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
EARNINGS (LOSS) PER SHARE -- The Company computed earnings (loss) per share
in accordance with SFAS No. 128, "Earnings Per Share." Basic earnings (loss) per
share is calculated based on the weighted average number of common shares
outstanding, adjusted for the nominal issuance of certain warrants. Diluted
earnings (loss) per share is based on the weighted average number of common
shares outstanding, adjusted for the nominal issuance of certain warrants,
shares of Series A Redeemable Convertible Preferred Stock and Series B
Redeemable Convertible Preferred Stock (the "preferred stock") outstanding, when
dilutive, and dilutive potential common shares (common stock options and
warrants).
The following is a reconciliation of the numerators and denominators of the
basic and diluted earnings (loss) per share:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED SEPTEMBER 30, MARCH 31,
------------------------------------- ------------------------
1995 1996 1997 1997 1998
---------- ---------- ----------- ----------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
BASIC EARNINGS (LOSS) PER
SHARE ("EPS")
Numerator:
Net Income................. $1,782,913 $1,789,215 $ 146,283 $1,302,724 $4,312,795
Accretion of Preferred
Stock Dividends......... -- 1,035,942 2,156,356 901,261 1,583,640
---------- ---------- ----------- ---------- ----------
Net Income (Loss) Available
to Common Shareholders..... 1,782,913 753,273 (2,010,073) 401,463 2,729,155
Denominator:
Weighted Average Common
Shares Outstanding...... 2,755,200 1,324,037 1,056,272 1,056,272 1,056,272
Nominal Issuances of
Warrants................ 616,235 616,235 616,235 616,235 616,235
---------- ---------- ----------- ---------- ----------
Weighted Average Shares
Outstanding................ 3,371,435 1,940,272 1,672,507 1,672,507 1,672,507
---------- ---------- ----------- ---------- ----------
Basic EPS.................... $ 0.53 $ 0.39 $ (1.20) $ 0.24 $ 1.63
========== ========== =========== ========== ==========
DILUTED EARNINGS (LOSS) PER
SHARE
Numerator.................... $1,782,913 $ 753,273 $(2,010,073) $ 401,463 $4,312,795
Denominator:
Weighted Average Shares
Outstanding............. 3,371,435 1,940,272 1,672,507 1,672,507 1,672,507
Potential Common Stock
Outstanding............. -- 42,865 -- 42,404 2,943,493
---------- ---------- ----------- ---------- ----------
Total........................ 3,371,435 1,983,137 1,672,507 1,714,911 4,616,000
---------- ---------- ----------- ---------- ----------
Diluted EPS.................. $ 0.53 $ 0.38 $ (1.20) $ 0.23 $ 0.93
========== ========== =========== ========== ==========
</TABLE>
RECENT ACCOUNTING PRONOUNCEMENTS -- The Financial Accounting Standards
Board recently issued SFAS No. 130, "Reporting Comprehensive Income," SFAS No.
131, "Disclosures about Segments of an Enterprise and Related Information" and
SFAS No. 132, "Employees' Disclosures About Pensions and Other Post Retirement
Benefits." The effect of adopting these Statements is not expected to be
material to the Company's consolidated financial position or results of
operations.
F-10
<PAGE> 73
TWEETER HOME ENTERTAINMENT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED SEPTEMBER 30, 1995, 1996 AND 1997
AND SIX MONTHS ENDED MARCH 31, 1997 AND 1998
(UNAUDITED WITH RESPECT TO THE SIX-MONTH PERIOD ENDED MARCH 31, 1997)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
RECLASSIFICATION -- Various financial statement amounts for 1995, 1996 and
1997 have been reclassified to conform to the classifications used in the March
31, 1998 financial statements.
3. PROPERTY AND EQUIPMENT
Major classifications of property and equipment are summarized below:
<TABLE>
<CAPTION>
SEPTEMBER 30, MARCH 31,
------------------------- -----------
1996 1997 1998
----------- ----------- -----------
<S> <C> <C> <C>
Leasehold improvements..................... $13,927,021 $17,050,196 $18,251,993
Furniture and equipment.................... 5,804,643 8,380,734 8,901,791
Automobiles and trucks..................... 208,266 247,950 302,663
Construction in progress................... 1,161,038 865,503 431,390
Leasehold interests........................ -- 165,000 165,000
----------- ----------- -----------
21,100,968 26,709,383 28,052,837
Less accumulated depreciation and
amortization............................. 7,610,664 8,741,879 10,163,787
----------- ----------- -----------
$13,490,304 $17,967,504 $17,889,050
=========== =========== ===========
</TABLE>
Depreciation and amortization (excluding amortization of goodwill) for the
fiscal years ended September 30, 1995, 1996 and 1997 aggregated $884,864,
$1,226,109 and $2,258,121, respectively. Depreciation and amortization
(excluding amortization of goodwill) for the six-month periods ended March 31,
1998 and March 31, 1997 aggregated $1,421,908 and $983,924, respectively.
4. ACCRUED EXPENSES
Accrued expenses consist of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30, MARCH 31,
------------------------ -----------
1996 1997 1998
---------- ---------- -----------
<S> <C> <C> <C>
Merchandise received not invoiced......... $ 472,799 $1,576,413 $ 2,579,884
Federal income taxes payable.............. 151,114 605,031 2,974,071
Fringe benefits........................... 376,557 660,790 1,525,548
Sales taxes payable....................... 513,543 616,764 1,027,987
Advertising............................... 342,308 900,952 1,540,767
Group insurance........................... 246,500 220,826 220,826
Compensation.............................. 845,577 1,422,106 2,118,208
Other..................................... 190,593 2,389,623 2,879,077
---------- ---------- -----------
$3,138,991 $8,392,505 $14,866,368
========== ========== ===========
</TABLE>
5. DEFERRED WARRANTY REVENUE
As part of the acquisition of Bryn Mawr in May of 1996, the Company assumed
deferred warranty revenue on Bryn Mawr's books at that time. Amortization of
deferred warranty revenue for the six months ended March 31, 1998 and March 31,
1997 was $179,724 and $254,465, respectively.
F-11
<PAGE> 74
TWEETER HOME ENTERTAINMENT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED SEPTEMBER 30, 1995, 1996 AND 1997
AND SIX MONTHS ENDED MARCH 31, 1997 AND 1998
(UNAUDITED WITH RESPECT TO THE SIX-MONTH PERIOD ENDED MARCH 31, 1997)
5. DEFERRED WARRANTY REVENUE (CONTINUED)
Amortization of deferred warranty revenue for the years ended September 30, 1996
and 1997 was $253,529 and $468,418, respectively (See Note 2). Self-funded
extended warranty contract sales were $96,416 in the year ended September 30,
1996.
As part of the acquisition of HiFi Buys on May 30, 1997, the Company
assumed the deferred warranty revenue and expense related to the sale of
self-funded extended warranty contracts on HiFi Buys' books at the date of the
acquisition. Amortization of deferred warranty revenue was $709,425 for the six
months ended March 31, 1998, and $478,145 for the year ended September 30, 1997
(See Note 2). Self-funded extended warranty contract sales were $276,720 in the
year ended September 30, 1997.
6. DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30,
------------------------- MARCH 31,
1996 1997 1998
----------- ----------- -----------
<S> <C> <C> <C>
Subordinated debt.......................... $ 1,000,000 $16,787,816 $16,607,614
Revolving term bank loan................... 9,700,000 14,500,000 15,100,000
----------- ----------- -----------
Subtotal................................... 10,700,000 31,287,816 31,707,614
Less current portion....................... -- 400,000 400,000
----------- ----------- -----------
$10,700,000 $30,887,816 $31,307,614
=========== =========== ===========
</TABLE>
On November 28, 1995, the Company entered into a loan agreement with a
bank. The agreement established a line of credit with a maximum balance of
$6,000,000 dependent upon the Company's inventory levels. Amounts outstanding
under the agreement bear interest at either the lender's base rate plus 1/4% or
the Eurodollar rate plus 2 1/4%, dependent upon the amount of advance
notification the Company gives to the bank.
On November 28, 1995, as part of a recapitalization, the Company
repurchased approximately 1,698,929 shares equalling 60% of its common stock
from the Company's then principal stockholder for cash and subordinated debt of
$550,017 and $1,000,000, respectively. The subordinated debt (the "Redemption
Note") carries interest at an effective rate of 10.8% and is due on the earlier
of December 31, 1998 or the consummation of the Company's initial public
offering. Interest is payable on a quarterly basis. The terms of the Redemption
Note also require that upon the closing of an initial public offering by the
Company an additional payment of $650,000 plus an amount equal to 9% interest
per annum accruing on such amount from November 28, 1995 to the date of such
offering be made (approximately $814,000 at the estimated time of the effective
date of the Offering). Also on November 28, 1995, $363,590 of long-term debt due
to officers and related parties was converted to Series A Redeemable Convertible
Preferred Stock ("Series A Preferred Stock") as part of the recapitalization. On
May 13, 1996, the remaining balance of the long-term debt due to officers and
related parties was converted to Series A Preferred Stock as part of the
recapitalization.
On May 13, 1996, in order to partially finance the acquisition of Bryn
Mawr, the Company amended its loan agreement with the bank. Among other things,
this amendment changed (a) the
F-12
<PAGE> 75
TWEETER HOME ENTERTAINMENT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED SEPTEMBER 30, 1995, 1996 AND 1997
AND SIX MONTHS ENDED MARCH 31, 1997 AND 1998
(UNAUDITED WITH RESPECT TO THE SIX-MONTH PERIOD ENDED MARCH 31, 1997)
6. DEBT (CONTINUED)
maximum balance from $6,000,000 to $12,000,000, (b) the maturity date from
September 30, 1997 to April 30, 1998, and (c) certain financial covenants, the
most restrictive of which continued to be the maintenance of certain debt
coverage and leverage ratios.
On March 7, 1997, the Company amended its loan agreement with the bank, and
entered into a Warrant and Debenture Commitment with certain of its
stockholders. This financing enabled the Company to borrow from the bank an
additional "Bridge Loan" of up to $2,000,000 due July 7, 1997. The proceeds of
these borrowings were used to fund store expansion. As a condition of providing
the Bridge Loan, the bank required a commitment from a third party to purchase
the Bridge Loan prior to maturity. Certain participating stockholders of the
Company entered into a Bridge Note Purchase Agreement with the bank, agreeing to
purchase, upon a put by the bank or upon the Company's request, 10% Convertible
Subordinated Debentures due 2000 (the "Debentures"), in an aggregate amount of
$2,000,000. The Debentures were never issued because the related Bridge Loan was
paid in full by the Company on May 30, 1997.
To induce the participating stockholders to enter into the Warrant and
Debenture Commitment, the Company issued warrants to the participating
stockholders for each month that they remained obligated to purchase the
Debentures under the Warrant and Debenture Commitment. During the time that this
commitment was in effect, the Company issued warrants to purchase an aggregate
of 37,138 shares of the Company's common stock, with an exercise price of $6.46
per share and a term of five years. The Company repaid the Bridge Loan on May
30, 1997, and the obligations of the participating stockholders terminated under
the Warrant and Debenture Commitment.
On May 30, 1997, in order to partially finance the acquisition of HiFi
Buys, the Company replaced its loan agreement with the bank with a new senior
acquisition and working capital financing agreement. Among other things, this
new agreement changed (a) the maximum balance from $14,000,000 to $20,000,000,
(b) the maturity date from April 30, 1998 to June 1, 2000, and (c) certain
financial covenants, the most restrictive of which continued to be the
maintenance of certain debt coverage and leverage ratios. Amounts outstanding
under the agreement totaled $14,500,000 and $15,100,000 at September 30, 1997
and March 31, 1998, respectively, and are collateralized by the Company's
inventory and certain other assets. The unpaid balances under this agreement
bear interest at the lender's base rate, or LIBOR plus 2% if the Company commits
the balances for a period of 30 days or more (8.16% at September 30, 1997 and
7.68% at March 31, 1998).
On May 30, 1997, as part of the acquisition of HiFi Buys, the Company
entered into a subordinated debt financing with a predecessor of HFB Associate,
LLC (the "Seller"), and issued a $1,200,000 subordinated term note to the
Seller, with principal payments made in 36 equal installments monthly. The
unpaid principal balance bears an annual interest rate of 9.5%. The unpaid
balance on this note was $1,100,000 and $900,000 at September 30, 1997 and March
31, 1998, respectively. In addition, the Company issued warrants to the seller
to purchase 104,960 shares of common stock with a ten-year term and an exercise
price of $8.08 per share.
On May 30, 1997, in order to partially finance the acquisition of HiFi
Buys, the Company entered into a senior subordinated debt financing with a group
of institutional investors, and issued $15,000,000 of senior subordinated
promissory notes (the "1997 Notes"), with warrants (see Note 11). The notes bear
an annual interest rate of 12% on the unpaid principal balance. Principal
F-13
<PAGE> 76
TWEETER HOME ENTERTAINMENT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED SEPTEMBER 30, 1995, 1996 AND 1997
AND SIX MONTHS ENDED MARCH 31, 1997 AND 1998
(UNAUDITED WITH RESPECT TO THE SIX-MONTH PERIOD ENDED MARCH 31, 1997)
6. DEBT (CONTINUED)
payments under the notes are $5,000,000 due on May 30 of 2002, 2003, and 2004.
The notes may be prepaid in whole or in part at any time and must be paid in
full upon the completion of the Company's initial public offering. The
detachable warrants issued with the 1997 Notes are exercisable for up to 629,566
shares of the Company's common stock, with an exercise price of $.002 per share.
Because these warrants had a fair value of $325,383, such discount was recorded
on the debt. The discount will accrete over the term of the debt.
Scheduled maturities under long-term debt, excluding the revolving term
bank loan, at March 31, 1998 were as follows:
<TABLE>
<S> <C>
Six months ended September 30, 1998......................... $ 200,000
Year ended September 30, 1999............................... 1,400,000
Year ended September 30, 2000............................... 300,000
Year ended September 30, 2001............................... --
Year ended September 30, 2002............................... 5,000,000
Thereafter.................................................. 10,000,000
-----------
Total............................................. $16,900,000
===========
</TABLE>
7. EMPLOYEE SAVINGS PLAN
In October 1985, the Company established an employee savings plan covering
all employees. Under the terms of the plan, which was adopted under Section
401(k) of the Internal Revenue Code, the Company can match employee
contributions. Such matching contributions cannot exceed the employer's
established annual percentage of compensation, which was a maximum of 6% for the
years ended September 30, 1995, 1996 and 1997. The Company's contribution
expense was $75,000, $75,000 and $100,000 for the years ended September 30,
1995, 1996 and 1997, respectively. The Company's contribution expense for the
six months ended March 31, 1998 and March 31, 1997 was $75,000 and $50,000,
respectively.
8. COMMITMENTS AND CONTINGENCIES
The Company leases all of its stores, installation centers, warehouses and
administrative facilities under operating leases. The lives of these leases
range from 5 to 20 years with varying renewal options. The leases provide for
base rentals, real estate taxes, common area maintenance charges and, in some
instances, for the payment of percentage rents based on sales volume. Rent
expense for the six months ended March 31, 1998 and March 31, 1997 was
$4,332,171 and $2,443,525, respectively. Rent expense for the years ended
September 30, 1995, 1996 and 1997 was $2,054,250, $3,163,095 and $5,978,819,
respectively. Percentage rent expense was $53,657 and $34,143 for the six months
ended March 31, 1998 and March 31, 1997, respectively. Percentage rent expense
was $82,379, $64,964 and $47,243 for the years ended September 30, 1995, 1996
and 1997, respectively.
F-14
<PAGE> 77
TWEETER HOME ENTERTAINMENT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED SEPTEMBER 30, 1995, 1996 AND 1997
AND SIX MONTHS ENDED MARCH 31, 1997 AND 1998
(UNAUDITED WITH RESPECT TO THE SIX-MONTH PERIOD ENDED MARCH 31, 1997)
8. COMMITMENTS AND CONTINGENCIES (CONTINUED)
Future minimum rental commitments on operating leases as of March 31, 1998
are as follows:
<TABLE>
<S> <C>
Six months ended September 30, 1998......................... $ 4,177,508
Year ended September 30, 1999............................... 8,118,044
Year ended September 30, 2000............................... 7,931,735
Year ended September 30, 2001............................... 7,601,751
Year ended September 30, 2002............................... 7,188,791
Thereafter.................................................. 41,903,750
-----------
Total............................................. $76,921,579
===========
</TABLE>
On March 25, 1998 the Company entered into a purchase and sale agreement
for a facility in Massachusetts that will serve as the corporate headquarters,
service center and distribution center in Massachusetts. According to the signed
purchase and sale agreement, the purchase price is $4.1 million. The Company
will also incur related building improvement costs for the facility. The Company
expects to finance these costs with a mortgage of approximately $4 million.
Effective upon the consummation of the offering contemplated in this
Prospectus, the Company will enter into employment agreements with certain key
employees. These agreements provide for continued employment with termination by
either party. Under certain circumstances, the key employees could receive up to
an amount equal three times annual base salary.
9. INCOME TAXES
The provision (benefit) for income taxes under SFAS No. 109 consisted of
the following:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED SEPTEMBER 30, MARCH 31,
--------------------------------- ------------------------
1995 1996 1997 1997 1998
--------- ----------- ------- ----------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Current:
Federal.......................... $ -- $ 563,777 $21,821 $654,881 $2,322,446
State............................ -- 160,195 6,101 162,773 657,499
--------- ----------- ------- -------- ----------
-- 723,972 27,922 817,654 2,979,945
Deferred:
Current deferral................. (173,498) (176,615) 71,040 58,683 (104,747)
Tax rate increase on temporary
differences resulting from the
revocation of the S Corporation
election....................... -- (1,000,805) -- -- --
--------- ----------- ------- -------- ----------
$(173,498) $ (453,448) $98,962 $876,337 $2,875,198
========= =========== ======= ======== ==========
</TABLE>
F-15
<PAGE> 78
TWEETER HOME ENTERTAINMENT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED SEPTEMBER 30, 1995, 1996 AND 1997
AND SIX MONTHS ENDED MARCH 31, 1997 AND 1998
(UNAUDITED WITH RESPECT TO THE SIX-MONTH PERIOD ENDED MARCH 31, 1997)
9. INCOME TAXES (CONTINUED)
The tax effects of significant temporary differences comprising the
Company's current and long-term net deferred tax assets are as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30, MARCH 31,
------------------------- -----------
1996 1997 1998
----------- ----------- -----------
<S> <C> <C> <C>
Accruals and reserves....................... $ 395,971 $ 574,272 $ 706,751
Deferred revenue............................ 200,483 646,209 569,269
----------- ----------- -----------
Net deferred tax assets -- current.......... 596,454 1,220,481 1,276,020
----------- ----------- -----------
Deferred rent............................... 883,344 1,036,466 1,143,208
Depreciation................................ 824,699 854,091 1,075,091
Deferred revenue............................ 278,521 931,364 665,999
Amortization and other...................... (1,232,100) (2,762,524) (2,775,693)
----------- ----------- -----------
Net deferred tax assets -- long-term........ 754,464 59,397 108,605
----------- ----------- -----------
Total net deferred tax assets............... $ 1,350,918 $ 1,279,878 $ 1,384,625
=========== =========== ===========
</TABLE>
The Company has determined that it is more likely than not that it will
fully realize the deferred tax assets. Consequently, no valuation allowance was
established as of September 30, 1996, September 30, 1997 and March 31, 1998. A
reconciliation between the statutory and effective income tax rates is as
follows:
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS ENDED
SEPTEMBER 30, MARCH 31,
------------- --------------------------
1996 1997 1997 1998
----- ---- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C>
Statutory income tax rate...... 34.0% 34.0% 34.0% 34.0%
State income taxes net of
federal benefit.............. 5.8% 5.8% 5.8% 5.8%
Change in tax status........... (74.9)% 0.0% 0.0% 0.0%
Other.......................... 1.2% 0.5% 0.5% 0.2%
----- ---- ---- ----
Effective income tax rate...... (33.9)% 40.3% 40.3% 40.0%
===== ==== ==== ====
</TABLE>
The Company was taxed under Subchapter S of the Internal Revenue Code for
1995. The significant items included in the reconciliation between the statutory
and effective state income tax rate for that year were primarily attributable to
changes in the valuation allowance.
10. ACQUISITIONS
BRYN MAWR -- On May 13, 1996, the Company acquired the principal operating
assets and assumed certain liabilities of Bryn Mawr. This transaction has been
accounted for as a purchase and, accordingly, the results of operations of the
Company's business relating to Bryn Mawr have been included in the statements of
income since the acquisition date. The allocation of the purchase price is final
and resulted in goodwill of $5,600,900, which is being amortized over 25 years
using
F-16
<PAGE> 79
TWEETER HOME ENTERTAINMENT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED SEPTEMBER 30, 1995, 1996 AND 1997
AND SIX MONTHS ENDED MARCH 31, 1997 AND 1998
(UNAUDITED WITH RESPECT TO THE SIX-MONTH PERIOD ENDED MARCH 31, 1997)
10. ACQUISITIONS (CONTINUED)
the straight-line method. The net assets acquired at fair market value on May
13, 1996 were allocated as follows:
<TABLE>
<S> <C>
Inventory............................................... $5,043,100
Property and equipment.................................. 6,860,400
Other assets............................................ 837,800
Accounts payable and accrued expenses................... (9,689,300)
----------
Net assets acquired................................ 3,052,000
Total purchase price and related costs.................. 8,652,900
----------
Goodwill........................................... $5,600,900
==========
</TABLE>
HIFI BUYS -- On May 31, 1997, the Company acquired the principal operating
assets and assumed certain liabilities of HiFi Buys. This transaction has been
accounted for as a purchase and, accordingly, the results of operations of the
Company's business relating to HiFi Buys have been included in the statement of
income since the acquisition date. The allocation of the purchase price is final
and resulted in goodwill of $15,521,950, which is being amortized over 25 years
using the straight-line method. The net assets acquired at fair market value on
May 30, 1997 were allocated as follows:
<TABLE>
<S> <C>
Inventory............................................. $ 9,273,400
Property and equipment................................ 2,771,700
Accounts receivable................................... 1,428,800
Other assets.......................................... 236,500
Accounts payable and accrued expenses................. (9,483,100)
-----------
Net assets acquired................................. 4,227,300
Total purchase price and related costs (see Note
11)................................................. 19,749,250
-----------
Goodwill............................................ $15,521,950
===========
</TABLE>
The following unaudited pro forma financial information reflects the
consolidated results of operations for the Company for the years ended September
30, 1996 and 1997 as though the acquisitions had occurred on the first day of
each fiscal year. The pro forma operating results are presented for comparative
purposes only and do not purport to present the Company's actual operating
results had the acquisitions been consummated on October 1, 1995 or results
which may occur in the future.
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30
----------------------------
1996 1997
------------ ------------
<S> <C> <C>
Net Sales............................ $207,359,183 $196,462,686
Net Income........................... 1,441,943 625,748
Net Income (Loss) Available to Common
Shareholders....................... 406,001 (1,530,608)
Basic Earnings (Loss) per Share...... .21 (.92)
Diluted Earnings (Loss) per share.... .20 (.92)
</TABLE>
F-17
<PAGE> 80
TWEETER HOME ENTERTAINMENT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED SEPTEMBER 30, 1995, 1996 AND 1997
AND SIX MONTHS ENDED MARCH 31, 1997 AND 1998
(UNAUDITED WITH RESPECT TO THE SIX-MONTH PERIOD ENDED MARCH 31, 1997)
10. ACQUISITIONS (CONTINUED)
The Company had also previously recorded approximately $809,000 of goodwill
in connection with prior acquisitions.
Accumulated amortization of goodwill was $1,682,000 for the six months
ended March 31, 1998. Accumulated amortization of goodwill was approximately
$782,000 and $1,227,000 for the years ended September 30, 1996 and 1997,
respectively.
11. STOCKHOLDERS' EQUITY (DEFICIT) AND REDEEMABLE CONVERTIBLE PREFERRED STOCK
COMMON STOCK -- Holders of common stock are entitled to dividends if
declared by the Board of Directors, and each share carries one vote. The common
stock has no cumulative voting, redemption or preemptive rights.
SERIES A AND SERIES B CONVERTIBLE PREFERRED STOCK -- The holders of
preferred stock are entitled to significant additional rights beyond those
granted to the common stock. Some of these rights are as follows:
Voting Rights -- Each share of preferred stock is entitled to one vote
for each share of common stock into which it is then convertible.
Representative Directors -- Holders of a majority of the shares of
preferred stock and Investor Common Stock (as such term is defined in the
Company's Certificate of Incorporation, the "Charter"), voting separately
as a class, are entitled to elect two members of the Board of Directors.
Holders of preferred stock are also entitled to elect additional members of
the Board of Directors under certain circumstances.
Conversion Provisions -- All shares of preferred stock are
automatically convertible into common stock upon the completion of a public
offering resulting in net proceeds to the Company of not less than
$15,000,000. As of September 30, 1997 and March 31, 1998, the conversion
price of a share of Series A Preferred Stock was $6.46. The conversion
price of a share of Series B Redeemable Convertible Preferred Stock (the
"Series B Preferred Stock") at September 30, 1997 and March 31, 1998 was
$8.08.
Dividends -- No dividends shall be paid on the common stock unless the
shares of preferred stock receive the same dividends that such shares would
have received had they been converted into common stock prior to the record
date for such dividend.
Liquidation Preference -- In the event of involuntary liquidation,
dissolution or winding up of the Company, each holder of Series A Preferred
Stock and Series B Preferred Stock is entitled to receive, prior and in
preference to any distribution of any assets to holders of any other
capital stock of the Company, the sum of (a) $6.46 and/or $8.08 for each
share of Series A Preferred Stock and Series B Preferred Stock,
respectively, plus (b) an amount in the form of a dividend equal to a 15%
rate of return on each holder's investment compounded annually from the
date of original issuance.
Redemption Provisions -- Preferred stock is redeemable if (a) such
redemption would not violate any of the existing subordination agreements
between the Company and its Senior Lender, (as such term is defined in the
Charter), and (b) the Company has the consent of the holders of the 1997
Notes. Mandatory redemption of 6.5% of the total outstanding shares of
F-18
<PAGE> 81
TWEETER HOME ENTERTAINMENT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED SEPTEMBER 30, 1995, 1996 AND 1997
AND SIX MONTHS ENDED MARCH 31, 1997 AND 1998
(UNAUDITED WITH RESPECT TO THE SIX-MONTH PERIOD ENDED MARCH 31, 1997)
11. STOCKHOLDERS' EQUITY (DEFICIT) AND REDEEMABLE CONVERTIBLE PREFERRED STOCK
(CONTINUED)
Preferred Stock, is required to occur on the last day of March, June,
September and December commencing in 2001. The redemption price is equal to
$6.46 for each share of Series A Preferred Stock and $8.08 for each share
of Series B Preferred Stock, plus an amount in the form of a dividend equal
to a 15% rate of return on such holder's investment compounded annually and
calculated from the original issue date.
Reserved Shares -- As of September 30, 1997, and March 31, 1998 there
were 2,566,561 shares of common stock reserved for issuance upon conversion
of the preferred stock, 855,400 shares of common stock reserved for
issuance upon the exercise of options granted under the Company's 1995
Stock Option Plan, and 771,664 shares of common stock issuable upon the
exercise of outstanding warrants.
On November 28, 1995, the Company made significant changes to its capital
structure. On this date, the Company purchased for the treasury 1,698,929 shares
of common stock from former stockholders for $1,550,017 in cash and the
Redemption Note. The terms of the Redemption Note also require that upon an
initial public offering by the Company an additional payment of $650,000 plus an
amount equal to 9% interest per annum accruing on such amount from November 28,
1995 to the date of such offering (approximately $814,000 at the estimated time
of the effective date of this Offering). Also on November 28, 1995, the Company
authorized and issued 4,000,000 and 911,781 shares, respectively, of Series A
Preferred Stock. In exchange for the shares issued, the Company received net
cash proceeds of $5,469,110.
On January 16, 1996, the Board of Directors authorized a 10-for-1 stock
split. All share data in these financial statements reflects the impact of the
split.
On May 13, 1996, the Company issued an additional 788,349 shares of Series
A Preferred Stock for net proceeds to the Company of $5,091,818 in order to
partially finance the acquisition of Bryn Mawr.
During the period from March 7, 1997 through May 30, 1997, the Company
issued warrants to purchase 37,132 shares of common stock to certain
stockholders who participated in a Warrant and Debenture Commitment relating to
a Bridge Loan financing (see Note 6). The warrants have a five-year term and an
exercise price of $6.46 per share. The Company hired an independent appraiser to
determine the fair value of the warrants as of the issue date. The warrants were
issued at or above the fair value of the underlying stock; consequently, the
Company has not assigned value to nor recorded an expense for this warrant
issuance. All of the warrants issued as part of this transaction were
outstanding and exercisable at September 30, 1997 and March 31, 1998.
On May 30, 1997, the Company issued 866,425 shares of Series B Preferred
Stock for net proceeds to the Company of $6,837,385 in order to partially
finance the acquisition of HiFi Buys. Series B Preferred Stock is subject to
essentially the same terms and conditions as the Series A Preferred Stock,
except that the conversion price of Series B Preferred Stock is $8.08 per share.
On May 30, 1997, the Company issued warrants to purchase 629,566 shares of
common stock in connection with a subordinated debt offering in order to
partially finance the acquisition of HiFi Buys. The warrants have a ten-year
term, an exercise price of $.01, and are subject to certain transfer
restrictions. The Company hired an independent appraiser to determine the fair
value of the warrants as of the issue date. That value was appraised to be
$0.517 per share. Accordingly, the Company placed an aggregate value on the
warrants of $325,383. All of the warrants issued as part of this transaction are
outstanding as of September 30, 1997 and March 31, 1998. These warrants are
F-19
<PAGE> 82
TWEETER HOME ENTERTAINMENT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED SEPTEMBER 30, 1995, 1996 AND 1997
AND SIX MONTHS ENDED MARCH 31, 1997 AND 1998
(UNAUDITED WITH RESPECT TO THE SIX-MONTH PERIOD ENDED MARCH 31, 1997)
11. STOCKHOLDERS' EQUITY (DEFICIT) AND REDEEMABLE CONVERTIBLE PREFERRED STOCK
(CONTINUED)
exercisable on the earlier of five years from the date of issue or the
completion of the Company's initial public offering with net cash proceeds in
excess of $15 million.
On May 30, 1997, the Company issued to the seller of HiFi Buys warrants to
purchase 104,960 shares of common stock in connection with the subordinated
debt. The warrants have a term of (a) ten years from the date of issuance, or
(b) five years from the date of a qualified initial public offering. The
warrants are only exercisable upon certain corporate events, including the
Company's initial public offering. The Company hired an independent appraiser to
determine the fair value of the warrants as of the issue date. The warrants were
issued at or above the fair value of the underlying stock; consequently, the
Company has not assigned value to, nor recorded an expense for, these warrants.
The warrants have an exercise price of $8.08 per share and were outstanding at
September 30, 1997 and March 31, 1998.
The weighted average exercise price for all warrants outstanding at
September 30, 1997 and March 31, 1998 is $1.42. The following table summarizes
information regarding stock warrants outstanding at March 31, 1998:
<TABLE>
<CAPTION>
NUMBER
OUTSTANDING WEIGHTED
AVERAGE AND EXERCISABLE AVERAGE
EXERCISE AT MARCH 31, REMAINING
PRICES 1998 LIFE (YEARS)
-------- --------------- ------------
<S> <C> <C>
$0.01......................................... 629,566 9.20
6.46......................................... 37,138 8.90
8.08......................................... 104,960 9.20
------- ----
771,664 9.20
=======
</TABLE>
COMMON STOCK INCENTIVE PLAN -- In November of 1995, the Company implemented
the 1995 Stock Option Plan, under which incentive and nonqualified stock options
may be granted to management, key employees and outside directors to purchase
shares of the Company's common stock. The exercise price for incentive stock
options for employees and nonqualified options for outside directors range from
$0.61 to $8.08 per share. Options are generally exercisable over a period of ten
years from the date of the grant and are dependent on the vesting schedule
associated with the grant.
Options for 388,779, 568,274 and 617,479 shares were exercisable under the
1995 Stock Option Plan at September 30, 1996 and 1997 and March 31, 1998,
respectively. There were 26,745, 30,438 and 10,431 shares available for future
grants at September 30, 1996 and 1997 and March 31, 1998, respectively.
F-20
<PAGE> 83
TWEETER HOME ENTERTAINMENT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED SEPTEMBER 30, 1995, 1996 AND 1997
AND SIX MONTHS ENDED MARCH 31, 1997 AND 1998
(UNAUDITED WITH RESPECT TO THE SIX-MONTH PERIOD ENDED MARCH 31, 1997)
11. STOCKHOLDERS' EQUITY (DEFICIT) AND REDEEMABLE CONVERTIBLE PREFERRED STOCK
(CONTINUED)
The following summarizes transactions under the 1995 Stock Option Plan:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
NUMBER PER SHARE EXERCISE
OF SHARES OPTION PRICE PRICE
--------- -------------- --------
<S> <C> <C> <C>
October 1, 1995..................... -- -- --
Granted........................... 604,424 $0.61 to $7.10 $2.31
Exercised......................... -- -- --
Canceled.......................... -- -- --
---------
September 30, 1996.................. 604,424 $0.61 to $7.10 $2.31
Granted........................... 232,602 $6.46 to $8.08 $7.59
Exercised......................... --
Canceled.......................... 11,289 $0.61 to $6.46 $1.77
---------
September 30, 1997.................. 825,737 $0.61 to $8.08 $3.72
Granted........................... 29,604 $7.24 $7.24
Exercised.........................
Canceled.......................... 10,282 $0.61 to $7.24 $3.24
---------
March 31, 1998...................... 845,059 $0.61 to $8.08 $3.97
=========
</TABLE>
The following summarizes information about all stock options outstanding at
March 31, 1998 (unaudited):
<TABLE>
<CAPTION>
WEIGHTED NUMBER OF
NUMBER AVERAGE OPTIONS
OUTSTANDING REMAINING EXERCISABLE
EXERCISE AT MARCH 31, CONTRACTUAL AT MARCH 31,
PRICES 1998 LIFE (YEARS) 1998
- -------- ------------ ------------ ------------
<S> <C> <C> <C>
$0.61............................... 215,676 7.9 172,157
0.67............................... 111,878 8.0 111,878
1.52............................... 107,584 7.8 107,584
6.46............................... 133,023 8.2 93,562
7.10............................... 44,148 8.3 44,148
7.24............................... 179,860 9.4 35,260
8.08............................... 52,890 9.4 52,890
--------- -------
Total............................... 845,059 8.38 617,479
========= =======
</TABLE>
The weighted average exercise price of all options outstanding as of
September 30, 1997 and March 31, 1998 is $3.72 and $3.97, respectively.
For purposes of determining the disclosure required by SFAS No. 123, the
fair value of each stock option granted in 1996, 1997 and 1998 under the
Company's 1995 Stock Option Plan was $0.12, $0.02 and $10.61, respectively. The
fair value of stock options was estimated on the date of
F-21
<PAGE> 84
TWEETER HOME ENTERTAINMENT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED SEPTEMBER 30, 1995, 1996 AND 1997
AND SIX MONTHS ENDED MARCH 31, 1997 AND 1998
(UNAUDITED WITH RESPECT TO THE SIX-MONTH PERIOD ENDED MARCH 31, 1997)
11. STOCKHOLDERS' EQUITY (DEFICIT) AND REDEEMABLE CONVERTIBLE PREFERRED STOCK
(CONTINUED)
grant using the Black-Scholes option-pricing model. Key assumptions used to
apply this pricing model were as follows:
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS
SEPTEMBER 30, ENDED
-------------- MARCH 31,
1996 1997 1998
----- ----- ----------
<S> <C> <C> <C>
Risk free interest rate.................................. 6.21% 5.69% 5.67%
Expected life of option grants (years)................... 5.0 4.0 3.0
Expected volatility of underlying stock.................. 54.5% 54.5% 54.5%
</TABLE>
Had compensation cost for stock option grants during fiscal 1996, fiscal
1997 and the six months ended March 31, 1998 been determined under the
provisions of SFAS No. 123, the Company's net income would have been
approximately $1,742,600, $136,000 and $4,306,600, respectively. Pro forma
diluted earnings per share would have been $0.03 and $0.87 for the year ended
September 30, 1997 and the six months ended March 31, 1998, respectively.
12. RELATED PARTY TRANSACTIONS
In May 1996, in connection with the acquisition of Bryn Mawr, the company
entered into a consulting agreement with Bryn Mawr's former owner and a former
director of the Company ("BMFO") for a term of four years (the "Consulting
Period"). This consulting agreement was amended as of April 23, 1997 and
currently the Company is obligated to pay BMFO approximately $21,000 a month
during the first year after the commencement date of the agreement, and
approximately $4,200 a month during years three and four of the Consulting
Period plus out-of-pocket expenses. Aggregate payments under the agreement are
expensed on a straight-line basis over the Consulting Period.
The Company also entered into certain lease agreements for three facilities
in Pennsylvania with an affiliate of BMFO. Aggregate yearly payments under these
agreements total approximately $670,000.
F-22
<PAGE> 85
PRO FORMA CONDENSED CONSOLIDATED FINANCIAL INFORMATION
(UNAUDITED)
The following Pro Forma Condensed Consolidated Financial Information should
be read in conjunction with the historical consolidated financial statements and
the notes thereto included elsewhere in this Prospectus.
The Pro Forma Condensed Consolidated Statement of Operations for the year
ended September 30, 1997 reflects financial information with respect to the
Company's acquisition of HiFi Buys on May 30, 1997, which has been accounted for
under the purchase method of accounting. The Pro Forma Condensed Consolidated
Statement of Operations for the year ended September 30, 1997 was prepared as if
the acquisition of HiFi Buys occurred on October 1, 1996, the first day of
fiscal 1997.
The Pro Forma Condensed Consolidated Statements of Operations for fiscal
1997 do not include any potential operational costs savings, with the exception
of the reduction of the workforce of HiFi Buys that took place at the time of
the acquisition. The Company believes that it may be able to further reduce
operational costs as it consolidates the HiFi Buys operations into the Company.
There can be no assurance that the Company will be successful in effecting any
such costs savings.
The Pro Forma Condensed Consolidated Financial Information is unaudited and
is not necessarily indicative of the consolidated financial position and results
which actually would have occurred if the acquisition of HiFi Buys had been
consummated as of the date presented, nor does it purport to present the
financial position or results of operations of the Company for future periods.
F-23
<PAGE> 86
TWEETER HOME ENTERTAINMENT GROUP, INC.
PRO FORMA CONDENSED CONSOLIDATED STATEMENT
OF OPERATIONS
FOR THE YEAR ENDED SEPTEMBER 30, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
HIFI BUYS
COMPANY EIGHT MONTHS ENDED PRO FORMA
HISTORICAL 5/30/97 SUBTOTAL ADJUSTMENTS PRO FORMA
------------ ------------------ ------------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Total Revenue............ $132,525,037 $ 63,937,649 $ 196,462,686 $ -- $ 196,462,686
Cost Of Sales............ (86,314,918) (45,168,763) (131,483,681) (131,483,681)
------------ ------------ ------------- -------------
Gross Profit............. 46,210,119 18,768,886 64,979,005 64,979,005
(1,574,323)(1)
Operating Expenses....... 44,157,214 17,842,958 62,000,172 408,333(2) 60,834,182
------------ ------------ ------------- -------------
Income (Loss) From
Operations............. 2,052,905 925,928 2,978,833 4,144,823
1,276,000(3)
Interest Expense......... 1,807,660 437,773 2,245,433 (437,773)(4) 3,083,660
------------ ------------ ------------- -------------
Income (loss) before
income taxes........... 245,245 488,155 733,400 1,061,163
Income tax expense
(benefit).............. 98,962 0 98,962 336,453(5) 435,415
------------ ------------ ------------- ----------- -------------
Net income............... $ 146,283 $ 488,155 $ 634,438 $ 8,690 $ 625,748
============ ============ ============= =========== =============
Accretion of Preferred
Stock Dividends........ $ 2,156,356 $ 2,156,356
------------ -------------
Net Income (Loss)
Available to Common
Shareholders........... (2,010,073) (1,530,608)
------------ -------------
Basic Earnings (Loss) per
Share.................. $ (1.20) $ (.92)
============ =============
Weighted Average Shares
Outstanding............ 1,672,507 1,672,507
============ =============
Diluted Earnings (Loss)
per Share.............. $ (1.20) $ (.92)
============ =============
Weighted Average Shares
Outstanding............ 1,672,507 1,672,507
============ =============
</TABLE>
F-24
<PAGE> 87
TWEETER HOME ENTERTAINMENT GROUP, INC.
NOTES TO PRO FORMA CONDENSED CONSOLIDATED STATEMENT
OF OPERATIONS
FOR THE YEAR ENDED SEPTEMBER 30, 1997
(UNAUDITED)
(1) To record the prorated eight-month savings associated with the closing down
of the corporate offices of HiFi Buys. This resulted in the immediate
termination of 43 positions, and as part of the purchase and sale agreement
severance costs for these positions were borne by the seller.
(2) To record the amortization of goodwill associated with the acquisition of
HiFi Buys for a full fiscal year. See Note 10 to the Consolidated Financial
Statements.
(3) To record interest expense for the 1997 Notes and the Seller Note for the
full fiscal year. Both notes were issued in connection with the acquisition
of HiFi Buys. See Note 6 to the Consolidated Financial Statements.
(4) To eliminate interest expense recorded by HiFi Buys associated with (i) a
HiFi Buys mortgage not assumed as part of the HiFi Buys acquisition and (ii)
a line of credit that was replaced with the financing mentioned in (2).
(5) To reflect an effective tax rate of 41%, representing management's estimate
of the effective tax rate had HiFi Buys been a C corporation for the period
presented. A reconciliation between the statutory and pro forma effective
income tax rates is as follows:
<TABLE>
<S> <C>
Statutory income tax rate................................... 34.0%
State income taxes, net of federal benefit.................. 6.8
Other....................................................... 0.2
----
Pro forma effective income tax rate......................... 41.0%
====
</TABLE>
F-25
<PAGE> 88
INDEPENDENT AUDITORS' REPORT
Board of Directors and Stockholders
HiFi Buys Incorporated
We have audited the accompanying statements of operations and cash flows of
HiFi Buys Incorporated (the "Company") for the years ended December 31, 1996,
1995 and 1994. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the results of operations and cash flows of the Company for the years
ended December 31, 1996, 1995 and 1994 in conformity with generally accepted
accounting principles.
/s/DELOITTE & TOUCHE LLP
Atlanta, Georgia
March 7, 1997
F-26
<PAGE> 89
HIFI BUYS INCORPORATED
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEARS ENDED DECEMBER 31, MARCH 31,
--------------------------------------- -------------------------
1996 1995 1994 1997 1996
----------- ----------- ----------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
NET SALES................. $93,227,100 $89,452,900 $78,305,300 $20,853,581 $21,491,067
COST OF GOODS SOLD........ 67,368,800 64,608,800 56,547,400 14,619,834 15,239,827
----------- ----------- ----------- ----------- -----------
25,858,300 24,844,100 21,757,900 6,233,747 6,251,240
OPERATING EXPENSES:
Selling, general, and
administrative....... 23,367,600 22,007,600 19,374,500 5,896,816 5,735,997
Depreciation and
amortization......... 991,900 972,100 870,900 269,894 215,771
----------- ----------- ----------- ----------- -----------
24,359,500 22,979,700 20,245,400 6,166,710 5,951,768
----------- ----------- ----------- ----------- -----------
OPERATING INCOME.......... 1,498,800 1,864,400 1,512,500 67,037 299,472
INTEREST EXPENSE.......... 519,600 491,500 352,100 145,265 115,671
----------- ----------- ----------- ----------- -----------
NET INCOME (LOSS)......... $ 979,200 $ 1,372,900 $ 1,160,400 $ (78,228) $ 183,801
=========== =========== =========== =========== ===========
</TABLE>
See notes to consolidated financial statements.
F-27
<PAGE> 90
HIFI BUYS INCORPORATED
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEARS ENDED DECEMBER 31, MARCH 31,
--------------------------------------- -------------------------
1996 1995 1994 1997 1996
----------- ----------- ----------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES:
Net income (loss)........................ $ 979,200 $ 1,372,900 $ 1,160,400 $ (78,228) $ 183,801
Adjustments to reconcile net income to
net cash provided by operating
activities:
Depreciation and amortization.......... 991,900 972,100 870,900 269,894 215,771
Deferred product warranty revenues and
related costs, net................... 356,700 304,600 78,400 86,989 75,798
Gain on the sale of property and
equipment............................ -- (80,300) (19,500) -- --
Change in operating assets and
liabilities:
Accounts receivable, net............. 201,200 (276,100) (19,400) (260,081) (511,245)
Inventories.......................... (1,568,100) 638,500 (2,086,600) 2,412,644 1,374,132
Prepaid expenses and other assets.... (103,900) (84,800) (73,400) 127,159 (157,674)
Accounts payable and accrued
expenses........................... 2,714,100 (2,544,700) 2,238,100 (5,879,764) (2,439,064)
Customer deposits.................... (215,900) 318,800 107,000 (13,200) (353,673)
----------- ----------- ----------- ----------- -----------
Net cash provided by operating
activities....................... 3,355,200 621,000 2,255,900 (3,334,587) (1,612,154)
INVESTING ACTIVITIES:
Purchase of property and equipment....... (3,632,100) (1,969,000) (549,000) (80,118) (795,584)
Proceeds from sale of property and
equipment.............................. -- 141,900 60,100 -- --
Sale (purchase) of short-term
investment............................. -- 600,000 (600,000) -- --
----------- ----------- ----------- ----------- -----------
Net cash used in investing
activities....................... (3,632,100) (1,227,100) (1,088,900) (80,118) (795,584)
FINANCING ACTIVITIES:
Net borrowings (repayments) on line of
credit................................. (770,400) 957,600 (1,689,000) -- --
Proceeds from long-term borrowings....... 2,945,000 566,300 600,000 4,539,122 3,346,614
Payments on long-term borrowings......... (1,089,000) (67,500) (67,200) -- --
Payment for repurchase of common stock... -- (105,000) -- -- --
Proceeds from the issuance of common
stock.................................. -- -- 500,000 -- --
Dividends paid........................... (854,800) (721,100) (516,500) (701,947) (626,027)
----------- ----------- ----------- ----------- -----------
Net cash provided by (used in)
financing activities............. 230,800 630,300 (1,172,700) 3,837,175 2,720,587
NET (DECREASE) INCREASE IN CASH............ (46,100) 24,200 (5,700) 422,470 312,849
CASH:
Beginning of year........................ 62,900 38,700 44,400 16,800 62,900
----------- ----------- ----------- ----------- -----------
End of year.............................. $ 16,800 $ 62,900 $ 38,700 $ 439,270 $ 375,749
=========== =========== =========== =========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
Interest paid during the year (net of
amounts capitalized)................... $ 456,200 $ 465,500 $ 353,200 $ 145,265 $ 115,670
=========== =========== =========== =========== ===========
Equipment purchased through note
payable................................ $ -- $ 354,600 $ -- $ -- $ --
=========== =========== =========== =========== ===========
Common stock repurchased through note
payable................................ $ -- $ 102,800 $ -- $ -- $ --
=========== =========== =========== =========== ===========
</TABLE>
See notes to consolidated financial statements.
F-28
<PAGE> 91
HIFI BUYS INCORPORATED
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 AND THE THREE-MONTH PERIODS
ENDED MARCH 31, 1997 AND 1996
(UNAUDITED WITH RESPECT TO THE THREE-MONTH PERIODS ENDED MARCH 31, 1997 AND
1996)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
HiFi Buys Incorporated (the "Company") sells consumer electronics through
its ten retail stores in Georgia. Its significant accounting policies are:
INVENTORIES -- Inventories are stated at the lower of average cost or
market. Cost includes certain warehousing and distribution costs which have been
capitalized in inventories.
PROPERTY AND EQUIPMENT -- Property and equipment is recorded at cost.
Depreciation is computed using accelerated methods based on the estimated useful
lives of the related assets. Amortization of leasehold improvements is computed
on the straight-line method over the shorter of the estimated useful lives or
the lease terms.
REVENUE RECOGNITION -- Revenue from merchandise sales is recognized upon
shipment or delivery of goods. Service revenue is recognized when the repair
service is completed.
COST OF GOODS SOLD -- Cost of goods sold represents the cost of the
inventory as well as substantially all warehousing and distribution costs.
INCOME TAXES -- The Company elected to be treated as an S Corporation for
federal and state income tax purposes.
STORE OPENING COSTS -- Costs associated with opening new stores are
expensed as incurred.
INTEREST -- In 1996, approximately $61,600 of interest incurred during the
construction of a new store was capitalized into the cost basis of the
constructed property. No interest costs were capitalized in 1995 or 1994.
USE OF ESTIMATES -- The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
LONG-LIVED ASSETS -- On an ongoing basis, the Company evaluates the
carrying value of its long-lived assets based upon estimated future undiscounted
cash flows relying on a number of factors, including operating results, business
plans and certain economic projections. In addition, the Company's evaluation
considers nonfinancial data such as changes in the operating environment,
competitive information, market trends and business relationships.
2. ACCOUNTING FOR PRODUCT WARRANTY REVENUES AND RELATED COSTS
Since 1988, the Company has offered and sold extended warranty contracts
(the "Contracts") under a Company-administered and self-insured program. The
terms of these Contracts generally extend from one to five years from their
purchase dates. Revenues from Contract sales are deferred and amortized into
income on a straight-line basis over the lives of the related Contracts (the
average life of Contracts sold by the Company is approximately four years).
Certain costs of such sales, principally sales commissions, are deferred and
amortized similarly; costs for product repairs are expensed as incurred.
F-29
<PAGE> 92
HIFI BUYS INCORPORATED
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 AND THE THREE-MONTH PERIODS
ENDED MARCH 31, 1997 AND 1996
(UNAUDITED WITH RESPECT TO THE THREE-MONTH PERIODS ENDED MARCH 31, 1997 AND
1996)
An analysis of product warranty sales and the associated product repair
expense is as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEARS ENDED DECEMBER 31, MARCH 31,
------------------------------------ -------------------------
1996 1995 1994 1997 1996
---------- ---------- ---------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Product warranty:
Contracts sold............... $1,908,800 $1,625,100 $1,456,400 $474,000 $436,000
========== ========== ========== ======== ========
Revenue recognized........... $1,535,600 $1,372,200 $1,410,300 $410,200 $351,000
========== ========== ========== ======== ========
Related costs of product
warranty sales:
Deferred..................... $ 233,300 $ 150,700 $ 166,400 $ 52,300 $ 53,300
========== ========== ========== ======== ========
Expensed..................... $ 216,800 $ 202,500 $ 198,800 $ 58,700 $ 49,600
========== ========== ========== ======== ========
Product repair expense......... $ 377,600 $ 230,200 $ 224,000 $130,600 $116,800
========== ========== ========== ======== ========
</TABLE>
3. INCOME TAXES
The Company has elected to be treated as an S Corporation under Section
1362(a) of the Internal Revenue Code and to have its income taxed directly to
its stockholders. As a result of this election, the statements of operations for
the years ended December 31, 1996, 1995 and 1994 do not include a provision for
income taxes. Had this election not been made, the Company's net income in 1996,
1995 and 1994 would have been reduced by approximately $391,700, $549,200 and
$464,200, respectively, for federal and state income taxes. Similarly, had this
selection not been made, net income (loss) in the three months ended March 31,
1997 and 1996 would have been (increased)/reduced by approximately ($31,291) and
73,520, respectively (unaudited).
4. COMMITMENTS
The Company leases office, warehouse, and retail space under various
noncancelable operating leases. Total annual minimum rental payments at December
31, 1996 for all noncancelable operating leases with terms in excess of one year
are as follows:
<TABLE>
<CAPTION>
YEAR ENDING
DECEMBER 31,
- ------------
<S> <C>
1997.................................................. $ 2,483,300
1998.................................................. 2,252,200
1999.................................................. 2,235,000
2000.................................................. 2,258,400
2001.................................................. 2,067,900
Thereafter............................................ 11,022,200
-----------
$22,319,000
===========
</TABLE>
Under a sublease agreement for certain retail space, the Company will
receive approximately $82,800 in annual minimum rental payments through 2003.
F-30
<PAGE> 93
HIFI BUYS INCORPORATED
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 AND THE THREE-MONTH PERIODS
ENDED MARCH 31, 1997 AND 1996
(UNAUDITED WITH RESPECT TO THE THREE-MONTH PERIODS ENDED MARCH 31, 1997 AND
1996)
Rent expense consisted of the following:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEARS ENDED DECEMBER 31, MARCH 31,
------------------------------------ -------------------------
1996 1995 1994 1997 1996
---------- ---------- ---------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Minimum rent................... $2,633,300 $2,567,400 $2,096,400 $649,800 $685,300
Contingent rent................ -- 21,700 39,400 -- --
Sublease income................ (82,800) (82,800) (82,800) (20,700) (20,700)
---------- ---------- ---------- -------- --------
Total rent expense... $2,550,500 $2,506,300 $2,053,000 $629,100 $664,600
========== ========== ========== ======== ========
</TABLE>
Most leases provide for additional payments of real estate taxes and other
operating expenses applicable to the property. Such expenses are recorded as a
component of minimum rent.
5. EMPLOYEE BENEFIT PLAN
The Company maintains a retirement plan (the "Plan") covering substantially
all of its employees. Employees who are over the age of 21 and who have
completed their first year of service with the Company are eligible to be
admitted to the Plan during the open enrollment period. The Plan provides for a
discretionary profit sharing contribution as well as discretionary matching of
participant contributions by the Company. Participants are fully vested in their
contributions to the Plan and become 40% and 100% vested in the Company's profit
sharing and matching contributions after four and five years, respectively. The
Company's profit sharing and matching contributions were $117,900, $92,200 and
$68,700 for the years ended December 31, 1996, 1995 and 1994, respectively and
approximately $30,000 and $29,500 for the three months ended March 31, 1997 and
1996, respectively.
6. SUBSEQUENT EVENT
In February 1997, the Company entered into a nonbinding letter of intent
for the sale of substantially all of its assets.
F-31
<PAGE> 94
INDEPENDENT AUDITORS' REPORT
Board of Directors and Stockholders
Bryn Mawr Radio and Television Centre, Inc.
We have audited the combined statements of operations and cash flows of
Bryn Mawr Radio and Television Centre, Inc. and affiliate (the "Company") for
the year ended August 31, 1995. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provide a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the combined results of operations and combined cash flows of the
Company for the year ended August 31, 1995 in conformity with generally accepted
accounting principles.
As discussed in Note 2 to the combined financial statements, on May 9,
1996, the Company sold substantially all of its assets to an unrelated party.
/s/ DELOITTE & TOUCHE LLP
Philadelphia, Pennsylvania
October 20, 1995 (May 9, 1996 as to Note 2)
F-32
<PAGE> 95
BRYN MAWR RADIO AND TELEVISION CENTRE, INC. AND AFFILIATE
COMBINED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
SIX MONTHS SIX MONTHS
YEAR ENDED ENDED ENDED
AUGUST 31, FEBRUARY 29, FEBRUARY 28,
1995 1996 1995
----------- ----------------- -----------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
NET SALES....................................... $29,020,487 $19,098,609 $17,712,637
COST OF SALES................................... 18,631,960 12,370,459 11,410,268
----------- ----------- -----------
GROSS PROFIT.................................... 10,388,527 6,728,150 6,302,369
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES.... 10,945,401 5,912,217 5,818,914
OTHER REVENUE................................... 255,882 81,683 125,456
----------- ----------- -----------
(LOSS) INCOME FROM OPERATIONS................... (300,992) 897,616 608,911
INTEREST EXPENSE ON DEBT AND CAPITAL LEASES..... 300,989 310,640 146,474
INCOME TAXES (STATE)............................ 4,000 -- --
----------- ----------- -----------
NET (LOSS) INCOME............................... $ (605,981) $ 586,976 $ 462,437
=========== =========== ===========
</TABLE>
See notes to consolidated financial statements.
F-33
<PAGE> 96
BRYN MAWR RADIO AND TELEVISION CENTRE, INC. AND AFFILIATE
COMBINED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS ENDED SIX MONTHS ENDED
AUGUST 31, 1995 FEBRUARY 29, 1996 FEBRUARY 28, 1995
--------------- ----------------- -----------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net (loss) income..................... $ (605,981) $ 586,976 $ 462,437
Adjustments to reconcile net (loss)
income to net cash (used in)
provided by operating activities:
Depreciation and amortization...... 610,481 485,891 255,082
Changes in assets and liabilities
which (used) provided cash:
Accounts receivable................ (180,712) (182,870) (167,453)
Inventories........................ 101,914 (1,221,898) (778,459)
Prepaid expenses and other
assets........................... 25,747 (114,473) (283,681)
Accounts payable and accrued
expenses......................... (557,335) 2,952,726 1,124,126
Deferred revenue................... (156,329) 46,156 (7,391)
Customer deposits.................. 90,128 70,171 121,553
----------- ----------- -----------
Net cash (used in) provided by
operating activities........ (672,087) 2,622,679 726,214
----------- ----------- -----------
INVESTING ACTIVITIES -- Acquisition of
property, plant and equipment......... (6,776,579) (3,273,258) (3,742,066)
----------- ----------- -----------
FINANCING ACTIVITIES:
Capital contributions................. 100,000 -- --
Distribution to shareholders.......... (265,860) (1,950,817) (1,902,191)
Principal payments on capital leases
and term loans..................... (245,451) (122,726) (110,453)
Prepayments of proceeds from bank line
of credit.......................... (1,600,000) -- --
Borrowings under revolving credit
facility........................... 2,950,000 -- --
Borrowings under term loan facility... 1,900,000 3,005,496 4,697,829
Proceeds from construction loan
agreements......................... 4,089,262 -- --
----------- ----------- -----------
Net cash provided by financial
activities.................. 6,927,951 931,953 2,685,185
----------- ----------- -----------
NET (DECREASE) INCREASE IN CASH AND CASH
EQUIVALENTS........................... (520,715) 281,374 (330,667)
CASH AND CASH EQUIVALENTS, BEGINNING OF
YEAR.................................. 711,163 190,448 711,163
----------- ----------- -----------
CASH AND CASH EQUIVALENTS, END OF
YEAR.................................. $ 190,448 $ 471,822 $ 380,496
=========== =========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
ITEMS:
Cash paid during the year for:
Interest........................... $ 300,989 $ 373,057 $ 70,125
=========== =========== ===========
Income taxes....................... $ 23,873 $ -- $ --
=========== =========== ===========
</TABLE>
See notes to combined financial statements.
F-34
<PAGE> 97
BRYN MAWR RADIO AND TELEVISION CENTRE, INC. AND AFFILIATE
NOTES TO COMBINED FINANCIAL STATEMENTS
YEAR ENDED AUGUST 31, 1995 AND SIX-MONTH PERIODS ENDED
FEBRUARY 29, 1996 AND FEBRUARY 28, 1995
(UNAUDITED WITH RESPECT TO THE SIX-MONTH PERIODS ENDED FEBRUARY 29, 1996
AND FEBRUARY 28, 1995)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION -- The financial statements are combined and include
the accounts of Bryn Mawr Radio and Television Centre, Inc. and BMS of Delaware,
Inc. (collectively, the "Company") which are under common ownership. All
significant balances and transactions between the companies have been
eliminated.
BMS of Delaware, a Delaware Holding Company, was incorporated in 1991, and
its shareholders are the same as Bryn Mawr Radio and Television Centre, Inc.
CASH AND CASH EQUIVALENTS -- The Company considers all highly liquid debt
instruments purchased with maturities of three months or less to be temporary
investments and cash equivalents for balance sheet and cash flow statement
purposes.
INVENTORIES -- Inventories are stated at the lower of cost (average-cost
basis) or market.
DEPRECIATION AND AMORTIZATION -- Depreciation and amortization are computed
by the straight-line method over the estimated useful lives of the respective
assets. Amortization of improvements to leased properties is based upon the
remaining terms of the leases or the estimated useful lives of such
improvements, whichever is shorter.
OTHER ASSETS -- Goodwill and other acquisition costs are being amortized on
a straight-line basis over periods from six to ten years.
DEFERRED REVENUE -- The Company sells extended warranty contracts beyond
the normal manufacturer's warranty period, usually with terms of coverage
(including the manufacturer's warranty period) between twelve and sixty months.
All revenue from the sale of extended warranty contracts is deferred, and the
revenue is amortized on a straight-line basis over the contract period. All
costs related to the contracts are charged to expense when incurred.
REVENUE RECOGNITION -- Revenue from merchandise sales is recognized upon
shipment or delivery of goods. Service revenue is recognized when the repair is
completed.
INCOME TAXES -- Effective September 1, 1987, the shareholders elected to
have the Company taxed as an S Corporation for federal and certain state
corporate income tax purposes.
STORE OPENING COSTS -- The costs of opening new stores are expensed as
incurred.
CAPITAL LEASES -- The amount of amortization of assets recorded under
capital leases is included with depreciation expense.
LONG-LIVED ASSETS -- On an ongoing basis, the Company evaluates the
carrying value of its long-lived assets based upon estimated future undiscounted
cash flows relying on a number of factors, including operating results, business
plans and certain economic projections. In addition, the Company's evaluation
considers nonfinancial data such as changes in the operating environment,
competitive information, market trends and business relationships.
2. SUBSEQUENT EVENT
On March 15, 1996, the Company entered into an agreement to sell
substantially all of the assets of the Company to an unrelated party. The
consummation of this transaction is expected to occur on or about May 9, 1996.
F-35
<PAGE> 98
BRYN MAWR RADIO AND TELEVISION CENTRE, INC. AND AFFILIATE
NOTES TO COMBINED FINANCIAL STATEMENTS -- CONTINUED
YEAR ENDED AUGUST 31, 1995 AND SIX-MONTH PERIODS ENDED
FEBRUARY 29, 1996 AND FEBRUARY 28, 1995
(UNAUDITED WITH RESPECT TO THE SIX-MONTH PERIODS ENDED FEBRUARY 29, 1996
AND FEBRUARY 28, 1995)
3. DEFERRED REVENUE
Extended warranty contract sales were approximately $531,000 in the year
ended August 31, 1995 and $375,000 and $337,000 in the six-month periods ended
February 29, 1996 and February 28, 1995, respectively. Amortization of the
deferred revenue was approximately $688,000 in the year ended August 31, 1995
and $324,000 and $353,200 in the six-month periods ended February 29, 1996 and
February 28, 1995, respectively. (See Note 1)
4. EMPLOYEE BENEFIT PLANS
The Company has a qualified profit sharing plan covering eligible employees
which provides for contributions at the discretion of the Board of Directors and
also contains a 401(k) feature which provides for salary reduction and certain
employer-matching contributions. Profit sharing plan contributions were $20,000
for the year ended August 31, 1995 and $10,000 for each of the six-month periods
ended February 29, 1996 and February 28, 1995.
5. COMMITMENTS AND RELATED-PARTY TRANSACTIONS
The Company has entered into various lease agreements with respect to its
stores and certain warehouse and administrative facilities. Certain of these
leases contain several options and escalation clauses.
A portion of the Company's store space is leased from an individual who is
both the principal shareholder and president. Rent expense was $1,271,811 for
the year ended August 31, 1995 (of which $186,000 was paid to related parties)
and $653,700 and $572,300 for the six-month periods ended February 29, 1996 and
February 28, 1995, respectively.
Future minimum rental commitments on operating leases are as follows:
<TABLE>
<CAPTION>
YEAR ENDING AUGUST 31
- ---------------------
<S> <C>
1996.................................................... $1,026,119
1997.................................................... 960,270
1998.................................................... 868,651
1999.................................................... 860,709
2000.................................................... 788,464
Thereafter 2,748,670
----------
Total................................................... $7,252,883
==========
</TABLE>
The Company has commitments at August 31, 1995 to expend approximately
$1,800,000 to complete construction of its new distribution center,
administrative offices, and a retail facility.
F-36
<PAGE> 99
==============================================================================
NO PERSON HAS BEEN AUTHORIZED IN CONNECTION WITH THE OFFERING MADE HEREBY
TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS
PROSPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT
BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY, ANY SELLING STOCKHOLDER
OR ANY UNDERWRITER. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A
SOLICITATION OF AN OFFER TO BUY ANY OF THE SECURITIES OFFERED HEREBY TO ANY
PERSON OR BY ANYONE IN ANY JURISDICTION IN WHICH IT IS UNLAWFUL TO MAKE SUCH
OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE
HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE
INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY DATE SUBSEQUENT TO THE DATE
HEREOF.
---------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary.................... 3
Risk Factors.......................... 8
Use of Proceeds....................... 15
Dividend Policy....................... 15
Capitalization........................ 16
Dilution.............................. 17
Selected Financial and Operating
Data................................ 18
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 21
Business.............................. 31
Management............................ 41
Principal and Selling Stockholders.... 48
Certain Transactions.................. 50
Description of Capital Stock.......... 52
Shares Eligible for Future Sale....... 56
Underwriting.......................... 58
Legal Matters......................... 59
Experts............................... 59
Additional Information................ 60
Index to Financial Statements......... F-1
</TABLE>
---------------
UNTIL , 1998 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL
DEALERS EFFECTING TRANSACTIONS IN THE COMMON STOCK OFFERED HEREBY, WHETHER OR
NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS IS IN ADDITION TO THE OBLIGATIONS OF DEALERS TO DELIVER A PROSPECTUS WHEN
ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
===============================================================================
===============================================================================
2,710,000 SHARES
TWEETER HOME
ENTERTAINMENT
GROUP, INC.
COMMON STOCK
---------------------
PROSPECTUS
---------------------
BT ALEX. BROWN
PAINEWEBBER INCORPORATED
DAIN RAUSCHER WESSELS
A DIVISION OF DAIN RAUSCHER INCORPORATED
, 1998
================================================================================
<PAGE> 100
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the various expenses to be incurred in
connection with the sale and distribution of the securities being registered,
all of which will be paid solely by the Company.
<TABLE>
<S> <C>
SEC Registration Fee........................................ $ 16,055
NASD Filing Fee............................................. 5,800
NASDAQ Listing Fee.......................................... 59,960
Printing, Engraving and Mailing Expenses.................... 125,000
Legal Fees and Expenses..................................... 400,000
Accounting Fees and Expenses................................ 275,000
Transfer Agent Fees and Expenses............................ 12,000
Miscellaneous............................................... 6,185
--------
TOTAL............................................. $900,000
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Company's Charter generally limits the liability of the Company's
Directors to the Company to the fullest extent permitted from time to time by
Delaware law. The DGCL permits, but does not require, a corporation to indemnify
its directors, officers, employees or agents, and expressly provides that the
indemnification provided for under the DGCL shall not be deemed exclusive of any
indemnification right under any By-law, vote of stockholders or disinterested
directors, or otherwise. The DGCL permits indemnification against expenses and
certain other liabilities arising out of legal actions brought or threatened
against such persons for their conduct on behalf of a corporation; provided,
however, that each such person acted in good faith and in a manner that he
reasonably believed was in or not opposed to such corporation's best interests
and, in the case of a criminal proceeding, had no reasonable cause to believe
his or her conduct was unlawful. The DGCL does not allow indemnification of
directors in the case of an action by or in the right of a corporation
(including stockholder derivative suits) unless the directors successfully
defend the action or indemnification is ordered by the court.
The Charter provides that directors and executive officers of the Company
shall be and, in the discretion of the Board of Directors, other officers and
non-officer employees may be indemnified by the Company to the fullest extent
authorized by Delaware law, as it now exists or may in the future be amended,
against all expenses and liabilities actually and reasonably incurred in
connection with service for or on behalf of the Company. The By-laws also
provide that the right of directors and officers to indemnification shall be a
contract right and shall not be exclusive of any other right now possessed or
hereafter acquired under any By-law, agreement, vote of stockholders, or
otherwise. The Charter contains a provision permitted by Delaware law that
generally eliminates the personal liability of directors for monetary damages
for breaches of their fiduciary duty, including breaches involving negligence or
gross negligence in business combinations, unless the director has breached his
or her duty of loyalty, failed to act in good faith, engaged in intentional
misconduct or a knowing violation of law, paid a dividend or approved a stock
repurchase in violation of the DGCL or obtained an improper personal benefit.
The provision does not alter a director's liability under the Federal securities
laws. In addition, this provision does not affect the availability of equitable
remedies, such as an injunction or rescission, for breach of fiduciary duty.
Reference is also made to the Underwriting Agreement, which is filed as
Exhibit 1.1 to this Registration Statement.
II-1
<PAGE> 101
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
Set forth in chronological order is information regarding the number of
shares of capital stock sold, the number of options granted by the Company, and
the amount of debt securities issued by the Company since March 31, 1995, the
consideration received by the Company for such shares, options and debt
instruments and information relating to the section of the Securities Act of
1933 (the "Securities Act"), or rule of the Securities and Exchange Commission
under which exemption from registration is claimed. None of these securities
were registered under the Securities Act. No sale of securities involved the use
of an underwriter and no commissions were paid in connection with the sales of
securities, except that the Company paid a placement fee of $500,000 to
BankBoston, N.A., in connection with the subordinated loan referred to in
paragraph 4 below.
1. On November 28, 1995, the Company issued an aggregate of 911,787
shares of Series A Redeemable Convertible Preferred Stock to Weston
Presidio Offshore Capital C.V., Natio Vie Developpement II, FCPR, BNP
Venture Holding Corp., Jeffrey Bloomberg, Harriet Bloomberg, Armin Biller
and Matthew Bronfman at a purchase price of $6.46 per share. These shares
will be converted into 911,787 shares of Common Stock upon consummation of
the Offering. At the same time, the Company redeemed shares of Common Stock
from certain stockholders and issued the Redemption Note to such
stockholders. The above securities were sold pursuant to Section 4(2) and
Regulation D under the Securities Act.
2. On May 13, 1996, the Company issued an aggregate of 788,349 shares
of Series A Redeemable Convertible Preferred Stock to Advent Direct
Investment Program Limited Partnership, Global Private Equity II Limited
Partnership and Carolina Bloomberg at a purchase price of $6.46 per share.
These shares will be converted into 788,349 shares of Common Stock upon
consummation of the Offering. The securities were sold pursuant to Section
4(2) and Regulation D under the Securities Act.
3. On March 7, 1997, in connection with a $2.0 million bridge loan
from the Company's existing lender, the Company sold to Weston Presidio
Offshore Capital, C.V., Natio Vie Developpement II, FCPR, BNP Venture
Holding Corp., Jeffrey Bloomberg, Harriet Bloomberg, Armin Biller, Matthew
Bronfman, Advent Direct Investment Program Limited Partnership, Global
Private Equity II Limited Partnership and Carolina Bloomberg, pursuant to
the terms of a Warrant and Debenture Commitment dated as of March 7, 1997,
Warrants initially exercisable for an aggregate of 37,138 shares of Common
Stock. The purchase price for each Warrant was $0.15 multiplied by the
number of shares of Common Stock which could initially be purchased upon
exercise in full of each Warrant. The exercise price for each such Warrant
is $6.46 per share. The securities were sold pursuant to Section 4(2) and
Regulation D under the Securities Act.
4. On May 30, 1997, as part of the total purchase price for the HiFi
Buys Acquisition, the Company issued a Warrant to HiFi Buys Incorporated,
now known as HFB Associates LLC, exercisable for 104,960 shares of Common
Stock. The exercise price for such HFB Associates Warrant is $8.08 per
share. The Company also issued the HiFi Buys Note to HiFi Buys Incorporated
at such time. The securities were sold pursuant to Section 4(2) and
Regulation D under the Securities Act.
5. On June 2, 1997, the Company issued the 1997 Notes in the
aggregate amount of $15,000,000 to PNC Capital Corp, Exeter Venture
Lenders, L.P., Exeter Equity Partners and Seacoast Capital Partners, L.P.
The Company also issued to these lenders warrants exercisable for an
aggregate of 629,566 shares of Common Stock. The exercise price under each
such Warrant is $.002 per share. The securities were sold pursuant to
Section 4(2) and Regulation D under the Securities Act.
6. On June 2, 1997, the Company issued an aggregate of 866,425 shares
of Series B Redeemable Convertible Preferred Stock to Weston Presidio
Offshore Capital C.V., Natio Vie
II-2
<PAGE> 102
Developpement II, FCPR, BNP Venture Holding Corp., Jeffrey Bloomberg,
Harriet Bloomberg, Matthew Bronfman, Advent Direct Investment Program
Limited Partnership, Carolina Bloomberg, PNC Capital Corp, Exeter Venture
Lenders, L.P. and BancBoston Investments Inc., at a purchase price of $8.08
per share. These shares will be converted into 866,425 shares of Common
Stock upon consummation of the Offering. The securities were sold pursuant
to Section 4(2) and Regulation D under the Securities Act.
7. During the past three years, the Company has granted options to
purchase an aggregate number of 866,630 shares to purchase Common Stock to
263 individuals, (some of which have terminated their employment with the
Company) all of whom were at the time of grant employees or directors of
the Company, pursuant to the Company's 1995 Stock Option Plan. These
options have been granted under Section 4(2) of the Securities Act and/or
Rule 701 under the Securities Act.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENTS.
(a) See the Exhibit Index included immediately preceding the exhibits to
this Registration Statement.
(b) Schedule II is included in this Registration Statement. All other
schedules are not required under the instructions relating to the applicable
accounting regulations of the Securities and Exchange Commission or are
inapplicable, and therefore have been omitted.
ITEM 17. UNDERTAKINGS.
(a) Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the registrant of expenses
incurred or paid by a director, officer or controlling person of the registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
(b) The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities
Act, the information omitted from the form of prospectus filed as part of
this registration statement in reliance upon Rule 430A and contained in a
form of prospectus filed by the registrant pursuant to under Rule 424(b)(1)
or (4) or 497(h) under the Securities Act shall be deemed to be part of
this registration statement as of the time it was declared effective; and
(2) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities
offered therein, and that offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
(c) The undersigned hereby undertakes to provide to the underwriters at the
closing specified in the underwriting agreement certificates in such
denominations and registered in such names as required by the underwriters to
permit prompt delivery to each purchaser.
II-3
<PAGE> 103
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Boston, Commonwealth of
Massachusetts on June 5, 1998.
TWEETER HOME ENTERTAINMENT GROUP, INC.
By: /s/ JEFFREY STONE
------------------------------------
Jeffrey Stone
President, Treasurer and Director
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been duly signed below by the following persons in
the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ SAMUEL BLOOMBERG Director, Chairman of the Board June 5, 1998
- --------------------------------------------------- and Chief Executive Officer
Samuel Bloomberg, By Jeffrey Stone;
His Attorney-in-Fact.
/s/ JEFFREY STONE Director and President (Principal June 5, 1998
- --------------------------------------------------- Executive Officer)
Jeffrey Stone
/s/ JOSEPH MCGUIRE Vice President and Chief Financial June 5, 1998
- --------------------------------------------------- Officer (Principal Financial
Joseph McGuire Officer and Principal Accounting
Officer)
/s/ JEFFREY BLOOMBERG Director June 5, 1998
- ---------------------------------------------------
Jeffrey Bloomberg, By Jeffrey Stone;
His Attorney-in-Fact.
/s/ MATTHEW BRONFMAN Director June 5, 1998
- ---------------------------------------------------
Matthew Bronfman, By Jeffrey Stone;
His Attorney-in-Fact.
/s/ MICHAEL CRONIN Director June 5, 1998
- ---------------------------------------------------
Michael Cronin, By Jeffrey Stone;
His Attorney-in-Fact.
</TABLE>
II-4
<PAGE> 104
SCHEDULE II
TWEETER HOME ENTERTAINMENT GROUP, INC.
VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
<TABLE>
<CAPTION>
ADDITIONS
BALANCE AT --------------------------------- DEDUCTIONS BALANCE AT
BEGINNING CHARGED TO COSTS CHARGED TO NET OF END OF
DESCRIPTION OF PERIOD AND EXPENSES OTHER ACCOUNTS WRITE-OFFS PERIOD
----------- ---------- ---------------- -------------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Allowance for doubtful
accounts:
Six months ended March 31,
1998........................ $631 $ -- $ -- $31 $600
Years ended
September 30, 1997.......... 440 191 -- -- 631
September 30, 1996.......... 15 427 -- 2 440
September 30, 1995.......... 15 4 -- 4 15
</TABLE>
S-1
<PAGE> 105
EXHIBIT INDEX
(a)EXHIBITS:
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- -----------
<C> <C> <S> <C>
+1.1 -- Form of Underwriting Agreement.
*3.1 -- Certificate of Incorporation of the Company.
**3.2 -- Amended and Restated Certificate of Incorporation of the
Company.
*3.3 -- Articles of Organization of New England Audio Co., Inc., as
amended.
*3.4 -- By-Laws of the Company.
**3.5 -- Amended and Restated By-Laws of the Company.
*3.6 -- By-Laws of New England Audio Co., Inc.
**3.7 -- Form of Amended and Restated Certificate of Incorporation of
the Company, to be effective immediately prior to the
closing of the Offering.
**3.8 -- Form of Amended and Restated By-Laws of the Company, to be
effective immediately prior to the closing of the Offering.
***4.1 -- Specimen Certificate representing the Common Stock.
**4.2 -- Form of Shareholders' Rights Agreement to be effective
immediately prior to the closing of the Offering.
**5.1 -- Opinion of Goulston & Storrs, P.C. with respect to the
legality of the shares being offered.
*10.1 -- Amended and Restated Registration Rights Agreement, dated as
of May 30, 1997, as amended, among the Company and the
shareholders and warrantholders listed therein, as amended.
*10.2 -- Warrant Purchase Agreement among the Company, PNC Capital
Corp, Seacoast Capital Partners, L.P. and Exeter Venture
Lenders, L.P., dated as of May 30, 1997, as amended.
*10.3 -- Stock Purchase Warrant issued to PNC Capital Corp dated May
30, 1997 for 209,855 shares of Common Stock of the Company.
*10.4 -- Stock Purchase Warrant issued to Seacoast Capital Partners,
L.P. dated May 30, 1997 for 209,855 shares of Common Stock
of the Company.
*10.5 -- Stock Purchase Warrant issued to Exeter Venture Lenders,
L.P. dated as of May 30, 1997 for 104,928 shares of Common
Stock of the Company.
*10.6 -- Stock Purchase Warrant issued to Exeter Equity Partners,
L.P. dated as of May 30, 1997 for 104,928 shares of Common
Stock of the Company.
*10.7 -- Common Stock Warrant issued to HiFi Buys Incorporated dated
May 30, 1997 for 104,960 shares of Common Stock of the
Company.
*10.8 -- Form of Common Stock Purchase Warrant dated March 7, 1997
issued by the Company pursuant to the Warrant and Debenture
Commitment.
***10.9 -- Credit Agreement among the Company, NEA Delaware, Inc. and
BankBoston, N.A. as agent for itself and other.
***10.10 -- Promissory Note by the Company in favor of BankBoston, N.A.
and other lenders.
*10.11 -- Lease from James M. Salah of Boca Raton, Florida, as Trustee
of JMS Realty Trust, to the Company for premises at 40
Hudson Road, Canton, Massachusetts, dated June 11, 1991.
*10.12 -- 1995 Stock Option Plan.
</TABLE>
<PAGE> 106
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- -----------
<C> <C> <S> <C>
**10.13 -- 1998 Plan.
**10.14 -- 1998 Outside Director Stock Plan (included as Section 12 of
1998 Plan filed as Exhibit 10.13).
**10.15 -- Employment Agreement between the Company and Samuel
Bloomberg to be effective upon the Offering.
**10.16 -- Employment Agreement between the Company and Jeffrey Stone
to be effective upon the Offering.
**10.17 -- Employment Agreement between the Company and Joseph McGuire
to be effective upon the Offering.
*10.18 -- Employment Agreement between the Company and Fred Lokoff,
dated as of May 13, 1996 and amended as of April 23, 1997.
*10.19 -- Employment Agreement between the Company and David Ginsburg,
dated as of June 1, 1997.
*10.20 -- Asset Purchase Agreement, dated as of May 30, 1997, between
the Company and HiFi Buys Incorporated.
*10.21 -- Purchase and Sale Agreement between Chadwick-Miller Inc. and
New England Audio Co., Inc. for premises at 10 Pequot Way,
Canton, MA, dated March 31, 1998.
*10.22 -- Progressive Retailers Organization, Inc. Policy and
Procedures Manual.
**11 -- Statement Re Computation of Per Share Earnings.
**21.1 -- Subsidiaries of the Company.
**23.1 -- Consent of Deloitte & Touche LLP (Boston).
**23.2 -- Consent of Deloitte & Touche LLP (Atlanta).
**23.3 -- Consent of Deloitte & Touche LLP (Philadelphia).
**23.4 -- Consent of Goulston & Storrs, P.C., counsel to the Company
(included in Exhibit 5.1).
**23.5 -- Consent of Audio Video International Magazine.
**23.6 -- Consent of TWICE Consumer Electronics Retail Registry.
**23.7 -- Consent of DVD Video Group.
*24.1 -- Power of Attorney (included on Signature Page).
**27.1 -- Financial Data Schedule.
</TABLE>
- ---------------
+ Replaces original previously filed with the Commission on April 24, 1998.
* Previously filed with the Commission on April 24, 1998.
** Filed herewith.
*** To be filed by amendment.
(b) FINANCIAL STATEMENT SCHEDULES
Schedule II -- Valuation and Qualifying Accounts
All other schedules have been omitted because they are not required or
because the required information is given in the Consolidated Financial
Statements or in the Notes thereto.
<PAGE> 1
TH&T DRAFT JUNE 5, 1998
-----------------------
2,710,000 SHARES
TWEETER HOME ENTERTAINMENT GROUP, INC.
COMMON STOCK
($.01 Par Value)
UNDERWRITING AGREEMENT
----------------------
June __, 1998
BT Alex. Brown Incorporated
PaineWebber Incorporated
Dain Rauscher Incorporated
As Representatives of the
Several Underwriters
c/o BT Alex. Brown Incorporated
One South Street
Baltimore, Maryland 21202
Ladies and Gentlemen:
Tweeter Home Entertainment Group, Inc., a Delaware corporation (the
"Company"), and certain shareholders and warrant holders of the Company (the
"Selling Shareholders") propose to sell to the several underwriters (the
"Underwriters") named in SCHEDULE I hereto for whom you are acting as
representatives (the "Representatives") (a) an aggregate of 2,450,144 shares of
the Company's Common Stock, $.01 par value (the "Firm Shares"), of which
2,200,000 shares will be sold by the Company and 250,144 shares will be sold by
the Selling Shareholders and (b) warrants to purchase an aggregate of 259,856
shares of Common Stock (the "Firm Warrants"), all of which will be sold by the
Selling Shareholders. The Company proposes to sell to the Underwriters 259,856
shares of its authorized but unissued Common Stock (the "Warrant Shares") upon
exercise by the Underwriters of the Firm Warrants. The respective amounts of the
Firm Shares and Firm Warrants to be so purchased by the several Underwriters are
set forth opposite their names in SCHEDULE I hereto, and the respective amounts
of Firm Shares and Firm Warrants to be sold by the Selling Shareholders are set
forth opposite their names in SCHEDULE II hereto. The Company and the Selling
Shareholders are sometimes referred to herein collectively as the "Sellers." The
Company also proposes to sell at the Underwriters' option an aggregate of up to
406,500 additional shares of the Company's Common Stock (the "Option Shares") as
set forth below.
<PAGE> 2
-2-
As the Representatives, you have advised the Company and the Selling
Shareholders (a) that you are authorized to enter into this Agreement on behalf
of the several Underwriters, and (b) that the several Underwriters are willing,
acting severally and not jointly, to purchase the numbers of Firm Shares and
Warrant Shares set forth opposite their respective names in SCHEDULE I, plus
their pro rata portion of the Option Shares if you elect to exercise the
over-allotment option in whole or in part for the accounts of the several
Underwriters. The Firm Shares, the Warrant Shares and the Option Shares (to the
extent the aforementioned option is exercised) are herein collectively called
the "Shares."
The Company has advised the Underwriters that the reorganization referred
to in the Notes to the Company's Consolidated Financial Statements included in
the Prospectus (as hereinafter defined) has taken place, and the Company's
wholly owned subsidiary, New England Audio Co., Inc., a Massachusetts
corporation (the "Operating Subsidiary"), has become a party to this Agreement.
In consideration of the mutual agreements contained herein and of the
interests of the parties in the transactions contemplated hereby, the parties
hereto agree as follows:
1. REPRESENTATIONS AND WARRANTIES OF THE COMPANY AND THE SELLING
SHAREHOLDERS.
(a) The Company and the Operating Subsidiary jointly and severally
represent and warrant to each of the Underwriters as follows:
(i) A registration statement on Form S-1 (File No. 333-51015) with
respect to the Shares has been prepared by the Company in conformity with the
requirements of the Securities Act of 1933, as amended (the "Act"), and the
Rules and Regulations (the "Rules and Regulations") of the Securities and
Exchange Commission (the "Commission") thereunder and has been filed with the
Commission. Copies of such registration statement, including any amendments
thereto, the preliminary prospectuses (meeting the requirements of the Rules and
Regulations) contained therein and the exhibits, financial statements and
schedules, as finally amended and revised, have heretofore been delivered by the
Company to you and to the extent applicable, were identical to the
electronically transmitted copies thereof filed with the Commission pursuant to
the Commission's Electronic Data Gathering, Analysis and Retrieval System
("EDGAR"), except to the extent permitted by Regulation S-T. Such registration
statement, together with any registration statement filed by the Company
pursuant to Rule 462(b) of the Act, herein referred to as the "Registration
Statement," which shall be deemed to include all information omitted therefrom
in reliance upon Rule 430A and contained in the Prospectus referred to below,
has become effective under the Act and no post-effective amendment to the
Registration Statement has been filed as of the date of this Agreement.
"Prospectus" means the form of prospectus first filed with the Commission
pursuant to Rule 424(b). Each preliminary prospectus included in the
Registration Statement prior to the time it becomes effective is herein referred
to as a "Preliminary Prospectus." Any reference herein to the Registration
Statement, any Preliminary Prospectus or to the Prospectus shall be deemed to
refer to and include any supplements or amendments thereto filed with the
Commission after the date of filing of the Prospectus under Rules 424(b) or 430A
and prior to the
<PAGE> 3
-3-
termination of the offering of the Shares by the Underwriters. For purposes of
this Agreement, all references to the Registration Statement, any Preliminary
Prospectus, the Prospectus, or any amendment or supplement to any of the
foregoing, shall be deemed to include the respective copies thereof filed with
the Commission pursuant to EDGAR.
(ii) The Company has been duly organized and is validly existing as a
corporation in good standing under the laws of the State of Delaware, with
corporate power and authority to own or lease its properties and conduct its
business as described in the Registration Statement. Each of the subsidiaries of
the Company, as listed in Exhibit 21.1 to the Registration Statement and
including the Operating Subsidiary (collectively, the "Subsidiaries"), has been
duly organized and is validly existing as a corporation in good standing under
the laws of the jurisdiction of its incorporation, with corporate power and
authority to own or lease its properties and conduct its business as described
in the Registration Statement. The Subsidiaries are the only subsidiaries,
direct or indirect, of the Company. The Company and each of the Subsidiaries are
duly qualified to transact business in all jurisdictions in which the conduct of
their business requires such qualification. The outstanding shares of capital
stock of each of the Subsidiaries have been duly authorized and validly issued,
are fully paid and non-assessable and are owned by the Company or another
Subsidiary free and clear of all liens, encumbrances, equities and claims; and
no options, warrants or other rights to purchase, agreements or other
obligations to issue or other rights to convert any obligations into shares of
capital stock or ownership interests in the Subsidiaries are outstanding.
(iii) The outstanding shares of Common Stock of the Company, including
all outstanding shares to be sold by the Selling Shareholders, have been duly
authorized and validly issued and are fully paid and non-assessable; the portion
of the Shares to be issued and sold by the Company have been duly authorized and
when issued and paid for as contemplated herein will be validly issued, fully
paid and non-assessable; the Warrant Shares have been duly authorized and when
issued and paid for in accordance with the terms of the Firm Warrants, will be
validly issued, fully paid and non-assessable; the portion of the Shares to be
sold by the Selling Shareholders after conversion of Preferred Stock into such
Common Stock have been duly authorized and when issued in accordance with the
terms of such Preferred Stock, will be validly issued, fully paid and
non-assessable; and no preemptive rights of stockholders exist with respect to
any of the Shares or the issue and sale thereof. Neither the filing of the
Registration Statement nor the offering or sale of the Shares as contemplated by
this Agreement gives rise to any rights, other than those which have been waived
or satisfied, for or relating to the registration of any shares of Common Stock.
(iv) The information set forth under the caption "Capitalization" in
the Prospectus is true and correct. All of the Shares conform, in all material
respects, to the description thereof contained in the Registration Statement.
The Warrant Shares, at the Closing Date, will conform to the description of the
Common Stock contained in the Registration Statement. The form of certificates
for the Shares conforms to the corporate law of the jurisdiction of the
Company's incorporation.
<PAGE> 4
-4-
(v) The Commission has not issued an order preventing or suspending
the use of any Prospectus relating to the proposed offering of the Shares nor
instituted proceedings for that purpose. The Registration Statement contains,
and the Prospectus and any amendments or supplements thereto will contain, all
statements which are required to be stated therein by, and will conform, to the
requirements of the Act and the Rules and Regulations. The Registration
Statement and any amendment thereto do not contain, and will not contain, any
untrue statement of a material fact and do not omit, and will not omit, to state
any material fact required to be stated therein or necessary to make the
statements therein not misleading. The Prospectus and any amendments and
supplements thereto do not contain, and will not contain, any untrue statement
of material fact; and do not omit, and will not omit, to state any material fact
required to be stated therein or necessary to make the statements therein, in
the light of the circumstances under which they were made, not misleading;
provided, however, that the Company and the Operating Subsidiary make no
representations or warranties as to information contained in or omitted from the
Registration Statement or the Prospectus, or any such amendment or supplement,
in reliance upon, and in conformity with, written information furnished to the
Company by or on behalf of any Underwriter through the Representatives,
specifically for use in the preparation thereof.
(vi) The financial statements, including the related notes and
schedules as set forth in the Registration Statement, present fairly the
financial position and the results of operations and cash flows of the entities
purported to be shown thereby, at the indicated dates and for the indicated
periods. Such financial statements and related schedules have been prepared in
accordance with generally accepted principles of accounting, consistently
applied throughout the periods involved, except as disclosed therein, and all
adjustments necessary for a fair presentation of results for such periods have
been made. The summary financial and statistical data included in the
Registration Statement presents fairly the information shown therein and such
data has been compiled on a basis consistent with the financial statements
presented therein and the books and records of the Company.
(vii) Deloitte & Touche LLP, who have certified the financial
statements filed with the Commission as part of the Registration Statement, are
independent public accountants as required by the Act and the Rules and
Regulations.
(viii) There is no action, suit, claim or proceeding pending or, to
the knowledge of the Company or the Operating Subsidiary, threatened against the
Company or any of the Subsidiaries before any court or administrative agency or
otherwise which if determined adversely to the Company or any of its
Subsidiaries might result in any material adverse change in the earnings,
business, management, properties, assets, rights, operations, condition
(financial or otherwise) or prospects of the Company and of the Subsidiaries
taken as a whole or to prevent the consummation of the transactions contemplated
hereby, except as set forth in the Registration Statement.
(ix) The Company and the Subsidiaries have good and marketable title
to all of the properties and assets reflected in the financial statements (or as
described in the Registration Statement) hereinabove described, subject to no
lien, mortgage, pledge, charge or encumbrance of any kind except those reflected
in such financial statements (or as described in the Registration
<PAGE> 5
-5-
Statement) or which are not material in amount. The Company and the Subsidiaries
occupy their leased properties under valid and binding leases conforming in all
material respects to the description thereof set forth in the Registration
Statement.
(x) The Company and the Subsidiaries have filed all Federal, State,
local and foreign tax returns which have been required to be filed and have paid
all taxes indicated by said returns and all assessments received by them or any
of them to the extent that such taxes have become due and are not being
contested in good faith and for which an adequate reserve for accrual has been
established in accordance with generally accepted accounting principles. All tax
liabilities have been adequately provided for in the financial statements of the
Company, and the Company and the Operating Subsidiary do not know of any actual
or proposed additional material tax assessments.
(xi) Since the respective dates as of which information is given in
the Registration Statement, as it may be amended or supplemented, there has not
been any material adverse change or any development involving a prospective
material adverse change in or affecting the earnings, business, management,
properties, assets, rights, operations, condition (financial or otherwise), or
prospects of the Company and its Subsidiaries taken as a whole, whether or not
occurring in the ordinary course of business, and there has not been any
material transaction entered into or any material transaction that is probable
of being entered into by the Company or the Subsidiaries, other than
transactions in the ordinary course of business and changes and transactions
described in the Registration Statement, as it may be amended or supplemented.
The Company and the Subsidiaries have no material contingent obligations which
are not disclosed in the Company's financial statements which are included in
the Registration Statement.
(xii) Neither the Company nor any of the Subsidiaries is or with the
giving of notice or lapse of time or both, will be, in violation of or in
default under its Certificate of Incorporation, as amended (the "Charter") or
By-Laws or under any agreement, lease, contract, indenture or other instrument
or obligation to which it is a party or by which it, or any of its properties,
is bound and which default is of material significance in respect of the
condition, financial or otherwise of the Company and its Subsidiaries taken as a
whole or the business, management, properties, assets, rights, operations,
condition (financial or otherwise) or prospects of the Company and the
Subsidiaries taken as a whole. The execution and delivery of this Agreement and
the consummation of the transactions herein contemplated and the fulfillment of
the terms hereof will not conflict with or result in a breach of any of the
terms or provisions of, or constitute a default under, any indenture, mortgage,
deed of trust or other agreement or instrument to which the Company or any
Subsidiary is a party, or of the Charter or By-Laws of the Company or any order,
rule or regulation applicable to the Company or any Subsidiary of any court or
of any regulatory body or administrative agency or other governmental body
having jurisdiction.
(xiii) Each approval, consent, order, authorization, designation,
declaration or filing by or with any regulatory, administrative or other
governmental body necessary in connection with the execution and delivery by the
Company and the Operating Subsidiary of this Agreement and the consummation of
the transactions herein contemplated (except such additional steps as may be
required by the Commission, the National Association of Securities Dealers, Inc.
(the "NASD") or
<PAGE> 6
-6-
such additional steps as may be necessary to qualify the Shares for public
offering by the Underwriters under state securities or Blue Sky laws) has been
obtained or made and is in full force and effect.
(xii) The Company and each of the Subsidiaries holds all material
licenses, certificates and permits from governmental authorities which are
necessary to the conduct of their businesses; and neither the Company nor any of
the Subsidiaries has infringed any patents, patent rights, trade names,
trademarks or copyrights, which infringement is material to the business of the
Company and the Subsidiaries taken as a whole. The Company and the Operating
Subsidiary know of no material infringement by others of patents, patent rights,
trade names, trademarks or copyrights owned by or licensed to the Company or any
of the Subsidiaries.
(xiii) Neither the Company, nor to the Company's or the Operating
Subsidiary's knowledge, any of its affiliates, has taken or may take, directly
or indirectly, any action designed to cause or result in, or which has
constituted or which might reasonably be expected to constitute, the
stabilization or manipulation of the price of the shares of Common Stock to
facilitate the sale or resale of the Shares.
(xiv) Neither the Company nor any Subsidiary is an "investment
company" within the meaning of such term under the Investment Company Act of
1940, (as amended, the "1940 Act") and the rules and regulations of the
Commission thereunder.
(xv) The Company maintains a system of internal accounting controls
sufficient to provide reasonable assurances that (i) transactions are executed
in accordance with management's general or specific authorization; (ii)
transactions are recorded as necessary to permit preparation of financial
statements in conformity with generally accepted accounting principles and to
maintain accountability for assets; (iii) access to assets is permitted only in
accordance with management's general or specific authorization; and (iv) the
recorded accountability for assets is compared with existing assets at
reasonable intervals and appropriate action is taken with respect to any
differences.
(xvi) The Company and each of its Subsidiaries carry, or are covered
by, insurance in such amounts and covering such risks as is adequate for the
conduct of their respective businesses and the value of their respective
properties and as is customary for companies engaged in similar industries.
(xvii) The Company and each of its Subsidiaries is in compliance in
all material respects with all presently applicable provisions of the Employee
Retirement Income Security Act of 1974, as amended, including the regulations
and published interpretations thereunder ("ERISA"); no "reportable event" (as
defined in ERISA) has occurred with respect to any "pension plan" (as defined in
ERISA) for which the Company or any of the Subsidiaries would have any
liability; the Company and each of the Subsidiaries has not incurred and does
not expect to incur liability under (i) Title IV of ERISA with respect to
termination of, or withdrawal from, any "pension plan" or (ii) Sections 412 or
4971 of the Internal Revenue Code of 1986, as amended, including the regulations
and published interpretations thereunder (the "Code"); and each "pension plan"
for which the
<PAGE> 7
-7-
Company or any Subsidiary would have any liability that is intended to be
qualified under Section 401(a) of the Code is so qualified in all material
respects and nothing has occurred, whether by action or by failure to act, which
would cause the loss of such qualification.
(xviii) To the Company's and the Operating Subsidiary's knowledge,
there are no affiliations or associations between any member of the NASD and any
of the Company's officers, directors or securityholders, except as set forth in
the Registration Statement.
(xix) The Firm Warrants may be transferred to the several Underwriters
pursuant to this Agreement, and the Underwriters, upon receipt of the Firm
Warrants being so transferred to them, may exercise the Firm Warrants, receiving
259,856 Warrant Shares upon exercise of the Firm Warrants in accordance with
their terms, including payment to the Company by the Underwriters of an amount
equal to $.002 per Warrant Share (the "Warrant Exercise Price").
(b) Each of the Selling Shareholders severally represents and warrants
as follows:
(i) Such Selling Shareholder now has and at the Closing Date (as such
date is hereinafter defined) will have good and marketable title to the Firm
Shares (and Firm Warrants, where applicable) to be sold by such Selling
Shareholder, free and clear of any liens, encumbrances, equities and claims, and
full right, power and authority to effect the sale and delivery of such Firm
Shares (and Firm Warrants, where applicable); and upon the delivery of, against
payment for, such Firm Shares (and Firm Warrants, where applicable) pursuant to
this Agreement, the Underwriters will acquire good and marketable title thereto,
free and clear of any liens, encumbrances, equities and claims.
(ii) Such Selling Shareholder has full right, power and authority to
execute and deliver this Agreement, the Power of Attorney, and the Custodian
Agreement referred to below and to perform its obligations under such
Agreements. The execution and delivery of this Agreement and the consummation by
such Selling Shareholder of the transactions herein contemplated and the
fulfillment by such Selling Shareholder of the terms hereof will not require any
consent, approval, authorization, or other order of any court, regulatory body,
administrative agency or other governmental body (except as may be required
under the Act, state securities laws or Blue Sky laws) and will not result in a
breach of any of the terms and provisions of, or constitute a default under, the
organizational documents of such Selling Shareholder, if not an individual, or
any indenture, mortgage, deed of trust or other agreement or instrument to which
such Selling Shareholder is a party, or of any order, rule or regulation
applicable to such Selling Shareholder of any court or of any regulatory body or
administrative agency or other governmental body having jurisdiction.
(iii) Such Selling Shareholder has not taken and will not take,
directly or indirectly, any action designed to, or which has constituted, or
which might reasonably be expected to cause or result in the stabilization or
manipulation of the price of the Common Stock of the Company and, other than as
permitted by the Act, the Selling Shareholder will not distribute any prospectus
or other offering material in connection with the offering of the Shares.
<PAGE> 8
-8-
(iv) Without having undertaken to determine independently the accuracy
or completeness of either the representations and warranties of the Company and
the Operating Subsidiary contained herein or the information contained in the
Registration Statement, such Selling Shareholder has no reason to believe that
the representations and warranties of the Company and the Operating Subsidiary
contained in this Section 1 are not true and correct, is familiar with the
Registration Statement and has no knowledge of any material fact, condition or
information not disclosed in the Registration Statement which has adversely
affected or may adversely affect the business of the Company or any of the
Subsidiaries; and the sale of the Firm Shares (and Firm Warrants, where
applicable) by such Selling Shareholder pursuant hereto is not prompted by any
information concerning the Company or any of the Subsidiaries which is not set
forth in the Registration Statement. The information pertaining to such Selling
Shareholder under the caption "Principal and Selling Stockholders" in the
Prospectus is complete and accurate in all material respects.
2. PURCHASE, SALE AND DELIVERY OF THE FIRM SHARES AND FIRM WARRANTS.
(a) On the basis of the representations, warranties and covenants
herein contained, and subject to the conditions herein set forth, (i) the
Company agrees to issue and sell to the Underwriters 2,200,000 Firm Shares, (ii)
the Selling Shareholders agree, severally and not jointly, to sell to the
Underwriters in the respective amounts set forth in SCHEDULE II hereto, an
aggregate of 250,144 Firm Shares and 259,856 Firm Warrants and (iii) the Company
agrees to issue and to sell to the Underwriters 259,856 Warrant Shares upon
exercise of the Firm Warrants. The Underwriters agree, severally and not
jointly, to purchase from the Company and the Selling Shareholders,
respectively, the number of Firm Shares and Firm Warrants set forth opposite the
name of each Underwriter in SCHEDULE I hereof, subject to adjustments in
accordance with Section 9 hereof. The purchase price per Firm Share to be paid
by the several Underwriters to the Company and to the Selling Shareholders,
respectively, shall be $______ per share. The purchase price per Firm Warrant
(each Firm Warrant representing the right to purchase one Common Share) shall be
the price stated in the preceding sentence less the Warrant Exercise Price. The
number of Firm Shares (and Firm Warrants, where applicable) to be purchased by
each Underwriter from each Seller shall be as nearly as practicable in the same
proportion to the total number of Firm Shares (and Firm Warrants, where
applicable) being sold by each Seller as the number of Firm Shares and Firm
Warrants being purchased by each Underwriter bears to the total number of Firm
Shares and Firm Warrants to be sold hereunder. The obligations of the Company
and of each of the Selling Shareholders shall be several and not joint.
(b) Certificates in negotiable form for the total number of the
Shares, including instruments representing the Firm Warrants, to be sold
hereunder by the Selling Shareholders have been placed in custody with
____________________, as custodian (the "Custodian") pursuant to the Custodian
Agreement executed by each Selling Shareholder for delivery of all Firm Shares
(and Firm Warrants, where applicable) to be sold hereunder by the Selling
Shareholders. Each of the Selling Shareholders specifically agrees that the Firm
Shares represented by the certificates (and the Firm Warrants represented by
instruments, where applicable) held in custody for the Selling Shareholders
under the Custodian Agreement are subject to the interests of the Underwriters
hereunder, that the arrangements made by the Selling Shareholders for such
custody are to that
<PAGE> 9
-9-
extent irrevocable, and that the obligations of the Selling Shareholders
hereunder shall not be terminable by any act or deed of the Selling Shareholders
(or by any other person, firm or corporation including the Company, the
Custodian or the Underwriters) or by operation of law (including the death of an
individual Selling Shareholder or the dissolution of a corporate Selling
Shareholder) or by the occurrence of any other event or events, except as set
forth in the Custodian Agreement. If any such event should occur prior to the
delivery to the Underwriters of the Firm Shares (and Firm Warrants, where
applicable) hereunder, certificates for the Firm Shares (and instruments
representing Firm Warrants, where applicable) shall be delivered by the
Custodian in accordance with the terms and conditions of this Agreement as if
such event has not occurred. The Custodian is authorized to receive and
acknowledge receipt of the proceeds of sale of the Shares held by it against
delivery of such Shares.
(c) Payment for the Firm Shares and Firm Warrants to be sold hereunder
is to be made in Federal (same day) funds (i) with respect to the Firm Shares to
(A) an account designated by the Company for the shares to be sold by it and (B)
an account designated by the Custodian for the shares to be sold by the Selling
Shareholders and (ii) with respect to the Firm Warrants and the Warrant Shares,
to an account designated by the Custodian for the Firm Warrants to be sold by
the Selling Shareholders and to an account designated by the Company for the
aggregate Warrant Exercise Price, in each case against delivery of certificates
therefor (including certificates for the Warrant Shares) to the Representatives
for the several accounts of the Underwriters. Such payment and delivery are to
be made through the facilities of the Depository Trust Company at 10:00 a.m.,
New York time, on the third business day after the date of this Agreement or at
such other time and date not later than five business days thereafter as you and
the Company shall agree upon, such time and date being herein referred to as the
"Closing Date." (As used herein, "business day" means a day on which the New
York Stock Exchange is open for trading and on which banks in New York are open
for business and not permitted by law or executive order to be closed.)
(d) In addition, on the basis of the representations and warranties
herein contained and subject to the terms and conditions herein set forth, the
Company hereby grants an option to the several Underwriters to purchase the
Option Shares at the price per share as set forth in the first paragraph of this
Section 2. The option granted hereby may be exercised in whole or in part by
giving written notice (i) at any time before the Closing Date and (ii) only once
thereafter within 30 days after the date of this Agreement, by you, as
Representatives of the several Underwriters, to the Company setting forth the
number of Option Shares as to which the several Underwriters are exercising the
option, the names and denominations in which the Option Shares are to be
registered and the time and date at which such certificates are to be delivered.
The time and date at which certificates for Option Shares are to be delivered
shall be determined by the Representatives but shall not be earlier than three
nor later than 10 full business days after the exercise of such option, nor in
any event prior to the Closing Date (such time and date being herein referred to
as the "Option Closing Date"). If the date of exercise of the option is three or
more days before the Closing Date, the notice of exercise shall set the Closing
Date as the Option Closing Date. The number of Option Shares to be purchased by
each Underwriter shall be in the same proportion to the total number of Option
Shares being purchased as the number of Firm Shares and Firm Warrants being
purchased by such Underwriter bears to the total number of Firm Shares and Firm
Warrant, adjusted by you in such manner as to avoid fractional shares. The
option with respect to
<PAGE> 10
-10-
the Option Shares granted hereunder may be exercised only to cover
over-allotments in the sale of the Firm Shares and Firm Warrants by the
Underwriters. You, as Representatives of the several Underwriters, may cancel
such option at any time prior to its expiration by giving written notice of such
cancellation to the Company. To the extent, if any, that the option is
exercised, payment for the Option Shares shall be made on the Option Closing
Date in Federal (same day) funds drawn to the order of the Company against
delivery of certificates therefor through the facilities of the Depository Trust
Company, New York, New York.
(e) If on the Closing Date, any Selling Shareholder fails to sell the
Firm Shares (and Firm Warrants, where applicable) which such Selling Shareholder
has agreed to sell on such date as set forth in SCHEDULE II, the Company agrees
that it will sell or arrange for the sale of that number of shares of Common
Stock to the Underwriters which represents Firm Shares (and Firm Warrants, where
applicable) which such Selling Shareholder has failed to so sell, as set forth
in SCHEDULE II hereto, or such lesser number as may be requested by the
Representatives.
3. OFFERING BY THE UNDERWRITERS.
It is understood that the several Underwriters are to make a public
offering of the Firm Shares and Warrant Shares as soon as the Representatives
deem it advisable to do so. The Firm Shares and Warrant Shares are to be
initially offered to the public at the initial public offering price set forth
in the Prospectus. The Representatives may from time to time thereafter change
the public offering price and other selling terms. To the extent, if at all,
that any Option Shares are purchased pursuant to Section 2 hereof, the
Underwriters will offer them to the public on the foregoing terms.
It is further understood that you will act as the Representatives for
the Underwriters in the offering and sale of the Shares in accordance with a
Master Agreement Among Underwriters entered into by you and the several other
Underwriters.
4. COVENANTS OF THE COMPANY AND THE SELLING SHAREHOLDERS.
(a) The Company covenants and agrees with the several Underwriters
that:
(i) The Company will (A) use its best efforts to cause the
Registration Statement to become effective or, if the procedure in Rule 430A of
the Rules and Regulations is followed, to prepare and timely file with the
Commission under Rule 424(b) of the Rules and Regulations a Prospectus in a form
approved by the Representatives containing information previously omitted at the
time of effectiveness of the Registration Statement in reliance on Rule 430A of
the Rules and Regulations and (B) not file any amendment to the Registration
Statement or supplement to the Prospectus of which the Representatives shall not
previously have been advised and furnished with a copy or to which the
Representatives shall have reasonably objected in writing or which is not in
compliance with the Rules and Regulations. To the extent applicable, the copies
of the Registration Statement and each amendment thereto (including all exhibits
filed therewith), any Preliminary Prospectus or Prospectus (in each case, as
amended or supplemented) furnished to
<PAGE> 11
-11-
the Underwriters will be identical to the electronically transmitted copies
thereof filed with the Commission pursuant to EDGAR, except to the extent
permitted by Regulation S-T.
(ii) The Company will advise the Representatives promptly (A) when the
Registration Statement or any post-effective amendment thereto shall have become
effective, (B) of receipt of any comments from the Commission, (C) of any
request of the Commission for amendment of the Registration Statement or for
supplement to the Prospectus or for any additional information, and (D) of the
issuance by the Commission of any stop order suspending the effectiveness of the
Registration Statement or the use of the Prospectus or of the institution of any
proceedings for that purpose. The Company will use its best efforts to prevent
the issuance of any such stop order preventing or suspending the use of the
Prospectus and to obtain as soon as possible the lifting thereof, if issued.
(iii) The Company will cooperate with the Representatives in
endeavoring to qualify the Shares for sale under the securities laws of such
jurisdictions as the Representatives may reasonably have designated in writing
and will make such applications, file such documents, and furnish such
information as may be reasonably required for that purpose, provided that the
Company shall not be required to qualify as a foreign corporation or to file a
general consent to service of process in any jurisdiction where it is not now so
qualified or required to file such a consent. The Company will, from time to
time, prepare and file such statements, reports, and other documents, as are or
may be required to continue such qualifications in effect for so long a period
as the Representatives may reasonably request for distribution of the Shares.
(iv) The Company will deliver to, or upon the order of, the
Representatives, from time to time, as many copies of any Preliminary Prospectus
as the Representatives may reasonably request. The Company will deliver to, or
upon the order of, the Representatives during the period when delivery of a
Prospectus is required under the Act, as many copies of the Prospectus in final
form, or as thereafter amended or supplemented, as the Representatives may
reasonably request. The Company will deliver to the Representatives at or before
the Closing Date, four signed copies of the Registration Statement and all
amendments thereto including all exhibits filed therewith, and will deliver to
the Representatives such number of copies of the Registration Statement
(including such number of copies of the exhibits filed therewith that may
reasonably be requested), and of all amendments thereto, as the Representatives
may reasonably request.
(v) The Company will comply with the Act and the Rules and
Regulations, and the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), and the rules and regulations of the Commission thereunder, so as to
permit the completion of the distribution of the Shares as contemplated in this
Agreement and the Prospectus. If during the period in which a prospectus is
required by law to be delivered by an Underwriter or dealer, any event shall
occur as a result of which, in the judgment of the Company or in the reasonable
opinion of the Underwriters, it becomes necessary to amend or supplement the
Prospectus in order to make the statements therein, in the light of the
circumstances existing at the time the Prospectus is delivered to a purchaser,
not misleading, or, if it is necessary at any time to amend or supplement the
Prospectus to comply with any law, the Company promptly will prepare and file
with the Commission an appropriate amendment to the Registration Statement or
supplement to the Prospectus so that the Prospectus as
<PAGE> 12
-12-
so amended or supplemented will not, in the light of the circumstances when it
is so delivered, be misleading, or so that the Prospectus will comply with the
law.
(vi) The Company will make generally available to its security
holders, as soon as it is practicable to do so, but in any event not later than
15 months after the effective date of the Registration Statement, an earning
statement (which need not be audited) in reasonable detail, covering a period of
at least 12 consecutive months beginning after the effective date of the
Registration Statement, which earning statement shall satisfy the requirements
of Section 11(a) of the Act and Rule 158 of the Rules and Regulations and will
advise you in writing when such statement has been so made available.
(vii) Prior to the Closing Date, the Company will furnish to the
Underwriters, as soon as they have been prepared by or are available to the
Company, a copy of any unaudited interim financial statements of the Company for
any period subsequent to the period covered by the most recent financial
statements appearing in the Registration Statement and the Prospectus.
(viii) No offering, sale, short sale or other disposition of any
shares of Common Stock of the Company or other securities convertible into or
exchangeable or exercisable for shares of Common Stock or derivative of Common
Stock (or agreement for such) will be made for a period of 180 days after the
date of this Agreement, directly or indirectly, by the Company otherwise than
hereunder or with the prior written consent of BT Alex. Brown Incorporated,
except that the Company may, without such consent, (A) issue shares upon
exercise of (1) options outstanding on the date of this Agreement issued
pursuant to the Company's currently existing stock-based compensation plans and
(2) warrants outstanding on the date of this Agreement, and (B) grant options,
offer to sell and sell shares of its Common Stock to its employees, directors
and consultants pursuant to its currently existing stock-based compensation
plans.
(ix) The Company will use its best efforts to list, subject to notice
of issuance, the Shares on the Nasdaq National Market.
(x) The Company has caused each officer and director and specific
shareholders of the Company to furnish to you, on or prior to the date of this
agreement, a letter or letters, in form and substance satisfactory to the
Underwriters, pursuant to which each such person shall agree not to sell, offer
or contract to sell, sell short or otherwise dispose of any shares of Common
Stock of the Company or other capital stock of the Company, or any other
securities convertible, exchangeable or exercisable for Common Shares or
derivative of Common Shares owned by such person or request the registration for
the offer or sale of any of the foregoing (or as to which such person has the
right to direct the disposition of) for a period of 180 days after the date of
this Agreement, directly or indirectly, except with the prior written consent of
BT Alex. Brown Incorporated ("Lockup Agreements"). The Company further agrees
not to file with the Commission any registration statements on Form S-8 or
equivalent on any date which is earlier than 90 days after the date of this
Agreement.
<PAGE> 13
-13-
(xi) The Company shall apply the net proceeds of its sale of the
Shares as set forth in the Prospectus and shall include such information with
respect thereto in such reports filed with the Commission as may be required in
accordance with Rule 463 under the Act.
(xii) The Company shall not invest, or otherwise use the proceeds
received by the Company from its sale of the Shares in such a manner as would
require the Company or any of the Subsidiaries to register as an investment
company under the 1940 Act.
(xiii) The Company will maintain a transfer agent and, if necessary
under the jurisdiction of incorporation of the Company, a registrar for the
Common Stock.
(xiv) The Company will not take, directly or indirectly, any action
designed to cause or result in, or that has constituted or might reasonably be
expected to constitute, the stabilization or manipulation of the price of any
securities of the Company.
(b) Each of the Selling Shareholders covenants and agrees with the
several Underwriters that:
(i) No offering, sale, short sale or other disposition of any
shares of Common Stock of the Company or other capital stock of the Company or
other securities convertible, exchangeable or exercisable for Common Stock or
derivative of Common Stock owned by the Selling Shareholder or request the
registration for the offer or sale of any of the foregoing (or as to which the
Selling Shareholder has the right to direct the disposition of) will be made for
a period of 180 days after the date of this Agreement, directly or indirectly,
by such Selling Shareholder otherwise than hereunder or with the prior written
consent of BT Alex. Brown Incorporated.
(ii) In order to document the Underwriters' compliance with the
reporting and withholding provisions of the Tax Equity and Fiscal Responsibility
Act of 1982 and the Interest and Dividend Tax Compliance Act of 1983 with
respect to the transactions herein contemplated, each of the Selling
Shareholders agrees to deliver to you prior to or at the Closing Date a properly
completed and executed United States Treasury Department Form W-8 or W-9 (or
other applicable form or statement specified by Treasury Department regulations
in lieu thereof).
(iii) Such Selling Shareholder will not take, directly or
indirectly, any action designed to cause or result in, or that has constituted
or might reasonably be expected to constitute, the stabilization or manipulation
of the price of any securities of the Company .
5. COSTS AND EXPENSES.
The Company will pay all costs, expenses and fees incident to the
performance of the obligations of the Sellers under this Agreement, including,
without limiting the generality of the foregoing, the following: accounting fees
of the Company; the fees and disbursements of counsel for the Company and the
Selling Shareholders; the cost of printing and delivering to, or as requested
by, the Underwriters copies of the Registration Statement, Preliminary
Prospectuses, the
<PAGE> 14
-14-
Prospectus, this Agreement, the Underwriters' Selling Memorandum, if any, the
Underwriters' Invitation Letter, the Blue Sky Survey and any supplements or
amendments thereto; the filing fees of the Commission; the filing fees and
expenses (including legal fees and disbursements) incident to securing any
required review by the NASD of the terms of the sale of the Shares; the Listing
Fee of the Nasdaq National Market; and the expenses, including the fees and
disbursements of counsel for the Underwriters, incurred in connection with the
qualification of the Shares under State securities or Blue Sky laws. To the
extent, if at all, that any of the Selling Shareholders engage special legal
counsel to represent them in connection with this offering, the fees and
expenses of such counsel shall be borne by such Selling Shareholder. Any
transfer taxes imposed on the sale of the Shares to the several Underwriters
will be paid by the Sellers pro rata. The Company agrees to pay all costs and
expenses of the Underwriters, including the fees and disbursements of counsel
for the Underwriters, incident to the offer and sale of directed shares of the
Common Stock by the Underwriters to employees and persons having business
relationships with the Company and its Subsidiaries. The Sellers shall not,
however, be required to pay for any of the Underwriters' expenses (other than
those related to qualification under NASD regulation and State securities or
Blue Sky laws) except that, if this Agreement shall not be consummated because
the conditions in Section 6 hereof are not satisfied, or because this Agreement
is terminated by the Representatives pursuant to Section 11 hereof, or by reason
of any failure, refusal or inability on the part of the Company or the Selling
Shareholders to perform any undertaking or satisfy any condition of this
Agreement or to comply with any of the terms hereof on their part to be
performed, unless such failure to satisfy said condition or to comply with said
terms be due to the default or omission of any Underwriter, then the Company
shall reimburse the several Underwriters for reasonable out-of-pocket expenses,
including fees and disbursements of counsel, reasonably incurred in connection
with investigating, marketing and proposing to market the Shares or in
contemplation of performing their obligations hereunder; but the Company and the
Selling Shareholders shall not in any event be liable to any of the several
Underwriters for damages on account of loss of anticipated profits from the sale
by them of the Shares.
6. CONDITIONS TO OBLIGATIONS OF THE UNDERWRITERS.
The several obligations of the Underwriters to purchase the Firm
Shares and the Warrant Shares on the Closing Date and the Option Shares, if any,
on the Option Closing Date are subject to the accuracy, as of the Closing Date
or the Option Closing Date, as the case may be, of the representations and
warranties of the Company and the Selling Shareholders contained herein, and to
the performance by the Company and the Selling Shareholders of their covenants
and obligations hereunder and to the following additional conditions:
(a) The Registration Statement and all post-effective amendments
thereto shall have become effective and any and all filings required by Rule 424
and Rule 430A of the Rules and Regulations shall have been made, and any request
of the Commission for additional information (to be included in the Registration
Statement or otherwise) shall have been disclosed to the Representatives and
complied with to their reasonable satisfaction. No stop order suspending the
effectiveness of the Registration Statement, as amended from time to time, shall
have been issued and no proceedings for that purpose shall have been taken or,
to the knowledge of the Company, the Operating Subsidiary or the Selling
Shareholders, shall be contemplated by the Commission and no
<PAGE> 15
-15-
injunction, restraining order, or order of any nature by a Federal or state
court of competent jurisdiction shall have been issued as of the Closing Date,
or Option Closing Date, as the case may be, which would prevent the issuance of
the Shares.
(b) The Representatives shall have received on the Closing Date or the
Option Closing Date, as the case may be, the opinion of Goulston & Storrs, P.C.,
counsel for Company and the Selling Shareholders, dated the Closing Date or the
Option Closing Date, as the case may be, addressed to the Underwriters (and
stating that it may be relied upon by counsel to the Underwriters) to the effect
that:
(i) The Company has been duly organized and is validly existing
as a corporation in good standing under the laws of the State of Delaware, with
corporate power and authority to own or lease its properties and, to the
knowledge of such counsel, conduct its business as described in the Registration
Statement; each of the Subsidiaries has been duly organized and is validly
existing as a corporation in good standing under the laws of the jurisdiction of
its incorporation, with corporate power and authority to own or lease its
properties and, to the knowledge of such counsel, conduct its business as
described in the Registration Statement; the Company and each of the
Subsidiaries are duly qualified to transact business in all jurisdictions in
which the conduct of their business requires such qualification and in which the
failure to so qualify would have a materially adverse effect upon the business
of the Company and the Subsidiaries taken as a whole; and the outstanding shares
of capital stock of each of the Subsidiaries have been duly authorized and
validly issued and are fully paid and non-assessable and are owned by the
Company or a Subsidiary; and, to the best of such counsel's knowledge, the
outstanding shares of capital stock of each of the Subsidiaries is owned free
and clear of all liens, encumbrances and equities and claims, and no options,
warrants or other rights to purchase, agreements or other obligations to issue
or other rights to convert any obligations into any shares of capital stock or
of ownership interests in the Subsidiaries are outstanding.
(ii) The Company has authorized and outstanding capital stock as
set forth under the caption "Capitalization" in the Prospectus; the authorized
shares of the Company's Common Stock have been duly authorized; the outstanding
shares of the Company's Common Stock, including the Shares to be sold by the
Selling Shareholders, have been duly authorized and validly issued and are fully
paid and non-assessable; all of the Shares conform to the description thereof
contained in the Prospectus; the certificates for the Shares, assuming they are
in the form filed with the Commission, are in due and proper form; the shares of
Common Stock, including the Option Shares, if any, to be sold by the Company
pursuant to this Agreement have been duly authorized and will be validly issued,
fully paid and non-assessable when issued and paid for as contemplated by this
Agreement; and no preemptive rights of stockholders exist with respect to any of
the Shares or the issue or sale thereof in the Company's Charter, the Company's
By-Laws or in any agreements known to us.
(iii) Except as described in or contemplated by the Prospectus,
to the knowledge of such counsel, there are no outstanding securities of the
Company convertible or exchangeable into or evidencing the right to purchase or
subscribe for any shares of capital stock of the Company and there are no
outstanding or authorized options, warrants or rights of any character
<PAGE> 16
-16-
obligating the Company to issue any shares of its capital stock or any
securities convertible or exchangeable into or evidencing the right to purchase
or subscribe for any shares of such stock; and except as described in the
Prospectus, to the knowledge of such counsel, no holder of any securities of the
Company or any other person has the right, contractual or otherwise, which has
not been satisfied or effectively waived, to cause the Company to sell or
otherwise issue to them, or to permit them to underwrite the sale of, any of the
Shares or the right to have any Common Shares or other securities of the Company
included in the Registration Statement or the right, as a result of the filing
of the Registration Statement, to require registration under the Act of any
shares of Common Stock or other securities of the Company.
(iv) The Registration Statement has become effective under the
Act and, to the knowledge of such counsel, no stop order proceedings with
respect thereto have been instituted or are pending or threatened under the Act.
(v) The Registration Statement, the Prospectus and each amendment
or supplement thereto comply as to form in all material respects with the
requirements of the Act and the applicable rules and regulations thereunder
(except that such counsel need express no opinion as to the financial statements
and related schedules therein).
(vi) The statements under the captions "Description of Capital
Stock" and "Shares Eligible for Future Sale" in the Prospectus, insofar as such
statements constitute a summary of documents referred to therein or matters of
law, fairly summarize in all material respects the information called for with
respect to such documents and matters.
(vii) Such counsel does not know of any contracts or documents
required to be filed as exhibits to the Registration Statement or described in
the Registration Statement or the Prospectus which are not so filed or described
as required, and such contracts and documents as are summarized in the
Registration Statement or the Prospectus are fairly summarized in all material
respects.
(viii) Based solely on a docket search and a certificate provided
by the Company, such counsel knows of no material legal or governmental
proceedings pending or threatened against the Company or any of the Subsidiaries
except as set forth in the Prospectus.
(ix) The execution and delivery of this Agreement and the
consummation of the transactions herein contemplated do not and will not
conflict with or result in a breach of any of the terms or provisions of, or
constitute a default under, the Charter or By-Laws of the Company, or any
agreement or instrument known to such counsel to which the Company or any of the
Subsidiaries is a party or by which the Company or any of the Subsidiaries may
be bound.
(x) This Agreement has been duly authorized, executed and
delivered by the Company and the Operating Subsidiary.
(xi) No approval, consent, order, authorization, designation,
declaration or filing by or with any regulatory, administrative or other
governmental body is necessary in
<PAGE> 17
-17-
connection with the execution and delivery of this Agreement and the
consummation of the transactions herein contemplated (other than as may be
required by the NASD or as required by State securities and Blue Sky laws as to
which such counsel need express no opinion) except such as have been obtained or
made, specifying the same.
(xii) The Company is not, and will not become, as a result of the
consummation of the transactions contemplated by this Agreement, and application
of the net proceeds therefrom as described in the Prospectus, required to
register as an investment company under the 1940 Act.
(xiii) This Agreement has been duly authorized, executed and
delivered on behalf of the Selling Shareholders.
(xiv) Each Selling Shareholder has full legal right, power and
authority, and any approval required by law (other than as required by State
securities and Blue Sky laws as to which such counsel need express no opinion),
to sell, assign, transfer and deliver the portion of the Shares to be sold by
such Selling Shareholder.
(xv) The Custodian Agreement and the Power of Attorney executed
and delivered by each Selling Shareholder is valid and binding.
(xvi) The Underwriters (assuming that they are bona fide
purchasers within the meaning of the Uniform Commercial Code) have acquired good
and marketable title to the Shares being sold by each Selling Shareholder on the
Closing Date, free and clear of all liens, encumbrances, equities and claims.
In rendering such opinion, Goulston & Storrs, P.C. may rely as to
matters governed by the laws of states other than Massachusetts or Delaware or
Federal laws on local counsel in such jurisdictions and as to the matters set
forth in subparagraphs (xiii), (xiv) and (xv) on opinions of other counsel
representing the respective Selling Shareholders, provided that in each case
Goulston & Storrs, P.C. shall state that they believe that they and the
Underwriters are justified in relying on such other counsel. In addition to the
matters set forth above, such opinion shall also include a statement to the
effect that nothing has come to the attention of such counsel which leads them
to believe that (i) the Registration Statement, at the time it became effective
under the Act (but after giving effect to any modifications incorporated therein
pursuant to Rule 430A under the Act) and as of the Closing Date or the Option
Closing Date, as the case may be, contained an untrue statement of a material
fact or omitted to state a material fact required to be stated therein or
necessary to make the statements therein not misleading, and (ii) the
Prospectus, or any supplement thereto, on the date it was filed pursuant to the
Rules and Regulations and as of the Closing Date or the Option Closing Date, as
the case may be, contained an untrue statement of a material fact or omitted to
state a material fact necessary in order to make the statements, in the light of
the circumstances under which they are made, not misleading (except that such
counsel need express no view as to financial statements, schedules and
statistical information therein). With respect to such statement, Goulston &
Storrs, P.C. may state that their belief is based upon the procedures set forth
in such opinion, but is without independent check and verification.
<PAGE> 18
-18-
(c) The Representatives shall have received from Testa, Hurwitz &
Thibeault, LLP, counsel for the Underwriters, an opinion dated the Closing Date
or the Option Closing Date, as the case may be, substantially to the effect
specified in subparagraphs (ii), (iii), (iv) and (ix) of Paragraph (b) of this
Section 6, and that the Company is a duly organized and validly existing
corporation under the laws of the State of Delaware. In rendering such opinion
Testa, Hurwitz & Thibeault, LLP may rely as to all matters governed other than
by the laws of the Commonwealth of Massachusetts or the State of Delaware or
Federal laws on the opinion of counsel referred to in Paragraph (b) of this
Section 6. In addition to the matters set forth above, such opinion shall also
include a statement to the effect that nothing has come to the attention of such
counsel which leads them to believe that (i) the Registration Statement, or any
amendment thereto, as of the time it became effective under the Act (but after
giving effect to any modifications incorporated therein pursuant to Rule 430A
under the Act) as of the Closing Date or the Option Closing Date, as the case
may be, contained an untrue statement of a material fact or omitted to state a
material fact required to be stated therein or necessary to make the statements
therein not misleading, and (ii) the Prospectus, or any supplement thereto, on
the date it was filed pursuant to the Rules and Regulations and as of the
Closing Date or the Option Closing Date, as the case may be, contained an untrue
statement of a material fact or omitted to state a material fact, necessary in
order to make the statements, in the light of the circumstances under which they
are made, not misleading (except that such counsel need express no view as to
financial statements, schedules and statistical information therein). With
respect to such statement, Testa, Hurwitz & Thibeault, LLP may state that their
belief is based upon the procedures set forth therein, but is without
independent check and verification.
(d) You shall have received, on each of the dates hereof, the Closing
Date and the Option Closing Date, as the case may be, a letter dated the date
hereof, the Closing Date or the Option Closing Date, as the case may be, in form
and substance satisfactory to you, of Deloitte & Touche LLP confirming that they
are independent public accountants within the meaning of the Act and the
applicable published Rules and Regulations thereunder and stating that in their
opinion the financial statements and schedules examined by them and included in
the Registration Statement comply in form in all material respects with the
applicable accounting requirements of the Act and the related published Rules
and Regulations; and containing such other statements and information as is
ordinarily included in accountants' "comfort letters" to Underwriters with
respect to the financial statements and certain financial and statistical
information contained in the Registration Statement and Prospectus.
(e) The Representatives shall have received on the Closing Date or the
Option Closing Date, as the case may be, a certificate or certificates of the
Chief Executive Officer and the Chief Financial Officer of the Company to the
effect that, as of the Closing Date or the Option Closing Date, as the case may
be, each of them severally represents as follows:
(i) The Registration Statement has become effective under the Act
and no stop order suspending the effectiveness of the Registrations Statement
has been issued, and no proceedings for such purpose have been taken or are, to
his knowledge, contemplated by the Commission;
<PAGE> 19
-19-
(ii) The representations and warranties of the Company contained
in Section 1 hereof are true and correct as of the Closing Date or the Option
Closing Date, as the case may be;
(iii) All filings required to have been made pursuant to Rules
424 or 430A under the Act have been made;
(iv) He or she has carefully examined the Registration Statement
and the Prospectus and, in his or her opinion, as of the effective date of the
Registration Statement, the statements contained in the Registration Statement
were true and correct, and such Registration Statement and Prospectus did not
omit to state a material fact required to be stated therein or necessary in
order to make the statements therein not misleading, and since the effective
date of the Registration Statement, no event has occurred which should have been
set forth in a supplement to or an amendment of the Prospectus which has not
been so set forth in such supplement or amendment; and
(v) Since the respective dates as of which information is given
in the Registration Statement and Prospectus, there has not been any material
adverse change or any development involving a prospective material adverse
change in or affecting the condition, financial or otherwise, of the Company and
its Subsidiaries taken as a whole or the earnings, business, management,
properties, assets, rights, operations, condition (financial or otherwise) or
prospects of the Company and the Subsidiaries taken as a whole, whether or not
arising in the ordinary course of business.
(f) The Company and the Selling Shareholders shall have furnished to
the Representatives such further certificates and documents confirming the
representations and warranties, covenants and conditions contained herein and
related matters as the Representatives may reasonably have requested.
(g) The Firm Shares and Warrant Shares and Option Shares, if any, have
been approved for designation upon notice of issuance on the Nasdaq National
Market.
(h) The Lockup Agreements described in Section 4 (j)(x) are in full
force and effect.
The opinions and certificates mentioned in this Agreement shall be
deemed to be in compliance with the provisions hereof only if they are in all
material respects satisfactory to the Representatives and to Testa, Hurwitz &
Thibeault, LLP, counsel for the Underwriters.
If any of the conditions hereinabove provided for in this Section 6
shall not have been fulfilled when and as required by this Agreement to be
fulfilled, the obligations of the Underwriters hereunder may be terminated by
the Representatives by notifying the Company and the Selling Shareholders of
such termination in writing or by telegram at or prior to the Closing Date or
the Option Closing Date, as the case may be.
<PAGE> 20
-20-
In such event, the Selling Shareholders, the Company, the Operating
Subsidiary and the Underwriters shall not be under any obligation to each other
(except to the extent provided in Sections 5 and 8 hereof).
7. CONDITIONS OF THE OBLIGATIONS OF THE SELLERS.
The obligations of the Sellers to sell and deliver the portion of the
Shares required to be delivered as and when specified in this Agreement are
subject to the conditions that at the Closing Date or the Option Closing Date,
as the case may be, no stop order suspending the effectiveness of the
Registration Statement shall have been issued and in effect or proceedings
therefor initiated or threatened.
8. INDEMNIFICATION.
(a) The Company and the Operating Subsidiary jointly and severally
agree as follows:
(1) to indemnify and hold harmless each Underwriter and each person,
if any, who controls any Underwriter within the meaning of the Act, against
any losses, claims, damages or liabilities to which such Underwriter or any
such controlling person may become subject under the Act or otherwise,
insofar as such losses, claims, damages or liabilities (or actions or
proceedings in respect thereof) arise out of or are based upon (i) any
untrue statement or alleged untrue statement of any material fact contained
in the Registration Statement, any Preliminary Prospectus, the Prospectus
or any amendment or supplement thereto, (ii) the omission or alleged
omission to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading, or (iii) any act
or failure to act, or any alleged act or failure to act, by any Underwriter
in connection with, or relating in any manner to, the Shares or the
offering contemplated hereby, and which is included as part of or referred
to in any loss, claim, damage, liability or action arising out of or based
upon matters covered by clause (i) or (ii) above (provided that the Company
and the Operating Subsidiary shall not be liable under this clause (iii) to
the extent that it is determined in a final judgment by a court of
competent jurisdiction that such loss, claim, damage, liability or action
resulted directly from any such acts or failures to act undertaken or
omitted to be taken by such Underwriter through its gross negligence or
willful misconduct); provided, however, that the Company and the Operating
Subsidiary will not be liable in any such case to the extent that any such
loss, claim, damage or liability arises out of or is based upon an untrue
statement or alleged untrue statement, or omission or alleged omission made
in the Registration Statement, any Preliminary Prospectus, the Prospectus,
or such amendment or supplement, in reliance upon and in conformity with
written information furnished to the Company by or through the
Representatives specifically for use in the preparation thereof. This
indemnity obligation will be in addition to any liability which the Company
or the Operating Subsidiary may otherwise have.
(2) to reimburse each Underwriter and each such controlling person
upon demand for any legal or other out-of-pocket expenses reasonably
incurred by such Underwriter or
<PAGE> 21
-21-
such controlling person in connection with investigating or defending any
such loss, claim, damage or liability, action or proceeding or in
responding to a subpoena or governmental inquiry related to the offering of
the Shares, whether or not such Underwriter or controlling person is a
party to any action or proceeding. In the event that it is finally
judicially determined that the Underwriters were not entitled to receive
payments for legal and other expenses pursuant to this subparagraph, the
Underwriters will promptly return all sums that had been advanced pursuant
hereto.
(b) The Selling Shareholders agree to indemnify the Underwriters and
each person, if any, who controls any Underwriter within the meaning of the Act,
against any losses, claims, damages or liabilities to which such Underwriter or
controlling person may become subject under the Act or otherwise to the same
extent as indemnity is provided by the Company and the Operating Subsidiary
pursuant to Section 8(a) above. The liability under this Agreement (excluding
any liability based on any statutory or common law claim, including without
limitation, fraud) of each Selling Shareholder shall not exceed, at any time,
the lesser of (a) the proceeds received by such Selling Shareholder from the
Underwriters in the offering and (b) the proportion of the aggregate amount of
losses, liabilities, claims, damages or expenses which, up to and including such
time, have been or are being claimed by the Underwriters and each person, if
any, who controls any Underwriter within the meaning of the Act, or any of them,
against the Selling Shareholders and the Company and the Operating Subsidiary,
or any of them, equal to the proportion that the number of Shares sold hereunder
by such Selling Shareholder bears to the aggregate number of Shares sold
hereunder. This indemnity obligation will be in addition to any liability which
the Selling Shareholders may otherwise have.
(c) Each Underwriter severally and not jointly will indemnify and hold
harmless the Company, each of its directors, each of its officers who have
signed the Registration Statement, the Selling Shareholders, and each person, if
any, who controls the Company or the Selling Shareholders within the meaning of
the Act, against any losses, claims, damages or liabilities to which the Company
or any such director, officer, Selling Shareholder or controlling person may
become subject under the Act or otherwise, insofar as such losses, claims,
damages or liabilities (or actions or proceedings in respect thereof) arise out
of or are based upon (i) any untrue statement or alleged untrue statement of any
material fact contained in the Registration Statement, any Preliminary
Prospectus, the Prospectus or any amendment or supplement thereto, or (ii) the
omission or the alleged omission to state therein a material fact required to be
stated therein or necessary to make the statements therein not misleading in the
light of the circumstances under which they were made; and will reimburse any
legal or other expenses reasonably incurred by the Company or any such director,
officer, Selling Shareholder or controlling person in connection with
investigating or defending any such loss, claim, damage, liability, action or
proceeding; provided, however, that each Underwriter will be liable in each case
to the extent, but only to the extent, that such untrue statement or alleged
untrue statement or omission or alleged omission has been made in the
Registration Statement, any Preliminary Prospectus, the Prospectus or such
amendment or supplement, in reliance upon and in conformity with written
information furnished to the Company by or through the Representatives
specifically for use in the preparation thereof. This indemnity agreement will
be in addition to any liability which such Underwriter may otherwise have.
<PAGE> 22
-22-
(d) In case any proceeding (including any governmental investigation)
shall be instituted involving any person in respect of which indemnity may be
sought pursuant to this Section 8, such person (the "indemnified party") shall
promptly notify the person against whom such indemnity may be sought (the
"indemnifying party") in writing. No indemnification provided for in Section
8(a), (b) or (c) shall be available to any party who shall fail to give notice
as provided in this Section 8(d) if the party to whom notice was not given was
unaware of the proceeding to which such notice would have related and was
materially prejudiced by the failure to give such notice, but the failure to
give such notice shall not relieve the indemnifying party or parties from any
liability which it or they may have to the indemnified party for contribution or
otherwise than on account of the provisions of Section 8(a), (b) or (c). In case
any such proceeding shall be brought against any indemnified party and it shall
notify the indemnifying party of the commencement thereof, the indemnifying
party shall be entitled to participate therein and, to the extent that it shall
wish, jointly with any other indemnifying party similarly notified, to assume
the defense thereof, with counsel satisfactory to such indemnified party and
shall pay as incurred the fees and disbursements of such counsel related to such
proceeding. In any such proceeding, any indemnified party shall have the right
to retain its own counsel at its own expense. Notwithstanding the foregoing, the
indemnifying party shall pay as incurred (or within 30 days of presentation) the
fees and expenses of the counsel retained by the indemnified party in the event
(i) the indemnifying party and the indemnified party shall have mutually agreed
to the retention of such counsel, (ii) the named parties to any such proceeding
(including any impleaded parties) include both the indemnifying party and the
indemnified party and representation of both parties by the same counsel would
be inappropriate due to actual or potential differing interests between them or
(iii) the indemnifying party shall have failed to assume the defense and employ
counsel acceptable to the indemnified party within a reasonable period of time
after notice of commencement of the action. It is understood that the
indemnifying party shall not, in connection with any proceeding or related
proceedings in the same jurisdiction, be liable for the reasonable fees and
expenses of more than one separate firm for all such indemnified parties. Such
firm shall be designated in writing by you in the case of parties indemnified
pursuant to Section 8(a) or (b) and by the Company and the Selling Shareholders
in the case of parties indemnified pursuant to Section 8(c). The indemnifying
party shall not be liable for any settlement of any proceeding effected without
its written consent but if settled with such consent or if there be a final
judgment for the plaintiff, the indemnifying party agrees to indemnify the
indemnified party from and against any loss or liability by reason of such
settlement or judgment. In addition, the indemnifying party will not, without
the prior written consent of the indemnified party, settle or compromise or
consent to the entry of any judgment in any pending or threatened claim, action
or proceeding of which indemnification may be sought hereunder (whether or not
any indemnified party is an actual or potential party to such claim, action or
proceeding) unless such settlement, compromise or consent includes an
unconditional release of each indemnified party from all liability arising out
of such claim, action or proceeding.
(e) If the indemnification provided for in this Section 8 is
unavailable to or insufficient to hold harmless an indemnified party under
Section 8(a), (b) or (c) above in respect of any losses, claims, damages or
liabilities (or actions or proceedings in respect thereof) referred to therein,
then each indemnifying party shall contribute to the amount paid or payable by
such indemnified party as a result of such losses, claims, damages or
liabilities (or actions or proceedings in respect thereof) in such proportion as
is appropriate to reflect the relative benefits received by the
<PAGE> 23
-23-
Company, the Operating Subsidiary and the Selling Shareholders on the one hand
and the Underwriters on the other from the offering of the Shares. If, however,
the allocation provided by the immediately preceding sentence is not permitted
by applicable law then each indemnifying party shall contribute to such amount
paid or payable by such indemnified party in such proportion as is appropriate
to reflect not only such relative benefits but also the relative fault of the
Company, the Operating Subsidiary and the Selling Shareholders on the one hand
and the Underwriters on the other in connection with the statements or omissions
which resulted in such losses, claims, damages or liabilities, (or actions or
proceedings in respect thereof), as well as any other relevant equitable
considerations. The relative benefits received by the Company, the Operating
Subsidiary and the Selling Shareholders on the one hand and the Underwriters on
the other shall be deemed to be in the same proportion as the total net proceeds
from the offering (before deducting expenses) received by the Company, the
Operating Subsidiary and the Selling Shareholders bear to the total underwriting
discounts and commissions received by the Underwriters, in each case as set
forth in the table on the cover page of the Prospectus. The relative fault shall
be determined by reference to, among other things, whether the untrue or alleged
untrue statement of a material fact or the omission or alleged omission to state
a material fact relates to information supplied by the Company or the Selling
Shareholders on the one hand or the Underwriters on the other and the parties'
relative intent, knowledge, access to information and opportunity to correct or
prevent such statement or omission.
The Company, the Operating Subsidiary, the Selling Shareholders and
the Underwriters agree that it would not be just and equitable if contributions
pursuant to this Section 8(e) were determined by pro rata allocation (even if
the Underwriters were treated as one entity for such purpose) or by any other
method of allocation which does not take account of the equitable considerations
referred to above in this Section 8(e). The amount paid or payable by an
indemnified party as a result of the losses, claims, damages or liabilities (or
actions or proceedings in respect thereof) referred to above in this Section
8(e) shall be deemed to include any legal or other expenses reasonably incurred
by such indemnified party in connection with investigating or defending any such
action or claim. Notwithstanding the provisions of this subsection (e), (i) no
Underwriter shall be required to contribute any amount in excess of the
underwriting discounts and commissions applicable to the Shares purchased by
such Underwriter, (ii) no person guilty of fraudulent misrepresentation (within
the meaning of Section 11(f) of the Act) shall be entitled to contribution from
any person who was not guilty of such fraudulent misrepresentation, and (iii) no
Selling Shareholder shall be required to contribute any amount in excess of the
proceeds received by such Selling Shareholder from the Underwriters in the
offering. The Underwriters' obligations in this Section 8(e) to contribute are
several in proportion to their respective underwriting obligations and not
joint.
(f) In any proceeding relating to the Registration Statement, any
Preliminary Prospectus, the Prospectus or any supplement or amendment thereto,
each party against whom contribution may be sought under this Section 8 hereby
consents to the jurisdiction of any court having jurisdiction over any other
contributing party, agrees that process issuing from such court may be served
upon him or it by any other contributing party and consents to the service of
such process and agrees that any other contributing party may join him or it as
an additional defendant in any such proceeding in which such other contributing
party is a party.
<PAGE> 24
-24-
(g) Any losses, claims, damages, liabilities or expenses for which an
indemnified party is entitled to indemnification or contribution under this
Section 8 shall be paid by the indemnifying party to the indemnified party as
such losses, claims, damages, liabilities or expenses are incurred. The
indemnity and contribution agreements contained in this Section 8 and the
representations and warranties of the Company and the Operating Subsidiary set
forth in this Agreement shall remain operative and in full force and effect,
regardless of (i) any investigation made by or on behalf of any Underwriter or
any person controlling any Underwriter, the Company, its directors or officers
or any persons controlling the Company, (ii) acceptance of any Shares and
payment therefor hereunder, and (iii) any termination of this Agreement. A
successor to any Underwriter, or to the Company, its directors or officers, or
any person controlling the Company, shall be entitled to the benefits of the
indemnity, contribution and reimbursement agreements contained in this
Section 8.
9. DEFAULT BY UNDERWRITERS.
If on the Closing Date or the Option Closing Date, as the case may be,
any Underwriter shall fail to purchase and pay for the portion of the Shares
which such Underwriter has agreed to purchase and pay for on such date
(otherwise than by reason of any default on the part of the Company or a Selling
Shareholder), you, as Representatives of the Underwriters, shall use your
reasonable efforts to procure within 36 hours thereafter one or more of the
other Underwriters, or any others, to purchase from the Company and the Selling
Shareholders such amounts as may be agreed upon and upon the terms set forth
herein, the Firm Shares and Warrant Shares or Option Shares, as the case may be,
which the defaulting Underwriter or Underwriters failed to purchase. If during
such 36 hours you, as such Representatives, shall not have procured such other
Underwriters, or any others, to purchase the Firm Shares and Warrant Shares or
Option Shares, as the case may be, agreed to be purchased by the defaulting
Underwriter or Underwriters, then (a) if the aggregate number of shares with
respect to which such default shall occur does not exceed 10% of the Firm Shares
and Warrant Shares or Option Shares, as the case may be, covered hereby, the
other Underwriters shall be obligated, severally, in proportion to the
respective numbers of Firm Shares and Warrant Shares or Option Shares, as the
case may be, which they are obligated to purchase hereunder, to purchase the
Firm Shares and Warrant Shares or Option Shares, as the case may be, which such
defaulting Underwriter or Underwriters failed to purchase, or (b) if the
aggregate number of shares of Firm Shares and Warrant Shares or Option Shares,
as the case may be, with respect to which such default shall occur exceeds 10%
of the Firm Shares and Warrant Shares or Option Shares, as the case may be,
covered hereby, the Company and the Selling Shareholders or you as the
Representatives of the Underwriters will have the right, by written notice given
within the next 36-hour period to the parties to this Agreement, to terminate
this Agreement without liability on the part of the non-defaulting Underwriters
or of the Company or of the Selling Shareholders except to the extent provided
in Section 8 hereof. In the event of a default by any Underwriter or
Underwriters, as set forth in this Section 9, the Closing Date or Option Closing
Date, as the case may be, may be postponed for such period, not exceeding seven
days, as you, as Representatives, may determine in order that the required
changes in the Registration Statement or in the Prospectus or in any other
documents or arrangements may be effected. The term "Underwriter" includes any
person substituted for a defaulting Underwriter. Any action taken under
<PAGE> 25
-25-
this Section 9 shall not relieve any defaulting Underwriter from liability in
respect of any default of such Underwriter under this Agreement.
10. NOTICES.
All communications hereunder shall be in writing and, except as
otherwise provided herein, will be mailed, delivered, telecopied or telegraphed
and confirmed as follows: if to the Underwriters, to BT Alex. Brown
Incorporated, One South Street, Baltimore, Maryland 21202, Attention: Mark
Goodman and Jay Eastman; with a copy to BT Alex. Brown Incorporated, One Bankers
Trust Plaza, 130 Liberty Street, New York, New York 10006, Attention: General
Counsel; if to the Company or the Selling Shareholders, to Tweeter Home
Entertainment Group, Inc., 40 Hudson Road, Canton, Massachusetts 02021,
Attention: Joseph McGuire; with a copy to Goulston & Storrs, P.C., 400 Atlantic
Avenue, Boston, Massachusetts 02110, Attention: Kitt Sawitsky, Esq. and Daniel
Avery, Esq.
11. TERMINATION.
(a) This Agreement may be terminated by you by notice to the Company
at any time prior to the Closing Date if any of the following has occurred: (i)
since the respective dates as of which information is given in the Registration
Statement and the Prospectus, any material adverse change or any development
involving a prospective material adverse change in or affecting the condition,
financial or otherwise, of the Company and its Subsidiaries taken as a whole or
the earnings, business, management, properties, assets, rights, operations,
condition (financial or otherwise) or prospects of the Company and its
Subsidiaries taken as a whole, whether or not arising in the ordinary course of
business, (ii) any outbreak or escalation of hostilities or declaration of war
or national emergency or other national or international calamity or crisis or
change in economic or political conditions if the effect of such outbreak,
escalation, declaration, emergency, calamity, crisis or change on the financial
markets of the United States would, in your reasonable judgment, make it
impracticable or inadvisable to market the Shares or to enforce contracts for
the sale of the Shares, or (iii) suspension of trading in securities generally
on the New York Stock Exchange or the American Stock Exchange or limitation on
prices (other than limitations on hours or numbers of days of trading) for
securities on either such Exchange, (iv) the enactment, publication, decree or
other promulgation of any statute, regulation, rule or order of any court or
other governmental authority which in your opinion materially and adversely
affects or may materially and adversely affect the business or operations of the
Company, (v) declaration of a banking moratorium by United States or New York
State authorities, (vi) the suspension of trading of the Company's common stock
by the Nasdaq National Market, the Commission, or any other governmental
authority or (vii) the taking of any action by any governmental body or agency
in respect of its monetary or fiscal affairs which in your reasonable opinion
has a material adverse effect on the securities markets in the United States; or
(b) as provided in Sections 6 and 9 of this Agreement.
<PAGE> 26
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12. SUCCESSORS.
This Agreement has been and is made solely for the benefit of the
Underwriters, the Company, the Operating Subsidiary and the Selling Shareholders
and their respective successors, executors, administrators, heirs and assigns,
and the officers, directors and controlling persons referred to herein, and no
other person will have any right or obligation hereunder. No purchaser of any of
the Shares from any Underwriter shall be deemed a successor or assign merely
because of such purchase.
13. INFORMATION PROVIDED BY UNDERWRITERS.
The Company, the Operating Subsidiary, the Selling Shareholders and
the Underwriters acknowledge and agree that the only information furnished or to
be furnished by any Underwriter to the Company for inclusion in any Prospectus
or the Registration Statement consists of the information set forth in the last
paragraph on the front cover page (insofar as such information relates to the
Underwriters), legends required by Item 502(d) of Regulation S-K under the Act
and the information set forth in the third, seventh and eighth paragraphs under
the caption "Underwriting" in the Prospectus.
14. MISCELLANEOUS.
The reimbursement, indemnification and contribution agreements
contained in this Agreement and the representations, warranties and covenants in
this Agreement shall remain in full force and effect regardless of (a) any
termination of this Agreement, (b) any investigation made by or on behalf of any
Underwriter or controlling person thereof, or by or on behalf of the Company or
its directors or officers and (c) delivery of and payment for the Shares under
this Agreement.
This Agreement may be executed in two or more counterparts, each of
which shall be deemed an original, but all of which together shall constitute
one and the same instrument.
This Agreement shall be governed by, and construed in accordance with,
the laws of the State of Maryland.
If the foregoing letter is in accordance with your understanding of our
agreement, please sign and return to us the enclosed duplicates hereof,
whereupon it will become a binding agreement among the Selling Shareholders, the
Company, the Operating Subsidiary and the several Underwriters in accordance
with its terms.
<PAGE> 27
-27-
Any person executing and delivering this Agreement as Attorney-in-Fact for
a Selling Shareholder represents by so doing that he has been duly appointed as
Attorney-in-Fact by such Selling Shareholder pursuant to a validly existing and
binding Power of Attorney which authorizes such Attorney-in-Fact to take such
action.
Very truly yours,
TWEETER HOME ENTERTAINMENT GROUP, INC.
By:
---------------------------------------
Title:
NEW ENGLAND AUDIO CO., INC.
By:
---------------------------------------
Title:
SELLING SHAREHOLDERS LISTED ON SCHEDULE II
By:
---------------------------------------
Attorney in Fact
The foregoing Underwriting Agreement
is hereby confirmed and accepted as
of the date first above written.
BT ALEX. BROWN INCORPORATED
PAINE WEBBER INCORPORATED
DAIN RAUSCHER INCORPORATED
As Representatives of the several
Underwriters listed on SCHEDULE I
By: BT Alex. Brown Incorporated
By:
--------------------------------
Authorized Officer
<PAGE> 28
-1-
SCHEDULE I
SCHEDULE OF UNDERWRITERS
<TABLE>
<CAPTION>
Number of Firm Shares Number of Firm Warrants
Underwriter to be Purchased to be Purchased
----------- --------------- ---------------
<S> <C> <C>
BT Alex. Brown Incorporated
PaineWebber Incorporated
Dain Rauscher Incorporated
--------- --------
Total 2,450,144 259,856
========= =======
</TABLE>
<PAGE> 29
SCHEDULE II
SCHEDULE OF SELLING SHAREHOLDERS
<TABLE>
<CAPTION>
Number of Firm Shares Number of Firm Warrants
Selling Shareholder to be Sold to be Sold
------------------- --------------------- -----------------------
<S> <C> <C>
Samuel Bloomberg 51,703 0
Carolina Bloomberg 17,234 0
Samuel Bloomberg Trust f/b/o Mikaela Bloomberg 8,091 0
Samuel Bloomberg Trust f/b/o Joshua Bloomberg 8,091 0
Jeffrey Bloomberg 17,478 0
Jeffrey Stone 16,473 0
Armin Biller 7,298 0
Seacoast Capital Partners, L.P. 0 50,000
Exeter Venture Lenders, L.P. 61,888 104,928
Exeter Equity Partners, L.P. 61,888 104,928
------- -------
Total 250,144 259,856
======= =======
</TABLE>
<PAGE> 1
EXHIBIT 3.2
AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
OF
TWEETER HOME ENTERTAINMENT GROUP, INC.
Tweeter Home Entertainment Group, Inc., a corporation organized and
existing under the laws of the State of Delaware (the "Company"), hereby
certifies as follows:
1. The name of the Company is Tweeter Home Entertainment Group,
Inc. The date of the filing of its original Certificate of Incorporation with
the Secretary of State of the State of Delaware was April 14, 1998 (the
"Original Certificate of Incorporation").
2. This Amended and Restated Certificate of Incorporation (the
"Certificate"), which amends, restates and integrates the provisions of the
Original Certificate of Incorporation, was duly adopted by the Board of
Directors of the Company in accordance with the provisions of Sections 141(f),
242 and 245 of the General Corporation Law of the State of Delaware, as amended
from time to time (the "DGCL"), and was duly adopted by the written consent of
the stockholders of the Company in accordance with the applicable provisions of
Sections 242 and 245 of the DGCL.
3. The text of the Original Certificate of Incorporation, as
amended to date, is hereby amended and restated in its entirety to provide as
follows:
ARTICLE I
NAME OF CORPORATION
The name of the Company is Tweeter Home Entertainment Group, Inc.
ARTICLE II
ADDRESS OF CORPORATION
The address of the Company's registered office in the State of Delaware
is 1209 Orange Street, Wilmington, New Castle County, Delaware 19801. The name
of its registered agent at such address is The Corporation Trust Company.
ARTICLE III
NATURE OF BUSINESS
The nature of the business or purpose to be conducted is to engage in
any lawful act or activity for which corporations may be organized under the
DGCL. The Company
-1-
<PAGE> 2
shall possess and may exercise all the powers and privileges granted or
available to it under any and all applicable statutory and common laws in effect
from time to time.
ARTICLE IV
CAPITAL STOCK
A. TOTAL NUMBER OF SHARES. The total number of shares of all
classes of capital stock which the Company shall have the authority to issue is
28,000,000 shares, of which (a) 20,000,000 shares shall be common stock, $.01
par value (the "Common Stock"), (b) 4,000,000 shares shall be Series A
Redeemable Convertible Preferred Stock, $.01 par value (the "Series A Preferred
Stock"), and (c) 4,000,000 shares shall be Series B Redeemable Convertible
Preferred Stock, $.01 par value (the "Series B Preferred Stock"). The rights,
preferences, voting powers and the qualifications, limitations and restrictions
of the authorized stock shall be as set forth in the following Sections B and C,
respectively, of this Article IV:
B. COMMON STOCK. Subject to all of the rights, powers and
preferences of the Series A Preferred Stock and Series B Preferred Stock and
except as provided by law or otherwise herein:
1. The holders of shares of Common Stock shall be
entitled to vote for the election of directors and on all other matters
requiring stockholder action, and each holder of shares of Common Stock shall be
entitled to one vote for each share of Common Stock held by such stockholder.
2. Holders of Common Stock shall be entitled to receive
such dividends and other distributions in cash, stock or property of the Company
as may be declared and paid or set apart for payment upon the Common Stock out
of any assets or funds of the Company legally available therefor, but only when
and as declared by the Board of Directors or any authorized committee thereof
from time to time.
3. Upon the voluntary or involuntary liquidation,
dissolution or winding up of the Company, the net assets of the Company
available for distribution to the holders of Common Stock shall be distributed
pro rata to such holders in proportion to the number of shares of Common Stock
held by each.
C. SERIES A PREFERRED STOCK AND SERIES B PREFERRED STOCK.
1. POWERS, PREFERENCES, RIGHTS, ETC. The relative
powers, preferences and rights, and relative participating, optional or other
special rights, and the qualifications, limitations or restrictions thereof,
granted to or imposed on the Series A Preferred Stock and the Series B Preferred
Stock and, where applicable, the Common Stock are set forth below in this
Section C of this Article IV.
-2-
<PAGE> 3
2. DEFINITIONS. Except as the context otherwise
explicitly requires, (a) the capitalized phrase "Preferred Stock Terms" refers
to this Section B of this Article IV, (b) the capitalized term "Section" refers,
when used in these Preferred Stock Terms, to sections of these Preferred Stock
Terms, (c) references to a particular Section include all subsections thereof,
and (d) the word "including" shall be construed as "including without
limitation". Accounting terms used in these Preferred Stock Terms and not
otherwise defined herein shall have the meanings provided in GAAP. Certain
capitalized terms are used in these Preferred Stock Terms as specifically
defined in this Section 2 as follows:
2.1. "ACCEPTED SHARES" is defined in Section 10.2.
2.2. "ADDITIONAL SHARES OF COMMON STOCK" is defined in
Section 8.4.1(d).
2.3. "AFFILIATE" is defined in the Purchase Agreement.
2.4. "APPLICABLE CONVERSION PRICE" is defined in
Section 8.1.
2.5. "APPLICABLE PREFERENTIAL AMOUNT" is defined in
Section 4.
2.6. "BRIDGE COMMITMENT" is defined in the Purchase
Agreement.
2.7. "BRIDGE WARRANTS" is defined in the Purchase
Agreement.
2.8. "BY-LAWS" means all written rules, regulations,
procedures and by-laws and all other similar documents, relating to the
management, governance or internal regulation of a Person other than an
individual, or interpretive of the Charter of such Person, each as from
time to time amended or modified.
2.9. "CALCULATION DATE" is defined in Section 4.
2.10. "COMBINED PREFERRED STOCK" means, collectively, the
Series A Preferred Stock and the Series B Preferred Stock, or either of
such series.
2.11. "CONVERTIBLE SECURITIES" is defined in Section
8.4.1(c).
2.12. "FUTURE SHARES" is defined in Section 10.1.
2.13. "FUTURE SHARES EXERCISE PERIOD" is defined in Section
10.1.
2.14. "MAJORITY OF COMBINED PREFERRED STOCK" means a
majority of the outstanding shares of Combined Preferred Stock (on an
as converted basis), voting together as a single class.
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2.15. "MAJORITY OF PREFERRED EQUITY" means a majority of
the outstanding shares of Combined Preferred Stock (on an as converted
basis) and Preferred Common Stock, voting together as a single class.
2.16. "MAJORITY OF SUB-DEBT INTERESTS" means the holders of
a majority of Sub-Debt Warrants (on an as converted basis) and Common
Stock issued upon the exercise of such Sub-Debt Warrants, voting
together as a single class.
2.17. "NEA" means New England Audio Co., Inc., an affiliate
of the Company.
2.18. "NON-INVESTOR COMMON STOCK" is defined in the
Purchase Agreement.
2.19. "NON-INVESTOR DIRECTOR" is defined in Section 5.2.3.
2.20. "NOTICE OF PURCHASE" is defined in Section 10.2.
2.21. "OFFEREE" is defined in Section 10.1.
2.22. "OPTIONS" is defined in Section 8.4.1(a).
2.23. "ORGANIC CHANGE" is defined in Section 6.3.
2.24. "PERMITTED LIQUIDATION" is defined in section 5.5 of
the Purchase Agreement.
2.25. "PERSON" means an individual, partnership,
corporation, limited liability company, association, trust, joint
venture, unincorporated organization and any governmental department or
agency or political subdivision.
2.26. "PNC" is defined in Section 5.2.4.
2.27. "PREEMPTIVE GROUP" is defined in Section 10.1.
2.28. "PREFERRED COMMON STOCK" means any Common Stock
issued upon conversion of any Combined Preferred Stock or upon
conversion or exercise of the Warrants.
2.29. "PREFERRED DIRECTOR" is defined in Section 5.2.1.
2.30. "PREFERRED STOCK" is defined in Section 1.
2.31. "PROPORTIONATE PERCENTAGE" is defined in
Section 10.1.
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2.32. "PROPOSAL" is defined in Section 10.1.
2.33. "PURCHASE AGREEMENT" means that certain Amended and
Restated Series A and Series B Preferred Stock Purchase Agreement dated
as of May 30, 1997 among the Company, as assignee of NEA, Weston
Presidio Offshore Capital C.V. and certain other investors, as in
effect from time to time.
2.34. "QUALIFIED AMOUNT" is defined in Section 8.2.
2.35. "QUALIFIED PROCEEDS" is defined in Section 8.2.
2.36. "QUALIFIED PUBLIC OFFERING" is defined in
Section 8.2.
2.37. "QUALIFIED SALE" is defined in Section 8.2.
2.38. "RELATED AGREEMENTS" is defined in the Purchase
Agreement.
2.39. "REMEDY EVENT" is defined in Section 7.
2.40. "REMEDY NOTICE" is defined in Section 5.2.6.
2.41. "SERIES A PREFERRED STOCK ORIGINAL ISSUE DATE" means:
(i) November 28, 1995, with respect to the shares of Series A Preferred
Stock issued on or after the date hereof in exchange for those shares
of Series A Redeemable Convertible Preferred Stock of NEA which were
originally issued on November 28, 1995, and (ii) May 13, 1996, with
respect to the shares of Series A Preferred Stock issued on or after
the date hereof in exchange for those shares of Series A Redeemable
Convertible Preferred Stock of NEA which were originally issued on May
13, 1996.
2.42. "SERIES B ORIGINAL ISSUE DATE" is defined in Section
8.4.1(b).
2.43. "SUB-DEBT NOTE AGREEMENT" is defined in the Purchase
Agreement.
2.44. "SUB-DEBT WARRANTS" is defined in the Purchase
Agreement.
2.45. "SUB-DEBT WARRANT AGREEMENT" is defined in the
Purchase Agreement.
2.46. "SUBORDINATED NOTES" is defined in the Purchase
Agreement.
2.47. "WARRANTS" is defined in Section 6.4.
2.48. "WPC" is defined in the Purchase Agreement.
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3. DIVIDENDS. No dividends of cash or other property
(other than additional shares of Common Stock) shall be paid on the Common Stock
unless the shares of Combined Preferred Stock receive the same dividends that
such shares would have received had they been converted into Common Stock
immediately prior to the record date for such dividend.
4. LIQUIDATION PREFERENCE. In the event of (a) any
liquidation, dissolution or winding up of the Company as a whole or
substantially as a whole in a single transaction or a series of related
transactions, either voluntary or involuntary; or (b) unless agreed otherwise in
writing by the holders of a Majority of Combined Preferred Stock, a merger or
consolidation of the Company except where (i) the Company is the surviving
entity and (ii) the stockholders of the Company immediately prior to such merger
or reconsolidation are the owners of stock having more than 50% of the
outstanding voting power of the surviving corporation immediately following the
merger, distributions to the stockholders of the Company shall be made in the
following manner: the holders of Combined Preferred Stock shall be entitled to
receive, on a pro rata basis based on the respective amounts of their Applicable
Preferential Amounts (as defined below), prior and in preference to any
distribution of any of the assets of the Company to the holders of any other
series of Preferred Stock, Common Stock or other capital stock of the Company by
reason of their ownership of such stock, an amount per share equal to the sum of
(A) $6.46 (in the case of the Series A Preferred Stock) and $8.08 (in the case
of the Series B Preferred Stock) PLUS (B) an amount in the form of a dividend
which would equal a 15% rate of return compounded annually on the applicable
amount in clause (A) above from the Series A Original Issue Date, in the case of
the Series A Preferred Stock, or the Series B Original Issue Date, in the case
of the Series B Preferred Stock, to the date of distribution PLUS (C) accrued
and unpaid dividends, if any, on such Combined Preferred Stock due under Section
3 (such sum being referred to as the "Applicable Preferential Amount"). Any
dividends paid to holders of Combined Preferred Stock from the Series A Original
Issue Date or Series B Original Issue Date, as applicable, shall serve as a
credit against the Applicable Preferential Amount due to such holders. If the
assets and funds of the Company shall be insufficient to permit the payment in
full of the Applicable Preferential Amounts to the holders of Combined Preferred
Stock, then the entire assets of the Company legally available for distribution
shall be distributed ratably among the holders of Combined Preferred Stock on a
pro rata basis based on the respective amounts of their Applicable Preferential
Amounts.
After payment has been made to the holders of Combined
Preferred Stock of the full amounts to which they are entitled under this
Section 4, the holders of Common Stock shall be entitled to share ratably in the
remaining assets without participation by the holders of Combined Preferred
Stock. If any such distributions described in this Section 4 are made in the
form of assets and not cash, then such distributions shall be deemed to have
been made at the fair market value of such assets.
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5. VOTING RIGHTS; REPRESENTATIVE DIRECTORS; ETC.
5.1. VOTES PER SHARE; NOTICES. Except as otherwise
provided herein or required by law, the holders of Combined Preferred Stock
shall vote as a single class with the holders of Common Stock and shall have
such votes in respect of each share of Combined Preferred Stock on any matter
submitted to the holders of Common Stock as the number of shares of Common Stock
into which shares of Combined Preferred Stock may then be converted. Record
holders of Combined Preferred Stock shall be entitled to notice of any
stockholders' meeting or solicitation of stockholders' consents in the manner
provided in the Bylaws of the Company for general notices.
5.2. PREFERRED DIRECTORS
5.2.1. NUMBER OF DIRECTORS. Except as provided in
Section 5.2.6, the Company shall have nine directors.
5.2.2. PREFERRED DIRECTORS. In addition to the
rights set forth in Sections 5.2.5 and 5.2.6, the holders of a Majority
of Preferred Equity shall be entitled to elect two directors (together
with any directors elected pursuant to Section 5.2.6 by a Majority of
the Preferred Equity, the "PREFERRED DIRECTORS"). The election of any
Preferred Director who is not a partner of WPC or its Affiliates or an
officer of Advent International Corporation or its Affiliates must be
consented to by the holders of a majority of the outstanding shares of
Non-Investor Common Stock, which consent shall not be unreasonably
withheld.
5.2.3. NON-INVESTOR DIRECTORS. The holders of a
majority of the outstanding shares of Non-Investor Common Stock, voting
together as a single class, separate from all other classes, shall be
entitled to elect five directors (the "NON-INVESTOR DIRECTORS")
5.2.4. SUB-DEBT DIRECTOR. In addition to the rights
set forth in Section 5.2.5 and 5.2.6, the holders of a Majority of
Sub-Debt Interests shall be entitled to elect one director (together
with any directors elected pursuant to Section 5.2.6 by a Majority of
the Sub-Debt Interests, the "Sub-Debt Directors"). The election of any
Sub-Debt Director who is not a partner or officer, as the case may be,
of Exeter Venture Lenders, L.P., Exeter Equity Partners, L.P., PNC
Capital Corp, Seacoast Capital Partners, L.P. or their Affiliates must
be consented to by the holders of a majority of the outstanding shares
of Non-Investor Common Stock, which consent shall not be unreasonably
withheld. Notwithstanding the foregoing, in the event that the original
holders of the Sub-Debt Warrants on the Series B Original Issuance Date
or any Affiliate of such a holder fail to own 60% of the aggregate
amount of all Sub-Debt Warrants, the Majority of Preferred Equity shall
be entitled to elect all Sub-Debt Directors (subject to the second
sentence of Section 5.2.2) and the provisions of the second sentence of
this Section 5.2.4 shall no longer apply. For purposes of the preceding
sentence only,
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the term "Affiliate", as applied to PNC Capital Corp ("PNC"), shall
include (a) any principal, officer or employee of PNC, PNC Equity
Management Corp or PNC Venture Corp and (b) any partnership or limited
liability company of which any person described in clause (a) above is
a partner or member, and as applied to each of Seacoast Capital
Partners, L.P., Exeter Venture Lenders, L.P. and Exeter Equity Partners
L.P., shall include (i) any partnership or limited liability company of
which such person is a partner or member and (ii) any partner or
limited partner of such Person or an Affiliate thereof.
5.2.5. COMBINED DIRECTOR. The holders of a Majority
of the Preferred Equity, voting as a single class, and the holders of a
Majority of Non-Investor Common Stock voting separately as a single
class, shall be together entitled to elect one director; PROVIDED,
HOWEVER, that if the Majority of Preferred Equity and the Majority of
Non-Investor Common Stock do not together so elect such director, the
directorship shall remain vacant.
5.2.6. MAJORITY PREFERRED DIRECTORS. In the event
that any Remedy Event shall occur, then, upon notice to the Company
given by the holders of not less than two-thirds of the outstanding
shares of Combined Preferred Stock (on an as converted basis) (a
"REMEDY NOTICE"), the number of directors shall be increased to
thirteen and (a) the holders of a Majority of Preferred Equity shall
become entitled to elect a total of five members of the Board of
Directors of the Company, (b) the holders of a Majority of Sub-Debt
Interests shall become entitled to elect a total of two members of the
Board of Directors of the Company (subject to the last sentence of
Section 5.2.4), (c) the holders of a majority of the outstanding shares
of Non-Investor Common Stock shall continue to be entitled to elect the
five Non-Investor Directors pursuant to Section 5.2.3 and (d) the
holders of a Majority of the Preferred Equity and a Majority of the
Non-Investor Common Stock shall together continue to be entitled to
elect one director pursuant to Section 5.2.5, all until any such Remedy
Event shall have been rectified or cured to the written satisfaction of
the holders of a Majority of Preferred Equity, whereupon the right of
the Majority of Preferred Equity to elect five members and the right of
the Majority of the Sub-Debt Interests to elect two members of the
Board of Directors of the Company shall cease and all Preferred
Directors and Sub-Debt Directors then in office who were elected
pursuant to this Section 5.2.6 shall be removed such that the Board of
Directors shall again be comprised of (i) two directors elected by a
Majority of Preferred Equity (subject to the second sentence of Section
5.2.2), (ii) five directors elected by a majority of the outstanding
shares of Non-Investor Common Stock, voting together as a single class,
separately from all other classes, (iii) one director elected by the
holders of a Majority of Sub-Debt Interests (subject to the second
sentence and the last sentence of Section 5.2.4), and (iv) one director
elected by the holders of a Majority of the Preferred Equity, voting as
a single class, and the holders of a Majority of Non-Investor Common
Stock, voting separately as a single class (subject to the proviso in
Section 5.2.5), and the number of directors shall be
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reduced to nine, subject to the above rights being again revived from
time to time upon the reoccurrence of the conditions above described.
5.3. TENURE. Subject to Section 5.4 below, each Preferred
Director or Sub-Debt Director elected pursuant to Section 5.2 shall serve for a
term of the lesser of (a) one year and until such director's successor is
elected and qualified, or (b) in the case of a Preferred Director or Sub-Debt
Director elected pursuant to Section 5.2.6, until the right of such Preferred
Director or Sub-Debt Director to remain in office under Section 5.2.6 ceases (at
which time such Preferred Director or Sub-Debt Director will be deemed to be
removed). So long as the holders of a Majority of Preferred Equity or a Majority
of Sub-Debt Interests are entitled to elect Preferred Directors or Sub-Debt
Directors, respectively, any vacancy in the position of a Preferred Director or
a Sub-Debt Director may be filled only by vote of the holders of a Majority of
Preferred Equity or a Majority of Sub-Debt Interests, as the case may be,
entitled to vote thereon. A Preferred Director or a Sub-Debt Director,
respectively, may, during such director's term of office, be removed at any
time, with or without cause, only by the affirmative vote of the holders of
record of a Majority of Preferred Equity or a Majority of Sub-Debt Interests, as
the case may be. Similarly, any vacancy in the position of a Non-Investor
Director may be filled only by vote of the holders of a majority of the
outstanding shares of the Non-Investor Common Stock entitled to vote thereon. A
Non-Investor Director may, during such Non-Investor Director's term of office,
be removed at any time, with or without cause, only by the affirmative vote of
the holders of record of a majority of the outstanding shares of Non-Investor
Common Stock.
5.4. TERMINATION OF CERTAIN RIGHTS.
5.4.1. MAJORITY OF PREFERRED EQUITY. All rights of
the Majority of Preferred Equity under Sections 5.2 and 5.3 shall
terminate, automatically and without necessity of any further actions
by any person, upon the earlier to occur of (a) the closing of a
Qualified Public Offering or Qualified Sale or (b) such time as the sum
of (i) all Common Stock previously issued upon conversion of Combined
Preferred Stock and which is still outstanding PLUS (ii) all Common
Stock that would then be issuable upon the conversion of outstanding
Combined Preferred Stock PLUS (iii) all Common Stock previously issued
or then issuable upon exercise or conversion of any Warrants which is
still outstanding IS LESS THAN 25% of such sum as calculated on the
Series B Original Issue Date (adjusting for stock splits, stock
dividends and similar recapitalization matters from and after the
Series B Original Issue Date). From and after the occurrence of any
such event described in the foregoing clauses (a) or (b), Section 5.1
shall, along with the other provisions of the Company's Certificate and
By-laws, govern as to the voting for directors which the Majority of
the Preferred Interests had previously been entitled to elect.
5.4.2. MAJORITY OF SUB-DEBT INTERESTS. All rights
of the Majority of Sub-Debt Interests under Sections 5.2 and 5.3 shall
terminate, automatically
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and without necessity of any further actions by any person, upon the
closing of a Qualified Public Offering or Qualified Sale. From and
after the occurrence of any event described in the foregoing sentence,
Section 5.1 shall, along with the other provisions of the Company's
Certificate and By-laws, govern as to the voting for directors which
the Majority of the Sub-Debt Interests had previously been entitled to
elect.
6. REDEMPTION.
6.1. REDEMPTION PRICE. Shares of Combined Preferred Stock
are redeemable in accordance with this Section 6 at a redemption price per share
equal to the Applicable Preferential Amount as of the date of redemption,
provided that notwithstanding anything else herein to the contrary, such shares
of Combined Preferred Stock shall not be redeemable (a) if such redemption would
violate any Subordination Agreement referred to in Section 6.7, or (b) without
the consent of the Noteholders (as defined in the Senior Subordinated Note
Agreement referred to below) if a Default or Event of Default (each term as
defined in such Senior Subordinated Note Agreement) has occurred and is
continuing under that Senior Subordinated Note Agreement between NEA and members
of the Bronfman family dated November 28, 1995.
6.2. MANDATORY REDEMPTION. Except as set forth in Section
6.4, irrespective of any other redemptions or acquisitions of shares of Combined
Preferred Stock, the Company will redeem at a price equal to the Applicable
Preferential Amount that number of shares of each series of Combined Preferred
Stock equal to 6.25% of the total number of issued and outstanding shares of
such series as of March 31, 2001 (or such lesser number as is then outstanding)
on the last day of each March, June, September and December commencing in June
2001.
6.3. MANDATORY CONTINGENT REDEMPTION. Upon the earliest to
occur of :
(a) the sale by the Company of all or a
substantial portion of its assets, other than a Permitted Liquidation
or a Qualified Sale;
(b) the merger of the Company with, or the
consolidation of the Company into, any other corporation (other than a
Qualified Sale) except where (i) the Company is the surviving entity
and (ii) the stockholders of the Company immediately prior to such
merger or consolidation own collectively stock having more than 50% of
the outstanding voting power (assuming conversion of all convertible
securities and exercise of all outstanding options and warrants) of the
surviving corporation;
(c) the dissolution or liquidation of the
Company;
(d) Jeffrey Stone shall cease for any reason to
be the President or Chief Operating Officer of the Company and a
replacement reasonably
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satisfactory to the holders of at least a Majority of Combined
Preferred Stock shall not be in place within 180 days;
(e) except as a result of a Qualified Public
Offering, more than 50% of the outstanding voting stock of the Company
becomes owned by Persons other than collectively (i) holders of
Combined Preferred Stock and their transferees and (ii) other
stockholders of record on the Series B Original Issue Date (the
foregoing events described in clauses (a) through (e) shall constitute
an "ORGANIC CHANGE"); or
(f) a Remedy Event,
to the extent permitted by the Company's principal senior bank working capital
facility and by the Sub-Debt Note Agreement, each holder of Combined Preferred
Stock and its permitted transferees may, in lieu of and not in addition to any
rights it may have under Section 7, require the Company to redeem all or any
portion of the then outstanding shares of the Combined Preferred Stock of such
holder, at the holder's option, either (A) at a price equal to the Applicable
Preferential Amount or (B) at a price equal to the sum of (1) the Applicable
Conversion Price PLUS (2) accrued and unpaid dividends, if any, on such Combined
Preferred Stock due under Section 3, together with Warrants on the same terms as
described in Section 6.4.
6.4. VOLUNTARY REDEMPTION. The Company may redeem at the
Applicable Preferential Amount pro rata from all holders of Combined Preferred
Stock an aggregate number of shares of Combined Preferred Stock specified in the
notice delivered pursuant to Section 6.5. Such redemption shall take place at
the time and on the date set forth in such notice. At the closing of such
redemption, the Company shall deliver to each holder of Combined Preferred Stock
whose shares are being redeemed warrants in substantially the form of Exhibit
2.1A to the Purchase Agreement (the "WARRANTS") to purchase the number of shares
of Common Stock into which the shares of Combined Preferred Stock so redeemed
could at the time have been converted at a purchase price per share equal to the
aggregate cash consideration received by the holder in connection with the
redemption divided by such number of shares of Common Stock. The number of
shares for which each Warrant shall be exercisable shall be reduced in
proportion to the mandatory redemption of Combined Preferred Stock under Section
6.2 as provided in the Warrant. At the option of the Company, any redemption
under this Section 6.4 may be applied against, and shall relieve the Company of,
the next succeeding redemption obligation under Section 6.2 to the extent of the
shares redeemed under this Section 6.4.
6.5. NOTICE OF REDEMPTION; PRO RATA TREATMENT. Written
notice of redemption of Combined Preferred Stock pursuant to Sections 6.2 and
6.4 shall be given not fewer than 30 days prior to the redemption date by first
class mail, postage prepaid, to each holder of record of shares of Combined
Preferred Stock, at such holder's address on the books of the Company. Each such
notice shall state: (a) the redemption date; (b) the number of shares of the
Combined Preferred Stock to be redeemed; (c) the Applicable
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Preferential Amount; (d) the place or places where certificates for such shares
are to be surrendered for payment of the Applicable Preferential Amount; and (e)
that dividends on the shares to be redeemed will cease to accrue on such
redemption date. Redemptions under Sections 6.2 and 6.4 shall be made pro rata
among all holders of Combined Preferred Stock.
6.6. SPECIFIC PERFORMANCE. If any holder becomes obligated
so to deliver any shares of Combined Preferred Stock to the Company upon any
redemption under this Section 6 and fails to deliver the certificate therefor in
accordance with these Preferred Stock Terms, the Company may, at its option, in
addition to all other remedies it may have, cancel on its books such certificate
representing such shares to be redeemed.
6.7. SUBORDINATION. The rights of the holders of the
Combined Preferred Stock shall be subject to the provisions of (i) the Amended
and Restated Subordination Agreement dated May 30, 1997 among NEA, BankBoston,
N.A. and the initial holders of the Combined Preferred Stock and (ii) the
Subordination Agreement dated May 30, 1997 among NEA, the holders of the
Combined Preferred Stock on such date and the initial holders of the
Subordinated Notes, which provisions are incorporated herein by reference. The
holders of the Combined Preferred Stock should refer to such subordination
agreements for a description of the terms under which redemption and other
payments on the Combined Preferred Stock are prohibited to be made by the
Company or to be received by the holders of the Combined Preferred Stock,
notwithstanding the other provisions of this Section 6.
7. REMEDY EVENT. The term "REMEDY EVENT" shall mean the
occurrence and continuance of any of the following events for a period exceeding
45 days after written notice of the occurrence of such event has been furnished
to the Company by one or more holders of Combined Preferred Stock at its
registered address:
7.1. The Company shall fail to make any payment in respect
of dividends on or redemptions of any shares of Combined Preferred Stock as the
same shall become due and, to the extent prohibited by any subordination
agreement in effect from time to time and to which the Company and all of the
holders of the Combined Preferred Stock are parties, such failure shall continue
for a period of 135 days.
7.2. The Company shall fail to perform or observe any of
the covenants, agreements or other provisions set forth in these Preferred Stock
Terms.
7.3. Any material written representation or warranty of or
with respect to the Company made in, or pursuant to the express requirements of,
the Purchase Agreement shall prove to have been false on the date as of which it
was made.
7.4. The Company or any of its Subsidiaries shall fail to
make any required payment on any senior bank indebtedness exceeding $250,000 in
principal amount of (or guaranteed by) the Company or any of its Subsidiaries,
or the Company or
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any of its Subsidiaries shall fail to perform or observe any of the covenants or
provisions required to be performed or observed by it pursuant to the credit
agreement evidencing such senior bank indebtedness (as from time to time in
effect), and (a) any security interest in or other lien on any property securing
any such indebtedness shall be enforced, unless contested in good faith by the
Company by appropriate proceedings or (b) if such payment is a partial payment,
all related indebtedness shall become due and payable prior to stated maturity.
7.5. The Company or any or its Subsidiaries shall fail to
make any required payments, which payments exceed $375,000 in the aggregate,
with respect to indebtedness of (or guaranteed by) the Company or any of its
Subsidiaries or with respect to any share of capital stock (whether because
funds are not legally available therefor or otherwise), whether such payments
are due upon final maturity, accelerated maturity, mandatory prepayment or
otherwise.
7.6. The Company shall fail to keep reserved a sufficient
number of shares of Common Stock for issuance upon conversion of the Combined
Preferred Stock or shall fail to issue an amount of shares of Common Stock upon
the conversion by the holders thereof of the Combined Preferred Stock.
7.7. An Organic Change shall occur.
7.8. The sum of consolidated stockholders' equity of the
Company and its subsidiaries PLUS (to the extent not included in stockholder's
equity) the Combined Preferred Stock, all determined in accordance with
generally accepted accounting principles consistently applied, shall at any time
be less than the sum of (a) $250,000 PLUS (b) two thirds of the Combined
Preferred Stock issued by the Company on or prior to the Series B Original Issue
Date, determined in accordance with generally accepted accounting principles.
7.9. A final judgment which, in the aggregate with other
outstanding final judgments against the Company or any of its Subsidiaries,
exceeds $500,000 above insurance coverage shall be rendered against the Company
or any of its Subsidiaries and, within 30 days after entry thereof, such
judgment shall not have been discharged or stayed pending appeal, or within 30
days after expiration of such stay such judgment shall not have been discharged.
7.10. The Company or any of its Subsidiaries or their
Affiliates shall fail to perform or observe any covenant, agreement or provision
to be performed or observed by it under section 5 of the Purchase Agreement or
sections 2 through 9 of the Registration Rights Agreement (as defined in the
Purchase Agreement) and such failure shall not have been rectified or cured
within 75 days after actual knowledge of Samuel Bloomberg or Jeffrey Stone or
their replacement executive officers.
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7.11. The Company or any of its subsidiaries owning at
least 10% of the assets, or contributing over the past fiscal year at least 10%
of the cash flow, of the Company and its subsidiaries on a consolidated basis,
shall:
(a) commence a voluntary case under Title 11 of
the United States as from time to time in effect, or authorize, by
appropriate proceedings of its board of directors or other governing
body, the commencement of such a voluntary case;
(b) have filed against it a petition commencing
an involuntary case under such Title 11 and such petition is not
dismissed within 90 days;
(c) seek relief as a debtor under any applicable
law, other than such Title 11, of any jurisdiction relating to the
liquidation or reorganization of debtors or to the modification or
alteration of the rights of creditors, or consent to or acquiesce in
such relief;
(d) have entered against it any order by a court
of competent jurisdiction (i) finding it to be bankrupt or insolvent,
(ii) ordering or approving its liquidation, reorganization or any
modification or alteration of the rights of its creditors generally, or
(iii) assuming custody of, or appointing a receiver or other custodian
for, all or a substantial part of its property; or
(e) make an assignment for the benefit of, or
enter into a composition with, its creditors, or appoint or consent to
the appointment of a receiver or other custodian for all or a
substantial part of its property.
8. CONVERSION.
8.1. RIGHT OF CONVERSION. Each share of Combined Preferred
Stock shall be convertible, at the option of the holder thereof at any time at
the office of the Company or any transfer agent for the Combined Preferred Stock
into the number of shares of the Common Stock of the Company obtained by
dividing $8.08 (in the case of the Series B Preferred Stock) and $6.46 (in the
case of the Series A Preferred Stock) by the Applicable Conversion Price.
"Applicable Conversion Price" means (i) with respect to each
share of Series A Preferred Stock, $6.46 and (ii) with respect to each share of
Series B Preferred Stock, $8.08, in each case as from time to time adjusted by
this Section 8. All calculations under this Section 8 shall be made to the
nearest one-hundredth of a cent.
8.2. AUTOMATIC CONVERSION. Each share of Combined
Preferred Stock shall automatically be converted into shares of Common Stock at
the then effective Applicable Conversion Price for such share at any time upon
the occurrence of any of the following events that result in Qualified Proceeds:
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(a) the closing of an underwritten public
offering pursuant to an effective registration statement under the
Securities Act of 1933, as amended, with managing underwriters
reasonably satisfactory to the holders of at least a Majority of
Combined Preferred Stock, covering the offer and sale of Common Stock
for the account of the Company to the public generally providing net
proceeds to the Company or selling stockholders (after underwriter
commissions and discounts, but before other offering expenses) of not
less than $15,000,000 in the aggregate (a "QUALIFIED PUBLIC OFFERING");
or
(b) (i) the sale or other disposition of all or
a substantial portion of the assets of the Company or (ii) the merger
or consolidation of the Company with or into any third party as a
result of which the stockholders of the Company immediately prior to
such merger or consolidation do not own stock having more than 50% of
the outstanding voting power (assuming conversion of all convertible
securities and exercise of all outstanding options and warrants) of the
surviving corporation (collectively, a "QUALIFIED SALE").
As used in this Section 8.2, an event shall be deemed to
result in "QUALIFIED PROCEEDS" if:
(A) in the case of a Qualified Public Offering,
the public offering price per share of Common Stock (after underwriting
commissions and discounts, but before other offering expenses), set
forth within the final prospectus which is part of the effective
registration statement relating to such Qualified Public Offering,
shall be not less than the Qualified Amount (as defined below); or
(B) in the case of a Qualified Sale as described
in clause (b)(i), the net proceeds received by the Company as a result
of such sale, which are attributable to one share of Common Stock, and
which are available for distribution to the holder of such share of
Common Stock, shall be not less than the Qualified Amount; or
(C) in the case of a Qualified Sale as described
in clause (b)(ii), either (1) in the case of such Qualified Sale where
the Company is the surviving entity, the fair market value of all
securities, cash or other property (including without limitation any
Common Stock), which is received or retained in connection with such
Qualified Sale (as determined in good faith by the Board of Directors)
on account of one share of Common Stock shall be not less than the
Qualified Amount; or (2) in the case of such a Qualified Sale where the
Company is not the surviving entity, the fair market value of the total
consideration received in connection with such Qualified Sale (as
determined in good faith by the Board of Directors) on account of one
share of Common Stock shall be not less than the Qualified Amount.
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As used above, "QUALIFIED AMOUNT" shall mean $14.52 (minus all
prior cash distributions and cash dividends paid per share of Preferred Common
Stock or Combined Preferred Stock pursuant to Section 3); provided that such
amount shall be adjusted, in each case, for increases in the number of issued
and outstanding Common Stock occurring after the date hereof as a result of
stock splits, subdivisions, dividends or similar recapitalizations.
8.3. MECHANICS OF CONVERSION. Before any holder of
Combined Preferred Stock shall be entitled to convert the same into shares of
Common Stock and to receive certificates therefor, such holder shall surrender
the Combined Preferred Stock certificates, duly endorsed, at the office of the
Company or of any transfer agent for the Combined Preferred Stock, and shall
give written notice to the Company at such office that such holder elects to
convert the same; PROVIDED, HOWEVER, that in the event of an automatic
conversion pursuant to Section 8.2, the outstanding shares of Combined Preferred
Stock shall be converted automatically without any further action by the holders
of such shares and whether or not the certificates representing such shares are
surrendered to the Company or its transfer agent; and PROVIDED, FURTHER that the
Company shall not be obligated to issue certificates evidencing the shares of
Common Stock issuable upon such automatic conversion unless the certificates
evidencing such shares of Combined Preferred Stock are either delivered to the
Company or its transfer agent as provided above, or the holder notifies the
Company or its transfer agent that such certificates have been lost, stolen or
destroyed and executes an agreement reasonably satisfactory to the Company to
indemnify the Company from any loss incurred by it in connection with such
certificates. The Company shall, as soon as practicable after such delivery, or
execution of such agreement in the case of a lost certificate, issue and deliver
at such office to such holder of Combined Preferred Stock, a certificate or
certificates for the number of shares of Common Stock to which such holder shall
be entitled as aforesaid and a check payable to the holder in the amount of any
cash amounts payable as the result of a conversion into fractional shares of
Common Stock plus all accrued and unpaid dividends on such holder's Combined
Preferred Stock so converted. Such conversion shall be deemed to have been made
immediately prior to the close of business on the date of such surrender of the
shares of Combined Preferred Stock to be converted, or in the case of automatic
conversion immediately upon closing of the Qualified Public Offering or
Qualified Sale, and the person entitled to receive the shares of Common Stock
issuable upon such conversion shall be treated for all purposes as the record
holder of such shares of Common Stock on such date.
8.4. ADJUSTMENT OF APPLICABLE CONVERSION PRICE DUE TO
ISSUANCE OF ADDITIONAL SHARES. The Applicable Conversion Price shall be subject
to adjustment as follows:
8.4.1. SPECIAL DEFINITIONS.
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(a) "OPTIONS" shall mean rights, options or
warrants to subscribe for, purchase or otherwise acquire either Common
Stock or Convertible Securities.
(b) "SERIES B ORIGINAL ISSUE DATE" shall mean
the date on which the Series B Preferred Stock is first issued by the
Company.
(c) "CONVERTIBLE SECURITIES" shall mean any
indebtedness, shares or other securities convertible into or
exchangeable for Common Stock, other than Combined Preferred Stock.
(d) "ADDITIONAL SHARES OF COMMON STOCK" shall
mean all shares of Common Stock issued (or, pursuant to Section 8.4.5,
deemed to be issued) by the Company after the Series B Original Issue
Date, other than shares of Common Stock issued or issuable at any time:
(i) upon conversion of Combined
Preferred Stock or upon exercise or conversion of the other
options and warrants, including the Bridge Warrants and the
Sub-Debt Warrants, set forth in Exhibit 4.3.1 or Exhibit 4.3.2
to the Purchase Agreement;
(ii) as a dividend or distribution on
the Combined Preferred Stock or any event for which adjustment
is made pursuant to Section 8.4.3;
(iii) pursuant to the Stock Option Plan
or other stock option, stock bonus or other employee stock
plan referred to in Section 4.1.1 of the Purchase Agreement or
otherwise permitted by section 5.17 of the Purchase Agreement
or approved by the holders of at least a Majority of Combined
Preferred Stock, which approval shall specify the number of
shares of Common Stock available for distribution under any
such plan; or
(iv) by way of dividend (or other
distribution) of shares of Common Stock on shares of any of
the foregoing securities which are excluded from the
definition of Additional Shares of Common Stock by this clause
(d).
8.4.2. NO ADJUSTMENT OF APPLICABLE CONVERSION
PRICE. No adjustment in the Applicable Conversion Price shall be made
in respect of the issuance of Additional Shares of Common Stock unless
the consideration per share for an Additional Share of Common Stock
issued or deemed to be issued by the Company is less than the
Applicable Conversion Price in effect on the date of, and immediately
prior to, such issue.
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8.4.3. ADJUSTMENT OF APPLICABLE CONVERSION PRICE
UPON ISSUANCE OF ADDITIONAL SHARES OF COMMON STOCK. In the event the
Company shall issue Additional Shares of Common Stock (including
Additional Shares of Common Stock deemed to be issued pursuant to
Section 8.4.5) for a consideration per share less than the Applicable
Conversion Price in effect on the date of and immediately prior to such
issue, then and in such event, the Applicable Conversion Price shall be
recomputed, concurrently with such issue (calculated to the nearest one
hundredth of a cent) to be the price determined by dividing (a) an
amount equal to the sum of (i) the number of shares of Common Stock
outstanding immediately prior to such issue multiplied by the then
effective Applicable Conversion Price and (ii) the consideration, if
any, deemed received by the Company upon such issue by (b) the total
number of shares of Common Stock deemed to be outstanding immediately
after such issue; and PROVIDED that, for purposes of this Section
8.4.3, all shares of Common Stock outstanding or issuable upon
conversion of outstanding Options, Convertible Securities and the
Combined Preferred Stock shall be deemed to be outstanding. In no event
will the Applicable Conversion Price be adjusted as the result of any
issuance of any Additional Shares of Common Stock to any amount higher
than the Applicable Conversion Price in effect immediately prior to
such issuance.
8.4.4. ADJUSTMENTS FOR SUBDIVISIONS, STOCK
DIVIDENDS, COMBINATIONS OR CONSOLIDATION OF COMMON STOCK. In the event
the outstanding shares of Common Stock shall be increased by way of
stock issued as a dividend for no consideration or subdivided (by stock
split or otherwise) into a greater number of shares of Common Stock,
the Applicable Conversion Prices then in effect shall, concurrently
with the effectiveness of such increase or subdivision, be
proportionately decreased. In the event the outstanding shares of
Common Stock shall be combined or consolidated, by reclassification or
otherwise, into a lesser number of shares of Common Stock, the
Applicable Conversion Prices then in effect shall, concurrently with
the effectiveness of such combination or consolidation, be
proportionately increased.
8.4.5. DEEMED ISSUE OF ADDITIONAL SHARES OF COMMON
STOCK - OPTIONS AND CONVERTIBLE SECURITIES. In the event the Company at
any time after the Series B Original Issue Date shall issue any Options
or Convertible Securities other than such Options or Convertible
Securities which are exchangeable, issuable, exercisable or convertible
into Common Stock which are excluded from the definition of Additional
Common Stock or shall fix a record date for the determination of
holders of any class of securities entitled to receive any such Options
or Convertible Securities, then the maximum number of shares (as set
forth in the instrument relating thereto without regard to any
provisions contained therein for a subsequent adjustment of such
number) of Common Stock issuable upon the exercise of such Options or,
in the case of Convertible Securities and Options therefor, the
conversion or exchange of such Convertible Securities, shall be deemed
to be Additional Shares of Common Stock issued as of the time of
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<PAGE> 19
such issue or, in case such a record date shall have been fixed, as of
the close of business on such record date, PROVIDED that, for purposes
of this Section 8.4.5, Additional Shares of Common Stock shall not be
deemed to have been issued unless the consideration per share
(determined pursuant to Section 8.4.6) of such Additional Shares of
Common Stock would be less than the Applicable Conversion Price in
effect on the date of, and immediately prior to, such issue, or such
record date, as the case may be (except as provided below in this
Section 8.4.5) and PROVIDED further that in any such case in which
Additional Shares of Common Stock are deemed to be issued:
(a) no further adjustment in the Applicable
Conversion Price shall be made upon the subsequent issue of shares of
Common Stock upon the exercise of such Options or conversion or
exchange of such Convertible Securities or upon the subsequent issue of
such Convertible Securities or Options;
(b) if such Options or Convertible Securities by
their terms provide, with the passage of time or otherwise, for any
increase or decrease in the consideration payable to the Company, or
any increase or decrease in the number of shares of Common Stock
issuable, upon the exercise, conversion or exchange thereof, the
Applicable Conversion Price computed upon the original issue thereof
(or upon the occurrence of a record date with respect thereto), and any
subsequent adjustments based thereon, shall, upon any such increase or
decrease becoming effective, be recomputed to reflect such increase or
decrease insofar as it affects such Options or the rights of conversion
or exchange under such Convertible Securities; and
(c) upon the expiration of any such Options or
any rights of conversion or exchange under such Convertible Securities
which shall not have been exercised, the Applicable Conversion Price
computed upon the original issue thereof (or upon the occurrence of a
record date with respect thereto), and any subsequent adjustments based
thereon shall, upon such expiration, be recomputed as if such
unexercised portion of such Options or rights of conversion or exchange
under such Convertible Securities had not been issued.
8.4.6. DETERMINATION OF CONSIDERATION. For purposes
of this Section 8.4, the consideration received by the Company for the
issue of any Additional Shares of Common Stock shall be computed as
follows:
(a) CASH AND PROPERTY: Such consideration shall:
(i) insofar as it consists of cash, be
computed at the aggregate amount of net cash proceeds received
by the Company excluding unpaid amounts payable for accrued
interest or accrued dividends;
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(ii) insofar as it consists of property
other than cash, be computed at the fair value thereof at the
time of such issue, as determined in good faith by the Board
of Directors of the Company; and
(iii) in the event Additional Shares of
Common Stock are issued together with other shares or
securities or other assets of the Company for consideration
which covers both, be the proportion of such consideration so
received, computed as provided in clauses (i) and (ii) above,
which is allocated to the Additional Shares of Common Stock as
determined in good faith by the Board of Directors.
(b) OPTIONS AND CONVERTIBLE SECURITIES. The
consideration per share received by the Company for Additional Shares
of Common Stock deemed to have been issued pursuant to Section 8.4.5,
relating to Options and Convertible Securities, shall be determined by
dividing
(i) the total amount, if any, received
or receivable by the Company as consideration for the issue of
such Options or Convertible Securities, plus, the minimum
aggregate amount of additional consideration (as set forth in
the instruments relating thereto, without regard to any
provision contained therein for a subsequent adjustment of
such consideration but subject to later readjustment pursuant
to Section 8.4.5) payable to the Company upon the exercise of
such Options or the conversion or exchange of such Convertible
Securities, or in the case of Options for Convertible
Securities, the exercise of such Options for Convertible
Securities and the conversion or exchange of such Convertible
Securities by
(ii) the maximum number of shares of
Common Stock (as set forth in the instruments relating
thereto, without regard to any provision contained therein for
a subsequent adjustment of such number but subject to later
readjustment pursuant to Section 8.4.5) issuable upon the
exercise of such Options or the conversion or exchange of such
Convertible Securities.
8.4.7. OTHER DILUTIVE EVENTS. In case any event
shall occur as to which the other provisions of this Section 8.4 are
not strictly applicable, but the failure to make any adjustment in the
Applicable Conversion Price would not fairly protect the conversion
rights represented by the Combined Preferred Stock in accordance with
the intention of this Section 8, then, upon request of the holders of a
Majority of Combined Preferred Stock, the Board of Directors of the
Company shall appoint a firm of independent public accountants of
recognized national standing (which may be the regular auditors of the
Company) to give their opinion as to the adjustment, if any, on a basis
consistent with the intention of this Section 8, necessary to preserve
without dilution the conversion rights
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represented by the Combined Preferred Stock. Upon receipt of such
opinion, the Company will promptly furnish a copy thereof to the
holders of the Combined Preferred Stock and the Applicable Conversion
Price shall be adjusted in accordance therewith. The fees and expenses
of such accountants shall be paid by the Company; PROVIDED, HOWEVER,
that if such accountants opine that no adjustment is necessary, such
fees and expenses will be paid by the holders of the Combined Preferred
Stock.
8.4.8. GENERAL. The parties acknowledge that in the
event of any circumstances requiring an adjustment of the Applicable
Conversion Price under this Section 8.4, such adjustment shall be
implemented and effected, if applicable, with respect to the Applicable
Conversion Price for the Series A Preferred Stock and the Series B
Preferred Stock, respectively and separately.
8.5. OTHER DISTRIBUTIONS. In the event the Company shall
declare a distribution payable in securities of the Company (other than shares
of Common Stock), securities of other entities, securities evidencing
indebtedness issued by the Company or other entities, assets (including cash
dividends) or options or rights, then, in each such case for the purpose of this
Section 8, the holders of the Combined Preferred Stock shall be entitled to a
proportionate share of any such distribution as though they were the holders of
the number of shares of Common Stock of the Company into which their shares of
such Combined Preferred Stock were convertible as of the record date fixed for
the determination of the holders of Common Stock of the Company entitled to
receive such distribution.
8.6. SUBSEQUENT EVENTS. In the event of any
recapitalization, consolidation or merger of the Company or its successor which
does not require redemption of the Combined Preferred Stock pursuant to Section
6.3, the shares of Combined Preferred Stock shall be convertible into such
shares or other interests as the Combined Preferred Stock would have been
entitled if the Combined Preferred Stock had been converted into Common Stock
immediately prior to such event.
9. COVENANTS.
9.8. SPECIAL RESTRICTIONS. At any time when shares of
Combined Preferred Stock are outstanding, except where the vote or written
consent of the holders of a greater number of shares of the Company is required
by law, the Certificate or the DGCL, and in addition to any other vote required
by law, the Certificate of the DGCL (in which case such requirements shall apply
to the extent inconsistent with this Section 9.1), without the consent of the
holders of at least a majority of the outstanding shares of Combined Preferred
Stock (on an as converted basis) given in writing or by vote at a meeting,
consenting or voting (as the case may be) separately as a class, the Company
will not:
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(a) create or authorize the creation of any
additional class or series of shares of stock, or issue any shares
thereof, unless the same ranks junior to the Combined Preferred Stock
as to the distribution of assets on the liquidation, dissolution or
winding up of the Company or increase the authorized amount of the
Combined Preferred Stock or increase the authorized amount of any
additional class or series of shares of stock unless the same ranks
junior to the Combined Preferred Stock as to the distribution of assets
on the liquidation, dissolution or winding up of the Company, or create
or authorize any instrument or security convertible into shares of
Combined Preferred Stock or into shares of any other class or series of
stock unless the same ranks junior to the Combined Preferred Stock as
to the distribution of assets on the liquidation, dissolution or
winding up of the Company, whether any such creation, authorization or
increase shall be by means of amendment to the Certificate or by
merger, consolidation or otherwise;
(b) amend, alter or repeal its Certificate or
By-laws in a manner that is adverse to the holders of Combined
Preferred Stock in any respect or for which the holders of Combined
Preferred Stock did not receive prior written notice;
(c) purchase or set aside any sums for the
purchase of any shares of stock or warrants other than (i) Combined
Preferred Stock, (ii) Future Shares, (iii) pursuant to the Sub-Debt
Warrant Agreement or (iv) Common Stock from former employees of the
Company who acquired such shares directly from the Company or pursuant
to the Stock Option Plan (as defined in the Purchase Agreement), if
each such purchase is made pursuant to contractual rights held by the
Company relating to the termination of employment of any such former
employee and the total purchase price does not exceed $100,000 for all
such purchases from each such former employee or is expressly permitted
by the Stock Option Plan or stock option agreements entered into in
connection therewith;
(d) redeem or otherwise acquire any shares of
Combined Preferred Stock except as expressly authorized in Section 6 or
pursuant to a purchase offer made pro rata to all holders of the shares
of Combined Preferred Stock on the basis of the aggregate number of
outstanding shares of Combined Preferred Stock then held by each such
holder;
(e) consent to any liquidation, dissolution or
winding up of the Company as a whole or substantially as a whole in a
single transaction or a series of related transactions; or
(f) consolidate or merge into or with any other
entity or entities or sell or transfer all or substantially all its
assets except that the Company may, without the consent of the holders
of at least a majority of the then outstanding Combined Preferred Stock
(on an as converted basis), effectuate a merger in which (i) the
Company is the surviving corporation and (ii) the stockholders of the
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Company immediately prior to the merger hold more than 50% of the
outstanding voting power of the surviving corporation (assuming
conversion of all convertible securities and exercise of all
outstanding options and warrants), and the Company may effect a
Qualified Sale.
9.9. NO IMPAIRMENT. The Company will not seek to avoid the
observance or performance of any of the terms to be observed or performed under
these Preferred Stock Terms by the Company, but will at all times in good faith
assist in carrying out all the provisions of these Preferred Stock Terms.
9.10. RESERVATION OF SHARES. So long as any share of
=Combined Preferred Stock shall remain outstanding, the Company shall at all
times reserve and keep available, free from preemptive rights, out of its
authorized capital stock, for the purpose of issuance upon conversion of the
Combined Preferred Stock, the full number of shares of Common Stock then
issuable upon exercise of all outstanding shares of Combined Preferred Stock. If
the Company's Common Stock shall be listed on any national stock exchange, the
Company at its expense shall include in its listing application all of the
shares of Common Stock reserved for issuance upon conversion of the Combined
Preferred Stock (subject to issuance or notice of issuance to the exchange) and
will similarly procure the listing of any further Common Stock reserved for
issuance upon conversion of the Combined Preferred Stock at any subsequent time
as a result of adjustments in the outstanding Common Stock or otherwise.
9.11. VALIDITY OF SHARES. The Company will from time to
time take all such action as may be required to assure that all shares of Common
Stock which may be issued upon conversion of any share of the Combined Preferred
Stock will, upon issuance, be legally and validly issued, fully paid and
non-assessable and free from all taxes, liens and charges with respect to the
issuance thereof. Without limiting the generality of the foregoing, the Company
will from time to time take all such action as may be required to assure that
the par value per share, if any, of the Common Stock is at all times equal to or
less than the lowest quotient obtained by dividing the then current par value of
the Combined Preferred Stock by the number of shares of Common Stock into which
each such share of Combined Preferred Stock can, from time to time, be
converted.
9.12. NOTICE OF CERTAIN EVENTS. If at any time:
(a) the Company shall declare any dividend or
distribution payable to the holders of its Common Stock;
(b) the Company shall offer for subscription pro
rata to the holders of Common Stock any additional shares of stock of
any class or any other rights;
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(c) any recapitalization of the Company, or
consolidation or merger of the Company with, or sale of all or
substantially all of its assets to, another corporation or business
organization shall occur; or
(d) a voluntary or involuntary dissolution,
liquidation or winding up of the Company as a whole or substantially as
a whole in a single transaction or a series of related transactions
shall occur;
then, in any one or more of such cases, the Company shall give the registered
holders of the Combined Preferred Stock written notice, by registered mail, of
the date on which a record shall be taken for such dividend, distribution or
subscription rights or for determining stockholders entitled to vote upon such
recapitalization, consolidation, merger, sale, dissolution, liquidation or
winding up and of the date when any such transaction shall take place, as the
case may be. Such notice shall also specify the date as of which the holders of
Common Stock of record shall participate in such dividend, distribution or
subscription rights, or shall be entitled to exchange their Common Stock for
securities or other property deliverable upon such recapitalization,
consolidation, merger, sale, dissolution, liquidation or winding up, as the case
may be. Such written notice shall be given 20 days prior to the record date with
respect thereto.
9.13. NO REISSUANCE OF COMBINED PREFERRED STOCK. No shares
of Combined Preferred Stock acquired by the Company by reason of redemption,
purchase, conversion or otherwise shall be reissued, and all such shares shall
be canceled, retired and eliminated from the shares which the Company shall be
authorized to issue. The Company may from time to time take such appropriate
corporate action as may be necessary to reduce the authorized number of shares
of Combined Preferred Stock accordingly.
10. PREEMPTIVE RIGHTS.
10.14. RIGHT OF FIRST OFFER. Until the initial closing under
a Qualified Public Offering, the Company shall not issue or sell any Common
Stock (including securities convertible into, or options, warrants or other
rights to purchase Common Stock, but excluding the shares described in Section
10.7) (collectively, the "FUTURE SHARES") to any person or other entity (an
"OFFEREE") without first providing each holder of (a) Combined Preferred Stock,
(b) Common Stock and (c) Sub-Debt Warrants, Bridge Warrants and Warrants (all
such holders collectively referred to as the "PREEMPTIVE GROUP") the right to
subscribe for its Proportionate Percentage of the Future Shares at a price and
on such other terms which are at least as favorable as shall have been offered
or are proposed to be offered by the Company to such Offeree and which shall
have been specified by the Company in a notice delivered to each member of the
Preemptive Group (the "PROPOSAL"); PROVIDED, HOWEVER, that the Preemptive Group
shall have the option to purchase Future Shares with cash, regardless of the
method of purchase offered to such Offeree. The Proposal by its terms shall
remain open and irrevocable for a period of 30 days from the date it is
delivered by the Company to the Preemptive Group (the "FUTURE
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SHARES EXERCISE PERIOD"). The Proposal shall also certify that the Company has
either (a) received a bona fide offer from a prospective purchaser, who shall be
identified in such certification, and that the Company in good faith believes a
binding agreement of sale is obtainable for consideration having a fair market,
cash equivalent or present value set forth in such certification; or (b) intends
in good faith to make an offering of its securities to prospective purchasers,
who shall be identified to the extent possible in such certification at the
price and on the terms set forth in such certification.
"PROPORTIONATE PERCENTAGE" means, for any member of the
Preemptive Group, the percentage of Future Shares covered by the Proposal equal
to (i) the number of shares of Common Stock either held by the member of the
Preemptive Group or into which the shares of Combined Preferred Stock held by
such member would then be convertible or into which the Sub-Debt Warrants,
Bridge Warrants and Warrants held by such member are exercisable divided by (ii)
the total number of shares of Common Stock outstanding at the time of delivery
of the Proposal PLUS the aggregate number of shares of Common Stock into which
all shares of Combined Preferred Stock would then be convertible PLUS the
aggregate number of shares of Common Stock into which the Sub-Debt Warrants,
Bridge Warrants and Warrants are exercisable.
10.15. NOTICE. Notice of each member of the Preemptive
Group's intention to accept the Proposal made pursuant to Section 10.1 shall be
evidenced by a writing signed by such holder and delivered to the Company prior
to the end of the Future Shares Exercise Period (the "NOTICE OF PURCHASE")
setting forth that portion of the Future Shares such holder elects to purchase
(the "ACCEPTED SHARES").
10.16 FULL ACCEPTANCE. In the event that each member of the
Preemptive Group elects to purchase all of the shares offered to such holder in
the Proposal, the Company shall sell to each such holder, pursuant to Section
10.6, the number of Accepted Shares set forth in such holder's Notice of
Purchase.
10.17. PARTIAL ACCEPTANCE. In the event that one or more
members of the Preemptive Group do not elect to purchase all of the shares
offered to such holders in the Proposal, the Company shall sell to each holder,
pursuant to Section 10.6, the number of Accepted Shares, if any, set forth in
such holder's Notice of Purchase. Members of the Preemptive Group may purchase
pursuant to Section 10.6 any remaining shares offered in the Proposal not
purchased by the other members of the Preemptive Group pro rata based on the
respective Proportionate Percentages of such holders wishing to purchase
additional shares, or as they may otherwise agree.
10.18. NO FRACTIONAL SHARES. For the purpose of avoiding
fractions as to Future Shares, the Company may adjust upward or downward by not
more than one full share the number of Future Shares which any member of the
Preemptive Group would otherwise be entitled to purchase.
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10.19. SALE OF SHARES. No later than 30 days after the
expiration of the Future Shares Exercise Period, the Company shall deliver to
each member of the Preemptive Group who has submitted a Notice of Purchase to
the Company a notice indicating the number of Future Shares which the Company
shall sell to such holder pursuant to this Section 10 and the terms and
conditions of such sale, which shall be in all respects (including unit price
and interest rates) the same as specified in the proposal. The sale to such
holders of such Future Shares shall take place not later than 10 days after
receipt of such notice.
Any sale to an Offeree of Future Shares that were not selected
for purchase by the members of the Preemptive Group as provided above shall take
place not later than 90 days after the expiration of the Future Shares Exercise
Period. Such sale shall be upon terms and conditions in all respects (including
unit price and interest rates) which are no more favorable to such Offeree or
less favorable to the Company than those set forth in the Proposal. Any refused
Future Shares not purchased by the Offeree as contemplated by the Proposal
within the 90-day period specified above shall remain subject to this Section
10.
10.20. EXCLUSION OF CERTAIN SHARES. Notwithstanding any
contrary provision of this Section 10, Future Shares shall not include shares of
Common Stock issuable in transactions described in clauses (i), (ii), (iii), and
(iv) of Section 8.4.1(d) or issuable upon exercise or conversion of any other
securities, options or warrants issued in compliance with Section 10.
11. AMENDMENTS. The provisions of these terms of the
Combined Preferred Stock may not be amended, modified or waived without the
written consent or affirmative vote of each of the following groups, except
where (i) the vote or written consent of the holders of a greater number of
shares of the Company is required by law, the Certificate or the DGCL or (ii)
any other vote is required by law, the Certificate or the DGCL (in which case
such requirements shall apply to the extent inconsistent with this Section 11):
(a) the holders of at least a majority of the outstanding shares of Combined
Preferred Stock (on an as converted basis), voting as a single class, (b) the
holders of at least a majority of the outstanding shares of Combined Preferred
(on an as converted basis) and Common Stock, voting together as a single class
and (c) the holders of at least 25% of the then outstanding shares of
Non-Investor Common Stock voting as a single class; PROVIDED, HOWEVER, that, in
addition to the foregoing requirements, any amendment to these Preferred Stock
Terms changing the amount of the Applicable Conversion Price, Applicable
Preferential Amount (including any dividend rate) or applicable time of
redemption shall require the written consent or affirmative vote of holders of
100% of the then outstanding shares of each series of Combined Preferred Stock
directly affected by such change. If there are any amendments, modifications or
waivers to Sections 5.2, 8 or 10 that adversely affect the rights of the holders
of the Sub-Debt Warrants, then the consent of a Majority of Sub-Debt Interests
will be required and provided that any amendment to these Preferred Stock Terms
changing the amount of the Applicable Conversion Price that adversely affects
the rights of the holders of the Sub-Debt Warrants
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shall require the consent of the holders of 90% of the Sub-Debt Warrants. Except
to the extent required by law, the vote of the holders of any other class of
capital stock of the Company is not required for the amendment, modification or
waiver of the terms of these Preferred Stock Terms.
ARTICLE V
TERM
The Corporation is to have perpetual existence.
ARTICLE VI
ADDITIONAL MATTERS
In furtherance and not in limitation of the powers conferred by the
laws of the State of Delaware:
A. The Board of Directors of the Company is expressly
authorized to adopt, amend or repeal the By-Laws of the Company.
B. Elections of directors need not be by written ballot
unless the By-Laws of the Company shall so provide.
ARTICLE VII
CERTAIN MATTERS RELATING TO CREDITORS
Whenever a compromise or arrangement is proposed between the Company
and its creditors or any class of them and/or between the Company and its
stockholders or any class of them, any court of equitable jurisdiction within
the State of Delaware may, on the application in a summary way of the Company or
of any creditor or stockholder thereof or on the application of any receiver or
receivers appointed for the Company under the provisions of Section 291 of the
DGCL or on the application of trustee in dissolution or of any receiver or
receivers appointed for the Company under the provisions of Section 279 of the
DGCL, order a meeting of the creditors or class of creditors, and/or of the
stockholders or class of stockholders, of the Company, as the case may be, to be
summoned in such manner as the said court directs. If a majority in number
representing three-fourths (3/4) in value of the creditors or class of
creditors, and/or of the stockholders or class of stockholders, of the Company,
as the case may be, agree to any compromise or arrangement and to any
reorganization of the Company as consequence of such compromise or arrangement,
the said compromise or arrangement and the said reorganization shall, if
sanctioned by the court to which the said application has been made, be binding
on all the creditors or class of creditors, and/or on all the stockholders or
class of stockholders, of the Company, as the case may be, and also on the
Company.
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ARTICLE VIII
LIABILITY OF DIRECTORS
A director of the Company shall not be personally liable to the Company
or its stockholders for monetary damages for breach of fiduciary duty as a
director, except for liability (i) for any breach of the director's duty of
loyalty to the Company or its stockholders, (ii) for acts or omissions not in
good faith or which involve intentional misconduct or a knowing violation of
law, (iii) under Section 174 of the DGCL, as the same exists or hereafter may be
amended, or (iv) for any transaction from which the director derived an improper
personal benefit. If the DGCL hereafter is amended to authorize the further
elimination or limitation of the liability of directors, then the liability of a
director of the Company, in addition to the limitation on personal liability
provided herein, shall be limited to the fullest extent permitted by the DGCL.
Any repeal or modification of this paragraph by the stockholders of the Company
shall be prospective only, and shall not adversely affect any limitation on the
personal liability of a director of the Company existing at the time of such
repeal or modification.
ARTICLE IX
AMENDMENT OF CERTIFICATE
The Company reserves the right to amend or repeal any provision
contained in this Certificate, in the manner now or hereafter prescribed by law,
and all rights conferred upon a stockholder herein are granted subject to this
reservation.
IN WITNESS WHEREOF, the undersigned has caused this Amended and
Restated Certificate of Incorporation to be duly executed as of the 1st day of
June, 1998.
------------------------------------
Jeffrey S. Stone, President
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<PAGE> 1
EXHIBIT 3.5
AMENDED AND RESTATED
BY-LAWS
of
TWEETER HOME ENTERTAINMENT GROUP, INC.
A Delaware Corporation
<PAGE> 2
BY-LAWS
TABLE OF CONTENTS
Page
----
ARTICLE I. STOCKHOLDERS..........................................1
Section 1.1 Annual Meeting........................................1
Section 1.2. Special Meetings......................................1
Section 1.3. Notice of Meeting.....................................1
Section 1.4. Quorum................................................2
Section 1.5. Proxies and Voting....................................2
Section 1.6. Action at Meeting.....................................2
Section 1.7. Action Without Meeting................................2
Section 1.8. Voting of Shares of Certain Holders...................2
ARTICLE II. BOARD OF DIRECTORS...................................3
Section 2.1. Powers................................................3
Section 2.2. Number of Directors; Qualifications...................3
Section 2.3. Nomination of Directors...............................3
Section 2.4. Election of Directors.................................4
Section 2.5. Vacancies; Reduction of the Board.....................4
Section 2.6. Enlargement of the Board..............................4
Section 2.7. Tenure and Resignation................................4
Section 2.8. Removal...............................................5
Section 2.9. Meetings..............................................5
Section 2.10. Notice of Meeting.....................................5
Section 2.11. Agenda................................................5
Section 2.12. Quorum................................................5
Section 2.13. Action at Meeting.....................................6
Section 2.14. Action Without Meeting................................6
Section 2.15. Committees............................................6
ARTICLE III. OFFICERS.............................................6
Section 3.1. Enumeration...........................................6
Section 3.2. Election..............................................6
Section 3.3. Qualification.........................................6
Section 3.4. Tenure................................................7
Section 3.5 Removal...............................................7
Section 3.6. Resignation...........................................7
Section 3.7. Vacancies.............................................7
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Section 3.8. President.............................................7
Section 3.9. Vice-Presidents.......................................7
Section 3.10. Treasurer and Assistant Treasurers....................7
Section 3.11. Clerk and Assistant Clerks............................8
Section 3.12. Other Powers and Duties...............................8
ARTICLE IV. CAPITAL STOCK.........................................8
Section 4.1. Stock Certificates....................................8
Section 4.2. Transfer of Shares....................................9
Section 4.3. Record Holders........................................9
Section 4.4. Record Date...........................................9
Section 4.5. Transfer Agent and Registrar for
Shares of Corporation................................10
Section 4.6. Loss of Certificates.................................10
Section 4.7 Restrictions on Transfer.............................10
Section 4.8. Multiple Classes of Stock............................10
ARTICLE V. DIVIDENDS............................................11
Section 5.1. Declaration of Dividends.............................11
Section 5.2. Reserves.............................................11
ARTICLE VI. POWERS OF OFFICERS TO CONTRACT
WITH THE CORPORATION.................................11
ARTICLE VII INDEMNIFICATION......................................12
Section 7.1. Definitions..........................................12
Section 7.2 Actions in Name of the Corporation or
Stockholder..........................................12
Section 7.3 Other Actions........................................13
Section 7.4. Advances of Expenses.................................13
Section 7.5. Presumptions upon Termination of Proceeding..........13
Section 7.6. Indemnification Not Exclusive........................14
Section 7.7. Insurance............................................14
Section 7.8. Employee Benefit Plans...............................14
ARTICLE VIII. MISCELLANEOUS PROVISIONS.............................14
Section 8.1. Certificate of Incorporation.........................14
Section 8.2. Fiscal Year..........................................14
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Section 8.3. Corporate Seal.......................................14
Section 8.4. Execution of Instruments.............................14
Section 8.5. Voting of Securities.................................14
Section 8.6. Evidence of Authority................................15
Section 8.7. Corporate Records....................................15
Section 8.8. Charitable Contributions.............................15
ARTICLE IX. AMENDMENTS...........................................15
Section 9.1. Amendment by Stockholders............................15
Section 9.2. Amendment by Directors...............................16
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<PAGE> 5
AMENDED AND RESTATED
BY-LAWS
OF
TWEETER HOME ENTERTAINMENT GROUP, INC.
(A Delaware Corporation)
ARTICLE I.
STOCKHOLDERS
SECTION 1.1. ANNUAL MEETING. The annual meeting of the stockholders of the
corporation shall be held on the first Monday in March in each year, at such
time and place within the United States as may be designated in the notice of
meeting. If the day fixed for the annual meeting shall fall on a legal holiday,
the meeting shall be held on the next succeeding day not a legal holiday. If the
annual meeting is omitted on the day herein provided, a special meeting may be
held in place thereof, and any business transacted at such special meeting in
lieu of annual meeting shall have the same effect as if transacted or held at
the annual meeting.
SECTION 1.2. SPECIAL MEETINGS. Special meetings of the stockholders may be
called at any time by the president or by the board of directors and shall be
called by the secretaries upon written application of one or more stockholders
who hold shares representing at least ten percent (10%) of the capital stock
entitled to vote at such meeting. Special meetings of the stockholders shall be
held at such time, date and place within or without the United States as may be
designated in the notice of such meeting.
SECTION 1.3. NOTICE OF MEETING. A written notice stating the place, date,
and hour of each meeting of the stockholders, and, in the case of a special
meeting, the purposes for which the meeting is called, shall be given to each
stockholder entitled to vote at such meeting, and to each stockholder who, under
the Certificate of Incorporation or these By-laws, is entitled to such notice,
by delivering such notice to such person or leaving it at their residence or
usual place of business, or by mailing it, postage prepaid, and addressed to
such stockholder at his address as it appears upon the books of the corporation,
at least seven (7) days and not more than sixty (60) before the meeting. Such
notice shall be given by the secretary, an assistant secretary, or any other
officer or person designated either by the secretary or by the person or persons
calling the meeting.
The requirement of notice to any stockholder may be waived by a written
waiver of notice, executed before or after the meeting by the stockholder or his
attorney thereunto duly authorized, and filed with the records of the meeting,
or if communication with such stockholder is unlawful, or by attendance at the
meeting without protesting prior thereto
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or at its commencement the lack of notice. Except as otherwise provided herein,
the notice to the stockholders need not specify the purposes of the meeting.
If a meeting is adjourned to another time or place, notice need not be
given of the adjourned meeting if the time and place are announced at the
meeting at which the adjournment is taken, except that if the adjournment is for
more than thirty days, or if after the adjournment a new record date is fixed
for the adjourned meeting, notice of the adjourned meeting shall be given to
each stockholder of record entitled to vote at the meeting.
SECTION 1.4. QUORUM. The holders of a majority in interest of all stock
issued, outstanding and entitled to vote at a meeting shall constitute a quorum.
Any meeting may be adjourned from time to time by a majority of the votes
properly cast upon the question, whether or not a quorum is present.
SECTION 1. 5. VOTING AND PROXIES. Each stockholder shall have one vote for
each share of stock entitled to vote owned by such stockholder of record
according to the books of the corporation, unless otherwise provided by law or
by the Certificate of Incorporation. Stockholders may vote either in person or
by written proxy. No proxy dated more than six months prior to the date of the
meeting shall be valid although, unless otherwise limited therein, proxies shall
entitle the persons authorized thereby to vote at any adjournment of such
meeting. Proxies shall be filed with the secretary of the meeting, or of any
adjournment thereof. A proxy purporting to be executed by or on behalf of a
stockholder shall be deemed valid unless challenged at or prior to its exercise
and the burden of proving invalidity shall rest on the challenger. A proxy with
respect to stock held in the name of two or more persons shall be valid if
executed by one of them unless. at or prior to exercise of the proxy the
corporation receives a specific written notice to the contrary from any one of
them.
SECTION 1.6. ACTION AT MEETING. When a quorum is present at any meeting, a
plurality of the votes properly cast for election to any office shall elect to
such office, and a majority of the votes properly cast upon any question other
than election to an office shall decide such question, except where a larger
vote is required by law, the Certificate of Incorporation or these by-laws. No
ballot shall be required for any election unless requested by a stockholder
present or represented at the meeting and entitled to vote in the election.
SECTION 1.7. ACTION WITHOUT MEETING. Any action required or permitted to
be taken at any meeting of the stockholders may be taken without a meeting if
all stockholders entitled to vote on the matter consent to the action in writing
and the consent shall be treated for all purposes as a vote at a meeting.
SECTION 1.8. VOTING OF SHARES OF CERTAIN HOLDERS. Shares of stock of the
corporation standing in the name of another corporation, domestic or foreign,
may be voted by such officer, agent, or proxy as the by-laws of such corporation
may prescribe,
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or, in the absence of such provision, as the board of directors of such
corporation may determine.
Shares of stock of the corporation standing in the name of a deceased
person, a minor ward or an incompetent person, may be voted by his
administrator, executor, court-appointed guardian or conservator without a
transfer of such shares into the name of such administrator, executor, court
appointed guardian or conservator. Shares of capital stock of the corporation
standing in the name of a trustee may be voted by him.
Shares of stock of the corporation standing in the name of a receiver may
be voted by such receiver, and shares held by or under the control of a receiver
may be voted by such receiver without the transfer thereof into his name if
authority so to do be contained in an appropriate order of the court by which
such receiver was appointed.
A stockholder whose shares are pledged shall be entitled to vote such
shares until the shares have been transferred into the name of the pledgee, and
thereafter the pledgee shall be entitled to vote the shares so transferred.
Shares of its own stock belonging to this corporation shall not be voted,
directly or indirectly, at any meeting and shall not be counted in determining
the total number of outstanding shares at any given time, but shares of its own
stock held by the corporation in a fiduciary capacity may be voted and shall be
counted in determining the total number of outstanding shares.
ARTICLE II.
BOARD OF DIRECTORS
SECTION 2.1. POWERS. Except as reserved to the stockholders by law, by the
Certificate of Incorporation or by these By-laws, the business of the
corporation shall be managed under the direction of the board of directors, who
shall have and may exercise all of the powers of the corporation. In particular,
and without limiting the foregoing, the board of directors shall have the power
to issue or reserve for issuance from time to time the whole or any part of the
capital stock of the corporation which may be authorized from time to time to
such person, for such consideration and upon such terms and conditions as they
shall determine, including the granting of options, warrants or conversion or
other rights to stock.
SECTION 2.2. NUMBER OF DIRECTORS; QUALIFICATIONS. The board of directors
shall consist of such number of directors (which shall not be less than three or
less than the number of stockholders, if less than three) as shall be fixed
initially by the incorporator(s) and thereafter by the stockholders. No director
need be a stockholder.
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SECTION 2.3. NOMINATION OF DIRECTORS.
(a) Nominations for the election of directors may be made by the board of
directors or by any stockholder entitled to vote for the election of directors.
Nominations by stockholders shall be made by notice in writing, delivered or
mailed by first class United States mail, postage prepaid, to the secretary of
the corporation not less than 14 days nor more than 50 days prior to any meeting
of the stockholders called for-the election of directors; provided, however,
that if less than 21 days' notice of the meeting is given to stockholders, such
written notice shall be delivered or mailed, as prescribed, to the secretary of
the corporation not later than the close of the seventh day following the day on
which notice of the meeting was mailed to stockholders.
(b) Each notice under subsection (a) shall set forth (i) the name, age,
business address and, if known, residence address of each nominee proposed in
such notice, (ii) the principal occupation or employment of each such nominee,
and (iii) the number of shares of stock of the corporation which are
beneficially owned by each such nominee.
(c) The chairman of the meeting of stockholders may, if the facts warrant,
determine and declare to the meeting that a nomination was not made in
accordance with the foregoing procedure, and if he should so determine, he shall
so declare to the meeting and the defective nomination shall be disregarded.
SECTION 2.4. ELECTION OF DIRECTORS. The initial board of directors shall
be elected by the incorporators at the first meeting thereof and thereafter by
the stockholders at their annual meeting or at any special meeting the notice of
which specifies the election of directors as an item of business for such
meeting.
SECTION 2.5. VACANCIES; REDUCTION of the Board. Any vacancy in the board
of directors, however occurring, including a vacancy resulting from the
enlargement of the board of directors, may be filled- by the stockholders or by
the directors then in office or by a sole remaining director. In lieu of filling
any such vacancy the stockholders or board of directors may reduce the number of
directors, but not to a number less than the minimum number required by Section
2.2. When one or more directors shall resign from the board of directors,
effective at a future date, a majority of the directors then in office,
including those who have so resigned, shall have power to fill such vacancy or
vacancies, the vote thereon to take effect when such resignation or resignations
shall become effective.
SECTION 2.6. ENLARGEMENT OF THE BOARD. The board of directors may be
enlarged by the stockholders at any meeting or by vote of a majority of the
directors then in office.
SECTION 2.7. TENURE AND RESIGNATION. Except as otherwise provided by law,
by the Certificate of Incorporation or by these By-laws, directors shall hold
office until the next annual meeting of stockholders and thereafter until their
successors are chosen and qualified. Any director may resign by delivering or
mailing postage prepaid a written
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<PAGE> 9
resignation to the corporation at its principal office or to the president,
secretary or assistant secretary, if any. Such resignation shall be effective
upon receipt unless it is specified to be effective at some other time or upon
the happening of some other event.
SECTION 2.8. REMOVAL. A director, whether elected by the stockholders or
directors, may be removed from office with or without cause at any annual or
special meeting of stockholders by vote of a majority of the stockholders
entitled to vote in the election of such director, or for cause by a vote of a
majority of the directors then in office; provided, however, that a director may
be removed for cause only after reasonable notice and opportunity to be heard
before the body proposing to remove him.
SECTION 2.9. MEETINGS. Regular meetings of the board of directors may be
held without call or notice at such times and such places within or without the
Commonwealth of Massachusetts as the board may, from time to time, determine,
provided that notice of the first regular meeting following any such
determination shall be given to directors absent from such determination. A
regular meeting of the board of directors shall be held without notice
immediately after, and at the same place as, the annual meeting of the
stockholders or the special meeting of the stockholders held in place of such
annual meeting, unless a quorum of the directors is not then present. Special
meetings of the board of directors may be held at any time and at any place
designated in the call of the meeting when called by the president, treasurer,
or one or more directors. Members of the board of directors or any committee
elected thereby may participate in a meeting of such board or committee by means
of a conference telephone or similar communications equipment by means of which
all persons participating in the meeting can hear each other at the same time,
.and participation by such means shall constitute presence in person at the
meeting.
SECTION 2.10. NOTICE OF MEETING. It shall be sufficient notice to a
director to send notice by mail at least seventy-two (72) hours before the
meeting addressed to such person at his usual or last known business or
residence address or to give notice to such person in person or by telephone at
least twenty-four (24) hours before the meeting. Notice shall be given by the
secretary, assistant secretary, if any, or by the officer or directors calling
the meeting. The requirement of notice to any director may be waived by a
written waiver of notice, executed by such person before or after the meeting or
meetings, and filed with the records of the meeting, or by attendance at the
meeting without protesting prior thereto or at its commencement the lack of
notice. A notice or waiver of notice of a directors' meeting need not specify
the purposes of the meeting.
SECTION 2.11. AGENDA. Any lawful business may be transacted at a meeting
of the board of directors, notwithstanding the fact that the nature of the
business may not have been specified in the notice or waiver of notice of the
meeting.
SECTION 2.12. QUORUM. At any meeting of the board of directors, a majority
of the directors then in office shall constitute a quorum for the transaction of
business. Any
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meeting may be adjourned by a majority of the votes cast upon the question,
whether or not a quorum is present, and the meeting may be held as adjourned
without further notice.
SECTION 2.13. ACTION AT MEETING. Any motion adopted by vote of the
majority of the directors present at a meeting at which a quorum is present
shall be the act of the board of directors, except where a different vote is
required by law, by the Certificate of Incorporation or by these By-laws. The
assent in writing of any director to any vote or action of the directors taken
at any meeting, whether or not a quorum was present and whether or not the
director had or waived notice of the meeting, shall have the same effect as if
the director so assenting was present at such meeting and voted in favor of such
vote or action.
SECTION 2.14. ACTION WITHOUT MEETING. Any action by the directors may be
taken without a meeting if all of the directors consent to the action in writing
and the consents are filed with the records of the directors' meetings. Such
consent shall be treated for all purposes as a vote of the directors at a
meeting.
SECTION 2.15. COMMITTEES. The board of directors may, by the affirmative
vote of a majority of the directors then in office, appoint an executive
committee or other committees consisting of one or more directors and may by
vote delegate to any such committee some or all of their powers except those
which by law, the Certificate of Incorporation or these By-laws they may not
delegate. Unless the board of directors shall otherwise provide, any such
committee may make rules for the conduct of its business, but unless otherwise
provided by the board of directors or such rules, its meetings shall be called,
notice given or waived, its business conducted or its action taken as nearly as
may be in the same manner as is provided in these By-laws with respect to
meetings or for the conduct of business or the taking of actions by the board of
directors. The board of directors shall have power at any time to fill vacancies
in, change the membership of, or discharge any such committee at any time. The
board of directors shall have power to rescind any action of any committee, but
no such rescission shall have retroactive effect.
ARTICLE III.
OFFICERS
SECTION 3.1. ENUMERATION. The officers shall consist of a president, a
treasurer, a secretary and such other officers and agents (including one or more
vice-presidents, assistant treasurers, and assistant secretaries), with such
duties and powers, as the board of directors may, in their discretion,
determine.
SECTION 3.2. ELECTION. The president, treasurer and secretary shall be
elected annually by the directors at their first meeting following the annual
meeting of the stockholders. Other officers may be chosen by the directors at
such meeting or at any other meeting.
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SECTION 3.3. QUALIFICATION. An officer may, but need not, be a director or
stockholder and no officer shall be a director solely by virtue of being an
officer. Any two or more offices may be held by the same person. The secretary
shall be a resident of Delaware unless the corporation has a resident agent
appointed for the purpose of service' of process. Any officer may be required by
the directors to give bond for the faithful performance of his duties to the
corporation in such amount and with such sureties as the directors may
determine. The premiums for such bonds may be paid by the corporation.
SECTION 3.4. TENURE. Except as otherwise provided by the Certificate of
Incorporation or these By-laws, the term of office of each officer shall be for
one year or until his successor is elected and qualified or until his earlier
resignation or removal.
SECTION 3.5. REMOVAL. Any officer may be removed from office, with or
without cause, by the affirmative vote of a majority of the directors then in
office; provided, however, that an officer may be removed for cause only after
reasonable notice and opportunity to be heard by the board of directors prior to
action thereon.
SECTION 3.6. RESIGNATION. Any officer may resign by delivering or mailing
postage prepaid a written resignation to the corporation at its principal office
or to the president, secretaries, or assistant secretary, if any, and such
resignation shall be effective upon receipt unless it is specified to be
effective at some other time or upon the happening of some event.
SECTION 3.7. VACANCIES. A vacancy in any office arising from any cause may
be filled for the unexpired portion of the term by the board of directors.
SECTION 3.8. PRESIDENT. The president shall have such duties and powers as
are commonly incident to the office, except that the president need not be the
chief executive officer of the corporation, and shall have such other duties and
powers as the board of directors shall from time to time designate.
SECTION 3.9. VICE-PRESIDENTS. Vice-Presidents, if any, shall have such
powers and perform such duties as the board of directors may from time to time
determine.
SECTION 3.10. TREASURER AND ASSISTANT TREASURERS. The treasurer, subject
to the direction and under the supervision and control of the board of
directors, shall have general charge of the financial affairs of the
corporation. The treasurer shall have custody of all funds, securities and
valuable papers of the corporation, except as the board of directors may
otherwise provide. The treasurer shall keep or cause to be kept full and
accurate records of account which shall be the property of the corporation, and
which shall be always open to the inspection of each elected officer and
director of the corporation. The treasurer shall deposit or cause to be
deposited all funds of the corporation in such depository or depositories as may
be authorized by the board of directors. The treasurer shall have the power to
endorse for deposit or collection all notes, checks, drafts, and other
negotiable instruments payable to the corporation. The treasurer shall
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have the power to borrow money and enter into and execute arrangements as to
advances, loans and credits to the corporation. The treasurer shall perform such
other duties as are incidental to the office, and such other duties as may be
assigned by the board of directors.
Assistant treasurers, if any, shall have such powers and perform such
duties as the board of directors may from time to time determine.
SECTION 3.11. SECRETARY AND ASSISTANT SECRETARIES. The secretary shall
record, or cause to be recorded, all proceedings of the meetings of the
stockholders and directors (including committees thereof) in the book of records
of this corporation. The record books shall be open at reasonable times to the
inspection of any stockholder, director, or officer. The secretary shall notify
the stockholders and directors, when required by law or by these By-laws, of
their respective meetings, and shall perform such other duties as the directors
and stockholders may from time to time prescribe. The secretary shall have the
custody and charge of the corporate seal, and shall affix the seal of the
corporation to all instruments requiring such seal, and shall certify under the
corporate seal the proceedings of the directors and of the stockholders, when
required. In the absence of the secretary at any such meeting, a temporary
secretary shall be chosen who shall record the proceedings of the meeting in the
aforesaid books.
Assistant secretaries, if any, shall have such powers and perform such
duties as the board of directors may from time to time designate.
SECTION 3.12 OTHER POWERS AND DUTIES. Subject to these By-laws and to such
limitations as the board of directors may from time to time prescribe, the
officers of the corporation shall each have such powers and duties as generally
pertain to their respective offices, as well as such powers and duties as from
time to time may be conferred by the board of directors.
ARTICLE IV.
CAPITAL STOCK
SECTION 4.1. STOCK CERTIFICATES. Each stockholder shall be entitled to a
certificate representing the number of shares of the capital stock of the
corporation owned by such person in such form as shall, in conformity to law, be
prescribed from time to time by the board of directors. Each certificate shall
be signed by the president or vice-president and treasurer or assistant
treasurer or such other officers designated by the board of directors from time
to time as permitted by law, shall bear the seal of the corporation, and shall
express on its face its number, date of issue, class, the number of shares for
which, and the name of the person to whom, it is issued. The corporate seal and
any or all of the signatures of corporation officers may be facsimile if the
stock certificate is manually counter-signed by an authorized person on behalf
of a transfer agent or registrar other than the corporation or its employee.
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If an officer, transfer agent or registrar who has signed, or whose
facsimile signature has been placed on, a certificate shall have ceased to be
such before the certificate is issued, it may be issued by the corporation with
the same effect as if he were such officer, transfer agent or registrar at the
time of its issue.
SECTION 4.2. TRANSFER OF SHARES. Title to a certificate of stock and to
the shares represented thereby shall be transferred only on the books of the
corporation by delivery to the corporation or its transfer agent of the
certificate properly endorsed, or by delivery of the certificate accompanied by
a written assignment of the same, or a properly executed written power of
attorney to sell, assign or transfer the same or the shares represented thereby.
Upon surrender of a certificate for the shares being transferred, a new
certificate or certificates shall be issued according to the interests of the
parties.
SECTION 4.3. RECORD HOLDERS. Except as otherwise may be required by law,
by the Certificate of Incorporation or by these By-laws, the corporation shall
be entitled to treat the record holder of stock as shown on its books as the
owner of such stock for all purposes, including the payment of dividends and the
right to vote with respect thereto, regardless of any transfer, pledge or other
disposition of such stock, until the shares have been transferred on the books
of the corporation in accordance with the requirements of these By-laws.
It shall be the duty of each stockholder to notify the corporation of his
post office address.
SECTION 4.4. RECORD DATE. In order that the corporation may determine the
stockholders entitled to receive notice of or to vote at any meeting of
stockholders or any adjournments thereof, or to express consent to corporate
action in writing without a meeting, or entitled to receive payment of any
dividend or other distribution or allotment of any rights, or entitled to
exercise any rights in respect of any change, conversion or exchange of stock or
for the purpose of any other lawful action, the board of directors may fix, in
advance, a record date, which shall not be more than sixty (60) days prior to
any other action. In such case only stockholders of record on such record date
shall be so entitled, notwithstanding any transfer of stock on the books of the
corporation after the record date.
If no record date is fixed: (i) the record date for determining
stockholders entitled to receive notice of or to vote at a meeting of
stockholders shall be at the close of business on the day next preceding the day
on which notice is given, or, if notice is waived, at the close of business on
the day next preceding the day on which the meeting is held; (ii) the record
date for determining stockholders entitled to express consent to corporate
action in writing without a meeting, when no prior action by the board of
directors is necessary, shall be the day on which the first written consent is
expressed; and (iii) the record date for determining stockholders for any other
purpose shall be at the close of business on the day on which the board of
directors adopts the resolution relating thereto.
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SECTION 4.5. TRANSFER AGENT AND REGISTRAR FOR SHARES OF CORPORATION. The
board of directors may appoint a transfer agent and a registrar of the
certificates of stock of the corporation. Any transfer agent so appointed shall
maintain, among other records, a stockholders' ledger, setting forth the names
and addresses of the holders of all issued shares of stock of the corporation,
the number of shares held by each, the certificate numbers representing such
shares, and the date of issue of the certificates representing such shares. Any
registrar so appointed shall maintain, among other records, a share register,
setting forth the total number of shares of each class of shares which the
corporation is authorized to issue and the total number of shares actually
issued. The stockholders' ledger and the share register are hereby identified as
the stock transfer books of the corporation; but as between the stockholders'
ledger and the share register, the names and addresses of stockholders, as they
appear on the stockholders' ledger maintained by the transfer agent shall be the
official list of stockholders of record of the corporation. The name and address
of each stockholder of record, as they appear upon the stockholders' ledger,
shall be conclusive evidence of who are the stockholders entitled to receive
notice of the meetings of stockholders, to vote at such meetings, to examine a
complete list of the stockholders entitled to vote at meetings, and to own,
enjoy and exercise any other property or rights deriving from such shares
against the corporation. Stockholders, but not the corporation, its directors,
officers, agents or attorneys, shall be responsible for notifying the transfer
agent, in writing, of any changes in their names or addresses from time to time,
and failure to do so will relieve the corporation, its other stockholders,
directors, officers, agents and attorneys, and its transfer agent and registrar,
of liability for failure to direct notices or other documents, or pay over or
transfer dividends or other property or rights, to a name or address other than
the name and address appearing in the stockholders' ledger maintained by the
transfer agent.
SECTION 4.6. LOSS OF CERTIFICATES. In case of the loss, destruction or
mutilation of a certificate of stock, a replacement certificate may be issued in
place thereof upon such terms as the board of directors may prescribe,
including, in the discretion of the board of directors, a requirement of bond
and indemnity to the corporation.
SECTION 4.7. RESTRICTIONS ON TRANSFER. Every certificate for shares
of-stock which are subject to any restriction on transfer, whether pursuant to
the Certificate of Incorporation, the By-laws or any agreement to which the
corporation is a party, shall have the fact of the restriction noted
conspicuously on the certificate and shall also set forth on the face or back
either the full text of the restriction or a statement that the corporation will
furnish a copy to the holder of such certificate upon written request and
without charge.
SECTION 4.8. MULTIPLE CLASSES OF STOCK. The amount and classes of the
capital stock and the par value, if any, of the shares, shall be as fixed in the
Certificate of Incorporation. At all times when there are two or more classes of
stock, the several classes of stock shall conform to the description and the
terms and have the respective preferences, voting powers, restrictions and
qualifications set forth in the Certificate of
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Incorporation and these By-laws. Every certificate issued when the corporation
is authorized to issue more than one class or series of stock shall set forth on
its face or back either (i) the full text of the preferences, voting powers,
qualifications and special and relative rights of the shares of each class and
series authorized to be issued, or (ii) a statement of the existence of such
preferences, powers, qualifications and rights, and a statement that the
corporation will furnish a copy thereof to the holder of such certificate upon
written request and without charge.
ARTICLE V.
DIVIDENDS
SECTION 5.1. DECLARATION OF DIVIDENDS. Except as otherwise required by law
or by the Certificate of Incorporation the board of directors may, in its
discretion, declare what, if any, dividends shall be paid from the surplus or
from the net profits of the corporation upon the stock of the corporation;
provided, however, that no dividend shall be declared or paid the payment of
which would diminish the amount of the paid-in capital of the corporation.
Dividends may be paid in cash, in property, in shares of the corporation's
stock, or in any combination thereof. Dividends shall be payable upon such dates
as the board of directors may designate.
SECTION 5.2. RESERVES. Before the payment of any dividend and before
making any distribution of profits, the board of directors, from time to time
and in its absolute discretion shall have power to set aside out of the surplus
or net profits of the corporation such sum or sums as the board of directors
deems proper and sufficient as a reserve fund to meet contingencies or for such
other purpose as the board of directors shall deem to be in the best interests
of the corporation, and the board of directors may modify or abolish any such
reserve.
ARTICLE VI.
POWERS OF OFFICERS TO CONTRACT
WITH THE CORPORATION
Any and all of the directors and officers of the corporation,
notwithstanding their official relations to it, may enter into and perform any
contract or agreement of any nature between the corporation and themselves, or
any and all of the individuals from time to time constituting the board of
directors of the corporation, or any firm or corporation in which any such
director may be interested, directly or indirectly, whether such individual,
firm or corporation thus contracting with the corporation shall thereby derive
personal or corporate profits or benefits or otherwise; provided, that (i) the
material facts of such interest are disclosed or are known to the board of
directors or committee thereof which authorizes such contract or agreement; (ii)
if the material facts as to such person's relationship or interest are disclosed
or are known to the stockholders entitled to vote thereon, and the contract is
specifically approved in good faith by a vote of the
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stockholders; or (iii) the contract or agreement is fair as to the corporation
as of the time it is authorized, approved or ratified by the board of directors,
a committee thereof, or the stockholders. Any director of the corporation who is
interested in any transaction as aforesaid may nevertheless be counted in
determining the existence of a quorum at any meeting of the board of directors
which shall authorize or ratify any such transaction. This Article shall not be
construed to invalidate any contract or other transaction which would otherwise
be valid under the common or statutory law applicable thereto.
ARTICLE VII.
INDEMNIFICATION
SECTION 7.1. DEFINITIONS. For purposes of this Article VII:
(a) "Covered Person" means an individual: (i) who is a present or former
director, officer, agent or employee of the corporation or who serves or served
another corporation, partnership, joint venture, trust, employee benefit plan or
other enterprise in one of those capacities or as trustee, partner or fiduciary
at the request of the corporation; and (ii) who by reason of his position was,
is, or is threatened to be made a party to a Proceeding. It shall also include
such person's heirs, executors and administrators.
(b) "Proceeding" includes any threatened, pending, or completed action,
suit, or proceeding, whether civil, criminal, administrative, or investigative,
and any claim which could be the subject of such a proceeding.
(c) "Disinterested Director" means a director who is not a party to the
Proceeding(s) in question.
(d) "Expenses" means liabilities, including but not limited to amounts
paid in satisfaction of judgments, in compromises or as fines or penalties, and
expenses, including reasonable legal and accounting fees.
SECTION 7.2. ACTIONS IN NAME OF THE CORPORATION OR STOCKHOLDER. The
corporation may indemnify any Covered Person to the extent legally permissible
against all Expenses incurred in connection with the defense or disposition of
any Proceeding by or in the name of the corporation or any stockholder in his
capacity as such if a reasonable determination is made, based on a review of the
readily available facts but without special investigation, that the Covered
Person acted in good faith, and in the reasonable belief that his action was in,
or not opposed to, the best interest of the corporation, and with respect to any
criminal action or proceeding, had no reasonable cause to believe that his
conduct was unlawful. Such determination shall be made by:
(a) the vote of a majority of a quorum of Disinterested Directors;
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(b) a special litigation/indemnification committee of the board of
directors appointed by the board;
(c) independent legal counsel in a written opinion; or
(d) the vote of the holders of a majority of the outstanding stock at
the time entitled to vote for directors, voting as a single
class, exclusive of any stock owned by any interested director or
officer.
No indemnification shall be made with respect to any matter as to which
such Covered Person has been adjudicated liable for negligence or misconduct in
the performance of his duty to the corporation, unless, and only to the extent
that, the court deciding the action determines that such Covered Person is
entitled to indemnification.
Such indemnification may be provided in connection with a Proceeding in
which it is claimed that an officer or director received an improper personal
benefit by reason of his position, regardless of whether the claim involves his
service in such capacity, subject to the foregoing limitations and to the
additional limitation that it shall not have been finally determined that an
improper personal benefit was received by the director or officer.
SECTION 7.3. OTHER ACTIONS. The corporation may indemnify any Covered
Person against any Expenses incurred in connection with the defense or
disposition of any Proceeding other than a Proceeding of the type described in
Section 7.2, except with respect to any matter as to which the Covered Person
shall have been finally adjudicated in the Proceeding (i) not to have acted in
good faith and in a manner he reasonably believed to be in, or not opposed to,
the best interests of the corporation or, (ii) with respect to any criminal
Proceeding, to have had reasonable cause to believe his conduct was unlawful.
SECTION 7.4. ADVANCES OF EXPENSES. The corporation may advance attorneys'
fees or other Expenses incurred by a Covered Person in defending a Proceeding,
upon receipt of an undertaking by or on behalf of the Covered Person to repay
the amount advanced, which undertaking may be accepted by the board of directors
without reference to the financial ability of such Covered Person to make
repayment.
SECTION 7.5. PRESUMPTIONS UPON TERMINATION OF PROCEEDING. The termination
of any Proceeding by judgment, order, settlement, conviction, or upon a plea of
nolo contenders, or its equivalent, shall not, of itself, create a presumption
that a person did not act in good faith and in a manner which he reasonably
believed to be in, or not opposed, to the best interests of the corporation, or,
with respect to any criminal Proceeding, had reasonable cause to believe that
his conduct was unlawful.
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SECTION 7.6. INDEMNIFICATION NOT EXCLUSIVE. The right of indemnification
provided by this Article VII shall not be exclusive of or affect any other
rights to which any such Covered Person may be entitled.
SECTION 7.7. INSURANCE. The corporation may purchase and maintain
insurance on its behalf and on behalf of any Covered Person against any
liability asserted against such Covered Person and incurred by him in any such
capacity, or arising out of his status as such, whether or not the corporation
would have the power to indemnify him against such liability under the
provisions of this Article VII.
SECTION 7.8. EMPLOYEE BENEFIT PLANS. If the corporation or any of its
subsidiaries or affiliates sponsors any employee benefit plan, and any Covered
Person undertakes or incurs any responsibility as a fiduciary with respect
thereto then, for purposes of indemnification of such Covered Person under this
Article VII, (i) such Covered Person shall be deemed not to have failed to have
acted in good faith and in the reasonable belief that his action was in or not
opposed to the best interests of the corporation if he acted in good faith and
in the reasonable belief that his action was in or not opposed to the best
interests of the participants or beneficiaries of said plan, and (ii) 'Expenses'
shall be deemed to include any taxes or penalties assessed on such Covered
Person with respect to said plan under applicable law.
ARTICLE VIII.
MISCELLANEOUS PROVISIONS
SECTION 8.1. CERTIFICATE OF INCORPORATION. All references in these By-laws
to the Certificate of Incorporation shall be deemed to refer to the Certificate
of Incorporation of the corporation, as amended and in effect from time to time.
SECTION 8.2. FISCAL YEAR. Except as from time to time otherwise provided
by the board of directors, the fiscal year of the corporation shall end on the
last day of February of each year.
SECTION 8.3. CORPORATE SEAL. The board of directors shall have the power
to adopt and alter the seal of the corporation.
SECTION 8.4. EXECUTION OF INSTRUMENTS. All deeds, leases, transfers,
contracts, bonds, notes, and other obligations authorized to be executed by an
officer of the corporation on its behalf shall be signed by the president or the
treasurer except as the board of directors may generally or in particular cases
otherwise determine.
SECTION 8.5. VOTING OF SECURITIES. Unless the board of directors otherwise
provides, the president or the treasurer may waive notice of and act on behalf
of this corporation, or appoint another person or persons to act as proxy or
attorney in fact for this corporation with or without discretionary power and/or
power of substitution, at any
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meeting of stockholders or shareholders of any other corporation or
organization, any of whose securities are held by this corporation.
SECTION 8.6. EVIDENCE OF AUTHORITY. A certificate by the secretary or any
assistant secretary as to any action taken by the stockholders, directors or any
officer or representative of the corporation shall, as to all persons who rely
thereon in good faith, be conclusive evidence of such action. The exercise of
any power which by law, by the Certificate of Incorporation or by these By-laws,
or under any vote of the stockholders or the board of directors, may be
exercised by an officer of the corporation only in the event of absence of
another officer or any other contingency shall bind the corporation in favor of
anyone relying thereon in good faith, whether or not such absence or contingency
existed.
SECTION 8.7. CORPORATE RECORDS. The original, or attested copies, of the
CERTIFICATE OF INCORPORATION, By-laws, records of all meetings of the
incorporators and stockholders, and the stock transfer books (which shall
contain the names of all stockholders and the record address and the amount of
stock held by each) shall be kept in Delaware at the principal office of the
corporation, or at an office of its resident agent, transfer agent or of the
secretary or of the assistant secretary, if any. Said copies and records need
not all be kept in the same office. They shall be available at all reasonable
times to inspection of any stockholder for any purpose but not to secure a list
of stockholders for the purpose of selling said list or copies thereof or of
using the same for a purpose other than in the interest of the applicant, as a
stockholder, relative to the affairs of the corporation.
SECTION 8.8. CHARITABLE CONTRIBUTIONS. The board of directors from time to
time may authorize contributions to be made by the corporation in such amounts
as it may determine to be reasonable to corporations, trusts, funds or
foundations organized and operated exclusively for charitable, scientific or
educational purposes, no part of the net earning of which inures to the private
benefit of any stockholder or individual.
ARTICLE IX.
AMENDMENTS
SECTION 9.1. AMENDMENT BY STOCKHOLDERS. Prior to the issuance of stock,
these By-laws may be amended, altered or repealed by the incorporators) by
majority vote. After stock has been issued, these By-laws may be amended,
altered or repealed by the stockholders at any annual or special meeting by vote
of a majority of all shares outstanding and entitled to vote, except that where
the effect of the amendment would. be to reduce any voting requirement otherwise
required by law, the Certificate of Incorporation or these By-laws, such
amendment shall require the vote that would have been required by such other
provision. Notice and a copy of any proposal to amend these By-laws must be
included in the notice of meeting of stockholders at which action is taken upon
such amendment.
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SECTION 9.2. AMENDMENT BY BOARD OF DIRECTORS.
(a) These By-laws may be amended, altered or repealed by the board of
directors at a meeting duly called for the purpose by majority vote of the
directors then in office, except that directors shall not amend the By-laws in a
manner which:
(i) changes the stockholder voting requirements for any action;
(ii) alters or abolishes any preferential right or right of redemption
applicable to a class or series of stock with shares already outstanding;
(iii) alters the provisions of Articles VII or IX hereof; or
(iv) permits the board of directors to take any action which under
law, the Certificate of Incorporation or these By-laws is required to be taken
by the stockholders.
(b) If the By-laws are amended or altered by the board of directors,
notice of the amendment, alteration or repeal shall be given to all stockholders
entitled to vote not later than the time of giving notice of the next meeting of
stockholders following such amendment, alteration or repeal.
(c) Any amendment of these By-laws by the board of directors may be
altered or repealed by the stockholders at any annual or special meeting of
stockholders.
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EXHIBIT 3.7
FORM OF AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION OF THE
COMPANY, TO BE EFFECTIVE IMMEDIATELY
PRIOR TO THE CLOSING OF THE OFFERING
<PAGE> 2
AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
OF
TWEETER HOME ENTERTAINMENT GROUP, INC.
Tweeter Home Entertainment Group, Inc., a corporation organized and
existing under the laws of the State of Delaware (the "Corporation"), hereby
certifies as follows:
1. The name of the Corporation is Tweeter Home Entertainment Group, Inc.
The date of the filing of its original Certificate of Incorporation with the
Secretary of State of the State of Delaware was April 14, 1998 (the "Original
Certificate of Incorporation"). The Original Certificate of Incorporation was
amended and restated on [__________________], 1998 (the "First Amended and
Restated Certificate of Incorporation").
2. This Amended and Restated Certificate of Incorporation (the
"Certificate"), which amends, restates and integrates the provisions of the
First Amended and Restated Certificate of Incorporation, was duly adopted by the
Board of Directors of the Corporation in accordance with the provisions of
Sections 141(f), 242 and 245 of the General Corporation Law of the State of
Delaware, as amended from time to time (the "DGCL"), and was duly adopted by the
written consent of the stockholders of the Corporation in accordance with the
applicable provisions of Sections 228, 242 and 245 of the DGCL.
3. The text of the First Amended and Restated Certificate of
Incorporation, as amended to date, is hereby amended and restated in its
entirety to provide as herein set forth in full.
ARTICLE I
NAME
The name of the corporation is Tweeter Home Entertainment Group, Inc.
ARTICLE II
REGISTERED OFFICE
The address of the registered office of the Corporation in the State of
Delaware is 1209 Orange Street, in the City of Wilmington, County of New Castle.
The name of the Corporation's registered agent at such address is The
Corporation Trust Company.
<PAGE> 3
ARTICLE III
PURPOSES
The purpose of the Corporation is to engage in any lawful act or
activity for which corporations may be organized under the DGCL.
ARTICLE IV
CAPITAL STOCK
A. AUTHORIZED CAPITAL. The Corporation is authorized to issue two classes
of stock to be designated, respectively, "Common Stock" and "Preferred Stock."
The total number of shares of stock which the Corporation shall have authority
to issue is Thirty Million (30,000,000) shares, consisting of Twenty Million
(20,000,000) shares of Common Stock, $.01 par value, and Ten Million
(10,000,000) shares of Preferred Stock, $.01 par value.
B. COMMON STOCK.
1. The holders of shares of Common Stock shall be entitled to one vote
for each share so held with respect to all matters voted on by the stockholders
of the Corporation.
2. Subject to any preferential dividend rights of the Preferred Stock,
dividends may be paid on the Common Stock as and when declared by the Board of
Directors or any authorized committee thereof.
3. Upon the voluntary or involuntary liquidation, dissolution or winding
up of the Corporation, after payment shall have been made to the holders of the
Preferred Stock having a prior and superior right to any assets of the
Corporation of the full amount to which they are entitled, the net assets of the
Corporation available for distribution to the holders of Common Stock shall be
distributed pro rata to such holders in proportion to the number of shares of
Common Stock held by each.
C. PREFERRED STOCK. The Board of Directors of the Corporation is hereby
expressly vested with the power by resolution to designate one or more series of
the Preferred Stock of the Corporation from time to time and by resolution to
designate the powers, preferences and relative, participating, optional or other
special rights of any such series, and the qualifications, limitations or
restrictions thereof, to the extent not in conflict with the powers,
designations, preferences or relative, participating, optional or other special
rights, or the qualifications, limitations or restrictions of any other series
fixed by resolution of the Board of Directors and set forth in a certificate of
designation filed with the Secretary of State of Delaware. The power of the
Board of Directors as describe in this paragraph shall include the right to fix
one or more of the following with respect to each series of Preferred Stock to
the extent permitted by law:
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1. the annual or other periodic dividend rate or amount of dividends to
be paid on the shares of such series, the dividend payment dates, the date from
which dividends on all shares of such series issued shall be cumulative, if
applicable, and the extent of participation and other rights, if any;
2. whether the shares of such series shall be redeemable and, if so, the
redemption price or prices, if any, for such series and other terms and
conditions on which such series may be retired and redeemed;
3. the distinctive serial designation and maximum number of shares of
such series issuable;
4. the right to vote, if any, with holders of shares of any other class
or series, either generally or as a condition to specified corporate action;
5. the amount payable upon shares of such series and the preferences
applicable thereto in the event of a voluntary or involuntary liquidation,
dissolution or winding up of the Corporation;
6. the rights, if any, of the holders of shares of such series to
convert such shares into other classes of stock of the Corporation or into any
other securities, or to exchange such shares for other securities, and, if so,
the conversion price or prices, or the rate or rates of exchange, and the
adjustments thereof, if any, at which such conversion or exchange may be made
and any other terms and conditions of any such conversion or exchange;
7. the price or other consideration for which the shares of such series
shall be issued;
8. whether the shares of such series which are redeemed or converted
shall have the status of authorized but unissued shares of Preferred Stock (or
series thereof) and whether such shares may be reissued as shares of the same or
any other class or series of stock; and
9. such other powers, preferences and relative, participating, optional
or other special rights, and the qualifications, limitations or restrictions
thereof, as the Board of Directors may deem advisable and as are not prohibited
by law.
All shares of Preferred Stock shall be identical with each other in all
respects except as provided herein or in the resolution or resolutions providing
for the issue of a particular series. All shares of Preferred Stock of any one
series shall be identical with each other in all respects except, if so
determined by the Board of Directors, as to the dates from which dividends
thereon shall be cumulative.
Any action by the Board of Directors under this Section C of Article IV
shall require the affirmative vote of a majority of the directors then in
office.
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ARTICLE V
STOCKHOLDER ACTION
Except as may be provided in the resolutions of the Board of Directors
designating any series of Preferred Stock solely with respect to action taken by
the holders of that series, any action required or permitted to be taken by
stockholders of the Corporation at any annual or special meeting of stockholders
of the Corporation must be effected at a duly called annual or special meeting
of stockholders and may not be taken or effected by a written consent of
stockholders in lieu thereof.
ARTICLE VI
DIRECTORS
A. GENERAL POWERS OF THE BOARD OF DIRECTORS. The business and affairs of
the Corporation shall be managed by or under the direction of its Board of
Directors. In furtherance, and not in limitation, of the powers conferred by the
State of Delaware, the Board of Directors of the Corporation is expressly
authorized to:
1. adopt, amend, or repeal the By-laws of the Corporation; provided,
however, that no By-laws hereafter adopted shall invalidate any prior act of the
directors that would have been valid if such new By-laws had not been adopted.
2. determine the rights, powers, duties, rules and procedures that
affect the power of the Board of Directors to manage the business and affairs of
the Corporation, including the power to designate and empower committees of the
Board of Directors, to elect, appoint and empower the officers and other agents
of the Corporation, and to determine the time and place of, and the notice
requirements for, Board meetings, as well as quorum and voting requirements for,
and manner of taking, Board action; and
3. exercise all such powers and do all such acts as may be exercised or
done by the Corporation, subject to the provisions of the laws of the State of
Delaware, this Certificate of Incorporation, and the By-laws of the Corporation.
B. NUMBER OF DIRECTORS. The number of directors constituting the Board of
Directors shall be fixed by, or in the manner provided in, the By-laws.
C. CLASSIFIED BOARD OF DIRECTORS. Effective as of the filing of this
Certificate, the directors shall be divided into three classes, with each class
to be as nearly equal in number as possible, and shall be referred to Class I
Directors, Class II Directors and Class III Directors, respectively. The initial
Class I Directors shall serve for a term expiring at the annual meeting of
stockholders to be held in 1999; the initial Class II Directors shall serve for
a term expiring at the annual meeting of stockholders to be held in 2000; and
the initial Class III Directors shall serve for a term expiring at the annual
meeting of stockholders to be held in 2001. At each annual meeting of
stockholders, the successor or successors of the class of directors whose term
expires at that meeting shall
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be elected by a plurality of the votes of the shares present in person or
represented by proxy at such meeting and entitled to vote on the election of
directors, and shall hold office for a term expiring at the annual meeting of
stockholders held in the third year following the year of their election. The
directors elected to each class shall hold office until their successors are
duly elected and qualified or until their earlier resignation or removal. If the
number of directors is changed, any increase or decrease shall be apportioned
among the classes so as to maintain or attain, if possible, the number of
directors in each class as nearly equal as possible, but in no case will a
decrease in the number of directors shorten the term of an incumbent director.
D. REMOVAL OF DIRECTORS. Subject to the rights, if any, of the holders of
any series of Preferred Stock to elect directors and to remove any director whom
such holders have the right to elect, any director (including persons elected by
directors to fill vacancies in the Board of Directors) may be removed from
office (a) only for cause and (b) only by the affirmative vote of the holders of
at least 75% of the voting power of all of the shares of capital stock of the
Corporation then entitled to vote generally in the election of directors, voting
together as a single class.
E. VACANCIES. Subject to the rights, if any, of the holders of any series
of Preferred Stock to elect directors and to fill vacancies in the Board of
Directors relating thereto, any vacancies in the Board of Directors, however
occurring, including, without limitation, by reason of an increase in size of
the Board of Directors, or the resignation or removal of a director, may filled
only by the affirmative vote of a majority of the remaining directors then in
office, even if less than a quorum of the Board of Directors. Any director
appointed in accordance with the preceding sentence shall hold office for the
remainder of the full term of the class of directors in which the new
directorship was created or the vacancy occurred and until such director's
successor shall have been duly elected and qualified or until such director's
earlier resignation or removal. Subject to the rights, if any, of the holders of
any series of Preferred Stock, when the number of directors is increased or
decreased, the Board of Directors shall determine the class or classes to which
the increased or decreased number of directors shall be apportioned, but in no
case will a decrease in the number of directors shorten the term of an incumbent
director. In the event of a vacancy in the Board of Directors, the remaining
directors, except as otherwise provided by law, may exercise the powers of the
full Board of Directors until such vacancy is filled.
F. AMENDMENT OF BY-LAWS. Except as may be may be provided otherwise in the
By-laws, the Board of Directors shall have the power to adopt, amend, or repeal
any By-laws of the Corporation, subject to the right of the stockholders of the
Corporation to amend or repeal the By-laws as provided therein.
G. CONSIDERATION OF CERTAIN FACTORS BY DIRECTORS. In determining what he or
she reasonably believes to be in the best interests of the Corporation in the
performance of his or her duties as a director, a director may consider, both in
the consideration of tender and exchange offers, mergers, consolidations and
sales of all or
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<PAGE> 7
substantially all of the corporation's assets and otherwise, such factors as the
Board of Directors determines to be relevant, including without limitation:
1. the long-term and short-term interests of the Corporation and its
stockholders, including the possibility that these interests may be best served
by the continued independence of the Corporation;
2. whether the proposed transaction might violate federal or state laws;
3. if applicable, not only the consideration being offered in a proposed
transaction, in relation to the then current market price for the outstanding
capital stock of the Corporation, but also to the market price for such capital
stock of the Corporation over a period of years, the estimated price that might
be achieved in a negotiated sale of the Corporation as a whole or in part or
through orderly liquidation, the premiums over market price for the securities
or other corporations in similar transactions, current political, economic and
other factors bearing on securities prices and the Corporation's financial
condition and future prospects; and
4. the social, legal and economic effects of the proposed transaction
upon the Corporation's employees, suppliers, customers, creditors and others
having similar relationships with the Corporation, upon the communities in which
the Corporation conducts business and upon the economy of the state, region and
nation.
ARTICLE VII
LIMITATION OF LIABILITY OF DIRECTORS
A director of the Corporation shall not be personally liable to the
Corporation or its stockholders for monetary damages for breach of fiduciary
duty as a director, except for liability (a) for any breach of the director's
duty of loyalty to the Corporation or its stockholders, (b) for acts or
omissions not in good faith or which involve intentional misconduct or a knowing
violation of law, (c) under Section 174 of the DGCL or (d) for any transaction
from which the director derived an improper personal benefit. If the DGCL is
amended after the effective date of this Certificate to authorize corporate
action further eliminating or limiting the personal liability of directors, then
the liability of a director of the Corporation shall be eliminated or limited to
the fullest extent permitted by the DGCL, as so amended.
Any amendment or repeal of this Article VII by either (i) the stockholders
of the Corporation or (ii) an amendment to the DGCL shall not adversely affect
any right or protection existing at the time of such amendment or repeal with
respect to any acts or omissions occurring before such amendment or repeal of a
person who has served as a director prior to, or is then serving as a director
at the time of, such amendment or repeal.
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<PAGE> 8
ARTICLE VIII
INDEMNIFICATION OF DIRECTORS
The corporation shall, to the fullest extent permitted by Section 145 of the
DGCL, indemnify all persons whom it shall have the power to indemnify under that
section from and against all of the expenses, liabilities or other matters
referred to in or covered by that section and the indemnification provided for
herein shall not be deemed exclusive of any other rights to which those
indemnified may be entitled under any by-law, agreement, vote of stockholders or
disinterested directors or otherwise, both as to action in his or her official
capacity and as to action in another capacity while holding such office, and
shall continue as to a person who has ceased to be a director, officer, employee
or agent and shall inure to the benefit of the heirs, executors and
administrators of such a person.
ARTICLE IX
AMENDMENT OF CERTIFICATE OF INCORPORATION
The Corporation reserves the right to amend or repeal this Certificate in
the manner now or hereafter prescribed by statute and this Certificate, and all
rights conferred upon stockholders herein are granted subject to this
reservation.
No amendment or repeal of this Certificate shall be made unless the same is
first approved by the Board of Directors pursuant to a resolution adopted by the
Board of Directors in accordance with Section 242 of the DGCL, and, except as
otherwise provided by law, thereafter approved by the stockholders. Whenever any
vote of the holders of voting stock is required to amend or repeal any provision
of this Certificate, then in addition to any other vote of the holders of voting
stock that is required by this Certificate or by law, the affirmative vote of at
least a majority of the outstanding shares of capital stock of the Corporation
entitled to vote on such amendment or repeal, voting together as a single class,
and the affirmative vote of at least a majority of the outstanding shares of
each class entitled to vote thereon as a class, shall be required to amend or
repeal any provision of this Certificate; provided, however, that the
affirmative vote of not less than 75% of the outstanding shares entitled to vote
on such amendment or repeal, voting together as a single class, and the
affirmative vote of not less than 75% of the outstanding shares of each class
entitled to vote thereon as a class, shall be required in any event to amend,
adopt any provision inconsistent with, or repeal any of the provisions of
Articles V through X of this Certificate.
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<PAGE> 9
CERTIFICATE OF DESIGNATION
OF
SERIES A JUNIOR PARTICIPATING CUMULATIVE PREFERRED STOCK
OF
TWEETER HOME ENTERTAINMENT GROUP, INC.
Pursuant to Section 151 of the
General Corporation Law of the State of Delaware
TWEETER HOME ENTERTAINMENT GROUP, INC. (the "Company"), a corporation
organized and existing under the General Corporation Law of the State of
Delaware (the "DGCL"), DOES HEREBY CERTIFY:
That the following resolution was duly adopted by the Board of Directors
of the Company, pursuant to the authority conferred upon the Board of Directors
by Article IV, Section C of the Company's Amended and Restated Certificate of
Incorporation and the provisions of Section 151 of the DGCL, [AT A DULY CALLED
MEETING OF THE BOARD OF DIRECTORS HELD ON [_____________], 1998][BY THE
UNANIMOUS WRITTEN CONSENT OF THE BOARD OF DIRECTORS, IN LIEU OF A MEETING
THEREOF]:
RESOLVED: That the Board of Directors hereby designates 200,000 shares of
the Company's Preferred Stock, $.01 par value, as Series A
Junior Participating Cumulative Preferred Stock with the
designations, powers, preferences, and relative, participating,
optional or other rights, and the qualifications, limitations
or restrictions thereof, set forth on EXHIBIT I hereto.
IN WITNESS WHEREOF, the Company has caused this Certificate of
Designation to be executed by [_________________], its [___________].
TWEETER HOME ENTERTAINMENT GROUP, INC.
By: __________________________________
[Name]
[Title]
<PAGE> 10
DESIGNATIONS, POWERS, PREFERENCES, AND RELATIVE,
PARTICIPATING, OPTIONAL OR OTHER RIGHTS, AND THE
QUALIFICATIONS, LIMITATIONS OR RESTRICTIONS THEREOF,
OF
SERIES A JUNIOR PARTICIPATING CUMULATIVE PREFERRED STOCK
OF
TWEETER HOME ENTERTAINMENT GROUP, INC.
SECTION 1. DESIGNATION AND AMOUNT. The shares of such series shall be
designated as "Series A Junior Participating Cumulative Preferred Stock," $.01
par value, (hereinafter called "Series A Preferred Stock"), and the number of
shares initially constituting such series shall be 200,000. Such number of
shares may be increased or decreased by resolution of the Board of Directors and
by the filing of a certificate pursuant to the provisions of the General
Corporation Law of the State of Delaware stating that such increase or reduction
has been so authorized; provided, however, that no decrease shall reduce the
number of shares of Series A Preferred Stock to a number less than that of the
shares then outstanding plus the number of shares of Series A Preferred Stock
issuable upon exercise of outstanding rights, options or warrants or upon
conversion of outstanding securities issued by the Corporation.
SECTION 2. DIVIDENDS AND DISTRIBUTIONS.
(A) (i) Subject to the rights of the holders of any shares of any
series of preferred stock (or any similar stock) ranking prior and superior to
the Series A Preferred Stock with respect to dividends, the holders of shares of
Series A Preferred Stock, in preference to the holders of shares of Common Stock
and of any other junior stock, shall be entitled to receive, when, as and if
declared by the Board of Directors out of funds legally available for the
purpose, quarterly dividends payable in cash on the first day of March, June,
September and December in each year (each such date being referred to herein as
a "Quarterly Dividend Payment Date"), commencing on the first Quarterly Dividend
Payment Date after the first issuance of a share or fraction of a share of
Series A Preferred Stock, in an amount per share (rounded to the nearest cent)
equal to the greater of (a) $1.00 or (b) subject to the provisions for
adjustment hereinafter set forth, 1,000 times the aggregate per share amount of
all cash dividends, and 1,000 times the aggregate per share amount (payable in
kind) of all non-cash dividends or other distributions other than a dividend
payable in shares of Common Stock or a subdivision of the outstanding shares of
Common Stock (by reclassification or otherwise), declared on the shares of
Common Stock since the immediately preceding Quarterly Dividend Payment Date,
or, with respect to the first Quarterly Dividend Payment Date, since the first
issuance of any share or fraction of a share of Series A Preferred Stock. The
multiple of cash and non- cash dividends declared on the shares of Common Stock
to which holders of the Series A Preferred Stock are entitled, which shall be
1,000 initially but
<PAGE> 11
which shall be adjusted from time to time as hereinafter provided, is
hereinafter referred to as the "Dividend Multiple." In the event the Corporation
shall at any time after [__________], 1998 (the "Rights Declaration Date") (i)
declare or pay any dividend on the shares of Common Stock payable in shares of
Common Stock, or (ii) effect a subdivision or combination or consolidation of
the outstanding shares of Common Stock (by reclassification or otherwise than by
payment of a dividend in shares of Common Stock) into a greater or lesser number
of shares of Common Stock, then in each such case the Dividend Multiple
thereafter applicable to the determination of the amount of dividends which
holders of shares of Series A Preferred Stock shall be entitled to receive shall
be the Dividend Multiple applicable immediately prior to such event multiplied
by a fraction, the numerator of which is the number of shares of Common Stock
outstanding immediately after such event and the denominator of which is the
number of shares of Common Stock that were outstanding immediately prior to such
event.
(ii) Notwithstanding anything else contained in this
paragraph (A), the Corporation shall, out of funds legally available for that
purpose, declare a dividend or distribution on the Series A Preferred Stock as
provided in this paragraph (A) immediately after it declares a dividend or
distribution on the shares of Common Stock (other than a dividend payable in
shares of Common Stock); provided that, in the event no dividend or distribution
shall have been declared on the shares of Common Stock during the period between
any Quarterly Dividend Payment Date and the next subsequent Quarterly Dividend
Payment Date, a dividend of $1.00 per share on the Series A Preferred Stock
shall nevertheless be payable on such subsequent Quarterly Dividend Payment
Date.
(B) Dividends shall begin to accrue and be cumulative on
outstanding shares of Series A Preferred Stock from the Quarterly Dividend
Payment Date next preceding the date of issue of such shares of Series A
Preferred Stock, unless the date of issue of such shares is prior to the record
date for the first Quarterly Dividend Payment Date, in which case dividends on
such shares shall begin to accrue from the date of issue of such shares, or
unless the date of issue is a Quarterly Dividend Payment Date or is a date after
the record date for the determination of holders of shares of Series A Preferred
Stock entitled to receive a quarterly dividend and before such Quarterly
Dividend Payment Date, in either of which events such dividends shall begin to
accrue and be cumulative from such Quarterly Dividend Payment Date. Accrued but
unpaid dividends shall not bear interest. Dividends paid on the shares of Series
A Preferred Stock in an amount less than the total amount of such dividends at
the time accrued and payable on such shares shall be allocated pro rata on a
share-by-share basis among all such shares at the time outstanding. The Board of
Directors may fix in accordance with applicable law a record date for the
determination of holders of shares of Series A Preferred Stock entitled to
receive payment of a dividend or distribution declared thereon, which record
date shall be not more than such number of days prior to the date fixed for the
payment thereof as may be allowed by applicable law.
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<PAGE> 12
SECTION 3. VOTING RIGHTS. In addition to any other voting rights
required by law, the holders of shares of Series A Preferred Stock shall have
the following voting rights:
(A) Subject to the provision for adjustment hereinafter set
forth, each share of Series A Preferred Stock shall entitle the holder thereof
to 1,000 votes on all matters submitted to a vote of the stockholders of the
Corporation. The number of votes which a holder of a share of Series A Preferred
Stock is entitled to cast, which shall initially be 1,000 but which may be
adjusted from time to time as hereinafter provided, is hereinafter referred to
as the "Vote Multiple." In the event the Corporation shall at any time after the
Rights Declaration Date (i) declare or pay any dividend on shares of Common
Stock payable in shares of Common Stock, or (ii) effect a subdivision or
combination or consolidation of the outstanding shares of Common Stock (by
reclassification or otherwise than by payment of a dividend in shares of Common
Stock) into a greater or lesser number of shares of Common Stock, then in each
such case the Vote Multiple thereafter applicable to the determination of the
number of votes per share to which holders of shares of Series A Preferred Stock
shall be entitled shall be the Vote Multiple immediately prior to such event
multiplied by a fraction, the numerator of which is the number of shares of
Common Stock outstanding immediately after such event and the denominator of
which is the number of shares of Common Stock that were outstanding immediately
prior to such event.
(B) Except as otherwise provided herein or by law, the
holders of shares of Series A Preferred Stock and the holders of shares of
Common Stock and the holders of shares of any other capital stock of this
Corporation having general voting rights, shall vote together as one class on
all matters submitted to a vote of stockholders of the Corporation.
(C) (i) Whenever, at any time or times, dividends payable on
any shares of Series A Preferred Stock shall be in arrears in an amount equal to
at least two full quarter dividends (whether or not declared and whether or not
consecutive), the holders of record of the outstanding shares of Series A
Preferred Stock shall have the exclusive right, voting separately as a single
class, to elect two directors of the Corporation at a special meeting of
stockholders of the Corporation or at the Corporation's next annual meeting of
stockholders, and at each subsequent annual meeting of stockholders, as provided
below. At elections for such directors, each Series A Preferred Share shall
entitle the holder thereof to 1,000 votes in such elections.
(ii) Upon the vesting of such right of the holders of
shares of Series A Preferred Stock, the maximum authorized number of members of
the Board of Directors shall automatically be increased by two and the two
vacancies so created shall be filled by vote of the holders of the outstanding
shares of Series A Preferred Stock as hereinafter set forth. A special meeting
of the stockholders of the Corporation then entitled to vote shall be called by
the Chairman of the Board of Directors or the President or the Secretary of the
Corporation, if requested in writing by the holders of record of not less than
10% of the shares of Series A Preferred Stock then outstanding. At such special
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<PAGE> 13
meeting, or, if no such special meeting shall have been called, then at the next
annual meeting of stockholders of the Corporation, the holders of the shares of
Series A Preferred Stock shall elect, voting as above provided, two directors of
the Corporation to fill the aforesaid vacancies created by the automatic
increase in the number of members of the Board of Directors. At any and all such
meetings for such election, the holders of a majority of the outstanding shares
of Series A Preferred Stock shall be necessary to constitute a quorum for such
election, whether present in person or proxy, and such two directors shall be
elected by the vote of at least a majority of the shares of Series A Preferred
Stock held by such stockholders present or represented at the meeting. Any
director elected by holders of shares of Series A Preferred Stock pursuant to
this Section may be removed at any annual or special meeting, by vote of a
majority of the stockholders voting as a class who elected such director, with
or without cause. In case any vacancy shall occur among the directors elected by
the holders of shares of Series A Preferred Stock pursuant to this Section, such
vacancy may be filled by the remaining director so elected, or his successor
then in office, and the director so elected to fill such vacancy shall serve
until the next meeting of stockholders for the election of directors. After the
holders of shares of Series A Preferred Stock shall have exercised their right
to elect directors in any default period and during the continuance of such
period, the number of directors shall not be further increased or decreased
except by vote of the holders of shares of Series A Preferred Stock as herein
provided or pursuant to the rights of any equity securities ranking senior to or
pari passu with the Series A Preferred Stock.
(iii) The right of the holders of shares of Series A
Preferred Stock, voting separately as a class, to elect two members of the Board
of Directors of the Corporation as aforesaid shall continue until, and only
until, such time as all arrears in dividends (whether or not declared) on the
Series A Preferred Stock shall have been paid or declared and set apart for
payment, at which time such right shall terminate, except as herein or by law
expressly provided subject to revesting in the event of each and every
subsequent default of the character above-mentioned. Upon any termination of the
right of the holders of the Series A Preferred Stock as a class to vote for
directors as herein provided, the term of office of all directors then in office
elected by the holders of shares of Series A Preferred Stock pursuant to this
Section shall terminate immediately. Whenever the term of office of the
directors elected by the holders of shares of Series A Preferred Stock pursuant
to this Section shall terminate and the special voting powers vested in the
holders of the Series A Preferred Stock pursuant to this Section shall have
expired, the maximum number of members of this Board of Directors of the
Corporation shall be such number as may be provided for in the By-laws of the
Corporation, irrespective of any increase made pursuant to the provisions of
this Section.
(D) Except as otherwise required by applicable law or as set
forth herein, holders of Series A Preferred Stock shall have no special voting
rights and their consent shall not be required (except to the extent they are
entitled to vote with holders of shares of Common Stock as set forth herein) for
taking any corporate action.
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<PAGE> 14
SECTION 4. CERTAIN RESTRICTIONS.
(A) Whenever dividends or distributions payable on the Series A
Preferred Stock as provided in Section 2 are in arrears, thereafter and until
all accrued and unpaid dividends and distributions, whether or not declared, on
shares of Series A Preferred Stock outstanding shall have been paid in full, the
Corporation shall not: (i) declare or pay dividends on, make any other
distributions on, or redeem or purchase or otherwise acquire for consideration
any shares of stock ranking junior (either as to dividends or upon liquidation,
dissolution or winding up) to the Series A Preferred Stock; (ii) declare or pay
dividends on or make any other distributions on any shares of stock ranking on a
parity (either as to dividends or upon liquidation, dissolution or winding up)
with the Series A Preferred Stock, except dividends paid ratably on the Series A
Preferred Stock and all such parity stock on which dividends are payable or in
arrears in proportion to the total amounts to which the holders of all such
shares are then entitled; (iii) except as permitted in subsection 4(A)(iv)
below, redeem, purchase or otherwise acquire for consideration shares of any
stock ranking on a parity (either as to dividends or upon liquidation,
dissolution or winding up) with the Series A Preferred Stock, provided that the
Corporation may at any time redeem, purchase or otherwise acquire shares of any
such parity stock in exchange for shares of any stock of the Corporation ranking
junior (either as to dividends or upon dissolution, liquidation or winding up)
to the Series A Preferred Stock; or (iv) purchase or otherwise acquire for
consideration any shares of Series A Preferred Stock, or any shares of any stock
ranking on a parity (either as to dividends or upon liquidation, dissolution or
winding up) with the Series A Preferred Stock, except in accordance with a
purchase offer made in writing or by publication (as determined by the Board of
Directors) to all holders of such shares upon such terms as the Board of
Directors, after consideration of the respective annual dividend rates and other
relative rights and preferences of the respective series and classes, shall
determine in good faith will result in fair and equitable treatment among the
respective series or classes.
(B) The Corporation shall not permit any subsidiary of the
Corporation to purchase or otherwise acquire for consideration any shares of
stock of the Corporation unless the Corporation could, under subsection (A) of
this Section 4, purchase or otherwise acquire such shares at such time and in
such manner.
SECTION 5. REACQUIRED SHARES. Any shares of Series A Preferred Stock
purchased or otherwise acquired by the Corporation in any manner whatsoever
shall be retired and canceled promptly after the acquisition thereof. All such
shares shall upon their cancellation become authorized but unissued shares of
preferred stock and may be reissued as part of a new series of preferred stock
to be created by resolution or resolutions of the Board of Directors, subject to
the conditions and restrictions on issuance set forth herein.
SECTION 6. LIQUIDATION, DISSOLUTION OR WINDING UP. Upon any liquidation
(voluntary or otherwise), dissolution or winding up of the Corporation, no
distribution shall be made (a) to the holders of shares of stock ranking junior
(either as to dividends or
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<PAGE> 15
upon liquidation, dissolution or winding up) to the Series A Preferred Stock
unless, prior thereto, the holders of shares of Series A Preferred Stock shall
have received an amount equal to accrued and unpaid dividends and distributions
thereon, whether or not declared, to the date of such payment, plus an amount
equal to the greater of (1) $1,000.00 per share or (2) an aggregate amount per
share, subject to the provision for adjustment hereinafter set forth, equal to
1,000 times the aggregate amount to be distributed per share to holders of
shares of Common Stock, or (b) to the holders of stock ranking on a parity
(either as to dividends or upon liquidation, dissolution or winding up) with the
Series A Preferred Stock, except distributions made ratably on the Series A
Preferred Stock and all other such parity stock in proportion to the total
amounts to which the holders of all such shares are entitled upon such
liquidation, dissolution or winding up. In the event the Corporation shall at
any time after the Rights Declaration Date (i) declare or pay any dividend on
shares of Common Stock payable in shares of Common Stock, or (ii) effect a
subdivision or combination or consolidation of the outstanding shares of Common
Stock (by reclassification or otherwise than by payment of a dividend in shares
of Common Stock) into a greater or lesser number of shares of Common Stock, then
in each such case the aggregate amount per share to which holders of shares of
Series A Preferred Stock were entitled immediately prior to such event under
clause (a) of this paragraph shall be adjusted by multiplying such amount by a
fraction, the numerator of which is the number of shares of Common Stock
outstanding immediately after such event and the denominator of which is the
number of shares of Common Stock that were outstanding immediately prior to such
event.
Neither the consolidation of nor merging of the Corporation with or into
any other corporation or corporations, nor the sale or other transfer of all or
substantially all of the assets of the Corporation, shall be deemed to be a
liquidation, dissolution or winding up of the Corporation within the meaning of
this Section 6.
SECTION 7. CONSOLIDATION, MERGER, ETC. In case the Corporation shall
enter into any consolidation, merger, combination or other transaction in which
the shares of Common Stock are exchanged for or changed into other stock or
securities, cash and/or any other property, then in any such case the shares of
Series A Preferred Stock shall at the same time be similarly exchanged or
changed in an amount per share (subject to the provision for adjustment
hereinafter set forth) equal to 1,000 times the aggregate amount of stock,
securities, cash and/or any other property (payable in kind), as the case may
be, into which or for which each share of Common Stock is changed or exchanged,
plus accrued and unpaid dividends, if any, payable with respect to the Series A
Preferred Stock. In the event the Corporation shall at any time after the Rights
Declaration Date (i) declare or pay any dividend on shares of Common Stock
payable in shares of Common Stock, or (ii) effect a subdivision or combination
or consolidation of the outstanding shares of Common Stock (by reclassification
or otherwise than by payment of a dividend in shares of Common Stock) into a
greater or lesser number of shares of Common Stock, then in each such case the
amount set forth in the preceding sentence with respect to the exchange or
change of shares of Series A Preferred Stock shall be adjusted by multiplying
such amount by a fraction, the numerator of which is the number of shares of
Common
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<PAGE> 16
Stock outstanding immediately after such event and the denominator of which is
the number of shares of Common Stock that were outstanding immediately prior to
such event.
SECTION 8. REDEMPTION. The shares of Series A Preferred Stock shall not
be redeemable; provided, however, that the foregoing shall not limit the ability
of the Corporation to purchase or otherwise deal in such shares to the extent
otherwise permitted hereby and by law.
SECTION 9. RANKING. Unless otherwise provided in the Certificate of
Incorporation or a Certificate of Designation relating to a
subsequently-designated series of preferred stock of the Corporation, the Series
A Preferred Stock shall rank junior to any other series of the Corporation's
preferred stock subsequently issued, as to the payment of dividends and the
distribution of assets on liquidation, dissolution or winding up and shall rank
senior to the Common Stock.
SECTION 10. AMENDMENT. The Certificate of Incorporation and this
Certificate of Designation shall not be amended in any manner which would
materially alter or change the powers, preferences or special rights of the
Series A Preferred Stock so as to affect them adversely without the affirmative
vote of the holders of two-thirds or more of the outstanding shares of Series A
Preferred Stock, voting separately as a class.
SECTION 11. FRACTIONAL SHARES. Shares of Series A Preferred Stock may be
issued in whole shares or in any fraction of a share that is one one-thousandth
(1/1,000th) of a share or any integral multiple of such fraction, which shall
entitle the holder, in proportion to such holder's fractional shares, to
exercise voting rights, receive dividends, participate in distributions and to
have the benefit of all other rights of holders of shares of Series A Preferred
Stock. In lieu of fractional shares, the Corporation may elect to make a cash
payment as provided in the Rights Agreement for fractions of a share other than
one one-thousandth (1/1,000th) of a share or any integral multiple thereof.
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<PAGE> 1
EXHIBIT 3.8
FORM OF AMENDED AND RESTATED
BY-LAWS OF THE COMPANY, TO BE
EFFECTIVE IMMEDIATELY PRIOR
TO THE CLOSING OF THE OFFERING
<PAGE> 2
AMENDED AND RESTATED
BY-LAWS
OF
TWEETER HOME ENTERTAINMENT GROUP, INC.
ARTICLE I
Definitions
For purposes of these By-laws, the following words shall have the
meanings set forth below:
(a) "Certificate" shall mean the Certificate of Incorporation of
the Corporation, as amended from time to time.
(b) "Common Stock" shall mean the Preferred Stock, no par value,
of the Corporation.
(c) "Corporation" shall mean Tweeter Home Entertainment
Group, Inc.
(d) "DGCL" shall mean the Delaware General Corporation Law, as
amended from time to time.
(e) "Equity Stock" shall mean the Common Stock and the Preferred
Stock of the Corporation.
(f) "Preferred Stock" shall mean the preferred stock, no par
value, of the Corporation.
(g) "Public Announcement" shall mean: (i) disclosure in a press
release reported by the Dow Jones News Service, Associated Press or other
similar national news service, (ii) a report or other document filed publicly
with the Securities and Exchange Commission (including, without limitation, a
Current Report on Form 8-K) or (iii) a letter or report sent to stockholders of
record of the Corporation at the time of the mailing of such letter or report.
ARTICLE II
Meetings of Stockholders
2.1 PLACES OF MEETINGS. All meetings of the stockholders shall be
held at such place, either within or without the State of Delaware, as from time
to time may be fixed by the majority of the Board of Directors, the Chairman of
the Board, if one is elected, or
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<PAGE> 3
the Chief Executive Officer, if one is elected, or the President, which place
may subsequently be changed at any time by vote of the Board of Directors.
2.2 ANNUAL MEETINGS. The annual meeting of the stockholders, for
the election of directors and transaction of such other business as may come
properly before the meeting, shall be held on the [FIRST, SECOND, THIRD][SPECIFY
DAY OF THE WEEK] of February of each year. If this date falls on a legal holiday
in any year, the meeting shall be held on the next succeeding business day. A
special meeting of the stockholders in lieu of the annual meeting may be held at
such date and time as shall be determined by a majority of the Board of
Directors and such special meeting shall have, for the purposes of these By-laws
or otherwise, all the force and effect of an annual meeting. All references
hereafter in these By-laws to an annual meeting or annual meetings also shall be
deemed to refer to any special meeting(s) in lieu thereof.
At any annual meeting of stockholders or any special meeting in lieu of
annual meeting of stockholders, only such business shall be conducted, and only
such proposals shall be acted upon, as shall have been properly brought before
such annual meeting. To be considered as properly brought before an annual
meeting, business must be: (a) specified in the notice of meeting, (b) otherwise
properly brought before the meeting by, or at the direction of, the Board of
Directors, or (c) otherwise properly brought before the meeting by any holder of
record (both as of the time notice of such proposal is given by the stockholder
as set forth below and as of the record date for the annual meeting in question)
of any shares of capital stock of the Corporation entitled to vote at such
annual meeting who complies with the requirements set forth in Section 2.9.
2.3 SPECIAL MEETINGS. Except as otherwise required by law and
subject to the rights, if any, of the holders of any series of the Preferred
Stock of the Corporation, special meetings of the stockholders may be called
only by the Board of Directors pursuant to a resolution approved by the
affirmative vote of a majority of the directors then in office, by the Chairman
of the Board, if one is elected, or by the Chief Executive Officer, if one is
elected. Only those matters set forth in the notice of the special meeting may
be considered or acted upon at a special meeting of stockholders of the
Corporation, unless otherwise provided by law.
2.4 NOTICE OF MEETINGS; ADJOURNMENTS. A written notice of each
annual meeting stating the hour, date and place of such annual meeting shall be
given by the Secretary or an Assistant Secretary of the Corporation (or other
person authorized by these By-laws or by law) not less than 10 days nor more
than 60 days before the annual meeting, to each stockholder entitled to vote
thereat and to each stockholder who, by law or under the Certificate or under
these By-laws, is entitled to such notice, by delivering such notice to him or
her or by mailing it, postage prepaid, addressed to such stockholder at the
address of such stockholder as it appears on the stock transfer books of the
Corporation. Such notice shall be deemed to be delivered when hand-delivered to
such address or deposited in the mail so addressed, with postage prepaid.
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Notice of all special meetings of stockholders shall be given in the
same manner as provided for annual meetings, except that the written notice of
all special meetings shall state the purpose or purposes for which the meeting
has been called.
Notice of an annual meeting or special meeting of stockholders need not
be given to a stockholder if a written waiver of notice is signed before or
after such meeting by such stockholder or if such stockholder attends such
meeting, unless such attendance was for the express purpose of objecting at the
beginning of the meeting to the transaction of any business because the meeting
was not lawfully called or convened. Neither the business to be transacted at,
nor the purpose of, any annual meeting or special meeting of stockholders need
be specified in any written waiver of notice.
The Board of Directors may postpone and reschedule any previously
scheduled annual meeting or special meeting of stockholders and any record date
with respect thereto, regardless of whether any notice or public disclosure with
respect to any such meeting has been sent or made pursuant to this Section 2.4
or otherwise. In no event shall the Public Announcement of an adjournment,
postponement or rescheduling of any previously scheduled meeting of stockholders
commence a new time period for the giving of a stockholder's notice under
Section 2.9 of these By-laws.
When any meeting is convened, the presiding officer of the meeting may
adjourn the meeting if (a) no quorum is present for the transaction of business,
(b) the Board of Directors determines that adjournment is necessary or
appropriate to enable the stockholders to consider fully information that the
Board of Directors determines has not been made sufficiently or timely available
to stockholders or (c) the Board of Directors determines that adjournment is
otherwise in the best interests of the Corporation. When any annual meeting or
special meeting of stockholders is adjourned to another hour, date or place,
notice need not be given of the adjourned meeting, other than an announcement at
the meeting at which the adjournment is taken, of the hour, date and place to
which the meeting is adjourned; provided, however, that if the adjournment is
for more than 30 days, or if after the adjournment a new record date is fixed
for the adjourned meeting, notice of the adjourned meeting shall be given to
each stockholder of record entitled to vote thereat and each stockholder who, by
law or under the Certificate or under these By-laws, is entitled to such notice.
2.5 QUORUM. Except as otherwise required by the Certificate or
law, any number of stockholders together holding at least a majority of the
outstanding shares of capital stock entitled to vote with respect to the
business to be transacted, who shall be present in person or represented by
proxy at any meeting duly called, shall constitute a quorum for the transaction
of business. Where a separate vote by class or series is required, a majority of
the outstanding shares of such class or series, present in person or represented
by proxy, shall constitute a quorum entitled to take action with respect to that
matter. If less than a quorum shall be in attendance at the time for which a
meeting shall have been called, the holders of voting stock representing a
majority of the voting power present at the meeting or represented by proxy or
the presiding officer may adjourn the
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meeting from time to time, and the meeting may be held as adjourned without
further notice. At such adjourned meeting at which a quorum is present, any
business may be transacted which might have been transacted at the meeting as
originally noticed. The stockholders present at a duly constituted meeting may
continue to transact business until adjournment, notwithstanding the withdrawal
of enough stockholders to leave less than a quorum.
2.6 VOTING AND PROXIES. Stockholders shall have one vote for each
share of stock entitled to vote owned by them of record according to the stock
transfer books of the Corporation, unless otherwise provided by law or by the
Certificate (or in any applicable certificate of designation with respect to
Preferred Stock). Stockholders may vote either in person or by written proxy,
but no proxy shall be voted or acted upon after three years from its date,
unless the proxy provides for a longer period. Proxies shall be filed with the
Secretary of the meeting before being voted. Except as otherwise limited therein
or as otherwise provided by law, proxies authorizing a person to vote at a
specific meeting shall entitle the persons authorized thereby to vote at any
adjournment of such meeting, but they shall not be valid after final adjournment
of such meeting. A proxy with respect to stock held in the name of two or more
persons shall be valid if executed by or on behalf of any one of them unless at
or prior to the exercise of the proxy the Corporation receives a specific
written notice to the contrary from any one of them. A proxy purporting to be
executed by or on behalf of a stockholder shall be deemed valid, and the burden
of proving invalidity shall rest on the challenger.
2.7 ACTION AT MEETING. When a quorum is present, any matter before
any meeting of stockholders shall be decided by the affirmative vote of the
majority of shares present in person or represented by proxy at such meeting and
entitled to vote on such matter, except where a larger vote is required by law,
by the Certificate or by these By-laws. Where a separate vote by a class or
series is required, the affirmative vote of the majority of shares of such class
or series present in person or represented by proxy at the meeting shall be the
act of such class or series. Any election of directors by stockholders shall be
determined by a plurality of the votes of the shares present in person or
represented by proxy at the meeting and entitled to vote on the election of
directors, except where a larger vote is required by law, by the Certificate or
by these By-laws. The Corporation shall not directly or indirectly vote any
shares of its own stock; provided, however, that the Corporation may vote shares
which it holds in a fiduciary capacity to the extent permitted by law.
2.8 STOCKHOLDER LIST. The officer or agent having charge of the
stock transfer books of the Corporation shall make, at least 10 days before
every annual meeting or special meeting of stockholders, a complete list of the
stockholders entitled to vote at the meeting or any adjournment thereof, in
alphabetical order, and showing the address of each stockholder and the number
of shares registered in the name of each stockholder. Such list shall be open to
the examination of any stockholder, for any purpose germane to the meeting,
during ordinary business hours, for a period of at least 10 days prior to the
meeting, either at a place within the city where the meeting is to be held,
which place
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shall be specified in the notice of the meeting, or, if not so specified, at the
place where the meeting is to be held. The list shall also be produced and kept
at the hour, date and place of the meeting during the whole time thereof, and
may be inspected by any stockholder who is present.
2.9 STOCKHOLDER PROPOSALS. In addition to any other applicable
requirements, for business to be properly brought before an annual or special
meeting by a stockholder of record, such stockholder shall: (a) be at the time
the proposal is submitted and continuing through the date of the meeting the
record or beneficial owner of at least 1% of the outstanding shares of capital
stock entitled to vote at such meeting and have held such shares for at least
one year, (b) give timely written notice as required by this Section 2.9 to the
Secretary of the Corporation and (c) be present at such meeting, either in
person or by a representative. For the first annual meeting following the
initial public offering of the Common Stock of the Corporation, a stockholder's
notice shall be timely if delivered to, or mailed to and received by, the
Corporation at its principal executive office not less than 120 days prior to
the date when the Corporation first mails to stockholders its proxy statement
for the meeting; provided, however, that in the event such annual meeting is
scheduled to be held on a date more than 30 days before or after the date
specified for annual meetings in the By-laws as in effect 120 days prior to such
first mailing, a stockholder's notice shall be timely if delivered to, or mailed
to and received by, the Corporation at its principal executive office on the
later of (i) 120 days prior to the date when the Corporation first mails to
stockholders its proxy statement for the meeting or (ii) the 15th day following
the day on which the Public Announcement of the date of such meeting is first
made by the Corporation. Subject to the following sentence, for all subsequent
annual meetings, a stockholder's notice shall be timely if delivered to, or
mailed to and received by, the Corporation at its principal executive office not
less than 120 days prior to the calendar day when the Corporation first mailed
to stockholders its proxy statement for the previous year's annual meeting. Not
withstanding the foregoing sentence, for annual meetings scheduled to be held on
a date more than 30 days before or after the anniversary date of the previous
year's annual meeting, and for all special meetings, a stockholder's notice
shall be timely if delivered to, or mailed to and received by, the Corporation
at its principal executive office on the later of (i) 120 days prior to the date
when the Corporation first mails to stockholders its proxy statement for the
meeting or (ii) the 15th day following the day on which the Public Announcement
of the date of such meeting is first made by the Corporation.
A stockholder's notice to the Secretary of the Corporation shall set
forth as to each matter proposed to be brought before an annual meeting: (i) a
brief description of the business the stockholder desires to bring before such
annual meeting and the reasons for conducting such business at such annual
meeting, (ii) the name and address, as they appear on the stock transfer books
of the Corporation, of the stockholder proposing such business, (iii) the class
and number of shares of the capital stock of the Corporation beneficially owned
by the stockholder proposing such business, (iv) the names and addresses of the
beneficial owners, if any, of any capital stock of the Corporation registered in
such stockholder's name on such books, and the class and number of shares
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of the capital stock of the Corporation beneficially owned by such beneficial
owners, (v) the names and addresses of other stockholders known by the
stockholder proposing such business to support such proposal, and the class and
number of shares of the capital stock of the Corporation beneficially owned by
such other stockholders and (vi) any material interest of the stockholder
proposing to bring such business before such meeting (or any other stockholders
known to be supporting such proposal) in such proposal.
If the Board of Directors or a designated committee thereof determines
that any stockholder proposal was not made in a timely fashion in accordance
with the provisions of this Section 2.9 or that the information provided in a
stockholder's notice does not satisfy the information requirements of this
Section 2.9 in any material respect, such proposal shall not be presented for
action at the annual meeting in question. If neither the Board of Directors nor
such committee makes a determination as to the validity of any stockholder
proposal in the manner set forth above, the presiding officer of the annual
meeting shall determine whether the stockholder proposal was made in accordance
with the terms of this Section 2.9. If the presiding officer determines that any
stockholder proposal was not made in a timely fashion in accordance with the
provisions of this Section 2.9 or that the information provided in a
stockholder's notice does not satisfy the information requirements of this
Section 2.9 in any material respect, such proposal shall not be presented for
action at the annual meeting in question. If the Board of Directors, a
designated committee thereof or the presiding officer determines that a
stockholder proposal was made in accordance with the requirements of this
Section 2.9, the presiding officer shall so declare at the annual meeting and
ballots shall be provided for use at the meeting with respect to such proposal.
Notwithstanding the foregoing provisions of this Section 2.9, a
stockholder shall also comply with all applicable requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and the rules and
regulations thereunder with respect to the matters set forth in this Section
2.9, and nothing in this Section 2.9 shall be deemed to affect any rights of
stockholders to request inclusion of proposals in the Corporation's proxy
statement pursuant to Rule 14a-8 under the Exchange Act (or any successor
provision thereof).
2.10 VOTING PROCEDURES AND INSPECTORS OF ELECTIONS. The Corporation
shall, in advance of any meeting of stockholders, appoint one or more inspectors
to act at the meeting and make a written report thereof. The Corporation may
designate one or more persons as alternate inspectors to replace any inspector
who fails to act. If no inspector or alternate is able to act at a meeting of
stockholders, the presiding officer shall appoint one or more inspectors to act
at the meeting. Any inspector may, but need not, be an officer, employee or
agent of the Corporation. Each inspector, before entering upon the discharge of
his or her duties, shall take and sign an oath faithfully to execute the duties
of inspector with strict impartiality and according to the best of his or her
ability. The inspectors shall perform such duties as are required by the DGCL,
including the counting of all votes and ballots. The inspectors may appoint or
retain other persons or entities to assist the inspectors in the performance of
the duties of the inspectors. The presiding officer may
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review all determinations made by the inspectors, and in so doing the presiding
officer shall be entitled to exercise his or her sole judgment and discretion
and he or she shall not be bound by any determinations made by the inspectors.
All determinations by the inspectors and, if applicable, the presiding officer,
shall be subject to further review by any court of competent jurisdiction.
2.11 PRESIDING OFFICER. The Chairman of the Board, if one is
elected, or if not elected or in his or her absence, or the Chief Executive
Officer, if one is elected, or if not elected or in his or her absence, the
President, shall preside at all annual meetings or special meetings of
stockholders and shall have the power, among other things, to adjourn such
meeting at any time and from time to time, subject to Sections 2.4 and 2.5 of
this Article II. The order of business and all other matters of procedure at any
meeting of the stockholders shall be determined by the presiding officer.
ARTICLE III
Directors
3.1 GENERAL POWERS. The business and affairs of the Corporation
shall be managed by or under the direction of the Board of Directors and, except
as otherwise expressly provided by law, the Certificate or these By-laws, all of
the powers of the Corporation shall be vested in such Board.
3.2 NUMBER OF DIRECTORS. The number of directors shall be fixed by
resolution duly adopted from time to time by the Board of Directors. The
directors shall hold office in the manner provided in the Certificate.
3.3 ELECTION AND REMOVAL OF DIRECTORS; QUORUM.
(a) Directors shall be elected and removed in the manner provided
for in Article VI of the Certificate.
(b) Vacancies in the Board of Directors shall be filled in the
manner provided for in Article VI of the Certificate.
(c) At any meeting of the Board of Directors, a majority of the
number of directors then in office shall constitute a quorum for the transaction
of business. If less than a quorum is present at a meeting, a majority of the
directors present may adjourn the meeting from time to time, and the meeting may
be held as adjourned without further notice, except as provided in Section 3.6
of this Article III. Any business which might have been transacted at the
meeting as originally noticed may be transacted at such adjourned meeting at
which a quorum is present.
(d) No director need be a stockholder of the Corporation.
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(e) A director may resign at any time by giving written notice to
the Chairman of the Board, if one is elected, the Chief Executive Officer, if
one is elected, the President or the Secretary. A resignation shall be effective
upon receipt, unless the resignation otherwise provides.
3.4 REGULAR MEETINGS. The regular annual meeting of the Board of
Directors shall be held, without notice other than this Section 3.4, on the same
date and at the same place as the annual meeting following the close of such
meeting of stockholders. Other regular meetings of the Board of Directors may be
held at such hour, date and place as the Board of Directors may by resolution
from time to time determine without notice other than such resolution.
3.5 SPECIAL MEETINGS. Special meetings of the Board of Directors
may be called, orally or in writing, by or at the request of a majority of the
directors, the Chairman of the Board, if one is elected, or the Chief Executive
Officer, if one is elected, or the President. The person calling any such
special meeting of the Board of Directors may fix the hour, date and place
thereof. 3.6 NOTICE OF MEETINGS. Notice of the hour, date and place of all
special meetings of the Board of Directors shall be given to each director by
the Secretary or an Assistant Secretary, or in case of the death, absence,
incapacity or refusal of such persons, by the Chairman of the Board, if one is
elected, or the Chief Executive Officer, if one is elected, or such other
officer designated by the Chairman of the Board, if one is elected, or the Chief
Executive Officer or the President. Notice of any special meeting of the Board
of Directors shall be given to each director in person, by telephone, or by
facsimile or other written form of electronic communication, sent to his or her
business or home address, at least 24 hours in advance of the meeting, or by
written notice mailed to his or her business or home address, at least 48 hours
in advance of the meeting. Such notice shall be deemed to be delivered when hand
delivered to such address, read to such director by telephone, deposited in the
mail so addressed, with postage thereon prepaid if mailed, or dispatched or
transmitted if faxed.
When any Board of Directors meeting, either regular or special, is
adjourned for 30 days or more, notice of the adjourned meeting shall be given as
in the case of an original meeting. It shall not be necessary to give any notice
of the hour, date or place of any meeting adjourned for less than 30 days or of
the business to be transacted thereat, other than an announcement at the meeting
at which such adjournment is taken of the hour, date and place to which the
meeting is adjourned.
A written waiver of notice signed before or after a meeting by a
director and filed with the records of the meeting shall be deemed to be
equivalent to notice of the meeting. The attendance of a director at a meeting
shall constitute a waiver of notice of such meeting, except where a director
attends a meeting for the express purpose of objecting at the beginning of the
meeting to the transaction of any business because such meeting is not lawfully
called or convened. Except as otherwise required by law, by the Certificate
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or by these By-laws, neither the business to be transacted at, nor the purpose
of, any meeting of the Board of Directors need be specified in the notice or
waiver of notice of such meeting.
3.7 NOMINATIONS. Nominations of candidates for election as
directors of the Corporation at any annual meeting may be made only (a) by, or
at the direction of, a majority of the Board of Directors or (b) by a person who
is the record or beneficial owner, at the time the nomination is submitted and
continuing through the date of the meeting, of at least 1% of the outstanding
shares of capital stock entitled to vote at such meeting and have held such
shares for at least one year and who complies with the timing, informational and
other requirements set forth in this Section 3.7. Any such stockholder who has
complied with the timing, informational and other requirements set forth in this
Section 3.7 and who seeks to make such a nomination must be present at such
meeting, either in person or by a representative. Only persons nominated in
accordance with the procedures set forth in this Section 3.7 shall be eligible
for election as directors at an annual meeting.
Nominations, other than those made by, or at the direction of, the
Board of Directors shall be made pursuant to timely notice in writing to the
Secretary of the Corporation as set forth in this Section 3.7. For the first
annual meeting following the initial public offering of the Common Stock of the
Corporation, a stockholder's notice shall be timely if delivered to, or mailed
to and received by, the Corporation at its principal executive office not less
than 120 days prior to the date when the Corporation first mails to stockholders
its proxy statement for the meeting; provided, however, that in the event the
annual meeting is scheduled to be held on a date more than 30 days before or
after the date specified for annual meetings in the By-laws as in effect 120
days prior to such first mailing, a stockholder's notice shall be timely if
delivered to, or mailed to and received by, the Corporation at its principal
executive office on the later of (i) 120 days prior to the date when the
Corporation first mails to stockholders its proxy statement for the meeting or
(ii) the 15th day following the day on which the Public Announcement of the date
of such meeting is first made by the Corporation. For all subsequent annual
meetings, a stockholder's notice shall be timely if delivered to, or mailed to
and received by, the Corporation at its principal executive office not less than
120 days prior to the calendar day when the Corporation first mailed to
stockholders its proxy statement for the previous year's annual meeting;
provided, however, that in the event the annual meeting is scheduled to be held
on a date more than 30 days before or after the anniversary date of the previous
year's annual meeting, a stockholder's notice shall be timely if delivered to,
or mailed to and received by, the Corporation at its principal executive office
on the later of (i) 120 days prior to the date when the Corporation first mails
to stockholders its proxy statement for the meeting or (ii) the 15th day
following the day on which the Public Announcement of the date of such meeting
is first made by the Corporation.
A stockholder's notice to the Secretary of the Corporation shall set
forth as to each person whom the stockholder proposes to nominate for election
or re-election as a director: (1) the name, age, business address and residence
address of such person; (2) the
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principal occupation or employment of such person; (3) the class and number of
shares of the capital stock of the Corporation which are beneficially owned by
such person on the date of such stockholder notice; and (4) the consent of each
nominee to serve as a director if elected. A stockholder's notice to the
Secretary of the Corporation shall further set forth as to the stockholder
giving such notice: (a) the name and address, as they appear on the stock
transfer books of the Corporation, of such stockholder and of the beneficial
owners (if any) of the capital stock of the Corporation registered in such
stockholder's name and the name and address of other stockholders known by such
stockholder to be supporting such nominee(s); (b) the class and number of shares
of the capital stock of the Corporation which are held of record, beneficially
owned or represented by proxy by such stockholder and by any other stockholders
known by such stockholder to be supporting such nominee(s) on the record date
for the annual meeting in question (if such date shall then have been made
publicly available and shall be earlier than the date of such stockholder
notice) and on the date of such stockholder's notice; and (c) a description of
all arrangements or understandings between such stockholder and each nominee and
any other person or persons (naming such person or persons) pursuant to which
the nomination or nominations are to be made by such stockholder.
If the Board of Directors or a designated committee thereof determines
that any stockholder nomination was not made in accordance with the terms of
this Section 3.7 or that the information provided in a stockholder's notice does
not satisfy the informational requirements of this Section 3.7 in any material
respect, then such nomination shall not be considered at the annual meeting in
question. If neither the Board of Directors nor such committee makes a
determination as to whether a nomination was made in accordance with the
provisions of this Section 3.7, the presiding officer of the annual meeting
shall determine whether a nomination was made in accordance with such
provisions. If the presiding officer determines that any stockholder nomination
was not made in accordance with the terms of this Section 3.7 or that the
information provided in a stockholder's notice does not satisfy the
informational requirements of this Section 3.7 in any material respect, then
such nomination shall not be considered at the annual meeting in question. If
the Board of Directors, a designated committee thereof or the presiding officer
determines that a nomination was made in accordance with the terms of this
Section 3.7, the presiding officer shall so declare at the annual meeting and
ballots shall be provided for use at the meeting with respect to such nominee.
Notwithstanding anything to the contrary in the second paragraph of
this Section 3.7, in the event that the number of directors to be elected to the
Board of Directors is increased and there is no Public Announcement by the
Corporation naming all of the nominees for director or specifying the size of
the increased Board of Directors at least 60 days prior to the Anniversary Date,
a stockholder's notice required by this Section 3.7 shall also be considered
timely, but only with respect to nominees for any new positions created by such
increase, if such notice shall be delivered to, or mailed to and received by,
the Corporation at its principal executive office not later than the close of
business on the 15th day following the day on which such Public Announcement is
first made by the Corporation.
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No person shall be elected by the stockholders as a director of the
Corporation unless nominated in accordance with the procedures set forth in this
Section 3.7. Election of directors at an annual meeting need not be by written
ballot, unless otherwise provided by the Board of Directors or presiding officer
at such annual meeting. If written ballots are to be used, ballots bearing the
names of all the persons who have been nominated for election as directors at
the annual meeting in accordance with the procedures set forth in this Section
3.7 shall be provided for use at the annual meeting.
3.8 ACTION AT MEETING AND BY CONSENT.
(a) At any meeting of the Board of Directors at which a quorum is
present, a majority of the directors present may take any action on behalf of
the Board of Directors, unless otherwise required by law, by the Certificate or
by these By-laws.
(b) Any action required or permitted to be taken at any meeting of
the Board of Directors may be taken without a meeting if all members of the
Board of Directors consent thereto in writing. Such written consent shall be
filed with the records of the meetings of the Board of Directors and shall be
treated for all purposes as a vote at a meeting of the Board of Directors.
3.9 MANNER OF PARTICIPATION. Directors may participate in meetings
of the Board of Directors by means of conference telephone or similar
communications equipment by means of which all directors participating in the
meeting can hear each other, and participation in a meeting in accordance
herewith shall constitute presence in person at such meeting for purposes of
these By-laws.
3.10 COMPENSATION OF DIRECTORS. By resolution of the Board of
Directors, directors may be allowed a fee for serving as a director and a fee
and expenses for attendance at a meeting of the Board, but nothing herein shall
preclude directors from serving the Corporation in other capacities and
receiving compensation for such other services; provided, however, that
directors who are serving the Corporation as employees and who receive
compensation for their services as such shall not receive any salary or other
compensation for their services as directors of the Corporation.
ARTICLE IV
Committees
4.1 EXECUTIVE COMMITTEE. The Board of Directors, by resolution
duly adopted, may designate an Executive Committee which shall consist of not
less than two directors. The members of the Executive Committee shall serve
until their successors are designated by the Board of Directors, until removed,
or until the Executive Committee is dissolved by the Board of Directors. All
vacancies that may occur in the Executive Committee shall be filled by the Board
of Directors.
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When the Board of Directors is not in session, the Executive Committee
shall have all power vested in the Board of Directors by law, by the
Certificate, or by these By-laws, except as otherwise provided in the DGCL or by
a resolution adopted by the Board of Directors. The Executive Committee shall
report at the next regular or special meeting of the Board of Directors all
action that the Executive Committee may have taken on behalf of the Board of
Directors since the last regular or special meeting of the Board of Directors.
Meetings of the Executive Committee shall be held at such places and at
such times fixed by resolution of the Executive Committee. Not less than 12
hours' notice shall be given by letter, facsimile, or telephone (or in person)
of all meetings of the Executive Committee; provided, however, that notice need
not be given of regular meetings held at times and places fixed by resolution of
the Executive Committee and that meetings may be held at any time without notice
if all of the members of the Executive Committee are present or if those not
present waive notice in writing either before or after the meeting; provided,
further, that attendance at a meeting for the express purpose of objecting at
the beginning of a meeting to the transaction of any business because the
meeting is not lawfully convened shall not be considered a waiver of notice. A
majority of the members of the Executive Committee then serving shall constitute
a quorum for the transaction of business at any meeting of the Executive
Committee.
4.2 COMPENSATION COMMITTEE. The Board of Directors, by resolution
duly adopted, may designate a Compensation Committee which shall consist of two
or more non-employee directors. In addition, the Board of Directors at any time
may designate one or more alternate members of the Compensation Committee, who
shall be non-employee directors, who may act in place of any absent regular
member upon invitation by the chairman or secretary of the Compensation
Committee.
With respect to bonuses, the Compensation Committee shall have and may
exercise the powers to determine the amounts annually available for bonuses
pursuant to any bonus plan or formula approved by the Board of Directors, to
determine bonus awards to executive officers and to exercise such further powers
with respect to bonuses as may from time to time be conferred by the Board of
Directors.
With respect to salaries, the Compensation Committee shall have and may
exercise the power to fix and determine from time to time all salaries of the
executive officers of the Corporation, and such further powers with respect to
salaries as may from time to time be conferred by the Board of Directors.
The Compensation Committee shall administer the Corporation's stock
incentive plans and from time to time may grant, consistent with the plans,
stock options and other awards permissible under such plans.
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Vacancies in the Compensation Committee shall be filled by the Board of
Directors, and members of the Compensation Committee shall be subject to removal
by the Board of Directors at any time.
The Compensation Committee shall, subject to the directives of the
Board of Directors, fix its own rules of procedure. A majority of the number of
regular members then serving on the Compensation Committee shall constitute a
quorum; and regular and alternate members present shall be counted to determine
whether there is a quorum. The Compensation Committee shall keep minutes of its
meetings, and all action taken by it shall be reported to the Board of
Directors.
4.3 AUDIT COMMITTEE. The Board of Directors, by resolution duly
adopted, may designate an Audit Committee which shall consist of two or more
directors whose membership on the Audit Committee shall meet the requirements
set forth in the rules of the Nasdaq Stock Market for issuers with securities
listed on the Nasdaq National Market, as amended from time to time. Vacancies in
the Audit Committee shall be filled by the Board of Directors with directors
meeting the requirements set forth above, giving consideration to continuity of
the Audit Committee, and members shall be subject to removal by the Board of
Directors at any time. The Audit Committee shall, subject to the directives of
the Board of Directors, fix its own rules of procedure and a majority of the
members serving shall constitute a quorum. The Audit Committee shall meet at
least twice per year with both the Corporation's internal and the Corporation's
outside auditors present at each meeting and shall keep minutes of its meetings
and all action taken shall be reported to the Board of Directors. The Audit
Committee shall review the reports and minutes of any audit committees of the
Corporation's subsidiaries. The Audit Committee shall review the Corporation's
financial reporting process, including accounting policies and procedures. The
Audit Committee shall examine the report of the Corporation's outside auditors,
consult with them with respect to their report and the standards and procedures
employed by them in their audit, report to the Board of Directors the results of
its study and recommend the selection of auditors for each fiscal year.
4.4 NOMINATING COMMITTEE. The Board of Directors, by resolution
duly adopted, may designate a Nominating Committee which shall consist of two or
more directors. The Nominating Committee shall make recommendations to the Board
of Directors regarding nominees for election as directors by the stockholders at
each annual meeting of stockholders and make such other recommendations
regarding tenure, and classification of directors as the Nominating Committee
may deem advisable from time to time. The Nominating Committee shall, subject to
the directives of the Board of Directors, fix its own rules of procedure and a
majority of the members then serving shall constitute a quorum.
4.5 OTHER COMMITTEES. The Board of Directors, by resolution
adopted, may establish such other standing or special committees of the Board of
Directors as it may deem advisable, and the members, terms and authority of such
committees shall be as set forth in the resolutions establishing the same.
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ARTICLE V
Officers
5.1 ENUMERATION. The officers of the Corporation shall consist of
a President, a Treasurer, a Secretary and such other officers, including,
without limitation, a Chairman of the Board of Directors, a Chief Executive
Officer, a Chief Operating Officer and one or more Vice Presidents (including
Executive Vice Presidents or Senior Vice Presidents), Assistant Vice Presidents,
Assistant Treasurers and Assistant Secretaries, and such other officers as the
Board of Directors may determine. The Board of Directors shall have the
authority, subject to applicable law, to appoint two or more persons to any
particular office; including by way of example only, to appoint co-presidents of
the Corporation, and references herein to any such office shall mean each and
all person(s) so appointed to such office as aforesaid.
5.2 ELECTION. At the regular annual meeting of the Board following
the annual meeting of stockholders, the Board of Directors shall elect the
President, the Treasurer and the Secretary and may elect such other officers as
the Board of Directors may determine. The Board of Directors also may elect
officers at any other regular or special meeting of the Board of Directors.
5.3 QUALIFICATION. No officer need be a stockholder or a director.
Any person may occupy more than one office of the Corporation at any time. Any
officer may be required by the Board of Directors to give bond for the faithful
performance of his or her duties in such amount and with such sureties as the
Board of Directors may determine.
5.4 TENURE. Except as otherwise provided by the Certificate or by
these By-laws, each of the officers of the Corporation shall hold office until
his or her successor is elected and qualified or until his or her earlier
resignation or removal.
5.5 RESIGNATION. Any officer may resign by delivering his or her
written resignation to the Corporation addressed to the President or the
Secretary, and such resignation shall be effective upon receipt unless it is
specified to be effective at some other time or upon the happening of some other
event.
5.6 REMOVAL. Except as otherwise provided by law, the Board of
Directors may remove any officer with or without cause by the affirmative vote
of a majority of the directors then in office.
5.7 ABSENCE OR DISABILITY. In the event of the absence or
disability of any officer, the Board of Directors may designate another officer
to act in place of such absent or disabled officer.
5.8 VACANCIES. Any vacancy in any office may be filled for the
unexpired portion of the term by the Board of Directors.
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5.9 CHAIRMAN OF THE BOARD. The Chairman of the Board, if one is
elected, shall preside, when present, at all meetings of the stockholders and of
the Board of Directors. The Chairman of the Board shall have such other powers
and shall perform such other duties as the Board of Directors may from time to
time designate.
5.10 CHIEF EXECUTIVE OFFICER. The Chief Executive Officer, if one
is elected, shall have such powers and shall perform such duties as the Board of
Directors may from time to time designate. If there is no Chairman of the Board
or if he or she is absent, the Chief Executive Officer shall preside, when
present, at all meetings of stockholders and of the Board of Directors.
5.11 PRESIDENT. The President shall, subject to the direction of
the Board of Directors and the Chief Executive Officer, if one is elected, have
general supervision and control of the Corporation's business. The President
shall have such other powers and perform such other duties as the Board of
Directors and the Chief Executive Officer, if one is elected, may from time to
time designate.
5.12 VICE PRESIDENTS AND ASSISTANT VICE PRESIDENTS. Any Vice
President (including any Executive Vice President or Senior Vice President) and
any Assistant Vice President shall have such powers and shall perform such
duties as the Board of Directors or the Chief Executive Officer may from time to
time designate.
5.13 TREASURER AND ASSISTANT TREASURERS. The Treasurer shall,
subject to the direction of the Board of Directors and except as the Board of
Directors or the President may otherwise provide, have general charge of the
financial affairs of the Corporation and shall cause to be kept accurate books
of account. The Treasurer shall have custody of all funds, securities, and
valuable documents of the Corporation. He or she shall have such other duties
and powers as may be designated from time to time by the Board of Directors or
the Chief Executive Officer.
Any Assistant Treasurer shall have such powers and perform such duties
as the Board of Directors or the Chief Executive Officer may from time to time
designate.
5.14 SECRETARY AND ASSISTANT SECRETARIES. The Secretary shall
record all the proceedings of the meetings of the stockholders and the Board of
Directors (including committees of the Board) in books kept for that purpose. In
his or her absence from any such meeting, a temporary secretary chosen at the
meeting shall record the proceedings thereof. The Secretary shall have charge of
the stock ledger (which may, however, be kept by any transfer or other agent of
the Corporation). The Secretary shall have custody of the seal of the
Corporation, and the Secretary, or an Assistant Secretary, shall have authority
to affix it to any instrument requiring it, and, when so affixed, the seal may
be attested by his or her signature or that of an Assistant Secretary. The
Secretary shall have such other duties and powers as may be designated from time
to time by the Board of Directors or
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the Chief Executive Officer. In the absence of the Secretary, any Assistant
Secretary may perform his or her duties and responsibilities.
Any Assistant Secretary shall have such powers and perform such duties
as the Board of Directors or the Chief Executive Officer may from time to time
designate.
5.15 OTHER POWERS AND DUTIES. Subject to these By-laws and to such
limitations as the Board of Directors may from time to time prescribe, the
officers of the Corporation shall each have such powers and duties as generally
pertain to their respective offices, as well as such powers and duties as from
time to time may be conferred by the Board of Directors, the Chairman of the
Board, or the Chief Executive Officer or the President.
ARTICLE VI
Capital Stock
6.1 CERTIFICATES. Each stockholder shall be entitled to a
certificate of the capital stock of the Corporation in such form as may from
time to time be prescribed by the Board of Directors. Such certificate shall be
signed by the Chairman of the Board, the President or a Vice President and by
the Treasurer or an Assistant Treasurer, or the Secretary or an Assistant
Secretary. The Corporation seal and the signatures by the Corporation's
officers, the transfer agent or the registrar may be facsimiles. In case any
officer, transfer agent or registrar who has signed or whose facsimile signature
has been placed on such certificate shall have ceased to be such officer,
transfer agent or registrar before such certificate is issued, the certificate
may be issued by the Corporation with the same effect as if he or she were such
officer, transfer agent or registrar at the time of its issue.
6.2 LOST, DESTROYED AND MUTILATED CERTIFICATES. Holders of the
shares of the stock of the Corporation shall immediately notify the Corporation
of any loss, destruction or mutilation of the certificate therefor, and the
Board of Directors may in its discretion cause one or more new certificates for
the same number of shares in the aggregate to be issued to such stockholder upon
the surrender of the mutilated certificate or upon satisfactory proof of such
loss or destruction, and the deposit of a bond in such form and amount and with
such surety as the Board of Directors may require.
6.3 TRANSFER OF STOCK. Shares of stock of the Corporation shall be
transferable or assignable only on the stock transfer books of the Corporation
by the holder in person or by attorney upon surrender to the Corporation or its
transfer agent of the certificate theretofore properly endorsed or, if sought to
be transferred by attorney, accompanied by a written assignment or power of
attorney properly executed, with transfer stamps (if necessary) affixed, and
with such proof of the authenticity of signatures as the Corporation or its
transfer agent may reasonably require.
6.4 RECORD HOLDERS. Except as may otherwise be required by law, by
the Certificate or by these By-laws, the Corporation shall be entitled to treat
the record holder
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of stock as shown on its books as the owner of such stock for all purposes,
including the payment of dividends and the right to vote with respect thereto,
regardless of any transfer, pledge or other disposition of such stock, until the
shares have been transferred on the books of the Corporation in accordance with
the requirements of these By-laws.
It shall be the duty of each stockholder to notify the Corporation of
his or her postal address and any changes thereto.
6.5 RECORD DATE. In order that the Corporation may determine the
stockholders entitled to notice of or to vote at any meeting of stockholders or
any adjournment thereof or entitled to receive payment of any dividend or other
distribution or allotment of any rights, or entitled to exercise any rights in
respect of any change, conversion or exchange of stock or for the purpose of any
other lawful action, the Board of Directors may fix a record date, which record
date shall not precede the date upon which the resolution fixing the record date
is adopted by the Board of Directors, and which record date: (a) in the case of
determination of stockholders entitled to vote at any meeting of stockholders,
shall, unless otherwise required by law, not be more than sixty nor less than
ten days before the date of such meeting and (b) in the case of any other
action, shall not be more than sixty days prior to such other action. If no
record date is fixed: (i) the record date for determining stockholders entitled
to notice of or to vote at a meeting of stockholders shall be at the close of
business on the day next preceding the day on which notice is given, or, if
notice is waived, at the close of business on the day next preceding the day on
which the meeting is held and (ii) the record date for determining stockholders
for any other purpose shall be at the close of business on the day on which the
Board of Directors adopts the resolution relating thereto.
ARTICLE VII
Indemnification
7.1 DEFINITIONS. For purposes of this Article VII:
(a) "Corporate Status" describes the status of a person who (i) in
the case of a Director, is or was a director of the Corporation and is or was
acting in such capacity, (ii) in the case of an Officer, is or was an officer,
employee or agent of the Corporation or is or was a director, officer, employee
or agent of any other corporation, partnership, joint venture, trust, employee
benefit plan or other enterprise that such Officer is or was serving at the
request of the Corporation and (iii) in the case of a Non-Executive Officer, is
or was an employee of the Corporation or is or was a director, officer, employee
or agent of any other corporation, partnership, joint venture, trust, employee
benefit plan or other enterprise that such Non-Executive Officer is or was
serving at the request of the Corporation;
(b) "Director" means any person who serves or has served the
Corporation as a director on the Board of Directors;
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(c) "Disinterested Director" means, with respect to each
Proceeding in respect of which indemnification is sought hereunder, a Director
of the Corporation who is not and was not a party to such Proceeding;
(d) "Executive Officer" means any person who serves or who has
served as the Chief Executive Officer or the President of the Corporation, or
any other person expressly designated as an Executive Officer by resolution of
the Board of Directors.
(e) "Expenses" means all reasonable attorneys' fees, retainers,
court costs, transcript costs, fees of expert witnesses, private investigators
and professional advisors (including, without limitation, accountants and
investment bankers), travel expenses, duplicating costs, printing and binding
costs, costs of preparation of demonstrative evidence and other courtroom
presentation aids and devices, costs incurred in connection with document
review, organization, imaging and computerization, telephone charges, postage,
delivery service fees, and all other disbursements, costs or expenses of the
type customarily incurred in connection with prosecuting, defending, preparing
to prosecute or defend, investigating, being or preparing to be a witness in,
settling or otherwise participating in, a Proceeding;
(f) "Non-Executive Officer Employee " means any person who serves
or has served as an employee or officer of the Corporation, but who is not or
was not a Director or an Executive Officer; and
(g) "Proceeding" means any threatened, pending or completed
action, suit, arbitration, alternate dispute resolution mechanism, inquiry,
investigation, administrative hearing or other proceeding, whether civil,
criminal, administrative, arbitrative or investigative.
7.2 INDEMNIFICATION OF DIRECTORS AND EXECUTIVE OFFICERS. Subject
to the operation of Section 7.4 of these By-laws, each Director and Executive
Officer shall be indemnified and held harmless by the Corporation to the fullest
extent authorized by the DGCL, as the same exists or may hereafter be amended
(but, in the case of any such amendment, only to the extent that such amendment
permits the Corporation to provide broader indemnification rights than such law
permitted the Corporation to provide prior to such amendment) against any and
all Expenses, judgments, penalties, fines and amounts reasonably paid in
settlement, in each case to the extent actually and reasonably incurred by such
Director or Executive Officer or on such Director's or Executive Officer's
behalf in connection with any threatened, pending or completed Proceeding or any
claim, issue or matter therein, which such Director or Officer is, or is
threatened to be made, a party to or participant in by reason of such Director's
or Executive Officer's Corporate Status, if such Director or Executive Officer
acted in good faith and in a manner such Director or Executive Officer
reasonably believed to be in or not opposed to the best interests of the
Corporation and, with respect to any criminal proceeding, had no reasonable
cause to believe his or her conduct was unlawful. The rights of indemnification
provided by this Section 7.2 shall exist as to a Director or Executive Officer
after he or she has ceased to be a Director or Executive Officer and shall inure
to
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the benefit of his or her heirs, executors, administrators and personal
representatives. Notwithstanding the foregoing, the Corporation shall indemnify
any Director or Executive Officer seeking indemnification in connection with a
Proceeding initiated by such Director or Executive Officer only if such
Proceeding was authorized by the Board of Directors. The Company hereby agrees
to indemnify such Director's or Executive Officer's spouse (whether by statute
or at common law and without regard to the location of the governing
jurisdiction) and children as express third-party beneficiaries hereunder to the
same extent and subject to the same limitations applicable to such Director or
Officer hereunder for claims arising out of the status of such person as a
spouse or child of such Director or Officer, including claims seeking damages
from marital property (including community property) or property held by such
Director or Executive Officer and such spouse or property transferred to such
spouse or child.
7.3 INDEMNIFICATION OF NON-EXECUTIVE OFFICER EMPLOYEES. Subject to
the operation of Section 7.4 of these By-laws, each Non-Executive Officer
Employee may, in the discretion of the Board of Directors, be indemnified by the
Corporation to the fullest extent authorized by the DGCL, as the same exists or
may hereafter be amended (but, in the case of any such amendment, only to the
extent that such amendment permits the Corporation to provide broader
indemnification rights than such law permitted the Corporation to provide prior
to such amendment), against any and all Expenses, judgments, penalties, fines
and amounts reasonably paid in settlement, in each case to the extent actually
and reasonably incurred by such Non-Executive Officer Employee or on such
Non-Executive Officer Employee's behalf in connection with any threatened,
pending or completed Proceeding, or any claim, issue or matter therein, which
such Non-Executive Officer Employee is, or is threatened to be made, a party to
or participant in by reason of such Non-Executive Officer Employee's Corporate
Status, if such Non-Executive Officer Employee acted in good faith and in a
manner such Non-Executive Officer Employee reasonably believed to be in or not
opposed to the best interests of the Corporation and, with respect to any
criminal proceeding, had no reasonable cause to believe his or her conduct was
unlawful. The rights of indemnification provided by this Section 7.3 shall exist
as to a Non-Executive Officer Employee after he or she has ceased to be a
Non-Executive Officer Employee and shall inure to the benefit of his or her
heirs, personal representatives, executors and administrators. Notwithstanding
the foregoing, the Corporation may indemnify any Non-Executive Officer Employee
seeking indemnification in connection with a Proceeding initiated by such
Non-Executive Officer Employee only if such Proceeding was authorized by the
Board of Directors. The Company hereby agrees to indemnify such Non-Executive
Officer Employee's spouse (whether by statute or at common law and without
regard to the location of the governing jurisdiction) and children as express
third-party beneficiaries hereunder to the same extent and subject to the same
limitations applicable to such Non-Executive Officer Employee hereunder for
claims arising out of the status of such person as a spouse or child of such
Non-Executive Officer Employee, including claims seeking damages from marital
property (including community property) or property held by such Non-Executive
Officer Employee and such spouse or property transferred to such spouse or
child.
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7.4 GOOD FAITH. Unless ordered by a court, no indemnification
shall be provided pursuant to this Article VII to a Director, to an Executive
Officer or to a Non-Executive Officer Employee unless a determination shall have
been made that such person acted in good faith and in a manner such person
reasonably believed to be in or not opposed to the best interests of the
Corporation and, with respect to any criminal Proceeding, such person had no
reasonable cause to believe his or her conduct was unlawful. Such determination
shall be made by (a) a majority vote of the Disinterested Directors, even though
less than a quorum of the Board of Directors, (b) if there are no such
Disinterested Directors, or if a majority of Disinterested Directors so direct,
by independent legal counsel in a written opinion or (c) by the stockholders of
the Corporation.
7.5 NOTICE/COOPERATION BY INDEMNITEE. Any Director, Executive
Officer or Non-Executive Officer Employee shall, as a condition precedent to his
or her right to be indemnified under these By-laws, give the Company notice in
writing as soon as practicable of any claim made against such Director,
Executive Officer or Non-Executive Officer Employee for which indemnification
will or could be sought under these By-laws. Such notice shall contain the
written affirmation of the Director, Executive Officer or Non-Executive Officer
Employee that the standard of conduct necessary for indemnification hereunder
has been satisfied. Notice to the Company shall be directed to the Chief
Executive Officer of the Company in the manner set forth below. The Director,
Executive Officer or Non-Executive Officer Employee shall give the Company such
information and cooperation as it may reasonably require and as shall be within
such Director, Executive Officer or Non-Executive Officer Employee's power. A
delay in giving notice under this Section 7.5 shall not invalidate the Director,
Executive Officer or Non-Executive Officer Employee's right to be indemnified
under these By-laws unless such delay prejudices the defense of the claim or the
availability to the Company of insurance coverage for such claim. All notices,
requests, demands and other communications under these By-laws shall be in
writing and shall be deemed duly given (i) if delivered by hand and receipted
for by the party addressed, on the date of such receipt or (ii) if mailed by
domestic certified or registered mail with postage prepaid, on the third
business day after the date postmarked.
7.6 ADVANCEMENT OF EXPENSES TO DIRECTORS PRIOR TO FINAL
DISPOSITION.
The Corporation shall advance all Expenses incurred by or on behalf of
any Director or Executive Officer in connection with any Proceeding in which
such Director or Executive Officer is involved by reason of such Director's or
Executive Officer's Corporate Status within 10 days after the receipt by the
Corporation of a written statement from such Director or Executive Officer
requesting such advance or advances from time to time, whether prior to or after
final disposition of such Proceeding. Such statement or statements shall
reasonably evidence the Expenses incurred by such Director or Executive Officer
and shall be preceded or accompanied by an undertaking by or on behalf of such
Director or Executive Officer to repay any Expenses so advanced if it shall
ultimately be
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determined that such Director or Executive Officer is not entitled to be
indemnified against such Expenses.
7.7 ADVANCEMENT OF EXPENSES TO NON-EXECUTIVE OFFICER EMPLOYEES
PRIOR TO FINAL DISPOSITION. The Corporation may, in the discretion of the Board
of Directors, advance any or all Expenses incurred by or on behalf of any
Non-Executive Officer Employee in connection with any Proceeding in which such
Non-Executive Officer Employee is involved by reason of Non-Executive Officer
Employee's Corporate Status upon the receipt by the Corporation of a statement
or statements from such Non-Executive Officer Employee requesting such advance
or advances from time to time, whether prior to or after final disposition of
such Proceeding. Such statement or statements shall reasonably evidence the
Expenses incurred by such Non-Executive Officer Employee and shall be preceded
or accompanied by an undertaking by or on behalf of such Non-Executive Officer
Employee to repay any Expenses so advanced if it shall ultimately be determined
that such Non-Executive Officer Employee is not entitled to be indemnified
against such Expenses.
7.8 NATURE OF RIGHTS. The foregoing provisions of this Article VII
shall be deemed to be a contract between the Corporation and each Director and
Executive Officer entitled to the benefits hereof at any time while this Article
VII is in effect, and any repeal or modification thereof shall not affect any
rights or obligations then existing with respect to any state of facts then or
theretofore existing or any Proceeding theretofore or thereafter brought based
in whole or in part upon any such state of facts. If a claim for indemnification
or advancement of Expenses hereunder by a Director or Executive Officer is not
paid in full by the Corporation within (a) 60 days after the receipt by the
Corporation of a written claim for indemnification or (b) 10 days after the
receipt by the Corporation of documentation of Expenses and the required
undertaking, such Director or Executive Officer may at any time thereafter bring
suit against the Corporation to recover the unpaid amount of the claim, and if
successful in whole or in part, such Director or Executive Officer shall also be
entitled to be paid the expenses of prosecuting such claim.
The failure of the Corporation (including its Board of Directors or any
committee thereof, independent legal counsel, or stockholders) to make a
determination concerning the permissibility of such indemnification or
advancement of Expenses for a Director and Executive Officer under this Article
VII shall not be a defense to the action and shall not create a presumption that
such indemnification or advancement is not permissible. It is the parties'
intention that if the Company contests any Director's or Executive Officer's
right to indemnification, the question of such Director's or Executive Officer's
right to indemnification shall be for the court to decide, and neither the
failure of the Company (including its Board of Directors, any committee or
subgroup of the Board of Directors, independent legal counsel, or its
shareholders) to have made a determination that indemnification of such Director
or Executive Officer is proper in the circumstances because the Director or
Executive Officer has met the applicable standard of conduct required by
applicable law, nor an actual determination by the Company (including its Board
of Directors, any committee or subgroup of the Board of Directors, independent
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legal counsel, or its stockholders) that the Director or Executive Officer has
not met such applicable standard of conduct, shall create a presumption that
such Director or Executive Officer has or has not met the applicable standard of
conduct.
The foregoing provisions of this Article VII shall not be deemed to be
a contract between the Corporation and any Non-Executive Officer Employee, and
shall not entitle any such Non-Executive Officer Employee to indemnification
hereunder absent a specific determination, evidenced by a resolution, of the
Board of Directors to provide such indemnification to such Non-Executive Officer
Employee.
7.9 NON-EXCLUSIVITY OF RIGHTS. The rights to (in the case of
Directors and Executive Officers), and the possibility of (in the case of
Non-Executive Officer Employees), indemnification and advancement of Expenses
set forth in this Article VII shall not be exclusive of any other right which
any Director, Officer or Non-Executive Officer Employee may have or hereafter
acquire under any statute, provision of the Certificate or these By-laws,
agreement, vote of stockholders or Disinterested Directors or otherwise.
7.10 PARTIAL INDEMNIFICATION. If any Director or Executive Officer
is entitled under any provision of these By-laws to indemnification by the
Company for some or a portion of the expenses, judgments, fines or penalties
actually or reasonably incurred by him in the investigation, defense, appeal or
settlement of any civil or criminal action or proceeding, but not, however, for
the total amount thereof, the Company shall nevertheless indemnify such Director
or Executive Officer for the portion of such expenses, judgments, fines or
penalties to which such Director or Executive Officer is entitled.
7.11 MUTUAL ACKNOWLEDGMENT. By accepting any potential benefits
under this Article VII each Director, Executive Officer or Non-Executive Officer
Employee acknowledges that in certain instances, Federal law or applicable
public policy may prohibit the Company from indemnifying its directors, officers
and employees under these By-laws or otherwise. The Director, Officer or
Non-Executive Officer employee understands and acknowledges that the Company has
undertaken and may be required in the future to undertake with the Securities
and Exchange Commission to submit the question of indemnification to a court in
certain circumstances for a determination of the Company's right under public
policy to indemnify any Director, Officer or Non-Executive Officer Employee with
respect to certain matters.
7.12 INSURANCE. The Corporation may maintain insurance, at its
expense, to protect itself and any Director, Officer or Non-Executive Officer
Employee against any liability of any character asserted against or incurred by
the Corporation or any such Director, Officer or Non-Executive Officer Employee,
or arising out of any such person's Corporate Status, whether or not the
Corporation would have the power to indemnify such person against such liability
under the DGCL or the provisions of this Article VII.
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ARTICLE VIII
Miscellaneous Provisions
8.1 SEAL. The seal of the Corporation shall consist of a
flat-faced circular die, of which there may be any number of counterparts, on
which there shall be engraved the word "Seal" and the name of the Corporation.
The Board of Directors shall have the power to adopt and alter the seal of the
Corporation.
8.2 FISCAL YEAR. The fiscal year of the Corporation shall end on
such date and shall consist of such accounting periods as may be fixed by the
Board of Directors.
8.3 CHECKS, NOTES AND DRAFTS. Checks, notes, drafts and other
orders for the payment of money shall be signed by such persons as the Board of
Directors from time to time may authorize. When the Board of Directors so
authorizes, however, the signature of any such person may be a facsimile.
8.4 EXECUTION OF INSTRUMENTS. All deeds, leases, transfers,
contracts, bonds, notes and other obligations to be entered into by the
Corporation in the ordinary course of its business without director action may
be executed on behalf of the Corporation by the Chairman of the Board, if one is
elected, the Chief Executive Officer, if one is elected, the President or the
Treasurer or any other officer, employee or agent of the Corporation as the
Board of Directors or Executive Committee may authorize.
8.5 RESIDENT AGENT. The Board of Directors may appoint a resident
agent upon whom legal process may be served in any action or proceeding against
the Corporation.
8.6 CORPORATE RECORDS. The original or attested copies of the
Certificate, By-laws and records of all meetings of the incorporators,
stockholders and the Board of Directors and the stock transfer books, which
shall contain the names of all stockholders, their record addresses and the
amount of stock held by each, may be kept outside the State of Delaware and
shall be kept at the principal office of the Corporation, at the office of its
counsel or at an office of its transfer agent or at such other place or places
as may be designated from time to time by the Board of Directors.
8.7 AMENDMENT OF BY-LAWS.
(a) AMENDMENT BY DIRECTORS. Except as provided otherwise by law,
these By-laws may be amended or repealed by the Board of Directors by the
affirmative vote of a majority of the directors then in office.
(b) AMENDMENT BY STOCKHOLDERS. These By-laws may be amended or
repealed at any annual meeting of stockholders, or special meeting of
stockholders called for such purpose, by the affirmative vote of at least 75% of
the shares present in person or
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represented by proxy at such meeting and entitled to vote on such amendment or
repeal, voting together as a single class.
8.8 VOTING OF STOCK HELD. Unless otherwise provided by resolution
of the Board of Directors or of the Executive Committee, if any, the Chairman of
the Board, if one is elected, the Chief Executive Officer, if one is elected,
the President or the Treasurer may from time to time waive notice of and act on
behalf of this Corporation, or appoint an attorney or attorneys or agent or
agents of the Corporation, in the name and on behalf of the Corporation, to cast
the vote that the Corporation may be entitled to cast as a stockholder or
otherwise in any other corporation, any of whose securities may be held by the
Corporation, at meetings of the holders of the shares or other securities of
such other corporation, or to consent in writing to any action by any such other
corporation; and the Chairman of the Board, if one is elected, the Chief
Executive Officer, if one is elected, the President or the Treasurer shall
instruct the person or persons so appointed as to the manner of casting such
votes or giving such consent and may execute or cause to be executed on behalf
of the Corporation, and under its corporate seal or otherwise, such written
proxies, consents, waivers or other instruments as may be necessary or proper in
the premises. In lieu of such appointment, the Chairman of the Board, if one is
elected, the Chief Executive Officer, if one is elected, the President or the
Treasurer may himself or herself attend any meetings of the holders of shares or
other securities of any such other corporation and there vote or exercise any or
all power of the Corporation as the holder of such shares or other securities of
such other corporation.
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<PAGE> 1
EXHIBIT 4.2
TWEETER HOME ENTERTAINMENT GROUP, INC.
SHAREHOLDERS' RIGHTS AGREEMENT
<PAGE> 2
TABLE OF CONTENTS
Section Page
Certain Definitions........................................................ 1
Appointment of Rights Agent................................................ 6
Issue of Right Certificates................................................ 7
Form of Right Certificates................................................. 9
Countersignature and Registration.......................................... 10
Transfer, Split Up, Combination and Exchange of Right
Certificates; Mutilated, Destroyed, Lost or Stolen
Right Certificates...................................................... 10
Exercise of Rights; Exercise Price; Expiration Date of Rights.............. 11
Cancellation and Destruction of Right Certificates......................... 13
Reservation and Availability of Preferred Stock............................ 14
Preferred Stock Record Date................................................ 15
Adjustment of Exercise Price, Number and Kind of Shares or
Number of Rights........................................................ 15
Certificate of Adjusted Exercise Price or Number of Shares................. 24
Consolidation, Merger or Sale or Transfer of Assets........................ 24
Fractional Rights and Fractional Shares.................................... 27
Rights of Action........................................................... 27
Agreement of Right Holders................................................. 28
Right Certificate Holder Not Deemed a Shareholder.......................... 29
Concerning the Rights Agent................................................ 29
Merger or Consolidation or Change of Name of Rights........................ 29
Duties of Rights Agent..................................................... 29
Change of Rights Agent..................................................... 29
Issuance of New Right Certificates......................................... 29
Redemption................................................................. 29
Exchange................................................................... 29
Notice of Certain Events................................................... 29
Notices.................................................................... 29
Supplements and Amendments................................................. 29
Successors................................................................. 29
Determinations and Actions by the Board of Directors....................... 29
Benefits of this Agreement................................................. 29
Severability............................................................... 29
Governing Law.............................................................. 29
Counterparts............................................................... 29
Descriptive Headings....................................................... 29
Exhibit A -- Certificate of Designation of Series A Junior Participating
Cumulative Preferred Stock
Exhibit B -- Form of Right Certificate
<PAGE> 3
TWEETER HOME ENTERTAINMENT GROUP, INC.
SHAREHOLDER RIGHTS AGREEMENT
This Shareholder Rights Agreement is dated as of [________], 1998,
between Tweeter Home Entertainment Group, Inc., a Delaware corporation (the
"Company"), and [_________________], a [______________________] (the "Rights
Agent").
W I T N E S S E T H
WHEREAS, the Board of Directors of the Company desires to provide
shareholders of the Company with the opportunity to benefit from the long-term
prospects and value of the Company and to ensure that shareholders of the
Company receive fair and equal treatment in the event of any proposed takeover
of the Company; and
WHEREAS, on _________, 1998, the Board of Directors of the Company
authorized and declared a dividend distribution of one Right (as such term is
hereinafter defined) for each outstanding share of Common Stock, $.01 par value
per share, of the Company outstanding as of the commencement of business on
_________, 1998 (the "Record Date"), and contemplates the issuance of one Right
for each share of Common Stock of the Company issued (whether originally issued
or sold from the Company's treasury) between the Record Date and the earlier of
the Distribution Date or the Expiration Date (as such terms are hereinafter
defined), each Right initially representing the right to purchase one
one-thousandth of one share of Series A Junior Participating Cumulative
Preferred Stock of the Company having the rights, powers and preferences set
forth on Exhibit A hereto, upon the terms and subject to the conditions
hereinafter set forth (the "Rights"); and
WHEREAS, the Company desires to appoint the Rights Agent to act as
rights agent hereunder, in accordance with the terms and conditions hereof;
NOW, THEREFORE, in consideration of the premises and the mutual
agreements herein set forth, the parties hereby agree as follows:
1. CERTAIN DEFINITIONS. For purposes of this Agreement, the
following terms have the meanings indicated:
1.1 "Acquiring Person" shall mean any Person (as such term is
hereinafter defined) who or which, together with all Affiliates (as such term is
hereinafter defined) and Associates (as such term is hereinafter defined) of
such Person, shall be the Beneficial Owner (as such term is hereinafter defined)
of more than 20% of the Common Shares (as such term is hereinafter defined) then
outstanding, but shall not include (a) the Company, (b) any Subsidiary (as such
term is hereinafter defined) of the Company, or (c) any employee benefit plan or
compensation arrangement of the Company or any
<PAGE> 4
Subsidiary of the Company (the Persons described in clauses (a) through (c)
above are referred to herein as "Exempt Persons").
Notwithstanding the foregoing, no Person shall become an "Acquiring
Person" as the result of an acquisition by the Company of Common Shares which,
by reducing the number of Common Shares outstanding, increases the proportionate
number of Common Shares beneficially owned by such Person to more than 20% of
the Common Shares then outstanding; provided, however, that if a Person shall
become the Beneficial Owner of more than 20% of the Common Shares then
outstanding by reason of share purchases by the Company and shall, after such
share purchases by the Company, become the Beneficial Owner of any additional
shares (other than pursuant to a stock split, stock dividend or similar
transaction) of Common Shares and immediately thereafter be the Beneficial Owner
of more than 20% of the Common Shares then outstanding, then such Person shall
be deemed to be an "Acquiring Person."
In addition, notwithstanding the foregoing, a Person shall not be an
"Acquiring Person" if the Board of Directors of the Company determines that a
Person who would otherwise be an "Acquiring Person," as defined pursuant to the
foregoing provisions of this Section 1.1, has become such inadvertently, and
such Person divests as promptly as practicable (or within such period of time as
the Board of Directors determines is reasonable) a sufficient number of shares
of Common Stock of the Company so that such person would no longer be an
"Acquiring Person," as defined pursuant to the foregoing provisions of this
Section 1.1.
Furthermore, no person who is a stockholder of the Company prior to
the completion of the Company's Initial Public Offering will be an Acquiring
Person unless such person is the Beneficial Owner of both (i) more than 20% of
the Common Shares then outstanding and (ii) a greater percentage of the
outstanding Common Shares than the percentage held by such person immediately
after the completion of the Initial Public Offering. The preceding two
paragraphs shall apply, mutatis mutandi, to such persons after taking into
account the preceding sentence.
1.2 "Adjustment Shares" shall have the meaning set forth in
Section 11.1.2 hereof.
1.3 "Affiliate" and "Associate" shall have the respective meanings
ascribed to such terms in Rule 12b-2 of the Rules under the Exchange Act, as in
effect on the date of this Agreement; provided, however, that no Person who is a
director or officer of the Company shall be deemed an Affiliate or an Associate
of any other director or officer of the Company solely as a result of his or her
position as director or officer of the Company.
1.4 A Person shall be deemed the "Beneficial Owner" of, and shall
be deemed to "beneficially own," any securities: (i) which such Person or any of
such Person's Affiliates or Associates, directly or indirectly, beneficially
owns (as determined pursuant to Rule 13d-3 of the Rules under the Exchange Act,
as in effect on the date of
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<PAGE> 5
this Agreement); (ii) which such Person or any of such Person's Affiliates or
Associates, directly or indirectly, has:
1.4.1 the right to acquire (whether such right is
exercisable immediately or only after the passage of time or upon the
satisfaction of any conditions or both) pursuant to any agreement, arrangement
or understanding (whether or not in writing) (other than customary agreements
with and between underwriters and selling group members with respect to a bona
fide public offering of securities) or upon the exercise of conversion rights,
exchange rights, rights (other than the Rights), warrants or options, or
otherwise; provided, however, that a Person shall not be deemed the "Beneficial
Owner" of, or to "beneficially own," (1) securities tendered pursuant to a
tender or exchange offer made by or on behalf of such Person or any of such
Person's Affiliates or Associates until such tendered securities are accepted
for purchase or exchange; (2) securities issuable upon exercise of these Rights
at any time prior to the occurrence of a Triggering Event; or (3) securities
issuable upon exercise of Rights from and after the occurrence of a Triggering
Event, which Rights were acquired by such Person or any of such Person's
Affiliates or Associates prior to the Distribution Date or pursuant to Sections
3.1, 11.9 or 22 hereof; or
1.4.2 the right to vote pursuant to any agreement,
arrangement or understanding (whether or not in writing); provided, however,
that a Person shall not be deemed the "Beneficial Owner" of, or to "beneficially
own," any security under this clause (B) if the agreement, arrangement or
understanding to vote such security (1) arises solely from a revocable proxy
given in response to a public proxy or consent solicitation made pursuant to,
and in accordance with, the Rules under the Exchange Act and (2) is not also
then reportable by such person on Schedule 13D under the Exchange Act (or any
comparable or successor report); or
1.4.3 the right to dispose of pursuant to any agreement,
arrangement or understanding (whether or not in writing) (other than customary
arrangements with and between underwriters and selling group members with
respect to a bona fide public offering of securities); or
1.4.4 which are beneficially owned, directly or indirectly,
by any other Person (or any Affiliate or Associate thereof) with which such
Person or any of such Person's Affiliates or Associates has any agreement,
arrangement or understanding (whether or not in writing) (other than customary
agreements with and between underwriters and selling group members with respect
to a bona fide public offering of securities) for the purpose of acquiring,
holding, voting (except pursuant to a revocable proxy as described in clause (B)
of Section 1.4.2 hereof) or disposing of any securities of the Company;
provided, however, that (a) no Person engaged in business as an underwriter of
securities shall be deemed the Beneficial Owner of any securities acquired
through such Person's participation as an underwriter in good faith in a firm
commitment underwriting until the expiration of forty (40) days after the date
of such acquisition, (b) no trustee or similar Person, organized, appointed or
established by the Company or any Subsidiary of the Company, holding shares of
Common Stock of the Company for or
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<PAGE> 6
pursuant to the terms of any employee benefit plan or compensation arrangement
of the Company or any Subsidiary of the Company shall be deemed the Beneficial
Owner of any securities acquired or held by such Person in such capacity, and
(c) no Person shall be deemed the Beneficial Owner of any securities acquired or
received from the Company by such Person pursuant to an employee benefit plan or
compensation arrangement of the Company or any Subsidiary of the Company.
1.5 "Business Day" shall mean any day other than a Saturday,
Sunday, or a day on which banking institutions in Boston, Massachusetts are
authorized or obligated by law or executive order to close.
1.6 "Certificate" shall mean the Company's Amended and Restated
Certificate of Incorporation as in effect at the closing of the Initial Public
Offering.
1.7 "Close of Business" on any given date shall mean 5:00 P.M.,
Boston, Massachusetts time, on such date; provided, however, that if such date
is not a Business Day it shall mean 5:00 P.M., Boston, Massachusetts time, on
the next succeeding Business Day.
1.8 "Common Shares" shall mean shares of Common Stock.
1.9 "Common Stock" when used in reference to the Company shall
mean the common stock, $.01 par value per share, of the Company or any other
shares of capital stock of the Company into which such stock shall be
reclassified or changed. "Common Stock" when used with reference to any Person
other than the Company organized in corporate form shall mean (i) the capital
stock or other equity interest of such Person with the greatest voting power or
(ii) the equity securities or other equity interest having power to control or
direct the management of such Person or, if such Person is a Subsidiary of
another Person, the Person or Persons which ultimately control such
first-mentioned Person and which have issued any such outstanding capital stock,
equity securities or equity interest. "Common Stock" when used with reference to
any Person not organized in corporate form shall mean units of beneficial
interest which shall be entitled to exercise the greatest voting power of such
Person or, in the case of a limited partnership, shall have the power to remove
or otherwise replace the general partner or partners.
1.10 "Current Value" shall have the meaning set forth in Section
11.1.3 hereof.
1.11 "Distribution Date" shall have the meaning set forth in
Section 3.1 hereof.
1.12 "Exchange Act" shall mean the Securities Exchange Act of 1934,
as amended, or any successor statute.
1.13 "Exercise Price" shall have the meaning set forth in Section
4.1 hereof.
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<PAGE> 7
1.14 "Expiration Date" and "Final Expiration Date" shall have the
meanings set forth in Section 7.1 hereof.
1.15 "Fair Market Value" of any securities or other property shall
be as determined in accordance with Section 11.4 hereof.
1.16 "Group" shall have the meaning ascribed thereto in clause (b)
of the definition of "Person."
1.17 "Initial Public Offering" means the initial public offering of
Common Stock of the Company by the Company pursuant to a Registration Statement
on Form S-1.
1.18 "Person" shall mean (a) an individual, a corporation, a
partnership, an association, a joint stock company, a trust, a business trust, a
government or political subdivision, any unincorporated organization, or any
other association or entity, and (b) a "group" as that term is used for purposes
of Section 13(d)(3) of the Exchange Act (any such group under this clause (b), a
"Group").
1.19 "Preferred Stock" shall mean shares of Series A Junior
Participating Cumulative Preferred Stock, $.01 par value per share, of the
Company having the rights and preferences set forth in the form of Certificate
of Designation attached hereto as Exhibit A.
1.20 "Preferred Stock Equivalents" shall have the meaning set forth
in Section 11.2 hereof.
1.21 "Principal Party" shall have the meaning set forth in Section
13.2 hereof.
1.22 "Record Date" shall have the meaning set forth in the preamble
to this Agreement.
1.23 "Redemption Price" shall have the meaning set forth in Section
23 hereof.
1.24 "Right Certificate" shall have the meaning set forth in
Section 3.1.
1.25 "Related Party" shall have the meaning ascribed thereto in the
Certificate.
1.26 "Rules" when used with reference to the Exchange Act or the
Securities Act, shall mean the rules and regulations of the Securities and
Exchange Commission, or any successor federal agency under such acts.
1.27 "Section 11.1.2 Event" shall have the meaning set forth in
Section 11.1.2 hereof.
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<PAGE> 8
1.28 "Section 11.1.2 Trigger Date" shall have the meaning set forth
in Section 11.1.3 hereof.
1.29 "Section 13 Event" shall mean any event described in clauses
(a), (b) or (c) of Section 13.1 hereof.
1.30 "Section 24.1.1 Exchange Ratio" shall have the meaning set
forth in Section 24.1.1 hereof.
1.31 "Section 24.1.2 Exchange Ratio" shall have the meaning set
forth in Section 24.1.2 hereof.
1.32 "Securities Act" shall mean the Securities Act of 1933, as
amended, or any successor statute.
1.33 "Spread" shall have the meaning set forth in Section 11.1.3
hereof.
1.34 "Stock Acquisition Date" shall mean the date of the first
public announcement (which for purposes of this definition shall include,
without limitation, the issuance of a press release or the filing of a
publicly-available report or other document with the Securities and Exchange
Commission or any other governmental agency) by the Company or an Acquiring
Person that an Acquiring Person has become such.
1.35 "Subsidiary" shall mean, with reference to any Person, any
corporation or other entity of which securities or other ownership interests
having ordinary voting power sufficient, in the absence of contingencies, to
elect a majority of the board of directors or other persons performing similar
functions of such corporation or other entity are at the time directly or
indirectly beneficially owned or otherwise controlled by such Person either
alone or together with one or more Affiliates of such Person.
1.36 "Substitution Period" shall have the meaning set forth in
Section 11.1.3 hereof.
1.37 "Triggering Event" shall mean any Section 11.1.2 Event or any
Section 13 Event.
2. APPOINTMENT OF RIGHTS AGENT. The Company hereby appoints the
Rights Agent to act as agent for the Company and the holders of the Rights (who,
in accordance with Section 3 hereof, shall prior to the Distribution Date also
be the holders of the Common Stock of the Company) in accordance with the terms
and conditions hereof, and the Rights Agent hereby accepts such appointment. The
Company may from time to time appoint such Co-Rights Agents as it may deem
necessary or desirable. In the event the Company appoints one or more Co-Rights
Agents, the respective duties of the Rights Agent and any Co-Rights Agents shall
be as the Company shall determine. The Company shall give ten (10) days prior
written notice to the Rights Agent of the appointment of one or more Co-Rights
Agents and the respective duties of the Rights Agent and any such Co-
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<PAGE> 9
Rights Agents. The Rights Agent shall have no duty to supervise, and shall in no
event be liable for, the acts or omissions of any such Co-Rights Agent.
3. ISSUE OF RIGHT CERTIFICATES.
3.1 From the date hereof until the earlier of (a) the
Close of Business on the tenth calendar day after the Stock Acquisition Date or
(b) the Close of Business on the tenth Business Day (or such other calendar day,
if any, as the Board of Directors may determine in its sole discretion) after
the date a tender or exchange offer by any Person, other than an Exempt Person,
is first published or sent or given within the meaning of Rule 14d-4(a) of the
Exchange Act, or any successor rule, if, upon consummation thereof, such Person
would be the Beneficial Owner of more than 20% of the Common Shares then
outstanding (and, if such person was a stockholder of the Company prior to the
completion of the Company's Initial Public Offering, such person's Beneficial
Ownership of Common Shares after consummation would cause such person to be the
Beneficial Owners of a greater percentage of the outstanding Common Shares than
the percentage held by such person immediately after the completion of the
Initial Public Offering) (including any such date which is after the date of
this Agreement and prior to the issuance of the Rights) (the earlier of such
dates being herein referred to as the "Distribution Date"), (i) the Rights will
be evidenced (subject to the provisions of Section 3.2 hereof) by the
certificates for the Common Stock of the Company registered in the names of the
holders of the Common Stock of the Company (which certificates for Common Stock
of the Company shall be deemed also to be certificates for Rights) and not by
separate certificates, and (ii) the Rights will be transferable only in
connection with the transfer of the underlying shares of Common Stock of the
Company. As soon as practicable after the Distribution Date, the Rights Agent
will, at the Company's expense, send, by first-class, insured, postage prepaid
mail, to each record holder of the Common Stock of the Company as of the Close
of Business on the Distribution Date, at the address of such holder shown on the
records of the Company, one or more certificates, in substantially the form of
Exhibit B hereto (the "Right Certificates"), evidencing one Right for each share
of Common Stock of the Company so held, subject to adjustment as provided
herein. In the event that an adjustment in the number of Rights per share of
Common Stock of the Company has been made pursuant to Section 11.15 hereof, the
Company may make the necessary and appropriate rounding adjustments (in
accordance with Section 14.1 hereof) at the time of distribution of the Right
Certificates, so that Right Certificates representing only whole numbers of
Rights are distributed and cash is paid in lieu of any fractional Rights. As of
and after the Close of Business on the Distribution Date, the Rights will be
evidenced solely by such Right Certificates.
3.2 With respect to certificates for the Common Stock of
the Company issued prior to the Close of Business on the Record Date, the Rights
will be evidenced by such certificates for the Common Stock of the Company on or
until the Distribution Date (or the earlier redemption, expiration or
termination of the Rights), and the registered holders of the Common Stock of
the Company also shall be the registered holders of the associated Rights. Until
the Distribution Date (or the earlier redemption, expiration or termination of
the Rights), the transfer of any of the certificates for the Common Stock of
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<PAGE> 10
the Company outstanding prior to the date of this Agreement shall also
constitute the transfer of the Rights associated with the Common Stock of the
Company represented by such certificate.
3.3 Certificates for the Common Stock of the Company
issued after the Record Date, but prior to the earlier of the Distribution Date
or the redemption, expiration or termination of the Rights, shall be deemed also
to be certificates for Rights, and shall bear a legend, substantially in the
form set forth below:
"This certificate also evidences and entitles the holder
hereof to certain Rights as set forth in a Shareholder Rights Agreement between
Tweeter Home Entertainment Group, Inc. (the "Company") and [_______________], as
Rights Agent, dated as of [_________], 1998, as amended, restated, renewed or
extended from time to time (the "Rights Agreement"), the terms of which are
hereby incorporated herein by reference and a copy of which is on file at the
principal offices of the Company and the stock transfer administration office of
the Rights Agent. Under certain circumstances, as set forth in the Rights
Agreement, such Rights will be evidenced by separate certificates and will no
longer be evidenced by this certificate. The Board of Directors may authorize
the Company to redeem the Rights at a redemption price of $0.001 per Right,
subject to adjustment, under the terms of the Rights Agreement. The Company will
mail to the holder of this certificate a copy of the Rights Agreement, as in
effect on the date of mailing, without charge promptly after receipt of a
written request therefor. Under certain circumstances, Rights issued to or held
by Acquiring Persons or any Affiliates or Associates thereof (as defined in the
Rights Agreement), and any subsequent holder of such Rights, may become null and
void. The Rights shall not be exercisable, and shall be void so long as held, by
a holder in any jurisdiction where the requisite qualification, if any, to the
issuance to such holder, or the exercise by such holder, of the Rights in such
jurisdiction shall not have been obtained or be obtainable."
With respect to such certificates containing the foregoing
legend, the Rights associated with the Common Stock of the Company represented
by such certificates shall be evidenced by such certificates alone until the
Distribution Date (or the earlier redemption, expiration or termination of the
Rights), and the transfer of any of such certificates shall also constitute the
transfer of the Rights associated with the Common Stock of the Company
represented by such certificates. In the event that the Company purchases or
acquires any shares of Common Stock of the Company after the Record Date but
prior to the Distribution Date, any Rights associated with such Common Stock of
the Company shall be deemed cancelled and retired so that the Company shall not
be entitled to exercise any Rights associated with the shares of Common Stock of
the Company which are no longer outstanding. The failure to print the foregoing
legend on any such certificate representing Common Stock of the Company or any
defect therein shall not affect in any manner whatsoever the application or
interpretation of the provisions of Section 7.5 hereof.
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<PAGE> 11
4. FORM OF RIGHT CERTIFICATES.
4.1 The Right Certificates (and the forms of election to
purchase shares and of assignment and certificate to be printed on the reverse
thereof) shall each be substantially in the form of EXHIBIT B hereto and may
have such marks of identification or designation and such legends, summaries or
endorsements printed thereon as the Company may deem appropriate and as are not
inconsistent with the provisions of this Agreement, or as may be required to
comply with any applicable law, rule or regulation or with any rule or
regulation of any stock exchange on which the Rights may from time to time be
listed, or to conform to customary usage. The Right Certificates shall be in a
machine printable format and in a form reasonably satisfactory to the Rights
Agent. Subject to the provisions of Section 11 and Section 22 hereof, the Right
Certificates, whenever distributed, shall be dated as of the Record Date, shall
show the date of countersignature, and on their face shall entitle the holders
thereof to purchase such number of one one-thousandths of a share of Preferred
Stock as shall be set forth therein at the price set forth therein (the
"Exercise Price"), but the number of such shares and the Exercise Price shall be
subject to adjustment as provided herein.
4.2 Any Right Certificate issued pursuant to Section 3.1
or Section 22 hereof that represents Rights beneficially owned by (a) an
Acquiring Person or any Associate or Affiliate of an Acquiring Person, (b) a
transferee of an Acquiring Person (or of any Associate or Affiliate of an
Acquiring Person) who becomes a transferee after the Acquiring Person becomes
such, or (c) a transferee of an Acquiring Person (or of any such Associate or
Affiliate) who becomes a transferee prior to or concurrently with the Acquiring
Person becoming such and receives such Rights pursuant to either (i) a transfer
(whether or not for consideration) from the Acquiring Person to holders of
equity interests in such Acquiring Person or to any Person with whom the
Acquiring Person has any continuing agreement, arrangement or understanding
(whether or not in writing) regarding the transferred Rights, the shares of
Common Stock of the Company associated with such Rights or the Company or (ii) a
transfer which the Board of Directors of the Company has determined is part of a
plan, arrangement or understanding which has as a primary purpose or effect the
avoidance of Section 7.5 hereof, and any Right Certificate issued pursuant to
Section 6, Section 11 or Section 22 upon transfer, exchange, replacement or
adjustment of any other Right Certificate referred to in this sentence, shall
have deleted therefrom the second sentence of the existing legend on such Right
Certificate and in substitution therefor shall contain the following legend:
"The Rights represented by this Right Certificate are or were
beneficially owned by a Person who was or became an Acquiring Person or an
Affiliate or an Associate of an Acquiring Person (as such terms are defined in
the Rights Agreement). This Right Certificate and the Rights represented hereby
may become null and void under certain circumstances as specified in Section 7.5
of the Rights Agreement."
The Company shall give notice to the Rights Agent promptly
after it becomes aware of the existence and identity of any Acquiring Person or
any Associate or Affiliate thereof. The Company shall instruct the Rights Agent
in writing of the Rights which
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<PAGE> 12
should be so legended. The failure to print the foregoing legend on any such
Right Certificate or any defect therein shall not affect in any manner
whatsoever the application or interpretation of the provisions of Section 7.5
hereof.
5. COUNTERSIGNATURE AND REGISTRATION.
5.1 The Right Certificates shall be executed on behalf of
the Company by its Chairman of the Board of Directors, or its President or any
Vice President and by its Treasurer or any Assistant Treasurer, or by its
Secretary or any Assistant Secretary, either manually or by facsimile signature,
and shall have affixed thereto the Company's seal or a facsimile thereof which
shall be attested to by the Secretary or any Assistant Secretary of the Company,
either manually or by facsimile signature. The Right Certificates shall be
manually countersigned by an authorized signatory of the Rights Agent and shall
not be valid for any purpose unless so countersigned, and such countersignature
upon any Right Certificate shall be conclusive evidence, and the only evidence,
that such Right Certificate has been duly countersigned as required hereunder.
In case any officer of the Company who shall have signed any of the Right
Certificates shall cease to be such officer of the Company before
countersignature by the Rights Agent and issuance and delivery by the Company,
such Right Certificates, nevertheless, may be countersigned by an authorized
signatory of the Rights Agent, and issued and delivered by the Company with the
same force and effect as though the person who signed such Right Certificates
had not ceased to be such officer of the Company; and any Right Certificates may
be signed on behalf of the Company by any person who, at the actual date of the
execution of such Right Certificate, shall be a proper officer of the Company to
sign such Right Certificate, although at the date of the execution of this
Rights Agreement any such person was not such an officer.
5.2 Following the Distribution Date, the Rights Agent
will keep or cause to be kept, at one of its offices designated as the
appropriate place for surrender of Right Certificates upon exercise or transfer,
books for registration and transfer of the Right Certificates issued hereunder.
Such books shall show the names and addresses of the respective holders of the
Right Certificates, the number of Rights evidenced on its face by each of the
Right Certificates and the date of each of the Right Certificates.
6. TRANSFER, SPLIT UP, COMBINATION AND EXCHANGE OF RIGHT
CERTIFICATES; MUTILATED, DESTROYED, LOST OR STOLEN RIGHT CERTIFICATES.
6.1 Subject to the provisions of Section 4.2, Section 7.5
and Section 14 hereof, at any time after the Close of Business on the
Distribution Date, and at or prior to the Close of Business on the Expiration
Date, any Right Certificate or Certificates may be transferred, split up,
combined or exchanged for another Right Certificate or Certificates, entitling
the registered holder to purchase a like number of one one-thousandths of a
share of Preferred Stock (or following a Triggering Event, preferred stock,
cash, property, debt securities, Common Stock of the Company or any combination
thereof) as the Right Certificate or Certificates surrendered then entitled such
holder to purchase and at the same Exercise Price. Any registered holder
desiring to transfer, split up, combine or
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<PAGE> 13
exchange any Right Certificate shall make such request in writing delivered to
the Rights Agent, and shall surrender the Right Certificate or Certificates to
be transferred, split up, combined or exchanged, with the form of assignment and
certificate duly executed, at the office or offices of the Rights Agent
designated for such purpose. Neither the Rights Agent nor the Company shall be
obligated to take any action whatsoever with respect to the transfer of any such
surrendered Right Certificate until the registered holder shall have completed
and signed the certificate contained in the form of assignment on the reverse
side of such Right Certificate and shall have provided such additional evidence
of the identity of the Beneficial Owner (or former Beneficial Owner) or
Affiliates or Associates thereof as the Company shall reasonably request.
Thereupon the Rights Agent shall, subject to Section 4.2, Section 7.5 and
Section 14 hereof, countersign and deliver to the Person entitled thereto a
Right Certificate or Certificates, as the case may be, as so requested. The
Company may require payment by the registered holder of a Right Certificate, of
a sum sufficient to cover any tax or governmental charge that may be imposed in
connection with any transfer, split up, combination or exchange of Right
Certificates.
6.2 Upon receipt by the Company and the Rights Agent of
evidence reasonably satisfactory to them of the loss, theft, destruction or
mutilation of a Right Certificate, and, in case of loss, theft or destruction,
of indemnity or security satisfactory to them, and reimbursement to the Company
and the Rights Agent of all reasonable expenses incidental thereto, and upon
surrender to the Rights Agent and cancellation of the Right Certificate, if
mutilated, the Company will execute and deliver a new Right Certificate of like
tenor to the Rights Agent for countersignature and delivery to the registered
owner in lieu of the Right Certificate so lost, stolen, destroyed or mutilated.
7. EXERCISE OF RIGHTS; EXERCISE PRICE; EXPIRATION DATE OF RIGHTS.
7.1 Subject to Section 7.5 hereof, the registered holder
of any Right Certificate may exercise the Rights evidenced thereby (except as
otherwise provided herein) in whole or in part at any time after the
Distribution Date upon surrender of the Right Certificate, with the form of
election to purchase and the certificate on the reverse side thereof duly
executed, to the Rights Agent at the office or offices of the Rights Agent
designated for such purpose, together with payment of the aggregate Exercise
Price for the total number of one one-thousandths of a share of Preferred Stock
(or other securities, cash or other assets, as the case may be) as to which such
surrendered Rights are then exercised, at or prior to the earlier of (a) the
Close of Business on the tenth anniversary of the date of this Agreement (the
"Final Expiration Date"), (b) the time at which the Rights are redeemed as
provided in Section 23 hereof or (c) the time at which such Rights are exchanged
as provided in Section 24 hereof (the earliest of (a), (b) or (c) being herein
referred to as the "Expiration Date"). Except as set forth in Section 7.5 hereof
and notwithstanding any other provision of this Agreement, any Person who prior
to the Distribution Date becomes a record holder of shares of Common Stock of
the Company may exercise all of the rights of a registered holder of a Right
Certificate with respect to the Rights associated with such shares of Common
Stock of the Company in accordance
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with the provisions of this Agreement, as of the date such Person becomes a
record holder of shares of Common Stock of the Company.
7.2 The Exercise Price for each one one-thousandth of a
share of Preferred Stock pursuant to the exercise of a Right shall initially be
one hundred dollars ($100), shall be subject to adjustment from time to time as
provided in Section 11 and Section 13 hereof and shall be payable in lawful
money of the United States of America in accordance with Section 7.3 below.
7.3 As promptly as practicable following the Distribution
Date, the Company shall deposit with a corporation, trust, bank or similar
institution in good standing organized under the laws of the United States or
any State of the United States, which is authorized under such laws to exercise
corporate trust or stock transfer powers and is subject to supervision or
examination by a federal or state authority (such institution is hereinafter
referred to as the "Depositary Agent"), certificates representing the shares of
Preferred Stock that may be acquired upon exercise of the Rights and the Company
shall cause such Depositary Agent to enter into an agreement pursuant to which
the Depositary Agent shall issue receipts representing interests in the shares
of Preferred Stock so deposited. Upon receipt of a Right Certificate
representing exercisable Rights, with the form of election to purchase and the
certificate on the reverse side thereof duly executed, accompanied by payment of
the Exercise Price for the shares to be purchased and an amount equal to any
applicable transfer tax (as determined by the Rights Agent) in cash, or by
certified check or bank draft payable to the order of the Company, the Rights
Agent shall, subject to Section 20.11 hereof, thereupon promptly (a) requisition
from the Depositary Agent (or make available, if the Rights Agent is the
Depository Agent) depository receipts or certificates for the number of one
one-thousandths of a share of Preferred Stock to be purchased and the Company
hereby irrevocably authorizes the Depositary Agent to comply with all such
requests, (b) when appropriate, requisition from the Company the amount of cash,
if any, to be paid in lieu of issuance of fractional shares in accordance with
Section 14 hereof, (c) promptly after receipt of such certificates or depositary
receipts, cause the same to be delivered to or upon the order of the registered
holder of such Right Certificate, registered in such name or names as may be
designated by such holder and (d) when appropriate, after receipt promptly
deliver such cash to or upon the order of the registered holder of such Right
Certificate. In the event that the Company is obligated to issue other
securities (including Common Stock) of the Company, pay cash or distribute other
property pursuant to Section 11.1 hereof, the Company will make all arrangements
necessary so that such other securities, cash or other property are available
for distribution by the Rights Agent, if and when appropriate. The payment of
the Exercise Price may be made in cash or by certified or bank check payable to
the order of the Company, or by wire transfer of immediately available funds to
the account of the Company (provided that notice of such wire transfer shall be
given by the holder of the related Right to the Rights Agent).
7.4 In case the registered holder of any Right
Certificate shall exercise less than all the Rights evidenced thereby, a new
Right Certificate evidencing Rights equivalent to the Rights remaining
unexercised shall be issued by the Rights Agent and
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<PAGE> 15
delivered to the registered holder of such Right Certificate or to his duly
authorized assigns, subject to the provisions of Section 14 hereof.
7.5 Notwithstanding anything in this Agreement to the
contrary, from and after the first occurrence of a Section 11.1.2 Event or
Section 13 Event, any Rights beneficially owned by (a) an Acquiring Person or
any Associate or Affiliate of an Acquiring Person, (b) a transferee of an
Acquiring Person (or of any Associate or Affiliate of an Acquiring Person) who
becomes a transferee after the Acquiring Person becomes such or (c) a transferee
of an Acquiring Person (or of any Associate or Affiliate of an Acquiring Person)
who becomes a transferee prior to or concurrently with the Acquiring Person
becoming such and receives such Rights pursuant to either (i) a transfer
(whether or not for consideration) from the Acquiring Person to holders of
equity interests in such Acquiring Person or to any Person with whom the
Acquiring Person has any continuing agreement, arrangement or understanding
regarding the transferred Rights, the shares of Common Stock of the Company
associated with such Rights or the Company, or (ii) a transfer which the Board
of Directors of the Company has determined is part of a plan, arrangement or
understanding which has as a primary purpose or effect the avoidance of this
Section 7.5, shall be null and void without any further action and no holder of
such Rights shall have any rights whatsoever with respect to such Rights,
whether under any provision of this Agreement or otherwise. The Company shall
use all reasonable efforts to ensure that the provisions of this Section 7.5 and
Section 4.2 hereof are complied with, but shall have no liability to any holder
of Right Certificates or other Person as a result of its failure to make any
determinations with respect to an Acquiring Person or any Affiliates or
Associates of an Acquiring Person or any transferee of any of them hereunder.
7.6 Notwithstanding anything in this Agreement to the
contrary, neither the Rights Agent nor the Company shall be obligated to
undertake any action with respect to a registered holder of Rights upon the
occurrence of any purported exercise as set forth in this Section 7 unless such
registered holder shall have (a) completed and signed the certificate contained
in the form of election to purchase set forth on the reverse side of the Right
Certificate surrendered for such exercise and (b) provided such additional
evidence of the identity of the Beneficial Owner (or former Beneficial Owner) or
Affiliates or Associates thereof as the Company shall reasonably request.
8. CANCELLATION AND DESTRUCTION OF RIGHT CERTIFICATES. All Right
Certificates surrendered for the purpose of exercise, transfer, split up,
combination or exchange shall, if surrendered to the Company or any of its
agents, be delivered to the Rights Agent for cancellation or in cancelled form,
or, if surrendered to the Rights Agent, shall be cancelled by it, and no Right
Certificates shall be issued in lieu thereof except as expressly permitted by
any of the provisions of this Agreement. The Company shall deliver to the Rights
Agent for cancellation and retirement, and the Rights Agent shall so cancel and
retire, any other Right Certificate purchased or acquired by the Company
otherwise than upon the exercise thereof. The Rights Agent shall deliver all
cancelled Right Certificates to the Company.
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9. RESERVATION AND AVAILABILITY OF PREFERRED STOCK.
9.1 The Company covenants and agrees that it will cause
to be reserved and kept available out of its authorized and unissued shares of
Preferred Stock or any authorized and issued shares of Preferred Stock held in
its treasury, the number of shares of Preferred Stock that will be sufficient to
permit the exercise in full of all outstanding and exercisable Rights. Upon the
occurrence of any events resulting in an increase in the aggregate number of
shares of Preferred Stock issuable upon exercise of all outstanding Rights in
excess of the number then reserved, the Company shall make appropriate increases
in the number of shares so reserved.
9.2 The Company shall use its best efforts to cause, from
and after such time as the Rights become exercisable, all shares of Preferred
Stock issued or reserved for issuance to be listed, upon official notice of
issuance, upon the principal national securities exchange, if any, upon which
the Common Stock of the Company is listed or, if the principal market for the
Common Stock of the Company is not on any national securities exchange, to be
eligible for quotation on the Nasdaq Stock Market ("Nasdaq") or any successor
thereto or other comparable quotation system.
9.3 The Company shall use its best efforts to (a) file,
as soon as practicable following the earliest date after the occurrence of a
Section 11.1.2 Event on which the consideration to be delivered by the Company
upon exercise of the Rights has been determined in accordance with Section
11.1.3 hereof, or as soon as required by law following the Distribution Date, as
the case may be, a registration statement under the Securities Act, with respect
to the securities purchasable upon exercise of the Rights on an appropriate
form, (b) cause such registration statement to become effective as soon as
practicable after such filing and (c) cause such registration statement to
remain effective (with a prospectus that at all times meets the requirements of
the Securities Act) until the earlier of (i) the date as of which the Rights are
no longer exercisable for such securities or (ii) the Expiration Date. The
Company will also take such action as may be appropriate under, and which will
ensure compliance with, the securities or "blue sky" laws of the various states
in connection with the exercisability of the Rights. The Company may temporarily
suspend, for a period of time not to exceed ninety (90) days after the date
determined in accordance with the provisions of the first sentence of this
Section 9.3, the exercisability of the Rights in order to prepare and file such
registration statement and permit it to become effective. Upon such suspension,
the Company shall issue a public announcement stating that the exercisability of
the Rights has been temporarily suspended, as well as a public announcement at
such time as the suspension is no longer in effect, in each case with prompt
written notice to the Rights Agent. Notwithstanding any such provision of this
Agreement to the contrary, the Rights shall not be exercisable in any
jurisdiction unless the requisite qualification in such jurisdiction shall have
been obtained.
9.4 The Company covenants and agrees that it will take
all such action as may be necessary to ensure that all shares of Preferred Stock
delivered upon the exercise of the Rights shall, at the time of delivery of the
certificates or depositary receipts for
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<PAGE> 17
such shares (subject to payment of the Exercise Price), be duly and validly
authorized and issued and fully paid and nonassessable.
9.5 The Company further covenants and agrees that it will
pay when due and payable any and all federal and state transfer taxes and
charges which may be payable in respect of the issuance or delivery of the Right
Certificates or of any certificates for shares of Preferred Stock upon the
exercise of Rights. The Company shall not, however, be required to pay any
transfer tax which may be payable in respect of any transfer or delivery of
Right Certificates to a person other than, or in respect of the issuance or
delivery of securities in a name other than that of, the registered holder of
the Right Certificates evidencing Rights surrendered for exercise or to issue or
deliver any certificates for securities in a name other than that of the
registered holder upon the exercise of any Rights until such tax shall have been
paid (any such tax being payable by the holder of such Right Certificate at the
time of surrender) or until it has been established to the Company's
satisfaction that no such tax is due.
10. PREFERRED STOCK RECORD DATE. Each Person in whose name any
certificate for Preferred Stock (including any fraction of a share of Preferred
Stock) is issued upon the exercise of Rights shall for all purposes be deemed to
have become the holder of record of the shares of Preferred Stock represented
thereby on, and such certificate shall be dated, the date upon which the Right
Certificate evidencing such Rights was duly surrendered and payment of the
Exercise Price (and any applicable transfer taxes) was made; provided, however,
that if the date of such surrender and payment is a date upon which the
Preferred Stock transfer books of the Company are closed, such person shall be
deemed to have become the record holder of such shares on, and such certificate
shall be dated, the next succeeding Business Day on which the Preferred Stock
transfer books of the Company are open; and further provided, however, that if
delivery of shares of Preferred Stock is delayed pursuant to Section 9.3, such
Person shall be deemed to have become the record holder of such shares of
Preferred Stock only when such shares first become deliverable. Prior to the
exercise of the Right evidenced thereby, the holder of a Right Certificate shall
not be entitled to any rights of a shareholder of the Company with respect to
shares for which the Rights shall be exercisable, including, without limitation,
the right to vote, to receive dividends or other distributions or to exercise
any preemptive rights, and shall not be entitled to receive any notice of any
proceedings of the Company, except as provided herein.
11. ADJUSTMENT OF EXERCISE PRICE, NUMBER AND KIND OF SHARES OR
NUMBER OF RIGHTS. The Exercise Price, the number and kind of shares covered by
each Right and the number of Rights outstanding are subject to adjustment from
time to time as provided in this Section 11.
11.1
11.1.1 In the event the Company shall at any time
after the date of this Agreement (a) declare a dividend on the Preferred Stock
payable in shares of Preferred Stock, (b) subdivide the outstanding Preferred
Stock, (c) combine the outstanding
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<PAGE> 18
Preferred Stock into a smaller number of shares or (d) issue any shares of its
capital stock in a reclassification of the Preferred Stock (including any such
reclassification in connection with a consolidation or merger in which the
Company is the continuing or surviving corporation), except as otherwise
provided in this Section 11.1 and Section 7.5 hereof, the Exercise Price in
effect at the time of the record date for such dividend or of the effective date
of such subdivision, combination or reclassification, and the number and kind of
shares of capital stock issuable on such date, shall be proportionately adjusted
so that the holder of any Right exercised after such time shall be entitled to
receive the aggregate number and kind of shares of capital stock which, if such
Right had been exercised immediately prior to such date and at a time when the
Preferred Stock transfer books of the Company were open, such holder would have
owned upon such exercise and been entitled to receive by virtue of such
dividend, subdivision, combination or reclassification; provided, however, that
in no event shall the consideration to be paid upon the exercise of a Right be
less than the aggregate par value of the shares of capital stock of the Company
issuable upon exercise of a Right. If an event occurs which would require an
adjustment under both Section 11.1.1 and Section 11.1.2 hereof, the adjustment
provided for in this Section 11.1.1 shall be in addition to, and shall be made
prior to, any adjustment required pursuant to Section 11.1.2 hereof.
11.1.2 Subject to the provisions of Section 24
hereof, in the event any Person, alone or together with its Affiliates and
Associates, shall become an Acquiring Person (a "Section 11.1.2 Event"), then
promptly following any such occurrence, proper provision shall be made so that
each holder of a Right, except as provided in Section 7.5 hereof, shall
thereafter have a right to receive, upon exercise thereof at the then current
Exercise Price in accordance with the terms of this Agreement, such number of
shares of Preferred Stock of the Company as shall equal the result obtained by
(a) multiplying the then current Exercise Price by the then number of one
one-thousandths of a share of Preferred Stock for which a Right was exercisable
immediately prior to the first occurrence of a Section 11.1.2 Event, whether or
not such Right was then exercisable, and dividing that product by (b) 50% of the
Fair Market Value per one one-thousandth of a share of the Preferred Stock
(determined pursuant to Section 11.4) on the date of the occurrence of a Section
11.1.2 Event (such number of shares being referred to as the "Adjustment
Shares").
11.1.3 In lieu of issuing any shares of Preferred
Stock in accordance with Section 11.1.2 hereof, the Company, acting by or
pursuant to resolution of the Board of Directors, may, and in the event that the
number of shares of Preferred Stock which are authorized by the Company's
Certificate of Incorporation but not outstanding or reserved for issuance for
purposes other than upon exercise of the Rights is not sufficient to permit the
exercise in full of the Rights in accordance with the foregoing Section 11.1.2,
the Company, acting by or pursuant to resolution of the Board of Directors,
shall: (a) determine the excess of (i) the Fair Market Value of the Adjustment
Shares issuable upon the exercise of a Right (the "Current Value") over (ii) the
Exercise Price attributable to each Right (such excess being referred to as the
"Spread") and (b) with respect to all or a portion of each Right (subject to
Section 7.5 hereof), make adequate provision to substitute for the Adjustment
Shares, upon payment of the applicable Exercise Price,
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<PAGE> 19
(1) cash, (2) a reduction in the Exercise Price, (3) Preferred Stock Equivalents
which the Board of Directors has deemed to have the same value as shares of
Common Stock of the Company, (4) debt securities of the Company, (5) other
assets of the Company or (6) any combination of the foregoing which, when added
to any shares of Preferred Stock issued upon such exercise, has an aggregate
value equal to the Current Value, where such aggregate value has been determined
by the Board of Directors based upon the advice of a nationally recognized
investment banking firm selected by the Board of Directors; provided, however,
that if the Company shall not have made adequate provision to deliver value
pursuant to clause (b) above within thirty (30) days following the later of (x)
the first occurrence of a Section 11.1.2 Event and (y) the date on which the
Company's right of redemption pursuant to Section 23.1 expires (the later of (x)
and (y) being referred to herein as the "Section 11.1.2 Trigger Date"), then the
Company shall be obligated to deliver, upon the surrender for exercise of a
Right and without requiring payment of the Exercise Price, shares of Preferred
Stock (to the extent available) and then, if necessary, cash, which shares
and/or cash have an aggregate value equal to the Spread. If the Board of
Directors shall determine in good faith that it is likely that sufficient
additional shares of Preferred Stock could be authorized for issuance upon
exercise in full of the Rights, the 30-day period set forth above may be
extended to the extent necessary, but not more than ninety (90) days after the
Section 11.1.2 Trigger Date, in order that the Company may seek stockholder
approval for the authorization of such additional shares (such period, as it may
be extended, being referred to herein as the "Substitution Period"). To the
extent that the Company determines that some action need be taken pursuant to
the first and/or second sentences of this Section 11.1.2, the Company (1) shall
provide, subject to Section 7.5 hereof, that such action shall apply uniformly
to all outstanding Rights and (2) may suspend the exercisability of the Rights
until the expiration of the Substitution Period in order to seek any
authorization of additional shares and/or to decide the appropriate form of
distribution to be made pursuant to such first sentence and to determine the
value thereof. In the event of any such suspension, the Company shall issue a
public announcement stating that the exercisability of the Rights has been
temporarily suspended and a public announcement at such time as the suspension
is no longer in effect. For purposes of this Section 11.1.3, the value of the
Preferred Stock shall be the Fair Market Value (as determined pursuant to
Section 11.4 hereof) per share of the Preferred Stock on the Section 11.1.2
Trigger Date and the value of any Preferred Stock Equivalent shall be deemed to
have the same value as the Preferred Stock on such date.
11.2 If the Company shall fix a record date for the
issuance of rights, options or warrants to all holders of Preferred Stock
entitling them (for a period expiring within forty-five (45) calendar days after
such record date) to subscribe for or purchase Preferred Stock (or securities
having the same or more favorable rights, privileges and preferences as the
shares of Preferred Stock ("Preferred Stock Equivalents")) or securities
convertible into Preferred Stock or Preferred Stock Equivalents at a price per
share of Preferred Stock or per share of Preferred Stock Equivalents (or having
a conversion price per share, if a security convertible into Preferred Stock or
Preferred Stock Equivalents) less than the Fair Market Value (as determined
pursuant to Section 11.4 hereof) per share of Preferred Stock on such record
date, the Exercise Price to be in effect after such record date shall be
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determined by multiplying the Exercise Price in effect immediately prior to such
record date by a fraction, the numerator of which shall be the number of shares
of Preferred Stock outstanding on such record date, plus the number of shares of
Preferred Stock which the aggregate offering price of the total number of shares
of Preferred Stock and/or Preferred Stock Equivalents to be offered (and the
aggregate initial conversion price of the convertible securities so to be
offered) would purchase at such Fair Market Value and the denominator of which
shall be the number of shares of Preferred Stock outstanding on such record
date, plus the number of additional shares of Preferred Stock and Preferred
Stock Equivalents to be offered for subscription or purchase (or into which the
convertible securities so to be offered are initially convertible); provided,
however, that in no event shall the consideration to be paid upon the exercise
of a Right be less than the aggregate par value of the shares of capital stock
of the Company issuable upon exercise of a Right. In case such subscription
price may be paid in a consideration part or all of which shall be in a form
other than cash, the value of such consideration shall be the Fair Market Value
thereof determined in accordance with Section 11.4 hereof. Shares of Preferred
Stock owned by or held for the account of the Company shall not be deemed
outstanding for the purpose of any such computation. Such adjustments shall be
made successively whenever such a record date is fixed; and in the event that
such rights or warrants are not so issued, the Exercise Price shall be adjusted
to be the Exercise Price which would then be in effect if such record date had
not been fixed.
11.3 If the Company shall fix a record date for the making
of a distribution to all holders of Preferred Stock (including any such
distribution made in connection with a consolidation or merger in which the
Company is the continuing or surviving corporation), of evidences of
indebtedness, cash (other than a regular periodic cash dividend out of the
earnings or retained earnings of the Company), assets (other than a dividend
payable in Preferred Stock, but including any dividend payable in stock other
than Preferred Stock) or convertible securities, subscription rights or warrants
(excluding those referred to in Section 11.2, the Exercise Price to be in effect
after such record date shall be determined by multiplying the Exercise Price in
effect immediately prior to such record date by a fraction, the numerator of
which shall be the Fair Market Value (as determined pursuant to Section 11.4
hereof) per one one-thousandth of a share of Preferred Stock on such record
date, less the Fair Market Value (as determined pursuant to Section 11.4 hereof)
of the portion of the cash, assets or evidences of indebtedness so to be
distributed or of such convertible securities, subscription rights or warrants
applicable to one one-thousandth of a share of Preferred Stock and the
denominator of which shall be the Fair Market Value (as determined pursuant to
Section 11.4 hereof) per one one-thousandth of a share of Preferred Stock;
provided, however, that in no event shall the consideration to be paid upon the
exercise of a Right be less than the aggregate par value of the shares of
capital stock of the Company issuable upon exercise of a Right. Such adjustments
shall be made successively whenever such a record date is fixed; and in the
event that such distribution is not so made, the Exercise Price shall again be
adjusted to be the Exercise Price which would be in effect if such record date
had not been fixed.
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<PAGE> 21
11.4 For the purpose of this Agreement, the "Fair Market
Value" of any share of Preferred Stock, Common Stock or any other stock or any
Right or other security or any other property shall be determined as provided in
this Section 11.4.
11.4.1 In the case of a publicly-traded stock or
other security, the Fair Market Value on any date shall be deemed to be the
average of the daily closing prices per share of such stock or per unit of such
other security for the 30 consecutive Trading Days (as such term is hereinafter
defined) immediately prior to such date; provided, however, that in the event
that the Fair Market Value per share of any share of stock is determined during
a period following the announcement by the issuer of such stock of (a) a
dividend or distribution on such stock payable in shares of such stock or
securities convertible into shares of such stock or (b) any subdivision,
combination or reclassification of such stock, and prior to the expiration of
the 30 Trading Day period after the ex-dividend date for such dividend or
distribution, or the record date for such subdivision, combination or
reclassification, then, and in each such case, the Fair Market Value shall be
properly adjusted to take into account ex-dividend trading. The closing price
for each day shall be the last sale price, regular way, or, in case no such sale
takes place on such day, the average of the closing bid and asked prices,
regular way, in either case as reported in the principal consolidated
transaction reporting system with respect to securities listed or admitted to
trading on the New York Stock Exchange or, if the securities are not listed or
admitted to trading on the New York Stock Exchange, as reported in the principal
consolidated transaction reporting system with respect to securities listed on
the principal national securities exchange on which such security is listed or
admitted to trading; or, if not listed or admitted to trading on any national
securities exchange, the last sale price as reported by Nasdaq for securities
listed on the Nasdaq National Market or, in case no such sale takes place on
such day, the average of the closing bid and asked prices as reported by Nasdaq;
or, if not listed or admitted to trading on a national securities exchange or
the Nasdaq National Market, the last quoted price (or, if not so quoted, the
average of the last quoted high bid and low asked prices) in the
over-the-counter market, as reported by Nasdaq or such other system then in use;
or, if on any such date no bids for such security are quoted by any such
organization, the average of the closing bid and asked prices as furnished by a
professional market maker making a market in such security selected by the Board
of Directors of the Company. If on any such date no market maker is making a
market in such security, the Fair Market Value of such security on such date
shall be determined reasonably and with utmost good faith to the holders of the
Rights by the Board of Directors of the Company, provided, however, that if at
the time of such determination there is an Acquiring Person, the Fair Market
Value of such security on such date shall be determined by a nationally
recognized investment banking firm selected by the Board of Directors, which
determination shall be described in a statement filed with the Rights Agent and
shall be binding on the Rights Agent and the holders of the Rights. The term
"Trading Day" shall mean a day on which the principal national securities
exchange on which such security is listed or admitted to trading is open for the
transaction of business or, if such security is not listed or admitted to
trading on any national securities exchange, a Business Day.
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11.4.2 If a security is not publicly held or not so
listed or traded, "Fair Market Value" shall mean the fair value per share of
stock or per other unit of such security, determined reasonably and with utmost
good faith to the holders of the Rights by the Board of Directors of the
Company, provided, however, that if at the time of such determination there is
an Acquiring Person, the Fair Market Value of such security on such date shall
be determined by a nationally recognized investment banking firm selected by the
Board of Directors, which determination shall be described in a statement filed
with the Rights Agent and shall be binding on the Rights Agent and the holders
of the Rights; provided, however, that for the purposes of making any adjustment
provided for by Section 11.1.2 hereof, the Fair Market Value of a share of
Preferred Stock shall not be less than the product of the then Fair Market Value
of a share of Common Stock multiplied by the higher of the then Dividend
Multiple or Vote Multiple (as both of such terms are defined in the Certificate
of Designation attached as Exhibit A hereto) applicable to the Preferred Stock
and shall not exceed 105% of the product of the then Fair Market Value of a
share of Common Stock multiplied by the higher of the then Dividend Multiple or
Vote Multiple applicable to the Preferred Stock.
11.4.3 In the case of property other than
securities, the Fair Market Value thereof shall be determined reasonably and
with utmost good faith to the holders of Rights by the Board of Directors of the
Company, provided, however, that if at the time of such determination there is
an Acquiring Person, the Fair Market Value of such property on such date shall
be determined by a nationally recognized investment banking firm selected by the
Board of Directors, which determination shall be described in a statement filed
with the Rights Agent and shall be binding upon the Rights Agent and the holders
of the Rights.
11.5 Anything herein to the contrary notwithstanding, no
adjustment in the Exercise Price shall be required unless such adjustment would
require an increase or decrease of at least 1% in the Exercise Price; provided,
however, that any adjustments which by reason of this Section 11.5 are not
required to be made shall be carried forward and taken into account in any
subsequent adjustment. All calculations under this Section 11 shall be made to
the nearest cent or to the nearest hundred-thousandth of a share of Common Stock
of the Company or ten-millionth of a share of Preferred Stock, as the case may
be, or to such other figure as the Board of Directors may deem appropriate.
Notwithstanding the first sentence of this Section 11.5, any adjustment required
by this Section 11 shall be made no later than the earlier of (i) three (3)
years from the date of the transaction which mandates such adjustment or (ii)
the Expiration Date.
11.6 If as a result of any provision of Section 11.1 or
Section 13.1 hereof, the holder of any Right thereafter exercised shall become
entitled to receive any shares of capital stock of the Company other than
Preferred Stock, thereafter the number of such other shares so receivable upon
exercise of any Right shall be subject to adjustment from time to time in a
manner and on terms as nearly equivalent as practicable to the provisions with
respect to the Preferred Stock contained in Sections 11.1 through 11.5, Sections
11.7 through 11.11, and Section 11.13, inclusive, and the provisions of Sections
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7, 9, 10, 13 and 14 hereof with respect to the Preferred Stock shall apply on
like terms to any such other shares.
11.7 All Rights originally issued by the Company
subsequent to any adjustment made to the Exercise Price hereunder shall evidence
the right to purchase, at the adjusted Exercise Price, the number of one
one-thousandths of a share of Preferred Stock (or other securities or amount of
cash or combination thereof) purchasable from time to time hereunder upon
exercise of the Rights, all subject to further adjustment as provided herein.
11.8 Unless the Company shall have exercised its election
as provided in Section 11.9, upon each adjustment of the Exercise Price as a
result of the calculations made in Sections 11.2 and 11.3, each Right
outstanding immediately prior to the making of such adjustment shall thereafter
evidence the right to purchase, at the adjusted Exercise Price, that number of
one one-thousandths of a share of Preferred Stock (calculated to the nearest one
ten-millionth) as the Board of Directors reasonably determines is appropriate to
preserve the economic value of the Rights, including, by way of example, that
number obtained by (a) multiplying (i) the number of one one-thousandths of a
share of Preferred Stock for which a Right may be exercisable immediately prior
to this adjustment by (ii) the Exercise Price in effect immediately prior to
such adjustment of the Exercise Price and (b) dividing the product so obtained
by the Exercise Price in effect immediately after such adjustment of the
Exercise Price.
11.9 The Company may elect on or after the date of any
adjustment of the Exercise Price to adjust the number of Rights, in substitution
for any adjustment in the number of shares of Preferred Stock purchasable upon
the exercise of a Right. Each of the Rights outstanding after the adjustment in
the number of Rights shall be exercisable for the number of one one-thousandths
of a share of Preferred Stock for which a Right was exercisable immediately
prior to such adjustment. Each Right held of record prior to such adjustment of
the number of Rights shall become that number of Rights (calculated to the
nearest one hundred-thousandth) obtained by dividing the Exercise Price in
effect immediately prior to adjustment of the Exercise Price by the Exercise
Price in effect immediately after adjustment of the Exercise Price. The Company
shall make a public announcement of its election to adjust the number of Rights,
indicating the record date for the adjustment, and, if known at the time, the
amount of the adjustment to be made. This record date may be the date on which
the Exercise Price is adjusted or any day thereafter, but, if the Right
Certificates have been issued, shall be at least ten (10) days later than the
date of the public announcement. If Right Certificates have been issued, upon
each adjustment of the number of Rights pursuant to this Section 11.9, the
Company shall, as promptly as practicable, cause to be distributed to holders of
record of Right Certificates on such record date Right Certificates evidencing,
subject to Section 14 hereof, the additional Rights to which such holders shall
be entitled as a result of such adjustment, or, at the option of the Company,
shall cause to be distributed to such holders of record in substitution and
replacement for the Right Certificates held by such holders prior to the date of
adjustment, and upon surrender thereof, if required by the Company, new Right
Certificates evidencing all the Rights to which such holders shall be entitled
after such
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adjustment. Right Certificates so to be distributed shall be issued, executed
and countersigned in the manner provided for herein (and may bear, at the option
of the Company, the adjusted Exercise Price) and shall be registered in the
names of the holders of record of Right Certificates on the record date
specified in the public announcement.
11.10 Irrespective of any adjustment or change in the
Exercise Price or the number of one one-thousandths of a share of Preferred
Stock issuable upon the exercise of the Rights, the Right Certificates
theretofore and thereafter issued may continue to express the Exercise Price per
share and the number of shares which were expressed in the initial Right
Certificates issued hereunder without prejudice to any adjustment or change.
11.11 Before taking any action that would cause an
adjustment reducing the Exercise Price below the then stated value, if any, of
the number of one one-thousandths of a share of Preferred Stock issuable upon
exercise of the Rights, the Company shall take any corporate action which may,
in the opinion of its counsel, be necessary in order that the Company may
validly and legally issue fully paid and nonassessable shares of Preferred Stock
at such adjusted Exercise Price.
11.12 In any case in which this Section 11 shall require
that an adjustment in the Exercise Price be made effective as of a record date
for a specified event, the Company may elect to defer until the occurrence of
such event the issuing to the holder of any Right exercised after such record
date the number of one one-thousandths of a share of Preferred Stock or other
capital stock or securities of the Company, if any, issuable upon such exercise
over and above the number of one one-thousandths of a share of Preferred Stock
and other capital stock or securities of the Company, if any, issuable upon such
exercise on the basis of the Exercise Price in effect prior to such adjustment;
provided, however, that the Company shall deliver to such holder a due bill or
other appropriate instrument evidencing such holder's right to receive such
additional shares upon the occurrence of the event requiring such adjustment.
11.13 Anything in this Section 11 to the contrary
notwithstanding, the Company shall be entitled to make such reductions in the
Exercise Price, in addition to those adjustments expressly required by this
Section 11, as and to the extent that in their good faith judgment a majority of
the Board of Directors shall determine to be advisable in order that any
consolidation or subdivision of the Preferred Stock, issuance wholly for cash of
any shares of Preferred Stock at less than the Fair Market Value, issuance
wholly for cash of shares of Preferred Stock or securities which by their terms
are convertible into or exchangeable for shares of Preferred Stock, stock
dividends or issuance of rights, options or warrants referred to hereinabove in
this Section 11, hereafter made by the Company to holders of its Preferred
Stock, shall not be taxable to such shareholders.
11.14 The Company covenants and agrees that it shall not,
at any time after the Distribution Date and so long as the Rights have not been
redeemed pursuant to Section 23 hereof or exchanged pursuant to Section 24
hereof, (a) consolidate with (other than a Subsidiary of the Company in a
transaction which complies with the proviso at the
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end of this sentence), (b) merge with or into, or (c) sell or transfer (or
permit any Subsidiary to sell or transfer), in one transaction or a series of
related transactions, assets or earning power aggregating 50% or more of the
assets or earning power of the Company and its Subsidiaries taken as a whole, to
any other Person or Persons (other than the Company and/or any of its
Subsidiaries in one or more transactions each of which complies with the proviso
at the end of this sentence) if (i) at the time of or immediately after such
consolidation, merger or sale there are any rights, warrants or other
instruments outstanding or agreements or arrangements in effect which would
substantially diminish or otherwise eliminate the benefits intended to be
afforded by the Rights, or (ii) prior to, simultaneously with or immediately
after such consolidation, merger or sale the shareholders of a Person who
constitutes, or would constitute, the "Principal Party" for the purposes of
Section 13.1 hereof shall have received a distribution of Rights previously
owned by such Person or any of its Affiliates and Associates; provided, however,
that this Section 11.14 shall not affect the ability of any Subsidiary of the
Company to consolidate with, merge with or into, or sell or transfer assets or
earning power to, any other Subsidiary of the Company. The Company further
covenants and agrees that after the Distribution Date it will not, except as
permitted by Section 23 or Section 27 hereof, take (or permit any Subsidiary to
take) any action if at the time such action is taken it is reasonably
foreseeable that such action will substantially diminish or otherwise eliminate
the benefits intended to be afforded by the Rights.
11.15 Notwithstanding anything in this Agreement to the
contrary, in the event the Company shall at any time after the date of this
Agreement and prior to the Distribution Date (a) declare or pay any dividend on
the outstanding Common Stock of the Company payable in shares of Common Stock of
the Company or (b) effect a subdivision, combination or consolidation of the
outstanding shares of Common Stock of the Company (by reclassification or
otherwise than by payment of dividends in shares of Common Stock of the Company)
into a greater or lesser number of shares of Common Stock of the Company, then
in any such case (i) the number of one one-thousandths of a share of Preferred
Stock purchasable after such event upon proper exercise of each Right shall be
determined by multiplying the number of one one-thousandths of a share of
Preferred Stock so purchasable immediately prior to such event by a fraction,
the numerator of which is the number of shares of Common Stock of the Company
outstanding immediately prior to such event and the denominator of which is the
number of shares of Common Stock of the Company outstanding immediately after
such event, and (ii) each share of Common Stock of the Company outstanding
immediately after such event shall have issued with respect to it that number of
Rights which each share of Common Stock of the Company outstanding immediately
prior to such event had issued with respect to it. The adjustments provided for
in this Section 11.15 shall be made successively whenever such a dividend is
declared or paid or such a subdivision, combination or consolidation is
effected.
11.16 The exercise of Rights under Section 11.1.2 shall
only result in the loss of rights under Section 11.1.2 to the extent so
exercised and shall not otherwise affect the rights of holders of Right
Certificates under this Rights Agreement, including rights to
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purchase securities of the Principal Party following a Section 13 Event which
has occurred or may thereafter occur, as set forth in Section 13 hereof. Upon
exercise of a Right Certificate under Section 11.1.2, the Rights Agent shall
return such Right Certificate duly marked to indicate that such exercise has
occurred.
12. CERTIFICATE OF ADJUSTED EXERCISE PRICE OR NUMBER OF SHARES.
Whenever an adjustment is made as provided in Section 11 or Section 13 hereof,
the Company shall (a) promptly prepare a certificate setting forth such
adjustment and a brief statement of the facts accounting for such adjustment,
(b) promptly file with the Rights Agent and with each transfer agent for the
Preferred Stock and the Common Stock of the Company a copy of such certificate
and (c) mail a brief summary thereof to each holder of a Right Certificate in
accordance with Section 26 hereof. The Rights Agent shall be fully protected in
relying on any such certificate and on any adjustment contained therein and
shall not be deemed to have knowledge of any such adjustment unless and until it
shall have received such certificate.
13. CONSOLIDATION, MERGER OR SALE OR TRANSFER OF ASSETS.
13.1 In the event that, following the Stock Acquisition
Date, directly or indirectly, (a) the Company shall consolidate with, or merge
with and into, any other Person (other than a Subsidiary of the Company in a
transaction which is not prohibited by Section 11.14 hereof), and the Company
shall not be the continuing or surviving corporation of such consolidation or
merger, (b) any Person (other than a Subsidiary of the Company in a transaction
which is not prohibited by the proviso at the end of the first sentence of
Section 11.14 hereof) shall consolidate with the Company, or merge with and into
the Company and the Company shall be the continuing or surviving corporation of
such merger and, in connection with such merger, all or part of the shares of
Common Stock of the Company shall be changed into or exchanged for stock or
other securities of any other Person or cash or any other property, or (c) the
Company shall sell, mortgage or otherwise transfer (or one or more of its
Subsidiaries shall sell, mortgage or otherwise transfer), in one transaction or
a series of related transactions, assets or earning power aggregating 50% or
more of the assets or earning power of the Company and its Subsidiaries (taken
as a whole) to any other Person or Persons (other than the Company or any
Subsidiary of the Company in one or more transactions, each of which is not
prohibited by the proviso at the end of the first sentence of Section 11.14
hereof), then, and in each such case, proper provision shall be made so that:
(i) each holder of a Right, except as provided in Section 7.5 hereof, shall have
the right to receive, upon the exercise thereof at the then current Exercise
Price in accordance with the terms of this Agreement, such number of validly
authorized and issued, fully paid and nonassessable shares of freely tradeable
Common Stock of the Principal Party (as hereinafter defined in Section 13.2),
free and clear of rights of call or first refusal, liens, encumbrances, transfer
restrictions or other adverse claims, as shall be equal to the result obtained
by (x) multiplying the then current Exercise Price by the number of one
one-thousandths of a share of Preferred Stock for which a Right is exercisable
immediately prior to the first occurrence of a Section 13 Event, and dividing
that product by (y) 50% of the Fair Market Value (determined pursuant to Section
11.4 hereof) per share of the Common Stock of
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such Principal Party on the date of consummation of such consolidation, merger,
sale or transfer; (ii) such Principal Party shall thereafter be liable for, and
shall assume, by virtue of such consolidation, merger, sale, mortgage or
transfer, all the obligations and duties of the Company pursuant to this
Agreement; (iii) the term "Company" shall thereafter be deemed to refer to such
Principal Party, it being specifically intended that the provisions of Section
11 hereof shall apply to such Principal Party; and (iv) such Principal Party
shall take such steps (including, but not limited to, the reservation of a
sufficient number of shares of its Common Stock to permit exercise of all
outstanding Rights in accordance with this Section 13.1 and the making of
payments in cash and/or other securities in accordance with Section 11.1.3
hereof) in connection with such consummation as may be necessary to assure that
the provisions hereof shall thereafter be applicable, as nearly as reasonably
may be, in relation to its shares of Common Stock thereafter deliverable upon
the exercise of the Rights.
13.2 "Principal Party" shall mean (a) in the case of any
transaction described in clause (a) or (b) of the first sentence of Section
13.1, the Person that is the issuer of any securities into which shares of
Common Stock of the Company are converted in such merger or consolidation, or,
if there is more than one such issuer, the issuer of Common Stock that has the
highest aggregate Fair Market Value (determined pursuant to Section 11.4), and
if no securities are so issued, the Person that is the other party to the merger
or consolidation, or, if there is more than one such Person, the Person the
Common Stock of which has the highest aggregate Fair Market Value (determined
pursuant to Section 11.4); and (b) in the case of any transaction described in
clause (c) of the first sentence of Section 13.1, the Person that is the party
receiving the greatest portion of the assets or earning power transferred
pursuant to such transaction or transactions, or, if each Person that is a party
to such transaction or transactions receives the same portion of the assets or
earning power transferred pursuant to such transaction or transactions or if the
Person receiving the largest portion of the assets or earning power cannot be
determined, whichever Person the Common Stock of which has the highest aggregate
Fair Market Value (determined pursuant to Section 11.4); provided, however, that
in any such case, (i) if the Common Stock of such Person is not at such time and
has not been continuously over the preceding 12-month period registered under
Section 12 of the Exchange Act ("Registered Common Stock") or such Person is not
a corporation, and such Person is a direct or indirect Subsidiary or Affiliate
of another Person who has Registered Common Stock outstanding, "Principal Party"
shall refer to such other Person; (ii) if the Common Stock of such Person is not
Registered Common Stock or such Person is not a corporation, and such Person is
a direct or indirect Subsidiary of another Person but is not a direct or
indirect Subsidiary of another Person which has Registered Common Stock
outstanding, "Principal Party" shall refer to the ultimate parent entity of such
first-mentioned Person; (iii) if the Common Stock of such Person is not
Registered Common Stock or such Person is not a corporation, and such Person is
directly or indirectly controlled by more than one Person, and one or more of
such other Persons has Registered Common Stock outstanding, "Principal Party"
shall refer to whichever of such other Persons is the issuer of the Registered
Common Stock having the highest aggregate Fair Market Value (determined pursuant
to Section 11.4); and (iv) if the Common Stock
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of such Person is not Registered Common Stock or such Person is not a
corporation, and such Person is directly or indirectly controlled by more than
one Person, and none of such other Persons has Registered Common Stock
outstanding, "Principal Party" shall refer to whichever ultimate parent entity
is the corporation having the greatest stockholders' equity or, if no such
ultimate parent entity is a corporation, "Principal Party" shall refer to
whichever ultimate parent entity is the entity having the greatest net assets.
13.3 The Company shall not consummate any such
consolidation, merger, sale or transfer unless prior thereto (a) the Principal
Party shall have a sufficient number of authorized shares of its Common Stock,
which have not been issued or reserved for issuance, to permit the exercise in
full of the Rights in accordance with this Section 13, and (b) the Company and
each Principal Party and each other Person who may become a Principal Party as a
result of such consolidation, merger, sale or transfer shall have executed and
delivered to the Rights Agent a supplemental agreement providing for the terms
set forth in Sections 13.1 and 13.2 and further providing that, as soon as
practicable after the date of any consolidation, merger, sale or transfer of
assets mentioned in Section 13.1, the Principal Party at its own expense will:
13.3.1 prepare and file a registration statement
under the Securities Act with respect to the Rights and the securities
purchasable upon exercise of the Rights on an appropriate form, use its
reasonable best efforts to cause such registration statement to become effective
as soon as practicable after such filing and use its reasonable best efforts to
cause such registration statement to remain effective (with a prospectus that at
all times meets the requirements of the Securities Act) until the Expiration
Date;
13.3.2 use its reasonable best efforts to qualify
or register the Rights and the securities purchasable upon exercise of the
Rights under the blue sky laws of such jurisdictions as may be necessary or
appropriate;
13.3.3 use its reasonable best efforts to list (or
continue the listing of) the Rights and the securities purchasable upon exercise
of the Rights on a national securities exchange or to meet the eligibility
requirements for quotation on Nasdaq; and
13.3.4 deliver to holders of the Rights historical
financial statements for the Principal Party and each of its Affiliates which
comply in all respects with the requirements for registration on Form 10 under
the Exchange Act.
13.4 In case the Principal Party which is to be a party to
a transaction referred to in this Section 13 has a provision in any of its
authorized securities or in its Certificate of Incorporation or By-laws or other
instrument governing its corporate affairs, which provision would have the
effect of (a) causing such Principal Party to issue (other than to holders of
Rights pursuant to this Section 13), in connection with, or as a consequence of,
the consummation of a transaction referred to in this Section 13, shares of
Common Stock of such Principal Party at less than the then current Fair Market
Value (determined pursuant to Section 11.4) or securities exercisable for, or
convertible into, Common Stock of such Principal Party at less than such Fair
Market Value, or (b) providing for any
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special payment, tax or similar provisions in connection with the issuance of
the Common Stock of such Principal Party pursuant to the provisions of this
Section 13, then, in such event, the Company shall not consummate any such
transaction unless prior thereto the Company and such Principal Party shall have
executed and delivered to the Rights Agent a supplemental agreement providing
that the provision in question of such Principal Party shall have been
cancelled, waived or amended, or that the authorized securities shall be
redeemed, so that the applicable provision will have no effect in connection
with, or as a consequence of, the consummation of the proposed transaction. The
provisions of this Section 13 shall similarly apply to successive mergers or
consolidations or sales or other transfers.
14. FRACTIONAL RIGHTS AND FRACTIONAL SHARES.
14.1 The Company shall not be required to issue fractions
of Rights, except prior to the Distribution Date as provided in Section 11.15
hereof, or to distribute Right Certificates which evidence fractional Rights. If
the Company elects not to issue such fractional Rights, the Company shall pay,
in lieu of such fractional Rights, to the registered holders of the Right
Certificates with regard to which such fractional Rights would otherwise be
issuable, an amount in cash equal to the same fraction of the Fair Market Value
of a whole Right, as determined pursuant to Section 11.4 hereof.
14.2 The Company shall not be required to issue fractions
of shares of Preferred Stock (other than fractions which are integral multiples
of one one-thousandth of a share of Preferred Stock) upon exercise of the Rights
or to distribute certificates which evidence fractional shares of Preferred
Stock (other than fractions which are integral multiples of one one-thousandth
of a share of Preferred Stock). In lieu of fractional shares of Preferred Stock
that are not integral multiples of one one-thousandth of a share of Preferred
Stock, the Company may pay to the registered holders of Right Certificates at
the time such Rights are exercised as herein provided an amount in cash equal to
the same fraction of the Fair Market Value of one one-thousandth of a share of
Preferred Stock. For purposes of this Section 14.2, the Fair Market Value of one
one-thousandth of a share of Preferred Stock shall be determined pursuant to
Section 11.4 hereof for the Trading Day immediately prior to the date of such
exercise.
14.3 The holder of a Right by the acceptance of the Rights
expressly waives his right to receive any fractional Rights or any fractional
shares upon exercise of a Right, except as permitted by this Section 14.
15. RIGHTS OF ACTION. All rights of action in respect of this
Agreement, other than rights of action vested in the Rights Agent pursuant to
Sections 18 and 20 hereof, are vested in the respective registered holders of
the Right Certificates (or, prior to the Distribution Date, the registered
holders of the Common Stock of the Company); and any registered holder of any
Right Certificate (or, prior to the Distribution Date, of the Common Stock of
the Company), without the consent of the Rights Agent or of the holder of any
other Right Certificate (or, prior to the Distribution Date, of the Common Stock
of the Company), may, in such registered holder's own behalf and for such
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registered holder's own benefit, enforce, and may institute and maintain any
suit, action or proceeding against the Company to enforce, or otherwise act in
respect of, his right to exercise the Right evidenced by such Right Certificate
in the manner provided in such Right Certificate and in this Agreement. Without
limiting the foregoing or any remedies available to the holders of Rights, it is
specifically acknowledged that the holders of Rights would not have an adequate
remedy at law for any breach of this Agreement and shall be entitled to specific
performance of the obligations hereunder and injunctive relief against actual or
threatened violations of the obligations hereunder of any Person subject to this
Agreement. Holders of Rights shall be entitled to recover the reasonable costs
and expenses, including attorneys' fees, incurred by them in any action to
enforce the provisions of this Agreement.
16. AGREEMENT OF RIGHT HOLDERS. Every holder of a Right, by
accepting the same, consents and agrees with the Company and the Rights Agent
and with every other holder of a Right that:
16.1 prior to the Distribution Date, each Right will be
transferable only simultaneously and together with the transfer of shares of
Common Stock of the Company;
16.2 after the Distribution Date, the Right Certificates
are transferable only on the registry books of the Rights Agent if surrendered
at the office or offices of the Rights Agent designated for such purpose, duly
endorsed or accompanied by a proper instrument of transfer;
16.3 subject to Sections 6.1 and 7.6, the Company and the
Rights Agent may deem and treat the person in whose name a Right Certificate
(or, prior to the Distribution Date, the associated certificate representing
Common Stock of the Company) is registered as the absolute owner thereof and of
the Rights evidenced thereby (notwithstanding any notations of ownership or
writing on the Right Certificates or the associated certificate representing
Common Stock of the Company made by anyone other than the Company or the Rights
Agent) for all purposes whatsoever, and, subject to the last sentence of Section
7.5, neither the Company nor the Rights Agent shall be affected by any notice to
the contrary; and
16.4 notwithstanding anything in this Agreement to the
contrary, neither the Company nor the Rights Agent shall have any liability to
any holder of a Right or other Person as the result of its inability to perform
any of its obligations under this Agreement by reason of any preliminary or
permanent injunction or other order, decree or ruling issued by a court of
competent jurisdiction or by a governmental, regulatory or administrative agency
or commission, or any statute, rule, regulation or executive order promulgated
or enacted by any governmental authority prohibiting or otherwise restraining
performance of such obligations; provided, however, that the Company must use
its best efforts to have any such order, decree or ruling lifted or otherwise
overturned as soon as possible.
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17. RIGHT CERTIFICATE HOLDER NOT DEEMED A SHAREHOLDER. No holder,
as such, of any Right Certificate shall be entitled to vote, receive dividends
or be deemed for any purpose the holder of the shares of Preferred Stock or any
other securities of the Company which may at any time be issuable on the
exercise of the Rights represented thereby, nor shall anything contained herein
or in any Right Certificate be construed to confer upon the holder of any Right
Certificate, as such, any of the rights of a shareholder of the Company or any
right to vote for the election of directors or upon any matter submitted to
shareholders at any meeting thereof, or to give or withhold consent to any
corporate action, or to receive notice of meetings or other actions affecting
shareholders (except as provided in Section 25 hereof), or to receive dividends
or subscription rights, or otherwise, until the Right or Rights evidenced by
such Right Certificate shall have been exercised in accordance with the
provisions hereof.
18. CONCERNING THE RIGHTS AGENT.
18.1 The Company agrees to pay to the Rights Agent such
compensation as shall be agreed to in writing between the Company and the Rights
Agent for all services rendered by it hereunder and, from time to time, on
demand of the Rights Agent, its reasonable expenses and counsel fees and
disbursements and other disbursements incurred in the administration and
execution of this Agreement and the exercise and performance of its duties
hereunder. The Company also agrees to indemnify the Rights Agent for, and to
hold it harmless against, any loss, liability, or expense, incurred without
gross negligence, bad faith or willful misconduct on the part of the Rights
Agent, for anything done or omitted by the Rights Agent in connection with the
acceptance and administration of this Agreement, including the costs and
expenses of defending against any claim of liability arising therefrom, directly
or indirectly. The provisions of this Section 18.1 shall survive the expiration
of the Rights and the termination of this Agreement.
18.2 The Rights Agent shall be protected and shall incur
no liability for or in respect of any action taken, suffered or omitted by it in
connection with its administration of this Agreement in reliance upon any Right
Certificate or certificate representing Common Stock of the Company, Preferred
Stock, or other securities of the Company, instrument of assignment or transfer,
power of attorney, endorsement, affidavit, letter, notice, direction, consent,
certificate, statement, or other paper or document believed by it in good faith
and without negligence to be genuine and to be signed and executed by the proper
Person or Persons.
18.3 The Rights Agent shall not be liable for
consequential damages under any provision of this Agreement or for any
consequential damages arising out of any act or failure to act hereunder.
19. MERGER OR CONSOLIDATION OR CHANGE OF NAME OF RIGHTS.
19.1 Any corporation into which the Rights Agent or any
successor Rights Agent may be merged or with which it may be consolidated, or
any corporation resulting
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from any merger or consolidation to which the Rights Agent or any successor
Rights Agent shall be a party, or any corporation succeeding to the corporate
trust or shareholder services business of the Rights Agent or any successor
Rights Agent, shall be the successor to the Rights Agent under this Agreement
without the execution or filing of any paper or any further act on the part of
any of the parties hereto, provided that such corporation would be eligible for
appointment as a successor Rights Agent under the provisions of Section 21
hereof. In case at the time such successor Rights Agent shall succeed to the
agency created by this Agreement, any of the Right Certificates shall have been
countersigned but not delivered, any such successor Rights Agent may adopt the
countersignature of the predecessor Rights Agent and deliver such Right
Certificates so countersigned; and in case at that time any of the Right
Certificates shall not have been countersigned, any successor Rights Agent may
countersign such Right Certificates either in the name of the predecessor or in
the name of the successor Rights Agent; and in all such cases such Right
Certificates shall have the full force provided in the Right Certificates and in
this Agreement.
19.2 In case at any time the name of the Rights Agent
shall be changed and at such time any of the Right Certificates shall have been
countersigned but not delivered, the Rights Agent may adopt the countersignature
under its prior name and deliver Right Certificates so countersigned; and in
case at that time any of the Right Certificates shall not have been
countersigned, the Rights Agent may countersign such Right Certificates either
in its prior name or in its changed name; and in all such cases such Right
Certificates shall have the full force provided in the Right Certificates and in
this Agreement.
20. DUTIES OF RIGHTS AGENT. The Rights Agent undertakes the duties
and obligations expressly imposed by this Agreement upon the following terms and
conditions, by all of which the Company and the holders of Right Certificates,
by their acceptance thereof, shall be bound:
20.1 The Rights Agent may consult with legal counsel
selected by it (who may be legal counsel for the Company), and the opinion of
such counsel shall be full and complete authorization and protection to the
Rights Agent as to any action taken or omitted by it in good faith and in
accordance with such opinion.
20.2 Whenever in the performance of its duties under this
Agreement the Rights Agent shall deem it necessary or desirable that any fact or
matter (including, without limitation, the identity of any Acquiring Person and
the determination of "Fair Market Value") be proved or established by the
Company prior to taking or suffering any action hereunder, such fact or matter
(unless other evidence in respect thereof shall be herein specifically
prescribed) may be deemed to be conclusively proved and established by a
certificate signed by a person believed by the Rights Agent to be the Chairman
of the Board of Directors, a Vice Chairman of the Board of Directors, the
President, a Vice President, the Treasurer, any Assistant Treasurer, the
Secretary or an Assistant Secretary of the Company and delivered to the Rights
Agent. Any such certificate shall be full
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<PAGE> 33
authorization to the Rights Agent for any action taken or suffered in good faith
by it under the provisions of this Agreement in reliance upon such certificate.
20.3 The Rights Agent shall be liable hereunder only for
its own gross negligence, bad faith or willful misconduct.
20.4 The Rights Agent shall not be liable for or by reason
of any of the statements of fact or recitals contained in this Agreement or in
the Right Certificates (except its countersignature thereof) or be required to
verify the same, but all such statements and recitals are and shall be deemed to
have been made by the Company only.
20.5 The Rights Agent shall not be under any
responsibility in respect of the validity of this Agreement or the execution and
delivery hereof (except the due execution hereof by the Rights Agent) or in
respect of the validity or execution of any Right Certificate (except its
countersignature thereof); nor shall it be responsible for any breach by the
Company of any covenant or condition contained in this Agreement or in any Right
Certificate; nor shall it be responsible for any change in the exercisability of
the Rights (including the Rights becoming void pursuant to Section 7.5 hereof)
or any adjustment required under the provisions of Sections 11, 13 or 23.3
hereof or responsible for the manner, method or amount of any such adjustment or
the ascertaining of the existence of facts that would require any such
adjustment (except with respect to the exercise of Rights evidenced by Right
Certificates after receipt of a certificate describing any such adjustment
furnished in accordance with Section 12 hereof), nor shall it be responsible for
any determination by the Board of Directors of the Company of the Fair Market
Value of the Rights or Preferred Stock pursuant to the provisions of Section 14
hereof; nor shall it by any act hereunder be deemed to make any representation
or warranty as to the authorization or reservation of any shares of Common Stock
of the Company or Preferred Stock to be issued pursuant to this Agreement or any
Right Certificate or as to whether any shares of Common Stock of the Company or
Preferred Stock will, when so issued, be validly authorized and issued, fully
paid and nonassessable.
20.6 The Company agrees that it will perform, execute,
acknowledge and deliver or cause to be performed, executed, acknowledged and
delivered all such further and other acts, instruments and assurances as may
reasonably be required by the Rights Agent for the carrying out or performing by
the Rights Agent of the provisions of this Agreement.
20.7 The Rights Agent is hereby authorized and directed to
accept instructions with respect to the performance of its duties hereunder and
certificates delivered pursuant to any provision hereof from any person believed
by the Rights Agent to be the Chairman of the Board of Directors, any Vice
Chairman of the Board of Directors, the President, a Vice President, the
Secretary, an Assistant Secretary, the Treasurer or an Assistant Treasurer of
the Company, and is authorized to apply to such officers for advice or
instructions in connection with its duties, and it shall not be liable for any
action taken or suffered to be taken by it in good faith in accordance with
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<PAGE> 34
instructions of any such officer. Any application by the Rights Agent for
written instructions from the Company may, at the option of the Rights Agent,
set forth in writing any action proposed to be taken or omitted by the Rights
Agent under this Agreement and the date on or after which such action shall be
taken or such omission shall be effective. The Rights Agent shall not be liable
for any action taken by, or omission of, the Rights Agent in accordance with a
proposal included in such application on or after the date specified in such
application (which date shall not be less than five (5) Business Days after the
date any officer of the Company actually receives such application, unless any
such officer shall have consented in writing to an earlier date) unless, prior
to taking any such action (or the effective date in the case of an omission),
the Rights Agent shall have received written instructions in response to such
application specifying the action to be taken or omitted.
20.8 The Rights Agent and any shareholder, director,
officer or employee of the Rights Agent may buy, sell or deal in any of the
Rights or other securities of the Company or become pecuniarily interested in
any transaction in which the Company may be interested, or contract with or lend
money to the Company or otherwise act as fully and freely as though it were not
the Rights Agent under this Agreement. Nothing herein shall preclude the Rights
Agent from acting in any other capacity for the Company or for any other legal
entity.
20.9 The Rights Agent may execute and exercise any of the
rights or powers hereby vested in it or perform any duty hereunder either itself
or by or through its attorneys or agents.
20.10 No provision of this Agreement shall require the
Rights Agent to expend or risk its own funds or otherwise incur any financial
liability in the performance of any of its duties hereunder or in the exercise
of its rights if there shall be reasonable grounds for believing that repayment
of such funds or adequate indemnification against such risk or liability is not
reasonably assured to it.
20.11 If, with respect to any Right Certificate surrendered
to the Rights Agent for exercise or transfer, the certificate attached to the
form of assignment or form of election to purchase, as the case may be, has
either not been completed or indicates an affirmative response to clause (1) or
clause (2) thereof, the Rights Agent shall not take any further action with
respect to such requested exercise or transfer without first consulting with the
Company.
21. CHANGE OF RIGHTS AGENT. The Rights Agent or any successor
Rights Agent may resign and be discharged from its duties under this Agreement
upon thirty (30) days' notice in writing mailed to the Company by first class
mail. The Company may remove the Rights Agent or any successor Rights Agent
(with or without cause) upon thirty (30) days' notice in writing, mailed to the
Rights Agent or successor Rights Agent, as the case may be, and to each transfer
agent of the Common Stock of the Company and Preferred Stock by certified mail,
and to the holders of the Right Certificates by first-class mail. If the Rights
Agent shall resign or be removed or shall otherwise become incapable of
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<PAGE> 35
acting, the Company shall appoint a successor to the Rights Agent. If the
Company shall fail to make such appointment within a period of thirty (30) days
after giving notice of such removal or after it has been notified in writing of
such resignation or incapacity by the resigning or incapacitated Rights Agent or
by the holder of a Right Certificate (who shall, with such notice, submit his
Right Certificate for inspection by the Company), then the incumbent Rights
Agent or the registered holder of any Right Certificate may apply to any court
of competent jurisdiction for the appointment of a new Rights Agent. Any
successor Rights Agent, whether appointed by the Company or by such a court,
shall be (a) a corporation organized and doing business under the laws of the
United States or of the Commonwealth of Massachusetts (or of any other state of
the United States so long as such corporation is authorized to do business as a
banking institution in the Commonwealth of Massachusetts), in good standing,
which is authorized under such laws to exercise stock transfer or corporate
trust powers and is subject to supervision or examination by federal or state
authority and which has at the time of its appointment as Rights Agent a
combined capital and surplus of at least $100,000,000 or (b) an Affiliate of a
corporation described in clause (a) of this sentence. After appointment, the
successor Rights Agent shall be vested with the same powers, rights, duties and
responsibilities as if it had been originally named as Rights Agent without
further act or deed; but the predecessor Rights Agent shall deliver and transfer
to the successor Rights Agent any property at the time held by it hereunder, and
execute and deliver any further assurance, conveyance, act or deed necessary for
the purpose. Not later than the effective date of any such appointment, the
Company shall file notice thereof in writing with the predecessor Rights Agent
and each transfer agent of the Common Stock of the Company and the Preferred
Stock, and mail a notice thereof in writing to the registered holders of the
Right Certificates. Failure to give any notice provided for in this Section 21,
however, or any defect therein, shall not affect the legality or validity of the
resignation or removal of the Rights Agent or the appointment of the successor
Rights Agent, as the case may be.
22. ISSUANCE OF NEW RIGHT CERTIFICATES. Notwithstanding any of the
provisions of this Agreement or of the Rights to the contrary, the Company may,
at its option, issue new Right Certificates evidencing Rights in such form as
may be approved by its Board of Directors to reflect any adjustment or change in
the Exercise Price per share and the number or kind or class of shares of stock
or other securities or property purchasable under the Right Certificates made in
accordance with the provisions of this Agreement. In addition, in connection
with the issuance or sale of shares of Common Stock of the Company following the
Distribution Date and prior to the redemption or expiration of the Rights, the
Company (a) shall, with respect to shares of Common Stock of the Company so
issued or sold pursuant to the exercise of stock options or under any employee
plan or arrangement, or upon the exercise, conversion or exchange of securities
hereafter issued by the Company, and (b) may, in any other case, if deemed
necessary or appropriate by the Board of Directors of the Company, issue Right
Certificates representing the appropriate number of Rights in connection with
such issuance or sale; provided, however, that (i) no such Right Certificate
shall be issued if, and to the extent that, the Company shall be advised by
counsel that such issuance would create a significant risk of material adverse
tax consequences to the Company or the person to whom such Right
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<PAGE> 36
Certificate would be issued, and (ii) no such Right Certificate shall be issued
if, and to the extent that, appropriate adjustments shall otherwise have been
made in lieu of the issuance thereof.
23. REDEMPTION.
23.1 The Board of Directors of the Company may, at its
option, redeem all but not less than all of the then outstanding Rights at a
redemption price of $0.001 per Right, appropriately adjusted to reflect any
dividend declared or paid on the Common Stock of the Company in shares of Common
Stock of the Company or any subdivision or combination of the outstanding shares
of Common Stock of the Company or similar event occurring after the date of this
Agreement (such redemption price, as adjusted from time to time, being
hereinafter referred to as the "Redemption Price"). The Rights may be redeemed
only until the earlier to occur of (i) 5:00 P.M., Boston, Massachusetts time, on
the tenth calendar day after the Stock Acquisition Date or (ii) the Final
Expiration Date.
23.2 Immediately upon the action of the Board of Directors
ordering the redemption of the Rights, and without any further action and
without any notice, the right to exercise the Rights will terminate and the only
right thereafter of the holders of Rights shall be to receive the Redemption
Price for each Right so held. Promptly after the action of the Board of
Directors ordering the redemption of the Rights, the Company shall give notice
of such redemption to the Rights Agent and the holders of the then outstanding
Rights by mailing such notice to the Rights Agent and to all such holders at
their last addresses as they appear upon the registry books of the Rights Agent
or, prior to the Distribution Date, on the registry books of the Transfer Agent
for the Common Stock of the Company. Any notice which is mailed in the manner
herein provided shall be deemed given, whether or not the holder receives the
notice. Each such notice of redemption will state the method by which the
payment of the Redemption Price will be made. Neither the Company nor any of its
Affiliates or Associates may redeem, acquire or purchase for value any Rights at
any time in any manner other than that specifically set forth in this Section 23
or Section 24 hereof or in connection with the purchase of shares of Common
Stock of the Company prior to the Distribution Date.
23.3 The Company may, at its option, pay the Redemption
Price in cash, shares of Common Stock of the Company (based on the Fair Market
Value of the Common Stock of the Company as of the time of redemption) or any
other form of consideration deemed appropriate by the Board of Directors.
24. EXCHANGE.
24.1
24.1.1 The Board of Directors of the Company may,
at its option, at any time on or after the Distribution Date, exchange all or
part of the then outstanding and exercisable Rights (which shall not include
Rights that have become void pursuant to the provisions of Section 7.5 hereof)
for shares of Common Stock of the Company at an
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<PAGE> 37
exchange ratio of one share of Common Stock of the Company per Right,
appropriately adjusted to reflect any stock split, stock dividend or similar
transaction occurring after the date hereof (such exchange ratio being
hereinafter referred to as the "Section 24.1.1 Exchange Ratio"). Notwithstanding
the foregoing, the Board of Directors shall not be empowered to effect such
exchange at any time after any Person (other than an Exempt Person), together
with all Affiliates and Associates of such Person, becomes the Beneficial Owner
of 50% or more of the Common Stock of the Company.
24.1.2 Notwithstanding the foregoing, the Board of
Directors of the Company may, at its option, at any time on or after the
Distribution Date, exchange all or part of the then outstanding and exercisable
Rights (which shall not include Rights that have become void pursuant to the
provisions of Section 7.5 hereof) for shares of Common Stock of the Company at
an exchange ratio specified in the following sentence, as appropriately adjusted
to reflect any stock split, stock dividend or similar transaction occurring
after the date of this Agreement. Subject to the adjustment described in the
foregoing sentence, each Right may be exchanged for that number of shares of
Common Stock of the Company obtained by dividing the Spread (as defined in
Section 11.1.3) by the then Fair Market Value per one one-thousandth of a share
of Preferred Stock on the earlier of (a) the date on which any person becomes an
Acquiring Person or (b) the date on which a tender or exchange offer by any
Person (other than an Exempt Person) is first published or sent or given within
the meaning of Rule 14d-4(a) of the Exchange Act or any successor rule, if upon
consummation thereof such Person would be the Beneficial Owner of more than 20%
of the shares of Common Stock of the Company then outstanding (such exchange
ratio being referred to herein as the "Section 24.1.2 Exchange Ratio").
Notwithstanding the foregoing, the Board of Directors shall
not be empowered to effect such exchange at any time after any Person (other
than an Exempt Person), together with all Affiliates and Associates of such
Person, becomes the Beneficial Owner of 50% or more of the Common Stock of the
Company.
24.2 Immediately upon the action of the Board of Directors
of the Company ordering the exchange of any Rights pursuant to subsection (a) of
this Section 24 and without any further action and without any notice, the right
to exercise such Rights shall terminate and the only right thereafter of a
holder of such Rights shall be to receive that number of shares of Common Stock
of the Company equal to the number of such Rights held by such holder multiplied
by the Section 24.1.1 Exchange Ratio or the Section 24.1.2 Exchange Ratio, as
applicable. The Company shall promptly give notice of any such exchange in
accordance with Section 26 hereof and shall promptly mail a notice of any such
exchange to all of the holders of such Rights at their last addresses as they
appear upon the registry books of the Rights Agent; provided, however, that the
failure to give, or any defect in, such notice shall not affect the validity of
such exchange. Any notice which is mailed in the manner herein provided shall be
deemed given, whether or not the holder receives the notice. Each such notice of
exchange will state the method by which the exchange of the shares of Common
Stock of the Company for Rights will be effected and, in the event of any
partial exchange, the number of Rights
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<PAGE> 38
which will be exchanged. Any partial exchange shall be effected pro rata based
on the number of Rights (other than Rights which have become void pursuant to
the provisions of Section 7.5 hereof) held by each holder of Rights.
24.3 In any exchange pursuant to this Section 24, the
Company, at its option, may substitute Preferred Stock (or Preferred Stock
Equivalent, as such term is defined in Section 11.2 hereof) for Common Stock of
the Company exchangeable for Rights, at the initial rate of one one-thousandth
of a share of Preferred Stock (or Preferred Stock Equivalent) for each share of
Common Stock of the Company, as appropriately adjusted to reflect adjustments in
the voting rights of the Preferred Stock pursuant to the terms thereof, so that
the fraction of a share of Preferred Stock delivered in lieu of each share of
Common Stock of the Company shall have the same voting rights as one share of
Common Stock of the Company.
24.4 In the event that there shall not be sufficient
shares of Common Stock of the Company or Preferred Stock (or Preferred Stock
Equivalent) issued but not outstanding or authorized but unissued to permit any
exchange of Rights as contemplated in accordance with this Section 24, the
Company shall take all such action as may be necessary to authorize additional
shares of Common Stock of the Company or Preferred Stock (or Preferred Stock
Equivalent) for issuance upon exchange of the Rights.
24.5 The Company shall not be required to issue fractions
of Common Stock of the Company or to distribute certificates which evidence
fractional shares of Common Stock of the Company. If the Company elects not to
issue such fractional shares of Common Stock of the Company, the Company shall
pay, in lieu of such fractional shares of Common Stock of the Company, to the
registered holders of the Right Certificates with regard to which such
fractional shares of Common Stock of the Company would otherwise be issuable, an
amount in cash equal to the same fraction of the Fair Market Value of a whole
share of Common Stock of the Company. For the purposes of this Section 24.5, the
Fair Market Value of a whole share of Common Stock of the Company shall be the
closing price of a share of Common Stock of the Company (as determined pursuant
to the second sentence of Section 11.4.1 hereof) for the Trading Day immediately
prior to the date of exchange pursuant to this Section 24.
25. NOTICE OF CERTAIN EVENTS.
25.1 In case the Company shall propose, at any time after
the Distribution Date, to (a) pay any dividend payable in stock of any class to
the holders of Preferred Stock or to make any other distribution to the holders
of Preferred Stock (other than a regular periodic cash dividend out of earnings
or retained earnings of the Company), (b) offer to the holders of Preferred
Stock rights or warrants to subscribe for or to purchase any additional shares
of Preferred Stock or shares of stock of any class or any other securities,
rights or options, (c) effect any reclassification of its Preferred Stock (other
than a reclassification involving only the subdivision of outstanding shares of
Preferred Stock), (d) effect any consolidation or merger into or with, or to
effect any sale, mortgage or other transfer (or to permit one or more of its
Subsidiaries to effect any sale,
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<PAGE> 39
mortgage or other transfer), in one transaction or a series of related
transactions, of 50% or more of the assets or earning power of the Company and
its Subsidiaries (taken as a whole) to, any other Person (other than a
Subsidiary of the Company in one or more transactions each of which is not
prohibited by the proviso at the end of the first sentence of Section 11.14
hereof), (e) effect the liquidation, dissolution or winding up of the Company,
or (f) declare or pay any dividend on the Common Stock of the Company payable in
Common Stock of the Company or to effect a subdivision, combination or
consolidation of the Common Stock of the Company (by reclassification or
otherwise than by payment of dividends in Common Stock of the Company) then in
each such case, the Company shall give to each holder of a Right Certificate and
to the Rights Agent, in accordance with Section 26 hereof, a notice of such
proposed action, which shall specify the record date for the purposes of such
stock dividend, distribution of rights or warrants, or the date on which such
reclassification, consolidation, merger, sale, transfer, liquidation,
dissolution, or winding up is to take place and the date of participation
therein by the holders of the shares of Common Stock of the Company and/or
Preferred Stock, if any such date is to be fixed, and such notice shall be so
given in the case of any action covered by clause (a) or (b above at least
twenty (20) days prior to the record date for determining holders of the shares
of Preferred Stock for purposes of such action, and in the case of any such
other action, at least twenty (20) days prior to the date of the taking of such
proposed action or the date of participation therein by the holders of the
shares of Common Stock of the Company and/or Preferred Stock, whichever shall be
the earlier; provided, however, no such notice shall be required pursuant to
this Section 25 as a result of any Subsidiary of the Company effecting a
consolidation or merger with or into, or effecting a sale or other transfer of
assets or earnings power to, any other Subsidiary of the Company in a manner not
inconsistent with the provisions of this Agreement.
25.2 In case any Section 11.1.2 Event shall occur, then,
in any such case, the Company shall as soon as practicable thereafter give to
each registered holder of a Right Certificate and to the Rights Agent, in
accordance with Section 26 hereof, a notice of the occurrence of such event,
which shall specify the event and the consequences of the event to holders of
Rights under Section 11.1.2 hereof.
26. NOTICES. Notices or demands authorized by this Agreement to be
given or made by the Rights Agent or by the holder of any Right Certificate to
or on the Company shall be sufficiently given or made if sent by first-class
mail, postage prepaid, by facsimile transmission or by nationally recognized
overnight courier addressed (until another address is filed in writing with the
Rights Agent) as follows:
Tweeter Home Entertainment Group, Inc.
40 Hudson Road
Canton, Massachusetts 02021
Attention: President
Subject to the provisions of Section 21, any notice or demand
authorized by this Agreement to be given or made by the Company or by the holder
of any Right Certificate
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<PAGE> 40
to or on the Rights Agent shall be sufficiently given or made if sent by
first-class mail, postage prepaid, by facsimile transmission or by
nationally-recognized overnight courier addressed (until another address is
filed in writing with the Company) as follows:
[_____________]
[______________________]
[______________________]
[______________________]
[______________________]
Notices or demands authorized by this Agreement to be given or made by
the Company or the Rights Agent to the holder of any Right Certificate (or,
prior to the Distribution Date, to the holder of any certificate representing
shares of Common Stock of the Company) shall be sufficiently given or made if
sent by first-class mail, postage prepaid, addressed to such holder at the
address of such holder as shown on the registry books of the Company.
27. SUPPLEMENTS AND AMENDMENTS. Prior to the Distribution Date,
the Company and the Rights Agent shall, if the Company so directs, supplement or
amend any provision of this Agreement as the Company may deem necessary or
desirable without the approval of any holders of certificates representing
shares of Common Stock of the Company. From and after the Distribution Date, the
Company and the Rights Agent shall, if the Company so directs, supplement or
amend this Agreement without the approval of any holder of Right Certificates in
order (i) to cure any ambiguity, (ii) to correct or supplement any provision
contained herein which may be defective or inconsistent with any other
provisions herein, (iii) to shorten or lengthen any time period hereunder, or
(iv) to change or supplement the provisions hereof in any manner which the
Company may deem necessary or desirable and which shall not adversely affect the
interests of the holders of Right Certificates (other than an Acquiring Person
or any Affiliate or Associate of an Acquiring Person); provided, however, that
from and after the Distribution Date this Agreement may not be supplemented or
amended to lengthen, pursuant to clause (iii) of this sentence, (A) a time
period relating to when the Rights may be redeemed at such time as the Rights
are not then redeemable or (B) any other time period unless such lengthening is
for the purpose of protecting, enhancing or clarifying the rights of, and the
benefits to, the holders of Rights (other than an Acquiring Person or any
Affiliate or Associate of an Acquiring Person). Upon the delivery of such
certificate from an appropriate officer of the Company which states that the
proposed supplement or amendment is in compliance with the terms of this Section
27, the Rights Agent shall execute such supplement or amendment. Prior to the
Distribution Date, the interests of the holders of Rights shall be deemed
coincident with the interests of the holders of Common Stock of the Company.
Notwithstanding any other provision hereof, the Rights Agent's consent must be
obtained regarding any amendment or supplement pursuant to this Section 27 which
alters the Rights Agent's rights or duties.
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<PAGE> 41
28. SUCCESSORS. All the covenants and provisions of this Agreement
by or for the benefit of the Company or the Rights Agent shall bind and inure to
the benefit of their respective successors and assigns hereunder.
29. DETERMINATIONS AND ACTIONS BY THE BOARD OF DIRECTORS. For all
purposes of this Agreement, any calculation of the number of shares of Common
Stock of the Company outstanding at any particular time, including for purposes
of determining the particular percentage of such outstanding shares of Common
Stock of the Company of which any Person is the Beneficial Owner, shall be made
in accordance with the last sentence of Rule 13d-3(d)(1)(i) of the Rules under
the Exchange Act as in effect on the date hereof. The Board of Directors of the
Company shall have the exclusive power and authority to administer this
Agreement and to exercise all rights and powers specifically granted to the
Board of Directors or to the Company, or as may be necessary or advisable in the
administration of this Agreement, including without limitation, the right and
power to (a) interpret the provisions of this Agreement and (b) make all
determinations deemed necessary or advisable for the administration of this
Agreement (including a determination to redeem or not redeem the Rights or to
amend the Agreement). All such actions, calculations, interpretations and
determinations (including, for purposes of clause (ii) below, all omissions with
respect to the foregoing) which are done or made by the Board of Directors in
good faith shall (i) be final, conclusive and binding on the Company, the Rights
Agent, the holders of the Rights and all other parties, and (ii) not subject any
member of the Board of Directors to any liability to the holders of the Rights
or to any other person.
30. BENEFITS OF THIS AGREEMENT. Nothing in this Agreement shall be
construed to give to any person or corporation other than the Company, the
Rights Agent and the registered holders of the Right Certificates (and, prior to
the Distribution Date, the Common Stock of the Company) any legal or equitable
right, remedy or claim under this Agreement; but this Agreement shall be for the
sole and exclusive benefit of the Company, the Rights Agent and the registered
holders of the Right Certificates (and, prior to the Distribution Date,
registered holders of the Common Stock of the Company).
31. SEVERABILITY. If any term, provision, covenant or restriction
of this Agreement is held by a court of competent jurisdiction or other
authority to be invalid, void or unenforceable, the remainder of the terms,
provisions, covenants and restrictions of this Agreement shall remain in full
force and effect and shall in no way be affected, impaired or invalidated;
provided, however, that notwithstanding anything in this Agreement to the
contrary, if any such term, provision, covenant or restriction is held by such
court or authority to be invalid, void or unenforceable and the Board of
Directors of the Company determines in its good faith judgment that severing the
invalid language from the Agreement would adversely affect the purpose or effect
of the Agreement, the right of redemption set forth in Section 23 hereof shall
be reinstated and shall not expire until the Close of Business on the tenth day
following the date of such determination by the Board of Directors.
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<PAGE> 42
32. GOVERNING LAW. This Agreement, each Right and each Right
Certificate issued hereunder shall be deemed to be a contract made under the
laws of the State of Delaware and for all purposes shall be governed by and
construed in accordance with the laws of such state applicable to contracts to
be made and to be performed entirely within such state. The courts of the State
of Delaware and of the United States of America located in the State of Delaware
(the "Delaware Courts") shall have exclusive jurisdiction over any litigation
arising out of or relating to this Agreement and the transactions contemplated
hereby, and any Person commencing or otherwise involved in any such litigation
shall waive any objection to the laying of venue of such litigation in the
Delaware Courts and shall not plead or claim in any Delaware Court that such
litigation brought therein has been brought in an inconvenient forum.
33. COUNTERPARTS. This Agreement may be executed in any number of
counterparts and each of such counterparts shall for all purposes be deemed to
be an original, and all such counterparts shall together constitute but one and
the same instrument.
34. DESCRIPTIVE HEADINGS. Descriptive headings of the several
Sections of this Agreement are inserted for convenience only and shall not
control or affect the meaning or construction of any of the provisions hereof.
[SIGNATURE PAGE FOLLOWS]
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<PAGE> 43
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed as of the day and year first above written.
TWEETER HOME ENTERTAINMENT GROUP, INC.
By:
---------------------------------
Name:
Title:
[________________]
By:
---------------------------------
Name:
Title:
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<PAGE> 44
EXHIBIT A
FORM OF
CERTIFICATE OF DESIGNATION
OF
SERIES A JUNIOR PARTICIPATING CUMULATIVE PREFERRED STOCK
OF
TWEETER HOME ENTERTAINMENT GROUP, INC.
Pursuant to Section 151 of the
General Corporation Law of the State of Delaware
TWEETER HOME ENTERTAINMENT GROUP, INC. (the "Company"), a corporation
organized and existing under the General Corporation Law of the State of
Delaware (the "DGCL"), DOES HEREBY CERTIFY:
That the following resolution was duly adopted by the Board of
Directors of the Company, pursuant to the authority conferred upon the Board of
Directors by Article IV, Section C of the Company's Amended and Restated
Certificate of Incorporation and the provisions of Section 151 of the DGCL, at a
duly called meeting of the Board of Directors held on _____________, 1998:
RESOLVED: That the Board of Directors hereby designates 200,000 shares of the
Company's Preferred Stock, $.01 par value, as Series A Junior
Participating Cumulative Preferred Stock with the designations,
powers, preferences, and relative, participating, optional or other
rights, and the qualifications, limitations or restrictions thereof,
set forth on EXHIBIT 1 hereto.
IN WITNESS WHEREOF, the Company has caused this Certificate of
Designation to be executed by _________________, its ___________.
TWEETER HOME ENTERTAINMENT GROUP, INC.
By:
----------------------------------------
Name:
Title:
<PAGE> 45
EXHIBIT 1
DESIGNATIONS, POWERS, PREFERENCES, AND RELATIVE,
PARTICIPATING, OPTIONAL OR OTHER RIGHTS, AND THE
QUALIFICATIONS, LIMITATIONS OR RESTRICTIONS THEREOF,
OF
SERIES A JUNIOR PARTICIPATING CUMULATIVE PREFERRED STOCK
OF
TWEETER HOME ENTERTAINMENT GROUP, INC.
SECTION 1. DESIGNATION AND AMOUNT. The shares of such series shall be
designated as "Series A Junior Participating Cumulative Preferred Stock," $.01
par value, (hereinafter called "Series A Preferred Stock"), and the number of
shares initially constituting such series shall be 200,000. Such number of
shares may be increased or decreased by resolution of the Board of Directors and
by the filing of a certificate pursuant to the provisions of the General
Corporation Law of the State of Delaware stating that such increase or reduction
has been so authorized; provided, however, that no decrease shall reduce the
number of shares of Series A Preferred Stock to a number less than that of the
shares then outstanding plus the number of shares of Series A Preferred Stock
issuable upon exercise of outstanding rights, options or warrants or upon
conversion of outstanding securities issued by the Corporation.
SECTION 2. DIVIDENDS AND DISTRIBUTIONS.
(A) (i) Subject to the rights of the holders of any
shares of any series of preferred stock (or any similar stock) ranking prior and
superior to the Series A Preferred Stock with respect to dividends, the holders
of shares of Series A Preferred Stock, in preference to the holders of shares of
Common Stock and of any other junior stock, shall be entitled to receive, when,
as and if declared by the Board of Directors out of funds legally available for
the purpose, quarterly dividends payable in cash on the first day of March,
June, September and December in each year (each such date being referred to
herein as a "Quarterly Dividend Payment Date"), commencing on the first
Quarterly Dividend Payment Date after the first issuance of a share or fraction
of a share of Series A Preferred Stock, in an amount per share (rounded to the
nearest cent) equal to the greater of (a) $1.00 or (b) subject to the provisions
for adjustment hereinafter set forth, 1,000 times the aggregate per share amount
of all cash dividends, and 1,000 times the aggregate per share amount (payable
in kind) of all non-cash dividends or other distributions other than a dividend
payable in shares of Common Stock or a subdivision of the outstanding shares of
Common Stock (by reclassification or otherwise), declared on the shares of
Common Stock since the immediately preceding Quarterly Dividend Payment Date,
or, with respect to the first Quarterly Dividend Payment Date, since the first
issuance of any share or fraction of a share of Series A Preferred Stock. The
multiple of cash and non-cash dividends declared on the shares of Common Stock
to which
<PAGE> 46
holders of the Series A Preferred Stock are entitled, which shall be 1,000
initially but which shall be adjusted from time to time as hereinafter provided,
is hereinafter referred to as the "Dividend Multiple." In the event the
Corporation shall at any time after __________, 1998 (the "Rights Declaration
Date") (i) declare or pay any dividend on the shares of Common Stock payable in
shares of Common Stock, or (ii) effect a subdivision or combination or
consolidation of the outstanding shares of Common Stock (by reclassification or
otherwise than by payment of a dividend in shares of Common Stock) into a
greater or lesser number of shares of Common Stock, then in each such case the
Dividend Multiple thereafter applicable to the determination of the amount of
dividends which holders of shares of Series A Preferred Stock shall be entitled
to receive shall be the Dividend Multiple applicable immediately prior to such
event multiplied by a fraction, the numerator of which is the number of shares
of Common Stock outstanding immediately after such event and the denominator of
which is the number of shares of Common Stock that were outstanding immediately
prior to such event.
(ii) Notwithstanding anything else contained in
this paragraph (A), the Corporation shall, out of funds legally available for
that purpose, declare a dividend or distribution on the Series A Preferred Stock
as provided in this paragraph (A) immediately after it declares a dividend or
distribution on the shares of Common Stock (other than a dividend payable in
shares of Common Stock); provided that, in the event no dividend or distribution
shall have been declared on the shares of Common Stock during the period between
any Quarterly Dividend Payment Date and the next subsequent Quarterly Dividend
Payment Date, a dividend of $1.00 per share on the Series A Preferred Stock
shall nevertheless be payable on such subsequent Quarterly Dividend Payment
Date.
(B) Dividends shall begin to accrue and be cumulative on
outstanding shares of Series A Preferred Stock from the Quarterly Dividend
Payment Date next preceding the date of issue of such shares of Series A
Preferred Stock, unless the date of issue of such shares is prior to the record
date for the first Quarterly Dividend Payment Date, in which case dividends on
such shares shall begin to accrue from the date of issue of such shares, or
unless the date of issue is a Quarterly Dividend Payment Date or is a date after
the record date for the determination of holders of shares of Series A Preferred
Stock entitled to receive a quarterly dividend and before such Quarterly
Dividend Payment Date, in either of which events such dividends shall begin to
accrue and be cumulative from such Quarterly Dividend Payment Date. Accrued but
unpaid dividends shall not bear interest. Dividends paid on the shares of Series
A Preferred Stock in an amount less than the total amount of such dividends at
the time accrued and payable on such shares shall be allocated pro rata on a
share-by-share basis among all such shares at the time outstanding. The Board of
Directors may fix in accordance with applicable law a record date for the
determination of holders of shares of Series A Preferred Stock entitled to
receive payment of a dividend or distribution declared thereon, which record
date shall be not more than such number of days prior to the date fixed for the
payment thereof as may be allowed by applicable law.
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<PAGE> 47
SECTION 3. VOTING RIGHTS. In addition to any other voting rights
required by law, the holders of shares of Series A Preferred Stock shall have
the following voting rights:
(A) Subject to the provision for adjustment hereinafter
set forth, each share of Series A Preferred Stock shall entitle the holder
thereof to 1,000 votes on all matters submitted to a vote of the stockholders of
the Corporation. The number of votes which a holder of a share of Series A
Preferred Stock is entitled to cast, which shall initially be 1,000 but which
may be adjusted from time to time as hereinafter provided, is hereinafter
referred to as the "Vote Multiple." In the event the Corporation shall at any
time after the Rights Declaration Date (i) declare or pay any dividend on shares
of Common Stock payable in shares of Common Stock, or (ii) effect a subdivision
or combination or consolidation of the outstanding shares of Common Stock (by
reclassification or otherwise than by payment of a dividend in shares of Common
Stock) into a greater or lesser number of shares of Common Stock, then in each
such case the Vote Multiple thereafter applicable to the determination of the
number of votes per share to which holders of shares of Series A Preferred Stock
shall be entitled shall be the Vote Multiple immediately prior to such event
multiplied by a fraction, the numerator of which is the number of shares of
Common Stock outstanding immediately after such event and the denominator of
which is the number of shares of Common Stock that were outstanding immediately
prior to such event.
(B) Except as otherwise provided herein or by law, the
holders of shares of Series A Preferred Stock and the holders of shares of
Common Stock and the holders of shares of any other capital stock of this
Corporation having general voting rights, shall vote together as one class on
all matters submitted to a vote of stockholders of the Corporation.
(C) (i) Whenever, at any time or times, dividends payable
on any shares of Series A Preferred Stock shall be in arrears in an amount equal
to at least two full quarter dividends (whether or not declared and whether or
not consecutive), the holders of record of the outstanding shares of Series A
Preferred Stock shall have the exclusive right, voting separately as a single
class, to elect two directors of the Corporation at a special meeting of
stockholders of the Corporation or at the Corporation's next annual meeting of
stockholders, and at each subsequent annual meeting of stockholders, as provided
below. At elections for such directors, each Series A Preferred Share shall
entitle the holder thereof to 1,000 votes in such elections.
(ii) Upon the vesting of such right of the
holders of shares of Series A Preferred Stock, the maximum authorized number of
members of the Board of Directors shall automatically be increased by two and
the two vacancies so created shall be filled by vote of the holders of the
outstanding shares of Series A Preferred Stock as hereinafter set forth. A
special meeting of the stockholders of the Corporation then entitled to vote
shall be called by the Chairman of the Board of Directors or the President or
the Secretary of the Corporation, if requested in writing by the holders of
record of not less than 10% of the shares of Series A Preferred Stock then
outstanding. At such special
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<PAGE> 48
meeting, or, if no such special meeting shall have been called, then at the next
annual meeting of stockholders of the Corporation, the holders of the shares of
Series A Preferred Stock shall elect, voting as above provided, two directors of
the Corporation to fill the aforesaid vacancies created by the automatic
increase in the number of members of the Board of Directors. At any and all such
meetings for such election, the holders of a majority of the outstanding shares
of Series A Preferred Stock shall be necessary to constitute a quorum for such
election, whether present in person or proxy, and such two directors shall be
elected by the vote of at least a majority of the shares of Series A Preferred
Stock held by such stockholders present or represented at the meeting. Any
director elected by holders of shares of Series A Preferred Stock pursuant to
this Section may be removed at any annual or special meeting, by vote of a
majority of the stockholders voting as a class who elected such director, with
or without cause. In case any vacancy shall occur among the directors elected by
the holders of shares of Series A Preferred Stock pursuant to this Section, such
vacancy may be filled by the remaining director so elected, or his successor
then in office, and the director so elected to fill such vacancy shall serve
until the next meeting of stockholders for the election of directors. After the
holders of shares of Series A Preferred Stock shall have exercised their right
to elect directors in any default period and during the continuance of such
period, the number of directors shall not be further increased or decreased
except by vote of the holders of shares of Series A Preferred Stock as herein
provided or pursuant to the rights of any equity securities ranking senior to or
pari passu with the Series A Preferred Stock.
(iii) The right of the holders of shares of Series
A Preferred Stock, voting separately as a class, to elect two members of the
Board of Directors of the Corporation as aforesaid shall continue until, and
only until, such time as all arrears in dividends (whether or not declared) on
the Series A Preferred Stock shall have been paid or declared and set apart for
payment, at which time such right shall terminate, except as herein or by law
expressly provided subject to revesting in the event of each and every
subsequent default of the character above-mentioned. Upon any termination of the
right of the holders of the Series A Preferred Stock as a class to vote for
directors as herein provided, the term of office of all directors then in office
elected by the holders of shares of Series A Preferred Stock pursuant to this
Section shall terminate immediately. Whenever the term of office of the
directors elected by the holders of shares of Series A Preferred Stock pursuant
to this Section shall terminate and the special voting powers vested in the
holders of the Series A Preferred Stock pursuant to this Section shall have
expired, the maximum number of members of this Board of Directors of the
Corporation shall be such number as may be provided for in the By-laws of the
Corporation, irrespective of any increase made pursuant to the provisions of
this Section.
(D) Except as otherwise required by applicable law or as
set forth herein, holders of Series A Preferred Stock shall have no special
voting rights and their consent shall not be required (except to the extent they
are entitled to vote with holders of shares of Common Stock as set forth herein)
for taking any corporate action.
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<PAGE> 49
SECTION 4. CERTAIN RESTRICTIONS.
(A) Whenever dividends or distributions payable on the
Series A Preferred Stock as provided in Section 2 are in arrears, thereafter and
until all accrued and unpaid dividends and distributions, whether or not
declared, on shares of Series A Preferred Stock outstanding shall have been paid
in full, the Corporation shall not: (i) declare or pay dividends on, make any
other distributions on, or redeem or purchase or otherwise acquire for
consideration any shares of stock ranking junior (either as to dividends or upon
liquidation, dissolution or winding up) to the Series A Preferred Stock; (ii)
declare or pay dividends on or make any other distributions on any shares of
stock ranking on a parity (either as to dividends or upon liquidation,
dissolution or winding up) with the Series A Preferred Stock, except dividends
paid ratably on the Series A Preferred Stock and all such parity stock on which
dividends are payable or in arrears in proportion to the total amounts to which
the holders of all such shares are then entitled; (iii) except as permitted in
subsection 4(A)(iv) below, redeem, purchase or otherwise acquire for
consideration shares of any stock ranking on a parity (either as to dividends or
upon liquidation, dissolution or winding up) with the Series A Preferred Stock,
provided that the Corporation may at any time redeem, purchase or otherwise
acquire shares of any such parity stock in exchange for shares of any stock of
the Corporation ranking junior (either as to dividends or upon dissolution,
liquidation or winding up) to the Series A Preferred Stock; or (iv) purchase or
otherwise acquire for consideration any shares of Series A Preferred Stock, or
any shares of any stock ranking on a parity (either as to dividends or upon
liquidation, dissolution or winding up) with the Series A Preferred Stock,
except in accordance with a purchase offer made in writing or by publication (as
determined by the Board of Directors) to all holders of such shares upon such
terms as the Board of Directors, after consideration of the respective annual
dividend rates and other relative rights and preferences of the respective
series and classes, shall determine in good faith will result in fair and
equitable treatment among the respective series or classes.
(B) The Corporation shall not permit any subsidiary of
the Corporation to purchase or otherwise acquire for consideration any shares of
stock of the Corporation unless the Corporation could, under subsection (A) of
this Section 4, purchase or otherwise acquire such shares at such time and in
such manner.
SECTION 5. REACQUIRED SHARES. Any shares of Series A Preferred Stock
purchased or otherwise acquired by the Corporation in any manner whatsoever
shall be retired and canceled promptly after the acquisition thereof. All such
shares shall upon their cancellation become authorized but unissued shares of
preferred stock and may be reissued as part of a new series of preferred stock
to be created by resolution or resolutions of the Board of Directors, subject to
the conditions and restrictions on issuance set forth herein.
SECTION 6. LIQUIDATION, DISSOLUTION OR WINDING UP. Upon any
liquidation (voluntary or otherwise), dissolution or winding up of the
Corporation, no distribution shall be made (a) to the holders of shares of stock
ranking junior (either as to dividends or
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<PAGE> 50
upon liquidation, dissolution or winding up) to the Series A Preferred Stock
unless, prior thereto, the holders of shares of Series A Preferred Stock shall
have received an amount equal to accrued and unpaid dividends and distributions
thereon, whether or not declared, to the date of such payment, plus an amount
equal to the greater of (1) $1,000.00 per share or (2) an aggregate amount per
share, subject to the provision for adjustment hereinafter set forth, equal to
1,000 times the aggregate amount to be distributed per share to holders of
shares of Common Stock, or (b) to the holders of stock ranking on a parity
(either as to dividends or upon liquidation, dissolution or winding up) with the
Series A Preferred Stock, except distributions made ratably on the Series A
Preferred Stock and all other such parity stock in proportion to the total
amounts to which the holders of all such shares are entitled upon such
liquidation, dissolution or winding up. In the event the Corporation shall at
any time after the Rights Declaration Date (i) declare or pay any dividend on
shares of Common Stock payable in shares of Common Stock, or (ii) effect a
subdivision or combination or consolidation of the outstanding shares of Common
Stock (by reclassification or otherwise than by payment of a dividend in shares
of Common Stock) into a greater or lesser number of shares of Common Stock, then
in each such case the aggregate amount per share to which holders of shares of
Series A Preferred Stock were entitled immediately prior to such event under
clause (a) of this paragraph shall be adjusted by multiplying such amount by a
fraction, the numerator of which is the number of shares of Common Stock
outstanding immediately after such event and the denominator of which is the
number of shares of Common Stock that were outstanding immediately prior to such
event.
Neither the consolidation of nor merging of the Corporation with or
into any other corporation or corporations, nor the sale or other transfer of
all or substantially all of the assets of the Corporation, shall be deemed to be
a liquidation, dissolution or winding up of the Corporation within the meaning
of this Section 6.
SECTION 7. CONSOLIDATION, MERGER, ETC. In case the Corporation shall
enter into any consolidation, merger, combination or other transaction in which
the shares of Common Stock are exchanged for or changed into other stock or
securities, cash and/or any other property, then in any such case the shares of
Series A Preferred Stock shall at the same time be similarly exchanged or
changed in an amount per share (subject to the provision for adjustment
hereinafter set forth) equal to 1,000 times the aggregate amount of stock,
securities, cash and/or any other property (payable in kind), as the case may
be, into which or for which each share of Common Stock is changed or exchanged,
plus accrued and unpaid dividends, if any, payable with respect to the Series A
Preferred Stock. In the event the Corporation shall at any time after the Rights
Declaration Date (i) declare or pay any dividend on shares of Common Stock
payable in shares of Common Stock, or (ii) effect a subdivision or combination
or consolidation of the outstanding shares of Common Stock (by reclassification
or otherwise than by payment of a dividend in shares of Common Stock) into a
greater or lesser number of shares of Common Stock, then in each such case the
amount set forth in the preceding sentence with respect to the exchange or
change of shares of Series A Preferred Stock shall be adjusted by multiplying
such amount by a fraction, the numerator of which is the number of shares of
Common
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<PAGE> 51
Stock outstanding immediately after such event and the denominator of which is
the number of shares of Common Stock that were outstanding immediately prior to
such event.
SECTION 8. REDEMPTION. The shares of Series A Preferred Stock shall not
be redeemable; provided, however, that the foregoing shall not limit the ability
of the Corporation to purchase or otherwise deal in such shares to the extent
otherwise permitted hereby and by law.
SECTION 9. RANKING. Unless otherwise provided in the Certificate of
Incorporation or a Certificate of Designation relating to a
subsequently-designated series of preferred stock of the Corporation, the Series
A Preferred Stock shall rank junior to any other series of the Corporation's
preferred stock subsequently issued, as to the payment of dividends and the
distribution of assets on liquidation, dissolution or winding up and shall rank
senior to the Common Stock.
SECTION 10. AMENDMENT. The Certificate of Incorporation and this
Certificate of Designation shall not be amended in any manner which would
materially alter or change the powers, preferences or special rights of the
Series A Preferred Stock so as to affect them adversely without the affirmative
vote of the holders of two-thirds or more of the outstanding shares of Series A
Preferred Stock, voting separately as a class.
SECTION 11. FRACTIONAL SHARES. Shares of Series A Preferred Stock may
be issued in whole shares or in any fraction of a share that is one
one-thousandth (1/1,000th) of a share or any integral multiple of such fraction,
which shall entitle the holder, in proportion to such holder's fractional
shares, to exercise voting rights, receive dividends, participate in
distributions and to have the benefit of all other rights of holders of shares
of Series A Preferred Stock. In lieu of fractional shares, the Corporation may
elect to make a cash payment as provided in the Rights Agreement for fractions
of a share other than one one-thousandth (1/1,000th) of a share or any integral
multiple thereof.
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<PAGE> 52
EXHIBIT B
FORM OF RIGHT CERTIFICATE
Certificate No. R- [Number] Rights
----------
NOT EXERCISABLE AFTER ___________, 200__ OR EARLIER IF NOTICE OF REDEMPTION IS
GIVEN. THE RIGHTS ARE SUBJECT TO REDEMPTION, AT THE OPTION OF TWEETER HOME
ENTERTAINMENT GROUP, INC., AT $0.001 PER RIGHT ON THE TERMS SET FORTH IN THE
SHAREHOLDER RIGHTS AGREEMENT BETWEEN TWEETER HOME ENTERTAINMENT GROUP, INC. AND
_____________, AS RIGHTS AGENT, DATED AS OF _________, 1998 (THE "RIGHTS
AGREEMENT"). UNDER CERTAIN CIRCUMSTANCES SPECIFIED IN SECTION 7.5 OF THE RIGHTS
AGREEMENT, RIGHTS BENEFICIALLY OWNED BY AN ACQUIRING PERSON OR AN ASSOCIATE OR
AFFILIATE OF AN ACQUIRING PERSON (AS SUCH TERMS ARE DEFINED IN THE RIGHTS
AGREEMENT) AND ANY SUBSEQUENT HOLDER OF SUCH RIGHTS MAY BECOME NULL AND VOID.
TWEETER HOME ENTERTAINMENT GROUP, INC.
RIGHT CERTIFICATE
This certifies that ________________________, or registered assigns, is the
registered owner of the number of Rights set forth above, each of which entitles
the owner thereof, subject to the terms, provisions and conditions of the
Shareholder Rights Agreement dated as of , 199 (the "Rights Agreement") between
TWEETER HOME ENTERTAINMENT GROUP, INC. (the "Company") and RIGHTS AGENT , as
Rights Agent (the "Rights Agent"), to purchase from the Company at any time
after the Distribution Date (as such term is defined in the Rights Agreement)
and prior to the close of business on _________, 200__ at the office or offices
of the Rights Agent designated for such purpose, or its successors as Rights
Agent, one one-thousandth of a fully paid, non-assessable share of Series A
Junior Participating Cumulative Preferred Stock (the "Preferred Stock") of the
Company, at a purchase price of $___ per one one-thousandth of a share (the
"Exercise Price"), upon presentation and surrender of this Right Certificate
with the Form of Election to Purchase and the related Certificate duly executed.
The number of Rights evidenced by this Right Certificate (and the number of
shares which may be purchased upon exercise thereof) set forth above, and the
Exercise Price per share set forth above, are the number and Exercise Price as
of , based on the shares of Preferred Stock as constituted at such date.
Upon the occurrence of a Section 11.1.2 Event (as such term is defined
in the Rights Agreement), if the Rights evidenced by this Right Certificate are
beneficially owned by (a) an Acquiring Person or an Affiliate or Associate of
any such Person (as such terms are defined in the Rights Agreement), (b) a
transferee of any such Acquiring
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<PAGE> 53
Person, Associate or Affiliate, or (c) under certain circumstances specified in
the Rights Agreement, a transferee of a Person who, after such transfer, became
an Acquiring Person or an Affiliate or Associate of an Acquiring Person, such
Rights shall become null and void and no holder hereof shall have any right with
respect to such Rights from and after the occurrence of such Section 11.1.2
Event.
As provided in the Rights Agreement, the Exercise Price and the number
of shares of Preferred Stock or other securities which may be purchased upon the
exercise of the Rights evidenced by this Right Certificate are subject to
modification and adjustment upon the happening of certain events.
This Right Certificate is subject to all of the terms, provisions and
conditions of the Rights Agreement, which terms, provisions and conditions are
hereby incorporated herein by reference and made a part hereof and to which
Rights Agreement reference is hereby made for a full description of the rights,
limitations of rights, obligations, duties and immunities hereunder of the
Rights Agent, the Company and the holders of the Right Certificates, which
limitations of rights include the temporary suspension of the exercisability of
such Rights under the specific circumstances set forth in the Rights Agreement.
Copies of the Rights Agreement are on file at the principal office of the
Company and the designated office of the Rights Agent and are also available
upon written request to the Company or the Rights Agent.
This Right Certificate, with or without other Right Certificates, upon
surrender at the office or offices of the Rights Agent designated for such
purpose, may be exchanged for another Right Certificate or Certificates of like
tenor and date evidencing Rights entitling the holder to purchase a like
aggregate number of shares of Preferred Stock as the Rights evidenced by the
Right Certificate or Certificates surrendered shall have entitled such holder to
purchase. If this Right Certificate shall be exercised in part, the holder shall
be entitled to receive upon surrender hereof another Right Certificate or
Certificates for the number of whole Rights not exercised. If this Right
Certificate shall be exercised in whole or in part pursuant to Section 11.1.2 of
the Rights Agreement, the holder shall be entitled to receive this Right
Certificate duly marked to indicate that such exercise has occurred as set forth
in the Rights Agreement.
Under certain circumstances, subject to the provisions of the Rights
Agreement, the Board of Directors of the Company at its option may exchange all
or any part of the Rights evidenced by this Certificate for shares of the
Company's Common Stock or Preferred Stock at an exchange ratio (subject to
adjustment) of one share of Common Stock or one one-thousandth of a share of
Preferred Stock per Right.
Subject to the provisions of the Rights Agreement, the Rights evidenced
by this Certificate may be redeemed by the Board of Directors of the Company at
its option at a redemption price of $0.001 per Right (payable in cash, Common
Stock or other consideration deemed appropriate by the Board of Directors).
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<PAGE> 54
The Company is not obligated to issue fractional shares of stock upon
the exercise of any Right or Rights evidenced hereby (other than fractions which
are integral multiples of one one-thousandth of a share of Preferred Stock,
which may, at the election of the Company, be evidenced by depositary receipts).
If the Company elects not to issue such fractional shares, in lieu thereof a
cash payment will be made, as provided in the Rights Agreement.
No holder of this Right Certificate, as such, shall be entitled to vote
or receive dividends or be deemed for any purpose the holder of shares of
Preferred Stock, Common Stock or any other securities of the Company which may
at any time be issuable on the exercise hereof, nor shall anything contained in
the Rights Agreement or herein be construed to confer upon the holder hereof, as
such, any of the rights of a stockholder of the Company or any right to vote for
the election of directors or upon any matter submitted to stockholders at any
meeting thereof, or to give or withhold consent to any corporate action, or to
receive notice of meetings or other actions affecting stockholders (except as
provided in the Rights Agreement), or to receive dividends or subscription
rights, or otherwise, until the Right or Rights evidenced by this Right
Certificate shall have been exercised as provided in the Rights Agreement.
This Right Certificate shall not be valid or obligatory for any purpose
until it shall have been countersigned by an authorized signatory of the Rights
Agent.
WITNESS the facsimile signature of the proper officers of the Company
and its corporate seal.
Corporate Seal
TWEETER HOME ENTERTAINMENT COUNTERSIGNED:
GROUP, INC.
_________________, as Rights Agent
By: By:
-------------------------------- ------------------------------
Name: Name:
Title: Title:
Attest: Authorized Signatory
Date of countersignature:_________
- ------------------------------------
Name:
Title:
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<PAGE> 55
Form of Reverse Side of Right Certificate
FORM OF ASSIGNMENT
(To be executed by the registered holder if such
holder desires to transfer the Right Certificate.)
FOR VALUE RECEIVED __________________________ hereby sells, assigns and
transfers unto (Please print name and address of transferee) this Right
Certificate, together with all right, title and interest therein, and does
hereby irrevocably constitute and appoint ___________________________________ as
Attorney, to transfer the within Right Certificate on the books of the
within-named Company, with full power of substitution.
Dated:
Signature:___________________________
Printed name:________________________
Signature Guaranteed:
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<PAGE> 56
CERTIFICATE
The undersigned hereby certifies by checking the appropriate boxes
that:
(1) the Rights evidenced by this Right Certificate ___are ___are
not being transferred by or on behalf of a Person who is or was an Acquiring
Person or an Affiliate or Associate of any such Person (as such terms are
defined in the Rights Agreement); and
(2) after due inquiry and to the best knowledge of the
undersigned, the undersigned ___did ___did not directly or indirectly acquire
the Rights evidenced by this Right Certificate from any Person who is, was or
became an Acquiring Person or an Affiliate or Associate of any such Person.
Dated:
Signature:________________________
Printed name:_____________________
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<PAGE> 57
NOTICE
The signature to the foregoing Assignment and Certificate must
correspond to the name as written upon the face of this Right Certificate in
every particular, without alteration or enlargement or any change whatsoever.
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<PAGE> 58
FORM OF ELECTION TO PURCHASE
(To be executed if holder desires to exercise the Right Certificate.)
To TWEETER HOME ENTERTAINMENT GROUP, INC.:
The undersigned hereby irrevocably elects to exercise _____________ Rights
represented by this Right Certificate to purchase the shares of Preferred Stock
issuable upon the exercise of the Rights (or such other securities of the
Company or of any other person which may be issuable upon the exercise of the
Rights) and requests that certificates for such shares be issued in the name
of _________________________:
Please insert social security or other identifying taxpayer number:
________________________________
________________________________
________________________________
________________________________
________________________________
(Please print name and address)
If such number of Rights shall not be all the Rights evidenced by this Right
Certificate or if the Rights are being exercised pursuant to Section 11.1.2 of
the Rights Agreement, a new Right Certificate for the balance of such Rights
shall be registered in the name of and delivered to ____________________: Please
insert social security or other identifying taxpayer number:
Please insert social security or other identifying taxpayer number:
________________________________
________________________________
________________________________
________________________________
________________________________
(Please print name and address)
Signature:______________________
Signature Guaranteed:
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<PAGE> 59
CERTIFICATE
The undersigned hereby certifies by checking the appropriate boxes
that:
(1) the Rights evidenced by this Right Certificate ___are ___are
not being exercised by or on behalf of a Person who is or was an Acquiring
Person or an Affiliate or Associate of any such Person (as such terms are
defined in the Rights Agreement); and
(2) after due inquiry and to the best knowledge of the
undersigned, the undersigned ___did ___did not directly or indirectly acquire
the Rights evidenced by this Right Certificate from any Person who is, was or
became an Acquiring Person or an Affiliate or Associate of any such Person.
Dated:
Signature:________________________
Printed name:_____________________
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<PAGE> 60
NOTICE
The signature to the foregoing Election to Purchase and Certificate
must correspond to the name as written upon the face of this Right Certificate
in every particular, without alteration or enlargement or any change whatsoever.
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<PAGE> 1
EXHIBIT 5.1
[Current Draft form of Legal Opinion]
[Goulston & Storrs, P.C. Letterhead]
June ___, 1998
Tweeter Home Entertainment Group, Inc.
40 Hudson Road
Canton, MA 02021
Ladies and Gentlemen:
This opinion is furnished to you in connection with a registration
statement on Form S-1 (the "Registration Statement"), filed with the Securities
and Exchange Commission (the "Commission") under the Securities Act of 1933, as
amended, for the registration of 3,116,500 shares of Common Stock, $.01 par
value (the "Shares"), of Tweeter Home Entertainment Group, Inc., a Delaware
corporation (the "Company"). The Shares are to be sold pursuant to an
underwriting agreement (the "Underwriting Agreement") to be entered into among
the Company, on the one hand, and BT Alex. Brown, PaineWebber Incorporated, and
Dain Rauscher Wessels, a division of Dain Rauscher Incorporated, as
representatives of the several underwriters named in such Underwriting
Agreement, on the other hand.
We have reviewed the corporate proceedings taken by the Board of Directors
of the Company with respect to the authorization and issuance of the Shares. We
have also examined and relied upon originals or copies, certified or otherwise
authenticated to our satisfaction, of all corporate records, documents,
agreements or other instruments of the Company and have made all investigations
of law and have discussed with the Company's officers all questions of fact that
we have deemed necessary or appropriate in connection with this opinion letter.
We express no opinion as to the applicability of compliance with or effect
of Federal law or the law of any jurisdiction other than the General Corporation
Law of the State of Delaware. Based upon the foregoing, we are of the opinion
that upon the filing with the Secretary of State of the State of Delaware of the
Company's Amended and Restated Certificate of Incorporation in the form approved
by the Company's Board of Directors on June 1, 1998, the Shares will have been
duly authorized and, when issued and sold by the Company in accordance with the
terms of the Underwriting Agreement, will be validly issued, fully paid and
nonassessable.
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It is understood that this opinion is to be used only in connection with
the offer and sale of the Shares while the Registration Statement is in effect.
We hereby consent to the filing of this opinion as Exhibit 5.1 to the
Registration Statement and to the reference to our firm in the Prospectus
contained in the Registration Statement under the caption "Legal Matters."
Very truly yours,
DRA/KS
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EXHIBIT 10.13
TWEETER HOME ENTERTAINMENT GROUP, INC.
1998 STOCK OPTION AND INCENTIVE PLAN
SECTION 1.
GENERAL PURPOSE OF THE PLAN; DEFINITIONS
The name of the plan is the Tweeter Home Entertainment Group, Inc. 1998
Stock Option and Incentive Plan (the "Plan"). The purpose of the Plan is to
encourage and enable the officers, employees, Independent Directors and other
key persons of Tweeter Home Entertainment Group, Inc. (the "Company") and the
Company's Subsidiaries, upon whose judgment, initiative and efforts the Company
largely depends for the successful conduct of its business, to acquire a
proprietary interest in the Company. It is anticipated that providing such
persons with a direct stake in the Company's welfare will assure a closer
identification of their interests with those of the Company, thereby stimulating
their efforts on the Company's behalf and strengthening their desire to remain
with the Company. The following terms shall be defined as set forth below:
"Act" means the Securities Exchange Act of 1934, as amended from time to
time.
"Administrator" is defined in Section 2(a).
"Award" or "Awards," except where referring to a particular category of
grant under the Plan, shall include Incentive Stock Options, Non-Qualified Stock
Options, Restricted Stock Awards, Performance Share Awards, Performance Unit
Awards, Stock Appreciation Rights Awards, Dividend Equivalent Rights Awards and
Common Stock in Lieu of Cash Compensation Awards.
"Board" means the Board of Directors of the Company as constituted from
time to time.
"Change of Control" is defined in Section 17.
"Code" means the Internal Revenue Code of 1986, as amended from time to
time, and any successor Code, and related rules, regulations and
interpretations.
"Committee" means the Committee of the Board referred to in Section 2.
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"Common Stock in Lieu of Cash Compensation Award" means Awards granted
pursuant to Section 11.
"Company" means Tweeter Home Entertainment Group, Inc., a Delaware
corporation, and any successor thereto.
"Dividend Equivalent Rights Award" means Awards granted pursuant to
Section 8.
"Effective Date" means the later to occur of (i) the date on which the
Plan is initially approved by stockholders as set forth in Section 19 or (ii)
the IPO Date.
"Fair Market Value" on any given date means the last sale price at which
Stock is traded on such date or, if no Stock is traded on such date, the next
preceding date on which Stock was traded, as reported by Nasdaq or, if
applicable, the principal stock exchange or, if applicable, any other national
stock exchange on which the Stock is traded or admitted to trading.
Notwithstanding the foregoing, the Fair Market Value on the first day of the
Company's initial public offering of Stock shall be the initial public offering
price as set forth in the final prospectus for the Company's initial public
offering.
"Incentive Stock Option" means any Stock Option that is intended to
qualify as and is designated in writing in the related Option Award agreement as
intending to constitute an "incentive stock option" as defined in Section 422 of
the Code.
"Independent Director" means a member of the Board who is not also an
employee of the Company or any Subsidiary.
"IPO" means an initial public offering of the common stock of the Company
pursuant to an effective registration statement.
"IPO Date" means the date on which the Company closes its IPO.
"Non-Qualified Stock Option" means any Stock Option that is not an
Incentive Stock Option.
"Performance Share Award" means Awards granted pursuant to Section 9.
"Performance Unit Award" means Awards granted pursuant to Section 10.
"Restricted Stock Award" means Awards granted pursuant to Section 6.
"Stock" means the Common Stock, no par value, of the Company, subject to
adjustments pursuant to Section 3.
"Stock Appreciation Rights Award" means Awards granted pursuant to
Section 7.
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"Stock Option" means any option to purchase shares of Stock granted
pursuant to Section 5.
"Subsidiary" means any corporation or other entity (other than the
Company) in any unbroken chain of corporations or other entities beginning with
the Company if each of the corporations or entities (other than the last
corporation or entity in the unbroken chain) owns stock or other interests
possessing 50% or more of the economic interest or the total combined voting
power of all classes of stock or other interests in one of the other
corporations or entities in the chain, and specifically includes without
limitation NEA Delaware, Inc.
SECTION 2.
ADMINISTRATION OF PLAN; ADMINISTRATOR AUTHORITY TO SELECT
PARTICIPANTS AND DETERMINE AWARDS
(a) COMMITTEE. The Plan shall be administered by either the Board or a
committee of not fewer than two (2) Independent Directors (in either case, the
"Administrator"). Each member of the Committee shall be a "non-employee
director" within the meaning of Rule 16b-3(b)(3)(i) promulgated under the Act,
or any successor definition under said rule. From and after the date the Company
becomes subject to Section 162(m) of the Code with respect to compensation
earned under this Plan, each member of the Committee shall also be an "outside
director" within the meaning of Section 162(m) of the Code and the regulations
promulgated thereunder.
(b) POWERS OF ADMINISTRATOR. The Administrator shall have the power and
authority to grant Awards consistent with the terms of the Plan, including the
power and authority:
(i) to select the individuals to whom Awards may from time
to time be granted;
(ii) to determine the time or times of grant, and the extent, if
any, of Incentive Stock Options, Non-Qualified Stock Options, Restricted Stock
Awards, Performance Share Awards, Performance Unit Awards, Stock Appreciation
Rights Awards, Dividend Equivalent Rights Awards and Common Stock in Lieu of
Cash Compensation Awards or any combination of the foregoing, granted to any one
or more participants;
(iii) to determine the number of shares of Stock to be covered
by any Award;
(iv) to determine and modify from time to time the terms and
conditions, including restrictions, not inconsistent with the terms of the Plan,
of any Award, which terms and conditions may differ among individual Awards and
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participants, and to approve the form of written instruments evidencing the
Awards;
(v) to accelerate at any time the exercisability or vesting
of all or any portion of any Award;
(vi) subject to the provisions of Section 5(a)(iii), to
extend at any time the post-termination period in which Stock Options may
be exercised;
(vii) to determine at any time whether, to what extent, and under
what circumstances Stock and other amounts payable with respect to an Award
shall be deferred either automatically or at the election of the participant and
whether and to what extent the Company shall pay or credit amounts constituting
deemed interest (at rates determined by the Administrator) or dividends or
deemed dividends on such deferrals; and
(viii) at any time to adopt, alter and repeal such rules, guidelines
and practices for administration of the Plan and for its own acts and
proceedings as it shall deem advisable; to interpret the terms and provisions of
the Plan and any Award (including related written instruments); to make all
determinations it deems advisable for the administration of the Plan; to decide
all disputes arising in connection with the Plan; and to otherwise supervise the
administration of the Plan.
All decisions and interpretations of the Administrator shall be made in
the Administrator's sole and absolute discretion and shall be final and binding
on all persons, including the Company and Plan participants.
(c) DELEGATION OF AUTHORITY TO GRANT AWARDS. The Administrator may
delegate to the Chief Executive Officer and/or the President of the Company
(provided that such officer is a member of the Board of Directors) all or part
of the Administrator's authority and duties with respect to Awards, including
the granting thereof, to individuals who are not subject to the reporting and
other provisions of Section 16 of the Act or "covered employees" within the
meaning of Section 162(m) of the Code, PROVIDED, however, that the number of
shares of Stock underlying Awards made by the Chief Executive Officer shall not
exceed, in the aggregate, ten percent (10%) of the number of shares of Stock
available for issuance under the Plan.
SECTION 3.
STOCK ISSUABLE UNDER THE PLAN; TERM OF PLAN;
RECAPITALIZATIONS; MERGERS; SUBSTITUTE AWARDS
(a) STOCK ISSUABLE. The maximum number of shares of Stock reserved and
available for issuance under the Plan initially shall be such aggregate number
of shares of Stock as does not exceed 19.56% of the total number of shares of
Stock outstanding, on a fully-diluted basis (including without limitation, for
purposes of such calculation, all options previously granted or available for
grant under the Company's 1995 Stock Option
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Plan), immediately following the closing of the IPO. In addition, (a) the
number of shares of Stock reserved and available for issuance under the Plan
will be supplemented each year by a number of shares of Stock equal to 2% of
the total number of shares of Stock outstanding on January 1 of such year, on a
fully-diluted basis (calculated as set forth in the preceding sentence, not to
exceed, however, with respect to any such annual supplement under this clause
(a), 150,000 additional shares of Stock), (b) as Awards consisting of Stock
Options are exercised, the shares of Stock underlying such previously
outstanding portion of the Award shall be added back to the Shares available
for issuance under the Plan not to exceed, however, with respect to any such
addition under this clause (b), 100,000 shares of Stock in any given year, and
(c) if any portion of an Award is forfeited, canceled, reacquired by the
Company, satisfied without the issuance of Stock or otherwise terminated, the
shares of Stock underlying such portion of the Award shall be added back to the
shares of Stock available for issuance under the Plan. Subject to such overall
limitation, shares of Stock may be issued up to such maximum number pursuant to
any type or types of Award; PROVIDED, however, that on and after the date the
Company is first subject to the provisions of Section 162(m) of the Code with
respect to grants made or compensation earned under the Plan, Stock Options
with respect to no more than twenty-five percent (25%) of the shares of Stock
issued or issuable under the Plan may be granted to any one individual
participant during any one calendar year period. The shares available for
issuance under the Plan may be authorized but unissued shares of Stock or
shares of Stock reacquired by the Company.
(b) TERM OF PLAN. No Awards shall be made after ________, 2003.
Notwithstanding the foregoing, Stock Options granted hereunder may, except as
otherwise expressly provided herein, be exercisable for up to ten years after
the date of grant.
(c) RECAPITALIZATIONS. Subject to the provisions of Section 17, if,
through or as a result of any merger, consolidation, sale of all or
substantially all of the assets of the Company, reorganization,
recapitalization, reclassification, stock dividend, stock split, reverse stock
split or other similar transaction, the outstanding shares of Stock are
increased or decreased or are exchanged for a different number or kind of shares
or other securities of the Company, or additional shares or new or different
shares or other securities of the Company or other non-cash assets are
distributed with respect to such shares of Stock or other securities, the
Administrator may make an appropriate or proportionate adjustment in (i) the
maximum number of shares reserved for issuance under the Plan, (ii) the number
of Stock Options that can be granted to any one individual participant, (iii)
the number and kind of shares or other securities subject to any then
outstanding Awards under the Plan, and (iv) the price for each share subject to
any then outstanding Stock Options under the Plan, without changing the
aggregate exercise price (i.e., the exercise price multiplied by the total
number of Stock Options) as to which such Stock Options remain exercisable. The
adjustment by the Administrator shall be final, binding and conclusive. No
fractional shares of Stock shall be issued under the Plan resulting from any
such adjustment, but the Administrator in its discretion may make a cash payment
in lieu of fractional shares.
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(d) SUBSTITUTE AWARDS. The Administrator may grant Awards under
the Plan in substitution for stock and stock based awards held by employees of
another corporation who become employees of the Company or a Subsidiary as the
result of a merger or consolidation of the employing corporation with the
Company or a Subsidiary or the acquisition by the Company or a Subsidiary of
property or stock of the employing corporation. The Administrator may direct
that the substitute awards be granted on such terms and conditions as the
Administrator considers appropriate in the circumstances.
SECTION 4.
ELIGIBILITY
Participants in the Plan will be such full or part-time officers and other
employees, Independent Directors and key persons of the Company and the
Company's Subsidiaries who are responsible for or contribute to the management,
growth or profitability of the Company and the Company's Subsidiaries as are
selected from time to time by the Administrator in its sole discretion.
SECTION 5.
STOCK OPTIONS
Any Stock Option granted under the Plan shall be in such form as the
Administrator may from time to time approve. Stock Options granted under the
Plan may be either Incentive Stock Options or Non-Qualified Stock Options.
Incentive Stock Options may be granted only to employees of the Company or any
Subsidiary that is a "subsidiary corporation" within the meaning of Section
424(f) of the Code. To the extent that any Option does not qualify as an
Incentive Stock Option, it shall be deemed a Non-Qualified Stock Option.
(a) STOCK OPTIONS GRANTED TO EMPLOYEES AND KEY PERSONS. The
Administrator in its discretion may grant Stock Options to eligible employees
and key persons of the Company or any Subsidiary. Stock Options granted pursuant
to this Section 5(a) shall be subject to the following terms and conditions and
shall contain such additional terms and conditions, not inconsistent with the
terms of the Plan, as the Administrator shall deem desirable. If the
Administrator so determines, Stock Options may be granted in lieu of cash
compensation at the participant's election, subject to such terms and conditions
as the Administrator may establish, as well as in addition to other
compensation.
(i) EXERCISE PRICE. The exercise price per share for the Stock
covered by a Stock Option granted pursuant to this Section 5(a) shall be
determined by the Administrator at the time of grant but shall not be less than
100% of the Fair Market Value on the date of grant. If an employee owns or is
deemed to own (by reason of the attribution rules of Section 424(d) of the Code)
more than 10% of the combined voting power of all classes of stock of the
Company or any parent or subsidiary corporation and an Incentive Stock Option is
granted to such employee, the option price of such Incentive Stock Option shall
be not less than 110% of the Fair Market Value on the grant date.
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(ii) OPTION TERM. The term of each Stock Option shall be fixed by
the Administrator, but no Incentive Stock Option shall be exercisable more than
ten years after the date the option is granted. If an employee owns or is deemed
to own (by reason of the attribution rules of Section 424(d) of the Code) more
than 10% of the combined voting power of all classes of stock of the Company or
any parent or subsidiary corporation and an Incentive Stock Option is granted to
such employee, the term of such option shall be no more than five years from the
date of grant.
(iii) EXERCISABILITY; RIGHTS OF A STOCKHOLDER. Stock Options shall
become exercisable at such time or times, whether or not in installments, as
shall be determined by the Administrator at or after the grant date; PROVIDED,
however, that (A) Stock Options granted in lieu of compensation shall be
exercisable in full as of the grant date unless the Administrator otherwise
provides in the Award agreement, and (B) all Stock Options must be exercised
within three (3) years of the date they become exercisable or they shall
automatically expire, and PROVIDED FURTHER that (1) no holder of a Stock Option
may exercise any Stock Options during any period in which such person is in
breach of any noncompetition agreement or covenant such person has with the
Company, and (2) if any such holder fails to cure any such breach within thirty
(30) days of written notice thereof, all Stock Options held by such person shall
thereupon be forfeited. The Administrator may at any time accelerate the
exercisability of all or any portion of any Stock Option. An optionee shall have
the rights of a stockholder only as to shares acquired upon the exercise of a
Stock Option and not as to unexercised Stock Options.
(iv) METHOD OF EXERCISE. Stock Options may be exercised in whole or
in part, by giving written notice of exercise to the Company, specifying the
number of shares to be purchased. Payment of the purchase price may be made by
one or more of the following methods to the extent provided in the Option Award
agreement:
(A) In cash, by certified or bank check or other instrument
acceptable to the Administrator;
(B) In the form of shares of Stock that are not then subject
to restrictions under any Company plan and that have been beneficially owned by
the optionee for at least six months, if permitted by the Administrator in its
discretion. Such surrendered shares shall be valued at Fair Market Value on the
exercise date;
(C) By the optionee delivering to the Company a properly
executed exercise notice together with irrevocable instructions to a broker to
promptly deliver to the Company cash or a check payable and acceptable to the
Company to pay the purchase price; provided that in the event the optionee
chooses to pay the purchase price as so provided, the optionee and the broker
shall comply with such procedures and enter into such agreements of indemnity
and other agreements as the Administrator shall prescribe as a condition of such
payment procedure; or
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(D) By the optionee delivering to the Company a promissory
note if the Administrator has expressly authorized the loan of funds to the
optionee for the purpose of enabling or assisting the optionee to effect the
exercise of his Stock Option; PROVIDED that at least so much of the exercise
price as represents the par value of the Stock shall be paid other than with a
promissory note, and provided further that any such promissory note shall bear
interest at market rates. Payment instruments will be received subject to
collection.
The delivery of certificates representing the shares of Stock to be purchased
pursuant to the exercise of a Stock Option will be contingent upon receipt from
the optionee (or a purchaser acting in his stead in accordance with the
provisions of the Stock Option) by the Company of the full purchase price for
such shares and the fulfillment of any other requirements contained in the Stock
Option or applicable provisions of laws.
(v) ANNUAL LIMIT ON INCENTIVE STOCK OPTIONS. To the extent
required for "incentive stock option" treatment under Section 422 of the Code,
the aggregate Fair Market Value (determined as of the time of grant) of the
shares of Stock with respect to which Incentive Stock Options granted under this
Plan and any other plan of the Company or its parent and subsidiary corporations
become exercisable for the first time by an optionee during any calendar year
shall not exceed $100,000. To the extent that any Stock Option exceeds this
limit, it shall constitute a Non-Qualified Stock Option.
(c) NON-TRANSFERABILITY OF OPTIONS. Except as otherwise set forth in the
following sentence, no Stock Option shall be transferable by the optionee other
than by will or by the laws of descent and distribution and all Stock Options
shall be exercisable, during the optionee's lifetime, only by the optionee.
Notwithstanding the foregoing, an optionee may transfer, without consideration
for the transfer, his Non-Qualified Stock Options to members of his family, to
trusts for the benefit of such family members, or to partnerships in which such
family members are the only partners, PROVIDED that the transferee agrees in
writing with the Company to be bound by all of the terms and conditions of this
Plan and the applicable option agreement.
(d) TERMINATION. Except as may otherwise be provided by the
Administrator either in the Award agreement, or subject to Section 15 below, in
writing after the Award agreement is issued, an optionee's rights in all Stock
Options shall automatically terminate sixty (60) days following optionee's
termination of employment (or cessation of business relationship) with the
Company and its Subsidiaries for any reason.
SECTION 6.
RESTRICTED STOCK AWARDS
(a) NATURE OF RESTRICTED STOCK AWARDS. A Restricted Stock Award is an
Award entitling the recipient to acquire, at par value or such other higher
purchase price determined by the Administrator, shares of Stock subject to such
restrictions and
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conditions as the Administrator may determine at the time of grant ("Restricted
Stock"). Conditions may be based on continuing employment (or other business
relationship) and/or achievement of pre-established performance goals and
objectives. The grant of a Restricted Stock Award is contingent on the
participant executing the Restricted Stock Award agreement. The terms and
conditions of each such agreement shall be determined by the Administrator, and
such terms and conditions may differ among individual Awards and participants.
(b) RIGHTS AS A STOCKHOLDER. Upon execution of the Restricted Stock Award
agreement and paying any applicable purchase price, a participant shall have the
rights of a stockholder with respect to the voting of the Restricted Stock,
subject to such terms and conditions as may be contained in the Restricted Stock
Award agreement. Unless the Administrator shall otherwise determine,
certificates evidencing the Restricted Stock shall remain in the possession of
the Company until such Restricted Stock is vested as provided in Section 6(d)
below, and the participant shall be required, as a condition of the grant, to
deliver to the Company a stock power endorsed in blank.
(c) RESTRICTIONS. Restricted Stock may not be sold, assigned, transferred,
pledged or otherwise encumbered or disposed of except as specifically provided
herein or in the Restricted Stock Award agreement. If a participant's employment
(or other business relationship) with the Company and its Subsidiaries
terminates for any reason, the Company shall have the right to repurchase
Restricted Stock that has not vested at the time of termination at its original
purchase price, from the participant or the participant's legal representative.
(d) VESTING OF RESTRICTED STOCK. The Administrator at the time of grant
shall specify the date or dates and/or the attainment of pre-established
performance goals, objectives and other conditions on which the non-
transferability of the Restricted Stock and the Company's right of repurchase or
forfeiture shall lapse, PROVIDED, however, that any Awards of Restricted Stock
that vest solely on the basis of continuing employment (or other business
relationship) shall be subject to a seven (7) year period of vesting, in equal
installments, SUBJECT, however, at the Administrator's discretion, to
accelerated vesting upon the achievement of specified performance goals.
Subsequent to such date or dates and/or the attainment of such pre-established
performance goals, objectives and other conditions, the shares on which all
restrictions have lapsed shall no longer be Restricted Stock and shall be deemed
"vested." Except as may otherwise be provided by the Administrator either in the
Award agreement or, subject to Section 15 below, in writing after the Award
agreement is issued, a participant's rights in any shares of Restricted Stock
that have not vested shall automatically terminate upon the participant's
termination of employment (or other business relationship) with the Company and
its Subsidiaries and such shares shall be subject to the Company's right of
repurchase as provided in Section 6(c) above.
(e) WAIVER, DEFERRAL AND REINVESTMENT OF DIVIDENDS. The Restricted Stock
Award agreement may require or permit the immediate payment, waiver, deferral or
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reinvestment (in the form of additional Restricted Stock) of dividends paid on
the Restricted Stock.
(f) LIMIT ON RESTRICTED STOCK AWARDS. No more than 25% of the shares of
Stock reserved for issuance under the Plan may, in any Plan year, be used for
Restricted Stock Awards.
SECTION 7.
STOCK APPRECIATION RIGHT AWARDS
(a) GRANTS OF STOCK APPRECIATION RIGHTS. A Stock Appreciation Right Award
is an Award entitling the recipient to receive, upon surrender to the Company
unexercised the Stock Option to which it relates, or any portion thereof, that
number of shares of Stock having an aggregate Fair Market Value equal to (A) the
excess of (i) the Fair Market Value of one (1) share of Common Stock as of the
date the Stock Appreciation Right Award is exercised over (ii) the option price
per share specified in such Stock Option, multiplied by (B) the number of shares
of Stock subject to the Stock Option, or portion thereof, which is surrendered.
Stock Appreciation Rights may be awarded by the Administrator in connection with
any Stock Option granted under the Plan, either at the time the Stock Option is
granted or thereafter at any time prior to the exercise, termination or
expiration of the Stock Option. The base price of a Stock Appreciation Right
shall be not less than the Fair Market Value of a share of Stock on the date of
grant. Stock Appreciation Rights shall be subject to such terms and conditions
not inconsistent with the other provisions of this Plan as the Administrator
shall determine.
(b) LIMITATIONS ON EXERCISE. A Stock Appreciation Right shall be
exercisable only to the extent that the related Stock Option is exercisable and
shall be exercisable only for such period as the Administrator may determine
(which period may expire prior to the expiration date of the related Stock
Option). Upon the exercise of all or a portion of Stock Appreciation Right, the
related Stock Option shall be canceled with respect to an equal number of shares
of Stock. Shares of Stock subject to Stock Options or portions thereof,
surrendered upon exercise of a Stock Appreciation Right, shall be available for
subsequent awards under the Plan. A Stock Appreciation Right shall be
exercisable during such period as the Administrator shall determine. Cash shall
be delivered in lieu of any fractional shares.
(c) SETTLEMENT OF STOCK APPRECIATION RIGHTS. As soon as is reasonably
practicable after the exercise of a Stock Appreciation Right, the Company shall
(i) issue, in the name of the participant, stock certificates representing the
total number of full shares of Stock to which the participant is entitled
pursuant to paragraph (c) hereof and cash in an amount equal to the Fair Market
Value, as of the date of exercise, of any resulting fractional shares, and (ii)
if the Administrator causes the Company to elect to settle all or part of its
obligations arising out of the exercise of the Stock Appreciation Right in cash
pursuant to paragraph (e) below, deliver to the participant an amount in
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cash equal to the Fair Market Value, as of the date of exercise, of the shares
of Stock it would otherwise be obligated to deliver.
(d) CASH SETTLEMENT. The Administrator, in its discretion, may cause the
Company to settle all or any part of its obligation arising out of the exercise
of a Stock Appreciation Right by the payment of cash in lieu of all or part of
the shares of Common Stock it would otherwise be obligated to deliver in an
amount equal to the Fair Market Value of such shares on the date of exercise.
SECTION 8.
DIVIDEND EQUIVALENT RIGHTS AWARDS
(a) DIVIDEND EQUIVALENT RIGHTS. A Dividend Equivalent Right is an Award
entitling the recipient to receive credits based on cash dividends that would
have been paid on the shares of Stock specified in the Dividend Equivalent Right
(or other Award to which it relates) if such shares had been issued to and held
by the recipient. A Dividend Equivalent Right may be granted hereunder to any
participant as a component of another Award or as a freestanding Award. The
terms and conditions of Dividend Equivalent Rights shall be specified in the
grant. Dividend equivalents credited to the holder of a Dividend Equivalent
Right may be paid currently or may be deemed to be reinvested in additional
shares of Stock, which may thereafter accrue additional equivalents. Any such
reinvestment shall be at Fair Market Value on the date of reinvestment. Dividend
Equivalent Rights may be settled in cash or shares of Stock. A Dividend
Equivalent Right granted as a component of another Award may also contain terms
and condition different from such other Award.
(b) TERMINATION. Except as may otherwise be provided by the Administrator
either in the Award agreement, or, subject to Section 15 below, in writing after
the Award agreement is issued, a participant's rights in all Dividend Equivalent
Rights shall automatically terminate upon the participant's termination of
employment (or cessation of business relationship) with the Company and its
Subsidiaries for any reason.
SECTION 9.
PERFORMANCE SHARE AWARDS
(a) NATURE OF PERFORMANCE SHARE AWARDS. A Performance Share Award is an
Award entitling the recipient to acquire shares of Stock upon the attainment of
specified long-term performance goals over a specified period of three to five
years. The Administrator may make Performance Share Awards independent of or in
connection with the granting of any other Award under the Plan. The
Administrator in its sole discretion shall determine whether and to whom
Performance Share Awards shall be made, the performance goals applicable under
each such Award, the periods during which performance is to be measured, and all
other limitations and conditions applicable to the awarded Performance Shares;
PROVIDED, however, that the Administrator may rely on the
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performance goals and other standards applicable to other performance unit plans
of the Company in setting the standards for Performance Share Awards under the
Plan.
(b) RIGHTS AS A STOCKHOLDER. A participant receiving a Performance Share
Award shall have the rights of a stockholder only as to shares actually received
by the participant under the Plan and not with respect to shares subject to the
Award but not actually received by the participant. A participant shall be
entitled to receive a stock certificate evidencing the acquisition of shares of
Stock under a Performance Share Award only upon satisfaction of all conditions
specified in the written instrument evidencing the Performance Share Award (or
in a performance plan adopted by the Administrator).
(c) TERMINATION. Except as may otherwise be provided by the Administrator
either in the Award agreement or, subject to Section 15 below, in writing after
the Award agreement is issued, a participant's rights in all Performance Share
Awards shall automatically terminate upon the participant's termination of
employment (or cessation of business relationship) with the Company and its
Subsidiaries for any reason.
(d) ACCELERATION, WAIVER, ETC. At any time prior to the participant's
termination of employment (or other business relationship) by the Company and
its Subsidiaries, the Administrator may in its sole discretion accelerate, waive
or, subject to Section 15, amend any or all of the goals, restrictions or
conditions imposed under any Performance Share Award.
SECTION 10.
PERFORMANCE UNIT AWARDS
(a) NATURE OF PERFORMANCE UNIT AWARDS. A Performance Unit Award is an
Award of units with a specified dollar value, the payment of which shall be
contingent upon the recipient's attainment of specified long-term performance
goals over a specified period of three to five years. Payment of the Awards may
be in the form of cash compensation of shares of Stock. The Administrator may
make Performance Unit Awards independent of or in connection with the granting
of any other Award under the Plan. The Administrator in its sole discretion
shall determine whether and to whom Performance Unit Awards shall be made, the
performance goals applicable under each such Award, the periods during which
performance is to be measured, and all other limitations and conditions
applicable to the awarded Performance Units; PROVIDED, however, that the
Administrator may rely on the performance goals and other standards applicable
to other performance unit plans of the Company in setting the standards for
Performance Unit Awards under the Plan.
(b) RIGHTS AS A STOCKHOLDER. A participant receiving a Performance Unit
Award payable in shares of Stock shall have the rights of a stockholder only as
to shares actually received by the participant under the Plan and not with
respect to shares subject to the Award but not actually received by the
participant. A participant shall be entitled
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to receive a stock certificate evidencing the acquisition of shares of Stock
under a Performance Unit Award only upon satisfaction of all conditions
specified in the written instrument evidencing the Performance Unit Award (or in
a performance plan adopted by the Administrator).
(c) TERMINATION. Except as may otherwise be provided by the Administrator
either in the Award agreement or, subject to Section 15 below, in writing after
the Award agreement is issued, a participant's rights in all Performance Unit
Awards shall automatically terminate upon the participant's termination of
employment (or cessation of business relationship) with the Company and its
Subsidiaries for any reason.
(d) ACCELERATION, WAIVER, ETC. At any time prior to the participant's
termination of employment (or other business relationship) by the Company and
its Subsidiaries, the Administrator may in its sole discretion accelerate, waive
or, subject to Section 15, amend any or all of the goals, restrictions or
conditions imposed under any Performance Unit Award.
SECTION 11.
COMMON STOCK IN LIEU OF CASH COMPENSATION AWARDS
(a) GRANTS OF COMMON STOCK PAYABLE IN LIEU OF CASH. The Administrator may
grant shares of Stock available for issuance under the Plan to an eligible
participant in lieu of cash compensation earned by the participant under a
short- or long-term incentive plan of the Company (an "Other Incentive Plan),
PROVIDED, however, that the award made under the Other Incentive Plan allows for
satisfaction of such award by payment of Stock in lieu of cash compensation.
Additionally, shares of Stock may be granted if specified performance goals
established by the Administrator are met, provided that the performance goals so
established meet the requirements of Section 162(m) of the Code and that the
Administrator certifies that the performance goals have been met. In the event
of a grant of shares of Stock in lieu of cash compensation, such grant shall be
conditioned upon the participant's irrevocable election to waive receipt of all
or a portion of the cash compensation otherwise payable, which waiver shall
constitute payment in full by such participant for the shares of Stock granted
in lieu of such cash compensation. All shares of Stock granted under this
Section 11 shall be without restriction.
(b) DATE OF GRANT. Stock granted in lieu of cash compensation shall be
granted to each participant on the date the waived cash compensation would
otherwise by paid, provided, however, that with respect to a participant who is
subject to Section 16 of the Act, if such grant date is not at least six months
and one day from the date of the election, the grant shall be delayed until the
date which is six months and one day from the date of the election (or the next
following business day, if such date is not a business day) to the extent
necessary to conform to the requirements for exempt purchases under Rule 16b-3
of the Act.
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(c) NUMBER OF SHARES. The number of shares of Stock granted in lieu of
cash compensation shall be determined by dividing the amount of the waived cash
compensation by the Fair Market Value of the Stock on the date the Stock is
granted. Such Stock shall be granted for the whole number of shares so
determined; the value of any fractional share shall be paid in cash.
SECTION 12.
INDEPENDENT DIRECTOR STOCK OPTION PLAN
Each person who is elected as an Independent Director after the IPO shall
be granted, on the date of his or her election, a Non-Qualified Stock Option to
acquire such number of shares of Stock as may be determined by the Administrator
with an exercise price per share for the Stock covered by such Stock Option
equal to the Fair Market Value on the date as of which the Stock Option is
granted. Such Stock Options shall become exercisable as may be determined by the
Administrator, provided that all Stock Options granted under this Section 12
shall expire if not exercised within three (3) years after they become
exercisable. Stock Options granted under this Section 12 may be exercised only
by written notice to the Company specifying the number of shares to be
purchased. Payment of the full purchase price of the shares to be purchased may
be made by one or more of the methods specified in Section 5(a)(iv). An optionee
shall have the rights of a stockholder only as to shares acquired upon the
exercise of a Stock Option and not as to unexercised Stock Options.
SECTION 13.
TAX WITHHOLDING
(a) PAYMENT BY PARTICIPANT. Each participant shall, no later than the date
as of which the value of an Award or of any Stock or other amounts received
thereunder first becomes includable in the gross income of the participant for
Federal income tax purposes, pay to the Company, or make arrangements
satisfactory to the Administrator regarding payment of, any Federal, state, or
local taxes of any kind required by law to be withheld with respect to such
income. The Company and its Subsidiaries shall, to the extent permitted by law,
have the right to deduct any such taxes from any payment of any kind otherwise
due to the participant. The Company's obligation to deliver stock certificates
to any participant is subject to and conditioned on tax obligations being
satisfied by the participant.
(b) PAYMENT IN STOCK. Subject to approval by the Administrator, a
participant may elect to have such tax withholding obligation satisfied, in
whole or in part, by (i) authorizing the Company to withhold from shares of
Stock to be issued pursuant to any Award a number of shares with an aggregate
Fair Market Value (as of the date the withholding is effected) that would
satisfy the withholding amount due, or (ii) transferring to the Company shares
of Stock owned by the participant with an aggregate Fair Market Value (as of the
date the withholding is effected) that would satisfy the withholding amount due.
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SECTION 14.
TRANSFER, LEAVE OF ABSENCE, ETC.
For purposes of the Plan, the following events shall not be deemed a
termination of employment:
(a) a transfer to the employment of the Company from a Subsidiary or from
the Company to a Subsidiary, or from one Subsidiary to another; or
(b) an approved leave of absence for military service or sickness, or for
any other purpose approved by the Company, if the employee's right to re-
employment is guaranteed either by a statute or by contract or under the written
policy pursuant to which the leave of absence was granted or if the
Administrator otherwise so provides in writing.
SECTION 15.
AMENDMENTS AND TERMINATION
The Board may, at any time, amend or discontinue the Plan, and the
Administrator may, at any time, amend or cancel any outstanding Award for the
purpose of satisfying changes in law or for any other lawful purpose, but no
such action shall adversely affect rights under any outstanding Award without
the holder's written consent. The Administrator may provide substitute Awards at
the same or reduced exercise or purchase price or with no exercise or purchase
price in a manner not inconsistent with the terms of the Plan, but such price,
if any, must satisfy the requirements which would apply to the substitute or
amended Award if it were then initially granted under this Plan, but no such
action shall adversely affect rights under any outstanding Award without the
holder's written consent. If and to the extent determined by the Administrator
to be required by (a) the Code to ensure that Incentive Stock Options granted
under the Plan are qualified under Section 422 of the Code or ensure that
compensation earned under Stock Options granted under the Plan qualifies as
performance-based compensation under Section 162(m) of the Code, if and to the
extent intended to so qualify, or (b) the rules of the Nasdaq Stock Market, Plan
amendments shall be subject to approval by the Company's stockholders entitled
to vote at a meeting of stockholders. Nothing in this Section 15 shall limit the
Board's authority to take any action permitted pursuant to Section 3(c) or 3(d).
SECTION 16.
STATUS OF PLAN
Unless the Administrator shall otherwise expressly determine in writing,
with respect to the portion of any Award which has not been exercised and any
payments in cash, Stock or other consideration not received by a participant, a
participant shall have no rights greater than those of a general creditor of the
Company. In its sole discretion, the Administrator may authorize the creation of
trusts or other arrangements to meet the
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<PAGE> 16
Company's obligations to deliver Stock or make payments with respect to Awards
hereunder, provided that the existence of such trusts or other arrangements is
consistent with the foregoing sentence.
SECTION 17.
CHANGE OF CONTROL AND MERGER PROVISIONS
(a) In contemplation of and subject to the consummation of a consolidation
or merger or sale of all or substantially all of the assets of the Company in
which outstanding shares of Stock are exchanged for securities, cash or other
property of an unrelated corporation or business entity or in the event of a
liquidation or dissolution of the Company or in the event of a corporate
reorganization of the Company (in each case, a "Transaction"), the Board, or the
board of directors of any corporation or other entity assuming the obligations
of the Company, may, in its discretion, take any one or more of the following
actions, as to outstanding Awards: (i) provide that such Awards shall be assumed
or equivalent awards shall be substituted, by the acquiring or succeeding
corporation or other entity (or an affiliate thereof), and/or (ii) upon written
notice to the participants, provide that all Awards will terminate immediately
prior to the consummation of the Transaction. In the event that, pursuant to
clause (ii) above, Awards will terminate immediately prior to the consummation
of the Transaction, all vested Awards, other than Options, shall be fully
settled in cash or in kind at such appropriate consideration as determined by
the Administrator in its sole discretion after taking into account any and all
consideration payable per share of Stock pursuant to the Transaction (the
"Transaction Price") and all Stock Options shall be fully settled, in cash or in
kind, in an amount equal to the difference between (A) the Transaction Price
times the number of shares of Stock subject to such outstanding Stock Options
(to the extent then exercisable at prices not in excess of the Transaction
Price) and (B) the aggregate exercise price of all such outstanding Stock
Options. In addition, the Board, or the board of directors of any corporation or
other entity assuming the obligations of the Company, may, in its discretion,
permit each participant, within a specified period determined by the Board prior
to the consummation of the Transaction, to exercise all outstanding Stock
Options, including those that are not then exercisable, subject to the
consummation of the Transaction.
(b) Upon the occurrence of a Change of Control as defined in Section 17(c)
below, unless otherwise specified in the Award instrument, unless otherwise
determined by the Board in office immediately prior to such Change of Control or
specified in the Plan Award instrument, each Award outstanding shall be
accelerated, such that all Stock Options shall become fully exercisable and the
restricted period on all shares of Restricted Stock shall terminate immediately.
(c) "Change of Control" shall mean the occurrence of any one of
the following events:
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<PAGE> 17
(i) any "person," as such term is used in Sections 13(d) and 14(d)
of the Act (other than the Company, any of its Subsidiaries, any
"affiliate" or "associate" (as such terms are defined in Rule 12b-2 under
the Act) of the foregoing persons, or any trustee, fiduciary or other
person or entity holding securities under any employee benefit plan or
trust of the Company or any of its Subsidiaries), together with all
"affiliates" and "associates" (as such terms are defined in Rule 12b-2
under the Act) of such person, shall become the "beneficial owner" (as
such term is defined in Rule 13d-3 under the Act), directly or indirectly,
of securities of the Company representing 25% or more of the combined
voting power of the Company's then outstanding securities having the right
to vote in an election of the Company's Board of Directors ("Voting
Securities") (other than as a result of an acquisition of securities
directly from the Company); or
(ii) persons who, as of the effective date of the Company's IPO,
constitute the Board (the "Incumbent Directors") cease for any reason,
including, without limitation, as a result of a tender offer, proxy
contest, merger or similar transaction, to constitute at least a majority
of the Board, PROVIDED that any person becoming a director of the Company
subsequent to such date shall be considered an Incumbent Director if such
person's election was approved by or such person was nominated for
election by either (A) a vote of at least two-thirds of the Incumbent
Directors or (B) a vote of at least a majority of the Incumbent Directors
who are members of a nominating committee comprised, in the majority, of
Incumbent Directors.
Notwithstanding the foregoing, a "Change of Control" shall not be deemed to have
occurred for purposes of the foregoing clause (i) solely as the result of an
acquisition of securities by the Company which, by reducing the number of shares
of Voting Securities outstanding, increases the proportionate number of shares
of Voting Securities beneficially owned by any person (as defined in the
foregoing clause (i)) to 25% or more of the combined voting power of all then
outstanding Voting Securities; PROVIDED, however, that if such person shall
thereafter become the beneficial owner of any additional shares of Voting
Securities (other than pursuant to a stock split, stock dividend, or similar
transaction or as a result of an acquisition of securities directly from the
Company), then a "Change of Control" shall be deemed to have occurred for
purposes of the foregoing clause (i).
SECTION 18.
GENERAL PROVISIONS
(a) NO DISTRIBUTION; COMPLIANCE WITH LEGAL REQUIREMENTS. The Administrator
may require each person acquiring Stock pursuant to an Award to represent to and
agree with the Company in writing that such person is acquiring the shares
without a view to distribution thereof. No shares of Stock shall be issued
pursuant to an Award until all applicable securities law and other legal and
stock exchange or similar
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<PAGE> 18
requirements have been satisfied. The Administrator may require the placing of
such stop-orders and restrictive legends on certificates for Stock and Awards as
it deems appropriate.
(b) DELIVERY OF STOCK CERTIFICATES. Stock certificates to be delivered to
participants under this Plan shall be deemed delivered for all purposes when the
Company or a stock transfer agent of the Company shall have mailed such
certificates in the United States mail, addressed to the participant, at the
participant's last known address on file with the Company.
(c) OTHER COMPENSATION ARRANGEMENTS; NO EMPLOYMENT RIGHTS. Nothing
contained in this Plan shall prevent the Board from adopting other or additional
compensation arrangements, including trusts, and such arrangements may be either
generally applicable or applicable only in specific cases. The adoption of this
Plan and the grant of Awards shall not confer upon any employee any right to
continued employment with the Company or any Subsidiary and shall not interfere
in any way with the right of the Company or any Subsidiary to terminate the
employment of any of its employees at any time.
(d) TRADING POLICY RESTRICTIONS. Option exercises and other Awards under
the Plan shall be subject to such Company insider-trading-policy-related
restrictions, terms and conditions as may be established by the Administrator,
or in accordance with policies set by the Administrator, from time to time.
SECTION 19.
EFFECTIVE DATE OF PLAN
This Plan shall become effective upon the later to occur of (i) approval
by the holders of a majority of the votes cast at a meeting of stockholders at
which a quorum is present or by a unanimous written consent of stockholders, or
(ii) the IPO Date. Subject to such approval by the stockholders and to the
requirement that no Stock may be issued hereunder prior to such approval, Stock
Options and other Awards may be granted hereunder on and after adoption of this
Plan by the Board.
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SECTION 20.
GOVERNING LAW
This Plan and all Awards and actions taken thereunder shall be governed
by, and construed in accordance with, the laws of the State of Delaware, applied
without regard to conflict of law principles.
DATE APPROVED BY BOARD OF DIRECTORS: June 1 and June _____, 1998
DATE APPROVED BY STOCKHOLDERS: _______________, 1998
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EXHIBIT 10.15
SAMUEL J. BLOOMBERG
EMPLOYMENT AGREEMENT
TWEETER HOME ENTERTAINMENT GROUP, INC., a Delaware corporation, whose
principal place of business is 40 Hudson Road, Canton, Massachusetts 02021
("Employer" or "Tweeter"), and Samuel J. Bloomberg, whose address is 309 Warren
Street, Brookline, Massachusetts 02146 ("Employee"), in consideration of the
mutual promises made herein, hereby agree to enter into this Employment
Agreement (this "Agreement") as follows:
ARTICLE 1.
TERM OF EMPLOYMENT; DUTIES
1.01. TERM OF EMPLOYMENT. Employer hereby employs Employee and
Employee hereby accepts employment with Employer for the period beginning on
June ____, 1998 and ending five (5) years thereafter unless earlier terminated
pursuant to this Agreement. This Agreement shall be renewed automatically for
succeeding three (3) year terms unless either party gives notice to the other at
least 120 days prior to the expiration of any such renewal term of such party's
intention not to renew. As used herein the phrase "employment term" refers to
the entire period of employment of Employee by Employer hereunder, whether for
the periods provided above, or whether terminated earlier as hereinafter
provided or extended by mutual agreement between Employer and Employee.
1.02. GENERAL DUTIES. Employee shall serve as the Chairman and Chief
Executive Officer ("CEO") of Tweeter. In his capacity as the CEO of Tweeter,
Employee shall do and perform all services, acts or things necessary or
advisable to manage and conduct the business of Employer, subject at all times
to the policies set by Tweeter's Board of Directors (the "Tweeter Board").
1.03. NON-COMPETITION AND NON-SOLICITATION. (a) Subject to the other
provisions of this Section 1.03, during the Restricted Period (as defined
below), the Employee shall not (whether as an owner, partner, officer, director,
trustee, agent, employee, consultant, advisor or otherwise), in the Restricted
Territory (as defined below), directly or indirectly, compete with the Employer
or engage or participate in the business conducted by the Employer or enter into
the employ of or provide any services to any person engaged in a business that
is competitive with the business of the Employer. During the Restricted Period,
the Employee also (i) shall not interfere with, disrupt or attempt to disrupt
the relationship, contractual or otherwise, between the Employer and any
customer, supplier, lessor, lessee, employee, consultant or investor of the
Employer, and (ii) shall not solicit or hire any employee or consultant of the
Employer. The "Restricted Period" shall mean the Employee's employment term, and
(A) any period thereafter in which the Employer is paying Severance Pay to the
Employee, or (B) if Employee is
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terminated for Cause, or if Employee terminates employment (other than by
expiration of this Agreement) without Good Reason, two (2) years following such
termination, regardless of the remaining employment term. The "Restricted
Territory" shall mean the area within fifty (50) miles of any retail store owned
or operated by Employer (I) from time to time during the employment term or (II)
with respect to the period following Employee's employment, at the time of
termination of the Employee's employment.
(b) It is the desire and intent of the parties that the
provisions of this Section 1.03 shall be enforced to the fullest extent
permissible under the laws and public policies applied in each jurisdiction in
which enforcement is sought. Accordingly, if any particular subsection or
portion of this Section 1.03 shall be adjudicated to be invalid or
unenforceable, this Section shall be deemed amended to delete therefrom the
portion thus adjudicated to be invalid or unenforceable, such deletion to apply
only with respect to the operation of this Section in the particular
jurisdiction in which such adjudication is made.
(c) In the event of any breach of the provisions of this
Section 1.03 by the Employee, any and all rights of the Employee following
termination of employment to receive any payments of Severance Pay pursuant to
Article 3 hereof shall automatically terminate, but the foregoing shall not be
construed so as to require repayment by the Employee of any such Severance Pay
that has been paid to the Employee.
1.04. INJUNCTIVE RELIEF. The Employee acknowledges and agrees that a
breach or threatened breach of the provisions of Section 1.03 of this Agreement
would result in irreparable economic harm to the Employer and that a remedy at
law for any such breach would be inadequate, and therefore, if there is a breach
or threatened breach of the provisions of Sections 1.03 of this Agreement, the
Employer shall be entitled to an injunction restraining the Employee from such
breach.
ARTICLE 2.
COMPENSATION OF EMPLOYEE
2.01. ANNUAL SALARY. As compensation for the services to be
performed hereunder, Employee shall receive a salary) (i) at the rate of three
hundred thousand dollars ($300,000.00) per annum through September 30, 1998,
payable at the rate of twenty-five thousand dollars ($25,000.00) per month, (ii)
at the rate of three hundred twenty-five thousand dollars ($325,000.00) per
annum from October 1, 1998 through September 30, 1999, payable at the rate of
twenty-seven thousand eighty-three dollars and thirty-three cents ($27,083.33)
per month, and (iii) thereafter, at the rate of at least three hundred
twenty-five thousand dollars ($325,000.00) per annum, plus such increases, if
any, as may be determined by the Tweeter Board. Employee's salary shall be
payable in accordance with Employer's payroll payment policies during his
employment term.
2.02. BENEFITS. Employee shall be eligible to receive such benefits,
and to participate in such bonus or incentive plans, are as generally made
available to other senior executives of Employer or as may be specifically
provided to Employee as
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determined by Employer or its Compensation Committee from time to time. In
addition, Employer shall provide Employee with a monthly automobile allowance of
up to thousand dollars ($1,000.00) paid to Employee in addition to his salary
and other benefits on the first of each month. All expenses relating to the
operation and maintenance of the automobile, including, but not limited to
insurance expense, oil and gas, and repair shall be paid by Tweeter.
Additionally, Employer shall procure and maintain an automobile liability
insurance policy for Employee's automobile with coverage including Employee and
Employee's spouse and those of his children who qualify as Employee's dependents
under section 152 of the Internal Revenue Code of 1986, as amended, in such
minimum amounts as are reasonable and prudent. Further, it is contemplated that
Employer and Employee will, within a reasonable time following the date of this
Agreement, agree upon and implement a split-dollar insurance or other deferred
compensation benefit for Employee.
2.03. INDEMNIFICATION OF LOSSES OF EMPLOYEE; INSURANCE. Employer
shall indemnify and defend Employee for all losses sustained by Employee in
direct consequence of the discharge of his duties on Employer's behalf,
including the payment of all reasonable legal fees and costs. Employer shall
obtain appropriate Directors and Officers liability insurance, including
Employee as a named insured in an amount comparable to industry standards for
public companies of a size similar to Employer.
ARTICLE 3.
TERMINATION OF EMPLOYMENT
3.01. TERMINATION EVENTS.
(a) TERMINATION UPON DEATH OR DISABILITY. Employee's
death shall terminate his employment by Employer. In addition, if Employee
becomes physically or mentally incapacitated or is injured so that he is unable
to perform the services required of him under this Agreement and such inability
to perform continues for a period in excess of one hundred twenty (120) days
during any twelve month period (whether such disability is continuous or
discontinuous during such twelve month period), Employer may terminate his
employment under this Agreement at any time thereafter, PROVIDED, however, that
such disability is continuing at the time of such termination notice.
(b) TERMINATION FOR "CAUSE" OR WITH OR WITHOUT "GOOD
REASON".
(i) Cause. Employer may terminate Employee's
employment at any time for Cause upon at least thirty (30) days written notice
to Employee. The term "Cause" shall mean (1) gross negligence or willful
misconduct in connection with the performance of the executive's material duties
under this Agreement, (2) a breach by Employee of any of his material duties
assigned to him by the Tweeter Board (other than by reason of physical or mental
illness) and Employee's failure to cure such breach within thirty (30) days of
written notice thereof, (3) conduct by Employee against the material best
interests of Tweeter or a material act of common law fraud by Employee against
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Tweeter or its affiliates or employees, or (4) conviction of or pleading nolo
contendere to a felony.
(ii) Termination With Good Reason. Subject to the
provisos contained in this subparagraph, Employee may terminate his employment
under this Agreement with Good Reason upon at least thirty (30) days written
notice to the Tweeter Board. Employee shall have "Good Reason" upon, and the
term "Good Reason" shall mean, the occurrence of any of the following: (i)
liquidation of Tweeter, cessation by Tweeter of its current core business, or
sale of Tweeter or substantially all of its assets, (ii) attempt by Tweeter to
relocate Employee outside the greater Boston area without Employee's consent,
(iii) breach by Tweeter of any of its material obligations under this Agreement
and failure by Tweeter to cure such breach within thirty (30) days of notice
thereof, (iv) without Employee's consent, a reduction in his title from CEO of
Tweeter or of his duties or responsibilities as CEO of Tweeter; or (v) a Change
in Control of Tweeter, as defined below; PROVIDED, however, that the occurrences
set forth in the foregoing clause (i) shall not be deemed to have occurred by
reason of a corporate reorganization or other transaction in which Tweeter
merges into another entity if the stockholders of Tweeter immediately prior to
such occurrence or transaction continue to own, immediately after such
occurrence or transaction, a majority in voting and economic interest of the
successor entity.
As used herein, a "Change in Control" shall mean, and shall be
deemed to occur if, the "Incumbent Directors" (as hereinafter defined) cease for
any reason, including without limitation as a result of a tender offer, proxy
contest, merger or similar transaction, to constitute at least a majority of the
Tweeter Board, PROVIDED, however, that any person becoming a Director of the
Company subsequent to such date whose election was approved by a vote of at
least two-thirds of the Incumbent Directors or whose nomination for election was
approved by a nominating committee comprised of Incumbent Directors shall be
deemed an Incumbent Director. The "Incumbent Directors" shall mean persons who,
as of closing of the Company's initial public offering of its common stock on or
about the date of this Agreement, constitute the Tweeter Board and those persons
deemed Incumbent Directors pursuant to the preceding sentence.
(iii) Termination Without Good Reason. Employee
may terminate his obligations under this Agreement without Good Reason by giving
Employer at least three (3) months notice in advance.
3.02 OBLIGATIONS OF EMPLOYER FOLLOWING TERMINATION.
(a) TERMINATION BY DEATH. In the event of termination of
employment by reason of Employee's death, Employee, or his estate or other
successors in interest, shall be entitled to receive any salary, pro rated
bonuses, and benefits earned by or accrued to Employee and unpaid at the date of
his death, but shall not receive any further salary or other compensation
hereunder.
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(b) TERMINATION BY REASON OF DISABILITY. In the event of
termination of employment upon disability pursuant to Section 3.01(a) above,
Employer agrees to pay Employee his annual salary for one year payable in the
same manner as provided for the payment of salary herein irrespective of any
disability insurance or other benefits available to Employee.
(c) TERMINATION FOR "CAUSE". In the event of termination
of employment during the employment term for Cause, Employee shall be entitled
to receive his salary then in effect and benefits due or to become due to him up
to the date of termination of employment, and, in the case of benefits, as may
be mandated by law following termination of employment, but Employee shall not
be entitled to any other or further salary or other compensation, bonuses
(whether or not pro rated) or other benefits.
(d) TERMINATION BY EMPLOYER WITHOUT CAUSE OR BY EMPLOYEE
WITH GOOD REASON. Upon termination of Employee's employment by Employee for Good
Reason, or by Employer for any reason other than for Cause, death or disability,
Employee shall be entitled to receive, subject to the provisions of Section 1.03
above, "Severance Pay" as follows:
(i) If such termination occurs during the first,
second or third year of this Agreement, Employee's annual salary then
in effect payable for three (3) years following termination of
employment.
(ii) If such termination occurs during the fourth
year of this Agreement, Employee's annual salary then in effect payable
for two (2) years following termination of employment.
(iii) If such termination occurs during the fifth
or any subsequent years of this Agreement, Employee's annual salary
then in effect payable for one (1) year following termination of
employment.
No Severance Pay shall be payable to Employee if his
employment terminates due to expiration of this Agreement without renewal,
PROVIDED, however, that upon any such expiration Employer may elect, at its
option, to pay Employee Severance Pay for up to two (2) years following such
expiration, in which event Employee shall be bound by the provisions of Section
1.03 above during the period in which such Severance Pay is paid. Severance Pay
shall be payable as salary continuation, payable over time in the same manner as
Employee's salary.
Additionally, upon any termination as described in this
Section 3.02(d): (i) all stock options of Employee under any incentive or stock
option plan of Employer or any Employer affiliate shall continue to vest during
the period in which Severance Pay is being paid, subject, however, to the
specific terms of any option or other agreement or plan relating thereto and
(ii) Tweeter shall pay Employee, within ninety (90) days of such a termination,
in cash, an amount equal to the unvested accrued benefits, if any (other
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than with respect to stock options or restricted stock), which Employee may have
under any retirement, short- or long-term incentive, or stock-option plan of
Tweeter or any Tweeter affiliate.
(e) TERMINATION BY EMPLOYEE WITHOUT GOOD REASON. In the
event of a termination of employment by Employee without Good Reason, Employee
shall be entitled to receive any salary or bonuses earned by or accrued to
Employee and unpaid at the date of his death, but shall not receive any further
salary or other compensation hereunder, and without limiting the foregoing, in
such event, (i) Employee shall receive no Severance Pay, (ii) vesting of all
stock options and restricted stock shall cease upon termination of employment,
and (iii) Employee shall receive no payments in respect of unvested accrued
benefits under any long or short-term incentive plan or retirement plan. The
foregoing clauses (i) through (iii) shall also apply if Employee's employment
terminates due to expiration of this Agreement, or of a renewal term of this
Agreement, without further renewal.
ARTICLE 4.
GENERAL PROVISIONS
4.01. NOTICES. Any notices to be given hereunder by either party to
the other shall be in writing and may be transmitted by personal delivery or by
mail, registered or certified, postage prepaid with return receipt requested to
such other party at the address first set forth above.
4.02 ENTIRE AGREEMENT. This Agreement supersedes any and all other
agreements, either oral or in writing, between the parties hereto with respect
to the employment of Employee by Employer and contains all of the covenants and
agreements between the parties with respect to that employment in any manner
whatsoever.
4.03. LAW GOVERNING AGREEMENT. This Agreement shall be governed by
and construed in accordance with the laws of the Commonwealth of Massachusetts,
without regard to conflicts of laws principles.
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<PAGE> 7
4.04. ASSIGNMENT. This Agreement may be assigned by Employer but not
by Employee.
Executed on _____________________, 1998, at Canton, Massachusetts.
EMPLOYER:
TWEETER HOME ENTERTAINMENT GROUP, INC.
By:
----------------------------------
Name:
Title:
EMPLOYEE:
--------------------------------------
Samuel J. Bloomberg
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<PAGE> 1
EXHIBIT 10.16
JEFFREY STONE
EMPLOYMENT AGREEMENT
TWEETER HOME ENTERTAINMENT GROUP, INC., a Delaware corporation, whose
principal place of business is 40 Hudson Road, Canton, Massachusetts 02021
("Employer" or "Tweeter"), and Jeffrey Stone, whose address is 68 Ingham Way,
Pembroke, Massachusetts 02359 ("Employee"), in consideration of the mutual
promises made herein, hereby agree to enter into this Employment Agreement (this
"Agreement") as follows:
ARTICLE 1.
TERM OF EMPLOYMENT; DUTIES
1.01. TERM OF EMPLOYMENT. Employer hereby employs Employee and Employee
hereby accepts employment with Employer for the period beginning on the June
____, 1998 and ending five (5) years thereafter unless earlier terminated
pursuant to this Agreement. This Agreement shall be renewed automatically for
succeeding three (3) year terms unless either party gives notice to the other at
least 120 days prior to the expiration of any such renewal term of such party's
intention not to renew. As used herein the phrase "employment term" refers to
the entire period of employment of Employee by Employer hereunder, whether for
the periods provided above, or whether terminated earlier as hereinafter
provided or extended by mutual agreement between Employer and Employee.
1.02. GENERAL DUTIES. Employee shall serve as the President and Chief
Operating Officer of Tweeter. In his capacity as the President and Chief
Operating Officer of Tweeter, Employee shall do and perform all services, acts
or things necessary or advisable to manage and conduct the business of Employer,
subject at all times to the policies set by Tweeter's Board of Directors (the
"Tweeter Board").
1.03. NON-COMPETITION AND NON-SOLICITATION. (a) Subject to the other
provisions of this Section 1.03, during the Restricted Period (as defined
below), the Employee shall not (whether as an owner, partner, officer, director,
trustee, agent, employee, consultant, advisor or otherwise), in the Restricted
Territory (as defined below), directly or indirectly, compete with the Employer
or engage or participate in the business conducted by the Employer or enter into
the employ of or provide any services to any person engaged in a business that
is competitive with the business of the Employer. During the Restricted Period,
the Employee also (i) shall not interfere with, disrupt or attempt to disrupt
the relationship, contractual or otherwise, between the Employer and any
customer, supplier, lessor, lessee, employee, consultant or investor of the
Employer, and (ii) shall not solicit or hire any employee or consultant of the
Employer. The "Restricted Period" shall mean the Employee's employment term, and
(A) any period thereafter in which the Employer is paying Severance Pay to the
Employee, or (B) if Employee is
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<PAGE> 2
terminated for Cause, or if Employee terminates employment (other than by
expiration of this Agreement) without Good Reason, two (2) years following such
termination, regardless of the remaining employment term. The "Restricted
Territory" shall mean the area within fifty (50) miles of any retail store owned
or operated by Employer (I) from time to time during the employment term or (II)
with respect to the period following Employee's employment, at the time of
termination of the Employee's employment.
(b) It is the desire and intent of the parties that the provisions
of this Section 1.03 shall be enforced to the fullest extent permissible under
the laws and public policies applied in each jurisdiction in which enforcement
is sought. Accordingly, if any particular subsection or portion of this Section
1.03 shall be adjudicated to be invalid or unenforceable, this Section shall be
deemed amended to delete therefrom the portion thus adjudicated to be invalid or
unenforceable, such deletion to apply only with respect to the operation of this
Section in the particular jurisdiction in which such adjudication is made.
(c) In the event of any breach of the provisions of this Section
1.03 by the Employee, any and all rights of the Employee following termination
of employment to receive any payments of Severance Pay pursuant to Article 3
hereof shall automatically terminate, but the foregoing shall not be construed
so as to require repayment by the Employee of any such Severance Pay that has
been paid to the Employee.
1.04. INJUNCTIVE RELIEF. The Employee acknowledges and agrees that a
breach or threatened breach of the provisions of Section 1.03 of this Agreement
would result in irreparable economic harm to the Employer and that a remedy at
law for any such breach would be inadequate, and therefore, if there is a breach
or threatened breach of the provisions of Sections 1.03 of this Agreement, the
Employer shall be entitled to an injunction restraining the Employee from such
breach.
ARTICLE 2.
COMPENSATION OF EMPLOYEE
2.01. ANNUAL SALARY. As compensation for the services to be performed
hereunder, Employee shall receive a salary) (i) at the rate of three hundred
thousand dollars ($300,000.00) per annum through September 30, 1998, payable at
the rate of twenty-five thousand dollars ($25,000.00) per month, (ii) at the
rate of three hundred twenty-five thousand dollars ($325,000.00) per annum from
October 1, 1998 through September 30, 1999, payable at the rate of twenty-seven
thousand eighty-three dollars and thirty-three cents ($27,083.33) per month, and
(iii) thereafter, at the rate of at least three hundred twenty-five thousand
dollars ($325,000.00) per annum, plus such increases, if any, as may be
determined by the Tweeter Board. Employee's salary shall be payable in
accordance with Employer's payroll payment policies during his employment term.
2.02. BENEFITS. Employee shall be eligible to receive such benefits, and
to participate in such bonus or incentive plans, are as generally made available
to other senior executives of Employer or as may be specifically provided to
Employee as
-2-
<PAGE> 3
determined by Employer or its Compensation Committee from time to time. In
addition, Employer shall provide Employee with a monthly automobile allowance of
up to thousand dollars ($1,000.00) paid to Employee in addition to his salary
and other benefits on the first of each month. All expenses relating to the
operation and maintenance of the automobile, including, but not limited to
insurance expense, oil and gas, and repair shall be paid by Tweeter.
Additionally, Employer shall procure and maintain an automobile liability
insurance policy for Employee's automobile with coverage including Employee and
Employee's spouse and those of his children who qualify as Employee's dependents
under section 152 of the Internal Revenue Code of 1986, as amended, in such
minimum amounts as are reasonable and prudent. Further, it is contemplated that
Employer and Employee will, within a reasonable time following the date of this
Agreement, agree upon and implement a split-dollar insurance or other deferred
compensation benefit for Employee.
2.03. INDEMNIFICATION OF LOSSES OF EMPLOYEE; INSURANCE. Employer shall
indemnify and defend Employee for all losses sustained by Employee in direct
consequence of the discharge of his duties on Employer's behalf, including the
payment of all reasonable legal fees and costs. Employer shall obtain
appropriate Directors and Officers liability insurance, including Employee as a
named insured in an amount comparable to industry standards for public companies
of a size similar to Employer.
ARTICLE 3.
TERMINATION OF EMPLOYMENT
3.01. TERMINATION EVENTS.
(a) TERMINATION UPON DEATH OR DISABILITY. Employee's death shall
terminate his employment by Employer. In addition, if Employee becomes
physically or mentally incapacitated or is injured so that he is unable to
perform the services required of him under this Agreement and such inability to
perform continues for a period in excess of one hundred twenty (120) days during
any twelve month period (whether such disability is continuous or discontinuous
during such twelve month period), Employer may terminate his employment under
this Agreement at any time thereafter, PROVIDED, however, that such disability
is continuing at the time of such termination notice.
(b) TERMINATION FOR "CAUSE" OR WITH OR WITHOUT "GOOD REASON".
(i) Cause. Employer may terminate Employee's employment at
any time for Cause upon at least thirty (30) days written notice to Employee.
The term "Cause" shall mean (1) gross negligence or willful misconduct in
connection with the performance of the executive's material duties under this
Agreement, (2) a breach by Employee of any of his material duties assigned to
him by the Tweeter Board (other than by reason of physical or mental illness)
and Employee's failure to cure such breach within thirty (30) days of written
notice thereof, (3) conduct by Employee against the material best interests of
Tweeter or a material act of common law fraud by Employee against
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<PAGE> 4
Tweeter or its affiliates or employees, or (4) conviction of or pleading nolo
contendere to a felony.
(ii) Termination With Good Reason. Subject to the provisos
contained in this subparagraph, Employee may terminate his employment under this
Agreement with Good Reason upon at least thirty (30) days written notice to the
Tweeter Board. Employee shall have "Good Reason" upon, and the term "Good
Reason" shall mean, the occurrence of any of the following: (i) liquidation of
Tweeter, cessation by Tweeter of its current core business, or sale of Tweeter
or substantially all of its assets, (ii) attempt by Tweeter to relocate Employee
outside the greater Boston area without Employee's consent, (iii) breach by
Tweeter of any of its material obligations under this Agreement and failure by
Tweeter to cure such breach within thirty (30) days of notice thereof, (iv)
without Employee's consent, a reduction in his title from President and Chief
Operating Officer or of his duties or responsibilities as President and Chief
Operating Officer; or (v) a Change in Control of Tweeter, as defined below;
PROVIDED, however, that the occurrences set forth in the foregoing clause (i)
shall not be deemed to have occurred by reason of a corporate reorganization or
other transaction in which Tweeter merges into another entity if the
stockholders of Tweeter immediately prior to such occurrence or transaction
continue to own, immediately after such occurrence or transaction, a majority in
voting and economic interest of the successor entity.
As used herein, a "Change in Control" shall mean, and shall be
deemed to occur if, the "Incumbent Directors" (as hereinafter defined) cease for
any reason, including without limitation as a result of a tender offer, proxy
contest, merger or similar transaction, to constitute at least a majority of the
Tweeter Board, PROVIDED, however, that any person becoming a Director of the
Company subsequent to such date whose election was approved by a vote of at
least two-thirds of the Incumbent Directors or whose nomination for election was
approved by a nominating committee comprised of Incumbent Directors shall be
deemed an Incumbent Director. The "Incumbent Directors" shall mean persons who,
as of closing of the Company's initial public offering of its common stock on or
about the date of this Agreement, constitute the Tweeter Board and those persons
deemed Incumbent Directors pursuant to the preceding sentence.
(iii) Termination Without Good Reason. Employee may terminate
his obligations under this Agreement without Good Reason by giving Employer at
least three (3) months notice in advance.
3.02 OBLIGATIONS OF EMPLOYER FOLLOWING TERMINATION.
(a) TERMINATION BY DEATH. In the event of termination of
employment by reason of Employee's death, Employee, or his estate or other
successors in interest, shall be entitled to receive any salary, pro rated
bonuses, and benefits earned by or accrued to Employee and unpaid at the date of
his death, but shall not receive any further salary or other compensation
hereunder.
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<PAGE> 5
(b) TERMINATION BY REASON OF DISABILITY. In the event of
termination of employment upon disability pursuant to Section 3.01(a) above,
Employer agrees to pay Employee his annual salary for one year payable in the
same manner as provided for the payment of salary herein irrespective of any
disability insurance or other benefits available to Employee.
(c) TERMINATION FOR "CAUSE". In the event of termination of
employment during the employment term for Cause, Employee shall be entitled to
receive his salary then in effect and benefits due or to become due to him up to
the date of termination of employment, and, in the case of benefits, as may be
mandated by law following termination of employment, but Employee shall not be
entitled to any other or further salary or other compensation, bonuses (whether
or not pro rated) or other benefits.
(d) TERMINATION BY EMPLOYER WITHOUT CAUSE OR BY EMPLOYEE WITH GOOD
REASON. Upon termination of Employee's employment by Employee for Good Reason,
or by Employer for any reason other than for Cause, death or disability,
Employee shall be entitled to receive, subject to the provisions of Section 1.03
above, "Severance Pay" as follows:
(i) If such termination occurs during the first, second or
third year of this Agreement, Employee's annual salary then in effect
payable for three (3) years following termination of employment.
(ii) If such termination occurs during the fourth year of
this Agreement, Employee's annual salary then in effect payable for two
(2) years following termination of employment.
(iii) If such termination occurs during the fifth or any
subsequent years of this Agreement, Employee's annual salary then in
effect payable for one (1) year following termination of employment.
No Severance Pay shall be payable to Employee if his employment
terminates due to expiration of this Agreement without renewal, PROVIDED,
however, that upon any such expiration Employer may elect, at its option, to pay
Employee Severance Pay for up to two (2) years following such expiration, in
which event Employee shall be bound by the provisions of Section 1.03 above
during the period in which such Severance Pay is paid. Severance Pay shall be
payable as salary continuation, payable over time in the same manner as
Employee's salary.
Additionally, upon any termination as described in this Section
3.02(d): (i) all stock options of Employee under any incentive or stock option
plan of Employer or any Employer affiliate shall continue to vest during the
period in which Severance Pay is being paid, subject, however, to the specific
terms of any option or other agreement or plan relating thereto and (ii) Tweeter
shall pay Employee, within ninety (90) days of such a termination, in cash, an
amount equal to the unvested accrued benefits, if any (other
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<PAGE> 6
than with respect to stock options or restricted stock), which Employee may have
under any retirement, short- or long-term incentive, or stock-option plan of
Tweeter or any Tweeter affiliate.
(e) TERMINATION BY EMPLOYEE WITHOUT GOOD REASON. In the event of a
termination of employment by Employee without Good Reason, Employee shall be
entitled to receive any salary or bonuses earned by or accrued to Employee and
unpaid at the date of his death, but shall not receive any further salary or
other compensation hereunder, and without limiting the foregoing, in such event,
(i) Employee shall receive no Severance Pay, (ii) vesting of all stock options
and restricted stock shall cease upon termination of employment, and (iii)
Employee shall receive no payments in respect of unvested accrued benefits under
any long or short-term incentive plan or retirement plan. The foregoing clauses
(i) through (iii) shall also apply if Employee's employment terminates due to
expiration of this Agreement, or of a renewal term of this Agreement, without
further renewal.
ARTICLE 4.
GENERAL PROVISIONS
4.01. NOTICES. Any notices to be given hereunder by either party to the
other shall be in writing and may be transmitted by personal delivery or by
mail, registered or certified, postage prepaid with return receipt requested to
such other party at the address first set forth above.
4.02 ENTIRE AGREEMENT. This Agreement supersedes any and all other
agreements, either oral or in writing, between the parties hereto with respect
to the employment of Employee by Employer and contains all of the covenants and
agreements between the parties with respect to that employment in any manner
whatsoever.
4.03. LAW GOVERNING AGREEMENT. This Agreement shall be governed by
and construed in accordance with the laws of the Commonwealth of
Massachusetts, without regard to conflicts of laws principles.
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<PAGE> 7
4.04. ASSIGNMENT. This Agreement may be assigned by Employer but not by
Employee.
Executed on _____________________, 1998, at Canton, Massachusetts.
EMPLOYER:
TWEETER HOME ENTERTAINMENT GROUP, INC.
By:
-----------------------------------------
Name:
Title:
EMPLOYEE:
---------------------------------------------
Jeffrey Stone
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<PAGE> 1
EXHIBIT 10.17
JOSEPH MCGUIRE
EMPLOYMENT AGREEMENT
TWEETER HOME ENTERTAINMENT GROUP, INC., a Delaware corporation, whose
principal place of business is 40 Hudson Road, Canton, Massachusetts 02021
("Employer" or "Tweeter"), and Joseph McGuire, whose address is 35 Joanna Drive,
Foxboro, Massachusetts 02035 ("Employee"), in consideration of the mutual
promises made herein, hereby agree to enter into this Employment Agreement (this
"Agreement") as follows:
ARTICLE 1.
TERM OF EMPLOYMENT; DUTIES
1.01. TERM OF EMPLOYMENT. Employer hereby employs Employee and
Employee hereby accepts employment with Employer for the period beginning on
June ____, 1998 and ending three (3) years thereafter unless earlier terminated
pursuant to this Agreement. This Agreement shall be renewed automatically for
succeeding one (1) year terms unless either party gives notice to the other at
least 60 days prior to the expiration of any such renewal term of such party's
intention not to renew. As used herein the phrase "employment term" refers to
the entire period of employment of Employee by Employer hereunder, whether for
the periods provided above, or whether terminated earlier as hereinafter
provided or extended by mutual agreement between Employer and Employee.
1.02. GENERAL DUTIES. Employee shall serve as the Chief Financial
Officer ("CFO") and Chief Information Officer ("CIO") of Tweeter. In his
capacity as CFO and CIO of Tweeter, Employee shall report to Employer's
President and to Employer's CEO, and shall do and perform all services, acts, or
things as directed by said CEO or President or by Tweeter's Board of Directors
(the "Tweeter Board").
1.03. NON-COMPETITION AND NON-SOLICITATION. (a) Subject to the other
provisions of this Section 1.03, during the Restricted Period (as defined
below), the Employee shall not (whether as an owner, partner, officer, director,
trustee, agent, employee, consultant, advisor or otherwise), in the Restricted
Territory (as defined below), directly or indirectly, compete with the Employer
or engage or participate in the business conducted by the Employer or enter into
the employ of or provide any services to any person engaged in a business that
is competitive with the business of the Employer. During the Restricted Period,
the Employee also (i) shall not interfere with, disrupt or attempt to disrupt
the relationship, contractual or otherwise, between the Employer and any
customer, supplier, lessor, lessee, employee, consultant or investor of the
Employer, and (ii) shall not solicit or hire any employee or consultant of the
Employer. The "Restricted Period" shall mean the Employee's employment term, and
(A) any period thereafter in which the Employer is paying Severance Pay to the
Employee, or (B) if Employee is
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<PAGE> 2
terminated for Cause, or if Employee terminates employment (other than by
expiration of this Agreement) without Good Reason, two (2) years following such
termination, regardless of the remaining employment term. The "Restricted
Territory" shall mean the area within fifty (50) miles of any retail store owned
or operated by Employer (I) from time to time during the employment term or (II)
with respect to the period following Employee's employment, at the time of
termination of the Employee's employment.
(b) It is the desire and intent of the parties that the
provisions of this Section 1.03 shall be enforced to the fullest extent
permissible under the laws and public policies applied in each jurisdiction in
which enforcement is sought. Accordingly, if any particular subsection or
portion of this Section 1.03 shall be adjudicated to be invalid or
unenforceable, this Section shall be deemed amended to delete therefrom the
portion thus adjudicated to be invalid or unenforceable, such deletion to apply
only with respect to the operation of this Section in the particular
jurisdiction in which such adjudication is made.
(c) In the event of any breach of the provisions of this
Section 1.03 by the Employee, any and all rights of the Employee following
termination of employment to receive any payments of Severance Pay pursuant to
Article 3 hereof shall automatically terminate, but the foregoing shall not be
construed so as to require repayment by the Employee of any such Severance Pay
that has been paid to the Employee.
1.04. INJUNCTIVE RELIEF. The Employee acknowledges and agrees that a
breach or threatened breach of the provisions of Section 1.03 of this Agreement
would result in irreparable economic harm to the Employer and that a remedy at
law for any such breach would be inadequate, and therefore, if there is a breach
or threatened breach of the provisions of Sections 1.03 of this Agreement, the
Employer shall be entitled to an injunction restraining the Employee from such
breach.
ARTICLE 2.
COMPENSATION OF EMPLOYEE
2.01. ANNUAL SALARY. As compensation for the services to be
performed hereunder, Employee shall receive a salary at the rate of one hundred
eighty-five thousand dollars ($185,000.00) per annum, payable at the rate of
fifteen thousand four hundred and sixteen dollars and sixty-seven cents
($15,416.67) per month. Employee's salary shall be payable in accordance with
Employer's payroll payment policies during his employment term.
2.02. BENEFITS. Employee shall be eligible to receive such benefits,
and to participate in such bonus or incentive plans, are as generally made
available to other senior executives of Employer or as may be specifically
provided to Employee as determined by Employer or its Compensation Committee
from time to time. In addition, Employer shall provide Employee with a monthly
automobile allowance of up to six hundred dollars ($600.00) paid to Employee in
addition to his salary and other benefits on the first of each month.
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<PAGE> 3
ARTICLE 3.
TERMINATION OF EMPLOYMENT
3.01. TERMINATION EVENTS.
(a) TERMINATION UPON DEATH OR DISABILITY. Employee's
death shall terminate his employment by Employer. In addition, if Employee
becomes physically or mentally incapacitated or is injured so that he is unable
to perform the services required of him under this Agreement and such inability
to perform continues for a period in excess of one hundred twenty (120) days
during any twelve month period (whether such disability is continuous or
discontinuous during such twelve month period), Employer may terminate his
employment under this Agreement at any time thereafter, PROVIDED, however, that
such disability is continuing at the time of such termination notice.
(b) TERMINATION FOR "CAUSE" OR WITH OR WITHOUT "GOOD
REASON".
(i) Cause. Employer may terminate Employee's
employment at any time for Cause upon at least thirty (30) days written notice
to Employee. The term "Cause" shall mean (1) gross negligence or willful
misconduct in connection with the performance of the executive's material duties
under this Agreement, (2) a breach by Employee of any of his material duties
assigned to him by the Tweeter Board, the CEO or President of Tweeter (other
than by reason of physical or mental illness) and Employee's failure to cure
such breach within thirty (30) days of written notice thereof, (3) conduct by
Employee against the material best interests of Tweeter or a material act of
common law fraud by Employee against Tweeter or its affiliates or employees, or
(4) conviction of or pleading nolo contendere to a felony.
(ii) Termination With Good Reason. Employee may
terminate his employment under this Agreement with Good Reason upon at least
thirty (30) days written notice to the Tweeter Board. Employee shall have "Good
Reason" upon, and the term "Good Reason" shall mean, the occurrence of any of
the following: (i) attempt by Tweeter to relocate Employee outside the greater
Boston area without Employee's consent, (ii) breach by Tweeter of any of its
material obligations under this Agreement and failure by Tweeter to cure such
breach within thirty (30) days of notice thereof, or (iii) without Employee's
consent, a reduction in his title from CFO and CIO or of his duties or
responsibilities as CFO and CIO.
(iii) Termination Without Good Reason. Employee
may terminate his obligations under this Agreement without Good Reason by giving
Employer at least three (3) months notice in advance.
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<PAGE> 4
3.02 OBLIGATIONS OF EMPLOYER FOLLOWING TERMINATION.
(a) TERMINATION BY DEATH. In the event of termination of
employment by reason of Employee's death, Employee, or his estate or other
successors in interest, shall be entitled to receive any salary, pro rated
bonuses, and benefits earned by or accrued to Employee and unpaid at the date of
his death, but shall not receive any further salary or other compensation
hereunder.
(b) TERMINATION BY REASON OF DISABILITY. In the event of
termination of employment upon disability pursuant to Section 3.01(a) above,
Employer agrees to pay Employee his annual salary for one year payable in the
same manner as provided for the payment of salary herein irrespective of any
disability insurance or other benefits available to Employee.
(c) TERMINATION FOR "CAUSE". In the event of termination
of employment during the employment term for Cause, Employee shall be entitled
to receive his salary then in effect and benefits due or to become due to him up
to the date of termination of employment, and, in the case of benefits, as may
be mandated by law following termination of employment, but Employee shall not
be entitled to any other or further salary or other compensation, bonuses
(whether or not pro rated) or other benefits.
(d) TERMINATION BY EMPLOYER WITHOUT CAUSE OR BY EMPLOYEE
WITH GOOD REASON. Upon termination of Employee's employment by Employee for Good
Reason, or by Employer for any reason other than for Cause, death or disability,
Employee shall be entitled to receive, subject to the provisions of Section 1.03
above, "Severance Pay" equal to his salary then in effect, payable for one (1)
year following termination of employment. No Severance Pay shall be payable to
Employee if his employment terminates due to expiration of this Agreement
without renewal, PROVIDED, however, that upon any such expiration Employer may
elect, at its option, to pay Employee Severance Pay for up to two (2) years
following such expiration, in which event Employee shall be bound by the
provisions of Section 1.03 above during the period in which such Severance Pay
is paid. Severance Pay shall be payable as salary continuation, payable over
time in the same manner as Employee's salary. Additionally, all stock options of
Employee under any incentive or stock option plan of Employer or any Employer
affiliate shall continue to vest during the period in which Severance Pay is
being paid, subject, however, to the specific terms of any option or other
agreement or plan relating thereto.
(e) TERMINATION BY EMPLOYEE WITHOUT GOOD REASON. In the
event of a termination of employment by Employee without Good Reason, Employee
shall be entitled to receive any salary or bonuses earned by or accrued to
Employee and unpaid at the date of his death, but shall not receive any further
salary or other compensation hereunder, and without limiting the foregoing, in
such event, (i) Employee shall receive no Severance Pay, (ii) vesting of all
stock options and restricted stock shall cease upon termination of employment,
and (iii) Employee shall receive no payments in respect of unvested accrued
benefits under any long or short-term incentive plan or retirement plan. The
foregoing
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<PAGE> 5
clauses (i) through (iii) shall also apply if Employee's employment terminates
due to expiration of this Agreement, or of a renewal term of this Agreement,
without further renewal.
ARTICLE 4.
GENERAL PROVISIONS
4.01. NOTICES. Any notices to be given hereunder by either party to
the other shall be in writing and may be transmitted by personal delivery or by
mail, registered or certified, postage prepaid with return receipt requested to
such other party at the address first set forth above.
4.02 ENTIRE AGREEMENT. This Agreement supersedes any and all other
agreements, either oral or in writing, between the parties hereto with respect
to the employment of Employee by Employer and contains all of the covenants and
agreements between the parties with respect to that employment in any manner
whatsoever.
4.03. LAW GOVERNING AGREEMENT. This Agreement shall be governed by
and construed in accordance with the laws of the Commonwealth of Massachusetts,
without regard to conflicts of laws principles.
4.04. ASSIGNMENT. This Agreement may be assigned by Employer but not
by Employee.
Executed on _____________________, 1998, at Canton, Massachusetts.
EMPLOYER:
TWEETER HOME ENTERTAINMENT GROUP, INC.
By:
------------------------------------
Name:
Title:
EMPLOYEE:
---------------------------------------
Joseph McGuire
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<PAGE> 1
EXHIBIT 11
TWEETER HOME ENTERTAINMENT GROUP, INC.
STATEMENT RE COMPUTATION OF PER SHARE EARNINGS
(IN THOUSANDS EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED SIX MONTHS ENDED SIX MONTHS ENDED
SEPTEMBER 30, 1995 SEPTEMBER 30, 1996 SEPTEMBER 30, 1997 MARCH 31, 1997 MARCH 31, 1998
BASIC DILUTED BASIC DILUTED BASIC DILUTED BASIC DILUTED BASIC DILUTED
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
SHARES
Weighted Average Shares of
Common Stock 2,755 2,755 1,324 1,324 1,056 1,056 1,056 1,056 1,056 1,056
Add:
Nominal Issuances of
Warrants 616 616 616 616 616 616 616 616 616 616
Common Stock Equivalents
in the form of Stock
Options and Warrants - - - 43 - - (1) - 42 - 377
Preferred Stock - - - - (2) - - (2) - - (2) - 2,567
----- ----- ------ ------ ------ ------ ----- ----- ------ -----
Weighted Average Common
Stock and Common
Stock Equivalents 3,371 3,371 1,940 1,983 1,672 1,672 1,672 1,714 1,672 4,616
===== ===== ====== ====== ====== ====== ===== ===== ====== =====
EARNINGS
Earnings per Consolidated
Statements of Income $1,783 $1,783 $1,789 $1,789 $ 146 $ 146 $1,303 $1,303 $ 4,313 $4,313
Less:
Accretion of Preferred
Stock - - (1,036) (1,036)(2) (2,157) (2,157)(2) (901) (901)(2) (1,584) (1,584)
----- ----- ------ ------ ------ ------ ----- ----- ------ ------
Earnings (Loss) Available
to Common Shareholders 1,783 1,783 753 753 (2,011) (2,011) 402 402 2,729 2,729
Add:
Dilutive effect of
Prefered Stock
Dividends - - - - - - - - - 1,584
----- ----- ------ ------ ------ ------ ----- ----- ------ -----
Total 1,783 1,783 753 753 (2,011) (2,011) 402 402 2,729 4,313
----- ----- ------ ------ ------ ------ ----- ----- ------ -----
Earnings (Loss) per Share $0.53 $0.53 $ 0.39 $ 0.38 $(1.20) $(1.20) $0.24 $0.23 $ 1.63 $0.93
===== ===== ====== ====== ====== ====== ===== ===== ====== =====
</TABLE>
(1) Since the Company has a loss from operations available to common
shareholders, inclusion of common stock equivalents would be antidilutive.
Accordingly, such common stock equivalents are excluded from this
computation.
(2) Conversion of preferred stock has an antidilutive impact on earnings per
share. Accordingly, such conversion is excluded from this computation.
<PAGE> 1
Exhibit 21.1
Subsidiaries of the Company
Subsidiaries of Tweeter Home Entertainment Group, Inc.:*
New England Audio Co., Inc., a Massachusetts corporation
Subsidiaries of New England Audio Co., Inc.:
NEA Delaware, Inc., a Delaware corporation
Subsidiaries of NEA Delaware, Inc.: none
*Note: the Company plans to create one or more Massachusetts business trust
subsidiaries prior to the closing of the Offering.
<PAGE> 1
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT AND REPORT ON SCHEDULE
We consent to the use in this Registration Statement of Tweeter Home
Entertainment Group, Inc. on Amendment No. 1 to Form S-1 of our report dated
June 5, 1998, appearing in the Prospectus, which is part of this Registration
Statement and to the reference to us under the headings "Experts" in such
Prospectus.
Our audits of the consolidated financial statements referred to in our
aforementioned report also included the consolidated financial statement
schedule of Tweeter Home Entertainment Group, Inc., listed in Item 16. This
financial statement schedule is the responsibility of the Company's management.
Our responsibility is to express an opinion based on our audits. In our opinion,
such consolidated financial statement schedule, when considered in relation to
the basic consolidated financial statements taken as a whole, presents fairly in
all material respects the information set forth therein.
/s/DELOITTE & TOUCHE LLP
Boston, Massachusetts
June 5, 1998
<PAGE> 1
EXHIBIT 23.2
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Registration Statement of Tweeter Home
Entertainment Group, Inc. on Amendment No. 1 to Form S-1 of our report dated
March 7, 1997 on the financial statements of HiFi Buys Incorporated for the
years ended December 31, 1996, 1995 and 1994, appearing in the Prospectus, which
is part of this Registration Statement, and to the reference to us under the
headings "Experts" in such Prospectus.
/s/DELOITTE & TOUCHE LLP
ATLANTA, GEORGIA
June 5, 1998
<PAGE> 1
EXHIBIT 23.3
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Registration Statement of Tweeter Home
Entertainment Group, Inc. on Amendment No. 1 to Form S-1 of our report dated
October 20, 1995 (May 9, 1996 as to Note 2) on the combined financial statements
of Bryn Mawr Radio and Television Center, Inc. and affiliate for the year ended
August 31, 1995, appearing in the Prospectus, which is part of this Registration
Statement, and to the reference to us under the heading "Experts" in such
Prospectus.
/s/ DELOITTE & TOUCHE LLP
Philadelphia, Pennsylvania
June 5, 1998
<PAGE> 1
EXHIBIT 23.5
Consent
In connection with the filing of a Registration Statement on Form S-1
(the "Registration Statement") by Tweeter Home Entertainment Group, Inc. (the
"Company"), the undersigned consents, on behalf of Audio Video International
Magazine, to the inclusion of the following clause (or any clause or sentence
substantially similar to the following clause) in the Registration Statement,
and to the filing of this consent with the Securities and Exchange Commission as
an exhibit to the Registration Statement:
"The Company has been recognized as the "Consumer Electronics Retailer
of the Year" in both 1996 and 1997 by Audio Video International
Magazine..."
For Audio Video International Magazine
/s/ Bruce Jacobs
--------------------------------------
Name: Bruce Jacobs
Title: Associate Publisher
<PAGE> 1
EXHIBIT 23.6
Consent
In connection with the filing of a Registration Statement on Form S-1
(the "Registration Statement") by Tweeter Home Entertainment Group, Inc. (the
"Company"), the undersigned consents, on behalf of TWICE Consumer Electronics
Retail Registry, to the inclusion of the following clause (or any clause or
sentence substantially similar to the following clause) in the Registration
Statement, and to the filing of this consent with the Securities and Exchange
Commission as an exhibit to the Registration Statement:
"The Company has been recognized...as the fastest growing consumer
electronics retailer in the United States in 1997 by the TWICE Consumer
Electronics Retail Registry."
For TWICE Consumer Electronics Retail Registry
/s/ Marcia Grand
----------------------------------------------
Name: Marcia Grand
Title: Publisher
<PAGE> 1
EXHIBIT 23.7
Consent
In connection with the filing of a Registration Statement on Form S-1 (the
"Registration Statement") by Tweeter Home Entertainment Group, Inc. (the
"Company"), the undersigned consents, on behalf of DVD Video Group, to the
inclusion of the following clause (or any clause or sentence substantially
similar to the following clause) in the Registration Statement, and to the
filing of this consent with the Securities and Exchange Commission as an exhibit
to the Registration Statement:
"According to statistics provided by DVD Video Group, approximately 500,000
DVD players were shipped within the first year after the product's release
in March 1997, and over 1,000,000 players are projected to be shipped in
1998."
For DVD Video Group
/s/ Robert Williams
--------------------------
Name: Robert Williams
--------------------
Title:
--------------------
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<CURRENCY> U.S. DOLLARS
<S> <C> <C>
<PERIOD-TYPE> YEAR 6-MOS
<FISCAL-YEAR-END> SEP-30-1997 SEP-30-1998
<PERIOD-START> OCT-01-1996 OCT-01-1997
<PERIOD-END> SEP-30-1997 MAR-31-1998
<EXCHANGE-RATE> 1 1
<CASH> 1,156,837 1,138,808
<SECURITIES> 0 0
<RECEIVABLES> 6,103,779 7,996,312
<ALLOWANCES> (631,000) (600,000)
<INVENTORY> 31,160,043 35,471,117
<CURRENT-ASSETS> 39,833,044 45,931,395
<PP&E> 26,709,383 28,052,837
<DEPRECIATION> (8,741,879) (10,163,787)
<TOTAL-ASSETS> 78,687,930 84,675,656
<CURRENT-LIABILITIES> 27,962,679 29,648,398
<BONDS> 30,887,816 31,307,614
0 0
20,590,607 22,174,247
<COMMON> 0 0
<OTHER-SE> (5,668,611) (2,939,456)
<TOTAL-LIABILITY-AND-EQUITY> 78,687,930 84,675,656
<SALES> 132,525,037 129,129,712
<TOTAL-REVENUES> 132,525,037 129,129,712
<CGS> 86,314,918 84,280,356
<TOTAL-COSTS> 86,314,918 84,280,356
<OTHER-EXPENSES> 44,157,214 36,050,917
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 1,807,660 1,610,446
<INCOME-PRETAX> 245,245 7,187,993
<INCOME-TAX> 98,962 2,875,198
<INCOME-CONTINUING> 146,283 4,312,795
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 146,283 4,312,795
<EPS-PRIMARY> 1.38 3.53
<EPS-DILUTED> .04 .93
</TABLE>
