<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON DECEMBER 21, 1998
REGISTRATION NO. 333-
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM S-1
REGISTRATION STATEMENT UNDER
THE SECURITIES ACT OF 1933
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VALLEY MEDIA, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
DELAWARE 5190 94-2556440
(State or other jurisdiction (Primary Standard Industrial (I.R.S. Employer
of Classification Code Number) Identification
incorporation or organization) Number)
</TABLE>
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1280 SANTA ANITA COURT
WOODLAND, CALIFORNIA 95776
(530) 661-6600
(Address, including zip code, and telephone number, including
area code, of registrant's principal executive offices)
------------------------
J. RANDOLPH CERF
CHIEF FINANCIAL OFFICER
VALLEY MEDIA, INC.
1280 SANTA ANITA COURT
WOODLAND, CALIFORNIA 95776
(530) 661-6600
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
------------------------
COPIES TO:
DANIEL J. WINNIKE ALAN C. MENDELSON
PAUL A. REINER COOLEY GODWARD LLP
HOWARD, RICE, NEMEROVSKI, CANADY, 5 PALO ALTO SQUARE
FALK & RABKIN, A PROFESSIONAL 3000 EL CAMINO ROAD
CORPORATION PALO ALTO, CA 94306
THREE EMBARCADERO CENTER, SUITE 700 (650) 843-5000
SAN FRANCISCO, CA 94111
(415) 434-1600
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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
TITLE OF EACH CLASS OF AGGREGATE OFFERING AMOUNT OF
SECURITIES TO BE REGISTERED PRICE (1) REGISTRATION FEE
<S> <C> <C>
Common Stock, .001 par value...................................................... $46,000,000 $12,788
</TABLE>
(1) Estimated solely for the purpose of computing the amount of the
registration fee pursuant to Rule 457.
------------------------
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.
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<PAGE>
The information in this preliminary Prospectus is not complete and may be
changed. These securities may not be sold until the registration statement filed
with the Securities and Exchange Commission is effective. This preliminary
Prospectus is not an offer to sell nor does it seek an offer to buy these
securities in any jurisdiction where the offer or sale is not permitted.
<PAGE>
PROSPECTUS SUBJECT TO COMPLETION
DATED DECEMBER , 1998
XX,000,000 SHARES
[VALLEY LOGO]
VALLEY MEDIA, INC.
COMMON STOCK
(PAR VALUE $0.001 PER SHARE)
This is an initial public offering of shares of Common Stock of Valley Media,
Inc. The Company is offering all of these shares and will receive all of the
proceeds from this offering. There is currently no public market for the Common
Stock.
Valley will list the Common Stock on the Nasdaq National Market under the symbol
"VMIX."
INVESTING IN THE COMMON STOCK INVOLVES CERTAIN RISKS. SEE "RISK FACTORS"
BEGINNING ON PAGE 7.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED THESE SECURITIES OR DETERMINED IF THIS
PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
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<TABLE>
<CAPTION>
PRICE TO UNDERWRITING PROCEEDS TO
PUBLIC DISCOUNT COMPANY
<S> <C> <C> <C>
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Per Share $ $ $
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Total $ $ $
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</TABLE>
This is a firm commitment underwriting. To cover over-allotments, the
underwriters may purchase up to an additional shares from the Company at
the initial public offering price less the underwriting discount.
It is expected that delivery of the shares will be made to investors on ,
1999.
J.P. MORGAN & CO. BANCBOSTON ROBERTSON STEPHENS
, 1999
<PAGE>
[Valley logo surrounded by logos of its suppliers and customers]
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
Prospectus Summary............................. 4
Risk Factors................................... 7
Use of Proceeds................................ 14
Dividend Policy................................ 14
Capitalization................................. 15
Dilution....................................... 16
Selected Consolidated Financial Data........... 17
Management's Discussion and Analysis of
Financial Condition and Results of
Operations................................... 18
<CAPTION>
PAGE
<S> <C>
Business....................................... 27
Management..................................... 39
Certain Transactions........................... 46
Principal Stockholders......................... 47
Description of Capital Stock................... 48
Shares Eligible for Future Sale................ 50
Underwriting................................... 51
Legal Matters.................................. 53
Experts........................................ 53
Additional Information......................... 53
Index to Financial Statements.................. F-1
</TABLE>
You should rely only on the information contained in this Prospectus. We have
not authorized anyone to provide you with information different from that
contained in this Prospectus. This Prospectus is an offer to sell, or a
solicitation of offers to buy, shares of Common Stock only in jurisdictions
where offers and sales are permitted. The information contained in this
Prospectus is accurate only as of the date of this Prospectus, regardless of the
time of delivery of this Prospectus or any sale of Common Stock.
In this Prospectus:
- "the Company," "Valley," "we," "us" and "our" refer to Valley Media, Inc.
- all brand names and trademarks listed are the properties of their owners
Unless otherwise indicated, references to the number and percentages of shares
of Common Stock assume that the underwriters' over-allotment option is not
exercised.
Our fiscal year is a 52 or 53 week period ending on the Saturday nearest to
March 31. Our fiscal quarter is a 13 week period ending on the Saturday of the
13th week. However, in a 53 week fiscal year, the fourth quarter is a 14 week
period. For convenience, at times in this Prospectus we refer to our fiscal year
end as March 31 and our quarters ended as of March, June, September and
December.
Our executive offices are at: 1280 Santa Anita Court
Woodland, California 95776
(530) 661-6600
www.valsat.com
Until , 1999 (25 days after the date of this Prospectus), all dealers
that affect transactions in the Common Stock, whether or not participating in
this offering, may be required to deliver a Prospectus. This is in addition to
the dealer's obligation to deliver a Prospectus when acting as an underwriter in
this offering and when selling unsold allotments or subscriptions.
3
<PAGE>
PROSPECTUS SUMMARY
THIS SUMMARY HIGHLIGHTS CERTAIN OF THE INFORMATION CONTAINED ELSEWHERE IN THIS
PROSPECTUS. THIS SUMMARY IS NOT COMPLETE AND DOES NOT CONTAIN ALL OF THE
INFORMATION THAT YOU SHOULD CONSIDER BEFORE INVESTING IN THE COMMON STOCK. TO
UNDERSTAND THIS OFFERING FULLY, YOU SHOULD READ THE ENTIRE PROSPECTUS CAREFULLY,
INCLUDING THE RISK FACTORS AND THE FINANCIAL STATEMENTS.
VALLEY MEDIA, INC.
Valley Media, Inc. is the largest independent full-line distributor of music and
video entertainment products in the United States. Our retail customers include
BestBuy, CVS, Toys R Us and Trans World Entertainment as well as thousands of
other retailers. In 1998, we distributed product to more than 6,000 retailers
operating over 32,000 traditional storefronts. We also provide product, data and
value-added services to more than 100 Internet music and video retailers
including Amazon.com, CDnow, Inc., DVD Express and N2K Inc. Our advanced
systems, technology and proprietary databases enable us to act as a partner to
music and video suppliers and retailers in the $28.8 billion domestic music and
video retail market. In fiscal 1998, we had net sales of $583.5 million. In the
six months ended September 1998, we had net sales of $343.4 million.
Valley has been a beneficiary of retailers' efforts to outsource certain of
their distribution and purchasing functions. The music and video industries are
offering, and consumers are demanding, a growing product selection from
thousands of individual film studios and music labels. This demand for a larger
variety of titles has been particularly illustrated by Internet retailers who
differentiate themselves from traditional stores by advertising the breadth of
their "virtual" selections. It is inefficient for many retailers to manage the
large number of supplier relationships necessary to satisfy their customers.
Accordingly, retailers turn to product aggregators such as Valley to simplify
their own operations and reduce costs.
We believe we differentiate ourselves by aggregating the deepest selection of
music and video titles while simultaneously offering value-added systems, data
and other capabilities. We aggregate and distribute product from all of the
major labels and studios and thousands of independent labels and studios. We
stock more than 245,000 different items, including CDs, video cassettes and
DVDs.
New Media, our Internet sales, support and data division, is our fastest growing
business. Its revenues increased 520%, from $8.2 million to $51.1 million, in
the six months ended September 1998 compared with the corresponding period of
1997. According to Forrester Research, domestic on-line sales of physical music
and video product at retail are expected to grow from approximately $338 million
in 1998 to $3.8 billion in 2003. Access to our extensive catalog is particularly
valuable to on-line retailers as on-line customers tend to buy higher
proportions of deep catalog titles relative to hits than do traditional
shoppers. Our databases serve as an integral part of Internet retailers' product
information and ordering systems. Most of our Internet customers also rely on a
number of our other value-added services to outsource operating capabilities
instead of making the substantial investment to build their own inventories and
infrastructure.
As a full-line distributor, we also play a key role in the delivery of music and
video to traditional retailers. We serve customers ranging from independent
stores to specialty chains to retailers who carry music and video product as an
ancillary product line. For the independent stores, we are usually the primary
or secondary supply source for most or all of their inventory needs. The large
chains frequently have their own distribution centers to acquire product
directly from the major labels and studios, but they generally stock only the
higher velocity titles. Accordingly, we serve their special needs for deep
catalog product, independent product, special orders and emergency
replenishment.
Our Independent Distribution Group leverages our strength in full-line
distribution and provides Valley the opportunity for higher gross margin sales.
This group provides marketing and logistical support to independent music labels
through Distribution North America, an independent music distribution company.
We intend to continue growing by exploiting the following opportunities:
- continued rapid growth of music and video sales over the Internet
- expected growth of DVD
- increased demand for deep catalog music and video
- cross-selling of music and video
- industry consolidation
We believe we can increase profitability and operating efficiency by leveraging
our scale and market leading position to improve delivery times, lower costs and
strengthen our partnerships with our suppliers and customers.
4
<PAGE>
THE OFFERING
<TABLE>
<S> <C>
COMMON STOCK OFFERED........................ XX,000,000 shares
COMMON STOCK OUTSTANDING AFTER THE
OFFERING................................... XX,XXX,000 shares (1)
USE OF PROCEEDS............................. For repayment of debt and working capital and
general corporate purposes. See "Use of
Proceeds."
PROPOSED NASDAQ NATIONAL MARKET SYMBOL...... "VMIX"
DIVIDEND POLICY............................. The Company intends to retain its earnings for
working capital and does not anticipate paying
cash dividends in the foreseeable future. See
"Dividend Policy."
</TABLE>
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(1) Excludes 150,020 shares of Common Stock subject to stock options we granted
under stock option agreements and 105,980 shares of Common Stock issuable under
our stock option plans.
5
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL INFORMATION
The data set forth below should be read in conjunction with the Company's
consolidated financial statements, including the notes thereto, included
elsewhere in this Prospectus.
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------
SIX MONTHS ENDED
FISCAL YEARS ----------------------------------
DOLLARS IN THOUSANDS, ------------------------------------------------------- SEPT. 27, 1997 SEPT. 26, 1998
EXCEPT PER SHARE DATA 1994 1995 1996 1997 1998 (1) (1) (2)
----------- --------- --------- --------- --------- ---------------- ----------------
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS
DATA
Net sales................. $ 100,172 $ 140,916 $ 156,557 $ 199,231 $ 583,492 $234,446 $343,351
Gross profit.............. 13,578 14,331 18,710 23,525 66,865 26,809 37,946
Operating income.......... 2,139 4,830 4,677 2,973 11,682 2,971 3,736
Equity in net loss of
joint venture........... - 162 903 207 - - -
Interest expense.......... 524 735 1,305 1,745 6,627 2,680 5,967
Income (loss) before
income taxes............ 1,615 3,933 2,469 1,021 5,055 291 (2,231)
Net income (loss)......... $ 954 $ 2,317 $ 1,453 $ 611 $ 3,021 $ 168 $ (1,333)
Net income (loss) per
share:
Basic................... $ 1.58 $ 3.79 $ 2.35 $ 1.02 $ 5.07 $ 0.28 $ (2.22)
Diluted................. $ 1.55 $ 3.72 $ 2.23 $ 0.95 $ 4.60 $ 0.26 $ (1.92)
Weighted average shares
outstanding:
Basic................... 605,459 611,616 617,584 596,666 596,003 595,132 601,052
Diluted................. 613,798 622,603 652,455 640,897 656,216 648,967 692,623
SUPPLEMENTAL OPERATING
DATA
EBITDA (3)................ $ 2,655 $ 5,322 $ 5,070 $ 4,615 $ 15,795 $ 4,785 $ 6,348
</TABLE>
<TABLE>
<CAPTION>
-------------------------
AT SEPT. 26, 1998
-------------------------
DOLLARS IN THOUSANDS ACTUAL AS ADJUSTED (4)
-------- ---------------
<S> <C> <C>
BALANCE SHEET DATA
Working capital (deficit)............................................................................. $(21,901) $X,000
Total assets.......................................................................................... 352,766 X,000
Total long-term obligations........................................................................... 4,845 X,000
Total short-term borrowings........................................................................... 131,115 X,000
Stockholders' equity.................................................................................. 9,644 X,000
</TABLE>
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(1) Includes the results of operations of the video business Valley acquired on
May 20, 1997.
(2) Includes interest expense of $1.2 million incurred in refinancing the
credit facility and selling, general and administrative expenses of $587,000 for
the write off of deferred offering costs.
(3) "EBITDA" is defined as earnings before interest, income taxes, depreciation
and amortization. While many in the financial community consider EBITDA to be an
important measure of comparative operating performance, it should not be
construed as an alternative to operating income or cash flows from operating
activities (as determined in accordance with generally accepted accounting
principles). The Company's calculation of EBITDA may be different from the
calculation used by other companies and, therefore, comparability may be
limited. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations - Liquidity and Capital Resources."
(4) Adjusted to reflect the sale by the Company of shares of Common Stock
offered at an assumed initial offering price of $ per share and the
application of the estimated net proceeds. See "Use of Proceeds" and
"Capitalization."
6
<PAGE>
RISK FACTORS
YOU SHOULD CAREFULLY CONSIDER THE FOLLOWING RISKS AND OTHER INFORMATION
CONTAINED IN THIS PROSPECTUS BEFORE PURCHASING THE COMMON STOCK.
COMPETITION
FULL-LINE DISTRIBUTION
The full-line distribution of music and video is an intensely competitive
business. We believe the primary competitive factors in the full-line
distribution of music are:
- inventory breadth (actively stocked)
- fulfillment rate (the percentage of a customer's order that is filled on a
current basis)
- reliability
- accuracy, completeness and depth of data
- price
- delivery time
- information systems and electronic data interchange capabilities
- customer service
- vendor managed inventory capabilities
- advertising support
- financial strength
These factors are also the primary competitive factors in distribution of video,
but because video is more "hit" driven than music, with fewer titles and less
demand for deep catalog product, price is a relatively more important
competitive factor.
We compete with national, regional and local full-line distributors. Our largest
direct competitor in full-line music distribution, Alliance Entertainment Corp.,
filed for Chapter 11 bankruptcy protection in July 1997 and emerged from
bankruptcy in August 1998. In addition to Alliance, we compete with dozens of
other full-line distributors, of which some sell to retailers nationwide and
others are particularly active in their respective geographic regions or in
certain niche markets. In our full-line video distribution business, we compete
with eight companies of greater or comparable size, the largest of which is
Ingram Entertainment, Inc. which has significantly greater sales than us.
In addition, the major labels, major studios and independent distribution
companies sell substantial amounts of their products directly to retailers.
However, to date they have not focused, to the same extent we have, on
fulfilling the needs of smaller independent stores or providing value-added
services. If the major labels, major studios and independent distribution
companies start providing more responsive service to underserved retail segments
or value-added services at competitive costs, our financial results could be
adversely affected.
From time to time, several of our retail chain customers have chosen to buy a
substantial volume of their inventory directly from the major labels and studios
that they had previously been purchasing from us. To the extent that our
customers increase their direct purchasing from the major labels and studios or
the independent distribution companies, our financial results could be adversely
affected.
We also compete with several vendor managed inventory firms, including two
national vendor managed inventory firms, Anderson Merchandising and Handleman
Company, both of which we believe have greater revenues than us. Vendor managed
inventory firms provide customers with inventory selection services for a
limited range of high-volume product, management services and in-store servicing
in addition to order fulfillment.
7
<PAGE>
In addition to competition from existing competitors, in the future we could
face competition from new competitors that may enter the business. If new
competitors enter the music and video distribution business, our financial
results could be adversely affected.
NEW MEDIA
Our existing competitors include Alliance Entertainment Corp., Baker & Taylor
and Ingram Entertainment. Other distributors have announced an interest in
starting to service the on-line market. If one or more of the leading on-line
retailers that we service buys more of its inventory directly from a label or
studio or through an alternative distributor, our financial results could be
adversely affected. Amazon.com, one of our largest New Media customers, has
announced its intent to increase the proportion of product it buys directly from
the labels and studios. In addition, to the extent our Internet customers
utilize fewer value-added services, such as direct-to-consumer fulfillment and
data, our financial results could also be adversely affected.
Our New Media Group's growth will largely depend on the development and
widespread acceptance of the Internet as a medium for commerce. Use of the
Internet by consumers is at an early stage of development, and market acceptance
of the Internet as a medium for commerce is subject to a high level of
uncertainty. The growth projections of Forrester Research for Internet music and
video sales that we have cited in this Prospectus are only their estimates and
may not prove to be accurate. If use of the Internet stops growing, our
financial results could be adversely affected. Additionally, we are not certain
that growth in on-line music and video retail businesses will continue or that
such growth will not adversely affect our traditional full-line distribution
business.
INDEPENDENT DISTRIBUTION
Our independent distribution arm, Distribution North America, competes with
several other independent distribution companies. Some of these competitors
conduct distribution operations equal or larger than Distribution North America
and others operate in niche markets. We also compete with several of the major
labels' own independent distribution arms. In addition, as a label or artist
gains in popularity, Distribution North America faces new competition from the
major labels to retain distribution rights for that label or artist. See
"Business - Competition."
DEPENDENCE ON SUPPLIERS
The major labels and studios produce most of the music and video product. Our
success depends upon our ability to obtain products in sufficient quantities on
competitive terms and conditions from each of the major labels and studios as
well as from thousands of smaller suppliers. We do not have long term contracts
with any supplier for our full-line distribution or New Media businesses. If we
cannot obtain sufficient quantities of product from the major labels or studios
or a significant number of other suppliers for our full-line distribution and
New Media operations, our financial results could be adversely affected.
Distribution North America maintains contracts with most of the suppliers it
represents. These contracts typically range in length from one to three years.
Distribution North America's largest label group accounted for approximately 11%
of Distribution North America's net sales for the first eight months of fiscal
1999. If Distribution North America were unable to maintain its distribution
relationship with any of its large customers, its financial results would be
adversely affected. See "Business - Suppliers."
DEPENDENCE ON MAJOR CUSTOMERS
During the first six months of fiscal 1999, our top three customers accounted
for an aggregate of 13.3% of our sales. We believe our percentage of sales from
these customers, as well as from a few of our other large customers, will
increase as a percentage of sales during the remaining six months of fiscal 1999
and potentially thereafter. In October 1998, under a contract that expires in
June 1999, we began providing a significant distribution function for the
Blockbuster Music stores purchased by Wherehouse Entertainment. We anticipate
that Wherehouse may become our largest customer for the last six months of
fiscal 1999 and generate more sales than any other customer. After June 1999, we
anticipate that sales to Wherehouse will decline as it handles more of its
distribution functions internally. In addition, we anticipate that if our New
Media business continues to grow, sales to a few large Internet retailers will
represent a significant percentage of our total sales. The completion of the
publicly announced merger of two of our largest New Media customers, CDnow and
N2K, will
8
<PAGE>
make the combined company our largest New Media customer for the first six
months of fiscal 1999. If any of our largest customers were to stop or reduce
their purchasing from us, our financial results could be adversely affected.
RELIANCE ON INFORMATION SYSTEMS
Our information systems are an integral part of our operations. We are
constantly upgrading these systems and developing new applications. Our primary
information system is currently utilized for our audio and video operations in
our Woodland and Louisville distribution centers and certain of our smaller
facilities. We use an ancillary information system for our video facilities in
Massachusetts, New Jersey, New York and Pennsylvania. In stages over the next
two years, we intend to integrate this ancillary information system into our
primary information system. In addition, we use a separate information system
for our vendor managed inventory operations. During 1999, we intend to license
software to replace our current vendor managed inventory system. We cannot be
certain that the integration or replacement of these systems will be completed
as scheduled or without unanticipated costs or operational difficulties. The
failure or inoperability of our systems, or difficulties in integration of these
systems, could have a material adverse impact on our financial results. See
"Risk Factors - Uncertainties Relating to Facilities," "Management's Discussion
and Analysis of Financial Condition and Results of Operations - Year 2000
Matters" and "Business - Full-Line Distribution - Operations and Technology."
EFFECTS OF YEAR 2000 ON INFORMATION SYSTEMS
Many information systems were designed to use only a two digit date field. These
date fields may need to accept four digit entries to distinguish 21st century
dates from 20th century dates. Until the date fields are expanded to four digits
on our information systems, any or all of our information systems could fail or
provide erroneous output when referencing dates subsequent to December 31, 1999.
In addition, as we provide electronic data interchange with our suppliers and
customers, difficulties with 21st century dates in our customers' or suppliers'
information systems could adversely affect our information systems, and vice
versa. Such failures or errors could occur prior to 2000. We are in the process
of updating our systems to preempt such problems. If we or our electronic data
interchange suppliers and customers are unable to update our systems
successfully to eliminate this problem, we may be prevented from using some or
all of our information systems or exchanging data with our customers or
suppliers. This, in turn, could disrupt our business and have a material adverse
impact on our financial results. See "Management's Discussion and Analysis of
Financial Conditions and Results of Operations - Year 2000 Matters."
UNCERTAINTIES RELATING TO VIDEO RENTAL MARKET
In the past two years, studios and full-line distributors have initiated
programs to increase the quantity of copies of popular video titles stocked by
retailers. These programs include providing retailers the opportunity to avoid
purchasing product by sharing their rental revenue with the studio or full-line
distributor. We believe that these programs have accelerated a shift of the
market share away from independent video rental stores and small chains in favor
of the larger chains. This is imposing financial pressure on independent
retailers and regional chains, and may have a negative impact on the Company's
ability to collect accounts receivable from these retailers. Since, in general,
full-line distributors play a larger role with independent retailers than the
larger chains, we believe that the market may contract for full-line
distribution of video rental product. In addition, while most full-line video
distributors have elected to participate in revenue sharing distribution
arrangements to help increase the quantity of copies of titles available from
the major studios, we have not. For the time being, we have not seen adequate
demand from independent retailers to justify the expense. In doing so, we risk
losing market share to those distributors who adopt revenue sharing.
UNCERTAIN IMPACT OF CHANGES IN PHYSICAL FORMAT
Within the past two years, studios started selling DVD, which currently is being
marketed as a superior alternative to the video cassette and may eventually be
marketed as a superior replacement for the music CD. In addition, even more
recently, Divx-enhanced DVD players have been introduced to play Divx discs and
DVDs. Divx discs are disposable DVDs and are an alternative to returnable video
rental products. Customers can play Divx discs for a short period or
electronically pay an additional fee to continue using the Divx disc. Currently,
we do not distribute Divx discs. The introductions of these new formats may
cause consumers to exercise caution in
9
<PAGE>
building their libraries of video cassettes and music CDs, thus decreasing our
video sell-through and music sales. In addition, our financial results could be
adversely affected if Divx products become widely accepted, Divx displaces
significant demand for the formats we sell and we are unable to participate in
their distribution.
EMERGENCE OF NEW DELIVERY TECHNOLOGIES
Music and video are currently marketed and distributed primarily on a physical
delivery basis through wholesale and retail distribution. In the future, if
products are marketed, sold and delivered by labels or studios directly to
stores or homes through electronic downloading or streaming, current methods of
wholesale and retail distribution could decrease or be eliminated. Real Networks
and others offer streaming technology which allows users to listen to, but not
record, audio and video. In addition, digital distribution has begun on the
Internet utilizing a technology called MP3, a coding compression technology that
allows downloading and copying of any digital audio product. Today, much of this
type of digital distribution is unauthorized and lacks copyright protection.
However, the major studios have recently announced a plan to develop a universal
standard for the electronic delivery of music and have announced their intention
to make this delivery method available by the end of 1999. If electronic
distribution of music or video becomes widespread and displaces significant
demand for the formats we sell and we fail to play a significant role in the
electronic distribution market, our financial results would be adversely
affected.
In addition, cable television companies, Direct Satellite TV and others are
beginning to offer movies on a "near-video-on-demand" or other basis that allows
subscribers to order selected videos for in-home viewing. To the extent that
these programs achieve a broad level of acceptance, the market for physical
video product sold or rented by retailers could decline, which would, in turn,
reduce our sales of video product.
UNCERTAINTIES RELATING TO FACILITIES
During the first quarter of fiscal 1999, we began distributing music and video
from our newest distribution center in Louisville, Kentucky. Integration of
operations into this new distribution center has and will absorb a substantial
amount of management attention during a period when our ability to manage our
growth and development is critical. After eight months of operation at the
Louisville distribution center, we continue to experience operating and
inventory inefficiencies. Such inefficiencies could have a material adverse
effect on our financial results. In addition, as the Louisville distribution
center has increased our fixed costs substantially, a lack of growth or decline
in sales would adversely affect our earnings. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and "Business -
Full-Line Distribution - Operations and Technology."
Continued growth of our business will likely cause us to add new facilities or
expand or move our current facilities. As with any such facility changes, we may
experience operational disruptions, inventory inefficiencies and other
difficulties due to such changes.
PRODUCT RETURNS
Music and video products generally are returnable throughout the distribution
channel, subject in some circumstances to restocking fees and to some
limitations on return rights. To the extent that customer return levels change
significantly from prior periods or that actual returns are substantially
greater than we anticipate, our operating results for the period in which such
returns occur would be adversely affected. We bear inventory risk associated
with the financial viability of our independent labels and studios. If a label
or studio cannot provide refunds in cash for the inventory Valley desires to
return, we may be forced to expense such inventory costs. Further, Valley often
experiences higher returns rates for products of financially troubled labels and
studios. If we fail to manage our inventory to avoid accumulating substantial
product that cannot be returned, our financial results could be adversely
affected.
COPYRIGHTS AND ROYALTIES
Substantially all of the music and video products we sell are subject to
copyright laws and licenses that limit the manner and geographic area in which
such products may be sold and provide royalties to the copyright owners. Any
sales of product in violation of such laws and licenses by anyone in the chain
of distribution may subject others in the distribution chain to monetary damages
or confiscation of such product. We distribute thousands of
10
<PAGE>
titles from different artists over numerous jurisdictions and rely primarily on
our suppliers to ensure compliance with the copyright laws, some of which may be
conflicting or not clearly developed, and payment of appropriate royalties.
Although we have not experienced a material loss due to copyright violations, we
could be damaged in the future by copyright violations by someone in our
distribution channel.
UNCERTAINTY OF INTERNATIONAL MUSIC SALES
Most of the major labels have adopted policies restricting the export of their
merchandise by domestic distributors. However, consistent with industry
practice, we distribute music of the major labels internationally. Our
international net sales of music for fiscal 1998 were approximately $43.2
million and for the first six months of fiscal 1999 were approximately $22.5
million. In particular, approximately $5.0 million of New Media net sales in the
first six months of fiscal 1999 were shipped overseas. We would be adversely
affected if a major label enforced any restriction on our ability to sell music
outside the United States.
Although our international sales are denominated in dollars, our international
sales volume can be adversely affected by appreciation of the dollar relative to
foreign currencies. In addition, our credit risk with international customers
could increase with such appreciation. Other risks to which international
operations are subject include:
- imposition of governmental controls
- export license requirements
- restrictions on the export of certain technology
- political instability
- trade restrictions
- tariff changes
- impact of local economic conditions and practices.
Our success will be dependent, in part, on our ability to anticipate and
effectively manage these and other risks.
SUBSTANTIAL LEVERAGE; RESTRICTIVE COVENANTS
We have a revolving credit facility which allows us to borrow up to $200.0
million, subject to certain accounts receivable and inventory availability
criteria. The credit facility is secured by substantially all of our assets. As
of November 28, 1998, borrowings of approximately $125.3 million were
outstanding under the credit facility. The credit facility will remain in place
following this offering and will be used for general working capital purposes.
See "Use of Proceeds."
As a result of our substantial leverage:
- we will incur significant interest expense and principal repayment
obligations
- our ability to obtain additional financing in the future may be limited
- our ability to compete through expansion, capital improvements and
flexibility in response to changing industry conditions may be limited
The credit facility contains numerous restrictive covenants, including:
- limitations on our ability to acquire or invest in other businesses
- requirements that we comply with certain financial covenants
If we fail to comply with the terms of the credit facility or other agreements
related to the credit facility, or obtain waivers from such obligations, we
could trigger an event of default under the credit facility or related
agreements. An event of default could permit acceleration of indebtedness under
the credit facility or related agreements that contain cross-acceleration or
cross-default provisions.
11
<PAGE>
Our cash flow and capacity needs change significantly during the year, with the
heaviest credit needs and highest capacity requirements typically occurring
during the third fiscal quarter. If we do not have sufficient finances to
purchase the inventory required or the distribution capacity to distribute
product in a timely and accurate manner during such seasonal peak periods, our
financial results could be adversely affected. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Liquidity and
Capital Resources" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Seasonality in Operating Results."
POTENTIAL FLUCTUATIONS IN QUARTERLY OPERATING RESULTS
We anticipate significant fluctuations in future quarterly sales and operating
results due to a number of factors outside our control, including:
- seasonal variations in the demand for music and video
- variability in the number and sales magnitude of new "hit" music or video
titles in a given quarter
- the proportions in which retailers buy their music and videos directly
from major labels or studios as opposed to through a full-line distributor
- the percentage of returns in a given quarter
- the general economic condition in the music and video industries
For example, the release of one major hit video in a quarter can materially
affect our operating results in a given quarter. As a result, we believe
period-to-period comparisons of our results of operations are not, and will not
necessarily be, meaningful and should not be relied upon as an indication of
future performance. Due to the foregoing factors, it is possible that in some
future quarters our operating results will be below the expectations of analysts
and investors. In such event, the price of the Common Stock may be adversely
affected.
NO PRIOR PUBLIC MARKET; STOCK PRICE VOLATILITY
Prior to this offering, there has been no public market for the Common Stock. We
will list the Common Stock for trading on the Nasdaq National Market. The
initial public offering price will be determined by negotiations between the
underwriters and us and may not be indicative of the market price for the Common
Stock after this offering. See "Underwriting" for a discussion of the factors
considered in determining the initial public offering price of the Common Stock.
We do not know the extent to which investor interest will lead to the
development of an active public market. Investors may not be able to resell the
Common Stock at or above the initial public offering price. Many factors could
cause the market price of the Common Stock to fluctuate substantially including:
- future announcements concerning Valley or its competitors
- variations in operating results
- loss of a key supplier or customer
- technological innovations such as changes in physical product formats or
delivery technologies
- changes in product pricing policies by Valley, its suppliers or
competitors
- changes in earnings estimates by securities analysts
These fluctuations, as well as general economic, political and market
conditions, may have a material adverse effect on the market price of the Common
Stock. See "Underwriting."
CONTROL BY FOUNDER AND ANTI-TAKEOVER CONSIDERATIONS
After giving effect to this offering, Barnet Cohen, the founder and Chairman of
the Board, will beneficially own approximately % of the Common Stock, and the
executive officers and directors, including Mr. Cohen, will own, in the
aggregate, approximately % of the Common Stock, assuming no exercise of
outstanding options. As a result, Mr. Cohen will be able to exercise control
over all matters requiring stockholder approval, including
12
<PAGE>
election of directors and approval of significant corporate transactions. Future
sales by Mr. Cohen or the other members of management of substantial amounts of
Common Stock, or the potential for such sales, could adversely affect the
prevailing market price of the Common Stock.
Certain provisions of Valley's Amended and Restated Certificate of Incorporation
and Amended and Restated Bylaws could make it more difficult for a third party
to acquire control of Valley without the consent of Valley's Board of Directors,
even if such change were favored by the stockholders. In addition, the Board of
Directors has the authority to issue preferred stock without stockholder
approval. See "Principal Stockholders" and "Description of Capital Stock."
SHARES ELIGIBLE FOR FUTURE SALE
The market price of the Common Stock could drop as a result of sales of a large
number of shares of Common Stock in the market after this offering, or the
perception that such sales could occur. These factors could also make it more
difficult for Valley to raise funds through future offering of Common Stock.
There will be shares of Common Stock outstanding immediately after this
offering. All of the shares sold in this offering will be freely transferable
without restriction or further registration under the Securities Act, except for
shares purchased by "affiliates" of Valley, as defined in Rule 144 under the
Securities Act. The remaining 602,327 shares of Common Stock that will be
outstanding upon completion of this offering are "restricted securities" as
defined in Rule 144. These restricted securities may be sold in the future
without registration under the Securities Act to the extent permitted under Rule
144 or an exemption under the Securities Act. In connection with this offering,
all holders of restricted securities have agreed not to sell their shares
without the prior written consent of J.P. Morgan & Co. for a period of 180 days
from the date of this Prospectus.
As of November 28, 1998, 150,020 shares of Common Stock were issuable upon
exercise of currently outstanding options, all of which are subject to the
lock-up agreements described above. Of those options, options to purchase
shares will be vested and fully exercisable 180 days after commencement of this
offering. See "Shares Eligible for Future Sale."
FORWARD-LOOKING STATEMENTS
Certain statement contained or incorporated in this Prospectus are
forward-looking statements concerning our operations, economic performance and
financial condition. Forward-looking statements are included, for example, in
the discussions about:
- the market for music and video sales
- our strategy
- future technology
- our information systems
- Year 2000 issues
Those forward-looking statements involve risks and uncertainties and actual
results may differ materially from those expressed or implied in those
statements. Factors that could cause differences include, but are not limited
to, those discussed under "Risk Factors" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
13
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from the sale of the shares of Common
Stock being offered hereby are estimated to be approximately $ at an
assumed initial public offering price of $ (approximately $ if
the Underwriters' over-allotment option is exercised in full). The Company
intends to use all of the net proceeds to repay a portion of the outstanding
balance under its revolving credit facility (the "Credit Facility"), as a result
of which the Company expects to have additional borrowing capacity available to
it for working capital and general corporate purposes. The Credit Facility was
established in May 1998 to provide working capital financing and replace the
Company's prior credit facility. At November 28, 1998, the outstanding balance
under the Credit Facility was approximately $125.3 million. Outstanding balances
under the Credit Facility bear interest, at the Company's election, of either
the prime rate plus a margin ranging from 0% to 0.5% or the Euro Dollar Rate (as
defined in the Credit Facility) plus a margin ranging from 2% to 2.75%. At
November 28, 1998, the average interest rate on outstanding borrowings under the
Credit Facility was approximately 7.64%. The Credit Facility expires in May
2001, unless extended by the parties, and upon such expiration all outstanding
amounts are then due.
DIVIDEND POLICY
The holders of Common Stock are entitled to share ratably in any dividends
declared by the Company on the Common Stock. The Company did not declare any
dividends on the Common Stock during fiscal 1996, 1997 or 1998, however, and
does not anticipate paying any dividends in the foreseeable future. In addition,
the Credit Facility contains certain limitations on the Company's ability to pay
cash dividends.
14
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company as of September
26, 1998 and as adjusted as of such date to reflect the sale of the Common Stock
offered by the Company hereby (at an assumed initial public offering price of
$ per share) and application of the estimated net proceeds therefrom.
This table should be read in conjunction with the Company's consolidated
financial statements and notes thereto appearing elsewhere in this Prospectus.
<TABLE>
<CAPTION>
----------------------
AT SEPT. 26, 1998
----------------------
DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA ACTUAL AS ADJUSTED
--------- -----------
<S> <C> <C>
Short-term debt (including current portion of long-term debt).......... $ 131,115 $ X,X00
Long-term debt (excluding current portion)............................. 4,845 X,X00
Stockholders' equity:
Preferred stock, $.001 par value, 2,000,000 shares authorized; no
shares issued and outstanding; no shares issued and outstanding as
adjusted............................................................ - -
Common stock, $.001 par value, 20,000,000 shares authorized; 602,327
shares issued and outstanding; and shares issued and
outstanding as adjusted (1)......................................... 1 X,X00
Additional paid-in capital........................................... 927 X,X00
Stockholder notes receivable......................................... (78) (X,X00)
Retained earnings.................................................... 8,794 X,X00
--------- -----------
Total stockholders' equity......................................... 9,644 X,X00
--------- -----------
Total capitalization............................................. $ 145,604 $ X,X00
--------- -----------
--------- -----------
</TABLE>
- ------------------------
(1) Excludes 149,257 shares of Common Stock issuable upon exercise of
outstanding options and 106,743 shares reserved for future issuance under the
Company's 1994 Stock Option Plan and 1997 Stock Option Plan.
15
<PAGE>
DILUTION
The net tangible book value of the Company as of September 26, 1998 was
approximately $ or $ per share of Common Stock. "Net tangible book
value" per share represents the amount of total assets less goodwill and other
intangibles of the Company reduced by the amount of its total liabilities and
divided by the total number of shares of Common Stock outstanding. After giving
effect to the sale of the XX,000,000 shares of Common Stock offered hereby at an
assumed initial public offering price of $ per share, and deducting
estimated underwriting discounts and commissions and offering expenses, the pro
forma net tangible book value of the Company at September 26, 1998 would have
been approximately $ or $ per share. This represents an
immediate increase in net tangible book value of $ per share to existing
stockholders and an immediate dilution of $ per share to new investors.
The following table illustrates this per share dilution:
<TABLE>
<S> <C> <C>
--------------------
Assumed initial public offering price per share........................... $ XX.XX
---------
Net tangible book value per share before the Offering..................... $ X.XX
Increase attributable to new investors.................................... X.XX
---------
Pro forma net tangible book value per share after the Offering............ X.XX
---------
Dilution per share to new investors....................................... $ X.XX
---------
---------
</TABLE>
The following table summarizes on a pro forma basis as of September 26, 1998,
the differences between the existing stockholders and the new investors with
respect to the number of shares of Common Stock purchased from the Company, the
total consideration paid to the Company and the average price per share paid:
<TABLE>
<CAPTION>
---------------------------------------------------------------
TOTAL CONSIDERATION
--------------------------------------
SHARES PURCHASED AVERAGE
----------------------- PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
---------- ----------- ------------ ----------- -----------
<S> <C> <C> <C> <C> <C>
Existing stockholders................... 602,327 XX.X% $XXX,000,000 X.X% $ X.XX
New investors........................... XX,000,000 XX.X XXX,000,000 X.X X.XX
----- ----- -----------
Total................................... XX,000,000 100.0% $XXX,000,000 100.0% $ X.XX
---------- ----- ------------ ----- -----------
---------- ----- ------------ ----- -----------
</TABLE>
16
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The Company's fiscal year is a 52 or 53 week period ending on the Saturday
nearest to March 31. The 1994, 1995, 1996, 1997 and 1998 fiscal years each
contained a 52 week period. The consolidated statements of operations data for
fiscal 1996, 1997 and 1998 and the consolidated balance sheet data as of fiscal
year end 1997 and 1998 have been derived from the consolidated financial
statements of the Company included elsewhere in this Prospectus that have been
audited by Deloitte & Touche LLP, independent auditors. The consolidated
statement of operations data for fiscal 1995 and the consolidated balance sheet
data as of fiscal year end 1995 and 1996 have been derived from audited
consolidated financial statements not included in this Prospectus. The
consolidated statement of operations data for fiscal 1994 and the consolidated
balance sheet data as of fiscal year end 1994 have been derived from unaudited
consolidated financial statements not included in this Prospectus. The Company's
consolidated financial statements as of September 1998 and for the six months
ended September 1997 and 1998 are unaudited and, in the opinion of management,
contain all adjustments that are of a normal and recurring nature (except for
line of credit termination fees and financing costs totalling approximately
$1,200,000 and the write-off of deferred offering costs of $587,000, both of
which were expensed in the six months ended September 1998) necessary to present
fairly the financial position and results of operations for such periods. The
results of operations for the six months ended September 1998 are not
necessarily indicative of the results expected for the full year. The data set
forth below should be read in conjunction with the Company's consolidated
financial statements, including the notes thereto, included elsewhere in this
Prospectus.
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------
SIX MONTHS ENDED
FISCAL YEARS ------------------------
------------------------------------------------------- SEPT. 27, SEPT. 26,
DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA 1994 1995 1996 1997 1998 (1) 1997 (1) 1998 (2)
--------- --------- --------- --------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA
Net sales................................... $ 100,172 $ 140,916 $ 156,557 $ 199,231 $ 583,492 $ 234,446 $ 343,351
Cost of goods sold.......................... 86,594 126,585 137,847 175,706 516,627 207,637 305,405
--------- --------- --------- --------- ----------- ----------- -----------
Gross profit................................ 13,578 14,331 18,710 23,525 66,865 26,809 37,946
Selling, general and administrative
expenses.................................. 11,439 9,501 14,033 20,552 55,183 23,838 34,210
--------- --------- --------- --------- ----------- ----------- -----------
Operating income............................ 2,139 4,830 4,677 2,973 11,682 2,971 3,736
Equity in net loss of joint venture......... - 162 903 207 - - -
Interest expense............................ 524 735 1,305 1,745 6,627 2,680 5,967
--------- --------- --------- --------- ----------- ----------- -----------
Income (loss) before income taxes........... 1,615 3,933 2,469 1,021 5,055 291 (2,231)
Income taxes................................ 661 1,616 1,016 410 2,034 123 (898)
--------- --------- --------- --------- ----------- ----------- -----------
Net income (loss)........................... $ 954 $ 2,317 $ 1,453 $ 611 $ 3,021 $ 168 $ (1,333)
--------- --------- --------- --------- ----------- ----------- -----------
--------- --------- --------- --------- ----------- ----------- -----------
Net income (loss) per share:
Basic..................................... $ 1.58 $ 3.79 $ 2.35 $ 1.02 $ 5.07 $ 0.28 $ (2.22)
Diluted................................... $ 1.55 $ 3.72 $ 2.23 $ 0.95 $ 4.60 $ 0.26 $ (1.92)
Weighted average shares outstanding:
Basic..................................... 605,459 611,616 617,584 596,666 596,003 595,132 601,052
Diluted................................... 613,798 622,603 652,455 640,897 656,216 648,967 692,623
SUPPLEMENTAL OPERATING DATA
EBITDA (3).................................. $ 2,655 $ 5,322 $ 5,070 $ 4,615 $ 15,795 $ 4,785 $ 6,348
</TABLE>
<TABLE>
<CAPTION>
------------------------------------------------------------------
AT FISCAL YEAR END
----------------------------------------------------- AT SEPT.
DOLLARS IN THOUSANDS 1994 1995 1996 1997 1998 26, 1998
--------- --------- --------- --------- --------- -----------
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA
Working capital (deficit)......................... $ 3,073 $ 3,762 $ 4,397 $ (200) $ (17,612) $ (21,901)
Total assets...................................... 32,171 48,648 58,114 94,591 245,062 352,766
Total long-term obligations....................... 873 961 3,157 2,257 3,166 4,845
Total short-term borrowings....................... 7,292 11,703 20,280 21,705 75,715 131,115
Stockholders' equity.............................. 3,930 6,333 7,716 7,773 10,977 9,644
</TABLE>
- ------------------------------
(1) Includes results of operations from the video business acquired by the
Company on May 20, 1997.
(2) Includes interest expense of $1.2 million incurred in refinancing the
Credit Facility, and selling, general and administrative expenses of $587,000
for the write-off of deferred offering costs.
(3) "EBITDA" is defined as earnings before interest, income taxes, depreciation
and amortization. While many in the financial community consider EBITDA to be an
important measure of comparative operating performance, it should not be
construed as an alternative to operating income or cash flows from operating
activities (as determined in accordance with generally accepted accounting
principles). The Company's calculation of EBITDA may be different from the
calculation used by other companies and, therefore, comparability may be
limited. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations - Liquidity and Capital Resources."
17
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THE FOLLOWING DISCUSSION AND ANALYSIS SHOULD BE READ IN CONJUNCTION WITH
"SELECTED CONSOLIDATED FINANCIAL DATA" AND THE COMPANY'S CONSOLIDATED FINANCIAL
STATEMENTS, AND THE RESPECTIVE NOTES THERETO INCLUDED ELSEWHERE IN THIS
PROSPECTUS. THE DISCUSSION IN THIS PROSPECTUS INCLUDES CERTAIN FORWARD-LOOKING
STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES, SUCH AS STATEMENTS OF THE
COMPANY'S PLANS, OBJECTIVES, EXPECTATIONS AND INTENTIONS. THE CAUTIONARY
STATEMENTS MADE IN THIS PROSPECTUS SHOULD BE READ AS BEING APPLICABLE TO ALL
RELATED FORWARD LOOKING STATEMENTS WHEREVER THEY APPEAR IN THIS PROSPECTUS. THE
COMPANY'S ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE DISCUSSED HEREIN.
FACTORS THAT COULD CAUSE OR CONTRIBUTE TO SUCH DIFFERENCES INCLUDE THOSE
DISCUSSED IN "RISK FACTORS" AS WELL AS THOSE DISCUSSED ELSEWHERE HEREIN.
OVERVIEW
The Company has been engaged in the full-line distribution of music since 1985
and expanded its operations to include the full-line distribution of video with
the acquisition of substantially all of the assets of Star Video Entertainment,
L.P. ("Star") in May 1997 (the "Star Acquisition"). In addition to its core
full-line distribution business, the Company conducts its music and video
distribution business through two other operating divisions, its New Media Group
and its Independent Distribution Group. The New Media Group provides product,
data and direct-to-consumer fulfillment services for Internet retailers and
currently represents Valley's fastest growing division. In September 1994,
Valley entered into a joint venture, Distribution North America ("DNA"), to
provide marketing, distribution and related services for independent record
labels. In January 1997, Valley acquired its joint venture partner's interest in
DNA, which now forms the largest component of the Company's Independent
Distribution Group.
The Company generates most of its revenue from the sale of music and video. The
Company also receives revenue from providing certain services to customers such
as direct-to-consumer fulfillment and licensing the Company's proprietary
databases of product information. Incremental revenues include sales of
publications, fees for applying retailers' customized stickers, preparation of
videos for rental and restocking fees. Sales are reported as net of returns and
returns reserves. See "Business - Suppliers" and "Business - Customers."
The Company's fiscal year is a 52 or 53 week period ending on the Saturday
nearest to March 31. The Company's three most recently completed fiscal years
ended March 30, 1996, March 29, 1997 and March 28, 1998. Each such fiscal year
contained a 52 week period. Fiscal 1999 will be a 53 week period. The following
table sets forth net sales of each of the Company's three principal business
groups for fiscal 1996, 1997 and 1998 and for the six months ended September
1997 and 1998.
<TABLE>
<CAPTION>
---------------------------------------------------------
SIX MONTHS ENDED
FISCAL YEARS ------------------------
------------------------------- SEPT. 27, SEPT. 26,
DOLLARS IN THOUSANDS 1996 1997 1998 1997 1998
--------- --------- --------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Full-line distribution............. $ 152,235 $ 184,721 $ 520,465 $211,820 $274,913
New Media.......................... 4,322 8,319 30,316 8,246 51,131
Independent Distribution........... - 6,626 45,685 20,075 25,835
Intercompany sales (1)............. - (435) (12,974) (5,695) (8,528)
--------- --------- --------- ----------- -----------
Total net sales.................. $ 156,557 $ 199,231 $ 583,492 $234,446 $343,351
--------- --------- --------- ----------- -----------
--------- --------- --------- ----------- -----------
</TABLE>
- ------------------------
(1) Consists primarily of sales of music by the Independent Distribution Group
to full-line distribution and the New Media Group.
In the mid-1990's, the Company's music distribution business was negatively
impacted by the Company's largest competitor pursuing an aggressive pricing
strategy to gain market share. This price competition negatively impacted both
margins and sales. Simultaneously, the Company recognized that in order to
compete effectively in a competitive pricing environment it needed to increase
its scale, efficiencies and capabilities. Beginning late in fiscal 1995, the
Company undertook several actions to support future growth. Significant
investments were made to develop and install advanced information systems and
automated equipment in the Company's California
18
<PAGE>
distribution center. Senior executives were added in key areas, and sales and
marketing, information systems and administrative support staffs were expanded.
The Company also invested in enhancing its product information databases. As a
result, selling, general and administrative expenses increased at a faster rate
than revenues in fiscal 1996 and 1997. The Company believes, however, that this
infrastructure development, along with the investment in its new Louisville
Distribution Center (the "LDC"), provides the capacity for growth in all lines
of its business. In addition, while the pricing environment for music and video
remains competitive, the Company believes that market conditions have stabilized
in the last year in all segments except video full-line distribution.
Gross margins are subject to both quarterly fluctuations and long term trends.
The mix of product sales among higher margin sales relative to lower margin
sales is the most significant factor affecting gross margins. The video
distribution business typically generates lower gross margins than the music
business. To the extent our Internet customers utilize fewer value-added
services, such as direct-to-consumer fulfillment and data, our gross margin for
New Media may decline. The Company believes that margins could be positively
affected over the long term when the LDC becomes fully operational as a result
of reduced freight costs and other scale efficiencies. Factors that can
contribute to gross margin fluctuations on a quarterly basis also include the
percentage of lower margin, higher volume "hits" versus catalog product sold in
a given quarter. Additionally, margin fluctuations are influenced by competitive
pricing conditions, the level of product discounts, rebates and advertising
support from the Company's vendors and changes in freight costs.
RESULTS OF OPERATIONS
The following discussion is based on the historical results of operations for
fiscal 1996, 1997 and 1998 and the six months ended September 1997 and 1998. The
Company engaged in a number of acquisitions during this period that enabled it
to achieve scale efficiencies, add product lines, acquire data and strengthen
its relationship with certain customer segments and suppliers. These
acquisitions included: (i) certain assets of four regional full-line music
distributors in Indianapolis, Omaha, Baltimore and Connecticut in June, July and
November 1996 and December 1997, respectively; (ii) a music database and the
rights to publish two music publications from Stereophile, Inc. in December
1996; (iii) the remaining 50% interest in DNA in January 1997 (the original
investment in the DNA joint venture was made in September 1994 and was accounted
for on the equity method) and (iv) the Star Acquisition. Each acquisition was
accounted for as a purchase; accordingly, the results of the acquired companies
are included in the Company's results of operations from the date of
acquisition.
The following table sets forth certain operating data as a percentage of net
sales for fiscal 1996, 1997 and 1998 and the six months ended September 1997 and
1998.
<TABLE>
<CAPTION>
---------------------------------------------------------
SIX MONTHS ENDED
FISCAL YEARS ------------------------
------------------------------- SEPT. 27, SEPT. 26,
1996 1997 1998 1997 1998
--------- --------- --------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Net sales................................... 100.0% 100.0% 100.0% 100.0% 100.0%
Gross profit................................ 12.0 11.8 11.5 11.4 11.1
Selling, general and administrative
expenses.................................. 9.0 10.3 9.5 10.1 10.0
Operating income............................ 3.0 1.5 2.0 1.3 1.1
Net income.................................. 0.9% 0.3% 0.5% 0.1% (0.4)%
Supplemental Data - EBITDA (1).............. 3.2% 2.3% 2.7% 2.0% 1.8%
</TABLE>
- ------------------------
(1) "EBITDA" is defined as earnings before interest, income taxes, depreciation
and amortization.
19
<PAGE>
SIX MONTHS ENDED SEPTEMBER 1998 COMPARED TO SIX MONTHS ENDED SEPTEMBER 1997
The Company's net sales increased $108.9 million, or 46.5%, from $234.5 million
in the six months ended September 1997 to $343.4 million in the six months ended
September 1998.
Full-line distribution sales increased $63.1 million, or 29.8%, from $211.8
million to $274.9 million. Approximately $32.5 million of this increase was
attributable to the inclusion of six months of video sales in 1998 compared to
four months in 1997 as a result of the Star Acquisition. In addition, the
release of the TITANIC video and growth of DVD sales increased video sales. The
balance of the growth was attributable to increased sales to existing and new
full-line music distribution customers.
New Media sales increased $42.9 million, or 520.1%, from $8.2 million to $51.1
million due to: (i) the addition of a significant new and fast growing customer,
Amazon.com; (ii) the overall growth of on-line sales to existing on-line
customers and (iii) the addition of new customers.
Independent Distribution sales increased $5.7 million, or 28.7%, from $20.1
million to $25.8 million due to: (i) the acquisition of new labels; (ii)
increased sales to the Company's full-line distribution and New Media divisions
and (iii) successful marketing of existing labels and artists.
The Company's gross profit increased $11.1 million, from $26.8 million to $37.9
million, with gross margin declining from 11.4% to 11.1%. Margins were affected
by: (i) changes in product, service and customer mix and (ii) increases in
freight and inventory carrying costs associated with the startup of the LDC.
Gross margin declined principally due to: (i) the inclusion of six months as
opposed to four months of video sales (which have lower margins than music
sales) and (ii) increased sales of video due to the sales of TITANIC.
Selling, general and administrative expenses increased $10.4 million, or 43.5%,
from $23.8 million to $34.2 million primarily as a result of sales growth.
Selling, general and administrative expenses declined as a percentage of sales
from 10.1% to 10.0% due primarily to: (i) lower general and administrative costs
as a percentage of sales for full-line video distribution as compared to
full-line music and (ii) operating leverage associated with the overall increase
in sales, particularly in full-line music distribution and New Media. Partially
offsetting these cost reductions were several unusual items: (i) costs
associated with opening the LDC; (ii) costs associated with consolidating video
sales offices and distribution centers; (iii) a write off of deferred offering
costs of $587,000 and (iv) increases in depreciation and amortization as a
result of the Star Acquisition and infrastructure development.
Interest expense increased $3.3 million, or 122.6%, from $2.7 million to $6.0
million due to: (i) costs of $1.2 million incurred to replace the Company's
revolving credit facility; (ii) growth in working capital associated largely
with increased sales and the LDC; (iii) the Star Acquisition and (iv) investment
in systems and in the LDC. Partially offsetting these factors was a reduction of
the Company's average interest rate from 8.9% in 1997 to 7.6% in 1998.
Net income decreased $1.5 million from a net income of $168,000 to a net loss of
$1.3 million.
FISCAL 1998 COMPARED TO FISCAL 1997
The Company's net sales increased $384.3 million, or 193%, from $199.2 million
in fiscal 1997 to $583.5 million in fiscal 1998.
Full-line distribution sales increased $335.7 million, or 181.8%, in fiscal
1998. Approximately $234 million of this increase was attributable to the Star
Acquisition, which extended the Company into the video distribution business,
and approximately $102 million was attributable to growth in full-line music
distribution, representing a 57% growth rate in this business from fiscal 1997
to fiscal 1998. This growth was due to increased sales to existing customers and
the addition of new customers.
New Media sales increased $22.0 million, or 264.4%, in fiscal 1998 due to: (i)
the overall growth of on-line sales to existing on-line customers and (ii) the
addition of new customers.
20
<PAGE>
Independent Distribution sales increased $39.1 million, or 589%, from $6.6
million in fiscal 1997 to $45.7 million in fiscal 1998 due to: (i) the
acquisition of the remaining 50% interest in DNA in the fourth quarter of fiscal
1997 (fiscal 1998 includes net sales for a full year versus two months in fiscal
1997) and (ii) successful marketing and new labels which provided strong growth
in sales of independent labels.
The Company's gross profit increased $43.4 million, from $23.5 million in fiscal
1997 to $66.9 million in fiscal 1998, with gross margin declining slightly from
11.8% to 11.5%. The changes in margin were impacted by changes in product and
customer mix. Margins in music full-line distribution did not change
meaningfully between fiscal 1997 and fiscal 1998. The decline in gross margin
was due primarily to the Company's entry into the video business, which more
than offset the gross margin gains associated with the growth in the Company's
New Media and Independent Distribution Groups. These groups generally have
higher margins than full-line distribution.
Selling, general and administrative expenses increased $34.6 million, or 168%,
from $20.6 million in fiscal 1997 to $55.2 million in fiscal 1998. Selling,
general and administrative expenses increased primarily as a result of the Star
Acquisition and internal growth. Selling, general and administrative expenses
declined as a percentage of sales from 10.3% in fiscal 1997 to 9.5% in fiscal
1998 due primarily to: (i) lower selling, general and administrative costs as a
percentage of sales for full-line video distribution, which the Company
commenced in the first quarter of fiscal 1998 following the Star Acquisition, as
compared to full-line music distribution, and (ii) operating leverage associated
with the overall increase in sales, particularly in full-line music
distribution. Partially offsetting these factors were: (i) increases in
operating costs associated with the growth in newer businesses that typically
require higher selling, general and administrative expenses (New Media and
Independent Distribution); (ii) costs associated with the Star Acquisition and
consolidation of the Star business; (iii) costs associated with planning and
preparing for the LDC and (iv) increases in depreciation and amortization as a
result of the recent acquisitions and infrastructure development.
Interest expense increased from $1.7 million in fiscal 1997 to $6.6 million in
fiscal 1998, reflecting borrowings incurred to fund: (i) the Star Acquisition;
(ii) growth in working capital and (iii) investments in systems and the LDC.
Net income increased by $2.4 million from $611,000 in fiscal 1997 to $3.0
million in fiscal 1998 as a result of these factors.
FISCAL 1997 COMPARED TO FISCAL 1996
The Company's net sales increased $42.6 million, or 27%, from $156.6 million in
fiscal 1996 to $199.2 million in fiscal 1997.
Full-line distribution sales increased $32 million, or 21%, primarily due to:
(i) new accounts and further penetration of existing accounts as a result of,
among other things, the opening of an East Coast sales office and the hiring of
additional sales and marketing representatives and (ii) the acquisition of
customer lists from three regional full-line distributors, offset by a reduction
of approximately $29 million in sales to two of the Company's largest customers
in fiscal 1997, compared to fiscal 1996.
New Media sales increased $4 million, or 92%, due to: (i) the overall growth of
on-line sales to existing on-line customers and (ii) the addition of new
customers.
Independent Distribution sales were $6.6 million in fiscal 1997 due to the
acquisition of the remaining 50% of the DNA business in January 1997.
The Company's gross profit increased $4.8 million, from $18.7 million for fiscal
1996 to $23.5 million for fiscal 1997. However, gross margin decreased from
12.0% in fiscal 1996 to 11.8% in fiscal 1997. This decline reflects the net
impact of several factors, including: (i) sales discounts to full-line
distribution customers due to intense price competition and (ii) higher freight
costs due primarily to a proportional increase in shipments to the Eastern
United States. These factors more than offset changes in the Company's product
mix that otherwise would have improved gross margins, including: (i) the effects
of the Company's January 1997 acquisition of the remaining 50% ownership
interest in the DNA joint venture and (ii) growth in New Media sales.
21
<PAGE>
Selling, general and administrative expenses increased $6.6 million, or 46%,
from $14.0 million for fiscal 1996 to $20.6 million for fiscal 1997. The
increase was attributable primarily to: (i) a decrease in the reimbursement of
selling, general and administrative expenses under the DNA administrative
agreement relative to the amount of such expenses; (ii) development of Schwann
publications, Valley Entertainment, the LDC and the East Coast sales office and
(iii) growth of other expenses due to increased sales.
Interest expense increased from $1.3 million in fiscal 1996 to $1.7 million in
fiscal 1997 due to higher outstanding balances under the Company's previous
credit facility, which financed increases in working capital, capital investment
and acquisitions associated with the growth of the Company.
Net income decreased from $1.5 million in fiscal 1996 to $611,000 in fiscal 1997
as a result primarily of the decline in operating income and the increase in
interest expense.
LIQUIDITY AND CAPITAL RESOURCES
The Company's capital requirements relate primarily to working capital, the
expansion of the Company's operations to accommodate sales growth, and the
funding of acquisitions. The Company's working capital needs are seasonal and
typically peak in the second and third fiscal quarters due to increases in
inventories purchased for the holiday selling season and extension of credit
terms to certain customers.
Historically, the Company has financed its cash requirements primarily from
short-term bank borrowings and cash from operations. Operating activities used
net cash of $5.5 million in fiscal 1996, provided net cash of $12.9 million in
fiscal 1997 and used $13.1 million in fiscal 1998. The change from fiscal 1996
to fiscal 1997 resulted from the timing of certain of the Company's inventory
purchases and the mix of purchases relative to vendor payment terms. The change
from fiscal 1997 to fiscal 1998 resulted from increases in accounts receivable
and inventories in excess of increases in accounts payable to vendors, which
resulted from the Company's substantially higher sales volume overall. Inventory
and receivables have increased throughout these periods primarily due to the
Company's growth and increases in its customer base.
Net cash used in investing activities was $1.8 million, $12.3 million and $37.6
million for fiscal 1996, 1997 and 1998, respectively. Cash used in fiscal 1996
related primarily to investments in property and equipment at the Company's
California distribution center. Cash used in fiscal 1997 consisted of $9.3
million for acquisitions completed during that year, and $2.9 million for
property and equipment acquisitions, primarily for system enhancements. Cash
used in fiscal 1998 consisted of $33.1 million for acquisitions, which consisted
primarily of the Star Acquisition, and $4.3 million for property and equipment
acquisitions. Cash used in investing activities has increased in each of the
past two fiscal years because of increasing investments in fixed assets and
technology required to facilitate overall sales growth. The Company expects
capital expenditures in fiscal 1999 to be substantially above fiscal 1998
levels, primarily as a result of the completion of the LDC and the continued
integration of Star's business into the Company.
Financing activities provided net cash of $7.3 million in fiscal 1996, used net
cash of $359,000 in fiscal 1997, and provided net cash of $50.7 million in
fiscal 1998. Cash provided from financing activities in fiscal 1996 related
primarily to additional borrowings under the Company's previous credit facility
to fund increased working capital requirements. The fiscal 1997 amount was
primarily a result of the repurchase of shares of the Company's common stock for
$550,000. See "Certain Transactions." Cash provided from financing activities in
fiscal 1998 related primarily to additional borrowings to fund the Star
Acquisition and working capital requirements generated by the Company's overall
sales growth.
For the six months ended September 1997, net cash used in operating activities
was $4.1 million, compared to $49.6 million for the same period in 1998. In both
periods, these figures were primarily the result of sales growth and
acquisitions generating growth in accounts receivable and inventories in excess
of growth of accounts payable. The substantial use of cash for operating
activities in the most recent period was the result of accounts payable growing
at a slower rate than in the earlier period, partially offset by a slower growth
rate in accounts receivable. Net cash used in investing activities totaled $35.3
million in the six months ended September 1997, and included $33.1 million for
the Star Acquisition and $2.0 million for purchases of property and equipment
and other assets. During the same period in 1998, net cash used in investing
activities totaled $6.6 million, primarily representing investments in equipment
and technology required to facilitate the Company's growth. Net
22
<PAGE>
cash provided from financing activities increased from $39.2 million in the six
months ended September 1997 to $56.6 million in the six months ended September
1998. The increase was caused by a much larger increase in short-term borrowings
in the most recent period. Increases in short-term bank borrowings occurred in
both periods to fund increases in accounts receivable, inventory and fixed
assets that exceeded increases in accounts payable.
On May 21, 1998, the Company entered into the Credit Facility. The Credit
Facility provides for borrowings up to the lesser of $200.0 million or the
amount of collateral availability. Collateral availability is limited to certain
percentages of eligible inventory and accounts receivable, subject to certain
limitations as to video and DNA inventories. The Credit Facility bears interest,
at the Company's election, of either the prime rate plus a margin of 0% to 0.5%
or the Eurodollar Rate plus a margin of 2.0% to 2.75%, subject to monthly
adjustments and certain terms and conditions as stated in the Credit Facility.
Borrowings are secured by all eligible accounts receivable, inventory, certain
equipment, and other tangible property of the Company. The Credit Facility
expires on May 21, 2001 and renews annually thereafter unless notice is given by
either party. The Credit Facility contains various covenants, including among
other things, compliance with: (i) adjusted net worth requirements; (ii)
restrictions on sales of assets, consolidations, mergers, and dissolution; (iii)
limitations on encumbrances, indebtedness, loans, investments, and guarantees
and (iv) limitations on payment of cash dividends and redemptions. The Company
intends to use the net proceeds of the Offering to repay a portion of the
outstanding balance under the Credit Facility.
The Company believes that its cash on hand, together with its cash flow from
operations, borrowing availability under the Credit Facility and the net
proceeds to the Company from this Offering, will be sufficient to meet its
operating and capital requirements through fiscal 2000. The Company's future
operating and capital requirements, however, will depend on numerous factors,
including without limitations, growth of the business, additional infrastructure
needs, potential acquisitions and/or joint ventures and future results of
operations.
SEASONALITY IN OPERATING RESULTS
The Company's quarterly net sales and operating results have varied
significantly in the past and will likely continue to do so in the future as a
result of seasonal variations in the demand for music and video. Historically,
the Company's sales are highest during the third fiscal quarter (the holiday
season) and returns are highest during the fourth fiscal quarter. Due to this
seasonality, the Company typically experiences significant changes in its cash
flow and capacity needs during the year, with the heaviest credit needs and
highest capacity requirements typically occurring during the third fiscal
quarter.
NEW ACCOUNTING STANDARDS
See Note 2 to the Company's consolidated financial statements for a discussion
of the impact on the Company of Statement of Financial Accounting Standards
("SFAS") No. 130, Reporting Comprehensive Income, and SFAS No. 131, Disclosures
about Segment Reporting of an Enterprise and Related Information, which will be
adopted by the Company in fiscal 1999, and SFAS No. 133, Accounting for
Derivative Instruments and Hedging Activities, which will be adopted by the
Company in fiscal 2001.
YEAR 2000 MATTERS
The year 2000 issue has arisen as a result of computer programs being written
using two digits rather than four to define the applicable year. Certain
information technology systems and their associated software ("IT Systems"), and
certain equipment that uses programmable logic chips to control aspects of their
operation ("embedded chip equipment"), may recognize "00" as a year other than
the year 2000. Some IT Systems and embedded chip equipment used by the Company
and by third parties who do business with the Company contain two-digit
programming to define a year. The year 2000 issue could result, at the Company
and elsewhere, in system failures or miscalculations causing disruptions of
operations, including, among other things, a temporary inability to process
transactions or to engage in other normal business activities.
23
<PAGE>
READINESS FOR YEAR 2000
The Company is addressing its year 2000 issues, including efforts to address
issue the Company faces relating to: (i) IT Systems and embedded chip equipment
used within the Company, (ii) third parties who do business with the Company
that are not prepared for the year 2000 and (iii) contingency planning.
The Company uses a variety of IT Systems, internally developed and third-party
provided software and embedded chip equipment. For these IT Systems, software
and embedded chip equipment, the Company has divided its year 2000 efforts into
four phases: (i) identification and inventorying of IT Systems and embedded chip
equipment with potential year 2000 problems; (ii) evaluation of scope of year
2000 issues for, and assigning priorities to, each item based on its importance
to the Company's operations; (iii) remediation of year 2000 issues in accordance
with assigned priorities, by correction, upgrade, replacement or retirement and
(iv) testing for and validation of year 2000 compliance on an application and
enterprise-wide basis. The Company has categorized as "mission critical" those
IT Systems and embedded chip equipment whose failure would cause cessation of
operations, or could otherwise have a sustained and significant detrimental
financial impact on the Company. Phases (i) and (ii) are complete across all
"mission critical" business functions and locations. All mission critical IT
Systems and embedded chip equipment are currently in phase (iii) or (iv). The
Company will conduct a comprehensive program of integration testing of internal
systems in order to ensure that all systems still work together properly and
without year 2000 problems. This integration testing will occur in August 1999.
The Company's operations are also dependent on the year 2000 readiness of third
parties that do business with the Company. In particular, the Company's IT
Systems interact with commercial electronic transaction processing systems of
customers. In addition, the Company is dependent on third-party suppliers of
infrastructure elements such as telecommunications services, electric power,
water and banking facilities. The Company does not depend to any significant
degree on any single merchandise supplier or upon electronic transaction
processing with individual vendors for merchandise purchases. The Company has
identified and initiated formal communications with key third parties to
determine the extent to which the Company will be vulnerable to such parties'
failure to resolve their own year 2000 issues. As a follow-up, the Company plans
to determine whether its customers and suppliers are taking appropriate steps to
achieve year 2000 readiness and ensure continued functioning in accordance with
the Company's business needs. The Company is assessing its risks with respect to
failure by third parties to be year 2000 compliant and intends to seek to
mitigate those risks. The Company is also developing contingency plans,
discussed below, to address issues related to third parties the Company
determines are not making sufficient progress toward becoming year 2000
compliant.
COSTS
The Company estimates that its IT Systems and embedded chip equipment will be
year 2000 compliant by August 1999. Aggregate costs for work related to year
2000 efforts in fiscal 1999 and 2000 currently are anticipated to total
approximately $2.7 million, including about $1.4 million of internal costs and
$400,000 for capital investments, and are expected to be funded through
operating cash flows. Operating costs related to year 2000 compliance projects
will be incurred over several quarters and will be expensed as incurred. They
include $208,000 in costs in the six months ended September 1998.
The Company's estimates of the costs of achieving year 2000 compliance and the
date by which year 2000 compliance will be achieved are based on management's
best estimates, which were derived using numerous assumptions about future
events including the continued availability of certain resources, third party
modification plans and other factors. However, there can be no assurance that
these estimates will be achieved, and actual results could differ materially
from these estimates. Specific facts that might cause such material differences
include the availability and cost of personnel trained in year 2000 remediation
work, the ability to locate and correct all relevant computer codes, the success
achieved by the Company's customers and suppliers in reaching year
2000-readiness, the timely availability of necessary replacement items and
similar uncertainties.
RISKS
The Company expects to implement the changes necessary to address the year 2000
issue for IT Systems and embedded chip equipment used within the Company. The
Company presently believes that, with modifications to existing software,
conversions to new software, and appropriate remediation of embedded chip
equipment, the year 2000 issue with respect to the Company's IT Systems and
embedded chip equipment is not reasonably
24
<PAGE>
likely to pose significant operational problems for the Company. However, if
unforeseen difficulties arise, such modifications, conversions and replacements
are not completed timely, or the Company's customers or suppliers' systems are
not modified to become year 2000 compliant, the year 2000 issue may have a
material impact on the results of operations and financial condition of the
Company.
The Company is presently unable to assess the likelihood that the Company will
experience significant operational problems due to unresolved year 2000 problems
of third parties that do business with the Company. Although the Company has not
been put on notice that any known third party problem will not be timely
resolved, the Company has limited information and no assurance can be made
concerning the year 2000 readiness of third parties. The resulting risks to the
Company's business are very difficult to assess due to the large number of
variables involved. If third parties fail to achieve year 2000 compliance, year
2000 problems could have a material impact on the Company's operations.
Similarly, there can be no assurance that the Company can timely mitigate its
risks related to a third party's failure to resolve its year 2000 issues. If
such mitigation is not achievable, year 2000 problems could have a material
impact on the Company's operations.
The Company expects the most reasonably likely worst case year 2000 scenarios to
include:
- disruption in utilities, transportation and communication
- disruption to commerce between the Company and third parties
CONTINGENCY PLANS
The Company presently believes that its most reasonably likely worst-case year
2000 scenarios would relate to the possible failure in one or more geographic
regions of third party systems over which the Company has no control and for
which the Company has no ready substitute, such as, but not limited to, power
and telecommunications services. The Company has in place a business resumption
plan that addresses recovery from various kinds of disasters, including recovery
from significant interruptions to data flows and distribution capabilities at
the Company's major data systems centers and major distribution centers. The
Company is using that plan as a starting point for developing specific year 2000
contingency plans, which will emphasize locating alternate sources of supply,
methods of distribution and ways of processing information.
The Company's contingency planning is expected to prepare our business for
disruptions but cannot protect us fully from commercial impact. The Company is
currently initiating the following efforts:
- prioritizing all hardware, software and services across the enterprise
- developing contingency plans for top priority items, including: (i)
forward-buy or sparing activities for hardware and inventory; (ii)
procurement of generators; (iii) identification of alternatives for
transportation of product and communications with business partners and
(iv) staffing and coverage plans for year-end and century start-up
timeframe
The Company expects its year 2000 contingency plans will be substantially
complete by June 1999. However, there can be no assurance that the Company will
be able to complete its contingency planning on that schedule.
25
<PAGE>
QUARTERLY RESULTS OF OPERATIONS
The table below sets forth quarterly operating data of the Company, including
such data as a percentage of net sales, for fiscal 1998 and the first two
quarters of fiscal 1999. This quarterly information is unaudited, but in
management's opinion reflects all adjustments, consisting only of normal
recurring adjustments, necessary for a fair presentation of the information for
the periods presented when read in conjunction with the audited consolidated
financial statements of the Company and notes thereto. The operating results for
any quarter are not necessarily indicative of results for any future period. See
"Risk Factors - Potential Fluctuations in Quarterly Operating Results."
<TABLE>
<CAPTION>
----------------------------------------------------------------
FISCAL QUARTERS ENDED
----------------------------------------------------------------
DOLLARS IN THOUSANDS, EXCEPT PER JUNE 28, SEPT. 27, DEC. 27, MARCH 28 JUNE 27, SEPT. 26,
SHARE DATA 1997(1) 1997 1997 1998 1998(2) 1998
--------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Net sales........................ $ 89,792 $ 144,654 $ 192,833 $ 156,213 $ 154,373 $ 188,978
Gross profit..................... 10,690 16,118 20,058 19,999 16,950 20,996
Selling, general and
administrative expenses........ 9,670 14,168 15,084 16,261 17,181 17,029
--------- --------- --------- --------- --------- ---------
Total operating income (loss).... $ 1,020 $ 1,950 $ 4,974 $ 3,738 $ (231) $ 3,967
Net income (loss)................ $ (11) $ 180 $ 1,885 $ 967 $ (2,101) $ 768
Net income per share:
Basic.......................... $ (0.02) $ 0.30 $ 3.17 $ 1.61 $ (3.50) $ 1.28
Diluted........................ $ (0.02) $ 0.28 $ 2.85 $ 1.44 $ (3.12) $ 1.11
SUPPLEMENTAL DATA
EBITDA (3)..................... $ 1,763 $ 3,023 $ 6,091 $ 4,919 $ 984 $ 5,307
</TABLE>
<TABLE>
<CAPTION>
----------------------------------------------------------------------------
FISCAL QUARTERS ENDED
----------------------------------------------------------------------------
JUNE 28, SEPT. 27, DEC. 27, MARCH 28 JUNE 27, SEPT. 26,
1997(1) 1997 1997 1998 1998 1998
----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Net sales.............................. 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Gross profit........................... 11.9 11.1 10.4 12.8 11.0 11.1
Selling, general and administrative
expenses............................. 10.8 9.8 7.8 10.4 11.1 9.0
----- ----- ----- ----- ----- -----
Total operating income (loss).......... 1.1 1.3 2.6 2.4 (0.1) 2.1
Net income............................. - 0.1 1.0 0.6 (1.5) 0.4
</TABLE>
The following table sets forth quarterly net sales of each of the Company's
three principal business groups for fiscal 1998 and the first two quarters of
fiscal 1999.
<TABLE>
<CAPTION>
----------------------------------------------------------------
FISCAL QUARTERS ENDED
----------------------------------------------------------------
JUNE 28, SEPT. 27, DEC. 27, MARCH 28 JUNE 27, SEPT. 26,
DOLLARS IN THOUSANDS 1997(1) 1997 1997 1998 1998 1998
--------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Full-line distribution........... $ 80,004 $ 131,816 $ 173,645 $ 135,000 $ 124,796 $ 150,117
New Media........................ 3,266 4,981 9,396 12,673 21,650 29,481
Independent Distribution......... 8,877 11,198 13,341 12,270 12,583 13,252
Intercompany sales (4)........... (2,355) (3,341) (3,549) (3,730) (4,656) (3,872)
--------- --------- --------- --------- --------- ---------
Total net sales................ $ 89,792 $ 144,654 $ 192,833 $ 156,213 $ 154,373 $ 188,978
--------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- ---------
</TABLE>
- ------------------------
(1) Includes results of operations from the Star business acquired by the
Company on May 20, 1997.
(2) Includes interest expense of $1.2 million incurred in refinancing the
Credit Facility, and selling, general and administrative expenses of $587,000
for the write-off of deferred offering costs.
(3) "EBITDA" is defined as earnings before interest, income taxes, depreciation
and amortization.
(4) Consists primarily of sales of music by the Independent Distribution Group
to full-line distribution and the New Media Group.
26
<PAGE>
BUSINESS
The Company is the largest independent full-line distributor of music and video
entertainment products in the United States. Valley's retail customers include
BestBuy, CVS, Toys R Us and Trans World Entertainment as well as thousands of
other retailers. Valley distributed product to more than 6,000 retailers
operating over 32,000 traditional storefronts. Valley also provides product,
data and value-added services to more than 100 music and video Internet
retailers, including Amazon.com, Inc., CDnow, Inc., DVD Express, Inc. and N2K
Inc. With its advanced systems, technology and proprietary databases, the
Company acts as a partner to music and video suppliers and retailers in the
$28.8 billion domestic music and video retail market. Valley enables music and
video suppliers to more effectively reach a fragmented retail market and
provides value-added services to its customers and suppliers. In fiscal 1998,
the Company had net sales of $583.5 million and EBITDA of $15.8 million. The
National Association of Recording Merchandisers ("NARM") has recognized the
Company as best in its class for each of the past five years.
Valley has developed its proprietary databases, as well as its distribution and
data collection systems to handle a "deep catalog" of approximately 245,000
stock keeping units ("skus") efficiently. Valley has developed state-of-the-art
fulfillment centers to ship very small orders directly to customers ordering via
on-line music retailers as well as large, complex orders from traditional
retailers. Valley's advanced systems are the result of 13 years of ongoing
investments and operating refinements as well as the commitment of approximately
130 technology professionals dedicated to maintaining and enhancing these
systems and databases. As a testament to the Company's data integrity, SoundScan
Inc., a retail audio and video sales data collection company, uses the Company's
data as a backbone for its own systems. Further, the Company believes that its
systems and deep catalog uniquely position it to capitalize on new growth
opportunities.
Valley has been a beneficiary of retailers' efforts to outsource certain of
their distribution and purchasing functions. The music and video industries are
offering and consumers are demanding a growing product selection from thousands
of individual studios and labels. This demand for a larger variety of titles has
been particularly illustrated by Internet retailers who differentiate themselves
from traditional stores by advertising the breadth of their "virtual"
selections. It is inefficient for many retailers to manage the large number of
supplier relationships necessary to satisfy their customers. Accordingly,
retailers turn to product aggregators such as Valley to simplify their own
operations and reduce costs. We believe we differentiate ourselves by
aggregating the deepest selection of music and video skus while simultaneously
offering value-added systems, data and other capabilities.
New Media, the Company's Internet sales, support and data division, is the
Company's fastest growing business and represented $29.5 million, or 16%, of net
sales for the fiscal quarter ended September 1998. New Media net sales grew from
$8.2 million for the six months ended September 1997 to $51.1 million for the
same period in 1998. According to Forrester Research, Inc., domestic on-line
sales of physical music and video product (at retail) are expected to grow from
approximately $338 million in 1998 to $3.8 billion in 2003. Through its
proprietary systems, technology and deep catalog commitment, the Company has
positioned itself to offer a set of value-added services that meet the
specialized needs of this growing retail channel. Valley has further partnered
with on-line retailers by providing them with the Company's proprietary product
databases, which serve as an important part of the retailer's "front-end"
product information and ordering systems. These databases contain data on title
availability, trade information, track information and other data enabling the
on-line retailer to offer its customers the ability to sort and search an
extensive catalog for the items they wish to purchase. This capability is
particularly important for on-line retailers as industry sources have observed
that Internet customers buy a higher proportion of deep catalog product relative
to "hits" than do storefront shoppers. The Company intends to further enhance
and develop its capabilities and value-added services for the on-line retail
channel.
As a full-line distributor, Valley also plays a key role in the delivery of
music and video to traditional retailers. In fiscal 1998, Valley aggregated and
distributed music and video product from all of the major, and many of the
independent, labels and studios. By partnering with the Company, a retailer can
increase sales and profitability while simultaneously reducing investment in
inventory, facilities and personnel. The Company's independent traditional
storefront customers generally rely on the Company to provide most, if not all,
of their product requirements. On the other hand, large chains frequently have
their own distribution centers to acquire product
27
<PAGE>
directly from the major labels and studios, but generally stock only higher
velocity skus. Accordingly, the Company serves the chains' special needs for
deep catalog product, independent product (as an aggregator of hundreds of small
suppliers), special orders and emergency replenishment.
After identifying an opportunity to apply its expertise in music distribution to
video, the Company entered the video distribution business through the Star
Acquisition. The Company intends to capitalize on the growth in video product
priced for sale to end users (commonly referred to as "sell-through video") and
the introduction of new physical formats such as DVD. The Company is leveraging
its technology, deep catalog, and operational capabilities to provide
value-added services to video customers in order to differentiate itself in the
market place and increase sales and market share.
Valley's Independent Distribution Group leverages Valley's leading position in
full-line distribution and provides Valley the opportunity for higher gross
margin sales. The Independent Distribution Group consists primarily of DNA, an
independent distribution company. It also includes Valley Entertainment, a music
label. DNA provides marketing and logistical support to independent music
labels.
INDUSTRY OVERVIEW
The domestic music and video markets generated retail sales of approximately
$28.8 billion in 1997, of which $12.0 billion represented music sales, $7.6
billion represented video sales and $9.2 billion represented video rentals.
These markets feature a dynamic mix of products. For example, during fiscal
1998, the Company added 52,425 audio skus and deleted 33,095 audio skus from its
inventory. The Company believes that most of these additions and deletions
represent skus that have been added to or removed from the marketplace. The
increase in sku count adds inventory costs and amplifies the need for management
and systems sophistication. While retailers acquire music and video product
through a variety of direct channels, the Company estimates that more than 25%
of the music and video sold at retail each year reaches retailers through
full-line distributors, vendor managed inventory firms or other intermediaries.
Music and video are produced and supplied by a complex network of labels,
studios and distribution companies. Five large record companies and their
distribution companies (the "Major Labels") and six large film studios (the
"Major Studios") produce and supply products that represent approximately 85% of
sales in the music industry and 70% of sales in the video industry. The Major
Labels (and their respective distribution groups) are: Time Warner Inc. (WEA),
The Seagram Company, Ltd. (Universal Music and Video Distribution), Bertelsmann
AG (BMG Distribution), Sony Corp. (Sony Music Distribution) and Thorne-EMI plc
(EMI Distribution); the Major Studios are The Walt Disney Company (Buena Vista
Home Entertainment), Time Warner Inc. (Warner Home Video), Sony Corp. (Columbia
Tri-Star Home Video), News Corporation (Twentieth Century Fox Home
Entertainment), Viacom Inc. (Paramount Home Video) and The Seagram Company, Ltd.
(Universal Music and Video Distribution). The balance of music and video is
produced by thousands of independent labels and studios that either sell their
product directly or, in the case of music, distribute through one of the Major
Labels or an independent distribution company, such as DNA.
Full-line distributors assist music and video suppliers by enabling them to
reach the full retail spectrum without assuming the burden of entering into
supplier relationships with thousands of retailers. This retail network is
diverse and evolving and includes sole proprietor music and video specialty
stores, national and regional specialty chains, diversified consumer electronic,
home entertainment, drug, grocery and toy stores, mass merchandisers and on-line
retailers offering music and video over the Internet. Full-line distributors
actively market product to these retailers and assume a substantial portion of
the order processing, credit management, collections and returns processing
logistics that would otherwise be the responsibility of the suppliers.
Most independent retailers rely on full-line distributors to supply the majority
of their product. Many large chains and some of the largest independent
retailers buy most of their higher volume products directly from the Major
Labels and Major Studios (collectively, the "Majors") and the larger independent
labels and studios, while relying on full-line distributors for the balance of
their inventory. By outsourcing a portion of its distribution function to a
full-line distributor, a retailer can reduce its investment in inventory,
facilities and personnel while increasing sales with reliable, just-in-time
delivery. The Company believes that a full-line distributor that can make prompt
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deliveries of slower moving, but often higher margin, skus is particularly
valuable to retailers. The sophisticated full-line distributor can also provide
value-added services that reduce costs and increase efficiency for retailers
such as stickering, sorting, box coding and providing current industry
information and product data.
On-line retailers are currently the fastest growing retail channel. Following
the growth in sales of music over the Internet, many companies have started
selling videos over the Internet. Many of the largest music and video Internet
retailers have outsourced their customer fulfillment processes rather than
commit the capital and managerial resources required to develop this capability
internally. Internet retailers also generally have relied on accurate and
reliable data from third parties to build their product information and ordering
systems. The Company believes that a full-line distributor with deep catalog,
strong systems, value-added fulfillment services and data integrity is well
positioned to serve such retailers and participate in the growth of on-line
music and video retailing.
The current music and video retail industries are very competitive. Many
retailers are demanding a higher level of service from full-line distributors,
including extensive deep catalog (in stock), faster delivery standards and more
extensive value-added marketing services. We believe that these demands will
become more stringent and the number of items retailers will expect full-line
distributors to stock will continue to grow. These increased demands make it
ever more difficult for smaller competitors or new entrants in the full-line
distribution business to compete effectively. There has been substantial
consolidation among full-line distributors over the last decade.
STRATEGY
The Company's goal is to serve its customers and suppliers more effectively than
its competition by offering superior sales and marketing, catalog depth,
reliability, data, systems and service. The Company's strategy includes the
following key elements:
EXPAND LEADERSHIP IN SERVING NEW MEDIA MARKETS
The Company believes that its past investment in its systems, data and
facilities, as well as the years it has spent developing and refining them,
provide the Company with a substantial competitive advantage in serving Internet
retailers. The Company intends to continually improve its service to this
market. Valley has employed a scaleable technology that positions it for growth
in the Internet retail market and plans to add additional data products, system
enhancements, value-added services and increased product selection to become an
even more valuable partner to the on-line music and video retailer.
STRENGTHEN PROFITABILITY
The Company intends to leverage its substantial investment in systems and
facilities to improve profitability. Valley plans to pursue further growth in
all lines of its business, through internal growth and acquisitions, to achieve
greater scale economies over its fixed cost base. Valley also expects to
increase the efficiency of its video distribution operations by continuing to
integrate these operations into the systems, technology and programs developed
for music distribution.
STRENGTHEN PARTNERSHIPS WITH SUPPLIERS AND CUSTOMERS
Valley intends to enhance its industry-leading capability in traditional
distribution by offering a broader range of cost reducing inventory management
alternatives to its customers and to improve the effectiveness of its marketing
programs. The Company works closely with its suppliers and customers to make the
distribution channel more effective. Further, the Company intends to expand its
breadth of music and video skus, thereby providing its customers greater
selection.
BUILD INDUSTRY LEADING VIDEO DISTRIBUTION CAPABILITIES
The Company completed the Star Acquisition after identifying an opportunity to
apply its expertise in music distribution to video and to capitalize on the
expected growth of video demand driven by the Internet, sell-through and the
introduction of DVD. The Company intends to apply its advanced distribution
systems and facilities to provide value-added services and deep catalog to video
customers to differentiate itself in the market and increase sales and market
share. Additionally, the Company believes that it will be able to exploit cross-
selling opportunities of music and video to all segments of the business.
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CONTINUE TO INCREASE MARKET SHARE
The Company intends to continue to grow market share, both through deeper
penetration of existing customers and markets and entering new markets. The
Company will seek to displace purchases by retailers currently made directly
from the Majors by offering innovative programs that enable retailers to benefit
from Valley's deep catalog, rapid product delivery and value-added services.
Valley has completed seven acquisitions since June 1996 and will continue to
seek out attractive acquisition candidates to build market share. The Company
also will continue to take the initiative in placing product with retailers that
have not previously offered music and video and with new retailing formats.
FULL-LINE DISTRIBUTION
The Company is the largest full-line music distributor, one of the two largest
sell-through video and DVD distributors and one of the nine largest video rental
distributors in terms of net sales in the United States. In fiscal 1998, the
Company distributed music and video to more than 6,000 retailers operating over
32,000 traditional storefronts. Working with Valley, a retailer can increase
sales by improving in-stock position while reducing inventory, warehousing and
other costs. Suppliers benefit from Valley's ability to distribute their
products through the full variety of retail channels. Valley's distinguishing
competitive advantages among full-line distributors include its industry leading
systems, databases, processing technology, deep catalog, operating efficiencies,
geographical coverage, economies of scale, reliability, knowledgable sales staff
and service. Valley believes that these capabilities have positioned it to
capture additional market share among full-line distributors in existing and
emerging retail channels.
OPERATIONS AND TECHNOLOGY
By combining state-of-the-art information systems and customized distribution
center automation equipment, the Company believes that it has developed the most
efficient and advanced distribution capabilities in the full-line music and
video distribution industry. These capabilities enable the Company to maintain a
highly reliable inventory management system, optimize product purchasing
decisions, minimize variable order processing costs, increase accuracy and speed
of order fulfillment and provide other value-added services to both suppliers
and retailers. Valley has designed its systems to be scaleable and has developed
software that can handle multiple warehouses and multiple sorters. The Company
has devoted substantial resources over the past four years to the development,
customization and integration of its advanced information and data systems.
Additionally, the Company employs approximately 130 people dedicated to
maintaining and further developing its systems, data and technology. The
Company's fully integrated operations system at its California and Kentucky
distribution centers provides it with the capacity to manage an inventory of
more than 245,000 skus. See "Risk Factors - Effects of Year 2000 on Information
Systems."
The Company's inventory system electronically accounts for, manages and
maximizes warehouse placement of more than 8.2 million units of inventory in its
California distribution center and 10.9 million units in the LDC. This system is
sufficiently accurate that the Company is able to rely upon it in place of a
wall-to-wall physical inventory count. To maximize distribution center space
utilization, the incoming product is scanned and located "randomly" within the
center utilizing "best fit" logic, which considers over 350,000 distinct
potential locations in a single distribution center. This logic considers, among
other things, the size of the incoming product and shipment as well as available
locations within the center.
Using inventory information derived from its systems, Valley utilizes customized
inventory replenishment software and purchasing systems to adjust its inventory
levels quickly and strategically in response to changes in demand. Valley's
integrated systems evaluate daily inventory levels on each sku and make
recommendations regarding the optimal order replenishment based on several
factors, including historical seasonal demand, supplier discounts, payment
terms, return dates, supplier characteristics, carrying costs and warehouse
processing costs. Employing the extensive industry knowledge of its product
managers, Valley manually orders new releases and adjusts the purchasing
system's recommendations to accommodate volatile-demand skus. Since the
implementation of its integrated purchasing systems, Valley has expanded the
number of skus offered by 116% while simultaneously optimizing use of the wide
variety of discounts, payment terms and other credits and promotions made
available by its suppliers.
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The Company has installed high capacity automated sorting equipment and order
processing systems in its California and Kentucky distribution centers that
reduce labor costs and freight upgrade expenses, increase peak capacity and
accuracy and enable Valley to provide certain automated value-added services
that some of its competitors may not be able to provide. For example, retailers
can receive shelf-ready product directly at their stores with advance shipping
notification of the contents of each box, custom stickers and genre labeling.
Customer orders are picked in batches of up to 100 or more, one batch
representing one trip through the distribution center. These batches are then
placed in an advanced sorting device, which uses high speed laser scanners to
separate, sticker and stack individual store orders at speeds of up to 10,000
units per hour. In the more than two years since the implementation of the
Company's automated systems, the Company has simultaneously:
- reduced operations labor as a percentage of net sales
- more than doubled the volume of orders filled on a daily basis
- developed a comprehensive database to manage its expanding inventory
breadth
- decreased reported order fulfillment error rate
DEEP CATALOG
The Company believes that it has differentiated itself with both retailers and
suppliers by stocking what it believes is the deepest catalog of music skus of
any full-line distributor and one of the deepest catalogs of video skus. As of
March 31, 1997, the Company had an inventory of 137,587 music skus. Currently,
the Company's inventory has grown to 245,000 skus, 43,800 of which are video
skus. By managing deep catalog for many retailers, the Company believes that it
has an economic advantage that it can share with retailers by optimizing the
tradeoff between availability and inventory levels.
The Company believes that its strategy of marketing and stocking lower volume
skus is a key competitive advantage in developing and maintaining relationships
with retailers and suppliers. By providing to its customers an aggregated
database describing all of its products, Valley provides the link between
suppliers and customers for the thousands of deep catalog skus. Retailers are
operating in an intensely competitive environment where their margin on "hit"
titles is constantly under pressure from competitors. On the other hand, the
margins attainable on lower volume, deep catalog skus, such as older or less
popular titles, are generally higher than the "hits." Retailers who do not have
access to these skus miss out on the opportunity for higher margin sales. Once a
retailer has retained Valley as its supplier for lower volume skus, it is often
convenient for that retailer to satisfy other product needs through Valley as
well.
PROPRIETARY DATA
Besides serving as the foundation of the Company's traditional distribution
operations, the Company's systems also accurately capture, compile and update
product data as inventory moves in and out of its fulfillment centers. The
Company has utilized this data collection capability to develop a proprietary
database, which it licenses to customers for a fee or as part of a package of
services. The data is used by SoundScan, Inc., a leading provider of music and
video information, as a backbone for its own systems. It contains over 30
distinct fields of information (e.g., genre, title, suggested retail price,
catalog code numbers, first sales date, vendor return dates and parental
advisory information), which can be sorted and analyzed by retailers to help
them better manage their purchasing and inventory requirements and service their
customers. Using SoundSearch, an electronic catalog system developed by Valley,
a retailer can access Valley's data from a Windows-based platform and generate
electronic data interchange orders without an internal point-of-sale system. As
of November 28, 1998, the Company was licensing its database to over 575
retailers, including most of the Company's New Media customers.
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For most music retailers, the task of accurately compiling and updating data
regarding the broad range of music products they offer is prohibitively
time-consuming and expensive. On the other hand, pure data providers, which do
not handle physical music and video inventory daily, face inherent disadvantages
compared to full-line distributors such as the Company in attempting to provide
data that immediately and accurately reflects changes in prices, suppliers,
catalog numbers, UPC codes, deletion information and other fields. Because
Valley already compiles and updates this data for its full-line distribution
business, it maintains its data accross a wider sku count than retailers or pure
data companies.
NEW MEDIA
Over the past four years, the New Media Group has been Valley's fastest growing
business. Net sales grew from approximately $1.7 million in fiscal 1995 to $30.3
million in fiscal 1998. Sales in the quarter ended September 1998 were $29.5
million, which represents a 491.9% increase compared to the same quarter in
1997. The New Media Group provides product and data to the fastest growing
segment of the music retail industry, Internet retailers. Valley fulfills
customer orders for many of its Internet retailers by shipping product directly
to the individual customer. These retailers have effectively outsourced their
inventory procurement and management functions and stock little or no product on
their own. Other customers, including Amazon.com, fulfill their own orders, and
Valley provides product to their internal distribution centers on a just-in-time
basis. The New Media Group currently has more than 100 customers, including
specialty Internet retailers, such as Amazon.com, CDnow, N2K and DVD Express,
record clubs and traditional retailers adding on-line capabilities.
The infrastructure, market channels and supplier relationships developed through
Valley's core full-line distribution business are the foundation of Valley's New
Media Group. See "Business - Full-Line Distribution." Valley believes that its
"First to Market" position and strategic emphasis on data, catalog depth and
systems enhancements have resulted in the Company's leadership position.
COMMITMENT TO DEEP CATALOG
The Company's deep catalog commitment enables Internet retailers to offer their
customers fast, reliable access to an extensive selection of product, without
having to take possession of the inventory. Furthermore, industry sources have
observed that Internet retail customers buy a higher proportion of deep catalog
product relative to hit titles than do shoppers at traditional storefronts.
Valley's Internet retailers rely on Valley's extensive inventory of product
offerings to supply the breadth of product selection that Internet shoppers
demand.
SUPERIOR PRODUCT DATA
Most Internet retailers served by the New Media Group rely on the Company's
proprietary product database to support their product information systems as
well as the ordering systems used by their customers. The Company believes that
its database is a key building block for Internet retailers' websites since it
would be prohibitively expensive for most such retailers to build such a
database independently. To supplement this database, and for the greater
convenience of retailers and their customers, Valley has recently introduced two
additional data products: (i) audioTRAX, which provides track-by-track
information for music skus, and (ii) "stock-on-hand file," which provides
current product-availability data for music skus. The Company intends to
continue adding additional data products and enhancements to strengthen its role
as an essential partner of Internet retailers, including detailed customer
oriented information on all DVD products.
ADVANCED SYSTEMS AND PROCESSING CAPABILITIES
Many Internet retailers require that their fulfillment partner fill a very large
number of small orders quickly and accurately and ship them in the name of such
retailers at the lowest cost possible. The New Media Group's fulfillment
capabilities were developed over a four-year period and incorporate the advanced
systems and equipment developed by Valley to support its full-line distribution
business. Furthermore, the New Media Group's systems are scaleable, allowing the
Company to support significant volume growth with low incremental costs.
COMPLETE PACKAGE OF SERVICES
The New Media Group can provide Internet retailers with tailored services that
best meet their particular needs. Such services range from the provision of
product data and order fulfillment, to marketing partnerships, to
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complete turn-key packages, encompassing product data, credit card processing,
custom labeling and packaging, order fulfillment and returns management.
Furthermore, Valley's advanced systems enable the New Media Group to monitor and
update order status several times a day.
INDEPENDENT DISTRIBUTION
The Independent Distribution Group consists of DNA, an independent music
distribution company, and Valley Entertainment, a label. Each business was built
to leverage Valley's systems and markets. See "Business - Sales and Marketing."
DNA represents approximately 150 independent suppliers and their labels in the
United States. DNA assumes marketing responsibilities for these labels and
allows them to focus on their creative operations. DNA represents several Grammy
winning artists and has marketed and distributed many Platinum titles.
In seeking marketing services, independent labels may work with distribution
companies owned by Major Labels. However, many independent labels are either too
small to work with Major Labels, have product mixes that do not match the Major
Labels' emphasis of higher volume and lower overall sku count, or serve artists
who prefer to do business with independent distributors. In addition, several
larger independent labels seek to maintain greater control over their
distribution than Major Labels allow. Finally, the Company believes that many
independent labels are concerned that Major Labels will not provide adequate
priority to their titles, which may sell in lower volume than the Major Labels'
proprietary "hit" titles. For these reasons, many independent labels seek DNA's
marketing and selling expertise as an alternative to the Major Labels.
DNA serves the special needs of each client label and assists it in maximizing
its market penetration. In promoting a label's products among retailers and
full-line distributors, DNA utilizes its broad understanding of industry
activities and its intimate knowledge of the music wholesale and retail
marketplaces, developed through close relationships with product managers,
operational management and marketing coordinators of many music retailers. In
addition, DNA coordinates its sales and marketing efforts with retailers through
promotion and publicity of the labels themselves.
The Company believes that DNA's affiliation with the Company's full-line music
distribution business provides strategic advantages for DNA and its customers.
DNA can capitalize on Valley's extensive network of contacts with music
retailers throughout the country, especially the independent retailers which are
likely to be more receptive to independent label product than the large chains.
DNA also benefits from Valley's expansive knowledge of the music business, which
can be important in designing a label's marketing program. Finally, Valley's
substantial existing infrastructure affords DNA a level of operational and
processing efficiency that would be very difficult for any independent
distribution company not affiliated with a full-line distributor to create on
its own.
DNA complements Valley's core full-line distribution business in a number of
ways. First, DNA sales increase the volume that passes through Valley's
facilities. Second, Valley has opportunities to cross-sell its DNA and full-line
distribution products to their respective retail customers. When Valley sells
DNA products directly to retailers, it captures both the independent
distribution and wholesale margins on a single sale. Third, by seeking out and
promoting new and emerging labels, Valley is better able to understand the
trends in the emerging music industry and adjust its full-line distribution
business accordingly.
Valley Entertainment is a two year old label developed to leverage Valley's
markets and capabilities and to bring new product to market effectively. Valley
Entertainment focuses on licensing and marketing existing product not currently
available in the United States. It typically offers relatively modest advances
with a greater revenue sharing than many labels.
SALES AND MARKETING
A key element of the Company's marketing strategy is the development and
maintenance of customer relationships with music and video retailers. This
strategy is implemented by a sales and marketing staff consisting of
approximately 320 people. Valley organizes its sales efforts around targeted
customer groups. Generally, sales to independently owned stores and small chains
are serviced by designated commission sales representatives. Smaller independent
accounts are serviced by a team of music and video specialists. Valley has
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established account management teams to work with the large retail chains, which
Valley refers to as "national accounts." New Media Group sales are also
conducted through account management teams equipped to meet the special needs of
on-line retailers. Senior management of the Company also participates actively
in sales and marketing activities.
The Company's marketing strategy employs the following customized programs and
services to further strengthen the partnerships Valley has developed with its
customers and suppliers: (i) customized marketing initiatives; (ii) new market
development and (iii) advanced vendor managed inventory services.
MARKETING INITIATIVES
The Company employs a number of marketing initiatives to build demand for music
and video, both among retailers and end consumers. These initiatives are
generally funded by Valley's suppliers to promote their products among retailers
and consumers. Marketing initiatives to the music and video retail community
include the following:
- financial incentives, such as product discounts and advertising support
- in-house publications and web page, containing information that helps
retailers stay abreast of current industry developments
- Schwann publications, which are the oldest and among the most popular
classical music reference guides in the United States
- frequent buyer programs that allow music and video retailers to earn
points redeemable for products and value-added services
Additionally, Valley has designed marketing programs to increase overall demand
for the products of Valley's suppliers and customers. These include: (i) co-op
advertising support from suppliers for print and electronic media
advertisements; (ii) listening stations that Valley places in certain stores,
which allow consumers to select and listen to songs from featured artists; (iii)
point of purchase displays and (iv) video promotions produced by Valley
containing short descriptions and footage of selected current and upcoming video
releases, which retailers can play in monitors throughout their stores.
NEW MARKET DEVELOPMENT
The Company's special markets group develops new markets and channels for its
music and video product. Special markets include non-music and video specialty
retail stores, libraries, insurance replacement, and public television and radio
stations.
ADVANCED VENDOR MANAGED INVENTORY SERVICES
The Company operates an advanced vendor managed inventory or "racking" service
for video retailers that wish to outsource a substantial portion of the
inventory management responsibility for their video products. Racking, which is
typically provided to mass merchandise, drug, toy, grocery or other stores not
solely dedicated to video, essentially involves managing the selection and
manually stocking the inventory in the retailer's dedicated video space. Racking
requires technological sophistication to select optimal product titles and
quantities for each storefront and generally entails the management of a
substantially lower sku count than is required of a full-line distributor. The
Company also sells and distributes previously viewed video to retail stores
through its Funatics division. The Company is in the process of significantly
enhancing its vendor managed inventory capabilities and intends to complete the
upgrade in 1999.
CUSTOMERS
Given the diversity in the size and operating philosophies of its customers,
Valley provides full-line distribution and New Media services under a range of
programs designed to best meet each customer's needs. Valley's full-line
distribution and New Media customers, and its most significant programs for
dealing with these customers, are the following:
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- INDEPENDENT MUSIC RETAILERS. Independent music retailers typically do not
have sufficient volume to deal directly with the labels and studios, and
therefore are supplied by a small number of full-line distributors. For
these customers, the Company is usually the primary or secondary supply
source for most or all of their inventory needs.
- NATIONAL MUSIC RETAILERS. The Company has developed different programs to
capture the opportunities that are available to provide product to
national music retail customers. Through Valley's catalog program, these
larger retailers rely on Valley to provide a range of product, from
virtually all of their music selections to certain designated categories
of product. Through Valley's special order program, they use Valley to
fill customer orders quickly for products that the retailer has elected
not to stock. Using Valley's emergency fill program, the retailer can
obtain product on a fast turnaround basis. Through Valley's just-in-time
replacement program, retailers can outsource some or all of their
distribution needs.
- SELL-THROUGH VIDEO ACCOUNTS. The Company's national video chain customers
primarily use Valley to fill their needs for sell-through video. Some of
these stores buy product from Valley that is produced by studios with
which the stores have not established a supplier relationship. Others may
only carry video on a special promotional basis, such as during holiday
periods or to feature a selected "hit," and rely on the Company to supply
these promotions. Other customers use Valley's racking services, with
Valley selecting product mix and providing inventory management and
in-store servicing.
- VIDEO RENTAL RETAILERS. The Company also sells video to independent video
rental stores as well as chains. For the independent video stores, Valley
typically serves as the primary supplier and for the video rental chains
Valley typically serves as a secondary provider.
- INTERNET RETAILERS. The Company provides Internet retailers with tailored
packages of services from which they can select to meet their individual
needs. These services range from the provision of product data and order
fulfillment to complete turn-key packages.
Set forth below are Valley's largest full-line distribution and New Media
customers for the first six months of fiscal 1998. See "Risk Factors -
Dependence on Major Customers."
<TABLE>
<CAPTION>
- ------------------------------------------------------------------
NATIONAL MUSIC, VIDEO, AND OTHER INDEPENDENT MUSIC AND VIDEO
SPECIALTY CHAINS SPECIALTY STORES
- -------------------------------- --------------------------------
<S> <C>
Best Buy Amoeba
Camelot Blowout Entertainment
Nobody Beats The Wiz Easy Video
Hastings Fry's Electronics
Trans World Entertainment Joseph Beth Booksellers
<CAPTION>
- ------------------------------------------------------------------
DRUG, GROCERY AND TOY STORES DEPARTMENT STORES/MASS MERCHANTS
- -------------------------------- --------------------------------
<S> <C>
CVS/Revco Bradlees
Pathmark Hills
RiteAid Kohl's
Shoprite Sears
Toys R Us Waban
<CAPTION>
- ------------------------------------------------------------------
ON-LINE MUSIC RETAILERS ON-LINE VIDEO RETAILERS
- -------------------------------- --------------------------------
<S> <C>
Amazon.com Amazon.com
CDnow CDnow
CD World DVD Express
N2K NetFlix
Spree.com Reel.com
</TABLE>
The Company believes that customer service is an important factor in maintaining
and expanding its customer base. Valley has developed a sophisticated customer
service department with an experienced staff of approximately 20 customer
service and support professionals, and offers its customers toll-free telephone
and
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facsimile numbers. The Company has automated certain of the tools used by its
customer service and support team members, and intends to actively pursue
enhancements and further automation of its customer service and support
operations.
As is typical of the music and video businesses, Valley generally does not have
long term purchase and sale contracts with most of its full-line distribution
customers, and generally deals with these customers on a purchase order basis.
The Company permits its customers to return music and video product subject to
certain time limitations that vary based on a number of factors, including the
product, price and quantity ordered.
The New Media Group has obtained fulfillment agreements with most of its
customers. These agreements generally have terms of two or more years and
contain provisions regarding the level of exclusivity of the retailer's
relationship with Valley and other negotiated terms. The agreements generally do
not contain minimum volume requirements or other terms establishing required
purchase and sale quantities.
DNA's fulfillment agreements with its customers specify such matters as the
term, DNA's level of exclusivity in distributing the product and inventory
ownership and management. These contracts generally do not specify any
particular volume of skus that will be purchased or sold.
SUPPLIERS
The Company purchases music and video product from each of the Majors and from
the leading independent studios and labels. Valley believes that it currently
has good relationships with each of the Majors as well as with the leading
independents. Valley has been recognized as best in its class by NARM, which is
comprised of the Major Labels and independent distribution companies, for each
of the past five years, while DNA was recognized as best in its class by NARM in
1997. See "Risk Factors - Dependence on Suppliers."
The Company enables independent labels to reach the independent retailers that
are most likely to promote their new talent and provides vital information to
such retailers regarding emerging artists. New artists are critical to the music
industry and independent music stores are more receptive than the chains to
promoting emerging artists, especially local or niche talent. Labels may also
hire Valley to manage targeted marketing efforts to "break" a new release. The
Major Labels generally have limited contact with the smaller independent stores
most likely to support emerging musicians.
The Majors offer various financial incentives to distributors and retailers that
purchase their product, including timely payment discounts and advertising
revenues and allowances. In addition, extended payment terms, discounts and
volume rebates are sometimes available under seasonal and promotional plans.
Payment terms vary considerably among the independent labels and independent
studios, and Valley is often able to negotiate favorable pricing, advertising
and discount programs with these suppliers. Consistent with other music and
video distributors, the Company does not have any long term contracts with
suppliers and purchases its inventory from its suppliers through purchase
orders. However, DNA maintains contracts with most of the suppliers it
represents. DNA supplier contracts typically range in length from one to three
years, with varied payment terms.
COMPETITION
FULL-LINE DISTRIBUTION
The full-line distribution of music and video is an intensely competitive
businesses. The Company faces competition from national, regional and local
full-line distributors and vendor managed inventory firms, as well as from the
Majors and independent distribution companies. The Company believes that the
primary competitive factors in the full-line distribution of music are inventory
breadth, fulfillment rate, reliability, accuracy and completeness of data,
price, delivery time, information systems and EDI capabilities, customer
service, vendor managed inventory capabilities, advertising support and
financial strength. These factors are also the primary competitive factors in
video, but because video is more "hit" driven than music, with fewer skus and
less demand for deep catalog product, price is a relatively more important
competitive factor.
The Majors and the independent distribution companies sell substantial amounts
of their products directly to retailers and to date it appears have not focused,
to the same extent Valley has, on fulfilling the needs of smaller independent
stores or providing value-added services.
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Several of the Company's retail chain customers have chosen, from time to time,
to buy a substantial volume of product they had been purchasing through the
Company directly from the Majors or the independent distribution companies. To
the extent the Company's customers increase their direct purchasing from the
Majors or the independent distribution companies, the Company's business,
financial condition and results of operations could be adversely affected.
The Company's largest direct competitor in full-line music distribution,
Alliance, filed for Chapter 11 bankruptcy protection in July 1997 and emerged
from bankruptcy in August 1998. In addition to Alliance, the Company faces
competition from dozens of other full-line distributors, of which some generally
sell to retailers nationwide and others are particularly active in their
respective geographic regions or in certain niche areas. The Company believes
that its fiscal 1998 net sales of music to its full-line distribution customers
were greater than those of any of its competitors and that it competes favorably
with respect to each of the leading competitive factors in music distribution
relative to other full-line distributors.
The Company's video business has eight competitors of greater or comparable
size. Valley believes that it is one of the two largest suppliers to retailers
of video priced for sell-through.
In music and video full-line distribution, Valley also competes with two
national vendor managed inventory firms, Anderson Merchandising and Handleman
Company, as well as several smaller regional firms. Vendor managed inventory
firms provide their customers with inventory selection services for a limited
selection of high-volume product, management services and in-store servicing in
addition to order fulfillment. Such services involve more direct physical
services for the retailer, are more labor intensive than wholesale distribution,
and generally involve higher margins.
Record clubs also act as retailers for many labels. Record clubs license
selected titles directly from the Major Labels and independent labels and sell
them by mail order directly to consumers.
The delivery of music and video is subject to changes in market conditions and
to technological change that can affect competitive conditions and give rise to
new forms of competition. See "Risk Factors - Uncertainties Relating to Video
Rental Market; Uncertain Impact of Changes in Physical Format; Emergence of New
Delivery Technologies."
NEW MEDIA
The New Media Group competes to provide product and fulfillment services with
several other full-line distributors. A number of companies provide data to
Internet retailers. In direct-to-consumer fulfillment, the principle competitive
factors are similar to those for full-line distribution, although the ability to
provide accurate and complete product data, deep catalog and highly efficient
processing is of even greater importance.
INDEPENDENT DISTRIBUTION
There are a number of independent music distribution companies, certain of which
may conduct larger distribution operations than DNA. Several of the Major Labels
operate their own independent distribution arms which also compete with DNA. DNA
also faces competition from a number of smaller and niche independent
distribution companies. As a label or artist gains in popularity, DNA may face
new competition from the Major Labels to retain distribution rights for that
label or artist. The principal competitive factors in independent music
distribution are effectiveness in marketing and selling independent label
product, efficiency in managing distribution logistics, price, size and
experience of sales staff, financial strength, industry relations and knowledge,
as well as the number and prestige of labels represented. See "Risk Factors -
Competition."
FACILITIES
The Company leases all of its sites, including its buildings and improvements,
where its offices and distribution centers are located. Valley's business is
operated principally out of its executive offices and California distribution
center, both located in Woodland, California and the LDC, located in Louisville,
Kentucky, which commenced operation in May 1998. A portion of the approximately
281,440 square foot leased facilities in Woodland expires in 2000 and the
remaining portion of the Woodland facilities lease expire in 2003. The LDC
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building consists of approximately 330,000 square feet and the Company's lease
on the LDC expires in 2008. Valley also currently maintains smaller sales or
distribution offices in Connecticut, Massachusetts, New Jersey, New Mexico, New
York and Pennsylvania.
EMPLOYEES
As of November 28, 1998, the Company had 1,369 employees, none of whom was
represented by an employee union. In addition, the Company regularly utilizes
the services of a number of temporary and contract personnel. The Company
believes that its relations with its employees are good.
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MANAGEMENT
The following table sets forth certain information with respect to the directors
and executive officers of the Company as of November 28, 1998.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------
NAME AGE POSITION AND OFFICE
<S> <C> <C>
- ----------------------------------------------------------------------------------------------------------------------
Barnet J. Cohen (2)............................... 52 Chairman of the Board
Robert R. Cain (1)................................ 45 President, Chief Executive Officer and Director
Kenneth Alterwitz................................. 46 Senior Vice President, Sales and Marketing
J. Randolph Cerf.................................. 45 Senior Vice President, Chief Financial Officer and
Secretary
Melanie Cullen.................................... 47 Senior Vice President, Information Services
Paige S. Dickow................................... 38 Senior Vice President, Human Resources
John Kordic....................................... 39 Senior Vice President, Operations
Ronald A. Phillips................................ 40 Senior Vice President, Purchasing
Lawrence Archibald (2)............................ 53 Director
Christopher Mottern (1)(2)........................ 54 Director
Wendy Paskin-Jordan............................... 42 Director
James Sha (1)..................................... 48 Director
</TABLE>
- ------------------------
(1) Member of the Audit Committee
(2) Member of the Compensation Committee
BARNET J. COHEN is the founder of the Company and has been Chairman of the Board
from its formation. He served as Chief Executive Officer from March 1979 until
December 1997. Mr. Cohen is a member of the Compensation Committee. Prior to
founding the Company, he owned and operated retail record stores. Mr. Cohen is
Past-Chairman of the Board of Directors of NARM. He is a graduate of Antioch
College and received an Executive M.B.A. from Harvard Business School.
ROBERT R. CAIN has served as the Company's President since January 1993, as the
Company's Chief Executive Officer since December 1997 and as a member of the
Board of Directors since February 1995. He is also a member of the Audit
Committee. Mr. Cain has been employed by the Company since November 1991. He is
a graduate of Oregon State University with a B.S. in Food Science, and received
an M.B.A. from the University of California, Berkeley.
KENNETH ALTERWITZ has served as the Company's Senior Vice President, Sales and
Marketing since March 1998 and served as the Company's Vice President, Sales and
Marketing from January 1995 to March 1998. Prior to joining the Company, Mr.
Alterwitz served as Senior Vice President of Sales for Alliance Entertainment
from November 1993 to August 1994. Mr. Alterwitz is a graduate of the New York
Institute of Technology with a B.A. in Communication Arts.
J. RANDOLPH CERF has served as the Company's Senior Vice President, Chief
Financial Officer and Secretary since March 1998 and served as the Company's
Vice President and Chief Financial Officer from October 1994 to March 1998.
Prior to joining the Company, Mr. Cerf was President of JRC Consulting, a
financial and management consulting firm, from July 1991 to October 1994. Mr.
Cerf is a graduate of the University of Colorado with a B.A. in Economics,
Computer Science and Political Science, and received an M.B.A. from Stanford
University.
MELANIE CULLEN has served as the Company's Senior Vice President, Information
Services since March 1998 and served as the Company's Vice President,
Information Systems from February 1995 to March 1998. Ms. Cullen has been
employed by the Company since August 1993. Ms. Cullen is a graduate of
California State University, Hayward with a B.S. in Business Administration, and
received an M.B.A. from Stanford University.
PAIGE S. DICKOW has served as the Company's Senior Vice President, Human
Resources since March 1998 and served as the Company's Vice President, Human
Resources, from February 1997 to March 1998. Prior to joining
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the Company, Ms. Dickow served as a consultant with Hewitt Associates from
August 1994 to February 1997, and with KPMG Peat Marwick from February 1986 to
July 1994. Ms. Dickow is a graduate of the University of Georgia with a B.B.A.
in Accounting.
JOHN KORDIC has served as the Company's Senior Vice President, Operations since
March 1998 and served as the Company's Vice President, Operations from February
1995 to March 1998. Mr. Kordic has been employed by the Company since November
1994. Prior to joining the Company, Mr. Kordic served as Director of
Distribution for Imaginarium, a San Francisco-based distributor of creative
toys, from November 1991 to November 1994. Mr. Kordic is a graduate of the
University of California, Berkeley, with a B.S. in Resource Economics.
RONALD A. PHILLIPS has served as the Company's Senior Vice President, Purchasing
since March 1998 and served as the Company's Vice President, Purchasing from
February 1995 to March 1998. Mr. Phillips has been employed by the Company since
February 1993.
LAWRENCE ARCHIBALD is a member of the Board of Directors and Chairman of the
Compensation Committee. He has been a member of the Board since March 1997. Mr.
Archibald owned and operated Stereophile, Inc., which published a variety of
music reference magazines, from March 1982 to June 1998, when the Company sold
substantially all of its assets. Mr. Archibald is a graduate of Harvard College.
CHRISTOPHER MOTTERN is a member of the Board of Directors, chairman of the Audit
Committee and a member of the Compensation Committee. He has been a member of
the Board since March 1997. Mr. Mottern has served as the President and Chief
Executive Officer of Peet's Coffee and Tea, Inc. since May 1997. Mr. Mottern
served as President of Heublein Wines from July 1992 to September 1996. Mr.
Mottern is a graduate of the University of Connecticut with a B.A. in Business
Administration.
WENDY PASKIN-JORDAN has been a member of the Board since December 1998. Ms.
Paskin-Jordan has served as Principal of Paskin & Kahr Capital Management, an
investment management firm, since August 1998, and as Principal of Jordan &
Torres LLC, a consulting firm, since August 1998. From January 1995 to July 1998
she served as a Managing Director and Partner for Montgomery Asset Management,
and from September 1986 to December 1994 she served as National Sales Manager
and Vice President for Wells Fargo Bank. Ms. Paskin-Jordan holds an A.B. from
Stanford University, a J.D. from the Boalt Hall School of Law and an M.B.A. from
the Wharton School of the University of Pennsylvania.
JAMES SHA is a member of the Board of Directors and a member of the Audit
Committee. He has been a member of the Board since June 1998. Mr. Sha served as
the Senior Vice President of Commerce Solutions at Netscape Communications from
1997 to November 1998. Mr. Sha holds an M.S.E.E. from the University of
California, Berkeley, an M.B.A. from Santa Clara University, and a B.S.E.E. from
Taiwan University.
COMMITTEES OF THE BOARD OF DIRECTORS
The Company's Board of Directors currently has two committees, the Audit
Committee and the Compensation Committee. The Audit Committee, among other
things, recommends the firm to be appointed as independent accountants to audit
the Company's financial statements, discusses the scope and results of the audit
with the independent accountants, reviews with management and the independent
accountants the Company's interim and year-end operating results, considers the
adequacy of the internal accounting controls and audit procedures of the Company
and reviews the non-audit services to be performed by the independent
accountants. The members of the Audit Committee are Messrs. Mottern, Cain and
Sha. Mr. Mottern is the Chairman of the Audit Committee. The Compensation
Committee reviews and recommends the compensation arrangements for management of
the Company and administers the Company's stock option plans. The members of the
Compensation Committee are
Messrs. Archibald, Cohen and Mottern. Mr. Archibald is the Chairman of the
Compensation Committee.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Compensation Committee was formed in December 1998. Two of the Committee
members, Mr. Archibald, who is the Chairman of the Committee, and Mr. Mottern,
are not and have never been officers or employees of the Company. Mr. Cohen, who
is the third member of the Committee, has been Chairman of the Board of the
Company since its formation and served as the Company's Chief Executive Officer
from March 1979 until December 1997. Prior to the formation of the Compensation
Committee, all decisions regarding executive compensation, salaries and
incentive compensation for employees and consultants of the Company were made
solely by the Board of Directors.
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<PAGE>
EXECUTIVE COMPENSATION
The following table sets forth information as to compensation paid or accrued by
the Company for fiscal 1998 to its Chief Executive Officer and each of its four
other most highly compensated executive officers (the "Named Executive
Officers").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
-------------------------------------
ANNUAL COMPENSATION ALL OTHER
---------------------- COMPENSATION
NAME AND PRINCIPAL POSITION SALARY ($) BONUS ($) ($)
- ------------------------------------------------------ ---------- ---------- -------------
<S> <C> <C> <C>
Barnet J. Cohen (1) ................................. $406,993 $166,263 $7,212(2)
Chairman of the Board
Robert R. Cain (3) .................................. 273,077 111,462 5,938(4)
President and Chief Executive Officer
Kenneth Alterwitz ................................... 192,712 62,860 19,890(5)
Senior Vice President, Sales and Marketing
J. Randolph Cerf .................................... 152,000 38,000 4,710(6)
Senior Vice President, Chief Financial Officer and
Secretary
Melanie Cullen ...................................... 125,604 33,887 4,008(7)
Senior Vice President, Information Services
</TABLE>
- ------------------------
(1) Mr. Cohen served as the Company's Chief Executive Officer from its
formation until December 1997.
(2) Represents the Company's contributions under the Company's 401(k) Plan and
ESOP of $5,612 and $1,600, respectively.
(3) Mr. Cain succeeded Mr. Cohen as the Company's Chief Executive Officer in
December 1997.
(4) Represents payments under the Company's 401(k) Plan and ESOP of $4,338 and
$1,600, respectively.
(5) Represents payments of nonrecurring commissions of $14,153 and payments
under the Company's 401(k) Plan and ESOP of $4,137 and $1,600, respectively.
(6) Represents payments under the Company's 401(k) Plan and ESOP of $3,140 and
$1,570, respectively.
(7) Represents payments under the Company's 401(k) Plan and ESOP of $2,672 and
$1,336, respectively.
OPTION GRANTS IN LAST FISCAL YEAR
The following table sets forth certain information concerning the number and
value of stock options granted to each of the Named Executive Officers in fiscal
1998.
<TABLE>
<CAPTION>
----------------------------------------------------------------------------
POTENTIAL REALIZABLE
INDIVIDUAL GRANTS (1) VALUE AT ASSUMED
---------------------------- ANNUAL RATES OF
NUMBER OF PERCENT OF STOCK PRICE
SECURITIES TOTAL OPTIONS APPRECIATION FOR
UNDERLYING GRANTED TO EXERCISE OPTION TERM (2)
OPTIONS EMPLOYEES IN PRICE EXPIRATION --------------------
NAME GRANTED FISCAL 1998 ($/SH) DATE 5% 10%
- ------------------------------------------- ----------- --------------- ----------- ----------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Barnet J. Cohen............................ - - - - - -
Robert R. Cain............................. - - - - - -
Kenneth Alterwitz.......................... 1,000 2.2% $ 35 08/17/07 $ 22,011 $ 55,781
J. Randolph Cerf........................... 1,000 2.2 35 08/17/07 22,011 55,781
Melanie Cullen............................. 1,000 2.2 35 08/17/07 22,011 55,781
</TABLE>
- ------------------------
(1) Percentages are based on an aggregate of options to purchase 45,483 shares
of the Company's Common Stock granted to employees and directors of, and
consultants to, the Company during fiscal year ended March 28, 1998, including
the Named Executive Officers. The exercise price per share of each option was
equal to the fair market value of the Common Stock on the date of grant as
determined by the Board of Directors. Each such option vests with respect to
1/48 of the shares of Common Stock underlying such option on the last day of
each calendar month, beginning August 1997. See "Management - Compensation
Plans."
(2) Potential realizable value is based on the assumption that the Common Stock
of the Company appreciates at the annual rate shown (compounded annually) from
the date of grant until the expiration of the ten year term. These numbers are
calculated based on Securities and Exchange Commission requirements and do not
reflect the Company's estimates of future stock price growth.
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<PAGE>
FISCAL YEAR-END OPTION VALUES
The following table sets forth certain information concerning the number and
value of unexercised stock options held as of March 28, 1998 by each of the
Named Executive Officers.
<TABLE>
<CAPTION>
--------------------------------------------------------
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
OPTIONS AT IN-THE-MONEY OPTIONS AT
MARCH 28, 1998 MARCH 28, 1998 (1)
-------------------------- ----------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---------------------------------------------- ----------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Barnet J. Cohen............................... - - $ XX $ XX
Robert R. Cain................................ 45,800 - XX XX
Kenneth Alterwitz............................. 6,278 2,055 XX XX
J. Randolph Cerf.............................. 9,854 2,146 XX XX
Melanie Cullen................................ 7,500 833 XX XX
</TABLE>
- ------------------------
(1) There was no public trading market for the Common Stock as of March 28,
1998. Accordingly, these values have been calculated based on the initial
offering price set forth on the cover page of this Prospectus.
COMPENSATION PLANS
1994 STOCK OPTION PLAN
The Company's 1994 Stock Option Plan (the "1994 Plan") was adopted by the Board
of Directors in December 1994 and approved by the Stockholders in February 1995.
The 1994 Plan provides for the grant to employees of the Company (including
officers and employee directors) of incentive stock options within the meaning
of Section 422 of the Internal Revenue Code of 1986, as amended (the "Code"),
and for the grant of nonstatutory stock options to employees, directors and
consultants of the Company. The 1994 Plan is administered and interpreted by the
Board of Directors or a committee designated by the Board (the "Administrator").
The Administrator has discretion, within the limits of the 1994 Plan, to select
the optionees and to determine the number of shares to be subject to each option
and the exercise price and vesting schedule of each option. The 1994 Plan
authorizes the issuance of up to 110,000 shares of Common Stock. As of November
28, 1998, options to purchase 4,000 shares had been exercised pursuant to the
1994 Plan, options to purchase 103,297 shares were outstanding, and 2,703 shares
remained available for future grants. The exercise price of incentive stock
options granted under the 1994 Plan must be at least equal to the fair market
value per share of the Common Stock on the date of grant. The exercise price of
nonstatutory stock options granted under the 1994 Plan must be at least 85% of
the fair market value of the Common Stock on the grant date. With respect to any
participant who owns stock possessing more than 10% of the voting power of all
classes of stock of the Company (a "10% stockholder"), the per share exercise
price of any stock option granted under the 1994 Plan must equal at least 110%
of the fair market value of the Common Stock on the grant date and the maximum
term of the option must not exceed five years. The term of all other options
granted under the 1994 Plan may not exceed ten years. In the event of the
occurrence of certain transactions deemed under the 1994 Plan to constitute a
change in control of the Company, the 1994 Plan provides that all options issued
under the 1994 Plan that have not vested shall immediately become vested upon
consummation of the change in control transaction. In addition, the 1994 Plan
further authorizes the Board to (a) cancel all outstanding options effective
immediately prior to such transaction and either (i) allow all option holders an
opportunity to exercise the portion of their option that has vested prior to
such transaction or (ii) make a payment to such option holders in an amount
equal to the difference between the fair-market value of the shares of Common
Stock underlying their options and the aggregate exercise price of such options.
Alternatively, upon a change in control, the Board may require that each
outstanding option be assumed or an equivalent option be substituted by the
successor corporation or a parent or subsidiary of the successor corporation.
The 1994 Plan will terminate in December 2004.
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<PAGE>
1997 STOCK OPTION PLAN
The Company's 1997 Stock Option Plan (the "1997 Plan") was adopted by the Board
of Directors in June 1997 and approved by the stockholders in February 1998. The
1997 Plan provides for the grant to employees of the Company (including officers
and employee directors) of incentive stock options within the meaning of Section
422 of the Code, and for the grant of nonstatutory stock options to employees,
directors, consultants, independent contractors and advisers of the Company. The
1997 Plan is administered and interpreted by the Board of Directors or a
committee designated by the Board (the "Administrator"). The Administrator has
discretion, within the limits of the 1997 Plan, to select the optionees and to
determine the number of shares to be subject to each option and the exercise
price and vesting schedule of each option. The 1997 Plan authorizes the issuance
of up to 150,000 shares of Common Stock. As of November 28, 1998, no options had
been exercised pursuant to the 1997 Plan, options to purchase 46,723 shares were
outstanding, and 103,277 shares remained available for future grants. The
exercise price of incentive stock options granted under the 1997 Plan must at
least be equal to the fair market value per share of the Common Stock on the
date of grant and the exercise price of nonstatutory stock options granted under
the 1997 Plan must be greater than or equal to 85% of the fair market value per
share of the Common Stock on the date of the grant. With respect to any
participant who is a 10% stockholder, the per share exercise price of any stock
option granted under the 1997 Plan must equal at least 110% of the fair market
value of the Common Stock on the grant date and the maximum term of the option
must not exceed five years. The term of all other options granted under the 1997
Plan may not exceed ten years.
In the event of the occurrence of certain transactions deemed under the 1997
Plan to constitute a change in control of the Company, the 1997 Plan (a)
provides that all options issued under the 1997 Plan that have not vested shall
immediately become vested upon consummation of the change in control transaction
and (b) authorizes the Board to (i) cancel all outstanding options effective
immediately prior to such transaction and allow all option holders an
opportunity to exercise the portion of their option that has vested prior to
such transaction, or (ii) require the successor entity to assume each
outstanding option or substitute a comparable option of such successor entity or
a parent or subsidiary of the successor entity. The 1997 Plan will terminate in
May 2007.
EMPLOYEE STOCK OWNERSHIP PLAN
The Company's Employee Stock Ownership Plan (the "ESOP") was adopted effective
as of November 1987 and subsequently amended in January 1990, March 1990,
January 1992 and July 1994. The ESOP is a combination of a stock bonus plan and
a money purchase pension plan, which together constitute an employee stock
ownership plan under section 4975(e)(7) of the Code. All employees of the
Company who have been employed by the Company for at least six months are
eligible to participate in the ESOP. The ESOP is administered by an
Administrative Committee (the "Committee") composed of individuals appointed by
the Board of Directors. The members of the Committee are named fiduciaries with
authority to control and manage the operation and administration of the ESOP.
Shares of Common Stock allocated to participants' accounts are voted in the
manner directed by such participants, and the Committee directs the voting of
unallocated shares and shares for which participants do not provide voting
instructions. Each year the Company makes a fixed contribution to the ESOP in an
amount equal to 1% of the aggregate annual compensation of all ESOP
participants. The Company is also permitted to make a variable contribution to
the ESOP each year in an amount determined by the Board. The Company's fixed and
variable contributions may be in the form of Common Stock or cash. ESOP
participants are not permitted to make contributions to the ESOP. The Company's
fixed contributions to the ESOP are allocated to the accounts of each ESOP
participant in an amount equal to 1% of the compensation of each such
participant. The Company's variable contributions to the ESOP are allocated to
the accounts of each ESOP participant in proportion to the ratio each
participant's annual compensation bears to the total annual compensation of all
participants in the aggregate. A participant's rights to his or her ESOP account
become fully vested after he or she has been employed with the Company for seven
years or upon his or her death, disability or retirement after attaining age 65.
The ESOP trustees may use any cash surplus in the ESOP to purchase additional
shares of Common Stock or to make other prudent investments. When an ESOP
participant's employment with the Company terminates, he or she receives a
distribution from the ESOP in an amount equal to the vested portion of his or
her ESOP account. Such distributions can be made in cash, Common Stock or a
combination of the two, as determined by the Administrative Committee; provided,
however, that any participant may demand that his or her distribution be
entirely in Common Stock, except to the extent such participant has elected to
"diversify" his or
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<PAGE>
her ESOP account as provided in Section 401(a)(28(B) of the Code. The timing of
a distribution upon a participant's termination of employment with the Company
is determined by the Committee. The Company has the right to terminate the ESOP,
in whole or in part, at any time; provided, however, that any such termination
may not reduce the vested rights of any participant.
401(K) PLAN
The Company sponsors a qualified defined contribution retirement plan that was
adopted effective as of April 1, 1995 (the "401(k) Plan"), under which eligible
employees may elect to defer their current compensation by up to certain
statutorily prescribed annual limits ($10,000 in 1998) and to contribute such
amount to the 401(k) Plan. The 401(k) Plan requires additional matching
contributions by the Company on behalf of all participants of up to 2% of each
such participant's annual compensation. In fiscal 1998, the Company made
matching contributions of approximately $282,000. During the first eight months
of fiscal 1999, the Company made matching contributions of $92,000 and has
accrued an additional $172,000. The 401(k) Plan is intended to qualify under
Section 401 of the Code, so that contributions by employees or by the Company to
the 401(k) Plan, and income earned on such contributions, are not taxable to
employees until withdrawn, and so that contributions by the Company will be
deductible by the Company when made. The trustee for the 401(k) Plan is Merrill
Lynch Trust. At the direction of each participant, the trustees invest the
assets of the 401(k) Plan among a selection of eight designated mutual funds.
MANAGEMENT INCENTIVE PLAN
In November 1998, the Company adopted a Management Incentive Plan (the "Bonus
Plan") for fiscal 1999. The Bonus Plan provides variable cash bonuses for
eligible executive and management employees (including the Named Executive
Officers). Cash bonuses will be based on a percentage of each participant's base
salary, with such percentages varying depending on how closely (i) Valley
achieves specific financial objectives and (ii) the employee achieves specific
performance objectives. No bonuses will be paid unless Valley's operating profit
for fiscal 1999, less interest, taxes and bonuses, is at least $3.8 million.
Depending on the employee, cash bonuses will range from 10% to 15% of base
salary if the specified financial and performance objectives are achieved. The
Company has retained the discretion to modify such bonuses as it deems
appropriate. The Board of Directors may modify or terminate the Bonus Plan.
EMPLOYMENT AGREEMENTS
On April 6, 1998, the Company entered into Severance and Change in Control
Agreements (the "Severance Agreements") with the following executive officers of
the Company: (i) Robert R. Cain, President and Chief Executive Officer; (ii)
Kenneth Alterwitz, Senior Vice President, Sales and Marketing; (iii) J. Randolph
Cerf, Senior Vice President and Chief Financial Officer; (iv) Melanie Cullen,
Senior Vice President, Information Services; (v) Paige S. Dickow, Senior Vice
President, Human Resources; (vi) John Kordic, Senior Vice President, Operations;
and (vii) Ronald A. Phillips, Senior Vice President, Purchasing (each an
"Officer"). Each Severance Agreement provides that the Officer who is a party to
that agreement will be entitled to certain severance payments if (i) his or her
employment is terminated constructively or without cause or (ii) he or she
resigns within 30 days after the first anniversary of a change in control of the
Company. Such severance payments could, under certain circumstances, include
payment of an amount equal to twice the aggregate of the Officer's annual salary
immediately prior to the termination of his or her employment and his or her
target bonus for the year in which such termination occurred.
COMPENSATION OF DIRECTORS
Directors who are not currently employees of the Company receive (i) an annual
retainer of $5,000, payable quarterly, (ii) $1,000 per Board meeting attended
and (iii) $500 per Committee meeting attended, if such meeting is held
separately from the Board meeting. In addition, non-employee Directors are
reimbursed for certain reasonable expenses incurred in connection with attending
each meeting of the Board of Directors and are eligible to receive stock options
under the 1997 Plan.
LIMITATION OF LIABILITY AND INDEMNIFICATION MATTERS
As permitted by the Delaware General Corporation Law, the Company's Amended and
Restated Certificate of Incorporation provides that no director of the Company
will be personally liable to the Company or its
44
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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 to its stockholders, (ii) for acts or omissions not in good faith or
that involve intentional misconduct or a knowing violation of law, (iii) under
Section 174 of the Delaware General Corporation Law, or (iv) for any transaction
from which the director derived an improper personal benefit.
The Company's Amended and Restated Bylaws further provide that the Company must
indemnify its directors and executive officers and may indemnify its other
officers and employees and agents to the fullest extent permitted by Delaware
law. The Company believes that indemnification under its Amended and Restated
Certificate of Incorporation covers negligence and gross negligence on the part
of indemnified parties. The Company currently maintains liability insurance for
its officers and directors.
The Company has entered into indemnification agreements with each of its
directors and officers. These agreements, among other things, require the
Company to indemnify such directors and officers for certain expenses (including
attorneys' fees), judgments, fines, penalties and settlement amounts incurred by
any such person in any threatened, pending or completed action, suit, proceeding
or alternative dispute resolution mechanism by reason of any event or occurrence
arising out of such person's services as a director or officer of the Company.
There is no pending litigation or proceeding involving any director, officer,
employee or agent of the Company as to which indemnification is being sought.
The Company is not aware of any pending or threatened litigation or proceeding
that might result in a claim for such indemnification.
45
<PAGE>
CERTAIN TRANSACTIONS
In April 1996, the Company repurchased 17,385 shares of its Common Stock from
Barnet J. Cohen, who is the Company's Chairman, and was also the Company's Chief
Executive Officer at that time, at a valuation of $28.76 per share for a total
repurchase price of $500,000.
In December 1996, the Company entered into a Contribution and Shareholders
Agreement (the "Contribution Agreement") with Stereophile, Inc. ("Stereophile").
Pursuant to the Contribution Agreement, the Company and Stereophile formed
Schwann Acquisition Corp., a Delaware corporation ("SAC"). The Company owned 80%
of the outstanding shares of SAC, while Stereophile owned the remaining 20%.
Lawrence Archibald owns 90% of the outstanding shares of Stereophile. In March
1997, Mr. Archibald was elected to the Company's Board of Directors. In December
1997, pursuant to the Contribution Agreement, SAC was merged into the Company
(the "SAC Merger"). In connection with the SAC Merger, and pursuant to Section
4.3 of the Contribution Agreement, Stereophile's 20% interest in SAC was
converted into 7,230 shares of the Company's Common Stock.
Bernard Herman and Arthur Bach, who were the senior officers of Star, entered
into three year and one year employment agreements, respectively, with the
Company in connection with the Star transaction to serve as officers of the
Company's video operations. In July 1997, the Company and Messrs. Herman and
Bach agreed to terminate those agreements and enter into consulting
relationships that expire in May 2000 for Mr. Herman and expired in May 1998 for
Mr. Bach. The consulting fee for each of Messrs. Herman and Bach is and was
$21,875 per month.
In May 1998, Robert R. Cain, the Company's President and Chief Executive
Officer, exercised an option granted to him under the 1994 Plan to purchase
4,000 shares of the Company's Common Stock at an exercise price of $19.50 per
share. The aggregate exercise price paid by Mr. Cain was $78,000. As permitted
under the 1994 Plan, Mr. Cain paid the exercise price by delivering to the
Company a promissory note in the principal amount of $78,000. This note bears
interest at a rate of 8 1/2% per annum, with interest payable quarterly and
outstanding principal due on May 15, 2001. Mr. Cain has pledged 4,000 shares of
Common Stock held by him to secure his obligations under the Note.
On April 6, 1998, the Company entered into the Severance Agreements with the
following executive officers of the Company: (i) Robert R. Cain, President and
Chief Executive Officer; (ii) Kenneth Alterwitz, Senior Vice President, Sales
and Marketing; (iii) J. Randolph Cerf, Senior Vice President and Chief Financial
Officer; (iv) Melanie Cullen, Senior Vice President, Information Services; (v)
Paige S. Dickow, Senior Vice President, Human Resources; (vi) John Kordic,
Senior Vice President, Operations; and (vii) Ronald A. Phillips, Senior Vice
President, Purchasing (each an "Officer"). Each Severance Agreement provides
that the Officer who is a party to that agreement will be entitled to certain
severance payments if (i) his or her employment is terminated constructively or
without cause or (ii) he or she resigns within 30 days after the first
anniversary of a change in control of the Company. Such severance payments
could, under certain circumstances, include payment of an amount equal to twice
the aggregate of the Officer's annual salary immediately prior to the
termination of his or her employment and his or her target bonus for the year in
which such termination occurred.
The Company has entered into indemnification agreements with each of its
directors and officers. These agreements, among other things, require the
Company to indemnify such directors and officers for certain expenses (including
attorneys' fees), judgments, fines, penalties and settlement amounts incurred by
any such person in any threatened, pending or completed action, suit, proceeding
or alternative dispute resolution mechanism by reason of any event or occurrence
arising out of such person's services as a director or officer of the Company.
The Company believes that the foregoing transactions were in its best interest.
As a matter of policy, the transactions were, and all future transactions
between the Company and any of its officers, directors, or principal
stockholders will be, approved by a majority of the independent and
disinterested members of the Board of Directors, will be on terms no less
favorable to the Company than could be obtained from unaffiliated third parties
and will be in connection with bona fide business purposes of the Company.
46
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of the Company's Common Stock as of November 28, 1998, and as
adjusted, to reflect the sale by the Company of the shares offered hereby by (i)
each person who is known by the Company to own beneficially more than five
percent (5%) of the outstanding shares of Common Stock, (ii) each of the
Company's directors, (iii) each of the Named Executive Officers, and (iv) all
directors and executive officers as a group. Except as otherwise indicated, the
Company believes that each individual or entity named has sole investment and
voting power with respect to the shares of Common Stock beneficially owned by
them, subject to community property laws where applicable.
<TABLE>
<CAPTION>
-------------------------------------
PERCENTAGE BENEFICIALLY
OWNED (1)
SHARES ------------------------
BENEFICIALLY BEFORE THE AFTER THE
NAME OWNED OFFERING OFFERING
- ------------------------------------------------------------- ----------- ----------- -----------
<S> <C> <C> <C>
Barnet J. Cohen (2).......................................... 542,997 90.1% XX.X%
Robert R. Cain (3)........................................... 56,580 8.8 XX.X
J. Randolph Cerf (4)......................................... 11,558 1.9 XX.X
Melanie Cullen (5)........................................... 8,028 1.3 XX.X
Kenneth Alterwitz (6)........................................ 7,865 1.3 XX.X
Lawrence Archibald (7)....................................... 6,770 1.1 XX.X
James Sha (8)................................................ 5,031 * XX.X
Wendy Paskin-Jordan.......................................... 5,000 * XX.X
Christopher Mottern (9)...................................... 3,219 * XX.X
All Directors and Executive Officers as a Group (12 persons)
(10)....................................................... 664,819 96.2 XX.X
</TABLE>
- ------------------------------
(1) Calculated pursuant to Rule 13d-3(d) of the Securities Exchange Act of
1934, as amended. Under Rule 13d-3(d), shares not outstanding which are subject
to options, warrants, rights or conversion privileges exercisable within 60 days
as of November 28, 1998 are deemed outstanding for the purpose of calculating
the number and percentage owned by such person, but not deemed outstanding for
the purpose of calculating the percentage owned by any other person listed.
Percentages beneficially owned are based on 602,327 shares of Common Stock
outstanding as of November 28, 1998 and shares outstanding after the
Offering.
(2) Consists of 443,715 shares of Common Stock and 99,282 shares of Common
Stock held by the ESOP. Mr. Cohen and his wife Barbara Cohen are the trustees of
the ESOP. Mr. Cohen disclaims beneficial ownership of the ESOP shares except to
the extent of any pecuniary interest in such shares held by Mr. Cohen as an ESOP
participant.
(3) Consists of 13,200 shares of Common Stock, exercisable options to purchase
42,008 shares of Common Stock, and 1,372 shares of Common Stock allocated to Mr.
Cain's account under the ESOP.
(4) Consists of exercisable options to purchase 11,458 shares of Common Stock
and 100 shares of Common Stock allocated to Mr. Cerf's account under the ESOP.
(5) Consists of exercisable options to purchase 7,791 shares of Common Stock
and 237 shares of Common Stock allocated to Ms. Cullen's account under the ESOP.
(6) Consists of exercisable options to purchase 7,791 shares of Common Stock
and 74 shares of Common Stock allocated to Mr. Alterwitz's account under the
ESOP.
(7) Consists of 6,551 shares of Common Stock and exercisable options to
purchase 219 shares of Common Stock.
(8) Consists of 5,000 shares of Common Stock and exercisable options to
purchase 31 shares of Common Stock.
(9) Consists of 3,000 shares of Common Stock and exercisable options to
purchase 219 shares of Common Stock.
(10) Consists of 476,466 shares of Common Stock, 99,282 shares of Common Stock
held by the ESOP, for which Mr. Cohen serves as co-trustee, and exercisable
options to purchase 89,071 shares of Common Stock.
* Indicates beneficial ownership of less than 1.0% of the outstanding shares
of common stock.
47
<PAGE>
DESCRIPTION OF CAPITAL STOCK
GENERAL
Upon completion of the Offering, the Company will have authorized capital stock
of 22,000,000 shares consisting of 20,000,000 shares of Common Stock, $0.001 par
value, and 2,000,000 shares of Preferred Stock, $0.001 par value. As of November
28, 1998, 602,327 shares of Common Stock were outstanding, held by 11 holders of
record.
COMMON STOCK
The holders of Common Stock are entitled to one vote for each share held of
record on all matters submitted to a vote of stockholders. The holders of Common
Stock are entitled to receive ratably such dividends, if any, as may be declared
from time to time by the Board of Directors out of funds legally available
therefor. However, the Company does not anticipate paying dividends on the
Common Stock in the foreseeable future. See "Dividend Policy." In the event of a
liquidation, dissolution or winding up of the Company, the holders of Common
Stock are entitled to share ratably in all assets remaining after payment of
liabilities. Holders of Common Stock have no preemptive rights or rights to
convert their Common Stock into any other securities. There are no redemption or
sinking fund provisions applicable to the Common Stock. All outstanding shares
of Common Stock are, and the shares of Common Stock to be outstanding upon
completion of the Offering will be, fully paid and non-assessable.
PREFERRED STOCK
The Board of Directors of the Company is authorized, without further stockholder
action, to issue up to two million undesignated shares of Preferred Stock in one
or more series and to fix the voting rights, liquidation preferences, dividend
rights, repurchase rights, conversion rights, preemption rights, redemption
rights and terms, including sinking fund provisions, and certain other rights
and preferences of such shares of the Preferred Stock. The issuance of any
series of Preferred Stock could adversely affect the rights of the holders of
Common Stock by restricting dividends on, diluting the power of, or impairing
the liquidation rights of Common Stock, or delaying, deferring or preventing a
change in control of the Company. The Company has no present plans to issue any
Preferred Stock.
TRANSFER AGENT
The Company's transfer agent and registrar for its Common Stock is Norwest Bank
Minnesota, N.A.
ANTI-TAKEOVER PROVISIONS IN CHARTER DOCUMENTS
The Company has adopted provisions in its Amended and Restated Certificate of
Incorporation and in its Amended and Restated Bylaws that do the following: (i)
eliminate the right of stockholders to call a special meeting of stockholders;
(ii) require stockholders to give the Company advance notice of intent to
nominate directors or bring matters before a meeting of stockholders; (iii)
eliminate the ability of stockholders to take action by written consent; (iv)
stagger the Board into three classes so that only one third of the Board members
are elected each year, and effectively provide that directors may not be removed
from office other than for cause and (v) provide that vacancies on the Board
resulting from increases in the size of the Board or from death, resignation,
retirement or removal may only be filled by the Board. These provisions could
adversely affect the rights of the holders of Common Stock by delaying,
deferring or preventing a change in control of the Company.
EFFECT OF DELAWARE ANTI-TAKEOVER STATUTE
The Company is subject to Section 203 of the Delaware General Corporation Law
("Section 203"), which, subject to certain exceptions, prohibits a publicly held
Delaware corporation from engaging in any "business combination" with any
"interested stockholder" for a period of three years following the date that
such stockholder became an interested stockholder, unless: (i) prior to such
date, the board of directors of the corporation approved either the business
combination or the transaction that resulted in the stockholder becoming an
interested stockholder; (ii) upon consummation of the transaction that resulted
in the stockholder becoming an interested stockholder, the interested
stockholder owned at least 85% of the voting stock of the corporation
outstanding at the time the transaction commenced; or (iii) on or subsequent to
such date, the business combination is approved by the board of directors and
authorized at an annual or special meeting of stockholders, and not by written
consent, by the affirmative vote of at least 66 2/3% of the outstanding voting
stock that is not owned by the interested stockholder.
48
<PAGE>
Section 203 defines "business combination" to include: (i) any merger or
consolidation involving the corporation and the interested stockholder; (ii) any
sale, transfer, pledge or other disposition of 10% or more of the assets of the
corporation involving the interested stockholder; (iii) subject to certain
exceptions, any transaction that results in the issuance or transfer by the
corporation of any stock of the corporation to the interested stockholder; (iv)
any transaction involving the corporation that has the effect of increasing the
proportionate share of the stock of any class or series of the corporation
beneficially owned by the interested stockholder; (v) the receipt by the
"interested stockholder" of the benefit of any loans, advances, guarantees,
pledges or other financial benefits provided by or through the corporation. In
general, Section 203 defines an interested stockholder as an entity or person
beneficially owning 15% or more of the outstanding voting stock of the
corporation and any entity or person affiliated with or controlling or
controlled by such entity or person.
49
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of the Offering, the Company will have shares of Common
Stock outstanding, assuming no exercise of outstanding options and no
distributions of ESOP shares. Of these shares, the shares sold in the
Offering will be freely transferable without restriction under the Securities
Act unless they are held by "affiliates" of the Company as that term is defined
in Rule 144 under the Securities Act. The remaining 602,327 shares of Common
Stock (the "Restricted Shares") held by officers, directors and other
stockholders of the Company were sold by the Company in reliance on exemptions
from the registration requirements of the Securities Act and are "restricted
securities" within the meaning of Rule 144 under the Securities Act and may not
be sold publicly unless they are registered under the Securities Act or are sold
pursuant to Rule 144 or another exemption from registration.
The officers, directors and all stockholders of the Company have agreed not to
sell their shares without the prior written consent of J.P. Morgan Securities
Inc. for a period of 180 days from the date of this Prospectus. Beginning 180
days after commencement of the Offering, 499,045 Restricted Shares that are
subject to lock-up agreements (as described below under "Underwriting") will
become eligible for sale in the public market subject to Rule 144 under the
Securities Act. An additional 99,282 Restricted Shares are held by the ESOP and
may not be sold without the consent of the Company's Board of Directors. See
"Management - Compensation Plans - Employee Stock Ownership Plan." The remaining
4,000 Restricted Shares, which are also subject to such lock-up agreements, will
have been held for less than one year upon the expiration of such lock-up
agreements and will become eligible for sale under Rule 144 at a date thereafter
as the holding period provisions of Rule 144 are satisfied.
In general, under Rule 144 as currently in effect, a person (or persons whose
shares are aggregated) who has beneficially owned Restricted Shares for at least
one year, including persons who may be deemed "affiliates" of the Company, is
entitled to sell, within any three month period commencing 90 days after the
Offering, a number of shares that does not exceed the greater of 1% of the
number of shares of Common Stock then outstanding (approximately shares
immediately after the Offering, assuming no exercise of the Underwriters' over-
allotment option) or the average weekly trading volume of the Common Stock as
reported through the Nasdaq National Market during the four calendar weeks
preceding the filing of a Form 144 with respect to such sale. Sales under Rule
144 are also subject to certain manner of sale provisions and notice
requirements and to the availability of current public information about the
Company. In addition, a person who is not deemed to have been an affiliate of
the Company at any time during the 90 days preceding a sale, and who has
beneficially owned for at least two years the shares proposed to be sold, would
be entitled to sell such shares under Rule 144(k) without regard to the
requirements described above.
As of November 28, 1998, 150,020 shares were issuable upon exercise of currently
outstanding options, all of which are subject to the lockup agreements described
above. Of those options, options to purchase shares will be vested and
fully exercisable 180 days after commencement of the Offering and those shares
will be eligible for sale, subject, in the case of sales by affiliates, to the
volume, manner of sale, notice and public information requirements of Rule 144.
In addition, as of November 28, 1998, 99,282 shares of Common Stock had been
allocated to the respective accounts of participants in the ESOP. Under certain
circumstances, including termination of a participant's employment with the
Company, shares of Common Stock allocated to the account of that participant may
be distributed to the participant and such shares may then be sold by the
participant, subject to certain restrictions on transfer, including the
Company's Right of First Refusal. See "Management - Compensation Plans" and
"Management - Compensation of Directors."
Prior to the Offering, there has been no public market for the Common Stock of
the Company. No predictions can be made as to the effect, if any, that the sale
or availability for sale of shares of additional Common Stock will have on the
market price of the Common Stock. Nevertheless, sales of a substantial amount of
such shares by existing stockholders or by stockholders purchasing in the
Offering could have a negative impact on the market price of the Common Stock.
50
<PAGE>
UNDERWRITING
Under the terms of, and subject to the conditions contained in the Underwriting
Agreement (the "Underwriting Agreement"), each of the underwriters named below
(the "Underwriters"), for whom J.P. Morgan Securities Inc. and BancBoston
Robertson Stephens Inc. are acting as representatives (the "Representatives"),
has severally agreed to purchase, and the Company has agreed to sell to them,
the respective number of shares of Common Stock set forth opposite their names
below. Under the terms and conditions of the Underwriting Agreement, the
Underwriters are obligated to take and pay for all such shares of Common Stock,
if any are taken. Under certain circumstances, the commitments of nondefaulting
Underwriters may be increased as set forth in the Underwriting Agreement.
<TABLE>
<CAPTION>
-----------------
UNDERWRITERS NUMBER OF SHARES
- --------------------------------------------------------------------------- -----------------
<S> <C>
J.P. Morgan Securities Inc.................................................
BancBoston Robertson Stephens Inc..........................................
-----------------
Total..................................................................
-----------------
-----------------
</TABLE>
The Company estimates that it will pay $ in expenses for this offering,
exclusive of underwriting commissions and discounts.
The Underwriters propose initially to offer the shares of Common Stock directly
to the public at the price set forth on the cover page of this Prospectus, and
to certain dealers at such price less a selling 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 such concessions may be
changed.
The Company has granted to the Underwriters an option to purchase up to an
additional shares of Common Stock at the initial public offering price to
the public, less the aggregate underwriting discount, solely to cover
over-allotments. This option may be exercised at any time up to 30 days after
the date of this Prospectus. To the extent that the Underwriters exercise such
option, each of the Underwriters will have a firm commitment, subject to certain
conditions, to purchase a number of option shares proportionate to such
Underwriter's initial commitment.
The Company's officers, directors and all stockholders of the Company have
agreed, subject to certain exceptions, not to, directly or indirectly, (i) sell,
grant any option to purchase or otherwise transfer or dispose of any shares of
Common Stock or securities convertible into or exchangeable or exercisable for
shares of Common Stock or file a registration statement under the Securities Act
with respect to the foregoing or (ii) enter into any swap or other agreement or
transaction that transfers, in whole or in part, the economic consequence of
ownership of the Common Stock, without the prior written consent of J.P. Morgan
Securities Inc., for a period of 180 days after the date of this Prospectus.
J.P. Morgan Securities Inc. may, in its sole discretion, at any time or from
time to time, without notice, release all or any portion of the shares subject
to these lock-up agreements.
The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act or to contribute to
payments that the Underwriters may be required to make in respect thereof.
The Representatives have informed the Company that the Underwriters do not
intend to confirm sales of Common Stock offered hereby to any accounts over
which they exercise discretionary authority.
The Company has applied to list the Common Stock on the Nasdaq National Market
under the trading symbol VMIX.
51
<PAGE>
To facilitate the Offering of the Common Stock, the Underwriters may engage in
transactions that stabilize, maintain or otherwise affect the market price of
the Common Stock. Specifically, the Underwriters may over-allot shares of the
Common Stock in connection with this Offering, thereby creating a short position
in the Underwriters' syndicate account. Additionally, to cover such
over-allotments or to stabilize the market price of the Common Stock, the
Underwriters may bid for, and purchase, shares of the Common Stock in the open
market. Any of these activities may maintain the market price of the Common
Stock at a level above that which might otherwise prevail in the open market.
The Underwriters are not required to engage in these activities, and, if
commenced, any such activities may be discontinued at any time. The
Representatives, on behalf of the Underwriters, also may reclaim selling
concessions allowed to an Underwriter or dealer, if the syndicate repurchases
shares distributed by that Underwriter or dealer.
Prior to the Offering, there has been no public market for the Common Stock of
the Company. There can be no assurance that an active trading market will
develop for shares of the Common Stock or that the Common Stock will trade in
the public market subsequent to the Offering at or above the initial public
offering price. The initial public offering price will be determined by
negotiation among the Company and the Representatives. Among the factors that
will be considered in determining the initial public offering price, in addition
to prevailing market conditions, are the financial and operating history and
condition of the Company, the Company's business and financial prospects, the
prospects for the industry in which the Company operates, the recent market
prices of securities of companies in businesses similar to that of the Company
and other relevant factors.
From time to time in the ordinary course of their respective businesses, the
Representatives and their respective affiliates may in the future provide
investment banking and other financial services to the Company and its
affiliates.
52
<PAGE>
LEGAL MATTERS
The validity of the shares of Common Stock offered by the Company hereby will be
passed upon for the Company by Howard, Rice, Nemerovski, Canady, Falk & Rabkin,
a Professional Corporation, San Francisco, California, who have acted as counsel
to the Company in connection with the Offering. Certain legal matters in
connection with the Offering will be passed upon for the Underwriters by Cooley
Godward LLP, Palo Alto, California.
EXPERTS
The (i) consolidated financial statements of Valley Media, Inc. as of March 29,
1997 and March 28, 1998 and for each of the three fiscal years in the period
ended March 28, 1998 included in this Prospectus and the related financial
statement schedule included elsewhere in the registration statement and (ii) the
financial statements of Star Video Entertainment, L.P. for the years ended
December 31, 1995 and 1996 and for the period from January 1, 1997 to May 20,
1997 included in this Prospectus, have been audited by Deloitte & Touche LLP,
independent auditors, as stated in their reports appearing herein and elsewhere
in the registration statement. Such financial statements and financial statement
schedule have been included in reliance upon the reports of such firm given upon
their authority as experts in accounting and auditing.
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement on Form S-1 (together with all
amendments, exhibits, schedules and supplements thereto, the "Registration
Statement") under the Securities Act with respect to the Common Stock offered
hereby. This Prospectus, which forms a part of the Registration Statement, does
not contain all of the information set forth in the Registration Statement. For
further information with respect to the Company and the Common Stock, reference
is made to the Registration Statement. Statements contained in this Prospectus
as to the contents of any contract or other document are not necessarily
complete, and, in each instance, reference is made to the copy of such contract
or document filed as an exhibit to the Registration Statement, and each such
statement is qualified in all respects by such reference. Copies of the
Registration Statement may be examined without charge at the Public Reference
Section of the Commission, 450 Fifth Street, N.W., Room 1024, Washington, D.C.
20549, and the Commission's Regional Offices located at Seven World Trade
Center, 13th Floor, New York, New York 10048 and Citicorp Center, 500 West
Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of all or any
portion of the Registration Statement can be obtained from the Public Reference
Section of the Commission, 450 Fifth Street, N.W., Washington, D.C. 20549, upon
payment of certain fees prescribed by the Commission. The Commission maintains a
World Wide Web site that contains registration statements, reports, proxy and
information statements and other information regarding Registrants (including
the Company) that file electronically with the Commission. The address of such
World Wide Web site is http://www.sec.gov. The Company intends to distribute
annual reports containing audited financial statements and will make copies of
quarterly reports available for the first three quarters of each fiscal year
containing unaudited interim financial statements.
53
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
VALLEY MEDIA, INC.:
Independent Auditors' Report........................................................ F-2
Consolidated Balance Sheets as of March 29, 1997, March 28, 1998 and September 26,
1998 (Unaudited)................................................................... F-3
Consolidated Statements of Operations for the Fiscal Years Ended March 30, 1996,
March 29, 1997 and March 28, 1998 and the Six Months Ended September 27, 1997
(Unaudited) and September 26, 1998 (Unaudited)..................................... F-4
Consolidated Statements of Stockholders' Equity for the Fiscal Years Ended March 30,
1996, March 29, 1997 and March 28, 1998 and the Six Months ended September 26, 1998
(Unaudited)........................................................................ F-5
Consolidated Statements of Cash Flows for the Fiscal Years Ended March 30, 1996,
March 29, 1997 and March 28, 1998 and the Six Months Ended September 27, 1997
(Unaudited) and September 26, 1998 (Unaudited)..................................... F-6
Notes to Consolidated Financial Statements.......................................... F-7
STAR VIDEO:
Independent Auditors' Report........................................................ F-19
Statements of Operations and Changes in Net Assets Acquired for the Years Ended
December 31, 1995 and 1996 and the Period from January 1, 1997 to May 20, 1997..... F-20
Statements of Cash Flows for the Years Ended December 31, 1995 and 1996 and the
Period from January 1, 1997 to May 20, 1997........................................ F-21
Notes to Financial Statements....................................................... F-22
UNAUDITED PRO FORMA FINANCIAL INFORMATION OF VALLEY MEDIA, INC.:
Unaudited Pro Forma Financial Information of Valley Media, Inc...................... F-24
Unaudited Pro Forma Consolidated Statement of Operations for the Fiscal Year Ended
March 28, 1998..................................................................... F-25
Notes to Unaudited Pro Forma Consolidated Statement of Operations................... F-26
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors and Stockholders of
Valley Media, Inc.:
We have audited the accompanying consolidated balance sheets of Valley Media,
Inc. and its subsidiaries (the "Company") as of March 29, 1997 and March 28,
1998 and the related consolidated statements of operations, stockholders'
equity, and cash flows for each of the three fiscal years in the period ended
March 28, 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 consolidated financial statements present fairly, in all
material respects, the financial position of Valley Media, Inc. and its
subsidiaries as of March 29, 1997 and March 28, 1998, and the results of their
operations and their cash flows for each of the three fiscal years in the period
ended March 28, 1998 in conformity with generally accepted accounting
principles.
/s/ Deloitte & Touche LLP
San Francisco, California
July 22, 1998
F-2
<PAGE>
VALLEY MEDIA, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
-----------------------------------
SEPT. 26,
MARCH 29, MARCH 28, 1998
DOLLARS IN THOUSANDS, EXCEPT SHARE DATA 1997 1998 -----------
----------- ---------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets
Cash....................................................... $ 310 $ 394 $ 796
Accounts receivable, less allowance for doubtful accounts
of $825 at March 29, 1997, $5,276 at March 28, 1998, and
$6,850 (unaudited) at September 26, 1998.................. 36,075 108,429 146,739
Inventories, net of reserves of $392 at March 29, 1997,
1,587 at March 28, 1998 and $2,120 (unaudited) at
September 26, 1998........................................ 44,351 95,365 159,564
Deferred income taxes...................................... 1,136 1,903 1,903
Prepaid expenses and other................................. 874 2,626 2,716
----------- --------- -----------
Total.................................................... 82,746 208,717 311,718
Property and equipment, net.................................. 9,085 15,681 20,857
Goodwill and other intangibles, net.......................... 2,626 19,040 18,392
Other assets................................................. 134 1,624 1,799
----------- --------- -----------
Total assets................................................. $ 94,591 $ 245,062 $ 352,766
----------- --------- -----------
----------- --------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable........................................... $ 58,428 $ 140,380 $ 194,426
Accrued expenses........................................... 1,594 8,088 5,874
Revolving line of credit................................... 20,447 73,381 129,347
Current portion of long-term debt.......................... 1,258 2,334 1,768
Deferred revenue........................................... 1,219 2,146 2,204
----------- --------- -----------
Total.................................................... 82,946 226,329 333,619
----------- --------- -----------
Deferred income taxes........................................ 1,407 4,590 4,590
Long-term debt............................................... 2,257 3,166 4,845
Other liabilities............................................ - - 68
Minority interest............................................ 208 - -
Commitments and contingencies (Notes 3,7 and 9)
Stockholders' equity
Common stock, no par value, 1,000,000 shares authorized
595,134, 598,327 and 602,327 shares issued and
outstanding............................................... 1 1 1
Additional paid-in capital................................. 666 849 927
Stockholder note receivable................................ (78)
Retained earnings.......................................... 7,106 10,127 8,794
----------- --------- -----------
Total stockholders' equity............................... 7,773 10,977 9,644
----------- --------- -----------
Total liabilities and stockholders' equity................... $ 94,591 $ 245,062 $ 352,766
----------- --------- -----------
----------- --------- -----------
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE>
VALLEY MEDIA, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
---------------------------------------------------------
FISCAL YEARS ENDED SIX MONTHS ENDED
------------------------------- ------------------------
MARCH 30, MARCH 29, MARCH 28, SEPT 27, SEPT 26,
DOLLARS IN THOUSANDS, EXCEPT SHARE DATA 1996 1997 1998 1997 1998
--------- --------- --------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net sales................................ $ 156,557 $ 199,231 $ 583,492 $ 234,446 $ 343,351
Cost of goods sold....................... 137,847 175,706 516,627 207,637 305,405
--------- --------- --------- ----------- -----------
Gross profit............................. 18,710 23,525 66,865 26,809 37,946
Selling, general and administrative
expenses............................... 14,033 20,552 55,183 23,838 34,210
--------- --------- --------- ----------- -----------
Operating income......................... 4,677 2,973 11,682 2,971 3,736
Equity in net loss of joint venture...... 903 207
Interest expense......................... 1,305 1,745 6,627 2,680 5,967
--------- --------- --------- ----------- -----------
Income (loss) before income taxes........ 2,469 1,021 5,055 291 (2,231)
Income taxes............................. 1,016 410 2,034 123 (898)
--------- --------- --------- ----------- -----------
Net income (loss)........................ $ 1,453 $ 611 $ 3,021 $ 168 $ (1,333)
--------- --------- --------- ----------- -----------
--------- --------- --------- ----------- -----------
Net income (loss) per share:
Basic.................................. $ 2.35 $ 1.02 $ 5.07 $ 0.28 $ (2.22)
--------- --------- --------- ----------- -----------
--------- --------- --------- ----------- -----------
Diluted................................ $ 2.23 $ 0.95 $ 4.60 $ 0.26 $ (1.92)
--------- --------- --------- ----------- -----------
--------- --------- --------- ----------- -----------
Weighted average shares used in the
calculation
Basic.................................. 617,584 596,666 596,003 595,132 601,052
Diluted................................ 652,455 640,897 656,216 648,967 692,623
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE>
VALLEY MEDIA, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
------------------------------------------------------------------
COMMON STOCK ADDITIONAL STOCKHOLDER
DOLLARS IN THOUSANDS, EXCEPT -------------------- PAID-IN NOTE RETAINED
SHARE DATA SHARES AMOUNT CAPITAL RECEIVABLE EARNINGS TOTAL
--------- --------- ----------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Balance at April 1, 1995......... 618,931 $1 $1,337 $5,042 $6,380
Repurchase of common stock....... (4,556) (117) (117)
Net income....................... 1,453 1,453
--------- --------- ----------- --------- --------- ---------
Balance at March 30, 1996........ 614,375 1 1,220 6,495 7,716
Repurchase of common stock....... (19,241) (554) (554)
Net income....................... 611 611
--------- --------- ----------- --------- --------- ---------
Balance at March 29, 1997........ 595,134 1 666 7,106 7,773
Repurchase of common stock....... (4,037) (143) (143)
Issuance of common stock in
connection with acquisition..... 7,230 326 326
Net income....................... 3,021 3,021
--------- --------- ----------- --------- --------- ---------
Balance at March 28, 1998........ 598,327 1 849 10,127 10,977
Unaudited:
Exercise of stock option in
exchange for note receivable.... 4,000 78 $(78)
Net loss......................... (1,333) (1,333)
--------- --------- ----------- --------- --------- ---------
Balance at September 26, 1998
(unaudited)..................... 602,327 $1 $927 $(78) $8,794 $9,644
--------- --------- ----------- --------- --------- ---------
--------- --------- ----------- --------- --------- ---------
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE>
VALLEY MEDIA, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
---------------------------------------------------------------
FISCAL YEARS ENDED SIX MONTHS ENDED
------------------------------------- ------------------------
MARCH 30, MARCH 29, MARCH 28, SEPT. 27, SEPT. 26,
DOLLARS IN THOUSANDS 1996 1997 1998 1997 1998
----------- ----------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss)............................................... $ 1,453 $ 611 $ 3,021 $ 168 $ (1,333)
Adjustments to reconcile net income (loss) to net cash provided
by (used in) operating activities
Depreciation and amortization................................. 1,296 1,849 4,113 1,814 2,612
Bad debt expense.............................................. 8 505 3,220 3,447 1,574
Equity in net loss of joint venture........................... 903 207
Deferred income taxes......................................... 264 121 1,889 866
Changes in assets and liabilities (net of acquisitions):
Accounts receivable......................................... (3,988) (15,401) (43,976) (43,022) (39,884)
Inventories................................................. (2,252) (9,412) (31,748) (45,303) (64,199)
Prepaid expenses and other.................................. (255) (441) (1,212) (794) (90)
Accounts payable............................................ (3,066) 33,532 51,549 78,713 54,046
Accrued expenses............................................ (261) 655 (1,175) (13) (2,347)
Deferred revenue............................................ 438 629 1,234 74 58
----------- ----------- ----------- ----------- -----------
Net cash provided by (used in) operating activities....... (5,460) 12,855 (13,085) (4,050) (49,563)
----------- ----------- ----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment............................. (1,728) (2,902) (4,344) (2,015) (6,428)
Business and net asset acquisitions, net of cash acquired....... (9,346) (33,148) (33,148)
Equipment deposit............................................... (34) (82) (62) (89) (176)
----------- ----------- ----------- ----------- -----------
Net cash used in investing activities..................... (1,762) (12,330) (37,554) (35,252) (6,604)
----------- ----------- ----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Net short-term borrowings under revolving line of credit........ 7,926 1,502 52,934 39,818 55,967
Issuance of long-term debt...................................... 373 7 3 3 1,296
Repayment of long-term debt..................................... (892) (1,314) (1,307) (643) (694)
Repurchase of common stock...................................... (117) (554) (143)
Deferred offering costs......................................... (764)
----------- ----------- ----------- ----------- -----------
Net cash provided by (used in) financing activities....... 7,290 (359) 50,723 39,178 56,569
----------- ----------- ----------- ----------- -----------
NET INCREASE (DECREASE) IN CASH................................... 68 166 84 (124) 402
CASH, BEGINNING OF PERIOD......................................... 76 144 310 310 394
----------- ----------- ----------- ----------- -----------
CASH, END OF PERIOD............................................... $ 144 $ 310 $ 394 $ 186 $ 796
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid for interest.......................................... $ 1,263 $ 1,676 $ 5,716
Cash paid for income taxes...................................... 730 85
NONCASH INVESTING AND FINANCING ACTIVITIES
Net liabilities assumed in connection with acquisition of
partnership interest........................................... 1,328
Noncompete agreement issued in connection with business
acquisition.................................................... 241
Net assets acquired............................................. 229
Purchase of equipment through capital leases.................... 820 231 2,788
Purchase of equipment through issuance of note payable.......... 2,546
Payable to Star Video Entertainment, L.P. as a result of
acquisition.................................................... 3,144
Issuance of common stock in connection with acquisition......... 326
</TABLE>
See notes to consolidated financial statements.
F-6
<PAGE>
VALLEY MEDIA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. DESCRIPTION OF BUSINESS
Valley Media, Inc. (a California corporation) and its subsidiaries (the
"Company") is a full-line distributor of prerecorded music and video
entertainment products. In July 1998, the Company was reincorporated as a
Delaware corporation. The Company has distribution facilities in California,
Kentucky, Pennsylvania and Massachusetts, and sells its products primarily to
retail stores throughout the United States and worldwide, as well as through
Internet music and video retailers. The Company also provides certain services
to customers such as direct-to-consumer fulfillment and licensing the Company's
proprietary products and databases of product information.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company and
its wholly owned subsidiaries. Prior to January 1997, the Company owned a 50%
partnership interest in Distribution North America ("DNA"), which was accounted
for on the equity method. On January 31, 1997, the Company acquired the
remaining 50% partnership interest in DNA (see Note 4). Significant intercompany
balances and transactions are eliminated in consolidation.
FISCAL YEAR
The Company's fiscal year is a 52 or 53 week period ending on the Saturday
closest to March 31. The fiscal years ended March 30, 1996 ("fiscal 1996"),
March 29, 1997 ("fiscal 1997") and March 28, 1998 ("fiscal 1998") each contained
a 52 week period.
INTERIM FINANCIAL INFORMATION (UNAUDITED)
The Company's consolidated financial statements as of September 26, 1998 and for
the six months ended September 27, 1997 and September 26, 1998 are unaudited
and, in the opinion of management, contain all adjustments that are of a normal
and recurring nature (except for line of credit termination fees and financing
costs totalling approximately $1,200,000 and the write-off of deferred offering
costs of approximately $587,000 expensed in the six months ended September 26,
1998) necessary to present fairly the financial position and results of
operations for such periods. The results of operations for the six months ended
September 26, 1998 are not necessarily indicative of the results expected for
the full year.
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 disclosures of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Significant estimates include allowances for doubtful accounts and vendor
receivables. Actual results could differ from those estimates.
INVENTORIES
Inventories are stated at the lower of average cost or market.
PROPERTY AND EQUIPMENT
Property and Equipment is stated at cost and depreciated or amortized on a
straight-line basis over the estimated useful lives of the assets or the lease
term, whichever is shorter. Estimated useful lives range from three to ten
years.
CAPITALIZED COMPUTER SOFTWARE
Capitalized Computer Software included in property and equipment, reflects costs
related to internally developed or purchased software that are capitalized and
amortized on a straight-line basis over periods not exceeding five
F-7
<PAGE>
VALLEY MEDIA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
years. Internally developed software costs are capitalized in accordance with
Statement of Position 98-1, ACCOUNTING FOR THE COSTS OF COMPUTER SOFTWARE
DEVELOPED OR OBTAINED FOR INTERNAL USE. Amortization expense for fiscal 1996,
fiscal 1997 and fiscal 1998 was $195,000, $339,000 and $490,000, respectively.
GOODWILL AND OTHER INTANGIBLES
Goodwill is amortized on a straight-line basis over 15 years. Identifiable
intangible assets, consisting primarily of customer lists, are amortized on a
straight-line basis over five years.
OTHER ASSETS
Other assets include $764,000 at March 28, 1998 and $509,000 (unaudited) at
September 26, 1998 of deferred offering costs, which the Company expects to
offset against the gross proceeds from an initial public offering.
REVENUE RECOGNITION
Sales of prerecorded music, video, music accessories, and other related products
are recognized upon shipment of the product, net of returns and allowances. Net
sales also includes fees for services.
CONCENTRATION OF CREDIT RISK
The Company is subject to credit risk through sales and related trade
receivables to retailers. The Company routinely assesses the financial strength
of significant customers and this assessment, combined with the large number and
geographic diversity of its customers, limits the Company's concentration of
risk with respect to trade accounts receivable.
STOCK-BASED COMPENSATION
The Company accounts for stock-based awards to employees using the intrinsic
value method in accordance with Accounting Principles Board No. 25, ACCOUNTING
FOR STOCK ISSUED TO EMPLOYEES ("APB 25").
INCOME TAXES
The Company accounts for income taxes under the asset and liability approach
where deferred income tax assets and liabilities reflect the future tax
consequences, based on enacted tax laws, of the temporary differences between
financial and tax reporting at the balance sheet date.
ASSET IMPAIRMENT
Statement of Financial Accounting Standards ("SFAS") No. 121, ACCOUNTING FOR THE
IMPAIRMENT OF LONG-LIVED ASSETS TO BE DISPOSED OF, requires periodic review of
long-lived assets and certain identifiable intangibles for impairment whenever
events or changes in circumstances indicate that the carrying amount of an asset
may not be recoverable. Impairment, if any, would be determined from a
comparison of undiscounted net cash flows to the carrying value of the assets.
Implementation of SFAS No. 121 in fiscal 1997 had no effect on the Company's
financial statements.
NET INCOME (LOSS) PER SHARE
Basic net income (loss) per share is computed by dividing net income (loss) by
the weighted average of common shares outstanding for the period. Diluted net
income (loss) per share reflects the potential dilution that could occur if
common stock was issued through exercise of stock options.
NEW ACCOUNTING PRONOUNCEMENTS
SFAS No. 130, REPORTING COMPREHENSIVE INCOME, establishes standards for
reporting and display of comprehensive income and its components (revenues,
expenses, gains and losses) in a full set of general-purpose financial
statements. This statement requires that all items that are required to be
recognized under accounting standards as components of comprehensive income be
reported in a financial statement that is displayed with the same prominence as
other financial statements. In addition, this statement requires that an
enterprise classify items of
F-8
<PAGE>
VALLEY MEDIA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
other comprehensive income by their nature in a financial statement and display
the accumulated balance of other comprehensive income separately from the
retained earnings and additional paid in capital in the equity section of a
statement of financial position. SFAS No. 130 is effective for the Company's
fiscal year ending April 3, 1999 ("fiscal 1999"). The Company is currently
evaluating what impact, if any, SFAS No. 130 may have on its financial statement
disclosures.
SFAS No. 131, DISCLOSURES ABOUT SEGMENT REPORTING OF AN ENTERPRISE AND RELATED
INFORMATION, establishes standards for the way that public business enterprises
report information about operating segments in annual financial statements and
requires that those enterprises report selected information about operating
segments in interim financial reports issued to shareholders. It also
establishes standards for related disclosure about products and services,
geographic areas, and major customers. SFAS No. 131 is effective for the
Company's fiscal 1999. The Company is currently evaluating what impact, if any,
SFAS No. 131 may have on its financial statement disclosures.
SFAS No. 133, ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES,
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts
(collectively referred to as derivatives) and for hedging activities. It
requires that an entity recognize all derivatives as either assets or
liabilities in the statement of financial position and measure these instruments
at fair value. SFAS No. 133 is effective for all fiscal quarters of fiscal years
beginning after June 15, 1999. The Company is currently evaluating what impact,
if any, SFAS No. 133 may have on its financial statements.
3. ACQUISITION OF BUSINESS OF STAR VIDEO ENTERTAINMENT, L.P.
On May 20, 1997, the Company acquired certain of the assets and assumed certain
liabilities of Star Video Entertainment, L.P. ("Star Video"), a distributor of
prerecorded videocassettes. Consideration paid to the seller was $37,872,000, of
which $34,728,000 was paid in cash on May 20, 1997 and in August 1997 and the
remaining $3,144,000 is due in various installments over the next three years.
Additionally, the Company incurred $2,565,000 of transaction, severance and
other acquisition costs. The purchase price is subject to adjustment, depending
upon the ultimate resolution of an arbitration proceeding between the Company
and Star Video. Any change in the purchase price will result in an adjustment to
goodwill.
The Company allocated the total purchase price of approximately $40,437,000 to
the fair value of the net assets acquired as follows:
<TABLE>
<S> <C>
---------
DOLLARS IN THOUSANDS
Cash.............................................................................. $ 3,697
Accounts receivable............................................................... 58,025
Inventories....................................................................... 20,513
Property and equipment............................................................ 1,472
Goodwill.......................................................................... 15,540
Customer lists.................................................................... 2,300
Prepaid and other assets.......................................................... 812
Accounts payable.................................................................. (43,061)
Accrued expenses.................................................................. (1,722)
Short-term borrowings............................................................. (17,139)
---------
Total............................................................................. $ 40,437
---------
---------
</TABLE>
F-9
<PAGE>
VALLEY MEDIA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. ACQUISITION OF BUSINESS OF STAR VIDEO ENTERTAINMENT, L.P. (CONTINUED)
The following unaudited pro forma information has been presented as if the
acquisition of business of Star Video had occurred on March 31, 1996. The
unaudited pro forma information is based on historical results of operations
adjusted for purchase price adjustments and, in the opinion of management, is
not necessarily indicative of what results would have been if the acquisition
had occurred on March 31, 1996.
<TABLE>
<CAPTION>
--------------------
FISCAL YEARS ENDED
--------------------
MARCH 29, MARCH 28,
1997(1) 1998
--------- ---------
(UNAUDITED)
<S> <C> <C>
DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA
Net sales............................................................... $ 500,353 $ 616,034
Net income.............................................................. 4,849 2,608
Net income per share:
Basic................................................................. $ 8.12 $ 4.38
Diluted............................................................... 7.56 3.97
</TABLE>
- ------------------------
(1) Includes results of operations of Star Video for the fiscal year ended
December 31, 1996
4. OTHER ACQUISITIONS
During fiscal 1998, the Company acquired inventories and accounts receivable
from a wholesale prerecorded music distributor for a purchase price of $798,000,
which was paid in cash.
In January 1997, the Company acquired the remaining 50% partnership interest in
DNA in exchange for assuming DNA's net liabilities of $1,328,000. Simultaneous
with the acquisition, the Company repaid DNA's line of credit balance
($3,133,000) utilizing borrowings from the Company's line of credit. The
transaction resulted in goodwill of $747,000. The Company provided certain
services (including warehousing, data processing and order processing) to DNA
through January 1997. The Company received $3,606,000 and $2,403,000 from DNA
for such services during fiscal 1996 and fiscal 1997, respectively.
Additionally, the Company purchased products from DNA totaling $5,201,000, and
$4,274,000 during fiscal 1996 and fiscal 1997, respectively.
During fiscal 1997, the Company acquired certain assets from three separate
wholesale prerecorded music distributors. The purchase prices totaled
$9,346,000, paid in cash. The purchases included inventory, accounts receivable,
trademarks and copyrights and a covenant not to compete, and resulted in
goodwill and other intangibles of $1,766,000.
In December 1996, the Company and Stereophile, Inc. ("Stereophile") entered into
an agreement to form Schwann Acquisition Corp. ("SAC") for the purpose of
publishing quarterly and annual comprehensive classical music guides.
Stereophile is owned by a Director of the Company. The Company contributed
$150,000 in cash and guaranteed a $100,000 note payable issued to Stereophile by
SAC for an 80% interest in SAC. Stereophile contributed certain publication
assets, as defined in the agreement, valued at $355,000 for the remaining 20%
interest in SAC. The transaction resulted in goodwill of $236,000. In December
1997, the Company acquired the remaining 20% interest in SAC by issuing 7,230
shares of the Company's common stock.
The above acquisitions have been accounted for using the purchase method of
accounting and, accordingly, the operations of these businesses and net assets
have been included in the Company's consolidated financial statements from their
respective dates of acquisition and were not material to the results of
operations of the Company.
F-10
<PAGE>
VALLEY MEDIA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
<TABLE>
<CAPTION>
-------------------------------
MARCH 29, MARCH 28,
DOLLARS IN THOUSANDS 1997 1998
--------- --------- SEPT. 26,
1998
---------
(UNAUDITED)
<S> <C> <C> <C>
Machinery and equipment...................................... $4,836 $9,682 $12,547
Office furniture and equipment............................... 4,953 6,733 9,021
Computer software............................................ 2,765 5,045 5,779
Leasehold improvements....................................... 1,064 1,273 2,208
--------- --------- ---------
Total.................................................... 13,618 22,733 29,555
Less accumulated depreciation and amortization............... (4,533) (7,052) (8,698)
--------- --------- ---------
Property and equipment, net.................................. $9,085 $15,681 $20,857
--------- --------- ---------
--------- --------- ---------
</TABLE>
The Company leases some of its office furniture and equipment under capital
leases. At March 29, 1997 and March 28, 1998 property and equipment recorded
under capital leases was $1,051,000 and $3,850,000, respectively. Related
accumulated amortization was $252,000 and $518,000, respectively.
6. GOODWILL AND OTHER INTANGIBLES
Goodwill and other intangibles consist of:
<TABLE>
<CAPTION>
-------------------------------
MARCH 29, MARCH 28,
DOLLARS IN THOUSANDS 1997 1998
--------- --------- SEPT. 26,
1998
---------
(UNAUDITED)
<S> <C> <C> <C>
Goodwill..................................................... $2,508 $18,165 $18,366
Identifiable intangible assets, primarily customer lists..... 241 2,554 2,554
--------- --------- ---------
Total.................................................... 2,749 20,719 20,920
Less accumulated amortization................................ (123) (1,679) (2,528)
--------- --------- ---------
Goodwill and other intangibles, net.......................... $2,626 $19,040 $18,392
--------- --------- ---------
--------- --------- ---------
</TABLE>
7. REVOLVING LINE OF CREDIT
At March 28, 1998, the Company had a revolving line of credit agreement that
provided for borrowings up to the lesser of $110,000,000 (reduced to
$100,000,000 as of April 1, 1998) or the amount of collateral availability. The
line of credit bore interest at rates ranging from 8.38% to 8.75% at March 28,
1998. At March 28, 1998, the Company had $73,381,000 in outstanding borrowings
and $12,424,000 in outstanding letters of credit. As of March 28, 1998, the
Company was not in compliance with certain financial covenants this line of
credit agreement; such line of credit was repaid and terminated on May 21, 1998.
On May 21, 1998, the Company entered into a new revolving line of credit
agreement ("Credit Facility") that provides for borrowings up to the lesser of
$130,000,000 or the amount of collateral availability, and on such date the
Company borrowed approximately $97,500,000. Collateral availability is limited
to 77% of eligible accounts receivable plus the lesser of 62% of cost or 91% of
net realizable value of inventories (subject to certain limitations as to video
and DNA inventories, as defined in the Credit Facility). The Credit Facility
bears interest, at the Company's election, at prime plus a margin of 0% to 0.5%
or the Eurodollar Rate plus a margin of 2.0% to 2.75%, subject to monthly
adjustments and certain terms and conditions stated in the Credit Facility. The
Credit Facility requires a monthly fee of 0.38% on the amount by which 80% of
the available borrowings
F-11
<PAGE>
VALLEY MEDIA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. REVOLVING LINE OF CREDIT (CONTINUED)
exceeds the average daily principal balance of outstanding loans and letters of
credit. Borrowings under the Credit Facility are secured by all eligible
accounts receivable, inventory, certain equipment, and other intangible property
of the Company. The Credit Facility contains various covenants, including among
other things, compliance with adjusted net worth requirements, restriction of
encumbrances, indebtedness, loans, investments and guarantees and restriction on
the payment of cash dividends. Dividends are restricted to 25% of net income,
subject to certain borrowing availability requirements. At September 26, 1998,
no dividends (unaudited) were allowable under the Credit Facility. The Credit
Facility expires on May 21, 2001 and renews annually thereafter unless notice is
given by either party.
As a result of terminating the prior line of credit agreement, the Company
incurred termination fees and wrote off prepaid financing costs totalling
approximately $1,200,000 which were expensed in the first quarter of fiscal
1999.
8. LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
---------------------------------
MARCH 29, MARCH 28,
DOLLARS IN THOUSANDS 1997 1998
--------- --------- SEPT. 26,
1998
-----------
(UNAUDITED)
<S> <C> <C> <C>
Various notes payable in monthly installments of $45,
interest at 9.4% to 9.5%, due July 2002, secured by
equipment................................................... $ 1,250
Equipment loan payable in monthly installments of $52,
interest at the treasury rate plus 3.2% (8.7% on March 28,
1998), due November 2000, secured by equipment.............. $1,971 $1,494 1,240
Various notes payable in monthly installments totaling $16,
interest at 9.3% on March 28, 1998, due at various dates
through October 1998, secured by equipment.................. 595 79 11
10% unsecured promissory note due with accrued interest May
2000........................................................ 500 500
10% unsecured promissory note due December 1998, interest due
quarterly beginning December 1997........................... 100 100 100
Capital lease obligations (see Note 9)....................... 786 3,260 3,445
Unsecured notes payable to related parties, interest at 8%,
payable monthly, due on demand.............................. 63 67 67
--------- --------- -----------
Total...................................................... 3,515 5,500 6,613
Less current portion......................................... (1,258) (2,334) (1,768)
--------- --------- -----------
Total long-term debt......................................... $2,257 $3,166 $ 4,845
--------- --------- -----------
--------- --------- -----------
</TABLE>
F-12
<PAGE>
VALLEY MEDIA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. LONG-TERM DEBT (CONTINUED)
Scheduled principal maturities as of March 28, 1998 are as follows:
<TABLE>
<S> <C>
---------
DOLLARS IN THOUSANDS
Fiscal year:
1999.............................................................................. $2,334
2000.............................................................................. 648
2001.............................................................................. 1,030
2002.............................................................................. 363
2003.............................................................................. 379
Thereafter........................................................................ 746
---------
Total........................................................................... $5,500
---------
---------
</TABLE>
The equipment loan contains various covenants, including among other things,
compliance with tangible net worth ratios, debt ratios and minimum cash flows.
At March 28, 1998, the Company was not in compliance with certain financial
covenants, certain of which were waived until September 30, 1998. The Company
has classified such equipment loan as current at March 28, 1998.
9. COMMITMENTS AND CONTINGENCIES
The Company has several capital leases for office furniture and equipment. The
Company also leases computer equipment and office and warehouse facilities and
equipment under noncancelable operating leases. During fiscal 1996, fiscal 1997
and fiscal 1998, total rent expense under all operating leases was $1,217,000,
$1,479,000 and $3,125,000, respectively. The Company was reimbursed $134,000 and
$231,000 by DNA related to these expenditures in fiscal 1996 and 1997,
respectively.
During fiscal 1998, the Company entered into a ten year noncancelable operating
lease for a new distribution facility. The Company began operations in the
facility during May 1998. Future lease payments are included in the table below.
As of March 28, 1998, the Company had commitments to provide leasehold
improvements of approximately $600,000 and to purchase equipment of
approximately $1,500,000.
Future minimum payments under capital leases and noncancelable operating leases
with terms of one year or more at March 28, 1998 consisted of the following:
<TABLE>
<CAPTION>
---------------------
CAPITAL OPERATING
DOLLARS IN THOUSANDS LEASES LEASES
---------- ---------
<S> <C> <C>
Fiscal year:
1999................................................................... $859 $4,153
2000................................................................... 859 3,731
2001................................................................... 686 2,441
2002................................................................... 481 1,469
2003................................................................... 464 1,357
Thereafter............................................................. 810 5,164
---------- ---------
Total lease payments................................................. 4,159 $18,315
---------
---------
Less amounts representing interest....................................... (899)
----------
Present value of net minimum lease payments.............................. $3,260
----------
----------
</TABLE>
F-13
<PAGE>
VALLEY MEDIA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. COMMITMENTS AND CONTINGENCIES (CONTINUED)
In the ordinary course of its business the Company is a party to certain claims
and legal actions. After consulting with legal counsel, the management of the
Company believes that the ultimate resolution of these matters will not have a
material adverse effect on the consolidated financial statements of the Company
taken as a whole.
10. INCOME TAXES
The income tax provision (benefit) consists of the following:
<TABLE>
<CAPTION>
------------------------------------------------
FISCAL YEARS ENDED
-------------------------------------
MARCH 30, MARCH 29, MARCH 28,
DOLLARS IN THOUSANDS 1996 1997 1998
----------- ----------- ----------- SIX
MONTHS
ENDED
SEPT. 26,
1998
---------
(UNAUDITED)
<S> <C> <C> <C> <C>
Income tax expense:
Current
Federal......................................... $ 551 $ 215 $ 98 $(700)
State........................................... 201 74 3 (198)
----------- ----- ----------- ---------
Total......................................... 752 289 101 (898)
Deferred
Federal......................................... 244 102 1,417
State........................................... 20 19 516
----------- ----- -----------
Total......................................... 264 121 1,933 --
----------- ----- ----------- ---------
Income tax provision (benefit)...................... $ 1,016 $ 410 $ 2,034 $(898)
----------- ----- ----------- ---------
----------- ----- ----------- ---------
</TABLE>
F-14
<PAGE>
VALLEY MEDIA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. INCOME TAXES (CONTINUED)
The significant components of the Company's deferred tax assets (liabilities)
are as follows:
<TABLE>
<CAPTION>
--------------------
<S> <C> <C>
MARCH 29, MARCH 28,
DOLLARS IN THOUSANDS 1997 1998
--------- ---------
Deferred tax assets
Investment in joint venture........................................... $ 420
Net operating loss carryforwards...................................... $ 135
Allowance for doubtful accounts....................................... 235 1,086
Minimum tax credits................................................... 143 24
Capitalized inventory costs........................................... 134 117
Accrued vacation...................................................... 109 126
Nondeductible reserves................................................ 362
Deferred state taxes.................................................. 182
ESOP contributions.................................................... 70
Credit carryforward................................................... 157
Other................................................................. 95 169
--------- ---------
Total deferred tax assets......................................... 1,136 2,428
--------- ---------
Deferred tax liabilities
Fair value adjustment on customer receivables......................... (3,517)
Capitalized software.................................................. (807) (1,210)
Depreciation and amortization......................................... (554) (758)
Other................................................................. (46) (13)
--------- ---------
Total deferred tax liabilities.................................... (1,407) (5,498)
--------- ---------
Net deferred tax liability.............................................. $ (271) $(3,070)
--------- ---------
--------- ---------
</TABLE>
The Company's effective tax rate differs from the federal statutory rate of 34%
as follows:
<TABLE>
<CAPTION>
--------------------------------------------------------------------
<S> <C> <C> <C> <C>
FISCAL YEARS ENDED SIX MONTHS
------------------------------------------------------- ENDED
MARCH 30, 1996 MARCH 29, 1997 MARCH 28, 1998 SEPT. 26,
----------------- ----------------- ----------------- 1998
-----------
(UNAUDITED)
Federal tax at statutory rate....... 34.0% 34.0% 34.0% 34.0%
State income taxes, net of Federal
benefit............................ 6.0 6.1 5.8 5.8
Other............................... 1.2 0.1 0.4 0.4
----------------- ----------------- ----------------- -----------
Total............................... 41.2% 40.2% 40.2% (40.2)%
----------------- ----------------- ----------------- -----------
----------------- ----------------- ----------------- -----------
</TABLE>
11. EMPLOYEE BENEFIT PLANS
During fiscal 1997, the Company repurchased 17,385 shares of common stock at
$28.76 per share from the principal shareholder. The repurchase price was based
upon an independent valuation of the Company.
STOCK OWNERSHIP PLAN
The Company's employee stock ownership plan ("ESOP") covers substantially all
employees who meet minimum age and length of service requirements. The ESOP
requires annual Company contributions of 1%-16% of eligible employees' annual
compensation in the form of common stock, cash or any combination thereof. ESOP
F-15
<PAGE>
VALLEY MEDIA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. EMPLOYEE BENEFIT PLANS (CONTINUED)
contribution expense, which represented 1% of eligible compensation, totaled
$140,000, $164,000 and $216,000 for fiscal 1996, fiscal 1997 and fiscal 1998,
respectively. The Company repurchased 1,856 and 4,037 ESOP shares during fiscal
1997 and fiscal 1998, respectively. The purchase price in each period was based
upon an independent valuation of the Company.
1994 STOCK OPTION PLAN
Under the 1994 Stock Option Plan ("1994 Plan"), there are 110,000 shares of
common stock reserved for which the Company may grant options to eligible
employees, directors, and consultants at prices not less than the fair market
value at the date of grant for incentive stock options and not less than 85% of
the fair market value at the date of grant for nonqualified stock options.
Options granted under the 1994 Plan generally vest over four years, and expire
10 years from the date of grant.
1997 STOCK OPTION PLAN
Under the Company's 1997 Stock Option Plan ("1997 Plan"), there are 150,000
shares of common stock reserved for which the Company may grant options to
eligible employees, outside directors, and consultants at prices not less than
the fair market value at the date of grant for incentive stock options and not
less than 85% of the fair market value at the date of grant for nonqualified
stock options. Options granted under the 1997 Plan generally vest over four
years, and expire 10 years from the date of grant.
Outstanding options under both plans are summarized as follows:
<TABLE>
<CAPTION>
---------------------------------------------
<S> <C> <C> <C> <C>
WEIGHTED WEIGHTED
AVERAGE AVERAGE
EXERCISE OPTIONS EXERCISE
OPTIONS PRICE EXERCISABLE PRICE
--------- ---------- ---------- ----------
Outstanding, April 1, 1995 and March 30, 1996.......... 93,464 $19.50
Granted (weighted average fair value of $8.34)......... 14,666 29.38
Forfeited.............................................. (8,402) 26.74
--------- ----------
Outstanding, March 29, 1997............................ 99,728 20.34 24,925 $19.50
Granted (weighted average fair value of $8.59)......... 45,843 35.99
Forfeited.............................................. (2,830) 40.62
---------
Outstanding, March 28, 1998............................ 142,741 $24.97 94,451 $20.44
---------
---------
</TABLE>
At March 28, 1998, there were 117,259 shares available for future grant under
both plans. Subsequent to March 28, 1998, the Company granted approximately
3,700 options to purchase the Company's common stock at $45-$47 per share and
approximately 11,500 shares to purchase the Company's common stock at $80 per
share. In addition, subsequent to March 28, 1998, the Company's principal
shareholder sold approximately 8,900 shares of common stock at $80 per share to
certain members of the Company's Board of Directors.
In May 1998, the Company's President and Chief Executive Officer exercised an
option to purchase 4,000 shares of Common Stock at an exercise price of $19.50
per share. The exercise price was paid by a $78,000 promissory note, with
interest at 8.5%, due on May 15, 2001.
F-16
<PAGE>
VALLEY MEDIA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. EMPLOYEE BENEFIT PLANS (CONTINUED)
The following table summarizes information about both plans at March 28, 1998:
<TABLE>
<CAPTION>
- ---------------------------------------------------------
WEIGHTED WEIGHTED
RANGE OF AVERAGE AVERAGE
EXERCISE OPTIONS EXERCISE OPTIONS EXERCISE
PRICES OUTSTANDING PRICE EXERCISABLE PRICE
- --------- --------- ----------- --------- -----------
<S> <C> <C> <C> <C>
$19.50 91,631 $19.50 88,881 $19.50
30.00 7,333 30.00 30.00
35.00 41,293 35.00 5,293 35.00
45.00 2,484 45.00 277 45.00
--------- ---------
142,741 $24.97 94,451 $20.44
--------- ---------
--------- ---------
</TABLE>
ADDITIONAL STOCK PLAN INFORMATION
SFAS No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION, requires the disclosure
of pro forma net income as if the Company had adopted the fair value method as
of the beginning of fiscal 1996. Under SFAS No. 123, the fair value of
stock-based awards to employees is calculated through the use of option pricing
models, even though such models were developed to estimate the fair value of
freely tradable, fully transferable options without vesting restrictions, which
significantly differ from the Company's stock option awards. These models also
require subjective assumptions, including future stock price volatility and
expected time to exercise, which greatly affect the calculated values. The
Company's calculations were made using the minimum value option pricing model
with the following weighted average assumptions: expected life, five years
following grant date; risk free interest rates, 5.6%-7.0%; and no dividends
during the expected term. The Company's calculations are based on a multiple
option valuation approach and forfeitures are recognized as they occur. If the
computed fair values of the fiscal 1997 and fiscal 1998 awards had been
amortized to expense over the vesting period of the awards, pro forma net income
would have been $610,000 in fiscal 1997 and $2,979,000 in fiscal 1998. As no
awards were granted in fiscal 1996, pro forma net income does not differ from
the reported amounts. However, the impact of outstanding nonvested stock options
granted prior to fiscal 1996 has been excluded from the pro forma calculation;
accordingly, the fiscal 1997 and fiscal 1998 pro forma adjustment is not
indicative of future period pro forma adjustments, when the calculation will
apply to all applicable stock options.
EMPLOYEE RETIREMENT PLAN
In April 1995, the Company adopted an employee retirement plan intended to be
qualified under Section 401(k) of the Internal Revenue Code. Participation in
the plan is available to substantially all employees. Generally, employees may
contribute up to 17% of their annual compensation to the plan on a pre-tax
basis. Under the plan, the Company makes matching contributions of 50% up to a
maximum of 4% of each participating employee's annual compensation. The
Company's contributions to the plan totaled $115,000, $164,000 and $282,000 in
fiscal 1996, fiscal 1997 and fiscal 1998, respectively.
F-17
<PAGE>
VALLEY MEDIA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. NET INCOME (LOSS) PER SHARE
A reconciliation of basic to diluted weighted average shares used in the
calculation of net income (loss) per share is as follows:
<TABLE>
<CAPTION>
---------------------------------------------------------
FISCAL YEARS ENDED SIX MONTHS ENDED
------------------------------- ------------------------
MARCH 30, MARCH 29, MARCH 28, SEPT. 27, SEPT. 26,
1996 1997 1998 1997 1998
--------- --------- --------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Weighted average shares used in the
calculation-basic....................... 617,584 596,666 596,003 595,132 601,052
Effect of dilutive stock options......... 34,871 44,231 60,213 53,835 91,571
--------- --------- --------- ----------- -----------
Weighted average shares used in the
calculation-diluted..................... 652,455 640,897 656,216 648,967 692,623
--------- --------- --------- ----------- -----------
--------- --------- --------- ----------- -----------
</TABLE>
13. INTERIM INFORMATION (UNAUDITED)
On November 30, 1998, the Company entered into an amendment to the Credit
Facility to increase the borrowings provided to the lesser of $200,000,000 or
the amount of collateral availability.
During November 1998, the Company and Star Video settled the arbitration
proceeding relating to the acquisition of Star Video. The settlement resulted in
the reduction of goodwill of approximately $2,000,000, representing
approximately $1,500,000 of accounts payable and $500,000 of notes payable no
longer due to the previous owners of Star Video.
In June 1998, the Company expensed approximately $587,000 of deferred offering
costs.
In November and December 1998 the Company granted 8,325 options to purchase the
Company's Common Stock at $80 per share.
F-18
<PAGE>
INDEPENDENT AUDITORS' REPORT
Valley Media, Inc.:
We have audited the accompanying statements of operations and changes in net
assets acquired and of cash flows of Star Video Entertainment, L.P. ("Star
Video") for the years ended December 31, 1995 and 1996 and for the period from
January 1, 1997 to May 20, 1997. These financial statements are the
responsibility of the management of Valley Media, Inc...........................
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 Star Video for the years
ended December 31, 1995 and 1996 and for the period from January 1, 1997 to May
20, 1997 in conformity with generally accepted accounting principles.
/s/ Deloitte & Touche LLP
San Francisco, California
July 22, 1998
F-19
<PAGE>
STAR VIDEO
STATEMENTS OF OPERATIONS AND CHANGES IN NET ASSETS ACQUIRED
<TABLE>
<CAPTION>
-----------------------------------
PERIOD FROM
YEAR ENDED DECEMBER JANUARY 1,
31, 1997
-------------------- TO MAY 20,
DOLLARS IN THOUSANDS 1995 1996 1997
--------- --------- -------------
<S> <C> <C> <C>
Net sales................................................ $ 253,083 $ 301,122 $102,115
Cost of goods sold....................................... 227,520 272,870 93,006
--------- --------- -------------
Gross profit............................................. 25,563 28,252 9,109
Selling, general and administrative expenses............. 17,229 16,280 10,325
--------- --------- -------------
Operating income (loss).................................. 8,334 11,972 (1,216)
Interest expense......................................... 505 603 270
--------- --------- -------------
Net income (loss)........................................ 7,829 11,369 (1,486)
Net assets acquired, beginning of period................. 14,893 19,609 26,129
Distributions to partners................................ (3,113) (4,849) (1,803)
--------- --------- -------------
Net assets acquired, end of period....................... $ 19,609 $ 26,129 $ 22,840
--------- --------- -------------
--------- --------- -------------
</TABLE>
See notes to financial statements.
F-20
<PAGE>
STAR VIDEO
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
-----------------------------------
PERIOD FROM
YEAR ENDED JANUARY 1,
DECEMBER 31, 1997
-------------------- TO MAY 20,
DOLLARS IN THOUSANDS 1995 1996 1997
--------- --------- -------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss)....................................... $ 7,829 $ 11,369 $(1,486)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization........................... 573 641 275
Bad debt expense........................................ 169 308 924
Changes in assets and liabilities:
Accounts receivables.................................. (25,841) (12,958) 28,931
Inventories........................................... (1,333) (1,957) (542)
Prepaid expenses and other............................ (440) 645 (5)
Accounts payable...................................... 6,896 9,440 (37,333)
Accrued expenses...................................... 156 382 (227)
--------- --------- -------------
Net cash provided by (used in) operating
activities......................................... (11,991) 7,870 (9,463)
--------- --------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment..................... (698) (862) (282)
--------- --------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net short-term borrowings (repayments).................. 3,791 (1,895) 15,243
Repayment of long-term debt............................. (144) (54)
Other................................................... (14) (138) (99)
Distributions to partners............................... (3,113) (4,849) (1,803)
--------- --------- -------------
Net cash provided by (used in) financing
activities......................................... 520 (6,936) 13,341
--------- --------- -------------
NET INCREASE (DECREASE) IN CASH........................... (12,169) 72 3,596
CASH, Beginning of period................................. 12,198 29 101
--------- --------- -------------
CASH, End of period....................................... $ 29 $ 101 $ 3,697
--------- --------- -------------
--------- --------- -------------
</TABLE>
See notes to financial statements.
F-21
<PAGE>
STAR VIDEO
NOTES TO FINANCIAL STATEMENTS
1. DESCRIPTION OF BUSINESS AND SALE OF BUSINESS TO VALLEY MEDIA, INC.
Star Video Entertainment, L.P. (the "Partnership") was engaged primarily in the
distribution of pre-recorded videocassettes, games and accessories and also
provided rental ready services as well as racking services for certain
customers. Distribution facilities were in New Jersey, Pennsylvania,
Massachusetts, New York and Indiana and products were sold primarily to retail
stores throughout the United States. The Partnership purchased approximately 30%
of video products from a single vendor.
On May 20, 1997, Valley Media, Inc. acquired substantially all of the
Partnership's assets and assumed certain Partnership liabilities. The total
purchase price was $37,872,000. The purchase price is subject to adjustment in
the future depending upon the ultimate resolution of an arbitration proceeding
between Valley Media, Inc. and the Partnership.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The accompanying financial statements present the results of operations and cash
flows of the net assets acquired by Valley Media, Inc. from the Partnership on
May 20, 1997. Such net assets acquired represent substantially all of the
business operations of the Partnership during the periods presented and are
referred to as "Star Video" in the accompanying financial statements and notes.
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 disclosures of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Significant estimates include allowances for doubtful accounts and vendor
receivables. Actual results could differ from those estimates.
REVENUE RECOGNITION
Sales are recognized upon shipment of pre-recorded videocassettes and other
related products net of returns and allowances. Net sales also include fees for
services.
CONCENTRATION OF CREDIT RISK
Star Video is subject to credit risk through sales and related trade accounts
receivable to retailers. Star Video routinely assesses the financial strength of
significant customers and this assessment, combined with the large number and
geographic diversity of its customers, limits Star Video's concentration of
credit risk with respect to trade accounts receivable.
INCOME TAXES
No provision for income taxes has been recorded within Star Video's financial
statements since they were includable in the income tax returns of the partners
of the Partnership.
3. SHORT-TERM BORROWINGS
On December 26, 1991, Star Video entered into a revolving line of credit
agreement ("Agreement") with BTM Capital Corporation ("BTM") that provided for
borrowings up to the lesser of $30,000,000 or 75% of eligible accounts
receivable and 50% of eligible inventory. The line of credit bore interest at
prime plus 1% (9.5% at May 20, 1997). The Agreement provided for a commitment
fee of 0.38% on the unused portion of the line. Borrowings were secured by all
eligible accounts receivable, inventory, equipment and other tangible property
of Star Video. The Agreement was due to expire June 1, 1998.
F-22
<PAGE>
STAR VIDEO
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
3. SHORT-TERM BORROWINGS (CONTINUED)
Letters of credit of $200,000 and $7,940,000 were outstanding as of December 31,
1995 and 1996, respectively, which were issued to various vendors by BTM.
The Agreement contained various financial covenants, including among other
things, compliance with debt ratios, capital expenditure limits, net worth
limits and restrictions on the payment of amounts to the partners. As of
December 31, 1995 and 1996, Star Video was not in compliance with one of the
financial covenants of the Agreement. On March 7, 1996 and March 14, 1997, the
Company subsequently obtained from BTM a waiver of the respective defaults as of
December 31, 1995 and 1996, respectively.
On May 20, 1997, concurrent with the acquisition of the net assets of Star Video
by Valley Media, Inc., the outstanding loan balance of $14,529,000 and other
short-term borrowings of $2,610,000 were paid by Valley Media, Inc. Upon payment
of the outstanding balance, the Agreement was terminated.
4. COMMITMENTS AND CONTINGENCIES
OPERATING LEASES
Star Video leases office and warehouse facilities and equipment under
noncancelable operating leases. During 1995, 1996 and the period from January 1,
1997 to May 20, 1997, total rent expense under operating leases was
approximately $950,000, $1,023,000 and $439,000, respectively.
Star Video leases its executive offices and warehouse in New Jersey from an
affiliate of the Partnership under the terms of the lease expiring in 2000 and
requiring minimum annual rentals of $224,000. Star Video has deposited $90,000
with the affiliate as rent security and Star Video is paid interest at the rate
of 8% per annum.
Future minimum payments under noncancelable operating leases with terms of one
year or more consisted of the following at May 20, 1997:
<TABLE>
<S> <C>
DOLLARS IN THOUSANDS
For the period ending December 31
1997.............................................................. $ 630
1998.............................................................. 726
1999.............................................................. 484
2000.............................................................. 279
---------
Total lease payments................................................ $ 2,119
---------
---------
</TABLE>
F-23
<PAGE>
UNAUDITED PRO FORMA FINANCIAL INFORMATION OF VALLEY MEDIA, INC.
The unaudited pro forma consolidated statement of income of Valley Media, Inc.
for the fiscal year ended March 28, 1998 gives effect to the May 20, 1997
acquisition of the net assets of Star Video Entertainment, L.P. ("Star Video"),
for approximately $37,900,000, as if it had occurred as of March 30, 1997, the
beginning of Valley Media, Inc.'s 1998 fiscal year.
Unaudited pro forma adjustments are based upon historical information,
preliminary estimates and certain assumptions that Valley Media, Inc. deems
appropriate. The unaudited pro forma financial information presented herein is
not necessarily indicative of the results of Valley Media, Inc. that would have
been obtained had such acquisition of the net assets of Star Video occurred at
the beginning of the fiscal year, or of the future results of Valley Media, Inc.
The pro forma consolidated statement of income should be read in conjunction
with the consolidated financial statements of Valley Media, Inc. and Star Video
appearing elsewhere in this Prospectus.
F-24
<PAGE>
VALLEY MEDIA, INC.
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FISCAL YEAR ENDED MARCH 28, 1998(1)
<TABLE>
<CAPTION>
------------------------------------------------------
<S> <C> <C> <C> <C>
VALLEY MEDIA, STAR VIDEO
INC. APRIL 1, PRO FORMA
FISCAL YEAR 1997- FISCAL YEAR
DOLLARS IN THOUSANDS, EXCEPT PER SHARE ENDED MARCH MAY 20, PRO FORMA ENDED MARCH
DATA 28, 1998 1997(2A) ADJUSTMENTS 28, 1998
------------- ----------- ------------- -----------
Net sales............................... $583,492 $ 32,542 $ $ 616,034
Cost of goods sold...................... 516,627 29,081 545,708
------------- ----------- ----- -----------
Gross profit............................ 66,865 3,461 70,326
Selling, general and administrative
expenses............................... 55,183 3,590 193 (2b) 58,966
------------- ----------- ----- -----------
Operating income........................ 11,682 (129) (193) 11,360
Interest expense........................ 6,627 86 280 (2c) 6,993
------------- ----------- ----- -----------
Income (loss) before income taxes....... 5,055 (215) (473) 4,367
Income taxes............................ 2,034 (275)(2d) 1,759
------------- ----------- ----- -----------
Net income (loss)....................... $ 3,021 $ (215) $ (198) $ 2,608
------------- ----------- ----- -----------
------------- ----------- ----- -----------
Net income per share:
Basic................................. $ 5.07 $ 4.38
------------- -----------
------------- -----------
Diluted............................... $ 4.60 $ 3.97
------------- -----------
------------- -----------
Weighted average number of shares
outstanding:
Basic................................. 596,003 596,003
------------- -----------
------------- -----------
Diluted............................... 656,216 656,216
------------- -----------
------------- -----------
</TABLE>
See accompanying notes to unaudited pro forma consolidated statement of
operations.
F-25
<PAGE>
VALLEY MEDIA, INC.
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED
STATEMENT OF OPERATIONS
1. BASIS OF PRESENTATION
The accompanying unaudited pro forma consolidated statement of operations
presents the results of operations of Valley Media, Inc. for the fiscal year
ended March 28, 1998 as if the acquisition of the net assets of Star Video
Entertainment, L.P. ("Star Video") had occurred as of March 30, 1997 the
beginning of Valley Media, Inc.'s 1998 fiscal year.
2. PRO FORMA ADJUSTMENTS TO UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF
OPERATIONS
(a) To reflect the inclusion of the operating results of Star Video for the
period from March 30, 1997 (April 1, 1997 for accounting purposes) to May
20, 1997.
(b) To reflect the amortization of goodwill, assuming a 15 year amortization
period.
(c) To reflect additional interest expense, assuming an interest rate of 9%, as
a result of additional borrowings under the Company's revolving line of
credit agreement utilized to fund the acquisition of Star Video.
(d) To reflect the income tax effect of the adjustments noted above.
F-26
<PAGE>
[Valley Logo]
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the costs and expenses payable by the Registrant
in connection with the sale of the Common Stock being registered hereby, other
than underwriting commissions and discounts. All amounts, except the SEC
registration fee, the NASD Filing Fee and the Nasdaq National Market listing
fee, are estimates.
<TABLE>
<CAPTION>
---------
ITEM AMOUNT
- ------------------------------------------------------------------- ---------
<S> <C>
SEC registration fee............................................... $ 12,788
NASD filing fee.................................................... 5,100
Nasdaq National Market listing fee................................. 1,000
Blue Sky fees and expenses......................................... +
Printing and engraving expenses.................................... +
Legal fees and expenses............................................ +
Accounting fees and expenses....................................... +
Transfer Agent and Registrar fees.................................. +
Miscellaneous expenses............................................. +
---------
Total.......................................................... $ +
---------
---------
</TABLE>
- ------------------------
+ To be filed by amendment.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
As permitted by Delaware law, the Company's Certificate of Incorporation
provides that no director of the Company will 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 duty of loyalty to the
Company or to its stockholders, (ii) for acts or omissions not in good faith or
that involve intentional misconduct or a knowing violation of law, (iii) under
Section 174 of the Delaware General Corporation Law, or (iv) for any transaction
from which the director derived an improper personal benefit.
The Company's Amended and Restated Certificate of Incorporation further provides
that the Company must indemnify its directors and executive officers and may
indemnify its other officers and employees and agents to the fullest extent
permitted by Delaware law. The Company believes that indemnification under its
Amended and Restated Certificate of Incorporation covers negligence and gross
negligence on the part of indemnified parties. The Company's Certificate of
Incorporation also permits the Company to secure insurance on behalf of any
officer, director, employee or other agent for any liability arising out of his
or her actions in such capacity, regardless of whether Delaware law would permit
indemnification.
The Company has entered into indemnification agreements with each of its
directors and officers. These agreements, among other things, require the
Company to indemnify such directors and officers for certain expenses (including
attorneys' fees), judgments, fines and settlement amounts incurred by any such
person in any action or proceeding, including any action by or in the right of
the Company, arising out of such person's services as a director or officer of
the Company, any subsidiary of the Company or any other company or enterprise to
which the person provides services at the request of the Company.
The Underwriting Agreement (Exhibit 1.1) provides for indemnification by the
Underwriters of the Company, its directors, its officers who sign the
Registration Statement, and the Company's controlling persons for certain
liabilities, including liabilities arising under the Securities Act, and affords
certain rights of contribution with respect thereto.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
Since December 1, 1995, the Registrant has issued and sold the following
unregistered securities:
II-1
<PAGE>
(1) In December 1997, the Company issued 7,230 shares of its Common Stock to
Stereophile, Inc. ("Stereophile"), 90% of the outstanding shares of which are
owned by Lawrence Archibald, a member of the Company's Board of Directors. The
shares were issued by the Company in connection with the merger of Schwann
Acquisition Corp. ("SAC") into the Company. Prior to the merger, the Company
owned 80% of the outstanding shares of SAC, while Stereophile owned the
remaining 20%. See "Certain Transactions." The sale and issuance of securities
in this transaction was deemed exempt from registration under the Securities Act
by virtue of Section 4(2).
(2) Since December 1, 1995, the Company has granted options to purchase
62,289 shares of Common Stock to a total of 60 employees, directors and
consultants at a weighted average exercise price of $46.24 per share pursuant to
the 1994 Plan and the 1997 Plan. These issuances of securities were deemed
exempt from registration under the Securities Act by virtue of Rule 701
promulgated thereunder.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Exhibits
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------
EXHIBITS
NUMBER DESCRIPTION OF DOCUMENT
- ----------- --------------------------------------------------------------------------------
<S> <C>
1.1+ Form of Underwriting Agreement.
3.1 Amended and Restated Certificate of Incorporation of the Company.
3.2 Amended and Restated Bylaws of the Company.
4.1+ Form of the Company's Common Stock Certificate.
4.2 Contribution and Shareholders Agreement, dated December 16, 1996, between the
Company and Stereophile, Inc.
4.3 Stockholder Agreement, dated January 15, 1995, between the Company and Robert R.
Cain.
4.4 Reference is made to Exhibits 3.1 and 3.2.
5.1+ Opinion of Howard, Rice, Nemerovski, Canady, Falk & Rabkin, A Professional
Corporation, as to the validity of the issuance of the securities registered
hereby.
10.1 Loan and Security Agreement, dated May 21, 1998, between the Company, Congress
Financial Corporation (Northwest) and the institutions named therein.
10.2 Asset Purchase Agreement, dated May 20, 1997, between the Company and Star Video
Entertainment, L.P.
10.3 Standard Industrial Lease - Net, dated October 6, 1988, between the Company and
Betty Kuhn.
10.4 Build-to-Suit Facility - Absolute Net Lease, dated October 3, 1989, between the
Company and Betty Kuhn.
10.5 Industrial Real Estate Lease, dated May 21, 1992, between the Company and
Panattoni Development Company.
10.6 Build to Suit Lease Agreement, dated October 1, 1997, between the Company and
Pizzuti Equities Inc.
10.7 Form of Indemnification Agreement between the Company and each of its officers
and directors.
10.8 1994 Stock Option Plan and form of Option Agreement under Plan.
10.8.1 Amendment No. 1 to 1994 Stock Option Plan.
10.9 1997 Stock Option Plan and form of Option Agreement under Plan.
10.9.1 Amendment No. 1 to 1997 Stock Option Plan.
10.10+ Employee Stock Ownership Plan.
10.11 Form of Severance and Change in Control Agreement between the Company and its
executive officers.
10.12 Management Incentive Plan - Plan Summary.
11.1+ Computation of Net Income Per Share.
23.1+ Consent of Howard, Rice, Nemerovski, Canady, Falk & Rabkin, A Professional
Corporation (included in Exhibit 5.1).
</TABLE>
II-2
<PAGE>
<TABLE>
<S> <C>
23.2 Independent Auditors' Consent and Report.
23.3 Independent Auditors' Consent.
24.1 Power of Attorney.
27.1 Financial Data Schedule.
</TABLE>
- ------------------------
+ To be filed by amendment.
(b) Financial Statement Schedules
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------
<S> <C>
SCHEDULE DESCRIPTION
- ----------- -------------------------------------------------------------------------------
II Valuation and Qualifying Accounts
</TABLE>
All other schedules are omitted because they are inapplicable or the requested
information is shown in the consolidated financial statements of the Registrant
or related notes thereto.
ITEM 17. UNDERTAKINGS.
The Company hereby undertakes to provide to the underwriters at the closing
specified in the underwriting agreements certificates in such denominations and
registered in such names as required by the underwriters to permit prompt
delivery to each purchaser.
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.
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act
of 1933, 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 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.
(2) For the purpose of determining any liability under the Securities
Act of 1933, 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 the offerings of such securities at that
time shall be deemed to be the initial BONA FIDE offerings thereof.
II-3
<PAGE>
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 Woodland, State of
California, on the 21st day of December, 1998.
VALLEY MEDIA, INC.
By: /s/ ROBERT R. CAIN
-----------------------------------------
Robert R. Cain
President and Chief Executive Officer
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Robert R. Cain and J. Randolph Cerf, and each of
them, as his or her true and lawful attorneys-in-fact and agents, with full
power of substitution for him or her in any and all capacities, to sign any and
all amendments (including post-effective amendments) to this Registration
Statement, and to file the same, with all exhibits thereto, and other documents
in connection therewith, as fully to an intents and purposes as he or she might
or could do in person, hereby ratifying and confirming all that said
attorneys-in-fact and agents, or any of them, or their or his substitute or
substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, as amended, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
SIGNATURE TITLE DATE
- ------------------------------ --------------------------- -------------------
/s/ BARNET J. COHEN
- ------------------------------ Chairman of the Board December 21, 1998
Barnet J. Cohen
President, Chief Executive
/s/ ROBERT R. CAIN Officer and Director
- ------------------------------ (Principal Executive December 21, 1998
Robert R. Cain Officer)
/s/ J. RANDOLPH CERF Chief Financial Officer
- ------------------------------ (Principal Financial and December 21, 1998
J. Randolph Cerf Accounting Officer)
/s/ LAWRENCE ARCHIBALD
- ------------------------------ Director December 21, 1998
Lawrence Archibald
/s/ CHRISTOPHER MOTTERN
- ------------------------------ Director December 21, 1998
Christopher Mottern
/s/ WENDY PASKIN-JORDAN
- ------------------------------ Director December 21, 1998
Wendy Paskin-Jordan
/s/ JAMES SHA
- ------------------------------ Director December 21, 1998
James Sha
II-4
<PAGE>
SCHEDULE II
VALLEY MEDIA, INC.
VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
----------------------------------------------------------
COLUMN B COLUMN C COLUMN E
---------- --------------------- ----------
BALANCE AT CHARGED COLUMN D BALANCE AT
BEGINNING CHARGED TO TO OTHER ----------- END OF
COLUMN A OF PERIOD EXPENSE ACCOUNTS DEDUCTIONS PERIOD
- ------------------------------ ---------- ---------- --------- ----------- ----------
<S> <C> <C> <C> <C> <C>
Fiscal year ended March 30, 1996:
Inventory reserves.......... $ - $ 428,414 $ - $ (378,014) $ 50,400
Allowance for doubtful
accounts receivable........ 312,800 108,342 - (100,642) 320,500
Customer returns reserve.... 248,433 1,567,061 - (1,529,757) 285,737
Vendor receivables
reserve.................... 18,727 306,988 325,715
---------- ---------- --------- ----------- ----------
Total......................... $ 579,960 $2,410,805 $ - $(2,008,413) $ 982,352
---------- ---------- --------- ----------- ----------
---------- ---------- --------- ----------- ----------
Fiscal year ended March 29, 1997:
Inventory reserves.......... $ 50,400 $ 788,140 $ 451,297 $ (897,913) $ 391,924
Allowance for doubtful
accounts receivable........ 320,500 408,012 194,550 (97,914) 825,148
Customer returns reserve.... 285,737 2,795,640 1,075,822 (2,548,576) 1,608,623
Vendor receivables
reserve.................... 325,715 77,191 44,564 (208,983) 238,487
---------- ---------- --------- ----------- ----------
Total......................... $ 982,352 $4,068,983 $1,766,233 $(3,753,386) $3,064,182
---------- ---------- --------- ----------- ----------
---------- ---------- --------- ----------- ----------
Fiscal year ended March 28, 1998:
Inventory reserves.......... $ 391,924 $1,273,409 $ 229,680 $ (308,177) $1,586,836
Allowance for doubtful
accounts receivable........ 825,148 6,077,164 1,833,357 (3,459,488) 5,276,181
Customer returns reserve.... 1,608,623 10,148,343 1,436,200 (9,471,891) 3,721,275
Vendor receivables
reserve.................... 238,487 - 1,695,326 (1,288,465) 645,348
---------- ---------- --------- ----------- ----------
Total......................... $3,064,182 $17,498,916 $5,194,563 $(14,528,021) $11,229,640
---------- ---------- --------- ----------- ----------
---------- ---------- --------- ----------- ----------
</TABLE>
S-1
<PAGE>
AMENDED AND RESTATED CERTIFICATE OF INCORPORATION
OF
VALLEY MEDIA, INC.
Valley Media. Inc., a corporation organized and existing under the laws of
the State of Delaware (the "Corporation"), hereby certifies as follows:
1. The original Certificate of Incorporation (the "Original Certificate")
of the Corporation was filed with the Secretary of State of the State of
Delaware on December 5, 1997 under the name, Valleytemp, Inc.
2. Pursuant to Sections 242 and 245 of the Delaware General Corporation
Law, this Amended and Restated Certificate of Incorporation restates, integrates
and further amends the provisions of the Original Certificate.
3. The terms and provisions of this Amended and Restated Certificate of
Incorporation have been duly adopted pursuant to the provisions of Sections 242
and 245 of the Delaware General Corporation Law.
4. The text of the Original Certificate is hereby restated and further
amended to read in its entirety as follows:
FIRST. The name of the corporation is Valley Media, Inc.
SECOND. The address of the corporation's registered office in the State of
Delaware is 15 East North Street, Dover, County of Kent. The name of its
registered agent at that address is Incorporating Services, Ltd.
THIRD. The purpose of the Corporation is to engage in any lawful act or
activity for which corporations may be organized under the General Corporation
Law of Delaware.
FOURTH.
(A) The corporation is authorized to issue two classes of stock,
preferred stock and common stock. The authorized number of shares of capital
stock is 22,000,000 shares, of which the authorized number of shares of
preferred stock is 2,000,000 and the authorized number of shares of common stock
is 20,000,000. The stock, whether preferred stock or common stock, shall have a
par value of one-tenth of one cent ($0.001) per share.
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<PAGE>
(B) Shares of preferred stock may be issued from time to time in one
or more series. Subject to the restrictions prescribed by law, the Board of
Directors of the corporation is hereby authorized to fix or alter the voting
rights, powers, preferences and privileges, and the relative, participating,
optional or other rights, if any, and the qualifications, limitations or
restrictions thereof, of any wholly unissued series of preferred stock; and to
fix the number of shares constituting any such series and the designation
thereof; and to increase or decrease the number of shares of any series of
preferred stock (but not below the number of shares thereof then outstanding).
FIFTH. The name and address of the incorporator is:
Steven F. Lewis
c/o Howard, Rice, Nemerovski,
Canady, Falk & Rabkin
A Professional Corporation
Three Embarcadero Center, Suite 700
San Francisco, California 94111-4065
SIXTH. The Board of Directors of the corporation is expressly authorized
to make, alter or repeal bylaws of the corporation, but the stockholders may
make additional bylaws and may alter or repeal any bylaw whether adopted by them
or otherwise.
SEVENTH. Elections of directors need not be by written ballot except and
to the extent provided in the bylaws of the corporation.
The directors shall be divided into three classes (I, II, III). The number
of directors comprising each class (assuming no vacancy in any class) shall be
as nearly equal in number as possible based upon the number of directors
comprising the entire Board of Directors. The Board shall, at or before the
first meeting of the Board of Directors following the time of filing of this
Amended and Restated Certificate of Incorporation with the Secretary of State of
the State of Delaware (the "Effective Time"), designate the class to which each
director then serving shall be a member. The initial terms of the directors in
Class I shall extend until the first annual meeting of stockholders following
the Effective Time; the initial term of directors in Class II shall extend until
the second annual meeting of the stockholders following the Effective Time; and
the initial terms of the directors in Class III shall extend until the third
annual meeting of stockholders following the Effective Time. At each annual
meeting of stockholders, successors to directors of the class whose term expires
at such meeting will be elected to serve for three-year
-2-
<PAGE>
terms and until their successors are elected and qualified.
Subject to the rights of the holders of any class or series of Preferred
Stock then outstanding, newly created directorships resulting from any increase
in the number of directors or any vacancies in the Board of Directors resulting
from death, resignation, retirement, disqualification, removal from office or
any other cause may be filled by the Board of Directors (and not by the
stockholders unless there are no directors then in office), provided that a
quorum is then in office and present, or by a majority of the directors then in
office, if less than a quorum is then in office, or by the sole remaining
director. A director elected to fill a newly created directorship or other
vacancy 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 has been elected and qualified.
EIGHTH. 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 (i) for any breach of the director's
duty of loyalty to the corporation 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 General Corporation Law of
Delaware, or (iv) for any transaction from which the director derived an
improper personal benefit. Neither the amendment nor repeal of this Article
EIGHTH, nor the adoption of any provision of the Certificate of Incorporation or
bylaws or of any statute inconsistent with this Article EIGHTH, shall eliminate
or reduce the effect of this Article EIGHTH in respect of any acts or omissions
occurring, or any causes of action, suits or claims that, but for this Article
EIGHTH, would accrue or arise, prior to such amendment, repeal or adoption of an
inconsistent provision.
NINTH. The corporation reserves the right at any time and from time to
time to amend, alter, change or repeal any provision contained herein, and other
provisions authorized by the laws of the State of Delaware at the time in force
may be added or inserted, in the manner now or hereafter prescribed by law, and
all rights, preferences, and privileges of whatsoever nature conferred upon
stockholders, directors, or any other person whomsoever by or pursuant to the
Certificate of Incorporation in its present form or as hereafter amended are
granted, subject to the rights reserved in this Article NINTH.
TENTH. Subject to the rights, if any, of holders of any class or series of
Preferred Stock then outstanding, (i) stockholders are not permitted to call a
special meeting of stockholders or to require the Board of Directors or officers
of the Corporation to call such a special meeting, (ii) a special
-3-
<PAGE>
meeting of stockholders may only be called by a majority of the Board of
Directors or by the Chief Executive Officer, (iii) the business permitted to be
conducted at a special meeting of stockholders shall be limited to matters
properly brought before the meeting by or at the direction of the Board of
Directors, and (iv) any action required or permitted to be taken by the
stockholders must be taken at a duly called and convened annual meeting or
special meeting of stockholders and cannot be taken by consent in writing;
provided, however, that the provisions of the foregoing clause (iv) shall not
apply prior to the consummation of an initial underwritten public offering of
the Corporation's Common Stock that is registered with the Securities and
Exchange Commission under the Securities Act of 1933, as amended.
IN WITNESS WHEREOF, the Corporation has caused this Amended and Restated
Certificate of Incorporation to be duly executed this ____ day of December,
1998.
Valley Media, Inc.
----------------------------
-4-
<PAGE>
AMENDED AND RESTATED BYLAWS OF
VALLEY MEDIA, INC.
ARTICLE I
OFFICES
Section 1.01. REGISTERED OFFICE. The registered office of Valley
Media, Inc. (hereafter called the "Corporation") in the State of Delaware shall
be at 15 East North Street, Dover, County of Kent, and the name of the
registered agent at that address shall be Incorporating Services, Ltd.
Section 1.02. PRINCIPAL OFFICE. The principal office for the
transaction of the business of the Corporation shall be at 15 East North Street,
Dover, County of Kent. The Board of Directors (hereafter called the "Board") is
hereby granted full power and authority to change said principal office from one
location to another.
Section 1.03. OTHER OFFICES. The Corporation may also have an office
or offices at such other place or places, either within or without the State of
Delaware, as the Board may from time to time determine or as the business of the
Corporation may require.
ARTICLE II
MEETINGS OF STOCKHOLDERS
Section 2.01. ANNUAL MEETINGS. Annual meetings of the stockholders
of the Corporation for the purpose of electing directors and for the transaction
of such other proper business as may come before such meetings shall be held
each year within 13 months of the previous annual meeting or, if none, of the
date of incorporation, on a specific date and at a time designated by the Board.
Section 2.02. SPECIAL MEETINGS. Special meetings of the stockholders
for any purpose or purposes may be called by the Chairman of the Board, the
Chief Executive Officer, the Board or a committee of the Board which has been
duly designated by the Board and whose powers and authority, as provided in a
resolution of the Board or in these Bylaws, include the power to call such
meetings. Unless otherwise prescribed by statute, the Certificate of
Incorporation or these Bylaws, special meetings may not be called by any other
person or persons. No business may be transacted at any special meeting of
stockholders other than such business as may be designated in the notice calling
such meeting.
Section 2.03. PLACE OF MEETINGS. All meetings of the stockholders
shall be held at such places, within or without the State of Delaware, as may
from time to time be designated by the person or persons calling the respective
meeting and specified in the respective notices or waivers of notice thereof.
<PAGE>
Section 2.04. NOTICE OF MEETINGS. Except as otherwise required by
law, notice of each meeting of the stockholders, whether annual or special,
shall be given not less than ten (10) nor more than sixty (60) days before the
date of the meeting to each stockholder of record entitled to vote at such
meeting by delivering a typewritten or printed notice thereof to him personally,
or by depositing such notice in the United States mail, in a postage prepaid
envelope, directed to them at their post office address furnished by him to the
Secretary of the Corporation for such purpose or, if he shall not have furnished
to the Secretary their address for such purpose, then at their post office
address last known to the Secretary, or by transmitting a notice thereof to him
at such address by telegraph, cable, or wireless. Except as otherwise expressly
required by law, no publication of any notice of a meeting of the stockholders
shall be required. Every notice of a meeting of the stockholders shall state
the place, date and hour of the meeting, and, in the case of a special meeting,
shall also state the purpose or purposes for which the meeting is called.
Notice of any meeting of stockholders shall not be required to be given to any
stockholder who shall have waived such notice and such notice shall be deemed
waived by any stockholder who shall attend such meeting in person or by proxy,
except a stockholder who shall attend such meeting for the express purpose of
objecting, at the beginning of the meeting, to the transaction of any business
because the meeting is not lawfully called or convened. Except as otherwise
expressly required by law, notice of any adjourned meeting of the stockholders
need not be given if the time and place thereof are announced at the meeting at
which the adjournment is taken.
Section 2.05. ADVANCE NOTIFICATION OF DIRECTOR NOMINATION. Only
persons who are nominated in accordance with the following procedures shall be
eligible for election as directors. Nominations of persons for election to the
Board of Directors of the Corporation at the annual meeting may be made at such
meeting by or at the direction of the Board of Directors, by any committee
appointed by the Board of Directors or by any common stockholder of the
Corporation entitled to vote for the election of directors at the meeting who
complies with the notice procedures set forth in this Section 2.05. Such
nominations, other than those made by or at the direction of the Board of
Directors or by any committee appointed by the Board of Directors, shall be made
pursuant to timely notice in writing to the Secretary of the Corporation. To be
timely, a stockholder's notice must be delivered to or mailed and received at
the principal executive offices of the Corporation not later than the close of
business on the 60th day nor earlier than the close of business on the 90th day
prior to the first anniversary of the preceding year's annual meeting; provided,
however, that in the event that the date of the annual meeting is more than 30
days before or more than 60 days after such anniversary date, notice by the
stockholder to be timely must be so delivered not earlier than the close of
business on the 90th day prior to such annual meeting and not later than the
close of business on the later of the 60th day prior to such annual meeting or
the 10th day following the day on which public announcement of the date of such
meeting is first made by the Corporation. Such stockholder's notice to the
Secretary shall set forth (a) as to each person whom the stockholder proposes to
nominate for election or re-election as a director, (i) the name, age, business
address and residence address of the person, (ii) the principal occupation or
employment of the person, (iii) the class, series and number of shares of
capital stock of the Corporation which are beneficially owned by the person and
(iv) any other information relating to the person that is required to be
disclosed in solicitations for proxies for election of directors pursuant to the
Rules and Regulations of the Securities and Exchange Commission under Section 14
of the Securities Exchange Act of 1934, as amended; and (b) as to the
stockholder giving the notice (i) the name
2
<PAGE>
and record address of the stockholder, (ii) the class, series and number of
shares of capital stock of the Corporation which are beneficially owned by the
stockholder and (iii) a description of all arrangements or understandings
between the 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 the stockholder. Such notice shall be accompanied by the executed
consent of each nominee to serve as a director if so elected. The Corporation
may require any proposed nominee to furnish such other information as may
reasonably be required by the Corporation to determine the eligibility of such
proposed nominee to serve as a director of the Corporation. No person shall be
eligible for election as a director of the Corporation by the holders of Common
Stock of the Corporation unless nominated in accordance with the procedures set
forth herein. The officer of the Corporation presiding at an annual meeting
shall, if the facts warrant, determine 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 2.06. ADVANCE NOTIFICATION OF BUSINESS TO BE TRANSACTED AT
STOCKHOLDER MEETINGS. To be properly brought before the annual meeting of
stockholders, business must be either (a) specified in the notice of meeting (or
any supplement or amendment thereto) given by or at the direction of the Board
of Directors or any committee appointed by the Board of Directors, (b) otherwise
properly brought before the meeting by or at the direction of the Board of
Directors, or (c) otherwise properly brought before an annual meeting by a
stockholder. In addition to any other applicable requirements, for business to
be properly brought before any annual meeting of stockholders by a stockholder,
the stockholder must have given timely notice thereof in writing to the
Secretary of the Corporation. To be timely, a stockholder's notice must be
delivered to or mailed and received at the principal executive offices of the
Corporation not later than the close of business on the 60th day nor earlier
than the close of business on the 90th day prior to the first anniversary of the
preceding year's annual meeting; provided, however, that in the event that the
date of the annual meeting is more than 30 days before or more than 60 days
after such anniversary date, notice by the stockholder to be timely must be so
delivered not earlier than the close of business on the 90th day prior to such
annual meeting and not later than the close of business on the later of the 60th
day prior to such annual meeting or the 10th day following the day on which
public announcement of the date of such meeting is first made by the
Corporation. Such stockholder's notice to the Secretary shall set forth as to
each matter the stockholder proposes to bring before the meeting (i) a brief
description of the business desired to be brought before the meeting and the
reasons for conducting such business at the meeting, (ii) the name and record
address of the stockholder proposing such business, (iii) the class, series and
number of shares of capital stock of the Corporation which are beneficially
owned by the stockholder, and (iv) any material interest of the stockholder in
such business.
No business shall be conducted at the annual meeting of stockholders unless
it is properly brought before the meeting in accordance with the procedures set
forth in this Section 2.06, PROVIDED, HOWEVER, that nothing in this Section 2.06
shall be deemed to preclude discussion by any stockholder of any business
properly brought before the meeting in accordance with the procedures set forth
in this Section 2.06. The officer of the Corporation presiding at the meeting
shall, if the facts warrant, determine that business was not properly brought
before the meeting in accordance with the provisions of this Section 2.06 and,
if he should so determine, he shall so
3
<PAGE>
declare to the meeting and any such business not properly brought before the
meeting shall not be transacted.
Section 2.07. QUORUM. Except in the case of any meeting for the
election of directors summarily ordered as provided by law, the holders of
record of a majority in voting interest of the shares of stock of the
Corporation entitled to be voted thereat, present in person or by proxy, shall
constitute a quorum for the transaction of business at any meeting of the
stockholders of the Corporation or any adjournment thereof. Where a separate
vote by a class or classes is required, a majority of the outstanding shares of
such class or classes, present in person or represented by proxy, shall
constitute a quorum entitled to take action with respect to that vote on that
matter and the affirmative vote of the majority of the shares of such class or
classes present in person or represented by proxy at the meeting shall be the
act of such class. In the absence of a quorum at any meeting or any adjournment
thereof, a majority in voting interest of the stockholders present in person or
by proxy and entitled to vote thereat or, in the absence therefrom of all the
stockholders, any officer entitled to preside at, or to act as secretary of,
such meeting may adjourn such meeting from time to time. At any such adjourned
meeting at which a quorum is present any business may be transacted which might
have been transacted at the meeting as originally called. No business may be
transacted at a meeting in the absence of a quorum other than the adjournment of
such meeting, except that if a quorum is present at the commencement of a
meeting, business may be transacted until the meeting is adjourned even though
the withdrawal of stockholders results in less than a quorum.
Section 2.08. VOTING.
(a) Each stockholder shall, at each meeting of the stockholders,
be entitled to vote in person or by proxy each share or fractional share of the
stock of the Corporation having voting rights on the matter in question and
which shall have been held by him and registered in their name on the books of
the Corporation:
(i) on the date fixed pursuant to Section 6.05 of these
Bylaws as the record date for the determination of stockholders
entitled to notice of and to vote at such meeting, or
(ii) if no such record date shall have been so fixed, then
(a) at the close of business on the day next preceding the day on
which notice of the meeting shall be given or (b) if notice of the
meeting shall be waived, at the close of business on the day next
preceding the day on which the meeting shall be held.
(b) Shares of its own stock belonging to the Corporation or to
another corporation, if a majority of the shares entitled to vote in the
election of directors in such other corporation is held, directly or indirectly,
by the Corporation, shall neither be entitled to vote nor be counted for quorum
purposes. Nothing in this section shall be construed as limiting the right of
the Corporation to vote stock, including but not limited to its own stock, held
by it in a fiduciary capacity. Persons holding stock of the Corporation in a
fiduciary capacity shall be entitled to vote such stock. Persons whose stock is
pledged shall be entitled to vote, unless in the transfer by the pledgor on the
books of the Corporation he shall have expressly empowered the pledgee to vote
thereon, in which case only the pledgee, or their proxy, may represent such
stock
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and vote thereon. Stock having voting power standing of record in the names of
two or more persons, whether fiduciaries, members of a partnership, joint
tenants, tenants in common, tenants by the entirety or otherwise, or with
respect to which two or more persons have the same fiduciary relationship, shall
be voted in accordance with the provisions of the General Corporation Law of the
State of Delaware.
(c) Any such voting rights may be exercised by the stockholder
entitled thereto in person or by their proxy appointed by an instrument in
writing, subscribed by such stockholder or by their attorney thereunto
authorized and delivered to the secretary of the meeting; provided, however,
that no proxy shall be voted or acted upon after three years from its date
unless said proxy shall provide for a longer period. The attendance at any
meeting of a stockholder who may theretofore have given a proxy shall not have
the effect of revoking the same unless he shall in writing so notify the
secretary of the meeting prior to the voting of the proxy. At any meeting of
the stockholders all matters, except as otherwise provided in the Certificate of
Incorporation, in these Bylaws or by law, shall be decided by the vote of a
majority of the shares present in person or by proxy and entitled to vote
thereat and thereon, a quorum being present. The vote at any meeting of the
stockholders on any questions need not be by ballot, unless so directed by the
chairman of the meeting. On a vote by ballot each ballot shall be signed by the
stockholder voting, or by their proxy, if there be such proxy, and it shall
state the number of shares voted.
Section 2.09. LIST OF STOCKHOLDERS. The Secretary of the Corporation
shall prepare and make, at least ten (10) days before every meeting of
stockholders, a complete list of the stockholders entitled to vote at the
meeting, arranged 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
ten (10) days prior to the meeting, either at a place within the city where the
meeting is to be held, which place 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 time and place of the meeting
during the duration thereof, and may be inspected by any stockholder who is
present.
Section 2.10. JUDGES. If at any meeting of the stockholders a vote
by written ballot shall be taken on any question, the chairman of such meeting
may appoint a judge or judges to act with respect to such vote. Each judge so
appointed shall first subscribe an oath faithfully to execute the duties of a
judge at such meeting with strict impartiality and according to the best of
their ability. Such judges shall decide upon the qualification of the voters
and shall report the number of shares represented at the meeting and entitled to
vote on such questions, shall conduct and accept the votes, and, when the voting
is completed, shall ascertain and report the number of shares voted respectively
for and against the question. Reports of judges shall be in writing and
subscribed and delivered by them to the Secretary of the Corporation. The
judges need not be stockholders of the Corporation, and any officer of the
Corporation may be a judge on any question other than a vote for or against a
proposal in which he shall have a material interest.
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Section 2.11. ACTION BY WRITTEN CONSENT. Unless otherwise provided
in the Certificate of Incorporation, any action required or permitted to be
taken at any annual or special meeting of stockholders of the Corporation may be
taken without a meeting, without prior notice except as otherwise provided by
applicable law, and without a vote, if a consent in writing setting forth the
action so taken shall be signed by the holders of outstanding stock having not
less than the minimum number of votes that would be necessary to authorize or
take such action at a meeting at which all shares entitled to vote thereon were
present and voted and shall be delivered to the Corporation by delivery to its
registered office in the State of Delaware, its principal place of business, or
an officer or agent of the Corporation having custody of the book in which
proceedings of meetings of stockholders are recorded. Delivery made to the
Corporation's registered office shall be by hand or by certified or registered
mail, return receipt requested. Every written consent shall bear the date of
signature of each stockholder who signs the consent and no written consent shall
be effective to take the corporate action referred to therein unless, within 60
days of the earliest dated consent delivered in the manner required by this
Section to the Corporation, written consents signed by a sufficient number of
stockholders to take action are delivered to the Corporation by delivery as
aforesaid. Prompt notice of the taking of corporate action without a meeting by
less than unanimous consent shall be given to those stockholders who have not
consented in writing.
ARTICLE III
BOARD OF DIRECTORS
Section 3.01. GENERAL POWERS. The property, business and affairs of
the Corporation shall be managed by or under the direction of the Board.
Section 3.02. NUMBER; QUALIFICATIONS. The Board of Directors shall
consist of one or more members. The number of directors shall be as determined
from time to time by resolution of the Board of Directors. No decrease in the
authorized number of directors constituting the Board of Directors shall shorten
the term of any incumbent director. Directors need not be stockholders of the
Corporation.
Section 3.03. ELECTION OF DIRECTORS. The directors shall be elected
by the stockholders of the Corporation at each annual meeting of stockholders or
by written consent pursuant to Section 2.09 hereof, and at each election the
persons receiving the greatest number of votes, up to the number of directors
then to be elected, shall be the persons then elected. The election of
directors is subject to any provisions contained in the Certificate of
Incorporation relating thereto, including any provisions for cumulative voting.
Section 3.04. RESIGNATIONS. Any director of the Corporation may
resign at any time by giving written notice to the Board or to the Secretary of
the Corporation. Any such resignation shall take effect at the time specified
therein, or, if the time be not specified, it shall take effect immediately upon
its receipt; and unless otherwise specified therein, the acceptance of such
resignation shall not be necessary to make it effective.
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Section 3.05. REMOVAL. Any Director or the entire Board may be
removed without cause by the affirmative vote of a majority of the total voting
power of all outstanding shares then entitled to vote at an election of
directors, provided that (1) when cumulative voting is permitted, no director
may be removed (unless the entire Board is removed) when the votes cast against
removal, or not consenting in writing to such removal, would be sufficient to
elect such director if voted cumulatively at an election at which the same total
number of votes were cast (or, if such action is taken by written consent, all
shares entitled to vote were voted) and the entire number of directors
authorized at the time of the director's most recent election were then being
elected, and (2) when by the provisions of the Certificate of Incorporation the
holders of the shares of any class or series, voting as a class or series, are
entitled to elect one or more directors, any director so elected may be removed
only by the applicable vote of the holders of the shares of that class or
series. Any reduction of the authorized number of directors does not remove any
director prior to the expiration of such director's term of office.
Section 3.06. VACANCIES. Except as otherwise provided in the
Certificate of Incorporation, any vacancy in the Board, whether because of
death, resignation, disqualification, an increase in the number of directors, or
any other cause, may be filled by vote of the majority of the remaining
directors, although less than a quorum. The stockholders may elect a director
at any time to fill any vacancy not filled by the directors. If, after the
filling of any vacancy by the directors, the directors then in office who have
been elected by the stockholders shall constitute less then a majority of the
directors then in office, any holder or holders of an aggregate of 5% or more of
the total number of shares then entitled to vote at an election of directors may
call a special election of stockholders to be held to elect the entire Board.
Each director so chosen or elected to fill a vacancy shall hold office until
their successor shall have been elected and shall qualify or until he shall
resign or shall have been removed in the manner herein provided.
Section 3.07. PLACE OF MEETING, ETC. The Board may hold any of its
meetings at such place or places within or without the State of Delaware as the
Board may from time to time by resolution designate or as shall be designated by
the person or persons calling the meeting or in the notice or a waiver of notice
of any such meeting. Directors may participate in any regular or special
meeting of the Board by means of conference telephone or similar communications
equipment pursuant to which all persons participating in the meeting of the
Board can hear each other, and such participation shall constitute presence in
person at such meeting.
Section 3.08. FIRST MEETING. The Board shall meet as soon as
practicable after each annual election of directors and notice of such first
meeting shall not be required.
Section 3.09. REGULAR MEETINGS. Regular meetings of the Board shall
be held at least four times per year, at such times as the Board shall from time
to time by resolution determine. If any day fixed for a regular meeting shall
be a legal holiday at the place where the meeting is to be held, then the
meeting shall be held at the same hour and place on the next succeeding business
day not a legal holiday. Except as provided by law, notice of regular meetings
need not be given.
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Section 3.10. SPECIAL MEETINGS. Special meetings of the Board may be
called by the Chairman of the Board of Directors or the President and shall be
called by the President or Secretary on the written request of two directors.
Notice of all special meetings of the Board shall be given to each director at
their address as it appears on the records of the Corporation, as follows:
(a) by first-class mail, postage prepaid, deposited in the
United States mail in the city where the principal office of the Corporation is
located at least five (5) days before the date of such meeting; or
(b) by telegram, charges prepaid, such notice to be delivered to
the telegraph company in the city of the principal office of the Corporation at
least forty-eight (48) hours before the time of holding such meeting; or
(c) by personal delivery at least twenty-four (24) hours prior
to the time of holding such meeting.
Such notice may be waived by any director and any meeting shall be a
legal meeting without notice having been given if all the directors shall be
present thereat or if those not present shall, either before or after the
meeting, sign a written waiver of notice of, or a consent to, such meeting or
shall after the meeting sign the approval of the minutes thereof. All such
waivers, consents or approvals shall be filed with the corporate records or be
made a part of the minutes of the meeting.
Section 3.11. QUORUM AND MANNER OF ACTING. Except as otherwise
provided in the Certificate of Incorporation or these Bylaws or by law, the
presence of a majority of the total number of directors then in office shall be
required to constitute a quorum for the transaction of business at any meeting
of the Board. Except as otherwise provided in the Certificate of Incorporation
or these Bylaws or by law, all matters shall be decided at any such meeting, a
quorum being present, by the affirmative votes of a majority of the directors
present. In the absence of a quorum, a majority of directors present at any
meeting may adjourn the same from time to time until a quorum shall be present.
Notice of any adjourned meeting need not be given. The directors shall act only
as a Board, and the individual directors shall have no power as such.
Section 3.12. ACTION BY CONSENT. Any action required or permitted to
be taken at any meeting of the Board or of any committee thereof may be taken
without a meeting if a written consent thereto is signed by all members of the
Board or of such committee, as the case may be, and such written consent is
filed with the minutes of proceedings of the Board or committee.
Section 3.13. COMPENSATION. The directors shall receive only such
compensation for their services as directors as may be allowed by resolution of
the Board. The Board may also provide that the Corporation shall reimburse each
such director for any expense incurred by him on account of their attendance at
any meetings of the Board or Committees of the Board. Neither the payment of
such compensation nor the reimbursement of such expenses shall be construed to
preclude any director from serving the Corporation or its subsidiaries in any
other capacity and receiving compensation therefor.
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Section 3.14. EXECUTIVE COMMITTEE. There may be an Executive
Committee of two or more directors appointed by the Board, who may meet at
stated times, or in notice to all by any of their own number, during the
intervals between the meetings of the Board; they shall advise and aid the
officers of the Corporation in all matters concerning its interest and the
management of its business, and generally perform such duties and exercise such
powers as may be directed or delegated by the Board from time to time. The
Board of Directors may also designate, if it desires, other directors as
alternate members who may replace any absent or disqualified member of the
Executive Committee at any meeting thereof. To the full extent permitted by
law, the Board may delegate to such committee authority to exercise all the
powers of the Board while the Board is not in session. Vacancies in the
membership of the committee shall be filled by the Board at a regular meeting or
at a special meeting for that purpose. In the absence or disqualification of
any member of the Executive Committee and any alternate member in their place,
the member or members of the Executive Committee present at the meeting and not
disqualified from voting, whether or not he or she or they constitute a quorum,
may, by unanimous vote, appoint another member of the Board of Directors to act
at the meeting in the place of the absent or disqualified member. The Executive
Committee shall keep written minutes of its meeting and report the same to the
Board when required. The provisions of Sections 3.09, 3.10, 3.11 and 3.12 of
these Bylaws shall apply, MUTATIS MUTANDIS, to any Executive Committee of the
Board.
Section 3.15. OTHER COMMITTEES. The Board may, by resolution passed
by a majority of the whole Board, designate one or more other committees, each
such committee to consist of one or more of the directors of the Corporation.
The Board of Directors may also designate, if it desires, other directors as
alternate members who may replace any absent or disqualified member of any such
committee at any meeting thereof. To the full extent permitted by law, any such
committee shall have and may exercise such powers and authority as the Board may
designate in such resolution. Vacancies in the membership of a committee shall
be filled by the Board at a regular meeting or a special meeting for that
purpose. Any such committee shall keep written minutes of its meeting and
report the same to the Board when required. In the absence or disqualification
of any member of any such committee and any alternate member or members of any
such committee present at the meeting and not disqualified from voting, whether
or not he or she or they constitute a quorum, may, by unanimous vote, appoint
another member of the Board of Directors to act at the meeting in the place of
the absent or disqualified member. The provisions of Sections 3.09, 3.10, 3.11
and 3.12 of these Bylaws shall apply, MUTATIS MUTANDIS, to any such committee of
the Board.
ARTICLE IV
OFFICERS
Section 4.01. NUMBER. The officers of the corporation shall be a
Chairman of the Board or a President, or both, and a Secretary. The Board may
also elect one or more Vice Presidents and Assistant Secretaries. A person may
hold more than one office providing the duties thereof can be consistently
performed by the same person.
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Section 4.02. OTHER OFFICERS. The Board may appoint such other
officers as it shall deem necessary who shall hold their offices for such terms
and shall exercise such powers and perform such duties as shall be determined
from time to time by the Board.
Section 4.03. ELECTION. Each of the officers of the Corporation,
except such officers as may be appointed in accordance with the provisions of
Section 4.02 or Section 4.05 of this Article, shall be chosen annually by the
Board and shall hold their office until he or she shall resign or shall be
removed or otherwise disqualified to serve, or their successor shall be elected
and qualified.
Section 4.04. SALARIES. The salaries of all executive officers of
the Corporation shall be fixed by the Board or by such committee of the Board as
may be designated from time to time by a resolution adopted by a majority of the
Board.
Section 4.05. REMOVAL; VACANCIES. Subject to the express provisions
of a contract authorized by the Board, any officer may be removed, either with
or without cause, at any time by the Board or by any officer upon whom such
power of removal may be conferred by the Board. Any vacancy occurring in any
office of the Corporation shall be filled by the Board.
Section 4.06. THE CHAIRMAN OF THE BOARD. The Chairman of the Board
shall preside at all meetings of the stockholders and directors and shall have
such other powers and duties as may be prescribed by the Board or by applicable
law. The Chairman shall be an ex-officio member of standing committees, if so
provided in the resolutions of the Board appointing the members of such
committees.
Section 4.07. THE PRESIDENT. The President shall be the managing
officer of the Corporation. Subject to the control of the Board, the President
shall have general supervision, control and management of the affairs and
business of the Corporation, and general charge and supervision of all officers,
agents and employees of the Corporation; shall see that all orders and
resolutions of the Board are carried into effect; shall, in the absence of the
Chairman of the Board, preside at all meetings of the stockholders and Board;
and in general shall exercise all powers and perform all duties incident to
President and managing officer of the Corporation and such other powers and
duties as may from time to time be assigned to the President by the Board or as
may be prescribed in these Bylaws.
The President may execute bonds, mortgages and other contracts
requiring a seal, under the seal of the Corporation, except where required or
permitted by law to be otherwise signed and executed and except where the
signing and execution thereof shall be expressly delegated by the Board to some
other officer or agent of the Corporation.
The President shall be an ex-officio member of standing committees, if
so provided in the resolutions of the Board appointing the members of such
committees.
Section 4.08. THE VICE PRESIDENTS. In the absence of the President
or in the event or their inability or refusal to act, the Vice President (or in
the event there be more than one Vice President, the Vice Presidents in the
order designated, or in the absence of any designation, then in the order of
their election) shall perform the duties of the President, and when so acting,
shall have all the powers of and be subject to all the restrictions upon the
President. The Vice
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Presidents shall perform such other duties and have such other powers as the
Board may from time to time prescribe.
Section 4.09. THE SECRETARY. The Secretary shall attend all meetings
of the Board and all meetings of the stockholders and record all the proceedings
of the meetings of the Corporation and of the Board in a book to be kept for
that purpose and shall perform like duties for the standing and special
committees of the Board when required. The Secretary shall give, or cause to be
given, notice of all meetings of the stockholders and special meetings of the
Board, and shall perform such other duties as may be prescribed by the Board or
President, under whose supervision the Secretary shall act. The Secretary shall
have custody of the corporate seal of the Corporation and shall have authority
to affix the same to any instrument requiring it and, when so affixed, it may be
attested by the Secretary's signature. The Board may give general authority to
any other officer to affix the seal of the Corporation and to attest the
affixing by such officer's signature.
The assistant secretary, if there is one, shall, in the absence of the
Secretary or in the event of the Secretary's inability or refusal to act,
perform the duties and exercise the powers of the Secretary and shall perform
such other duties and have such other powers as the Board may from time to time
prescribe.
Section 4.10. THE TREASURER. The Treasurer shall have the custody of
the corporate funds and securities and shall keep full and accurate accounts of
receipts and disbursements in books belonging to the Corporation and shall
deposit all moneys and other valuable effects in the name and to the credit of
the Corporation in such depositories as may be designated by the Board.
The Treasurer shall disburse the funds of the Corporation as may be
ordered by the Board, making proper vouchers for such disbursements, and shall
render to the President and the Board, at its regular meetings, or when the
Board so requires, an account of all the transactions of the Treasurer and of
the financial condition of the Corporation.
If required by the Board, the Treasurer shall give the Corporation a
bond (which shall be renewed every six years) in such sum and with such surety
or sureties as shall be satisfactory to the Board for the faithful performance
of the duties of the Treasurer's office and for the restoration to the
Corporation, in case of the Treasurer's death, resignation, retirement or
removal from office, of all books, papers, vouchers, money and other property of
whatever kind in the Treasurer's possession or under the Treasurer's control
belonging to the Corporation.
ARTICLE V
CONTRACTS, CHECKS, DRAFTS, BANK ACCOUNTS, ETC.
Section 5.01. CHECKS, DRAFTS, ETC. All checks, drafts or other
orders for payment of money, notes or other evidence of indebtedness payable by
the Corporation and all contracts or agreements shall be signed by such person
or persons and in such manner as, from time to time, shall be determined by
resolution of the Board. Each such person or persons shall give such bond, if
any, as the Board may require.
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Section 5.02. DEPOSITS. All funds of the Corporation not otherwise
employed shall be deposited from time to time to the credit of the Corporation
in such banks, trust companies or other depositories as the Board may select, or
as may be selected by any officer or officers, assistant or assistants, agent or
agents, or attorney or attorneys of the Corporation to whom such power shall
have been delegated by the Board. For the purpose of deposit and for the
purpose of collection for the account of the Corporation, the President, any
Vice President or the Treasurer (or any other officer or officers, assistant or
assistants, agent or agents, or attorney or attorneys of the Corporation who
shall from time to time be determined by the Board) may endorse, assign and
deliver checks, drafts and other orders for the payment of money which are
payable to the order of the Corporation.
Section 5.03. GENERAL AND SPECIAL BANK ACCOUNTS. The Board may from
time to time authorize the opening and keeping of general and special bank
accounts with such banks, trust companies or other depositories as the Board may
select or as may be selected by any officer or officers, assistant or
assistants, agent or agents, or attorney or attorneys of the Corporation to whom
such power shall have been delegated by the Board. The Board may make such
special rules and regulations with respect to such bank accounts, not
inconsistent with the provisions of these Bylaws, as it may deem expedient.
ARTICLE VI
SHARES AND THEIR TRANSFER
Section 6.01. CERTIFICATES FOR STOCK. Every owner of stock of the
Corporation shall be entitled to have a certificate or certificates, to be in
such form as the Board shall prescribe, certifying the number and class of
shares of the stock of the Corporation owned by such person. The certificates
representing shares of such stock shall be numbered in the order in which they
shall be issued and shall be signed in the name of the Corporation by the
Chairman, or President or a Vice President, and by the Secretary or the
Treasurer, or any Assistant Secretary or Treasurer. Any or all of the
signatures on the certificates may be a facsimile. In case any officer,
transfer agent or registrar who has signed, or whose facsimile signature has
been placed upon, any such certificate shall have ceased to be such officer,
transfer agent or registrar before such certificate is issued, such certificate
may nevertheless be issued by the Corporation with the same effect as though the
person who signed such certificate, or whose facsimile signature shall have been
placed thereupon, were such officer, transfer agent or registrar at the date of
issue. A record shall be kept of the respective names of the persons, firms or
corporations owning the stock represented by such certificates, the number and
class of shares represented by such certificates, respectively, and the
respective dates thereof, and in case of cancellation, the respective dates of
cancellation. Every certificate surrendered to the Corporation for exchange or
transfer shall be cancelled, and no new certificate or certificates shall be
issued in exchange for any existing certificate until such existing certificate
shall have been so cancelled, except in cases provided for in Section 6.04.
Section 6.02. TRANSFERS OF STOCK. Transfers of shares of stock of
the Corporation shall be made only on the books of the Corporation by the
registered holder thereof, or by their attorney thereunto authorized by power of
attorney duly executed and filed with the Secretary, or with a transfer clerk or
a transfer agent appointed as provided in Section 6.03, and upon
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surrender of the certificate or certificates for such shares properly endorsed
and the payment of all taxes thereon. The person in whose name shares of stock
stand on the books of the Corporation shall be deemed the owner thereof for all
purposes as regards the Corporation. Whenever any transfer of shares shall be
made for collateral security, and not absolutely, such fact shall be so
expressed in the entry of transfer if, when the certificate or certificates
shall be presented to the Corporation for transfer, both the transferor and the
transferee request the Corporation to do so.
Section 6.03. REGULATIONS. The Board may make such rules and
regulations as it may deem expedient, not inconsistent with these Bylaws,
concerning the issue, transfer and registration of certificates for shares of
the stock of the Corporation. It may appoint, or authorize any officer or
officers to appoint, one or more transfer clerks or one or more transfer agents
and one or more registrars, and may require all certificates for stock to bear
the signature or signatures of any of them.
Section 6.04. LOST, STOLEN, DESTROYED, AND MUTILATED CERTIFICATES.
In any case of loss, theft, destruction or mutilation of any certificate of
stock, another may be issued in its place upon proof of such loss, theft,
destruction or mutilation and upon the giving of a bond of indemnity to the
Corporation in such form and in such sum as the Board may direct; provided,
however, that a new certificate may be issued without requiring any bond when,
in the judgment of the Board, it is proper so to do.
Section 6.05. FIXING DATE FOR DETERMINATION OF STOCKHOLDERS OF
RECORD. In order that the Corporation may determine the stockholders entitled
to notice of or to vote at any meeting of stockholders, or to receive payment of
any dividend or other distribution or allotment of any rights or to exercise any
rights in respect of any change, conversion or exchange of stock or for the
purpose of any other lawful action except for consenting to corporate action in
writing without a meeting, the Board of Directors may fix a record date, which
shall not precede the date the resolution fixing the record date is adopted and
which record date shall not be more than 60 nor less than 10 days before the
date of any meeting of stockholders, nor more than 60 days prior to the time for
such other action as herein before described; provided, however, that if no
record date is fixed by the Board of Directors, 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 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, for determining stockholders
entitled to receive payment of any dividend or other distribution or allotment
of any rights or to exercise any rights in respect of any change, conversion or
exchange of stock or any other lawful action except for consenting to corporate
action in writing without a meeting, the record date shall be the close of
business on the day on which the Board of Directors adopts a resolution relating
thereto.
For purposes of determining the stockholders entitled to consent to
corporate action in writing without a meeting, the Board of Directors may fix a
record date, which shall not precede the date upon which the resolution fixing
the record date is adopted by the Board of Directors, and which record date
shall not be more than 10 days after the date upon which the resolution fixing
the record date is adopted, as of which shall be determined the stockholders of
record entitled to consent to corporate action in writing without a meeting. If
no record date has
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been fixed by the Board of Directors and no prior action by the Board of
Directors is required by the Delaware General Corporation Law, the record date
shall be the first date on which a signed written consent setting forth the
action taken or proposed to be taken is delivered to the Corporation in the
manner prescribed in Section 2.09 hereof. If no record date has been fixed by
the Board of Directors and prior action by the Board of Directors is required by
the Delaware General Corporation Law with respect to the proposed action, the
record date for determining stockholders entitled to consent to corporate action
in writing shall be the close of business on the day in which the Board of
Directors adopts the resolutions taking such prior action.
ARTICLE VII
INDEMNIFICATION
Section 7.01. Indemnification of Officers, Directors, Employees and
Agents; Insurance.
(a) RIGHT TO INDEMNIFICATION. Each person who was or is made a
party or is threatened to be made a party to or is otherwise involved in any
action, suit or proceeding, whether civil, criminal, administrative or
investigative (hereinafter a "proceeding"), by reason of the fact that he or she
is or was a director or officer of the Corporation or is or was serving at the
request of the Corporation as a director, officer, employee or agent of another
corporation or of a partnership, joint venture, trust or other enterprise,
including service with respect to an employee benefit plan (hereinafter an
"indemnitee"), whether the basis of such proceeding is alleged action in an
official capacity as a director, officer, employee or agent or in any other
capacity while serving as a director, officer, employee or agent, shall be
indemnified and held harmless by the Corporation to the fullest extent
authorized by the Delaware General Corporation Law, 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 permitted prior thereto), against all expense, liability and loss
(including attorneys' fees, judgments, fines, ERISA excise taxes or penalties
and amounts paid in settlement) reasonably incurred or suffered by such
indemnitee in connection therewith and such indemnification shall continue as to
an indemnitee who has ceased to be a director, officer, employee or agent and
shall inure to the benefit of the indemnitee's heirs, executors and
administrators; PROVIDED, HOWEVER, that except as provided in paragraph (c)
hereof with respect to proceedings to enforce rights to indemnification, the
Corporation shall indemnify any such indemnitee in connection with a proceeding
(or part thereof) initiated by such indemnitee only if such proceeding (or part
thereof) was authorized or is subsequently ratified by the board of directors of
the Corporation.
(b) RIGHT TO ADVANCEMENT OF EXPENSES. The right to
indemnification conferred in paragraph (a) of this Section shall include the
right to be paid by the Corporation the expenses incurred in defending any
proceeding for which such right to indemnification is applicable in advance of
its final disposition (hereinafter an "advancement of expenses"); PROVIDED,
HOWEVER, that, if the Delaware General Corporation Law requires, an advancement
of expenses incurred by an indemnitee in their capacity as a director or officer
(and not in any other capacity in which service was or is rendered by such
indemnitee, including, without limitation, service to an employee benefit plan)
shall be made only upon delivery to the Corporation of an undertaking
(hereinafter an "undertaking"), by or on behalf of such indemnitee, to repay all
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amounts so advanced if it shall ultimately be determined by final judicial
decision from which there is no further right to appeal (hereinafter a "final
adjudication") that such indemnitee is not entitled to be indemnified for such
expenses under this Section or otherwise.
(c) RIGHT OF INDEMNITEE TO BRING SUIT. The rights to
indemnification and to the advancement of expenses conferred in paragraphs (a)
and (b) of this Section shall be a contract between the Corporation and each
director or officer of the Corporation who serves or served in such capacity at
any time while this Article VII is in effect. Any repeal or modification of
this Article VII or any repeal or modification of relevant provisions of the
Delaware General Corporation Law or any other applicable laws shall not in any
way diminish any rights to indemnification of such director or officer or the
obligations of the Corporation hereunder. If a claim under paragraph (a) or (b)
of this Section is not paid in full by the Corporation within sixty days after a
written claim has been received by the Corporation, except in the case of a
claim for an advancement of expenses, in which case the applicable period shall
be twenty days, the indemnitee may at any time thereafter bring suit against the
Corporation to recover the unpaid amount of the claim. If successful in whole
or in part in any such suit, or in a suit brought by the Corporation to recover
an advancement of expenses pursuant to the terms of an undertaking, the
indemnitee shall be entitled to be paid also the expense of prosecuting or
defending such suit. In (i) any suit brought by the indemnitee to enforce a
right to indemnification hereunder (but not in a suit brought by the indemnitee
to enforce a right to an advancement of expenses) it shall be a defense that,
and (ii) in any suit by the Corporation to recover an advancement of expenses
pursuant to the terms of an undertaking the Corporation shall be entitled to
recover such expenses upon a final adjudication that, the indemnitee has not met
any applicable standard for indemnification set forth in the Delaware General
Corporation Law. Neither the failure of the Corporation (including its board of
directors, independent legal counsel, or its stockholders) to have made a
determination prior to the commencement of such suit that indemnification of the
indemnitee is proper in the circumstances because the indemnitee has met the
applicable standard of conduct set forth in the Delaware General Corporation
Law, nor an actual determination by the Corporation (including its board of
directors, independent legal counsel, or its stockholders) that the indemnitee
has not met such applicable standard of conduct, shall create a presumption that
the indemnitee has not met the applicable standard of conduct or, in the case of
such a suit brought by the indemnitee, be a defense to such suit. In any suit
brought by the indemnitee to enforce a right to indemnification or to an
advancement of expenses hereunder, or by the Corporation to recover an
advancement of expenses pursuant to the terms of an undertaking, the burden of
proving that the indemnitee is not entitled to be indemnified, or to such
advancement of expenses, under this Section or otherwise shall be on the
Corporation.
(d) NON-EXCLUSIVITY OF RIGHTS. The rights to indemnification
and to the advancement of expenses conferred in this Section shall not be
exclusive of any other right which any person may have or hereafter acquire
under any statute, the Corporation's certificate of incorporation, by-law,
agreement, vote of stockholders or disinterested directors or otherwise.
(e) INSURANCE. The Corporation may maintain insurance, at its
expense, to protect itself and any director, officer, employee or agent of the
Corporation or another corporation, partnership, joint venture, trust or other
enterprise against any expense, liability or loss, whether or not the
Corporation would have the power to indemnify such person against such expense,
liability or loss under the Delaware General Corporation Law, PROVIDED
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that such insurance is available on acceptable terms, which determination shall
be made by the Board of Directors or by a committee thereof.
(f) INDEMNIFICATION OF EMPLOYEES AND AGENTS OF THE CORPORATION.
The Corporation may, to the extent and in accordance with the terms authorized
from time to time by the board of directors, grant rights to indemnification,
and to the advancement of expenses to any employee or agent of the Corporation
to the fullest extent of the provisions of this Section with respect to the
indemnification and advancement of expenses of directors and officers of the
Corporation.
(g) For purposes of this Section, references to "the
Corporation" shall include, in addition to the resulting corporation, any
constituent corporation (including any constituent of a constituent) absorbed in
a consolidation or merger which, if its separate existence had continued, would
have had power and authority to indemnify its directors, officers, and employees
or agents, so that any person who is or was a director, officer, employee or
agent of such constituent corporation, or is or was serving at the request of
such constituent corporation as a director, officer, employee or agent of
another corporation, partnership, joint venture, trust or other enterprise,
shall stand in the same position under this Section with respect to the
resulting or surviving corporation as he would have with respect to such
constituent corporation if its separate existence had continued.
(h) For purposes of this Section, references to "serving at the
request of the Corporation" shall include any service as a director, officer,
employee or agent of the Corporation which imposes duties on, or involves
services by, such director, officer, employee or agent with respect to an
employee benefit plan, its participants or beneficiaries; and a person who acted
in good faith and in a manner he reasonably believed to be in the interest of
the participants and beneficiaries of an employee benefit plan shall be deemed
to have acted in a manner "not opposed to the best interests of the Corporation"
as referred to in the Delaware General Corporation Law.
(i) Notwithstanding anything else in this Article VII, in the
event that the express provisions of the Delaware General Corporation Law
relating to indemnification of, or advancement of expenses by the Corporation
to, persons eligible for indemnification or advancement of expenses under this
Article VII are amended to permit broader indemnification or advancement of
expenses, then the Corporation will provide such indemnification and advancement
of expenses to the maximum extent permitted by the Delaware General Corporation
Law.
(j) If this Article VII or any portion hereof shall be
invalidated on any ground by any court of competent jurisdiction, then the
Corporation shall nevertheless indemnify each indemnitee of the Corporation as
to costs, charges and expenses (including attorneys' fees), judgments, fines and
amounts paid in settlement with respect to any action, suit or proceeding,
whether civil, criminal, administrative or investigative, including an action by
or in the right of the Corporation, to the full extent permitted by any
applicable portion of this Article VII that shall not have been invalidated and
to the full extent permitted by applicable law.
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(k) Notwithstanding anything else in this Article VII, at any
and all times at which the Corporation is subject to the provisions of the
California Corporations Code by virtue of the operation of Section 2115 thereof
or otherwise, the indemnification and advancement of expenses provided by, or
granted pursuant to, this Article VII shall be in all respects limited by the
provisions of the California Corporations Code made applicable by such Section
2115 (or such other provision of California law).
ARTICLE VIII
MISCELLANEOUS
Section 8.01. SEAL. The Board shall provide a corporate seal, which
shall be in the form of a circle and shall bear the name of the Corporation and
words and figures showing that the Corporation was incorporated in the State of
Delaware and the year of incorporation.
Section 8.02. WAIVER OF NOTICES. Whenever notice is required to be
given by these Bylaws or the Certificate of Incorporation or by law, the person
entitled to said notice may waive such notice in writing, either before or after
the time stated therein, and such waiver shall be deemed equivalent to notice.
Section 8.03. FISCAL YEAR. The fiscal year of the Corporation shall
be fixed by resolution of the Board.
Section 8.04. AMENDMENTS. Subject to the provisions of the
Certificate of Incorporation, these Bylaws and applicable law, these Bylaws or
any of them may be amended or repealed and new Bylaws may be adopted (a) by the
Board, by vote of a majority of the number of directors then in office or (b) by
the vote of the holders of in excess of 50% of the total voting power of all
outstanding shares of voting stock of the Corporation at a meeting of
stockholders; provided that such action may be taken at a special meeting of the
Board or stockholders only if notice of such proposed amendment, repeal or
adoption is given in the notice of special meeting. Subject to the provisions
of the Certificate of Incorporation, any Bylaws adopted or amended by the
stockholders may be amended or repealed by the Board or the stockholders.
Section 8.05. VOTING STOCK. Any person so authorized by the Board,
and in the absence of such authorization, the Chairman of the Board, the
President or any Vice President, shall have full power and authority on behalf
of the Corporation to attend and to act and vote at any meeting of the
stockholders of any corporation in which the Corporation may hold stock and at
any such meeting shall possess and may exercise any and all rights and powers
which are incident to the ownership of such stock and which as the owner thereof
the Corporation might have possessed and exercised if present. The Board by
resolution from time to time may confer like powers upon any other person or
persons.
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CONTRIBUTION AND SHAREHOLDERS AGREEMENT
This Contribution and Shareholders Agreement (the "Agreement") is executed
as of this 16th day of December, 1996, and is by and between VALLEY RECORD
DISTRIBUTORS, INC., a California corporation ("Valley"), STEREOPHILE, INC., a
New Mexico corporation ("Stereophile"), and, for the sole purpose of Sections
4.9 and 4.10 hereof, Barney Cohen, the principal shareholder of Valley
("Shareholder").
RECITALS:
A. Stereophile is a publisher of magazines and periodicals, among which are
the Schwann Guides to recordings. Stereophile wishes to sell the rights to
publish all of the Schwann Guides except the CDRD Publications (the Schwann
Guides other than the CDRD Publications are referred to herein as the
"Publications"). The Publications include OPUS, ARTIST and SPECTRUM. The CDRD
Publications consist of two separate publications, COMPACT DISC REVIEW DIGEST
and BEST RATED CDS, which will continue to be published by Stereophile.
SPECTRUM shall be discontinued. Stereophile also owns intangible and tangible
assets which it uses in the publication of the Publications, as set forth on
EXHIBIT A and which are referred to herein as the "Publication Assets." The
rights to publish the Publications and to own and use the Publication Assets
shall hereafter sometimes be referred to as the "Business." The Business shall
NOT refer to any other aspect of Stereophile's business, including the
publication of the CDRD Publications, STEREOPHILE magazine or STEREOPHILE GUIDE
TO HOME THEATER.
B. Valley is in the business of distributing compact discs ("cds") and
tapes nationwide. Valley wishes to acquire the rights to publish the
Publications and to acquire the Publication Assets.
C. Stereophile and Valley have entered into this Agreement to form a new
corporation ("NewCo"), which will be owned by them, to cause the Publications
and the Publication Assets to be transferred to NewCo, to cause certain payments
to be made to Stereophile, to provide for the possible merger of NewCo into
Valley or its subsidiary, and to govern the relations between them.
D. The capital stock of Valley consists of a single class of common stock.
Shareholder owns more than fifty percent (50%) of the issued and outstanding
capital stock of Valley, and is executing this Agreement for the sole purpose of
providing certain agreements in the event he proposes to take certain specified
action with respect to some or all of his stock in Valley. The promises of
Shareholder in this regard are a material inducement to Stereophile to enter
into this Agreement.
COVENANTS:
In consideration of the recitals and mutual covenants contained herein, the
parties agree:
<PAGE>
CONTRIBUTION AND SHAREHOLDERS AGREEMENT
VALLEY RECORD DISTRIBUTORS, INC. -- STEREOPHILE, INC.
1. FORMATION OF NEWCO. Prior to the Closing Date, the parties will cause
NewCo to be formed as a Delaware corporation with a board of directors to be
named by Valley. NewCo shall have authorized a single class of voting common
stock. The exact name for NewCo shall be "Schwann Acquisition Corp." At the
Closing, the parties will make capital contributions in return for the stock of
NewCo as follows:
1.1 TRANSFER OF ASSETS. Stereophile will transfer to NewCo the
Publication Assets and the rights to publish the Publications. Stereophile will
receive twenty percent of the stock of NewCo (the "Stereophile Holding"), the
sum of $150,000 cash, and a promissory note of NewCo in the amount of $100,000
payable in accordance with the terms and in the form set forth in EXHIBIT B-1
(the "Note").
1.2 PAYMENT OF CASH. Valley will transfer to NewCo not less than
$150,000 in cash, will guarantee the Note by a written Guaranty in the form
attached as EXHIBIT B-2, will transfer to NewCo the cash to pay such note at
maturity, and will provide sufficient working capital to NewCo to permit it to
engage in the routine operations of the Business for six months following the
Closing. Valley will receive eighty percent of the stock of NewCo (the "Valley
Holding").
2. ACTIVITIES OF NEWCO. Following the Closing, NewCo shall operate the
business of publishing the Publications. In addition, NewCo will take the
following actions.
2.1 PAYMENT TO STEREOPHILE. NewCo at Closing shall pay to Stereophile
$150,000 cash and shall execute and deliver the Note to Stereophile, as
contemplated in Section 1.1.
2.2 ASSUMPTION OF LIABILITIES. NewCo will assume all deferred
subscription liabilities for the Publications. NewCo will assume and perform the
obligations of Stereophile under the leases, advertising contracts and other
contracts included in the Publication Assets (including those described in
Section 6.6) other than prepaid ad liabilities. Except as expressly set forth in
this Agreement, neither NewCo nor Valley shall assume, pay or be obligated for
any other liabilities or obligations of Stereophile.
2.3 PREPAID ADVERTISING. NewCo will assume and perform all prepaid ad
liabilities for the Publications, but will deduct the amounts of all such
liabilities actually satisfied by NewCo from the principal of the Note, with
such principal reduction effective as of the Closing.
2.4 LICENSE OF TRADEMARK. NewCo shall license to Stereophile without
further cost the perpetual right to use the trademark SCHWANN on and in
connection with the printed magazine versions of the COMPACT DISC REVIEW DIGEST
and BEST RATED CDS. The license shall not extend to and Stereophile shall not
be entitled to use the mark in connection with the
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CONTRIBUTION AND SHAREHOLDERS AGREEMENT
VALLEY RECORD DISTRIBUTORS, INC. -- STEREOPHILE, INC.
promotion of computer on-line publications. If Stereophile shall sell all or a
controlling interest in either of the CDRD Publications or the right to publish
either of the CDRD Publications (other than in connection with a sale of all or
substantially all of Stereophile's stock or assets), this license to use the
SCHWANN trademark with respect to the publication that was sold shall
terminate.
2.5 SUBSCRIPTION FULFILLMENT. NewCo shall provide without cost to
Stereophile up to 500 one-year subscriptions to OPUS for use by Stereophile in
fulfilling subscription obligations to subscribers to SPECTRUM. Stereophile may
purchase additional subscriptions to OPUS for the purpose of fulfilling
subscription obligations to subscribers to SPECTRUM at the price of $28.00 per
year.
3. ACTIVITIES AND OBLIGATIONS OF STEREOPHILE. Following the Closing,
Stereophile may continue to conduct all of its businesses not transferred to
NewCo, including the publication OF COMPACT DISC REVIEW DIGEST.
3.1 RETENTION OF NAMES. Stereophile shall retain all rights to the
names COMPACT DISC REVIEW DIGEST, CDRD, and BEST RATED CDS (the "CDRD Marks").
Stereophile may continue the publication of either or both COMPACT DISC REVIEW
DIGEST and BEST RATED CDS, but need not do so. If at any time Stereophile
discontinues such publication, it shall be responsible for all costs of
discontinuing publication, including deferred subscription liabilities.
3.2 QUALITY CONTROL. Stereophile shall continue to maintain the
same or better quality of editorial content and production standards for
COMPACT DISC REVIEW DIGEST as long as the trademark SCHWANN continues to be
used on such publications. If such standards are not maintained, NewCo may
give written notice (specifying the particular failure to maintain quality),
and if standards are not restored within ninety (90) days after such notice
NewCo may terminate the right to use the SCHWANN mark in connection with
COMPACT DISC REVIEW DIGEST.
3.3 SALE OF PUBLICATION. If Stereophile desires to sell either
COMPACT DISC REVIEW DIGEST or BEST RATED CDS (or an interest therein) to any
person, Stereophile shall give Valley a right of first refusal on such sale.
Valley will have thirty (30) days after the giving of written notice by
Stereophile to agree to match any offer and an additional fifteen (15) days to
close. The right of first refusal will not apply to a sale of all, or
substantially all, of the stock or assets of Stereophile. If Valley elects not
to exercise its rights pursuant to this Section, Stereophile may complete the
sale which was the subject of the notification but only at the price, on the
terms and to the buyer specified in the notification. Upon sale of either
COMPACT DISC REVIEW DIGEST or BEST RATED CDS to any person by Stereophile, the
license granted in this Agreement to Stereophile by Valley to use the SCHWANN
trademark in connection with the publication which was sold shall cease, and the
buyer shall not be entitled to nor have the right to use the SCHWANN trademark
for any purpose.
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<PAGE>
CONTRIBUTION AND SHAREHOLDERS AGREEMENT
VALLEY RECORD DISTRIBUTORS, INC. -- STEREOPHILE, INC.
3.4 DISCONTINUANCE OF PUBLICATION. Stereophile shall discontinue
publication of SPECTRUM as of the Closing Date. Stereophile shall pay all costs
of discontinuing such publication, including deferred subscription liabilities.
Stereophile may use up to 500 one-year subscriptions to OPUS as provided by
NewCo in fulfillment of those subscription liabilities, so long as full
information necessary to start such subscriptions is provided to NewCo within
180 days of Closing. Notwithstanding such discontinuance, the rights to publish
SPECTRUM are being transferred at Closing to NewCo.
3.5 ACCOUNTS PAYABLE AND RECEIVABLE. Stereophile shall remain
obligated for and shall pay all accounts payable incurred in connection with the
publication of the Publications through the Closing. Stereophile shall also
remain obligated for and shall pay all wages, benefits, vacation, sick leave
and other benefit accruals through the date of Closing for all employees who
cease being employees of Stereophile, whether or not they become employees of
NewCo. Stereophile shall be entitled to collect and retain all accounts
receivable or other rights to receive money or property earned or accrued prior
to Closing.
4. REORGANIZATION AND MERGER; STOCK RIGHTS. For so long as Stereophile owns
stock of NewCo, NewCo shall not take any action and Valley shall not permit
NewCo to take any action which would result in the Stereophile Holding becoming
less than twenty percent of the total stock of NewCo outstanding.
4.1 THE MERGER. NewCo may be merged into Valley or a wholly owned
subsidiary of Valley in a transaction in which the Stereophile Holding will be
converted into common stock of Valley (such a transaction, undertaken in
accordance with the provisions of this Agreement, shall hereafter be referred to
as the "Merger").
4.2 TIME OF MERGER. Either Stereophile or Valley may require the
Merger to occur at any time after six months after Closing, or any time after
March 31, 1997, if Valley has completed an initial public offering of its
shares.
4.3 SHARES TO BE RECEIVED IN MERGER. If the Merger occurs,
Stereophile shall receive for the Stereophile Holdings 7,230 shares of Valley
common stock as adjusted for stock splits, reverse stock splits, stock
dividends or other reorganizations causing the number of shares represented
by an existing share to change, considering all securities convertible into
common stock as if they had been fully converted (the "Merger Shares").
4.4 REGISTRATION OF STOCK. If registration rights are granted to any
person with respect to capital stock of Valley, Stereophile shall receive
registration rights for the Merger Shares on terms no less favorable than those
granted to any other person, except that Stereophile shall not have the right to
initiate a demand registration.
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<PAGE>
CONTRIBUTION AND SHAREHOLDERS AGREEMENT
VALLEY RECORD DISTRIBUTORS, INC. -- STEREOPHILE, INC.
4.5 REPURCHASE OPTION. At any time after the third anniversary of the
Closing (provided that by the time of the request for repurchase the Merger has
occurred but no initial public offering by Valley has been completed),
Stereophile may request Valley to repurchase any portion of or all Merger Shares
for the then fair market value thereof without discount for being a minority
interest. If Valley fails to repurchase such Merger Shares within ninety (90)
days of the request, Valley shall issue to Stereophile additional stock of
Valley equal to the number of Merger Shares held by Stereophile. If such
additional shares are issued to Stereophile, Stereophile will not thereafter be
entitled to make further repurchase demands under this Section 4.5. At any time
after the third anniversary of the Closing if no initial public offering by
Valley has been completed, Valley may repurchase the Merger Shares from
Stereophile for the then fair market value thereof without discount for being a
minority interest. If Valley completes an initial public offering within 180
days after the purchase by which Valley shares are offered at a price per share
higher than Stereophile received for the Merger Shares, Valley shall, on the
closing date of the initial public offering, pay Stereophile the difference
between the amount received by Stereophile and the amount Stereophile would have
received if it had sold the Merger Shares in the public offering.
4.6 ANTI-DILUTION. If, prior to the Merger, Valley sells or issues
any of its stock to an affiliate of Valley for a price less than such stock's
fair market value (other than as part of an employee stock option plan, an ESOP
contribution consistent with traditional sales to the ESOP in the past, or
pursuant to stock rights existing at the Closing Date), the amount of stock to
be issued to Stereophile as a result of the Merger shall be increased in
accordance with the Institutional Weighted Average Formula set forth in EXHIBIT
C. If Valley stock is issued for other than cash consideration, the sale price
for such shares will be the value of the assets received as determined in the
reasonable judgment of Valley's board of directors. This obligation shall
terminate upon the effective date of the Merger.
4.7 RESTRICTION ON STEREOPHILE SALES. Stereophile shall not sell,
pledge or transfer or offer to sell, pledge or transfer shares of NewCo or
Valley for a period of 18 months following the Closing Date except pursuant to
registration of the shares as provided in Section 4.4. Thereafter, Stereophile
shall not transfer, pledge, sell or otherwise dispose of any of the shares of
NewCo, or of Valley owned by it unless such shares are first offered in writing
to Valley. Such offer shall be at a price and under terms offered by an
unaffiliated third party, which offer shall be attached to the offer to Valley.
Valley shall have not less than thirty (30) days to accept or decline the offer,
and failure of Valley to respond within thirty (30) days shall constitute
declination. Stereophile may then complete the sale which was the subject of
the notification but only at the price, on the terms, and to the buyer specified
in the notification. Any stock certificates issued to Stereophile which are
subject to this provision shall have the restrictions stated thereon with
reference to this Agreement as well as legends required by applicable federal
and state securities laws. The provisions of this Section 4.7 with respect to
stock of Valley shall terminate upon the completion of an initial public
offering by Valley and shall not apply to any shares offered to Valley pursuant
to Section 4.5. This right of first refusal
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<PAGE>
CONTRIBUTION AND SHAREHOLDERS AGREEMENT
VALLEY RECORD DISTRIBUTORS, INC. -- STEREOPHILE, INC.
will terminate if Valley declines to purchase any Merger Shares pursuant to a
request by Stereophile made pursuant to Section 4.5.
4.8 RESTRICTION ON VALLEY SALES. Valley shall not transfer, pledge,
sell or otherwise dispose of any of the shares of NewCo owned by it for a period
of six months following the Closing Date. Thereafter, if Valley shall determine
to sell the shares owned by it in NewCo to any other person, it shall notify
Stereophile of its intention. Valley shall not complete any such sale until
after 30 days following notice to Stereophile. During the 30 day period,
Stereophile may require the Merger to take place. If Stereophile does not make a
demand for the Merger, Valley may complete the sale which was the subject of
the notification but only at the price, on the terms, and to the buyer specified
in the notification. Any stock certificates issued to Valley which are subject
to this provision shall have the restrictions stated thereon with reference to
this Agreement. The provisions of this Section 4.8 shall terminate upon the
completion of the Merger.
4.9 COME-ALONG. If at any time prior to the completion of an initial
public offering by Valley, Shareholder agrees to sell more than fifty percent
(50%) of the total outstanding shares of the capital stock of Valley (whether
owned beneficially or of record) to any unaffiliated purchaser, Shareholder
shall notify Stereophile at least thirty (30) days prior to the proposed sale.
Shareholder shall include in the notice the price to be paid, the terms of the
sale, and the percentage of the capital stock beneficially owned by him and all
persons affiliated with him (the "Percentage") Upon request by Stereophile
within ten (10) days of receipt of the notice, Shareholder will cause the
purchase by the unaffiliated purchaser of the same percentage of Valley shares
owned by Stereophile at the same price and on the same terms (unless the Merger
has not occurred, in which case Stereophile may demand that the Merger occur
before the sale to the unaffiliated party is completed). If the proposed
purchaser is unwilling to purchase the additional shares of Stereophile,
Shareholder will cause the necessary number of shares owned by Stereophile to be
substituted for shares of the Shareholder to be sold or Shareholder will himself
buy such shares from Stereophile at the price and terms offered by the proposed
purchaser. This obligation shall terminate upon the completion of an initial
public offering by Valley.
4.10 BRING-ALONG. If Shareholder or any person affiliated with him
sells more than fifty percent (50%) of the total outstanding shares of capital
stock of Valley to an unaffiliated purchaser at any time prior to the completion
of an initial public offering by Valley, Stereophile will, upon request of
Shareholder, sell its shares of Valley to the purchaser at the same price and on
the same conditions as Shareholder obtains for his stock. This obligation
shall terminate upon the completion of an initial public offering by Valley.
4.11 CONFIDENTIALITY. Stereophile shall maintain the
confidentiality of confidential or proprietary business information
concerning Valley which is obtained by Stereophile as a result of its being a
stockholder of Valley. Prior to Closing, Valley shall
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<PAGE>
CONTRIBUTION AND SHAREHOLDERS AGREEMENT
VALLEY RECORD DISTRIBUTORS, INC. -- STEREOPHILE, INC.
provide Stereophile with a written statement of reasonable policy as to
confidential and proprietary information. Such policy requirements shall be
imposed on all future non-management shareholders of Valley. Valley may amend
such policy from time to time as it applies to all non-management shareholders.
This obligation shall terminate upon the completion of an initial public
offering by Valley.
5. CLOSING DATE. The closing of the transactions contemplated by this
Agreement to occur on the Closing Date shall occur at the offices of Gust
Rosenfeld in Phoenix, Arizona, on December 16, 1996, or at such other time or
place as may be agreed on by the parties. Each party shall pay its own costs and
expenses incurred in the transactions contemplated by this Agreement.
6. REPRESENTATIONS AND WARRANTIES OF STEREOPHILE. To induce Valley to
enter into this Agreement and to perform the transactions contemplated
hereunder, Stereophile represents as follows (unless otherwise stated in the
following representations and warranties, all such representations and
warranties are and shall be true and correct as of the date of Closing as though
made on the date of Closing):
6.1 ORGANIZATION. Stereophile is a corporation duly organized,
validly existing and in good standing under the laws of the state of New Mexico
and has all requisite corporate power and authority to own, lease and operate
its properties, including the Publication Assets, and to carry on its business
as now being conducted, and is duly qualified and in good standing to do
business in each jurisdiction in which the nature of its business or the
ownership or the leasing of its properties makes such qualification necessary,
or if not so duly qualified, its failure to be so qualified will not have a
material adverse effect on the Publication Assets or the Business.
6.2 AUTHORITY; CONSENTS AND APPROVALS; NO VIOLATIONS. Stereophile has
the full corporate power and authority and legal right to execute and deliver
this Agreement and all other agreements, instruments or other documents executed
by Stereophile in connection herewith (the "Stereophile Documents"), to transfer
the Assets pursuant to this Agreement, and otherwise to perform its obligations
hereunder and under the other Stereophile Documents. The execution and delivery
of this Agreement and the other Stereophile Documents has been duly authorized
by Stereophile's Board of Directors, and no other proceeding or action on the
part of Stereophile is necessary to authorize this Agreement, the sale of the
Assets hereunder or the other transactions contemplated hereunder. This
Agreement and each of the other Stereophile Documents has been (or upon Closing
will be) validly executed and delivered by Stereophile and constitute valid
and binding obligations of Stereophile, except to the extent that the
binding nature thereof may be subject to the limitations which might result
from bankruptcy, insolvency, reorganization, moratorium or other similar laws
relating to creditors' rights now or thereafter in effect, and except for the
limitations on the remedy of specific performance and other forms of
equitable relief. No permit, authorization, consent or approval of, or
declaration or filing
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CONTRIBUTION AND SHAREHOLDERS AGREEMENT
VALLEY RECORD DISTRIBUTORS, INC. -- STEREOPHILE, INC.
with any public body, agency, court or authority is necessary for the lawful,
proper and valid consummation by Stereophile of the other transactions
contemplated hereunder. The execution and delivery of this Agreement and the
other Stereophile Documents, the sale of the Publication Assets, and the
consummation of the other transactions and matters contemplated hereunder and
thereunder do not and will not violate any provision of Stereophile's Articles
of Incorporation or Bylaws, any statute, rule or regulation, any order or decree
of any public body, agency, court or authority by which Stereophile or any of
its properties, is bound, or violate, conflict with, result in a breach of or
constitute (with or without due notice or lapse of time) a default under any
agreement, license, contract, franchise, permit, indenture, lease, or other
instrument to which Stereophile is a party, or by which it or any of the
Publication Assets is bound.
6.3 FINANCIAL INFORMATION. Stereophile has previously furnished to
Valley financial information relating to the Publications and to the Business.
All such financial information is true and correct in all material respects.
6.4 ASSETS. Except as set forth in SCHEDULE 6.4, to the knowledge and
belief of Stereophile, the tangible assets included in the Publication Assets
are in good working order and repair. Except for assets excluded from the
Publication Assets in EXHIBIT A, the Publication Assets include all assets used
by Stereophile in the Business.
6.5 TAX MATTERS. Stereophile has filed all tax returns and paid all
taxes which are required by any federal, state or local taxing authority
thorough the Closing Date which would affect the Publication Assets or which
might become the liability of NewCo or Valley as successors to the Publications
or the Business.
6.6 CONTRACTS.
a. To the knowledge and belief of Stereophile after due
investigation and inquiry, SCHEDULE 6.6 hereto contains a true and complete
listing of the following as they relate to Stereophile or the Publication Assets
(collectively, the "Contracts"):
(1) a copy of Stereophile's current standard form of
advertising agreement and any prior standard form of advertising agreement used
in connection with the Publications and still in effect for any account;
(2) any advertising contract not on a standard form
disclosed pursuant to Section 6.6(a)(1) or not at a rate disclosed on the
Stereophile's current rate card disclosed pursuant to Section 6.6(a)(3), other
than contracts which individually do not, and would not if entered into at the
current card rate require payments totaling more than $1,500; and any agreement,
written or oral, to exchange or provide advertising in the Publications for
consideration other than cash;
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CONTRIBUTION AND SHAREHOLDERS AGREEMENT
VALLEY RECORD DISTRIBUTORS, INC -- STEREOPHILE, INC.
(3) the current advertising rate card for the Publications
and all advertising rate cards used in connection with the Publications since
January 1, 1995;
(4) except for advertising contracts, all contracts,
agreements or other commitments to which Stereophile is a party or by which it
or its property is bound which involves the Business or which affect or may
materially affect in the future any of the Publication Assets;
(5) all leases, options to purchase, or agreements to lease
or purchase any property which is part of the Publication Assets;
(6) all property which is part of the Publication Assets
[other than property held under a lease disclosed in SCHEDULE 6.6 pursuant to
Section 6.6(a)(5)] used by Stereophile but not owned by Stereophile;
(7) all permits (including second class mailing permits),
licenses, franchises, authorizations, approvals and other certificates of
authority held by Stereophile to the extent the same is required or useful for
the conduct of the Business;
(8) all patents, registered or unregistered trademarks,
trade names, registered copyrights and internet domain names, and all pending
applications which are part of the Publication Assets or used in the Business;
(9) all written employment, consulting or independent
contractor agreements and a summary of all such agreements that are oral (other
than oral agreements containing no terms other than employment at will) with
persons involved with publishing the Publications on behalf of Stereophile;
(10) any other agreement or instrument to which Stereophile
is a party and which is material to the continued publication of the
Publications, or with respect to which a default thereunder would materially or
adversely affect the business of publishing the Publications, including, but not
limited to, any contract for printing or production services; and
(11) a list of all deferred subscription liabilities to each
of the Publications, which may be appended to SCHEDULE 6.6 within 15 days after
Closing when all such liabilities are determined.
b. Except as may be disclosed in SCHEDULE 6.6, Stereophile is
not in default under any of the Contracts which is material to the Business.
6.7 AGREEMENTS WITH RESPECT TO ASSETS. Other than this Agreement,
there are no existing options, rights, contracts, commitments,
understandings, arrangements, or
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CONTRIBUTION AND SHAREHOLDERS AGREEMENT
VALLEY RECORD DISTRIBUTORS, INC., -- STEREOPHILE INC.
executory agreements of any nature to which Stereophile is a party or by which
it is bound, relating to the sale, delivery, lease (as lessor) or transfer of
any of the Publication Assets, except in the ordinary course of Stereophile's
business.
6.8 BROKER. No agent, broker or other person acting pursuant to
authority of Stereophile is entitled to any commission or finder's fee in
connection with this Agreement or the transactions contemplated hereunder.
6.9 EMPLOYEE MATTERS. SCHEDULE 6.9 contains the name, residence
address, social security number and current rate of compensation of
Stereophile's present employees who are engaged primarily in publication of
the Publications and who Stereophile will no longer employ following the
Closing Date and the capacity in which each person is employed and a job
description for each such person. Except as disclosed in SCHEDULE 6.9: (a) to
Stereophile's knowledge, no employee is represented by any union or other
labor organization; (b) there is no unfair labor practice charge pending or,
to Stereophile's knowledge, threatened against Stereophile relating to any of
Stereophile's employees; (c) there is no labor strike, dispute, slowdown or
stoppage relating to any of its employees actually pending or, to
Stereophile's knowledge, threatened against or involving Stereophile; (d) no
labor grievance relating to any of its employees is pending against
Stereophile; and (e) Stereophile has not in the past three years experienced
any work stoppage or organizational activity relating to its employees. The
termination of any employee as a result of the transactions contemplated by
this Agreement will not breach or result in a claim or cause of action
arising under any written or oral employment agreement, other than the
obligation to pay all wages and benefits accrued through the date of Closing,
all of which shall be duly and timely paid by Stereophile.
6.10 INFRINGEMENT. Stereophile has not in connection with the
Publications infringed, and is not infringing on any trade name, trademark,
service mark, patent, copyright or other proprietary right belonging to any
other person, firm or corporation.
6.11 LEGAL COMPLIANCE. There is no pending or, to the knowledge of
Stereophile, threatened litigation and administrative or judicial proceedings of
any nature involving the Publication Assets. There are no other facts or
circumstances which are likely to result in, and there is no basis for, any
future civil, administrative or criminal claim or proceeding against the
Publication Assets. To the knowledge of Stereophile, Stereophile has operated,
is presently operating, and will continue to operate the business of publishing
the Publications through the Closing in material compliance with all conditions
and requirements of all applicable federal, state and local laws, statutes,
ordinances, rules, regulations, permits, licenses, certificates and other
authorizations. NewCo will be required to obtain business and tax permits to
operate the Business.
6.12 OWNERSHIP OF ASSETS. Except as set forth in SCHEDULE 6.12,
Stereophile has good and marketable title to, or a valid leasehold interest in,
all of the Publication Assets,
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CONTRIBUTION AND SHAREHOLDERS AGREEMENT
VALLEY RECORD DISTRIBUTORS, INC. -- STEREOPHILE INC.
and all of the Publication Assets are owned or held free and clear of all
title defects or objections, mortgages, claims, liens, pledges, charges,
security interests, co-ownership interests, options to purchase or other
encumbrances of any kind or character, except liens for current taxes,
assessments and governmental charges not yet due and payable. Stereophile
shall cause all objections, mortgages, claims, liens, pledges, charges,
options or other encumbrances against or upon the Publication Assets to be
released and all other title defects to be cured. With respect to the
business of publishing the Publications, Stereophile shall be responsible for
payroll and withholding and paying as and when due all taxes not due and
payable as of the date of Closing, but which were incurred or accrued prior
to or through the date of Closing.
6.13 NO UNTRUE STATEMENT. No representation or warranty by Stereophile
in this Agreement or any instrument, certificate, exhibit, schedule or list
attached hereto or furnished or to be furnished to Valley pursuant to the terms
of this Agreement, contains or will contain any untrue statement of a material
fact. In the event any such representation or warranty is discovered at any
time, before or after the Closing, to contain any material misstatement,
Stereophile shall advise Valley in writing immediately of such misstatement.
Unless Valley is advised of such misstatement in writing prior to Closing, by
advising Valley of any such misstatement, Stereophile shall not be relieved of
any liability which may arise under this Agreement for breach of any
representation or warranty. Stereophile acknowledges that Valley is entering
into this Agreement in reliance upon its representations, warranties and
covenants made in this Agreement. All representations, warranties and covenants
of Stereophile contained herein shall survive the Closing and the sale of the
Assets to NewCo.
7. REPRESENTATIONS AND WARRANTIES OF VALLEY. To induce Stereophile to enter
into this Agreement and to consummate the transactions contemplated hereunder,
Valley represents and warrants to, and covenants with, Stereophile as follows
(unless otherwise stated in the following representations and warranties, all
such representations and warranties shall be true and correct as of the date
hereof and as of the Closing and shall survive the Closing).
7.1 ORGANIZATION. Valley is a corporation duly organized, validly
existing and in good standing under the laws of the State of California and has
all requisite corporate power and authority to own, lease and operate its
properties and to carry on its business as now being conducted, and is duly
qualified and in good standing to do business in each jurisdiction in which the
nature of its business or the ownership or leasing of its properties makes such
qualification necessary, or if not so duly qualified, its failure to be so
qualified will not have a material adverse effect on its business, operations or
financial condition.
7.2 AUTHORITY; CONSENTS AND APPROVALS; NO VIOLATION. Valley has the
full corporate power and authority to execute and deliver this Agreement and to
perform its obligation and consummate the transactions contemplated hereunder.
The execution and delivery of this Agreement and the consummation of the
transactions contemplated hereby by Valley have been duly authorized by the
Board of Directors of Valley, and no other corporate proceeding
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CONTRIBUTION AND SHAREHOLDERS AGREEMENT
VALLEY RECORD DISTRIBUTORS, INC. -- STEREOPHILE INC.
on the part of Valley is necessary to authorize such agreements or such
transactions. This Agreement has been duly and validly executed and delivered by
Valley and constitutes a valid and binding obligation of Valley except to the
extent that the binding nature thereof may be subject to the limitations which
might result from bankruptcy, insolvency, reorganization, moratorium or other
similar laws relating to creditors' rights now or thereafter in effect, and
except for the limitations on the remedy of specific performance and other forms
of equitable relief. No permit, authorization, consent or approval of any public
body or authority within the United States is necessary for the consummation by
Valley of the transactions contemplated hereunder. The execution and delivery of
this Agreement, and the consummation of the transactions contemplated
hereunder, will not violate any provision of Valley's Articles of Incorporation
or Bylaws, any statute, rule or regulation, any order or decree of any public
body or authority by which Valley is bound or conflict with, result in a breach
of or constitute (with or without due notice or lapse of time) a default under
any license, franchise, permit, indenture, agreement or other instrument to
which Valley is a party, or by which it or any of its properties is bound, and
which is material to the business of Valley taken as a whole.
7.3 BROKER. No agent, broker or other person acting pursuant to
authority of Valley is entitled to any commission or finder's fee in connection
with the transactions contemplated by this Agreement.
7.4 FINANCIAL AND OTHER INFORMATION. All financial and other
information concerning Valley disclosed by Valley to Stereophile is, and at
Closing will be, true and correct in all material respects.
7.5 STOCK OF VALLEY. As at the date hereof, and as at the date of
Closing, Valley's capital shares consist solely of, and will consist solely of,
612,517 shares of common stock presently issued and outstanding and 103,214
shares of common stock which are subject to issuance pursuant to options
presently outstanding. No other class of shares is authorized by Valley's
Articles of Incorporation. Valley has reserved 7,230 shares of its common stock
for issuance in connection with the Merger, should the Merger occur. There are
no other outstanding options, warrants or rights to purchase Valley's common
stock, obligations of Valley to issue its common stock, or shares of common
stock reserved for issuance, other than obligations to reserve for and issue to
Stereophile.
7.6 ARTICLES AND BYLAWS. Valley has delivered to Stereophile true and
correct copies of its current Articles of Incorporation and Bylaws, and all
amendments thereto, or restatements thereof.
8. COVENANTS OF STEREOPHILE. Stereophile covenants and agrees with Valley
as follows:
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CONTRIBUTION AND SHAREHOLDERS AGREEMENT
VALLEY RECORD DISTRIBUTORS, INC. -- STEREOPHILE, INC.
8.1 ACCESS TO PROPERTIES AND RECORDS. Stereophile shall permit Valley
and its representatives (at Valley's sole cost and expense), from and after the
date of execution of this Agreement, reasonable access during normal business
hours to all of the properties, books, contracts, documents and records of
Stereophile relating to the Business, the opportunity to inspect, copy and
audit such books and records and to otherwise make reasonable investigation of
the Business and the Publication Assets, and to furnish to Valley and its
representatives any additional available financial statements of, and all
reasonable information with respect to the Business that Valley or its
representatives may request.
8.2 CONDUCT OF BUSINESS PENDING THE CLOSING. Until the Closing,
Stereophile will preserve the Business organization intact and will use
reasonable efforts to retain all present key employees. Except as otherwise
permitted by this Agreement or as consented to by Valley in writing, until the
Closing:
a. the Business will be conducted only in the ordinary course
which, without limitation, shall include compliance with all applicable laws,
regulations and administrative orders of any state or municipality the
noncompliance with which could, individually or in the aggregate, have a
material or adverse effect upon the Business, and the maintenance in force of
all insurance policies, fidelity bonds and performance bonds currently in force
and effect;
b. consistent with conducting the Business in accordance with
good business judgment, Stereophile shall use its best efforts to keep available
to the Business the goodwill of suppliers, advertisers, customers and others
having business relations with the Business;
c. Stereophile shall refrain from taking any action to dissuade
any of the employees, agents, advertisers, customers, clients, representatives,
distributors, creditors and suppliers of the Business from remaining associated
with, or of inducing any of the foregoing persons to terminate an association
with, NewCo or the Business; and
d. except as otherwise provided in this Agreement, Stereophile
shall not:
(1) enter into any contract or commitment, incur any
liability, absolute or contingent, waive any right or enter into any other
transaction which would materially or adversely affect the Publication Assets or
the Business;
(2) commit to sell or lease or agree to sell or lease or
otherwise dispose of any of the property included in the Publication Assets,
except for sales of inventory or other tangible personal property in the
ordinary course of the conduct of the Business;
(3) mortgage or pledge any of the Publication Assets;
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CONTRIBUTION AND SHAREHOLDERS AGREEMENT
VALLEY RECORD DISTRIBUTORS, INC. -- STEREOPHILE, INC.
(4) take or omit to take any action which, if taken or
omitted prior to the date hereof, would constitute a breach of Stereophile's
representations or warranties or cause any of them to be untrue or misleading;
and
(5) make any commitments to take any of the actions
specified in this Section.
8.3 ASSURANCES OF CONTINUITY. Until closing Stereophile shall use
its best efforts to introduce representatives of Valley to such of the Business'
advertisers, customers, lessors, suppliers and other persons with whom
Stereophile does business as may be reasonably requested by Valley, and assist
the representatives of Valley to obtain assurances from such persons that they
will continue to conduct business with Valley, as such business was conducted
prior to the Closing.
8.4 PAYMENT OF LIABILITIES. After Closing, Stereophile shall pay, or
cause to be paid, all liabilities and obligations of Stereophile with respect to
the Business which accrued prior to the Closing, as or before the same become
due other than those to be assumed or paid by NewCo.
8.5 DOCUMENTS TO BE DELIVERED. Stereophile shall deliver or cause to
be delivered to Valley at or prior to the Closing:
a. A good standing certificate with respect to Stereophile from
the Secretary of State of the State of New Mexico dated within ten (10) days
prior to Closing;
b. Such evidence that Stereophile has taken all necessary actions
to approve and authorize this Agreement and the transactions contemplated
hereunder as Valley may reasonably request;
c. An assignment and bill of sale and a trademark assignment in
the form of Exhibits D and E hereto, respectively, for the sale, assignment,
conveyance and transfer of the Publication Assets to NewCo;
d. Duly executed and acknowledged (if required) originals of
other agreements which are to be executed or delivered at or prior to the
Closing by Stereophile and are not otherwise specifically mentioned in this
Section; and
e. Such evidence of satisfaction of all conditions to Closing as
Valley may reasonably request.
8.6 PAYMENT OF TAX LIABILITIES. Stereophile shall pay when due all AD
VALOREM or property taxes on the Publication Assets pro rata for 1996 through
the date of
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CONTRIBUTION AND SHAREHOLDERS AGREEMENT
VALLEY RECORD DISTRIBUTORS, INC. -- STEREOPHILE, INC.
Closing, all sales, use or transaction privilege taxes payable with respect to
the Business through Closing including all such taxes, if any, assessed in
connection with this transaction, all payroll taxes and withholdings on
compensation of persons employed in the Business accrued through Closing and all
other taxes with respect to the Business or operation, or the Publication
Assets, incurred or accrued through the Closing, and upon request provide Valley
with a copy of the returns or filings with respect thereto.
8.7 NO OTHER NEGOTIATIONS. Prior to the Closing, unless and until
such time as the obligations of Stereophile to proceed with the transactions
contemplated hereunder shall be terminated, Stereophile agrees that it will
not (a) contact, initiate, or engage in any discussion with any person or
entity (whether or not such discussions were as the result of solicitation,
contact or initiation by such other person or entity), other than the parties
hereto and their agents and representatives, which relate to the purchase or
acquisition of the Publication Assets or any part thereof, or the Business or
any interest therein, (b) discuss any of the proposed terms of this Agreement
with any person or entity other than the parties hereto and their agents and
representatives.
8.8 GOOD FAITH OBLIGATIONS. Stereophile agrees to proceed diligently
and in good faith to consummate the transactions contemplated by this Agreement,
and otherwise to cause the Closing to occur, and it will use all reasonable
efforts to take or cause to be taken all actions, and do or cause to be done
all things, necessary, proper or advisable to consummate the transactions
contemplated by this Agreement; PROVIDED, HOWEVER, that Stereophile shall not
be obligated to waive any conditions to its obligation to close set forth in
Section 11 of this Agreement.
9. COVENANTS OF VALLEY. Valley covenants and agrees with Stereophile as
follows:
9.1 DOCUMENTS TO BE DELIVERED AT CLOSING. At or prior to the Closing,
Valley will cause to be delivered to Stereophile:
a. Good standing certificate with respect to Valley from the
California Secretary of State dated within ten (10) days of Closing;
b. Evidence satisfactory to Stereophile that NewCo has been
validly formed, is in good standing in the state under whose laws it was formed,
and that it has validly approved and authorized all actions to be taken by it as
contemplated by this Agreement;
c. Evidence satisfactory to Stereophile that Valley has taken all
necessary corporate and other action to approve and authorize this Agreement
and the transactions contemplated hereunder;
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CONTRIBUTION AND SHAREHOLDERS AGREEMENT
VALLEY RECORD DISTRIBUTORS, INC. -- STEREOPHILE, INC.
d. Duly executed and acknowledged (if required) originals of all
other agreements which are to be executed or delivered at or prior to the
Closing by Valley and which are not otherwise specifically referenced in this
Section 9.1; and
e. NewCo shall have delivered the portion of the purchase price
payable at Closing, the Note, and stock certificates representing twenty percent
of the issued and outstanding stock of NewCo.
9.2 GOOD FAITH OBLIGATIONS. Valley agrees to proceed diligently and
in good faith to consummate the transactions contemplated by this Agreement, and
otherwise to cause the Closing to occur, and it will use all reasonable efforts
to take or cause to be taken all actions, and do or cause to be done all
things, necessary, proper or advisable to consummate the transactions
contemplated by this Agreement; PROVIDED, HOWEVER, that Valley shall not be
obligated to waive any conditions to its obligation to close set forth in
Section 10 of this Agreement.
10. CONDITIONS PRECEDENT TO THE OBLIGATIONS OF VALLEY TO CLOSE. The
obligations of Valley to close and consummate the transactions contemplated
hereunder shall be subject to the fulfillment at or prior to the Closing of each
of the following conditions:
10.1 ACCURACY OF REPRESENTATIONS AND WARRANTIES. All representations
and warranties of Stereophile contained herein or in the exhibits, schedules or
documents attached hereto or described herein or otherwise made in writing
pursuant to this Agreement shall be true and correct as of the Closing, with the
same force and effect as though made at and as of the Closing, except for
changes expressly contemplated or permitted by this Agreement. If at or prior
to the Closing Stereophile shall supplement or correct any schedule to this
Agreement as allowed by Section 6.13 hereof, such schedule, as supplemented or
corrected, and all matters referred to or disclosed therein, must prove to be
satisfactory to Valley in the exercise of its good faith judgment.
10.2 COMPLIANCE WITH OBLIGATIONS. Stereophile shall have performed and
complied with all of the covenants, agreements, obligations and conditions
required by this Agreement to be performed or complied with by it at or prior to
the Closing, and Valley shall have received all of the agreements, instruments
and other documents required by Section 8.5 to be executed or delivered to it
prior to the Closing. Stereophile shall not be in breach of any term or
provision of this Agreement.
10.3 GOING BUSINESS INTACT. Except for any adverse consequences of
the announcement of the sale of the Assets to Valley, the Business'
organization, personnel and relations with suppliers, advertisers and others,
shall have been preserved intact and shall not have been impaired in any
material or adverse respect.
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CONTRIBUTION AND SHAREHOLDERS AGREEMENT
VALLEY RECORD DISTRIBUTORS, INC. -- STEREOPHILE, INC.
10.4 ABSENCE OF ACTIONS OR PROCEEDINGS. There shall be no actual or
threatened action or proceeding by or before any court, governmental body or
arbitration tribunal which shall seek to restrain, prohibit or invalidate any of
the transactions contemplated by this Agreement or which might affect the right
of NewCo to own or operate the Assets or the Business or which, in the judgment
of the board of directors of Valley made in good faith and based upon advice of
its counsel, makes it inadvisable to proceed with the Closing.
10.5 NO MATERIAL ADVERSE CHANGE OR OCCURRENCE. There shall have been
no material adverse change in the results of the operations or financial
condition of the Business.
10.6 CONDITION OF ASSETS. Stereophile shall have maintained the
tangible items of the Publication Assets from the date of this Agreement to the
date of Closing in their represented condition.
10.7 CONSENTS AND APPROVALS; ITEMS SATISFACTORY TO OTHER PARTIES.
All consents or approvals of any third party which are necessary or, in the
reasonable judgment of Valley, advisable to consummate the transactions
contemplated hereunder shall have been received and be satisfactory to
Valley. Any condition, schedule, disclosure, agreement, document or other
item or matter which is subject to the approval or satisfaction of any other
party hereto as a condition to such other party's obligation to close shall
have been approved by or be satisfactory to such other party.
10.8 ACTION BY LENDER. Valley shall have notified Valley's principal
lender of this proposed transaction, including the possible merger of NewCo into
Valley, and no objection shall have been received from the principal lender to
this Agreement or to the transactions contemplated herein.
11. CONDITIONS PRECEDENT TO THE OBLIGATIONS OF STEREOPHILE TO CLOSE. The
obligations of Stereophile to close and consummate the transactions contemplated
hereunder shall be subject to the fulfillment at or prior to the Closing of each
of the following conditions:
11.1 ACCURACY OF REPRESENTATIONS AND WARRANTIES. All representations
and warranties of Valley contained in this Agreement or otherwise made in
writing pursuant to this Agreement shall be true and correct at the Closing,
with the same force and effect as though made at and as of the Closing, except
for changes contemplated or permitted by this Agreement.
11.2 COMPLIANCE WITH OBLIGATIONS. Valley shall have performed and
complied with all the covenants, agreements, obligations and conditions required
by this Agreement to be performed or complied with by it at or prior to the
Closing and Stereophile shall have received all of the agreements, instruments
and other documents required by Section 9.1 to be executed or delivered by
Valley to it at or prior to the Closing. Valley shall not be in breach of any
term or provision of this Agreement.
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CONTRIBUTION AND SHAREHOLDERS AGREEMENT
VALLEY RECORD DISTRIBUTORS, INC. -- STEREOPHILE, INC.
11.3 ABSENCE OF ACTIONS OR PROCEEDINGS. There shall be no actual or
threatened action or proceeding by or before any court, governmental body or
arbitration tribunal which shall seek to restrain, prohibit or invalidate any of
the transactions contemplated hereunder which in the judgment of Stereophile
made in good faith and based upon advice of its counsel, makes it inadvisable to
proceed with the transactions contemplated by this Agreement.
11.4 CONSENTS AND APPROVALS; ITEMS SATISFACTORY TO OTHER PARTIES. All
consents or approvals of any third party which are necessary or, in the
reasonable judgment of Stereophile, advisable to consummate the transactions
contemplated hereunder, or to proceed with the Closing, shall have been received
and be satisfactory to Stereophile. Any condition, schedule, disclosure,
agreement, document or other item or matter which is subject to the approval or
satisfaction of any other party hereto as a condition to such other party's
obligation to close shall have been approved by or be satisfactory to such other
party.
11.5 NEWCO ACTIONS. All actions necessary to form NewCo and to cause
it to be obligated to perform all actions required of it by this Agreement shall
have been taken.
11.6 TAX TREATMENT. Stereophile shall have reasonably assured itself
that the transaction contemplated by this Agreement shall be a tax-free
transaction under Section 351 of the Internal Revenue Code except to the extent
that Stereophile receives boot. Valley shall not take, and shall not allow NewCo
to take, a tax position inconsistent with such treatment.
12. REMEDIES FOR BREACH OF REPRESENTATIONS OR WARRANTIES.
12.1 CANCELLATION. If any of the conditions precedent set forth in
Section 10 are not satisfied or waived by Valley prior to the scheduled Closing,
then Valley may cancel this Agreement by notice to Stereophile. If any of the
conditions precedent set forth in Section 11 are not satisfied or waived by
Stereophile prior to the scheduled Closing, then Stereophile may cancel this
Agreement by notice to Valley. If this Agreement is cancelled pursuant to the
provisions of this section, such cancellation shall be effected only by the
cancelling party giving written notice of the cancellation as required by this
section. Upon such cancellation, each party shall return all documents to the
party who supplied the documents. Upon such cancellation, the obligations to
purchase and to sell the Publication Assets and the other obligations set forth
in this Agreement will terminate, and, except as provided elsewhere in this
Agreement, neither party shall have any further obligation hereunder.
12.2 BREACH OF REPRESENTATIONS AND WARRANTIES GENERALLY. If the
Closing shall have occurred, then in the event of a breach of any of the
representations, warranties or covenants made by any party to this Agreement,
or in the event any party to this Agreement fails to perform any covenant or
agreement contained in this Agreement or any agreement or
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<PAGE>
CONTRIBUTION AND SHAREHOLDERS AGREEMENT
VALLEY RECORD DISTRIBUTORS, INC. -- STEREOPHILE, INC.
instrument provided for hereunder, the non-breaching party shall be entitled to
proceed against the breaching party for such legal or equitable relief as it may
be entitled.
12.3 INDEMNIFICATION FOR LIABILITIES. If the Closing occurs, Valley
shall indemnify, defend and hold harmless Stereophile from, against and in
respect of claims against Stereophile relating to the liabilities which arise
from the operation of the Business after the Closing; and Stereophile shall
indemnify, defend and hold harmless Valley from, against and in respect of the
liabilities of the Business which arise before or are based on actions or
omissions occurring prior to the Closing.
13. OTHER PROVISIONS.
13.1 SURVIVAL OF REPRESENTATIONS AND WARRANTIES. All of the respective
representations, warranties, covenants and agreements of the parties to this
Agreement to indemnify shall survive the Closing, the consummation of the
transactions contemplated hereunder, and the delivery of any instruments
required by this Agreement.
13.2 CONFIDENTIALITY. Each of the parties to this Agreement shall keep
the terms, provisions and conditions of this Agreement confidential and shall
not disclose the same to any third parties except as may be required by law or
except to such party's attorneys, accountants and, to the extent necessary,
persons providing financing. Notwithstanding the foregoing, after Closing,
Valley may, in its sole discretion, issue a press release and otherwise announce
its purchase hereunder. Valley shall provide any such press release or other
public announcements to Stereophile for review and comment prior to release. The
covenants of the parties under this section shall continue from the date of this
Agreement and shall survive the Closing. Stereophile shall continue to maintain
and keep confidential all financial information relating to Valley which Valley
has provided to Stereophile. Valley shall continue to maintain the
confidentiality of all financial information relating to Stereophile (other than
relating solely to the Business) which Stereophile has provided to Valley.
13.3 RISKS OF LOSS; PRORATIONS; EXPENSES. Any damage to the
Publication Assets, or any single asset or any part thereof, prior to the
Closing shall be borne by Stereophile. In the event of any material loss or
material damage to the Assets prior to the Closing, Valley shall have the option
to cancel this Agreement by notice to Stereophile, and the provisions of Section
12.1 shall apply. Each party shall bear its own costs and expenses, including
attorneys' and accountants' fees, in connection with the negotiation, due
diligence investigation, documentation and consummation of the sale and purchase
of the Publication Assets and the other transactions contemplated by this
Agreement.
13.4 ADDITIONAL ACTS. In addition to the obligations required to be
performed by the parties hereto under the other provisions of this Agreement,
the parties agree to perform, without further consideration, such other acts and
to execute, acknowledge and deliver such
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<PAGE>
CONTRIBUTION AND SHAREHOLDERS AGREEMENT
VALLEY RECORD DISTRIBUTORS, INC. -- STEREOPHILE, INC.
other instruments and documents, subsequent to the Closing, as may be reasonably
required to carry out the provisions and purposes of this Agreement and to
fully and properly transfer the Assets and title thereto.
13.5 EXTENSION; WAIVER. The parties hereto may extend the time for, or
waive the performance of, any of the obligations of any parties hereto, waive
any inaccuracies in the representations or warranties of any parties hereto, or
waive compliance by any parties hereto with any of the covenants or conditions
contained in this Agreement. However, any such extension or waiver shall be in
writing and signed by all of the parties hereto. No such waiver shall operate
or be construed as a waiver of any subsequent act or omission of any party
hereto.
13.6 NOTICES. Any notice to a party pursuant to this Agreement
shall be given by one of the following means: (a) certified or registered
United States mail, postage prepaid, (b) private courier or express service
requesting evidence of receipt as a part of its service, or (c) by telecopy,
with a copy also to be given by first class United States mail, postage
prepaid, or by any means permitted under subparagraphs (a) or (b) of this
section. Notices shall be given to the parties at the following addressees:
If to Valley: Valley Record Distributors, Inc.
1280 Santa Anita Court
Post Office Box 2057
Woodland, California 95776
Attention: Randy Cerf
Telecopy #: (916) 661-7854
with a mandatory copy to:
Howard, Rice, Nemerovsi Canady, Falk & Rabkin
Three Embarcadero Center, Seventh Floor
San Francisco, California 94111
Attention: Daniel J. Winnike
Telecopy #: (415) 399-3041
If to Stereophile: Stereophile, Inc.
208 Delgado Street
Santa Fe, New Mexico 87501
mailing address: P.O. Box 5529
Santa Fe, New Mexico 87502
Attention: Ralph Johnson
Telecopy #: (505) 989-8791
with a mandatory copy to:
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<PAGE>
CONTRIBUTION AND SHAREHOLDERS AGREEMENT
VALLEY RECORD DISTRIBUTORS, INC. -- STEREOPHILE, INC.
Stephen W. Watkinson, Esq.
Gust Rosenfeld
201 N. Central Avenue, Suite 3300
Phoenix, Arizona 85073-3300
Telecopy #: (602) 254-4878
13.7 EMPLOYMENT LIABILITIES.
a. Valley does not assume, and Stereophile hereby retains, any
and all employment related costs, obligations, and liabilities of Stereophile or
the Business incurred on or prior to Closing or which relate to events,
occurrences, conditions, actions, or inactions which took place or were in
effect on or prior to Closing (whether or not reported, filed, billed, or paid
for on or prior to Closing), including, without limitation, wages, salaries,
commissions, accrued vacation and sick pay accrued for periods prior to Closing,
costs, obligations and liabilities relating to the closing of any of
Stereophile's facilities or places of business, the termination or relocation of
employees of Stereophile, severance rights of employees of Stereophile,
employment discrimination, unfair labor practices, wage and hour laws, health
and safety, workers compensation, wrongful discharge, plant closing,
compensation, fringe benefits, insurance, employee benefit plans, pensions,
retiree medical, severance pay, vacations, torts, accidents, disabilities,
injuries, sickness, exposure to harmful conditions, breach of oral or written
employment contracts or collective bargaining agreements, or breaches of any
law, statute, judgment, decree, injunction, order, writ, rule or regulation of
any court or governmental authority.
b. Valley does not assume, and Stereophile agrees to be solely
responsible for, any and all liabilities and obligations, including but not
limited to obligations to give notice, relating to health care continuation
coverage under the Consolidated Omnibus Budget Reconciliation Act of 1985, as
amended ("COBRA") which relate to, arise out of, or are in connection with, this
transaction or the events contemplated by this Agreement.
13.8 BINDING EFFECT. Upon execution hereof by all parties hereto,
this Agreement shall inure to the benefit of, be binding on and be enforceable
against the parties and their respective heirs, legal representatives,
successors and assigns.
13.9 ENTIRE AGREEMENT. This Agreement (including the exhibits and
schedules hereto) and the instruments and documents delivered pursuant hereto,
and the other agreements contemplated or required hereby, constitute the entire
agreement and understanding between the parties with respect to the subject
matter hereof, and supersede any prior agreements and understandings relating to
the subject matter hereof. This Agreement may be modified or amended only by a
written instrument executed by all parties hereto.
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<PAGE>
CONTRIBUTION AND SHAREHOLDERS AGREEMENT
VALLEY RECORD DISTRIBUTORS, INC. -- STEREOPHILE, INC.
13.10 EXECUTION IN COUNTERPARTS. This Agreement may be executed in two
or more counterparts, each of which shall be deemed an original and all of which
together shall constitute one and the same agreement.
13.11 ATTORNEYS' FEES; COSTS OF LITIGATION. If any arbitration, legal
action or any other proceeding is brought for the enforcement of this Agreement,
or because of in alleged dispute, breach, default or misrepresentation in
connection with any of the provisions of this Agreement, the successful or
prevailing party or parties shall be entitled to recover reasonable attorneys'
fees and other costs incurred in that action or proceeding, in addition to any
other relief to which it or they may be entitled.
13.12 RIGHT TO SUPPLEMENT SCHEDULES. Each party hereto shall have the
right to supplement or correct any schedule to this Agreement which relates to
any representation, warranty or disclosure made by such party pursuant to this
Agreement. Any such supplement or correction to a schedule shall be delivered to
all other parties hereto prior to the Closing, shall be accompanied by true and
complete copies of all agreements, instruments or other documents or items
referred to therein, shall be subject to the approval of all other parties
hereto and shall be subject to the other provisions of this Agreement with
respect to such schedule.
13.13 CONSTRUCTION AND INTERPRETATION. This Agreement is the result
of negotiations between the parties and their legal counsel, and the terms and
provisions hereof shall be interpreted and construed in accordance with their
usual and customary meanings. The parties each waive the application of any rule
of law which otherwise would be applicable in connection with the interpretation
and construction of this Agreement that ambiguous or conflicting terms or
provisions should be interpreted or construed against the party who, or whose
attorney, prepared the executed agreement or any earlier draft of same. The
headings of the paragraphs and sections of this Agreement are included for
purposes of convenience only and shall not affect the construction or
interpretation of any of its provisions.
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<PAGE>
CONTRIBUTION AND SHAREHOLDERS AGREEMENT
VALLEY RECORD DISTRIBUTORS, INC, -- STEREOPHILE, INC.
In witness whereof, the parties have executed this Agreement as of the
date first above written.
VALLEY RECORD DISTRIBUTORS, INC.
By /s/ J. Randolph Cerf
-----------------------------------
Its CFO
-----------------------------------
STEREPHILE, INC.
By /s/ Lawrence Archibald
-----------------------------------
Its CHAIRMAN
-----------------------------------
/s/ Barnet Cohen
--------------------------------------
Shareholder
-23-
<PAGE>
EXHIBIT A
The following shall constitute the Publication Assets:
GENERALLY
(i) the SCHWANN trademark and trade name, and all goodwill associated therewith,
and all other trademarks and trade names used in the business of publishing the
Publications, and all goodwill associated therewith; (ii) all advertiser lists,
subscriber lists, dealer lists, back issues, computer databases and recording
catalogs used principally for the Publications; (iii) computers and computer
software licenses used by Stereophile solely in connection with the
Publications; (iv) printing and distribution contracts for the Publications,
advertising contracts and other contracts necessary for or used in the operation
of the Publications, all of which are listed in Schedule 6.6; and (v) other
tangible and intangible assets owned or held under lease by Stereophile which
are used only in connection with the Publications.
DATABASES
Opus Main Database
Opus Artist Database
Spectrum Database
Archived song listings for non-classical releases from approximately
1985 to 1994 in ASCII format
Collected reference materials for the Publication
[Does not include CDRD databases]
TRADEMARKS
Unregistered -
SCHWANN
SCHWANN OPUS
SCHWANN SPECTRUM
SCHWANN ARTIST
A-1
<PAGE>
FINANCIAL RECORDS
Copies of available financial records, as needed
TANGIBLE ASSETS
Inventory of prior issues as requested by NewCo
Office furniture for 8-10 people used for the Publication, including
Canon NP6025 Copier
Ten (10) personal computers (Pentium and 486 class or MACs) used for
the Publication, and related printers, peripherals and software
licenses
Eight (8) phone telephone system
EXCLUDED ASSETS
The following assets of Stereophile which are or may have been used in
the Business are NOT included in the Publication Assets:
Cash
Bank Accounts
Accounts Receivable
Computer Programs described as follows:
SCS (Single Copy Sales) software program
Quark desktop publishing software program
Photoshop software program
Adobe Illustrator software program
AccPac accounting software program
Fonts
Advertising accounting tracking program
A-2
<PAGE>
STOCKHOLDER AGREEMENT
This Agreement is made as of this January ___, 1995 between Valley
Record Distributors, Inc., a California corporation ("Company), and Robert R.
Cain ("Holder").
WHEREAS, Holder has as of this date acquired 9,200 shares ("Shares")
of the Common Stock of the Company in connection with Holder's termination of an
award previously made to him pursuant to the Company's Stock Appreciation Rights
Plan;
WHEREAS, in partial consideration for the Shares, Holder has agreed to
enter into this Agreement.
NOW, THEREFORE, in consideration of the foregoing and the
representations, warranties and covenants contained herein, the parties hereby
agree as follows:
1. Holder may Transfer Shares only after compliance with this
Agreement. The only Transfers of Shares ("Permitted Transfers") permitted prior
to termination of Agreement without regard to the Company's rights of first
refusal are as follows:
(a) a Transfer by will or under the laws of descent and
distribution; and
(b) a Transfer by Holder to his ancestors, descendants or spouse
(other than pursuant to a decree of divorce, dissolution or separate
maintenance, a property settlement, or a separation agreement or any similar
agreement or arrangement with a spouse, except for BONA FIDE estate planning
purposes), or to a trust, partnership, custodianship or other fiduciary account
for the benefit of Holder and/or such ancestors, descendants or spouse,
including any Transfer in the form of a distribution from any such trust,
partnership, custodianship or other fiduciary account to any of the foregoing
permitted beneficiaries thereof.
Any prohibited Transfer is void and of no effect, and no purported transferee
thereof will be recognized as a shareholder of the Company for any purpose
whatsoever. Should such a Transfer purport to occur, the Company may refuse to
carry out the Transfer on its books, attempt to set aside the Transfer, enforce
any undertakings or rights under this Agreement, or exercise any other legal or
equitable remedy.
2. It will be a condition to the Company transferring any Shares on
its books and issuing a new stock certificate in the name of the transferee, or
causing or allowing the Company's transfer agent to do so, that in the case of
-1-
<PAGE>
either a Permitted Transfer or the Company's failure or refusal to exercise its
rights of first refusal under section 3 below:
(a) the transferee of Shares will execute such documents as the
Company may reasonably require to ensure that the Company's rights hereunder are
adequately protected with respect to such Shares, including, without limitation,
the transferee's agreement to be bound by all of the terms and conditions of
this Agreement; and
(b) the Company satisfies itself that such Transfer complies in
all respects with the requirements imposed by applicable state or federal
securities laws.
3. If Shares are Transferred or are proposed to be Transferred, the
Company will have an assignable right (but not an obligation) to purchase such
Shares on the terms and conditions set out in this section 3. The right of
first refusal under this section 3 will be exercisable only on an all-or-nothing
basis as to any particular Transfer or proposed Transfer of Shares by the holder
thereof. The transferor of any Shares subject to this section 3 will provide to
the Company a notice of proposed Transfer (the "Transferor Notice") stating:
the number of Shares that the transferor proposes to Transfer and the
transferor's BONA FIDE intention to Transfer such shares; the name(s) and
address(es) of the transferor(s), the name and address of the transferee (and
subsequently such other information regarding the transferee as the Company
reasonably requests), and the original holder of the Shares (if other than the
transferor); the manner and date of such proposed Transfer; and the BONA FIDE
cash price and/or other consideration per Share, if any, that the transferee has
offered to pay (the "Offered Price"). The Company may exercise its right of
first refusal under this section 3 at any time not more than 30 days after the
Company has received the Transferor Notice with respect to such Shares. The
Company will exercise its right, if at all, by informing the transferor in
writing of the Company's intention to do so, in a notice that specifies a
closing date that is no more than 60 days (or such later date as the transferee
may have offered or that the Transfer is otherwise scheduled to occur) after
receipt of the Transferor Notice. In exercising its repurchase rights under
this section 3, the Company will pay in cash at such closing, to be held at the
Company's principal executive offices, a price equal to the Offered Price,
subject to an appropriate adjustment to take into account any deferred payment
terms and the risk of nonpayment of any future payments included in the Offered
Price. If the Offered Price includes any non-cash consideration the value
thereof for the purposes of this subsection shall be determined in good faith by
the Board of Directors of the Company ("Board"). If the Transfer or proposed
Transfer occurs other than in connection with a bona fide offer from a third
party to purchase the Shares, including, without limitation, from any of the
following circumstances, then the purchase price for the Shares being
repurchased will be their Fair Market Value: an assignment of the Shares for
the benefit of creditors of the transferor; a Transfer by operation of law,
except in connection with a Permitted Transfer; an
-2-
<PAGE>
execution of judgment against the Shares or the acquisition of record or
beneficial ownership of Shares by a lender or creditor; a Transfer pursuant to
any decree of divorce, dissolution or separate maintenance, any property
settlement, any separation agreement or any other agreement with a spouse
(except for BONA FIDE estate planning purposes) under which any Shares are
Transferred or awarded to the spouse of the transferor or are required to be
sold; or a Transfer resulting from the filing by the transferor of a petition
for relief, or the filing of an involuntary petition against the transferor,
under the bankruptcy laws of the United States or of any other nation.
4. In addition to the rights set forth in section 3 above, the
Company shall have the assignable right (but not the obligation), exercisable
from and after the date that Holder ceases (for any reason) to be an employee or
director of the Company or any subsidiary of the Company and prior to the date
that is 120 days thereafter, to purchase from the then-current holder of any
Shares any or all of such Shares for a purchase price that is equal to their
Fair Market Value at the time of such termination of employment. The Company
may elect to exercise such right by delivering a written notice to such holder
of Shares, such notice specifying the date on which such repurchase will take
place (which will be no more than 90 days after the giving of such notice). The
purchase price shall be paid in the form of cash, including the Company's check,
or, at the Company's election if the aggregate repurchase price exceeds
$500,000, the Company's three year promissory note bearing interest at an annual
rate equal to the greater of twelve percent or the prime rate (as reported in
The Wall Street Journal) plus two percentage points.
5. Holder represents, warrants and agrees that in addition to the
restrictions contained herein (i) the Shares may only be transferred pursuant to
registration under the Securities Act of 1933 ("1933 Act") or an exemption from
such registration; (ii) the Company is under no obligation to register the
Shares; (iii) Holder has acquired the Shares for his own account and not with a
view to distribution within the meaning of the 1933 Act, other than as may be
effected in compliance with the 1933 Act and the rules and regulations
promulgated thereunder.
6. (a) Certificates representing the Shares will bear all legends
required by law and necessary or appropriate to effectuate the provisions of
this Agreement.
(b) To the extent requested by the Company in connection with a
firm commitment underwritten public offering of securities of the Company,
Holder will: (i) not sell or otherwise transfer any such shares not included in
such underwriting during the 180 day period (or such shorter or longer period as
the underwriter may require of the principal security holders of the Company)
following the effective date of the registration statement filed with the
Securities and Exchange Commission in connection with such offering; and
(ii) execute such
-3-
<PAGE>
instruments as the underwriter may reasonably require to evidence such
agreement.
7. Any notice to be given to the Company hereunder will be addressed
to the Company at its principal executive office, Attention: Corporate
Secretary, or at such other address as the Company may designate in writing.
Any notice to be given to Holder will be addressed to him at the address
provided to the Company by Holder. Any such notice will be deemed to have been
duly given if and when delivered personally or when enclosed in a properly
sealed envelope, addressed as aforesaid, deposited, postage prepaid, in a post
office or branch post office regularly maintained by the United States
Government.
8. The Company may assign its rights hereunder to purchase the
Shares to any person of whose identity Holder is notified in writing. This
Agreement shall be binding upon and enforceable by the respective successors of
the parties hereto.
9. In the event of any change in the outstanding Common Stock of the
Company as a result of a stock split, reverse stock split, stock dividend,
recapitalization, combination or reclassification, the resultant number of
shares of common stock or other securities held or received by Holder in respect
of the shares originally constituting the Shares shall thereafter constitute the
Shares, or additional Shares, as the case may be.
10. This Agreement will terminate upon the first to occur of (i) the
closing of a firm-commitment underwritten public offering of capital stock of
the Company for an aggregate price to the public of $5,000,000 or more pursuant
to an effective Registration Statement filed with the Securities and Exchange
Commission under the Securities Act of 1933, or (ii) the mutual written consent
of the Company and Holder.
11. The following capitalized terms have the indicated meanings when
used herein:
(a) "Fair Market Value" means, with respect to the Shares
(i) the most recent closing price of the Common Stock of the Company if the same
trades on a securities exchange or is quoted on an automated system that reports
closing sale prices, (ii) the average of the most recent "bid" and "asked"
prices of the Common Stock of the Company if the same trades on an
over-the-counter market that does not report closing sale prices, (iii) if
neither (i) or (ii) are applicable, a price based on the most recent private
sale of the Common Stock of the Company in a negotiated arm's length transaction
or based on the most recently completed valuation of the Stock performed for the
Company's Employee Stock Ownership Plan, in either case as determined by the
Board with such adjustments from either of such prices as the Board determines
in good faith to be appropriate in light of
-4-
<PAGE>
events or results occurring subsequent to such private sale or valuation, as the
case may be.
(b) "Transfer," with respect to Shares, includes, without
limitation, a voluntary or involuntary sale, assignment, transfer, conveyance,
pledge, hypothecation, encumbrance, disposal, loan, gift, attachment or levy of
those shares, including without limitation an assignment for the benefit of
creditors of the transferor, a transfer by operation of law, such as a transfer
by will or under the laws of descent and distribution, an execution of judgment
against those shares or the acquisition of record or beneficial ownership
thereof by a lender or creditor, a transfer pursuant to any decree of divorce,
dissolution or separate maintenance, any property settlement, any separation
agreement or any other agreement with a spouse under which a part or all of the
Shares are transferred or awarded to the spouse of the transferor or are
required to be sold; or a transfer resulting from the filing by the transferor
of a petition for relief, or the filing of an involuntary petition against the
transferor, under the bankruptcy laws of the United States or of any other
nation.
In witness whereof, the parties have set their hands as of the date
first above written.
VALLEY RECORD DISTRIBUTORS, INC.
By: /s/ Valley Record Distributors
---------------------------------
/s/ Robert R. Cain
---------------------------------
Robert R. Cain
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<PAGE>
LOAN AND SECURITY AGREEMENT
BY AND BETWEEN
CONGRESS FINANCIAL CORPORATION (NORTHWEST)
AS LENDER
AND
VALLEY MEDIA, INC.
AS BORROWER
DATED: MAY 21, 1998
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
SECTION 1. DEFINITIONS. . . . . . . . . . . . . . . . . . . . . . . . . . . 1
SECTION 2. CREDIT FACILITIES. . . . . . . . . . . . . . . . . . . . . . . . 12
2.1 Revolving Loans. . . . . . . . . . . . . . . . . . . . . . . . . 12
2.2 Letter of Credit Accommodations. . . . . . . . . . . . . . . . . 13
2.3 Availability Reserves. . . . . . . . . . . . . . . . . . . . . . 15
2.4 Reduction in Maximum Credit. . . . . . . . . . . . . . . . . . . 16
SECTION 3. INTEREST AND FEES. . . . . . . . . . . . . . . . . . . . . . . . 16
3.1 Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
3.2 Closing Fee. . . . . . . . . . . . . . . . . . . . . . . . . . . 17
3.3 Servicing Fee. . . . . . . . . . . . . . . . . . . . . . . . . . 18
3.4 Unused Line Fee. . . . . . . . . . . . . . . . . . . . . . . . . 18
3.5 Changes in Laws and Increased Costs of Loans . . . . . . . . . . 18
SECTION 4. CONDITIONS PRECEDENT . . . . . . . . . . . . . . . . . . . . . . 19
4.1 Conditions Precedent to Initial Loans and Letter of Credit
Accommodations . . . . . . . . . . . . . . . . . . . . . . . . 19
4.2 Conditions Precedent to All Loans and Letter of Credit
Accommodations . . . . . . . . . . . . . . . . . . . . . . . . 20
SECTION 5. GRANT OF SECURITY INTEREST . . . . . . . . . . . . . . . . . . . 21
SECTION 6. COLLECTION AND ADMINISTRATION. . . . . . . . . . . . . . . . . . 23
6.1 Borrower's Loan Account. . . . . . . . . . . . . . . . . . . . . 23
6.2 Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
6.3 Collection of Accounts . . . . . . . . . . . . . . . . . . . . . 23
6.4 Payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
6.5 Authorization to Make Loans. . . . . . . . . . . . . . . . . . . 25
6.6 Use of Proceeds. . . . . . . . . . . . . . . . . . . . . . . . . 25
SECTION 7. COLLATERAL REPORTING AND COVENANTS . . . . . . . . . . . . . . . 25
7.1 Collateral Reporting . . . . . . . . . . . . . . . . . . . . . . 25
7.2 Accounts Covenants . . . . . . . . . . . . . . . . . . . . . . . 26
7.3 Inventory Covenants. . . . . . . . . . . . . . . . . . . . . . . 28
7.4 Equipment Covenants. . . . . . . . . . . . . . . . . . . . . . . 29
7.5 Power of Attorney. . . . . . . . . . . . . . . . . . . . . . . . 29
7.6 Right to Cure. . . . . . . . . . . . . . . . . . . . . . . . . . 30
7.7 Access to Premises . . . . . . . . . . . . . . . . . . . . . . . 30
SECTION 8. REPRESENTATIONS AND WARRANTIES . . . . . . . . . . . . . . . . . 31
8.1 Corporate Existence, Power and Authority; Subsidiaries . . . . . 31
8.2 Financial Statements; No Material Adverse Change.. . . . . . . . 31
8.3 Chief Executive Office; Collateral Locations.. . . . . . . . . . 32
8.4 Priority of Liens; Title to Properties . . . . . . . . . . . . . 32
8.5 Tax Returns. . . . . . . . . . . . . . . . . . . . . . . . . . . 32
8.6 Litigation . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
(i)
<PAGE>
8.7 Compliance with Other Agreements and Applicable Laws . . . . . . 32
8.8 Bank Accounts. . . . . . . . . . . . . . . . . . . . . . . . . . 33
8.9 Accuracy and Completeness of Information.. . . . . . . . . . . . 33
8.10 Survival of Warranties; Cumulative . . . . . . . . . . . . . . . 33
SECTION 9. AFFIRMATIVE AND NEGATIVE COVENANTS . . . . . . . . . . . . . . . 33
9.1 Maintenance of Existence . . . . . . . . . . . . . . . . . . . . 33
9.2 New Collateral Locations . . . . . . . . . . . . . . . . . . . . 33
9.3 Compliance with Laws, Regulations, Etc.. . . . . . . . . . . . . 34
9.4 Payment of Taxes and Claims. . . . . . . . . . . . . . . . . . . 34
9.5 Insurance. . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
9.6 Financial Statements and Other Information . . . . . . . . . . . 35
9.7 Sale of Assets, Consolidation, Merger, Dissolution, Etc. . . . . 36
9.8 Encumbrances . . . . . . . . . . . . . . . . . . . . . . . . . . 37
9.9 Indebtedness . . . . . . . . . . . . . . . . . . . . . . . . . . 38
9.10 Loans, Investments, Guarantees, Etc. . . . . . . . . . . . . . . 39
9.11 Dividends and Redemptions. . . . . . . . . . . . . . . . . . . . 42
9.12 Transactions with Affiliates . . . . . . . . . . . . . . . . . . 43
9.13 Additional Bank Accounts . . . . . . . . . . . . . . . . . . . . 43
9.14 Adjusted Net Worth . . . . . . . . . . . . . . . . . . . . . . . 43
9.15 Costs and Expenses . . . . . . . . . . . . . . . . . . . . . . . 43
9.16 Further Assurances . . . . . . . . . . . . . . . . . . . . . . . 44
SECTION 10. EVENTS OF DEFAULT AND REMEDIES . . . . . . . . . . . . . . . . . 44
10.1 Events of Default. . . . . . . . . . . . . . . . . . . . . . . . 44
10.2 Remedies . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46
SECTION 11. JURY TRIAL WAIVER; OTHER WAIVERS
AND CONSENTS; GOVERNING LAW . . . . . . . . . . . . . . . . 48
11.1 Governing Law; Choice of Forum; Service of Process; Jury Trial
Waiver . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48
11.2 Waiver of Notices. . . . . . . . . . . . . . . . . . . . . . . . 49
11.3 Amendments and Waivers . . . . . . . . . . . . . . . . . . . . . 49
11.4 Waiver of Counterclaims. . . . . . . . . . . . . . . . . . . . . 50
11.5 Indemnification. . . . . . . . . . . . . . . . . . . . . . . . . 50
SECTION 12. TERM OF AGREEMENT; MISCELLANEOUS . . . . . . . . . . . . . . . . 50
12.1 Term . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50
12.2 Notices. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51
12.3 Partial Invalidity . . . . . . . . . . . . . . . . . . . . . . . 51
12.4 Successors . . . . . . . . . . . . . . . . . . . . . . . . . . . 52
12.5 Confidentiality. . . . . . . . . . . . . . . . . . . . . . . . . 52
12.6 Entire Agreement . . . . . . . . . . . . . . . . . . . . . . . . 53
</TABLE>
(ii)
<PAGE>
INDEX TO
EXHIBITS AND SCHEDULES
Exhibit A Information Certificate
Exhibit B Form of Landlord Agreement
Schedule 5.5 Equipment Excluded from Collateral
Schedule 8.6 Pending Actions, Suits, Proceedings and
Governmental Investigations
Schedule 8.8 Bank Accounts
Schedule 9.8 Permitted Liens
Schedule 9.9 Existing Indebtedness
Schedule 9.10 Existing Loans, Advances and Guarantees
Schedule 9.12 Transactions with Affiliates
(i)
<PAGE>
LOAN AND SECURITY AGREEMENT
This Loan and Security Agreement dated May 21, 1998 is entered into by and
between CONGRESS FINANCIAL CORPORATION (NORTHWEST), an Oregon corporation
("LENDER") and VALLEY MEDIA, INC., a California corporation ("BORROWER").
W I T N E S S E T H:
WHEREAS, Borrower has requested that Lender enter into certain financing
arrangements with Borrower pursuant to which Lender may make loans and provide
other financial accommodations to Borrower; and
WHEREAS, Lender is willing to make such loans and provide such financial
accommodations on the terms and conditions set forth herein;
NOW, THEREFORE, in consideration of the mutual conditions and agreements
set forth herein, and for other good and valuable consideration, the receipt and
sufficiency of which is hereby acknowledged, the parties hereto agree as
follows:
SECTION 1. DEFINITIONS
All terms used herein which are defined in Article 1 or Article 9 of the
Uniform Commercial Code shall have the meanings given therein unless otherwise
defined in this Agreement. All references to the plural herein shall also mean
the singular and to the singular shall also mean the plural unless the context
otherwise requires. All references to Borrower and Lender pursuant to the
definitions set forth in the recitals hereto, or to any other person herein,
shall include their respective successors and assigns. The words "hereof",
"herein", "hereunder", "this Agreement" and words of similar import when used in
this Agreement shall refer to this Agreement as a whole and not any particular
provision of this Agreement and as this Agreement now exists or may hereafter be
amended, modified, supplemented, extended, renewed, restated or replaced. The
word "including" when used in this Agreement shall mean "including, without
limitation". An Event of Default shall exist or continue or be continuing until
such Event of Default is waived in accordance with Section 11.3 or is cured in a
manner satisfactory to Lender, if such Event of Default is capable of being
cured as determined by Lender. Any accounting term used herein unless otherwise
defined in this Agreement shall have the meanings customarily given to such term
in accordance with GAAP. For purposes of this Agreement, the following terms
shall have the respective meanings given to them below:
1.1 "ACCOUNT SETTLEMENT AGREEMENT" shall have the meaning set forth in
Section 7.2(c).
1.2 "ACCOUNTS" shall mean all present and future rights of Borrower to
payment for goods sold or leased or for services rendered, which are not
evidenced by instruments or chattel paper, and whether or not earned by
performance.
<PAGE>
1.3 "ADJUSTED EURODOLLAR RATE" shall mean, with respect to each
Interest Period for any Eurodollar Rate Loan, the rate per annum (rounded
upwards, if necessary, to the next one-sixteenth (1/16) of one (1%) percent)
determined by dividing (a) the Eurodollar Rate for such Interest Period by
(b) a percentage equal to: (i) one (1) minus (ii) the Reserve Percentage.
For purposes hereof, "Reserve Percentage" shall mean the reserve percentage,
expressed as a decimal, prescribed by any United States or foreign banking
authority for determining the reserve requirement which is or would be
applicable to deposits of United States dollars in a non-United States or an
international banking office of Reference Bank used to fund a Eurodollar Rate
Loan or any Eurodollar Rate Loan made with the proceeds of such deposit,
whether or not the Reference Bank actually holds or has made any such
deposits or loans. The Adjusted Eurodollar Rate shall be adjusted on and as
of the effective day of any change in the Reserve Percentage.
1.4 "ADJUSTED NET WORTH" shall mean as to any Person, at any time,
using the average cost basis in accordance with GAAP (except as otherwise
specifically set forth below), on a consolidated basis for such Person and its
subsidiaries (if any), the amount equal to the sum of: (a) the difference
between: (i) the aggregate net book value of all assets of such Person and its
subsidiaries, calculating the book value of inventory for this purpose on an
average cost basis, after deducting from such book values all appropriate
reserves in accordance with GAAP (including all reserves for doubtful
receivables, obsolescence, depreciation and amortization) and (ii) the aggregate
amount of the indebtedness and other liabilities of such Person and its
subsidiaries (including tax and other proper accruals), PLUS (b) Subordinated
Debt (as defined in Section 9.9(e) hereof).
1.5 "AVAILABILITY RESERVES" shall mean, as of any date of
determination, such amounts as Lender may from time to time establish and revise
in good faith reducing the amount of Revolving Loans and Letter of Credit
Accommodations which would otherwise be available to Borrower under the lending
formula(s) provided for herein: (a) to reflect events, conditions, contingencies
or risks which, as determined by Lender in good faith, do or may affect either
(i) the Collateral or any other property which is security for the Obligations
or its value,(ii) the assets or business of Borrower or any Obligor or (iii) the
security interests and other rights of Lender in the Collateral (including the
enforceability, perfection and priority thereof), (b) to reflect Lender's good
faith belief that any collateral report or financial information furnished by or
on behalf of Borrower or any Obligor to Lender is or may have been incomplete,
inaccurate or misleading in any material respect,(c) to reflect outstanding
Letter of Credit Accommodations as provided in Section 2.2 hereof, (d) in
respect of any state of facts which Lender determines in good faith constitutes
an Event of Default, (e) to reflect credits granted by Borrower with respect to
coop advertising allowance, or (f) if the Monthly Excess Availability for the
calendar month of August of any year of this Agreement is less than $10,000,000,
then for each week during the calendar months of September, October and
November, respectively, of such year of this Agreement, an amount equal to six
(6%) percent of the gross sales (subject to adjustment (either upward or
downward) by Lender based upon historical changes in dilution) for each such
week (the "Seasonal Reserve"); EXCEPT THAT, provided that Lender determines, in
good faith, that the Seasonal Reserve should not otherwise remain as an
Availability Reserve in respect of events, conditions, contingencies or risks as
provided for in Section 1.4(a), (b), (d), or (e) above, and
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<PAGE>
provided further that no Event of Default exists and is continuing, Lender
agrees to release (i) thirty-three and one-third (33-1/3%) percent of the
Seasonal Reserve on the last Business Day of December of such year in which the
Seasonal Reserve was established, provided that Lender has received from
Borrower a schedule of all credits issued for such month of December,
(ii) thirty-three and one-third (33-1/3%) percent of the Seasonal Reserve on the
last Business Day of January of the immediately succeeding year, provided that
Lender has received from Borrower a schedule of all credits issued for such
month of January, and (iii) thirty-three and one-third (33-1/3%) percent of the
Seasonal Reserve on the last Business Day of February of the immediately
succeeding year, provided that Lender has received from Borrower a schedule of
all credits issued for such month of February.
1.6 "BLOCKED ACCOUNTS" shall have the meaning set forth in Section 6.3
hereof.
1.7 "BUSINESS DAY" shall mean any day other than a Saturday, Sunday, or
other day on which commercial banks are authorized or required to close under
the laws of the State of California or the Commonwealth of Pennsylvania, and a
day on which the Reference Bank and Lender are open for the transaction of
business, except that if a determination of a Business Day shall relate to any
Eurodollar Rate Loans, the term Business Day shall also exclude any day on which
banks are closed for dealings in dollar deposits in the London interbank market
or other applicable Eurodollar Rate market.
1.8 "CHANGE OF CONTROL" shall mean the occurrence of the issuance,
sale, transfer or other disposition of shares of capital stock of Borrower that,
individually or in the aggregate, results in any Person (other than Barnet J.
Cohen and Barbara Cohen (his wife) collectively) owning, at any time, a majority
of the voting control of the equity ownership of Borrower, PROVIDED THAT, a
Change of Control shall not have occurred if said Barnet J. Cohen and Barbara
Cohen collectively own, at any time, less than a majority, and no other Person
then owns a majority, of the voting control of the equity ownership of Borrower.
1.9 "COLLATERAL" shall have the meaning set forth in Section 5 hereof.
1.10 "DELAWARE REINCORPORATION MERGER" shall mean the merger of the
Borrower into a Delaware corporation ("NEWCO") that, immediately prior to such
merger, is an entity that has no operating assets and liabilities and is subject
to no liens and that is wholly owned by Borrower prior to such merger, and that,
immediately after giving effect to such merger, Newco shall be the surviving
entity, will be owned by the same persons and entities, in the same percentages,
as owned Borrower prior to such merger, and provided that each of the following
conditions is satisfied prior to or contemporaneously with the effectiveness of
such merger: (a) Newco shall have changed its name to Valley Media, Inc.,(b)
Newco's directors and officers shall be the same as the directors and officers
of Borrower immediately prior to the merger,(c) Newco shall have delivered to
Lender an Assumption Agreement, duly executed by an authorized officer of Newco,
in form satisfactory to Lender and providing in substance that Newco expressly
assumes all of the Obligations of Borrower under the Financing Agreements, and
(d) Newco shall have delivered to Lender such UCC-2 or UCC-3 amendment
statements, such new UCC-1 financing statements,
3
<PAGE>
such new documents for filing with the United States Patent and Trademark
Office, and such other notice filing documents, each duly executed by an
authorized officer of Newco, as Lender may request, regarding continuity of
perfection of Lender's security interests granted under any of the Financing
Agreements.
1.11 "DNA" shall mean Borrower's Distribution North America Division,
which sells audio products purchased from independent audio production
companies.
1.12 "ELIGIBLE ACCOUNTS" shall mean Accounts created by Borrower which
are and continue to be acceptable to Lender based on the criteria set forth
below. In general, Accounts shall be Eligible Accounts if:
(a) such Accounts arise from the actual and BONA FIDE sale and
delivery of goods by Borrower or rendition of services by Borrower in the
ordinary course of its business which transactions are completed in accordance
with the terms and provisions contained in any documents related thereto;
(b) such Accounts are not unpaid more than the lesser of
(i) sixty (60) days past the original due date thereof,and (ii) one hundred
twenty (120) days after the date of the original invoice for them; EXCEPT THAT,
Eligible Accounts shall include Accounts due and owing from those account
debtors as set forth in a written schedule submitted to Lender by Borrower from
time to time and which account debtors shall be acceptable to Lender ("SPECIAL
DESIGNATED ACCOUNTS") which are unpaid more than one hundred twenty (120) days
but not in excess of one hundred fifty (150) days from the original invoice date
for such Special Designated Accounts, PROVIDED, HOWEVER, that the maximum
aggregate amount of Special Designated Accounts created by DNA which may be
considered Eligible Accounts at any time shall not exceed $10,000,000;
(c) such Accounts are not Accounts created by Borrower under its
"Funatics" trade name;
(d) such Accounts comply with the terms and conditions contained
in Section 7.2(c) of this Agreement;
(e) such Accounts do not arise from (i) sales on consignment or
(ii) sales on any terms under which payment by the account debtor may be
conditional or contingent, except in the ordinary course of Borrower's business
in accordance with practices and policies previously disclosed in writing to
Lender;
(f) the chief executive office of the account debtor with
respect to such Accounts is located in the United States of America or in
Canada, or, at Lender's option, if either: (i) the account debtor has delivered
to Borrower an irrevocable letter of credit issued or confirmed by a bank
satisfactory to Lender and payable only in the United States of America or
Canada and in U.S. dollars, sufficient to cover such Account, in form and
substance satisfactory to Lender and, if required by Lender, the original of
such letter of credit has been delivered to
4
<PAGE>
Lender or Lender's agent and the issuer thereof notified of the assignment of
the proceeds of such letter of credit to Lender, or (ii)(A) such Account is
subject to credit insurance issued by Great American Insurance Company, Policy
Number MB-I-118833 and all of Borrower's interest to claim payments thereunder
has been, as of the date hereof, assigned to Lender or (B) is subject to such
other credit insurance payable to Lender issued by an insurer and on terms and
in an amount acceptable to Lender, or (iii) such Account is otherwise acceptable
in all respects to Lender (subject to such lending formula with respect thereto
as Lender may determine);
(g) such Accounts do not consist of progress billings, bill and
hold invoices or retainage invoices, except as to bill and hold invoices, if
Lender shall have received an agreement in writing from the account debtor, in
form and substance satisfactory to Lender, confirming the unconditional
obligation of the account debtor to take the goods related thereto and pay such
invoice;
(h) there are no facts, events or occurrences which would
(i) impair the validity, enforceability or collectability of such Accounts or
(ii) reduce the amount payable or delay payment thereunder, except in the
ordinary course of Borrower's business in accordance with practices and policies
previously disclosed in writing to Lender;
(i) such Accounts are subject to the first priority, valid and
perfected security interest of Lender and any goods giving rise thereto are not,
and were not at the time of the sale thereof, subject to any liens except those
permitted in this Agreement;
(j) neither the account debtor nor any officer or employee of
the account debtor with respect to such Accounts is an officer, employee or
agent of or affiliated with Borrower directly or indirectly by virtue of family
membership, ownership, control, management or otherwise, except for such
Accounts that arise in the ordinary course of and pursuant to the reasonable
requirements of Borrower's business and upon fair and reasonable terms no less
favorable to Borrower than Borrower would obtain in a comparable arm's-length
transaction with an unaffiliated person;
(k) the account debtors with respect to such Accounts are not
any foreign government, the United States of America, political subdivision,
department, agency or instrumentality thereof, unless, if the account debtor is
the United States of America, political subdivision, department, agency or
instrumentality thereof, upon Lender's request, the Federal Assignment of Claims
Act of 1940, as amended, has been complied with in a manner satisfactory to
Lender;
(l) there are no proceedings or actions which are threatened or
pending against the account debtors with respect to such Accounts which
reasonably could be expected to result in any material adverse change in any
such account debtor's financial condition;
5
<PAGE>
(m) such Accounts of a single account debtor or its affiliates
do not constitute more than fifteen (15%) percent of all otherwise Eligible
Accounts (but the portion of the Accounts not in excess of such percentage may
be deemed Eligible Accounts);
(n) such Accounts are not owed by an account debtor who has
Accounts unpaid more than sixty (60) days past the original due date thereof,
but less than one hundred twenty (120) days after the date of the original
invoice for them and which Accounts constitute more than fifty (50%) percent of
the total Accounts of such account debtor;
(o) such Accounts are owed by account debtors whose total
indebtedness to Borrower does not exceed the credit limit with respect to such
account debtors as determined by Lender from time to time (but the portion of
the Accounts not in excess of such credit limit may be deemed Eligible
Accounts); and
(p) such Accounts are not owed by account debtors reasonably
deemed to be uncreditworthy as determined by Lender in good faith.
General criteria for Eligible Accounts may be established and revised from time
to time by Lender in good faith. Any Accounts which are not Eligible Accounts
shall nevertheless be part of the Collateral.
1.13 "ELIGIBLE INVENTORY" shall mean Inventory consisting of finished
goods held for resale in the ordinary course of the business of Borrower
which are acceptable to Lender based on the criteria set forth below. In
general, Eligible Inventory shall not include (a) packaging and shipping
materials; (b) supplies used or consumed in Borrower's business; (c)
Inventory at premises other than those owned and controlled by Borrower,
except if (i) Lender shall have received an agreement in writing from the
person in possession of such Inventory and/or the owner or operator of such
premises substantially in the form of Exhibit B attached hereto, as
applicable, acknowledging Lender's first priority security interest in the
Inventory, waiving security interests and claims by such person against the
Inventory and permitting Lender access to, and the right to remain on, the
premises so as to exercise Lender's rights and remedies and otherwise deal
with the Collateral, or (ii) if no agreement substantially in the form of
Exhibit B hereto has been received by Lender from the owner or operator of
such premises, Lender has established Availability Reserves in such amounts
as Lender deems appropriate and necessary, in its sole discretion, to enable
Lender to pay rent and other amounts due or to become due to the owner or
operator of such premises for the purpose of gaining access to the premises
so as to exercise Lender's rights and remedies and otherwise deal with the
Collateral; (d) Inventory subject to a security interest or lien in favor of
any person other than Lender except those permitted in this Agreement;
(e) bill and hold goods; (f) Inventory which is not subject to the first
priority, valid and perfected security interest of Lender; (g) damaged and/or
defective Inventory; and (h) Inventory purchased or sold on consignment.
General criteria for Eligible Inventory may be established and revised from
time to time by Lender in good faith. Any Inventory which is not Eligible
Inventory shall nevertheless be part of the Collateral.
6
<PAGE>
1.14 "EQUITY OFFERING" shall mean the sale and issuance by Borrower, at
any time from and after the date of this Agreement, of additional shares of its
capital stock as permitted under Section 9.7 hereof.
1.15 "EQUIPMENT" shall mean all of Borrower's now owned and hereafter
acquired equipment, machinery, computers and computer hardware and software
(whether owned or licensed), vehicles, tools, furniture, fixtures, all
attachments, accessions and property now or hereafter affixed thereto or used in
connection therewith, and substitutions and replacements thereof, wherever
located.
1.16 "EURODOLLAR RATE" shall mean with respect to the Interest Period
for a Eurodollar Rate Loan, the interest rate per annum equal to the arithmetic
average of the rates of interest per annum (rounded upwards, if necessary, to
the next one-sixteenth (1/16) of one (1%) percent) at which Reference Bank is
offered deposits of United States dollars in the London interbank market (or
other Eurodollar Rate market selected by Borrower and approved by Lender) on or
about 9:00 a.m. (Los Angeles, California time) two (2) Business Days prior to
the commencement of such Interest Period in amounts substantially equal to the
principal amount of the Eurodollar Rate Loans requested by and available to
Borrower in accordance with this Agreement, with a maturity of comparable
duration to the Interest Period selected by Borrower.
1.17 "EURODOLLAR RATE LOANS" shall mean any Loans or portion thereof on
which interest is payable based on the Adjusted Eurodollar Rate in accordance
with the terms hereof.
1.18 "EVENT OF DEFAULT" shall mean the occurrence or existence of any
event or condition described in Section 10.1 hereof.
1.19 "EXCESS AVAILABILITY" shall mean the amount, as determined by
Lender, calculated at any time from and after the date of this Agreement, equal
to: (a) the lesser of (i) the amount of the Revolving Loans available to
Borrower as of such time based on the applicable lending formulas multiplied by
the Net Amount of Eligible Accounts and the Value of Eligible Inventory, as
determined by Lender, and subject to the sublimits and Availability Reserves
from time to time established by Lender hereunder and (ii) the Maximum Credit,
MINUS (b) the sum of:(i) the amount of all then outstanding and unpaid Revolving
Loans and Letter of Credit Accommodations, plus (ii) as reflected on the
accounts payable aging for the immediately preceding month end, the aggregate
amount of all trade payables of Borrower which are more than sixty (60) days
past due as of such time, only to the extent that such trade payables exceed
five (5%) of all of Borrower's trade payables, excluding, however, trade
payables in an amount not to exceed $2,000,000 incurred by Borrower in the
ordinary course of its business in connection with "dollar day swap" programs
maintained by Borrower from time to time with certain of Borrower's vendors.
1.20 "EXCESS CLOSING AVAILABILITY" shall mean the amount, as determined
by Lender, calculated as of the date of this Agreement, equal to: (a) the lesser
of (i) the amount of the Revolving Loans available to Borrower as of such time
based on the applicable lending formulas
7
<PAGE>
multiplied by the Net Amount of Eligible Accounts and the Value of Eligible
Inventory, as determined by Lender, and subject to the sublimits and
Availability Reserves from time to time established by Lender hereunder and (ii)
the Maximum Credit, MINUS (b) the sum of:(i) the amount of all then outstanding
and unpaid Revolving Loans and Letter of Credit Accommodations, plus (ii) the
aggregate amount of all trade payables of Borrower which are more than sixty
(60) days past due as of such time, only to the extent that such trade payables
exceed five (5%) of all of Borrower's trade payables, excluding, however, trade
payables in an amount not to exceed $2,000,000 incurred by Borrower in the
ordinary course of its business in connection with "dollar day swap" programs
maintained by Borrower from time to time with certain of Borrower's vendors.
1.21 "FINANCING AGREEMENTS" shall mean, collectively, this Agreement and
all notes, guarantees, security agreements and other agreements, documents and
instruments now or at any time hereafter executed and/or delivered by Borrower
or any Obligor in connection with this Agreement, as the same now exist or may
hereafter be amended, modified, supplemented, extended, renewed, restated or
replaced.
1.22 "GAAP" shall mean generally accepted accounting principles in the
United States of America as in effect from time to time as set forth in the
opinions and pronouncements of the Accounting Principles Board and the American
Institute of Certified Public Accountants and the statements and pronouncements
of the Financial Accounting Standards Board which are applicable to the
circumstances as of the date of determination consistently applied, except that,
for purposes of Section 9.14 hereof, GAAP shall be determined on the basis of
such principles in effect on the date hereof and consistent with those used in
the preparation of the audited financial statements delivered to Lender prior to
the date hereof.
1.23 "INFORMATION CERTIFICATE" shall mean the Information Certificate of
Borrower constituting Exhibit A hereto containing material information with
respect to Borrower, its business and assets provided by or on behalf of
Borrower to Lender in connection with the preparation of this Agreement and the
other Financing Agreements and the financing arrangements provided for herein.
1.24 "INITIAL PUBLIC OFFERING" shall have the meaning set forth in
Section 9.7.
1.25 "INTEREST PERIOD" shall mean for any Eurodollar Rate Loan, a period
of approximately one (1), two (2), or three (3) months duration as Borrower may
elect, the exact duration to be determined in accordance with the customary
practice in the applicable Eurodollar Rate market; PROVIDED, THAT, Borrower may
not elect an Interest Period which will end after the last day of the
then-current term of this Agreement.
1.26 "INTEREST RATE" shall mean,(a) as to Prime Rate Loans, commencing
as of the date hereof through and including June 30, 1998, a rate equal to eight
and one-half (8 1/2%) percent; and thereafter, for any given month, (i) if the
Monthly Excess Availability for the immediately preceding calendar month is
equal to or greater than $35,000,000, a rate equal to
8
<PAGE>
the Prime Rate,(ii) if the Monthly Excess Availability for the immediately
preceding month is equal to or greater than $25,000,000, but less than
$35,000,000, a rate equal to the Prime Rate,(iii) if the Monthly Excess
Availability for the immediately preceding month is equal to or greater than
$10,000,000, but less than $25,000,000, a rate equal to one-quarter (1/4%)
percent per annum in excess of the Prime Rate, and (iv) if the Monthly Excess
Availability for the immediately preceding calendar month is less than
$10,000,000, a rate equal to one-half (1/2%) percent per annum in excess of the
Prime Rate, and (b) as to each Eurodollar Rate Loan, commencing as of the date
hereof through and including June 30, 1998, a rate equal to two and one-quarter
(2 1/4%) percent per annum in excess of the Adjusted Eurodollar Rate, and,
thereafter, a rate of:(i) if the Monthly Excess Availability for the calendar
month immediately preceding the Effective Eurodollar Rate Determination Date (as
defined below) with respect to such Eurodollar Rate Loan is equal to or greater
than $35,000,000, a rate of two (2%) percent per annum in excess of the Adjusted
Eurodollar Rate,(ii) if the Monthly Excess Availability for the calendar month
immediately preceding the Effective Eurodollar Rate Determination Date with
respect to such Eurodollar Rate Loan is equal to or greater than $25,000,000,
but less than $35,000,000, a rate of two-and-one-quarter (21/4%) percent per
annum in excess of the Adjusted Eurodollar Rate,(iii) if the Monthly Excess
Availability for the calendar month immediately preceding the Effective
Eurodollar Rate Determination Date with respect to such Eurodollar Rate Loan is
equal to or greater than $10,000,000, but less than $25,000,000, a rate of
two-and-one-half (21/2%) percent per annum in excess of the Adjusted Eurodollar
Rate, and (iv) if the Monthly Excess Availability for the calendar month
immediately preceding the Effective Eurodollar Rate Determination Date with
respect to such Eurodollar Rate Loan is less than $10,000,000, a rate of
two-and-three-quarter (23/4%) percent per annum in excess of the Adjusted
Eurodollar Rate (the Adjusted Eurodollar Rate, in the case of each Eurodollar
Rate Loan, being based on the Eurodollar Rate applicable for the Interest Period
selected by Borrower as in effect three (3) Business Days after the date of
receipt by Lender of the request of Borrower for such Eurodollar Rate Loans in
accordance with the terms hereof, whether such rate is higher or lower than any
rate previously quoted to Borrower); PROVIDED, THAT, the Interest Rate specified
in clauses (a)(i), (a)(ii) and (a)(iii) above with respect to Prime Rate Loans
and in clauses (b)(i), (b)(ii) and (b)(iii) above with respect to Eurodollar
Rate Loans shall be increased, in each case, by two (2%) percent, at Lender's
option, without notice, (A) for the period (1) from and after the date of
termination or non-renewal hereof until Lender has received full and final
payment of all obligations (notwithstanding entry of a judgment against
Borrower) and (2) from and after the date of the occurrence of an Event of
Default for so long as such Event of Default is continuing as determined by
Lender, and (B) on the Revolving Loans at any time outstanding in excess of the
amounts available to Borrower under Section 2 (whether or not such excess(es),
arise or are made with or without Lender's knowledge or consent and whether made
before or after an Event of Default). For the purposes hereof, the "Effective
Eurodollar Rate Determination Date" shall mean, with respect to each Eurodollar
Rate Loan, the day on which the Eurodollar Rate is determined under Section 1.16
of this Agreement for such Eurodollar Rate Loan and, thereafter, the first day
of each calendar month during the Interest Period with respect to such
Eurodollar Rate Loan.
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1.27 "INVENTORY" shall mean all of Borrower's now owned and hereafter
existing or acquired raw materials, work in process, finished goods and all
other inventory of whatsoever kind or nature, wherever located.
1.28 "INVENTORY APPRAISAL" shall have the meaning set forth in Section
7.3 of this Agreement.
1.29 "LETTER OF CREDIT ACCOMMODATIONS" shall mean the letters of credit,
merchandise purchase or other guaranties which are from time to time either (a)
issued or opened by Lender for the account of Borrower or any Obligor or (b)
with respect to which Lender has agreed to indemnify the issuer or guaranteed to
the issuer the performance by Borrower of its obligations to such issuer.
1.30 "LOANS" shall mean the Revolving Loans.
1.31 "MATERIAL ADVERSE CHANGE" shall mean a material adverse change in
the condition (financial or otherwise), operations, performance, properties,
business or affairs of the Borrower or any Obligor.
1.32 "MATERIAL ADVERSE EFFECT" shall mean a material adverse change in,
or a material adverse effect upon (a) the condition (financial or otherwise),
operations, business or affairs of Borrower or any Obligor, (b) the ability of
Borrower or any Obligor to repay any Obligations under any of the Financing
Agreements, or (c) Lender's rights or interests in its Collateral or of Lender's
ability to enforce the Obligations or realize upon its Collateral.
1.33 "MAXIMUM CREDIT" shall mean the amount of $130,000,000.
1.34 "MONTHLY EXCESS AVAILABILITY" shall mean, for any calendar month,
the sum of the Excess Availability on each Business Day during such calendar
month, divided by the total number of Business Days during such calendar month.
1.35 "NET AMOUNT OF ELIGIBLE ACCOUNTS" shall mean the gross amount of
Eligible Accounts less (a) sales, excise or similar taxes included in the amount
thereof and (b) returns, discounts, claims, credits, chargebacks and allowances
of any nature at any time issued, owing, granted or outstanding with respect
thereto, other than returns, discounts, credits, chargebacks and allowances
issued or granted by Borrower in the ordinary course of its business in
accordance with practices and policies previously disclosed in writing to
Lender.
1.36 "OBLIGATIONS" shall mean any and all Revolving Loans, Letter of
Credit Accommodations and all other obligations, liabilities and indebtedness of
every kind, nature and description owing by Borrower to Lender and/or its
affiliates, including principal, interest, charges, fees, costs and expenses,
however evidenced, whether as principal, surety, endorser, guarantor or
otherwise, whether arising under this Agreement or otherwise, whether now
existing or hereafter arising, whether arising before, during or after the
initial or any renewal term of this
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Agreement or after the commencement of any case with respect to Borrower under
the United States Bankruptcy Code or any similar statute (including the payment
of interest and other amounts which would accrue and become due but for the
commencement of such case, whether or not such amounts are allowed or allowable
in whole or in part in such case), whether direct or indirect, absolute or
contingent, joint or several, due or not due, primary or secondary, liquidated
or unliquidated, secured or unsecured, and however acquired by Lender.
1.37 "OBLIGOR" shall mean any guarantor, endorser, acceptor, surety or
other person liable on or with respect to the Obligations or who is the owner of
any property which is security for the Obligations, other than Borrower.
1.38 "PAYMENT ACCOUNT" shall have the meaning set forth in Section 6.3
hereof.
1.39 "PERSON" or "PERSON" shall mean any individual, sole
proprietorship, partnership, corporation (including any corporation which elects
subchapter S status under the Internal Revenue Code of 1986, as amended),
limited liability company, limited liability partnership, business trust,
unincorporated association, joint stock corporation, trust, joint venture or
other entity or any government or any agency or instrumentality or political
subdivision thereof.
1.40 "PRIME RATE" shall mean the rate from time to time publicly
announced by CoreStates Bank, N.A. (or its successors, including First Union
National Bank) at its office in Philadelphia, Pennsylvania, as its prime rate,
whether or not such announced rate is the best rate available at such bank.
1.41 "PRIME RATE LOANS" shall mean any Loans or portion thereof on which
interest is payable based on the Prime Rate in accordance with the terms
thereof.
1.42 "RECORDS" shall mean all of Borrower's present and future books of
account of every kind or nature, purchase and sale agreements, invoices, ledger
cards, bills of lading and other shipping evidence, statements, correspondence,
memoranda, credit files and other data relating to the Collateral or any account
debtor, together with the tapes, disks, diskettes and other data and software
storage media and devices, file cabinets or containers in or on which the
foregoing are stored (including any rights of Borrower with respect to the
foregoing maintained with or by any other person).
1.43 "REFERENCE BANK" shall mean CoreStates Bank, N.A., or its
successor, First Union National Bank, or such other bank as Lender may from time
to time designate.
1.44 "VALUE" shall mean, as determined by Lender in good faith, with
respect to Inventory, the lower of (a) cost computed using the average cost
method in accordance with GAAP or (b) market value.
1.45 "VIDEO INVENTORY" shall mean Inventory consisting of "VHS" format
video tapes.
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SECTION 2. CREDIT FACILITIES
2.1 REVOLVING LOANS.
(a) Subject to and upon the terms and conditions contained
herein, Lender agrees to make Revolving Loans to Borrower from time to time in
amounts requested by Borrower up to the amount equal to the sum of:
(i) seventy-seven (77%) percent of the Net Amount of
Eligible Accounts, PLUS
(ii) subject to the provisions of Section 2.1(e) below,
the lesser of (A) sixty-two (62%) percent of the
Value of Eligible Inventory consisting of finished
goods and (B) ninety-one (91%) percent of the median
net recovery Value of Eligible Inventory, as
determined from time to time by Lender using a
methodology and assumptions similar to the
methodology and assumptions set forth in the
Inventory Appraisal prepared by BGA Consulting,
Inc., dated as of March 19, 1998, delivered to
Lender prior to the date of this Agreement, LESS
(iii) any Availability Reserves.
(b) Lender may, in its discretion, from time to time, upon not
less than five (5) days prior notice to Borrower,(i) reduce the lending formula
with respect to Eligible Accounts to the extent that Lender determines in its
good faith, reasonably exercised, that, without duplication: (A) the dilution
with respect to the Accounts for any period (based on the ratio of (1) the
aggregate amount of reductions in Accounts other than as a result of payments in
cash to (2) the aggregate amount of total sales) has increased in any material
respect or may be reasonably anticipated to increase in any material respect
above historical levels, or (B) the general creditworthiness of account debtors
has declined or (ii) reduce the lending formula(s) with respect to Eligible
Inventory to the extent that Lender determines in its good faith, reasonably
exercised, that, without duplication: (A) the number of days of the turnover of
the Inventory for any period has changed in any material respect or (B) the
nature and quality of the Inventory has deteriorated. In determining whether to
reduce the lending formula(s), Lender may consider events, conditions,
contingencies or risks which are also considered in determining Eligible
Accounts, Eligible Inventory or in establishing Availability Reserves.
To the extent Lender shall have established an Availability Reserve
which is sufficient to address any event, condition or matter in a manner
satisfactory to Lender in good faith, Lender shall not exercise its rights under
this Section 2.1(b) to reduce the lending formulas to address such event,
condition or matter. The amount of any reduction in the lending formula
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by Lender pursuant to this Section 2.1(b) shall have a reasonable relationship
to the matter which is the basis for such a reduction.
(c) Except in Lender's discretion, the aggregate amount of the
Loans and the Letter of Credit Accommodations outstanding at any time shall not
exceed the Maximum Credit. In the event that the outstanding amount of any
component of the Loans, or the aggregate amount of the outstanding Loans and
Letter of Credit Accommodations, exceed the amounts available under the lending
formulas, the sublimits for Letter of Credit Accommodations set forth in Section
2.2(d) or the Maximum Credit, as applicable, such event shall not limit, waive
or otherwise affect any rights of Lender in that circumstance or on any future
occasions and Borrower shall, upon demand by Lender, which may be made at any
time or from time to time, immediately repay to Lender the entire amount of any
such excess(es) for which payment is demanded.
(d) For purposes only of applying the sublimit on Revolving
Loans based on Eligible Inventory pursuant to Section 2.1(a)(ii), Lender may
treat the then undrawn amounts of outstanding Letter of Credit Accommodations
for the purpose of purchasing Eligible Inventory as Revolving Loans to the
extent Lender is in effect basing the issuance of the Letter of Credit
Accommodations on the Value of the Eligible Inventory being purchased with such
Letter of Credit Accommodations. In determining the actual amounts of such
Letter of Credit Accommodations to be so treated for purposes of the sublimit,
the outstanding Revolving Loans and Availability Reserves shall be attributed
first to any components of the lending formulas in Section 2.1(a) that are not
subject to such sublimit, before being attributed to the components of the
lending formulas subject to such sublimit.
(e) Notwithstanding anything to the contrary contained in
Section 2.1(a)(ii) above, the maximum aggregate amount of Revolving Loans
outstanding at any time (i) made in respect of the Value of Eligible Inventory,
shall not at any time exceed (x) $25,000,000 in respect of Eligible Inventory
consisting of Video Inventory and (y) $10,000,000 in respect of Eligible
Inventory relating to DNA.
2.2 LETTER OF CREDIT ACCOMMODATIONS.
(a) Subject to and upon the terms and conditions contained
herein, at the request of Borrower, Lender agrees to provide or arrange for
Letter of Credit Accommodations for the account of Borrower containing terms and
conditions acceptable to Lender and the issuer thereof. Any payments made by
Lender to any issuer thereof and/or related parties in connection with the
Letter of Credit Accommodations shall constitute additional Revolving Loans to
Borrower pursuant to this Section 2.
(b) In addition to any charges, fees or expenses charged by any
bank or issuer in connection with the Letter of Credit Accommodations, Borrower
shall pay to Lender a letter of credit fee at a rate equal to two (2%) percent
per annum on the daily outstanding balance of the Letter of Credit
Accommodations for the immediately preceding month (or part thereof),
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payable in arrears as of the first day of each succeeding month, except that
Borrower shall pay to Lender such letter of credit fee, at Lender's option,
without notice, at a rate equal to four (4%) percent per annum on such daily
outstanding balance for: (i) the period from and after the date of termination
or non-renewal hereof until Lender has received full and final payment of all
Obligations (notwithstanding entry of a judgment against Borrower) and (ii) the
period from and after the date of the occurrence of an Event of Default for so
long as such Event of Default is continuing as determined by Lender. Such
letter of credit fee shall be calculated on the basis of a three hundred sixty
(360) day year and actual days elapsed and the obligation of Borrower to pay
such fee shall survive the termination or non-renewal of this Agreement.
(c) No Letter of Credit Accommodations shall be available unless
on the date of the proposed issuance of any Letter of Credit Accommodations, the
Revolving Loans available to Borrower (subject to the Maximum Credit and any
Availability Reserves) are equal to or greater than: (i) if the proposed Letter
of Credit Accommodation is for the purpose of purchasing Eligible Inventory, the
sum of (A) the percentage equal to one hundred (100%) percent of the face amount
thereof minus the then applicable percentage set forth in Section 2.1(a)(ii)(A)
above of the Value of such Eligible Inventory, plus (B) freight, taxes, duty and
other amounts which Lender estimates must be paid in connection with such
Inventory upon arrival and for delivery to one of Borrower's locations for
Eligible Inventory within the United States of America and (ii) if the proposed
Letter of Credit Accommodation is for any other purpose, an amount equal to one
hundred (100%) percent of the face amount thereof and all other commitments and
obligations made or incurred by Lender with respect thereto. Effective on the
issuance of each Letter of Credit Accommodation, an Availability Reserve shall
be established in the applicable amount set forth in Section 2.2(c)(i) or
Section 2.2(c)(ii).
(d) Except in Lender's discretion, the amount of all outstanding
Letter of Credit Accommodations and all other commitments and obligations made
or incurred by Lender in connection therewith shall not at any time exceed
$30,000,000. At any time an Event of Default exists or has occurred and is
continuing, upon Lender's request, Borrower will either furnish cash collateral
to secure the reimbursement obligations to the issuer in connection with any
Letter of Credit Accommodations or furnish cash collateral to Lender for the
Letter of Credit Accommodations, and in either case, the Revolving Loans
otherwise available to Borrower shall not be reduced as provided in Section
2.2(c) to the extent of such cash collateral.
(e) Borrower shall indemnify and hold Lender harmless from and
against any and all losses, claims, damages, liabilities, costs and expenses
which Lender may suffer or incur in connection with any Letter of Credit
Accommodations and any documents, drafts or acceptances relating thereto,
including any losses, claims, damages, liabilities, costs and expenses due to
any action taken by any issuer or correspondent with respect to any Letter of
Credit Accommodation. Borrower assumes all risks with respect to the acts or
omissions of the drawer under or beneficiary of any Letter of Credit
Accommodation and for such purposes the drawer or beneficiary shall be deemed
Borrower's agent. Borrower assumes all risks for, and agrees to pay, all
foreign, Federal, State and local taxes, duties and levies relating to any goods
subject to any Letter of Credit Accommodations or any documents, drafts or
acceptances thereunder.
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Borrower hereby releases and holds Lender harmless from and against any acts,
waivers, errors, delays or omissions, whether caused by Borrower, by any issuer
or correspondent or otherwise with respect to or relating to any Letter of
Credit Accommodation. The provisions of this Section 2.2(e) shall survive the
payment of Obligations and the termination or non-renewal of this Agreement.
Nothing in this Section 2.2(e) or elsewhere in this Agreement is intended to
constitute or operate as a waiver of any claim, right or defense Borrower may
have against any third party other than Lender (including, without limitation,
the issuer of any Letter of Credit Accommodation) on account of any negligent or
other wrongful conduct of such third party.
(f) Nothing contained herein shall be deemed or construed to
grant Borrower any right or authority to pledge the credit of Lender in any
manner. Lender shall have no liability of any kind with respect to any Letter
of Credit Accommodation provided by an issuer other than Lender unless Lender
has duly executed and delivered to such issuer the application or a guarantee or
indemnification in writing with respect to such Letter of Credit Accommodation.
Borrower shall be bound by any interpretation made in good faith by Lender, or
any other issuer or correspondent under or in connection with any Letter of
Credit Accommodation or any documents, drafts or acceptances thereunder,
notwithstanding that such interpretation may be inconsistent with any
instructions of Borrower. Lender shall have the sole and exclusive right and
authority to, and Borrower shall not: (i) at any time an Event of Default exists
or has occurred and is continuing,(A) approve or resolve any questions of
non-compliance of documents,(B) give any instructions as to acceptance or
rejection of any documents or goods or (C) execute any and all applications for
steamship or airway guaranties, indemnities or delivery orders, and (ii) at all
times, (A) grant any extensions of the maturity of, time of payment for, or time
of presentation of, any drafts, acceptances, or documents, and (B)agree to any
amendments, renewals, extensions, modifications, changes or cancellations of any
of the terms or conditions of any of the applications, Letter of Credit
Accommodations, or documents, drafts or acceptances thereunder or any letters of
credit included in the Collateral. Lender may take such actions either in its
own name or in Borrower's name.
(g) Any rights, remedies, duties or obligations granted or
undertaken by Borrower to any issuer or correspondent in any application for any
Letter of Credit Accommodation, or any other agreement in favor of any issuer or
correspondent relating to any Letter of Credit Accommodation, shall be deemed to
have been granted or undertaken by Borrower to Lender. Any duties or
obligations undertaken by Lender to any issuer or correspondent in any
application for any Letter of Credit Accommodation, or any other agreement by
Lender in favor of any issuer or correspondent relating to any Letter of Credit
Accommodation, shall be deemed to have been undertaken by Borrower to Lender and
to apply in all respects to Borrower.
2.3 AVAILABILITY RESERVES. All Revolving Loans otherwise available to
Borrower pursuant to the lending formulas and subject to the Maximum Credit and
other applicable limits hereunder shall be subject to Lender's continuing right
to establish and revise Availability Reserves.
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2.4 REDUCTION IN MAXIMUM CREDIT. (a) Notwithstanding anything to the
contrary contained in this Agreement, Borrower shall have the right at any time
within thirty (30) days after the date Borrower receives the net proceeds from
an Equity Offering, a subordinated loan permitted under Section 9.9(e) below or
a sale of assets permitted under Section 9.7(b) below ("NET REDUCTION PROCEEDS")
to reduce the Maximum Credit to an amount of not less than $90,000,000 (the
"REDUCED MAXIMUM CREDIT") by delivering written notice to Lender ("MAXIMUM
CREDIT REDUCTION NOTICE") at least twenty (20) days prior to the date, which
shall be specified in such Maximum Credit Reduction Notice, that the Reduced
Maximum Credit shall take effect (such effective date, the "REDUCED MAXIMUM
CREDIT EFFECTIVE DATE"), PROVIDED, HOWEVER, that the foregoing shall be of no
force and effect and the Reduced Maximum Credit specified in such written
Maximum Credit Reduction Notice shall not become effective on the Reduced
Maximum Credit Effective Date if any Event of Default exists on the Reduced
Maximum Credit Effective Date, PROVIDED FURTHER THAT, the Maximum Credit is
reduced in each instance by an amount not greater than the Net Reduction
Proceeds but in no event shall the Maximum Credit be reduced to an amount less
than $90,000,000.
(b) If the Reduced Maximum Credit becomes effective in
accordance with Section 2.4(a), the reduction in the original Maximum Credit
thereby effected shall be permanent and irrevocable and the Reduced Maximum
Credit shall, without further act or notice by either Lender or Borrower,
automatically constitute the Maximum Credit for all purposes of this Agreement
and the other Financing Agreements from and after the Reduced Maximum Credit
Effective Date. Borrower shall not be required to pay any prepayment or early
termination fee in connection with the reduction of the Maximum Credit as
permitted hereunder.
SECTION 3. INTEREST AND FEES
3.1 INTEREST.
(a) Borrower shall pay to Lender interest on the outstanding
principal amount of the Loans at the Interest Rate. All interest accruing
hereunder on and after the date of any Event of Default or termination or
non-renewal hereof shall be payable on demand.
(b) Borrower may from time to time request that Prime Rate Loans
be converted to Eurodollar Rate Loans or that any existing Eurodollar Rate Loans
continue for an additional Interest Period. Such request from Borrower shall
specify the amount of the Prime Rate Loans which will constitute Eurodollar Rate
Loans (subject to the limits set forth below) and the Interest Period to be
applicable to such Eurodollar Rate Loans. Subject to the terms and conditions
contained herein, three (3) Business Days after receipt by Lender of such a
request from Borrower, such Prime Rate Loans shall be converted to Eurodollar
Rate Loans or such Eurodollar Rate Loans shall continue, as the case may be,
PROVIDED, THAT,(i) no Event of Default exists or has occurred and is
continuing,(ii) no party hereto shall have sent any notice of termination or
non-renewal of this Agreement, (iii)Borrower shall have complied with such
customary procedures as are established by Lender and specified by Lender to
Borrower from time to time for requests by Borrower for Eurodollar Rate
Loans,(iv) no more than five (5)
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Interest Periods may be in effect at any one time, (v) the aggregate amount of
the Eurodollar Rate Loans must be in an amount not less than $5,000,000 or an
integral multiple of $1,000,000 in excess thereof, (vi) the maximum amount of
the Eurodollar Rate Loans at any time requested by Borrower shall not exceed the
amount equal to ninety (90%) percent of the Revolving Loans then available to
Borrower under Section 2 of this Agreement as determined by Lender, and (vii)
Lender shall have determined that the Interest Period or Adjusted Eurodollar
Rate is available to Lender through the Reference Bank and can be readily
determined as of the date of the request for such Eurodollar Rate Loan by
Borrower. Any request by Borrower to convert Prime Rate Loans to Eurodollar
Rate Loans or to continue any existing Eurodollar Rate Loans shall be
irrevocable. Notwithstanding anything to the contrary contained herein, Lender
and Reference Bank shall not be required to purchase United States Dollar
deposits in the London interbank market or other applicable Eurodollar Rate
market to fund any Eurodollar Rate Loans, but the provisions hereof shall be
deemed to apply as if Lender and Reference Bank had purchased such deposits to
fund the Eurodollar Rate Loans.
(c) Any Eurodollar Rate Loans shall automatically convert to
Prime Rate Loans upon the last day of the applicable Interest Period, unless
Lender has received and approved a request to continue such Eurodollar Rate Loan
at least three (3) Business Days prior to such last day in accordance with the
terms hereof. Any Eurodollar Rate Loans shall, at Lender's option, upon notice
by Lender to Borrower, convert to Prime Rate Loans in the event that (i) an
Event of Default shall exist, or (ii) this Agreement shall terminate or not be
renewed. Borrower shall pay to Lender, upon demand by Lender (or Lender may, at
its option, charge any loan account of Borrower) any amounts required to
compensate Lender, the Reference Bank or any participant with Lender for any
loss (including loss of anticipated profits), cost or expense incurred by such
person, as a result of the conversion of Eurodollar Rate Loans to Prime Rate
Loans pursuant to any of the foregoing.
(d) Interest shall be payable by Borrower to Lender monthly in
arrears not later than the first day of each calendar month and shall be
calculated on the basis of a three hundred sixty (360) day year and actual days
elapsed. The interest rate on non-contingent Obligations (other than Eurodollar
Rate Loans) shall increase or decrease by an amount equal to each increase or
decrease in the Prime Rate effective on the first day of the month after any
change in such Prime Rate is announced based on the Prime Rate in effect on the
last day of the month in which any such change occurs. In no event shall
charges constituting interest payable by Borrower to Lender exceed the maximum
amount or the rate permitted under any applicable law or regulation, and if any
such part or provision of this Agreement is in contravention of any such law or
regulation, such part or provision shall be deemed amended to conform thereto.
(e) If a credit balance exists at any time in Borrower's loan
account maintained by Lender, interest shall accrue thereon at a rate equal to
the Prime Rate less three (3) percent or, at Borrower's option, such credit
balance shall be remitted by Lender to Borrower.
3.2 CLOSING FEE. Borrower shall pay to Lender as a closing fee the
amount of $975,000, which shall be fully earned as of and payable on the date
hereof.
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3.3 SERVICING FEE. Borrower shall pay to Lender monthly a servicing
fee in an amount equal to $3,000 in respect of Lender's services for each month
(or part thereof) while this Agreement remains in effect and for so long
thereafter as any of the Obligations are outstanding, which fee shall be fully
earned as of and payable in advance on the date hereof and on the first day of
each month hereafter.
3.4 UNUSED LINE FEE. Borrower shall pay to Lender monthly an unused
line fee at a rate equal to three-eighths (3/8%) percent per annum calculated
upon the amount by which the amount equal to eighty (80%) percent of the Maximum
Credit exceeds the average daily principal balance of the outstanding Revolving
Loans and Letter of Credit Accommodations during the immediately preceding month
(or part thereof) while this Agreement is in effect and for so long thereafter
as any of the Obligations are outstanding, which fee shall be payable on the
first day of each month in arrears.
3.5 CHANGES IN LAWS AND INCREASED COSTS OF LOANS.
(a) Notwithstanding anything to the contrary contained herein,
all Eurodollar Rate Loans shall, upon notice by Lender to Borrower, convert to
Prime Rate Loans in the event that (i) any change in applicable law or
regulation (or the interpretation or administration thereof) shall either (A)
make it unlawful for Lender, Reference Bank or any participant to make or
maintain Eurodollar Rate Loans or to comply with the terms hereof in connection
with the Eurodollar Rate Loans, or (B) shall result in the increase in the costs
to Lender, Reference Bank or any participant of making or maintaining any
Eurodollar Rate Loans by an amount deemed by Lender to be material, or (C)
reduce the amounts received or receivable by Lender in respect thereof, by an
amount deemed by Lender to be material or (ii) the cost to Lender, Reference
Bank or any participant of making or maintaining any Eurodollar Rate Loans shall
otherwise increase by an amount deemed by Lender to be material. Borrower shall
pay to Lender, upon demand by Lender (or Lender may, at its option, charge any
loan account of Borrower) any amounts required to compensate Lender, the
Reference Bank or any participant with Lender for any loss (including loss of
anticipated profits), cost or expense incurred by such person as a result of the
foregoing, including, without limitation, any such loss, cost or expense
incurred by reason of the liquidation or reemployment of deposits or other funds
acquired by such person to make or maintain the Eurodollar Rate Loans or any
portion thereof. A certificate of Lender setting forth the basis for the
determination of such amount necessary to compensate Lender as aforesaid shall
be delivered to Borrower and shall be conclusive, absent manifest error.
(b) If any payments or prepayments in respect of the Eurodollar
Rate Loans are received by Lender other than on the last day of the applicable
Interest Period (whether pursuant to acceleration, upon maturity or otherwise),
including any payments pursuant to the application of collections under Section
6.3 or any other payments made with the proceeds of Collateral, Borrower shall
pay to Lender upon demand by Lender (or Lender may, at its option, charge any
loan account of Borrower) any amounts required to compensate Lender, the
Reference Bank or any participant with Lender for any additional loss (including
loss of anticipated profits), cost or expense incurred by such person as a
result of such prepayment or payment, including,
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without limitation, any loss, cost or expense incurred by reason of the
liquidation or reemployment of deposits or other funds acquired by such person
to make or maintain such Eurodollar Rate Loans or any portion thereof.
SECTION 4. CONDITIONS PRECEDENT
4.1 CONDITIONS PRECEDENT TO INITIAL LOANS AND LETTER OF CREDIT
ACCOMMODATIONS. Each of the following is a condition precedent to Lender making
the initial Loans and providing the initial Letter of Credit Accommodations
hereunder:
(a) Lender shall have received evidence, in form and substance
satisfactory to Lender, that Lender has valid perfected and first priority
security interests in and liens upon the Collateral and any other property which
is intended to be security for the Obligations or the liability of any Obligor
in respect thereof, subject only to the security interests and liens permitted
herein or in the other Financing Agreements;
(b) all requisite corporate action and proceedings in connection
with this Agreement and the other Financing Agreements shall be satisfactory in
form and substance to Lender, and Lender shall have received all information and
copies of all documents, including records of requisite corporate action and
proceedings which Lender may have requested in connection therewith, such
documents where requested by Lender or its counsel to be certified by
appropriate corporate officers or governmental authorities;
(c) no material adverse change shall have occurred in the
assets, business or prospects of Borrower since the date of Lender's latest
field examination and no change or event shall have occurred which would impair
the ability of Borrower or any Obligor to perform its obligations hereunder or
under any of the other Financing Agreements to which it is a party or of Lender
to enforce the Obligations or realize upon the Collateral;
(d) Lender shall have completed a field review of the Records
and such other information with respect to the Collateral as Lender may require
to determine the amount of Revolving Loans available to Borrower, the results of
which shall be satisfactory to Lender;
(e) Lender shall have received, in form and substance
satisfactory to Lender, all such consents, waivers, acknowledgments and other
agreements from third persons which Lender may deem necessary or desirable in
order to permit, protect and perfect its security interests in and liens upon
the Collateral or to effectuate the provisions or purposes of this Agreement and
the other Financing Agreements, which may include acknowledgements by lessors,
mortgagees and warehousemen of Lender's security interests in the Collateral,
waivers by such persons of any security interests, liens or other claims by such
persons to the Collateral, subordination agreements in form and substance
satisfactory to Lender from all of Borrower's vendors claiming any security
interest in or lien upon any of the Collateral and Borrower's consignors who
deliver inventory to Borrower from time to time pursuant to consignment
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arrangements with Borrower, and agreements permitting Lender access to, and the
right to remain on, the premises to exercise its rights and remedies and
otherwise deal with the Collateral;
(f) [Intentionally Omitted]
(g) Lender shall have received evidence of insurance and loss
payee endorsements required hereunder and under the other Financing Agreements,
in form and substance satisfactory to Lender, and certificates of insurance
policies and/or endorsements naming Lender as loss payee;
(h) Lender shall have received, in form and substance
satisfactory to Lender, such opinion letters of counsel to Borrower with respect
to the Financing Agreements and such other matters as Lender may request;
(i) Lender shall have received, in form and substance
satisfactory to Lender, all releases, terminations and such other documents as
Lender may request to evidence and effectuate the termination by the existing
lender or lenders to Borrower of their respective financing arrangements with
Borrower and the termination and release by it or them, as the case may be, of
any interest in and to any assets and properties of Borrower and each Obligor,
duly authorized, executed and delivered by it or each of them, including, but
not limited to, (i) UCC termination statements for all UCC financing statements
previously filed by it or any of them or their predecessors, as secured party
and Borrower or any Obligor, as debtor and (ii) satisfactions and discharges of
any mortgages, deeds of trust or deeds to secure debt by Borrower or any Obligor
in favor of such existing lender or lenders, in form acceptable for recording in
the appropriate government office;
(j) the Excess Closing Availability as determined by Lender, as
of the date hereof, shall be not less than $12,000,000 after giving effect to
the initial Loans made or to be made and Letter of Credit Accommodations issued
or to be issued in connection with the initial transactions hereunder; and
(k) the other Financing Agreements and all instruments and
documents hereunder and thereunder shall have been duly executed and delivered
to Lender, in form and substance satisfactory to Lender.
4.2 CONDITIONS PRECEDENT TO ALL LOANS AND LETTER OF CREDIT
ACCOMMODATIONS. Each of the following is a condition precedent to Lender making
Loans and/or providing Letter of Credit Accommodations to Borrower, including
the initial Loans and Letter of Credit Accommodations and any future Loans and
Letter of Credit Accommodations:
(a) all representations and warranties contained herein and in
the other Financing Agreements shall be true and correct in all material
respects with the same effect as though such representations and warranties had
been made on and as of the date of the making
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of each such Loan or providing each such Letter of Credit Accommodation and
after giving effect thereto; and
(b) no Event of Default and no event or condition which could
reasonably be expected to have a Material Adverse Effect shall exist or have
occurred and be continuing on and as of the date of the making of such Loan or
providing each such Letter of Credit Accommodation and after giving effect
thereto.
SECTION 5. GRANT OF SECURITY INTEREST
To secure payment and performance of all Obligations, Borrower hereby
grants to Lender a continuing security interest in, a lien upon, and a right of
set off against, and hereby assigns to Lender as security, the following
property and interests in property of Borrower, whether now owned or hereafter
acquired or existing, and wherever located (collectively, the "COLLATERAL"):
5.1 Accounts;
5.2 all present and future contract rights, general intangibles
(including tax and duty refunds, registered and unregistered patents,
trademarks, service marks, copyrights, trade names, applications for the
foregoing, trade secrets, goodwill, processes, drawings, blueprints, customer
lists, licenses, whether as licensor or licensee, choses in action and other
claims and existing and future leasehold interests in equipment, real estate and
fixtures), chattel paper, documents, instruments, securities and other
investment property, letters of credit, bankers' acceptances and guaranties;
5.3 all present and future monies, securities, credit balances,
deposits, deposit accounts and other property of Borrower now or hereafter held
or received by or in transit to Lender or its affiliates or at any other
depository or other institution from or for the account of Borrower, whether for
safekeeping, pledge, custody, transmission, collection or otherwise, and all
present and future liens, security interests, rights, remedies, title and
interest in, to and in respect of Accounts and other Collateral, including (a)
rights and remedies under or relating to guaranties, contracts of suretyship,
letters of credit and credit and other insurance related to the Collateral, (b)
rights of stoppage in transit, replevin, repossession, reclamation and other
rights and remedies of an unpaid vendor, lienor or secured party, (c) goods
described in invoices, documents, contracts or instruments with respect to, or
otherwise representing or evidencing, Accounts or other Collateral, including
returned, repossessed and reclaimed goods, and (d) deposits by and property of
account debtors or other persons securing the obligations of account debtors;
5.4 Inventory;
5.5 Equipment;
5.6 Records; and
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5.7 all products and proceeds of the foregoing, in any form, including
insurance proceeds and all claims against third parties for loss or damage to or
destruction of any or all of the foregoing.
Notwithstanding anything to the contrary contained in this Section 5, the
foregoing grant of security interest shall not extend to or encompass, and the
Collateral shall not include,(i) the Equipment (or Borrower's leasehold interest
in any of the Equipment) identified in Part I of Schedule 5 hereto, which is
subject to an existing equipment lease or financing contract with a third party
that prohibits Borrower from granting or permitting to exist a security interest
in such Equipment (or Borrower's leasehold interest in such Equipment) in favor
of any other person or entity, which Equipment (or Borrower's leasehold interest
therein) shall not constitute Collateral for so long as the Equipment (or
Borrower's leasehold interest therein) remains subject to such a contractual
restriction, whether under the existing contract or contracts pertaining thereto
or under any modification, renewal or refinancing thereof as permitted pursuant
to Sections 9.8 and 9.9 of this Agreement, and (ii) the Equipment identified in
Part II of Schedule 5 hereto, which is existing Equipment of Borrower that
Borrower intends to bundle into and subject to an equipment lease or financing
contract, to the extent permitted pursuant to Sections 9.8 and 9.9 of this
Agreement, and the Borrower in fact enters into an equipment lease or financing
transaction with respect to such Equipment within 180 days after the date of
this Agreement that prohibits Borrower from granting or permitting to exist a
security interest in such Equipment (or Borrower's leasehold interest therein)
in favor of any person or entity other than the lessor or financer thereof,
which Equipment (or Borrower's leasehold interest therein) shall not constitute
Collateral for so long as the Equipment (or Borrower's leasehold interest
therein) remains subject to a contractual restriction, whether under the initial
contract or contracts pertaining thereto or under any modification, renewal or
refinancing thereof, as permitted pursuant to Sections 9.8 and 9.9 of this
Agreement; and (iii) any other Equipment (or Borrower's leasehold interest
therein) acquired or financed by Borrower in a future purchase money financing
transaction or a future secured equipment loan, whether styled as an equipment
lease or financing contract, each as permitted pursuant to Sections 9.8 and 9.9
of this Agreement, where the equipment lease or financing contract prohibits
Borrower from granting or permitting to exist a security interest in such
Equipment (or Borrower's leasehold interest in such Equipment) in favor of any
person or entity other than the lessor or financer thereof, which Equipment (or
Borrower's leasehold interest therein) shall not constitute Collateral for so
long as the Equipment (or Borrower's leasehold interest therein) remains subject
to such a contractual restriction, whether under the initial contract or
contracts pertaining thereto or under any modification, renewal or refinancing
thereof, as permitted pursuant to Sections 9.8 and 9.9 of this Agreement. To
the extent that Borrower enters into a financing transaction with a third party
of the type described in Section 5.7 (iii) above with respect to Equipment owned
by Borrower that constitutes Collateral hereunder, Lender agrees to release its
security interest in such Equipment and to execute, at Borrower's expense, such
UCC release forms or other documents reasonably required by such third party to
evidence such release.
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SECTION 6. COLLECTION AND ADMINISTRATION
6.1 BORROWER'S LOAN ACCOUNT. Lender shall maintain one or more loan
account(s) on its books in which shall be recorded (a) all Loans, Letter of
Credit Accommodations and other Obligations and the Collateral,(b) all payments
made by or on behalf of Borrower and (c) all other appropriate debits and
credits as provided in this Agreement, including fees, charges, costs, expenses
and interest. All entries in the loan account(s) shall be made in accordance
with Lender's customary practices as in effect from time to time.
6.2 STATEMENTS. Lender shall render to Borrower each month a statement
setting forth the balance in the Borrower's loan account(s) maintained by Lender
for Borrower pursuant to the provisions of this Agreement, including principal,
interest, fees, costs and expenses. Each such statement shall be subject to
subsequent adjustment by Lender but shall, absent manifest errors or omissions,
be considered correct and deemed accepted by Borrower and conclusively binding
upon Borrower as an account stated except to the extent that Lender receives a
written notice from Borrower of any specific exceptions of Borrower thereto
within forty-five (45) days after the date such statement has been mailed by
Lender. Until such time as Lender shall have rendered to Borrower a written
statement as provided above, the balance in Borrower's loan account(s) shall be
presumptive evidence of the amounts due and owing to Lender by Borrower.
6.3 COLLECTION OF ACCOUNTS.
(a) Borrower shall establish and maintain, at its expense,
blocked accounts or lockboxes and related blocked accounts (in either case,
"BLOCKED ACCOUNTS"), as Lender may specify, with such banks as are acceptable to
Lender into which Borrower shall promptly deposit and direct its account debtors
to directly remit all payments on Accounts and all payments constituting
proceeds of Inventory or other Collateral in the identical form in which such
payments are made, whether by cash, check or other manner. The banks at which
the Blocked Accounts are established shall enter into an agreement, in form and
substance satisfactory to Lender, providing that all items received or deposited
in the Blocked Accounts are the property of Lender, that the depository bank has
no lien upon, or right to setoff against, the Blocked Accounts, the items
received for deposit therein, or the funds from time to time on deposit therein
and that the depository bank will wire, or otherwise transfer, in immediately
available funds, on a daily basis, all funds received or deposited into the
Blocked Accounts to such bank account of Lender as Lender may from time to time
designate for such purpose ("PAYMENT ACCOUNT"). Borrower agrees that all
payments made to such Blocked Accounts or other funds received and collected by
Lender, whether on the Accounts or as proceeds of Inventory or other Collateral
or otherwise shall be the property of Lender.
(b) For purposes of calculating the amount of the Loans
available to Borrower, such payments will be applied (conditional upon final
collection) to the Obligations on the business day of receipt by Lender of
immediately available funds in the Payment Account provided such payments and
notice thereof are received in accordance with Lender's usual and customary
practices as in effect from time to time and are received by 1:00 p.m. Eastern
Standard
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Time, and if not, then on the next business day. For the purposes of
calculating interest on the Loans, such payments or other funds received will be
applied (conditional upon final collection) to the Loans (i) from the date
hereof up to the first anniversary of the date hereof, one (1) business day
following the date of receipt of immediately available funds by Lender in the
Payment Account and (ii) from and after the first anniversary of the date
hereof, on the date of receipt of immediately available funds by Lender in the
Payment Account, PROVIDED, in each instance, such payments or other funds and
notice thereof are received in accordance with Lender's usual and customary
practices as in effect from time to time and within sufficient time to credit
Borrower's loan account on such day, and if not, then on the next business day.
(c) Borrower and all of its affiliates, subsidiaries,
shareholders, directors, employees or agents shall, acting as trustee for
Lender, receive, as the property of Lender, any monies, checks, notes, drafts or
any other payment relating to and/or proceeds of Accounts or other Collateral
which come into their possession or under their control and immediately upon
receipt thereof, shall deposit or cause the same to be deposited in the Blocked
Accounts, or remit the same or cause the same to be remitted, in kind, to
Lender, except that with respect to any monies received by Borrower in respect
of any cash sales to employees or other incidental cash sales, Borrower shall
remit the cash proceeds from such sales to Lender in accordance with the terms
hereof if, as and when, the aggregate amount of such cash proceeds received by
Borrower and not remitted to Lender equals or exceeds $30,000. In no event
shall the same be commingled with Borrower's own funds. Borrower agrees to
reimburse Lender on demand for any amounts owed or paid to any bank at which a
Blocked Account is established or any other bank or person involved in the
transfer of funds to or from the Blocked Accounts arising out of Lender's
payments to or indemnification of such bank or person. The obligation of
Borrower to reimburse Lender for such amounts pursuant to this Section 6.3 shall
survive the termination or non-renewal of this Agreement.
6.4 PAYMENTS. All Obligations shall be payable to the Payment Account
as provided in Section 6.3 or such other place as Lender may designate from time
to time. Lender may apply payments received or collected from Borrower or for
the account of Borrower (including the monetary proceeds of collections or of
realization upon any Collateral) to such of the Obligations, whether or not then
due, in such order and manner as Lender determines. At Lender's option, all
principal, interest, fees, costs, expenses and other charges provided for in
this Agreement or the other Financing Agreements may be charged directly to the
loan account(s) of Borrower. Borrower shall make all payments to Lender on the
Obligations free and clear of, and without deduction or withholding for or on
account of, any setoff, counterclaim, defense, duties, taxes, levies, imposts,
fees, deductions, withholding, restrictions or conditions of any kind. If after
receipt of any payment of, or proceeds of Collateral applied to the payment of,
any of the Obligations, Lender is required to surrender or return such payment
or proceeds to any Person for any reason, then the Obligations intended to be
satisfied by such payment or proceeds shall be reinstated and continue and this
Agreement shall continue in full force and effect as if such payment or proceeds
had not been received by Lender. Borrower shall be liable to pay to Lender, and
does hereby indemnify and hold Lender harmless for the amount of any payments or
proceeds surrendered or returned. This Section 6.4 shall remain effective
notwithstanding any
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contrary action which may be taken by Lender in reliance upon such payment or
proceeds. This Section 6.4 shall survive the payment of the Obligations and the
termination or non-renewal of this Agreement.
6.5 AUTHORIZATION TO MAKE LOANS. Lender is authorized to make the
Loans and provide the Letter of Credit Accommodations based upon telephonic or
other instructions received from anyone purporting to be an officer of Borrower
or other authorized person or, at the discretion of Lender, if such Loans are
necessary to satisfy any Obligations. All Loans shall be disbursed by Lender to
Borrower's "Disbursement Account" designated as such on Schedule 8.8 hereto or
to any account subsequently opened by Borrower consistent with Section 9.13
hereof and designated by Borrower in writing to Lender as Borrower's
"Disbursement Account" into which all Loans shall be disbursed from and after
the date of such written notice. All requests for Loans or Letter of Credit
Accommodations hereunder shall specify the date on which the requested advance
is to be made or Letter of Credit Accommodations established (which day shall be
a business day) and the amount of the requested Loan. Requests received after
11:00 a.m. Los Angeles, California time on any day shall be deemed to have been
made as of the opening of business on the immediately following business day.
All Loans and Letter of Credit Accommodations under this Agreement shall be
conclusively presumed to have been made to, and at the request of and for the
benefit of, Borrower when deposited to the credit of Borrower or otherwise
disbursed or established in accordance with the instructions of Borrower or in
accordance with the terms and conditions of this Agreement.
6.6 USE OF PROCEEDS. Borrower shall use the initial proceeds of the
Loans provided by Lender to Borrower hereunder only for: (a) payments to each
of the persons listed in the disbursement direction letter furnished by Borrower
to Lender on or about the date hereof and (b) costs, expenses and fees in
connection with the preparation, negotiation, execution and delivery of this
Agreement and the other Financing Agreements. All other Loans made or Letter of
Credit Accommodations provided by Lender to Borrower pursuant to the provisions
hereof shall be used by Borrower only for general operating, working capital and
other proper corporate purposes of Borrower not otherwise prohibited by the
terms hereof. None of the proceeds will be used, directly or indirectly, for
the purpose of purchasing or carrying any margin security or for the purposes of
reducing or retiring any indebtedness which was originally incurred to purchase
or carry any margin security or for any other purpose which might cause any of
the Loans to be considered a "purpose credit" within the meaning of Regulation G
of the Board of Governors of the Federal Reserve System, as amended.
SECTION 7. COLLATERAL REPORTING AND COVENANTS
7.1 COLLATERAL REPORTING. Borrower shall provide Lender with the
following documents in a form satisfactory to Lender: (a)on a daily basis as
required by Lender, a schedule of sales made, credits issued and cash
received;(b) on a weekly basis or more frequently as Lender may request,
perpetual inventory reports and inventory reports by division (including Video
Inventory and DNA) and by category, including, without limitation, any inventory
which is subject to any consignment arrangements;(c) on a monthly basis or more
frequently as Lender may request,
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(i) agings of accounts receivable, together with a schedule of all returns,
discounts, claims, credits, chargebacks and allowances of any nature issued,
owing, granted, outstanding, available or claimed with respect to such accounts
receivable, (ii)agings of accounts payable, (iii) a schedule of all outstanding
loans and advances to Designated Vendors (as defined in Section 9.10(b)(ii));(d)
upon Lender's request,(i) copies of customer statements and credit memos,
remittance advices and reports, and copies of deposit slips and bank
statements,(ii) copies of shipping and delivery documents, (iii) copies of
purchase orders, invoices and delivery documents for Inventory and Equipment
acquired by Borrower, and (iv) a schedule of all loans and advances referenced
under Section 9.10(a)(ii) hereof; and (e) such other reports as to the
Collateral as Lender shall request from time to time. If any of Borrower's
records or reports of the Collateral are prepared or maintained by an accounting
service, contractor, shipper or other agent, Borrower hereby irrevocably
authorizes such service, contractor, shipper or agent to deliver such records,
reports, and related documents to Lender and to follow Lender's instructions
with respect to further services at any time that an Event of Default exists or
has occurred and is continuing.
7.2 ACCOUNTS COVENANTS.
(a) No credit, discount, allowance or extension or agreement for
any of the foregoing shall be granted to any account debtor without Lender's
consent, except in the ordinary course of Borrower's business in accordance with
practices and policies previously disclosed in writing to Lender. At any time
the Borrower has Excess Availability of less than $10,000,000, or at any time
after the occurrence of an Event of Default and during its continuance, Borrower
shall, with respect to any Account which Lender deems an Eligible Account,
notify Lender promptly of:(i) any material delay in Borrower's performance of
any of its obligations to any account debtor or the assertion of any claims,
offsets, defenses or counterclaims by any account debtor, or any disputes with
account debtors, or any settlement, adjustment or compromise thereof involving,
with respect to any claim, offset, defense, counterclaim, dispute, settlement,
compromise or adjustment, an amount greater than $500,000, individually, or
greater than $1,000,000, in the aggregate; and (ii)any event or circumstance
which, to Borrower's knowledge, would cause Lender to consider any then existing
Eligible Accounts involving an amount greater than $500,000, individually, or
$1,000,000, in the aggregate, to no longer constitute Eligible Accounts. So
long as no Event of Default exists or has occurred and is continuing, Borrower
shall settle, adjust or compromise any claim, offset, counterclaim or dispute
with any account debtor. At any time that an Event of Default exists or has
occurred and is continuing, Lender shall, at its option, have the exclusive
right to settle, adjust or compromise any claim, offset, counterclaim or dispute
with account debtors or grant any credits, discounts or allowances.
(b) At any time that Inventory is returned, reclaimed or
repossessed, the Account (or portion thereof) which arose from the sale of such
returned, reclaimed or repossessed Inventory shall not be deemed an Eligible
Account. In the event any account debtor returns Inventory when an Event of
Default exists or has occurred and is continuing, Borrower shall, upon Lender's
request,(i) hold the returned Inventory in trust for Lender, (ii)segregate all
returned Inventory from all of its other property,(iii) dispose of the returned
Inventory solely
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according to Lender's instructions, and (iv) not issue any credits, discounts or
allowances with respect thereto without Lender's prior written consent.
(c) With respect to Accounts:(i) the amounts shown on invoices
delivered to Lender or schedules thereof delivered to Lender with respect to the
Borrower's Accounts shall be true and complete in all material respects,(ii) no
payments shall be made thereon except payments immediately delivered to Lender
pursuant to the terms of this Agreement,(iii) no credit, discount, allowance or
extension or agreement for any of the foregoing shall be granted to any account
debtor except as reported to Lender in accordance with this Agreement and except
for (A) credits, discounts, allowances or extensions made or given in the
ordinary course of Borrower's business in accordance with practices and policies
previously disclosed to Lender and (B) an agreement with any account debtor
pursuant to which any Account owing by such account debtor which is no longer an
Eligible Account, as a result of the operation of Section 1.12(b) hereof (all
Accounts at any time owing to Borrower by such account debtor and by all other
account debtors that are not Eligible Accounts as a result of the operation of
Section 1.12(b) hereof are collectively referred to as "PAST DUE ACCOUNTS"),
becomes evidenced by and due and payable in accordance with a promissory note
and/or other written agreement executed and delivered by such account debtor in
favor of Borrower (such note and all such agreements executed with respect to
any Past Due Account are collectively referred to as an "ACCOUNTS SETTLEMENT
AGREEMENT"), PROVIDED, THAT, Borrower shall not enter into an Account Settlement
Agreements if an Event of Default exists and is continuing, and notwithstanding
Borrower's execution of any Settlement Agreements permitted by this
Section 7.2(c), all Past Due Accounts that become payable to Borrower in
accordance with Account Settlement Agreements permitted by this Section
7.2(c)(iii) shall nonetheless be deemed and in all events remain Accounts of
such account debtor for purposes of Section 1.12(n) hereof, (iv) there shall be
no setoffs, deductions, contras, defenses, counterclaims or disputes existing or
asserted with respect thereto except as expressly permitted pursuant to the
terms hereof, or except in the ordinary course of Borrower's business in
accordance with practices and policies previously disclosed in writing to
Lender, or except as otherwise reported to Lender in accordance with the terms
of this Agreement,(v) none of the transactions giving rise thereto will violate
any applicable State or Federal laws or regulations, all documentation relating
thereto will be legally sufficient under such laws and regulations and all such
documentation will be legally enforceable in accordance with its terms,
including, without limitation, all recording, filing and other requirements of
giving public notice under any applicable law have been satisfied with respect
to Accounts, including, without limitation, the filing of any report in the
states of New Jersey, Minnesota and Indiana with the New Jersey Division of
Taxation, the Minnesota Department of Revenue and the Indiana Department of
Revenue, respectively.
(d) Lender shall have the right at any time or times, in
Lender's name or in the name of a nominee of Lender, to verify the validity,
amount or any other matter relating to any Account or other Collateral, by mail,
telephone, facsimile transmission or otherwise.
(e) Immediately upon Borrower's receipt of any Collateral which
constitutes or is evidenced by instruments or chattel paper ("SPECIAL
COLLATERAL"), Borrower shall deliver
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the original thereof to Lender with appropriate endorsements or other specific
evidence (in form and substance acceptable to Lender) of assignment thereof to
Lender as security and shall take such actions as Lender may require to perfect
Lender's security interest in such Special Collateral; PROVIDED, HOWEVER, that
notwithstanding the foregoing, so long as no Event of Default has occurred and
is continuing, Borrower shall not be required to deliver to Lender any Special
Collateral (or take any of the foregoing actions with respect to Special
Collateral) relating to obligations to Borrower of less than $500,000
individually or $3,000,000 in the aggregate, EXCEPT THAT, provided no Event of
Default has occurred and is continuing, Borrower shall not be required to
deliver to Lender any Special Collateral (or take any of the foregoing actions
with respect to Special Collateral) if the Borrower has Excess Availability of
greater than $25,000,000.
(f) Lender may, at any time or times that an Event of Default
exists or has occurred and is continuing, (i) notify any or all account
debtors that the Accounts have been assigned to Lender and that Lender has a
security interest therein and Lender may direct any or all accounts debtors
to make payment of Accounts directly to Lender, (ii) extend the time of
payment of, compromise, settle or adjust for cash, credit, return of
merchandise or otherwise, and upon any terms or conditions, any and all
Accounts or other obligations included in the Collateral and thereby
discharge or release the account debtor or any other party or parties in any
way liable for payment thereof without affecting any of the Obligations,
(iii) demand, collect or enforce payment of any Accounts or such other
obligations, but without any duty to do so, and Lender shall not be liable
for its failure to collect or enforce the payment thereof nor for the
negligence of its agents or attorneys with respect thereto and (iv) take
whatever other action Lender may deem necessary or desirable for the
protection of its interests. At any time that an Event of Default exists or
has occurred and is continuing, at Lender's request, all invoices and
statements sent to any account debtor shall state that the Accounts and such
other obligations have been assigned to Lender and are payable directly and
only to Lender and Borrower shall deliver to Lender such originals of
documents evidencing the sale and delivery of goods or the performance of
services giving rise to any Accounts as Lender may require.
7.3 INVENTORY COVENANTS. With respect to the Inventory: (a) Borrower
shall at all times maintain inventory records reasonably satisfactory to
Lender, keeping correct and accurate records itemizing and describing the
kind, type, quality and quantity of Inventory, Borrower's cost therefor and
daily withdrawals therefrom and additions thereto; (b) Borrower shall conduct
a periodic cycle count of the Inventory in a manner that is acceptable to
Borrower's independent certified public accountants and, on or after an Event
of Default, shall conduct a physical count of the Inventory at any time or
times as Lender may request, and promptly following such physical inventory
shall supply Lender with a report in the form and with such specificity as
may be reasonably satisfactory to Lender concerning such physical count; (c)
Borrower shall not remove any Inventory from the locations set forth or
permitted herein, without the prior written consent of Lender, except for
sales of Inventory in the ordinary course of Borrower's business and except
to move Inventory directly from one location set forth or permitted herein to
another such location; (d) at Lender's request, Borrower shall, at its
expense on no more than two (2) occasions in any twelve month period, and at
Lender's own expense on the third and all subsequent occasions during such
period, deliver or cause to be delivered to Lender written
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reports or appraisals as to the Inventory in form, scope and methodology
acceptable to Lender and by Buxbaum-Ginsberg & Associates, Inc. or another
appraiser acceptable to Lender, addressed to Lender or upon which Lender is
expressly permitted to rely (the "INVENTORY APPRAISAL"), PROVIDED, THAT, from
and after the occurrence and during the continuance of an Event of Default, all
Inventory Appraisals requested by Lender shall be delivered at Borrower's sole
cost and expense;(e) Borrower shall produce, use, store and maintain the
Inventory with all reasonable care and caution and in accordance with applicable
standards of any insurance and in conformity with applicable laws (including the
requirements of the Federal Fair Labor Standards Act of 1938, as amended and all
rules, regulations and orders related thereto); (f) Borrower assumes all
responsibility and liability arising from or relating to the production, use,
sale or other disposition of the Inventory;(g) except in the ordinary course of
Borrower's business in accordance with practices and policies previously
disclosed in writing to Lender, Borrower shall not sell Inventory to any
customer on approval, or any other basis which may obligate Borrower to
repurchase such Inventory;(h) Borrower shall keep the Inventory in good and
marketable condition;(i) Borrower shall not acquire or accept any Inventory on
consignment or approval unless Borrower discloses same in the weekly inventory
report delivered to Lender pursuant to Section 7.1(b) of this Agreement; and
(j) Borrower shall not, without Lender's prior consent in each instance, return
Inventory to any vendor in the ordinary course of Borrower's business or
otherwise if an Event of Default exists or has occurred and is continuing or if
the Borrower has Excess Availability of less than $2,000,000.
7.4 EQUIPMENT COVENANTS. With respect to the Equipment: (a) upon
Lender's request, Borrower shall, at its expense, at any time or times as Lender
may request on or after an Event of Default, deliver or cause to be delivered to
Lender written reports as to the Equipment; (b) Borrower shall keep the
Equipment in good order, repair, running and marketable condition (ordinary wear
and tear excepted); (c) the Equipment is and shall be used in Borrower's
business; (d) Borrower shall deliver notice to Lender promptly after any
Equipment that constitutes a part of the Collateral is moved to a location that
is not owned or leased by Borrower, except to the extent necessary to have any
Equipment repaired or maintained in the ordinary course of the business of
Borrower or to move Equipment directly from one location set forth or permitted
herein to another such location and except for the movement of motor vehicles
used by or for the benefit of Borrower.
7.5 POWER OF ATTORNEY. Borrower hereby irrevocably designates and
appoints Lender (and all persons designated by Lender) as Borrower's true and
lawful attorney-in-fact, and authorizes Lender, in Borrower's or Lender's
name, to: (a) at any time an Event of Default exists or has occurred and is
continuing (i) demand payment on Accounts or other proceeds of Inventory or
other Collateral, (ii) enforce payment of Accounts by legal proceedings or
otherwise, (iii) exercise all of Borrower's rights and remedies to collect
any Account or other Collateral, (iv) sell or assign any Account upon such
terms, for such amount and at such time or times as the Lender deems
advisable, (v) settle, adjust, compromise, extend or renew an Account, (vi)
discharge and release any Account, (vii) prepare, file and sign Borrower's
name on any proof of claim in bankruptcy or other similar document against an
account debtor, (viii) notify the post office authorities to change the
address for delivery of Borrower's mail to an address designated
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by Lender, and open and dispose of all mail addressed to Borrower, (ix)
endorse Borrower's name upon any chattel paper, document, instrument,
invoice, or similar document or agreement relating to any Account or any
goods pertaining thereto or any other Collateral, (x) sign Borrower's name on
any verification of Accounts and notices thereof to account debtors and (xi)
do all acts and things which are necessary, in Lender's determination, to
fulfill Borrower's obligations under this Agreement and the other Financing
Agreements and (b) at any time to (i) take control in any manner of any item
of payment on or respecting Collateral or proceeds thereof to the extent it
has not been timely deposited into the Blocked Account in accordance with the
provisions of this Agreement, (ii) have access to any lockbox or postal box
into which any proceeds of Collateral is deposited, (iii) endorse Borrower's
name upon any items of payment on or respecting Collateral or proceeds of
Collateral and deposit the same in the Lender's account for application to
the Obligations, and (iv) execute in Borrower's name and file any UCC
financing statements or amendments thereto that Lender determines are
required in order to perfect, maintain or otherwise protect Lender's security
interest in any Collateral and/or the priority thereof, PROVIDED THAT, so
long as no Event of Default has occurred and is continuing, Lender shall not
exercise such right unless Borrower fails to execute any such financing
statement or amendment thereto promptly after request therefor by Lender.
Borrower hereby releases Lender and its officers, employees and designees
from any liabilities arising from any act or acts under this power of
attorney and in furtherance thereof, whether of omission or commission,
except as a result of Lender's own gross negligence or wilful misconduct as
determined pursuant to a final non-appealable order of a court of competent
jurisdiction.
7.6 RIGHT TO CURE. Lender may, at its option, (a) cure any default
by Borrower under any agreement with a third party or pay or bond on appeal
any judgment entered against Borrower, (b) discharge taxes, liens, security
interests or other encumbrances at any time levied on or existing with
respect to the Collateral and (c) pay any amount, incur any expense or
perform any act which, in Lender's judgment, is necessary or appropriate to
preserve, protect, insure or maintain the Collateral and the rights of Lender
with respect thereto. Lender may add any amounts so expended to the
Obligations and charge Borrower's account therefor, such amounts to be
repayable by Borrower on demand. Lender shall be under no obligation to
effect such cure, payment or bonding and shall not, by doing so, be deemed to
have assumed any obligation or liability of Borrower. Any payment made or
other action taken by Lender under this Section shall be without prejudice to
any right to assert an Event of Default hereunder and to proceed accordingly.
7.7 ACCESS TO PREMISES. From time to time as requested by Lender, at
the cost and expense of Borrower, subject to the expense limitations set
forth in Section 7.3 and Section 9.15(g), (a) Lender or its designee shall
have complete access to all of Borrower's premises during normal business
hours and after reasonable notice to Borrower, or at any time and without
notice to Borrower if an Event of Default exists or has occurred and is
continuing, for the purposes of inspecting, verifying and auditing the
Collateral and all of Borrower's books and records, including the Records,
and (b) Borrower shall promptly furnish to Lender such copies of such books
and records or extracts therefrom as Lender may request after reasonable
notice to Borrower and during normal business hours, or at any time and
without notice to Borrower
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if an Event of Default exists or has occurred and is continuing, and (c)
after reasonable notice to Borrower, use during normal business hours such of
Borrower's personnel, equipment, supplies and premises as may be reasonably
necessary for the foregoing and at any time and without notice to Borrower if
an Event of Default exists or has occurred and is continuing for the
collection of Accounts and realization of other Collateral.
SECTION 8. REPRESENTATIONS AND WARRANTIES
Borrower hereby represents and warrants to Lender the following (which
shall survive the execution and delivery of this Agreement), the truth and
accuracy of which are a continuing condition of the making of Loans and
providing Letter of Credit Accommodations by Lender to Borrower:
8.1 CORPORATE EXISTENCE, POWER AND AUTHORITY; SUBSIDIARIES. Borrower
is a corporation duly organized and in good standing under the laws of its state
of incorporation and is duly qualified as a foreign corporation and in good
standing in all states or other jurisdictions where the nature and extent of the
business transacted by it or the ownership of assets makes such qualification
necessary, except for those jurisdictions in which the failure to so qualify
would not have a material adverse effect on Borrower's financial condition,
results of operation or business or the rights of Lender in or to any of the
Collateral. The execution, delivery and performance of this Agreement, the
other Financing Agreements and the transactions contemplated hereunder and
thereunder are all within Borrower's corporate powers, have been duly authorized
and are not in contravention of law or the terms of Borrower's certificate of
incorporation, by-laws, or other organizational documentation, or any indenture,
agreement or undertaking to which Borrower is a party or by which Borrower or
its property are bound. This Agreement and the other Financing Agreements
constitute legal, valid and binding obligations of Borrower enforceable in
accordance with their respective terms, except (a) to the extent that the
availability of equitable remedies may be subject to judicial discretion, and
(b)to the extent that enforcement of certain rights and remedies may be limited
by the effect of bankruptcy, insolvency, reorganization, arrangement, moratorium
or other similar laws affecting the rights of creditors generally, including
without limitation, laws relating to fraudulent transfers or conveyances,
preferences and equitable subordination. Borrower does not have any
subsidiaries except as set forth on the Information Certificate and those
acquired or created after the date of this Agreement as permitted pursuant to
Sections 9.7 and 9.10 hereof.
8.2 FINANCIAL STATEMENTS; NO MATERIAL ADVERSE CHANGE. All financial
statements relating to Borrower which have been or may hereafter be delivered by
Borrower to Lender have been prepared in accordance with GAAP and fairly present
the financial condition and the results of operation of Borrower as at the dates
and for the periods set forth therein. Except as disclosed in any interim
financial statements furnished by Borrower to Lender prior to the date of this
Agreement, there has been no material adverse change in the assets, liabilities,
properties and condition, financial or otherwise, of Borrower, since the date of
the most recent audited financial statements furnished by Borrower to Lender
prior to the date of this Agreement.
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8.3 CHIEF EXECUTIVE OFFICE; COLLATERAL LOCATIONS. The chief executive
office of Borrower and Borrower's Records concerning Accounts are located only
at the address set forth below and its only other places of business and the
only other locations of Collateral, if any, are the addresses set forth in the
Information Certificate, subject to the right of Borrower to establish new
locations in accordance with Section 9.2 below. The Information Certificate
correctly identifies any of such locations which are not owned by Borrower and
sets forth the owners and/or operators thereof.
8.4 PRIORITY OF LIENS; TITLE TO PROPERTIES. The security interests and
liens granted to Lender under this Agreement and the other Financing Agreements
constitute valid and perfected first priority liens and security interests in
and upon the Collateral subject only to the liens permitted under Section 9.8
hereof. Borrower has good and marketable title to all of its properties and
assets subject to no liens, mortgages, pledges, security interests, encumbrances
or charges of any kind, except those granted to Lender and such others as are
specifically permitted under Section 9.8 hereof.
8.5 TAX RETURNS. Borrower has filed, or caused to be filed, in a
timely manner all tax returns, reports and declarations which are required to be
filed by it (without requests for extension except as previously disclosed in
writing to Lender), except where the failure to do so could not reasonably be
expected to have a Material Adverse Effect. All information in such tax
returns, reports and declarations is complete and accurate in all material
respects. Borrower has paid or caused to be paid all taxes due and payable or
claimed due and payable in any assessment received by it, except taxes the
validity of which are being contested in good faith by appropriate proceedings
diligently pursued and available to Borrower and with respect to which adequate
reserves have been set aside on its books, or except where the failure to do so
could not reasonably be expected to have a Material Adverse Effect. Adequate
provision has been made for the payment of all accrued and unpaid Federal,
State, county, local, foreign and other taxes whether or not yet due and payable
and whether or not disputed.
8.6 LITIGATION. Except as set forth on the Information Certificate and
on Schedule 8.6 hereto, as the same may be updated or supplemented from time to
time in accordance with the terms of this Agreement, and except for litigation
not required to be reported under Section 9.6(b) hereof and litigation reported
to Lender as required under Section 9.6(b) hereof, there is no present
investigation by any governmental agency pending, or to the best of Borrower's
knowledge threatened, against or affecting Borrower, its assets or business and
there is no action, suit, proceeding or claim by any Person pending, or to the
best of Borrower's knowledge threatened, against Borrower or its assets or
goodwill, or against or affecting any transactions contemplated by this
Agreement, which, in each or any case, if adversely determined against Borrower,
could reasonably be expected to result in a Material Adverse Effect.
8.7 COMPLIANCE WITH OTHER AGREEMENTS AND APPLICABLE LAWS. Borrower is
not in default in any material respect under, or in violation in any material
respect of any of the terms of, any agreement, contract, instrument, lease or
other commitment to which it is a party or by which it or any of its assets are
bound and Borrower is in compliance in all material respects with
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all applicable provisions of laws, rules, regulations, licenses, permits,
approvals and orders of any foreign, Federal, State or local governmental
authority, except any such defaults, violations or non-compliance that,
individually or in the aggregate, have not resulted in, and could not reasonably
be expected to result in, a Material Adverse Effect.
8.8 BANK ACCOUNTS. All of the deposit accounts, investment accounts or
other accounts in the name of or used by Borrower maintained at any bank or
other financial institution are set forth on Schedule 8.8 hereto, subject to the
right of Borrower to establish new accounts in accordance with Section 9.13
below.
8.9 ACCURACY AND COMPLETENESS OF INFORMATION. All information
furnished by or on behalf of Borrower in writing to Lender in connection with
this Agreement or any of the other Financing Agreements or any transaction
contemplated hereby or thereby, including all information on the Information
Certificate is true and correct in all material respects on the date as of which
such information is dated or certified and does not omit any material fact
necessary in order to make such information not misleading. No event or
circumstance has occurred which has had or could reasonably be expected to have
a Material Adverse Effect, which has not been fully and accurately disclosed to
Lender in writing.
8.10 SURVIVAL OF WARRANTIES; CUMULATIVE. All representations and
warranties contained in this Agreement or any of the other Financing Agreements
shall survive the execution and delivery of this Agreement and shall be deemed
to have been made again to Lender on the date of each additional borrowing or
other credit accommodation hereunder and shall be conclusively presumed to have
been relied on by Lender regardless of any investigation made or information
possessed by Lender. The representations and warranties set forth herein shall
be cumulative and in addition to any other representations or warranties which
Borrower shall now or hereafter give, or cause to be given, to Lender.
SECTION 9. AFFIRMATIVE AND NEGATIVE COVENANTS
9.1 MAINTENANCE OF EXISTENCE. Borrower shall at all times preserve,
renew and keep in full, force and effect its corporate existence and rights and
franchises with respect thereto and maintain in full force and effect all
permits, licenses, trademarks, tradenames, approvals, authorizations, leases and
contracts necessary to carry on the business as presently or proposed to be
conducted, except to the extent that any failure to do so, individually or in
the aggregate, does not, and could not reasonably be expected to, result in a
Material Adverse Effect. Borrower shall give Lender thirty (30) days prior
written notice of any proposed change in its corporate name, which notice shall
set forth the new name and Borrower shall deliver to Lender a copy of the
amendment to the Certificate of Incorporation of Borrower providing for the name
change certified by the Secretary of State of the jurisdiction of incorporation
of Borrower as soon as it is available.
9.2 NEW COLLATERAL LOCATIONS. (a) Borrower may open any new location
within the continental United States or in Canada provided Borrower (i) gives
Lender ten (10) days prior
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written notice of the intended opening of any such new location and (ii)
executes and delivers, or causes to be executed and delivered, to Lender such
agreements, documents, and instruments as Lender may deem reasonably necessary
or desirable to protect its interests in the Collateral at such location,
including UCC financing statements.
(b) Notwithstanding anything to the contrary set forth in
Section 9.2(a) above, so long as no Event of Default exists and is continuing,
and provided Borrower provides Lender with ten (10) days' prior written notice,
Borrower may move or transfer Inventory or Equipment to a location or locations
outside the United States and Canada, PROVIDED THAT,(i) in each instance, after
giving effect to such transfer of Inventory and Equipment, Borrower has Excess
Availability of not less than $25,000,000 and (ii)during the term of this
Agreement,(A) the aggregate value of all Equipment located outside the United
States and Canada shall not exceed, at any given time, $2,000,000 in the
aggregate and (B) the aggregate value of all Inventory located outside the
United States and Canada shall not exceed, at any given time, $5,000,000 in the
aggregate.
9.3 COMPLIANCE WITH LAWS, REGULATIONS, ETC. Borrower shall, at all
times, comply in all material respects with all laws, rules, regulations,
licenses, permits, approvals and orders of any Federal, State or local
governmental authority applicable to it, except where the failure to so comply
does not, individually or in the aggregate, and could not reasonably be expected
to, result in a Material Adverse Effect.
9.4 PAYMENT OF TAXES AND CLAIMS. Borrower shall duly pay and discharge
all taxes, assessments, contributions and governmental charges upon or against
it or its properties or assets, except (a) taxes the validity of which are being
contested in good faith by appropriate proceedings diligently pursued and
available to Borrower and with respect to which adequate reserves have been set
aside on its books and (b) where failure to pay any such taxes, assessments,
contributions or governmental charges does not, individually or in the
aggregate, and could not reasonably be expected to, result in a Material Adverse
Effect. Borrower shall be liable for any tax or penalties imposed on Lender as
a result of the financing arrangements provided for herein and Borrower agrees
to indemnify and hold Lender harmless with respect to the foregoing, and to
repay to Lender on demand the amount thereof, and until paid by Borrower such
amount shall be added and deemed part of the Loans, PROVIDED, THAT, nothing
contained herein shall be construed to require Borrower to pay any income or
franchise taxes attributable to the income of Lender from any amounts charged or
paid hereunder to Lender. The foregoing indemnity shall survive the payment of
the Obligations and the termination or non-renewal of this Agreement.
9.5 INSURANCE. Borrower shall, at all times, maintain with financially
sound and reputable insurers insurance with respect to the Collateral against
loss or damage and all other insurance of the kinds (excluding earthquake
insurance) and in the amounts customarily insured against or carried by
corporations of established reputation engaged in the same or similar businesses
and similarly situated. Said policies of insurance shall be satisfactory to
Lender as to form, amount and insurer. Borrower shall furnish certificates,
policies or endorsements to Lender as Lender shall require as proof of such
insurance, and, if Borrower fails to do so, Lender is
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authorized, but not required, to obtain such insurance at the expense of
Borrower. All policies shall provide for at least ten (10) days prior written
notice to Lender of any cancellation or reduction of coverage and that Lender
may act for Borrower in obtaining, and at any time an Event of Default exists or
has occurred and is continuing, adjusting, settling, amending and canceling such
insurance. Borrower shall cause Lender to be named as a loss payee and an
additional insured (but without any liability for any premiums) under such
insurance policies and Borrower shall obtain non-contributory lender's loss
payable endorsements to all insurance policies in form and substance
satisfactory to Lender. Such lender's loss payable endorsements shall specify
that the proceeds of such insurance with respect to the Collateral shall be
payable to Lender as its interests may appear and further specify that Lender
shall be paid regardless of any act or omission by Borrower or any of its
affiliates. At its option, Lender may apply any insurance proceeds received by
Lender at any time to the cost of repairs or replacement of Collateral and/or to
payment of the Obligations, whether or not then due, in any order and in such
manner as Lender may determine or hold such proceeds as cash collateral for the
Obligations.
9.6 FINANCIAL STATEMENTS AND OTHER INFORMATION.
(a) Borrower shall keep proper books and records in which true
and complete entries shall be made of all dealings or transactions of or in
relation to the Collateral and the business of Borrower and its subsidiaries (if
any) in accordance with GAAP and Borrower shall furnish or cause to be furnished
to Lender: (i)within forty-five (45) business days after the end of each fiscal
month, monthly unaudited consolidated financial statements, and, if Borrower has
any subsidiaries, unaudited consolidating financial statements (including in
each case balance sheets, statements of income and loss, statements of cash
flow, and statements of shareholders' equity), all in reasonable detail, fairly
presenting the financial position and the results of the operations of Borrower
and its subsidiaries as of the end of and through such fiscal month and (ii)
prior to the consummation of an Initial Public Offering, within one hundred
twenty (120) days after the end of each fiscal year, and from and after
consummation of an Initial Public Offering, within ninety (90) days after the
end of each fiscal year, audited consolidated financial statements and, if
Borrower has any subsidiaries, audited consolidating financial statements of
Borrower and its subsidiaries (including in each case balance sheets, statements
of income and loss, statements of cash flow and statements of shareholders'
equity), and the accompanying notes thereto, all in reasonable detail, fairly
presenting the financial position and the results of the operations of Borrower
and its subsidiaries as of the end of and for such fiscal year, together with
the unqualified opinion of independent certified public accountants, which
accountants shall be an independent accounting firm selected by Borrower and
reasonably acceptable to Lender, that such financial statements have been
prepared in accordance with GAAP, and present fairly the results of operations
and financial condition of Borrower and its subsidiaries as of the end of and
for the fiscal year then ended.
(b) Borrower shall promptly notify Lender in writing of the
details of (i) any loss or damage in an amount of $500,000 or greater relating
to Collateral or any other property which is security for the Obligations;(ii)
any action, suit or proceeding relating to the Collateral
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or any other property which is security for the Obligations, which action, suit
or proceeding, if adversely determined, could reasonably be expected to have a
Material Adverse Effect upon the Borrower's business or upon the Collateral or
any other property which is security for the Obligations; and (iii) the
occurrence of any Event of Default or event which, with the passage of time or
giving of notice or both, would constitute an Event of Default.
(c) Borrower shall promptly after the sending or filing thereof
furnish or cause to be furnished to Lender copies of all reports which Borrower
sends to its stockholders generally and copies of all reports and registration
statements which Borrower files with the Securities and Exchange Commission, any
national securities exchange or the National Association of Securities Dealers,
Inc.
(d) Borrower shall furnish or cause to be furnished to Lender
such budgets, forecasts, projections and other information respecting the
Collateral and the business of Borrower, as Lender may, from time to time,
reasonably request. Subject to the provisions of Section 12.5 below, Lender is
hereby authorized to deliver a copy of any financial statement or any other
information relating to the business of Borrower to any court or other
government agency or to any participant or assignee or prospective participant
or assignee. Borrower hereby irrevocably authorizes and directs all accountants
or auditors to deliver to Lender, upon Lender's request, at Borrower's expense,
copies of the audited financial statements of Borrower and any reports or
management letters issued by such accountants or auditors pertaining to
Borrower, PROVIDED, THAT, if no Event of Default shall have occurred and be
continuing at the time of any such request of Lender, Borrower's accountants or
auditors shall not be authorized to make such delivery and/or disclosure to
Lender without Borrower's prior consent thereto. Any documents, schedules,
invoices or other papers delivered to Lender may be destroyed or otherwise
disposed of by Lender one (1) year after the same are delivered to Lender,
except as otherwise designated by Borrower to Lender in writing.
9.7 SALE OF ASSETS, CONSOLIDATION, MERGER, DISSOLUTION, ETC. Borrower
shall not, directly or indirectly,(a) merge into or with or consolidate with any
other Person or permit any other Person to merge into or with or consolidate
with it except for the Delaware Reincorporation Merger, or (b) sell, assign,
lease, transfer, abandon or otherwise dispose of any stock to any other Person
or any of its assets to any other Person (except for (i) sales of Inventory in
the ordinary course of business,(ii) the disposition of Equipment so long as, if
an Event of Default exists or has occurred and is continuing, the proceeds are
paid to Lender to the extent such Equipment, at the time of the disposition
thereof, constituted Collateral, and (iii) the sale or other disposition of
assets and properties of Borrower (other than Accounts, Inventory and Equipment)
having an aggregate fair market value not in excess of $2,000,000 for all such
assets and properties disposed of in any fiscal year of Borrower, provided that,
if an Event of Default exists or has occurred and is continuing, any proceeds
thereof shall be promptly remitted to Lender for application to the then unpaid
Obligations in such order and manner as Lender shall determine, or (c) form or
acquire any subsidiaries, or (d) wind up, liquidate or dissolve or (e) agree to
do any of the foregoing. Notwithstanding the foregoing, and provided no Event
of Default exists and is continuing, Borrower shall have the right to (x) form
or acquire subsidiaries in connection with
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the acquisition of the assets or capital stock of another Person permitted by
Section 9.10 hereof, (y) sell and issue additional shares of its capital stock
or issue warrants or options with respect to Borrower's capital stock, (i) in
one or more private sales thereof, (ii) pursuant to the Securities Act of 1933,
as amended (the "INITIAL PUBLIC OFFERING"), and (iii) in connection with any
secondary public offering pursuant to the Securities Act of 1933, as amended,
PROVIDED THAT (1) all proceeds of any Equity Offering shall be used by Borrower
solely for its working capital and corporate purposes and (2) after giving
effect to any proposed Equity Offering, no Change of Control shall have
occurred, and (z) form any subsidiary, make an investment in any Person or
contribute assets or property to a joint venture in accordance with the
provisions of Section 9.10 hereof.
9.8 ENCUMBRANCES. Borrower shall not create, incur, assume or suffer
to exist any security interest, mortgage, pledge, lien, charge or other
encumbrance of any nature whatsoever on any of its assets or properties,
including the Collateral, EXCEPT: (a) liens and security interests of Lender;
(b) liens securing the payment of taxes, either not yet overdue or the
validity of which are being contested in good faith by appropriate
proceedings diligently pursued and available to Borrower and with respect to
which adequate reserves have been set aside on its books; (c) non-consensual
statutory liens (other than liens securing the payment of taxes) arising in
the ordinary course of Borrower's business to the extent: (i) such liens
secure indebtedness which is not overdue or (ii) such liens secure
indebtedness relating to claims or liabilities which are fully insured and
being defended at the sole cost and expense and at the sole risk of the
insurer or being contested in good faith by appropriate proceedings
diligently pursued and available to Borrower, in each case prior to the
commencement of foreclosure or other similar proceedings and with respect to
which adequate reserves have been set aside on its books; (d) zoning
restrictions, easements, licenses, covenants and other restrictions affecting
the use of real property which do not interfere in any material respect with
the use of such real property or ordinary conduct of the business of Borrower
as presently conducted thereon or materially impair the value of the real
property which may be subject thereto; (e) purchase money security interests
in (i) Equipment (including capital leases) acquired after the date hereof
that does not constitute Collateral not to exceed (A) $15,000,000 in any
twelve-month period following the date of this Agreement and (B) $25,000,000
in the aggregate during the term of this Agreement and (ii) purchase money
mortgages on real estate acquired after the date hereof not to exceed
$4,000,000 in the aggregate at any time outstanding so long as such security
interests and mortgages do not apply to any property of Borrower other than
the Equipment or real estate so acquired, and the indebtedness secured
thereby does not exceed the cost of the Equipment or real estate so acquired,
as the case may be; (f) liens securing the refinancing of any indebtedness
secured by purchase money security interests in Equipment and real estate
provided that any such refinancing shall be provided by a non-affiliated
Person in an arm's length transaction and on commercially reasonable terms;
(g) liens securing secured equipment loans or capital leases ("EQUIPMENT
LOANS") provided by a non-affiliated Person, which Equipment Loans shall be
an arm's length transaction and on commercially reasonable terms, PROVIDED
THAT, in connection therewith, (i) any Equipment Loans shall be secured only
by the specific Equipment directly relating to the Equipment Loans made by
such Person and not by any other assets of the Borrower, (ii) any proceeds
received by Borrower from each Equipment Loan shall be used by
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the Borrower to repay the Obligations hereunder and (iii) as of the date of
each Equipment Loan, no Event of Default exists hereunder; (h) the security
interests and liens set forth on Schedule 9.8 hereto; (i) liens approved by
Lender in accordance with Section 9.10(b) hereof; (j) any vendor's lien on
Inventory in favor of a vendor from whom Borrower has purchased Inventory,
PROVIDED THAT, such vendor has executed and delivered to Borrower for the
benefit of Lender a subordination agreement in substantially identical form
to the vendors' subordination agreements delivered to Lender on the closing
date pursuant to Section 4.1(e) hereof; and (k) any purported lien on
merchandise in Borrower's possession evidenced by a protective UCC-1 filing
by a person or entity who consigned such merchandise to Borrower, PROVIDED
THAT, such person or entity has executed and delivered to Borrower for the
benefit of Lender a consignor's waiver letter in substantially identical form
to the consignors' waiver letters delivered to Lender on the closing date
pursuant to Section 4.1(e) hereof.
9.9 INDEBTEDNESS. Borrower shall not incur, create, assume, become
or be liable in any manner with respect to, or permit to exist, any
obligations or indebtedness, EXCEPT: (a) the Obligations; (b) trade
obligations, other obligations reasonably incurred in the course of business
and normal accruals in the course of business that are not past due, or with
respect to which the Borrower is contesting in good faith the amount or
validity thereof by appropriate proceedings diligently pursued and available
to Borrower, and with respect to which adequate reserves have been set aside
on its books; (c)(i) indebtedness (including capital leases) to the extent
not incurred or secured by liens (including capital leases) in violation of
any other provision of this Agreement or (ii) indebtedness relating to
equipment leases or equipment financing transactions entered into in an arm's
length transaction and on commercially reasonable terms; (d) the indebtedness
set forth on Schedule 9.9 hereto; and (e) unsecured subordinated indebtedness
of Borrower ("SUBORDINATED DEBT") hereafter owing to one or more other
Persons (each, a "JUNIOR CREDITOR"), PROVIDED, THAT (i) the Junior Creditor
making any such subordinated loan(s) to Borrower shall have executed and
delivered in favor of Lender a subordination agreement, in form and substance
satisfactory to Lender, which shall provide, among other things, that the
Subordinated Debt owing to such Junior Creditor is subject and subordinate in
right of payment to the right of Lender to receive the prior final payment
and satisfaction in full of all of the Obligations, and (ii) all proceeds of
the Subordinated Debt shall be remitted by Borrower, upon receipt thereof, to
Lender for application to the then unpaid Obligations in such order and
manner as Lender shall determine; PROVIDED, THAT, with respect to the
indebtedness described in clauses (c) and (d) of this Section 9.9, Borrower
may only make regularly scheduled payments of principal and interest in
respect of such indebtedness in accordance with the terms of the agreement or
instrument evidencing or giving rise to such indebtedness as in effect on the
date hereof so long as no Event of Default exists and is continuing, EXCEPT
THAT, Borrower shall have the right to refinance and prepay any equipment
financing indebtedness and shall have the right to prepay any other
indebtedness described in clauses (c) and (d) of this Section 9.9; PROVIDED
THAT, (A) no Event of Default exists and is continuing on the date Borrower
proposes to make such prepayment ("PREPAYMENT DATE") as set forth in a notice
of such proposed prepayment to be delivered by Borrower to Lender at least
ten (10) days prior to the Prepayment Date, (B) after giving effect to such
proposed prepayment, Borrower has Excess Availability of not less than
$20,000,000, and (C) the aggregate amount of all prepayments permitted
pursuant to this Section
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9.9 shall not exceed (1) $6,000,000 in any twelve-month period following the
date of this Agreement and (2) $12,000,000 in the aggregate during the term of
this Agreement.
9.10 LOANS, INVESTMENTS, GUARANTEES, ETC. (a) Borrower shall not,
directly or indirectly, make any loans or advance money or property to any
person, or invest in (by capital contribution, dividend or otherwise) or
purchase or repurchase the stock or indebtedness or all or a substantial part of
the assets or property of any person, or guarantee, assume, endorse, or
otherwise become responsible for (directly or indirectly) the indebtedness,
performance, obligations or dividends of any Person or agree to do any of the
foregoing, EXCEPT:
(i) the endorsement of instruments for collection or
deposit in the ordinary course of business;
(ii) loans or advances of money (other than salary) to
officers, directors, employees, independent contractors, or stockholders of
Borrower consisting of (A) expense advances in the ordinary course of business
consistent with past practices, (B) loans, not to exceed Five Hundred Thousand
Dollars ($500,000), individually, or One Million Dollars ($1,000,000)
outstanding in the aggregate at any time, incidental to recruiting or relocating
officers, and (C) non-cash loans in connection with the exercise of stock
options;
(iii) the loans, advances and guarantees set forth on
Schedule 9.10 hereto; and
(iv) except as otherwise permitted hereunder;
PROVIDED, THAT, as to such loans, advances and guarantees, to the extent
requested by Lender, Borrower shall furnish to Lender all notices or demands in
connection with such loans, advances or guarantees or other indebtedness subject
to such guarantees either received by Borrower or on its behalf, promptly after
the receipt thereof, or sent by Borrower or on its behalf, concurrently with the
sending thereof, as the case may be.
(b) Notwithstanding anything to the contrary contained in
Section 9.9 or this Section 9.10, provided no Event of Default exists and is
continuing:
(i) Borrower shall be permitted to purchase a
controlling ownership in the stock of any Person (a "STOCK ACQUISITION"; and
such Person whose shares of capital are acquired in the Stock Acquisition is
hereinafter referred to as the "TARGET COMPANY") or all or a substantial part of
the assets or property of any Person (an "ASSET ACQUISITION"; and the assets to
be acquired upon consummation of the Asset Acquisition are hereinafter
collectively referred to as the "ACQUIRED ASSETS"), provided the Target Company
is engaged in, or the Acquired Assets are then used in, a business (the
"ACQUIRED BUSINESS") similar or related to Borrower's business as presently
conducted, PROVIDED THAT (A) Borrower provides Lender with thirty (30) Business
Days' prior written notice of each contemplated Stock Acquisition or Asset
Acquisition (hereinafter, an "ACQUISITION"), which notice shall describe the
proposed Acquisition in
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reasonable detail, including the total amount of consideration to be paid by
Borrower in connection therewith and a description of the assets or stock to be
acquired, (B) contemporaneously with the consummation of the Acquisition,
Borrower shall have granted Lender a first priority, perfected security interest
in and lien upon or pledge of (as applicable) all of the stock or assets
acquired by Borrower upon consummation of the Acquisition, subject to no other
liens or encumbrances except for those that shall be acceptable to Lender in its
discretion ("PERMITTED LIENS"), (C) notwithstanding anything to the contrary
contained herein, the Accounts and Inventory that are owned by the Target
Company or that constitute a part of the Acquired Assets (as applicable) and
that arise or are acquired as a result of Borrower's operation of the Acquired
Business after consummation of the Acquisition will not be Eligible Accounts or
Eligible Inventory hereunder unless and until Lender shall have completed a
field examination and, if Lender reasonably requests, conduct an appraisal with
respect thereto, the results of which, together with any legal due diligence as
Lender shall request, shall be satisfactory to Lender in all respects, and, in
the case of a Stock Acquisition, Lender shall have received from the Target
Company all documents, instruments and agreements as Lender shall reasonably
require in connection therewith, in form and substance satisfactory to Lender,
including, without limitation, a guarantee by the Target Company of all of the
Obligations to Lender and a general security agreement and related UCC-1
financing statements pursuant to which Lender shall have received a first
priority, perfected security interest in and lien upon all of the Target
Company's assets and properties, including, without limitation, its Accounts and
Inventory, subject to no other liens or encumbrances except Permitted Liens;
(D) after giving effect to the proposed Acquisition, Borrower shall have Excess
Availability of not less than $20,000,000, except that if the condition
precedent set forth in the immediately preceding clause (C) has been satisfied
in full, in Lender's sole judgment, as of the date of consummation of the
Acquisition, then the Acquired Assets consisting of Accounts and Inventory of
the Acquired Business shall be taken into account by Lender in calculating
Borrower's Excess Availability for the purposes of this clause (D); and
(ii) Borrower shall be permitted to make, in the ordinary
course of Borrower's business in accordance with practices and policies
previously disclosed in writing to Lender, (A) loans and advances evidenced by
Accounts Settlement Agreements permitted pursuant to Section 7.2(c)(iii) hereof
and (B) so long as Borrower has, in each instance, Excess Availability of not
less than $10,000,000, loans and advances to certain Persons who sell and supply
to Borrower goods consisting of musical recordings, intellectual property
rights, distribution rights, or video records, games or accessories or other
related products or who manufacture such goods for such Persons (individually, a
"DESIGNATED VENDOR", and collectively, "DESIGNATED VENDORS"), PROVIDED THAT, (1)
if, after giving effect to the proposed loan or advance, Borrower has Excess
Availability of not less than (x) $10,000,000 on the date of such loan or
advance, the maximum aggregate amount of all loans and advances to any
Designated Vendor shall not exceed the aggregate amount of $1,000,000
outstanding at any given time, (y) $25,000,000 on the date of such loan or
advance, the maximum aggregate amount of all loans and advances to any
Designated Vendor shall not exceed the aggregate amount of $5,000,000
outstanding at any given time, and (z) $50,000,000 on the date of such loan or
advance, the maximum aggregate amount of all loans and advances to any
Designated Vendor
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shall not exceed the aggregate amount of $5,000,000 outstanding at any given
time; and (2) the maximum aggregate amount of all loans and advances to all
Designated Vendors outstanding at any given time shall not exceed $15,000,000;
and
(iii) Borrower shall be permitted to form a subsidiary,
acquire a minority equity interest in a Person or contribute assets or
properties to a joint venture, PROVIDED THAT, during the term of this Agreement,
the maximum aggregate amount of all investments permitted under this Section
9.10(b)(iii) shall not exceed $20,000,000 and, PROVIDED FURTHER THAT, in each
instance (A) Borrower pledges or assigns in favor of Lender as Collateral for
the Obligations, all of Borrower's right, title and interest in and to such
subsidiary, equity ownership in such Person, or joint venture and executes and
delivers such agreements and documentation as Lender shall reasonably request to
perfect such security interest, and (B) the maximum aggregate amount of such
investments permitted under this Section 9.10(b)(iii) shall not exceed, in each
instance, the following amounts:
(1) If the Monthly Excess Availability for the
six (6) calendar months immediately preceding the date of any proposed
investment permitted hereunder is equal to or greater than $40,000,000 and,
after giving effect to the proposed investment permitted hereunder, Borrower has
Excess Availability of not less than $40,000,000, then the maximum amount of
such investment shall be $5,000,000, PROVIDED THAT, after giving effect to the
proposed investment, the aggregate amount of all existing investments permitted
under this Section 9.10(b)(iii) does not and will not exceed $5,000,000; and
(2) If the Monthly Excess Availability for the
six (6) calendar months immediately preceding the date of any proposed
investment permitted hereunder is equal to or greater than $75,000,000 and,
after giving effect to the proposed investment permitted hereunder, Borrower has
Excess Availability of not less than $75,000,000, then the maximum amount of
such investment shall be $10,000,000, PROVIDED THAT, after giving effect to the
proposed investment, the aggregate amount of all existing investments permitted
under this Section 9.10(b)(iii) does not and will not exceed $10,000,000; and
(3) If the Monthly Excess Availability for the
six (6) calendar months immediately preceding the date of any proposed
investment permitted hereunder is equal to or greater than $100,000,000 and,
after giving effect to the proposed investment permitted hereunder, Borrower has
Excess Availability of not less than $100,000,000, then the maximum amount of
such investment shall be $20,000,00, PROVIDED THAT, after giving effect to the
proposed investment, the aggregate amount of all existing investments permitted
under this Section 9.10(b)(iii) does not and will not exceed $20,000,000;
For the purposes of calculating the Monthly Excess Availability as required
under this Section 9.10(b)(iii), and not for any other Section of this
Agreement, to the extent that the Borrower receives proceeds from an Equity
Offering during any applicable six (6) month period as set forth above, said
proceeds shall be deemed received by Borrower as of the first (1st) Business Day
of such period;
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(iv) Borrower shall be permitted to make investments in
Valley Records Foreign Sales Corporation, PROVIDED THAT, the maximum aggregate
amount of all investments permitted under this Section 9.10(b)(iv) shall not
exceed $30,000 in any fiscal year of Borrower; and
(v) Borrower shall be permitted to guarantee the
accounts payable owing to product manufacturers by Designated Vendors, PROVIDED
THAT, the aggregate amount of all such guarantees shall not exceed at any given
time $1,000,000.
9.11 DIVIDENDS AND REDEMPTIONS. Borrower shall not, directly or
indirectly:
(a) declare or pay any dividends on account of any shares of
class of capital stock of Borrower now or hereafter outstanding, or set aside or
otherwise deposit or invest any sums for such purpose, EXCEPT, THAT (i) Borrower
may declare and pay cash dividends upon its capital stock in an aggregate amount
not to exceed twenty-five (25%) percent of Borrower's net income for any fiscal
year, as reflected on the audited financial statements for such fiscal year
delivered by Borrower to Lender in accordance with Section 9.6(a) above,
PROVIDED, THAT (A) no Event of Default has occurred and is continuing on the
proposed dividend payment date ("DIVIDEND PAYMENT DATE") set forth in a notice
of such proposed dividend to be delivered by Borrower to Lender at least ten
(10) days prior to the Dividend Payment Date, (B) Borrower's Excess Availability
on the Dividend Payment Date, after giving effect to such dividend, is at least
$20,000,000, and (C) such cash dividend must be paid no later than thirty (30)
days after Lender's receipt of such audited financial statements, and
(ii) Borrower may issue stock dividends upon any shares of any class of capital
stock so long as the same is in accordance with all applicable laws and provided
no Event of Default has occurred; or
(b) redeem, retire, defease, purchase or otherwise acquire
any shares of any class of capital stock or retire options or warrants with
respect thereto (or set aside or otherwise deposit or invest any sums for
such purpose) (collectively, "REDEMPTION PAYMENTS") for any consideration
other than common stock or apply or set apart any sum, or make any other
distribution (by reduction of capital or otherwise) in respect of any such
shares or agree to do any of the foregoing, EXCEPT THAT Borrower may
repurchase shares of any class of its capital stock or retire options or
warrants with respect thereto if (i) no Event of Default shall have occurred
and be continuing on the proposed Redemption Payment date ("REDEMPTION
PAYMENT DATE") set forth in a notice of such proposed Redemption Payment to
be delivered by Borrower to Lender at least ten (10) days prior to the
Redemption Payment Date, and (ii) Borrower's Excess Availability, after
giving effect to the Redemption Payment, is at least $10,000,000 on the
Redemption Payment Date, then Borrower may repurchase shares of any class of
its capital stock or retire options or warrants with respect thereto as
follows: (A) if Borrower's Excess Availability, after giving effect to such
Redemption Payment, is equal to or greater than $10,000,000 but less than
$20,000,000, then the aggregate amount of all such Redemption Payments shall
not exceed $1,000,000 in the aggregate, or (B) if (1) the Borrower's Excess
Availability, after giving effect to such Redemption Payment is $20,000,000
or greater and (2) Borrower's Monthly Excess Availability for the six (6)
calendar months immediately preceding
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the Redemption Payment Date is greater than $20,000,000, then the aggregate
amount of all such Redemption Payments shall not exceed $3,000,000 in the
aggregate. During the term of this Agreement, and notwithstanding anything to
the contrary contained above, the aggregate amount of all such Redemption
Payments permitted above shall in no event exceed $3,000,000 in the aggregate.
9.12 TRANSACTIONS WITH AFFILIATES. Borrower shall not, directly or
indirectly, (a) purchase, acquire or lease any property from, or sell, transfer
or lease any property to, any officer, director, agent or other person
affiliated with Borrower, except in the ordinary course of and pursuant to the
reasonable requirements of Borrower's business and upon fair and reasonable
terms no less favorable to the Borrower than Borrower would obtain in a
comparable arm's length transaction with an unaffiliated person, or (b) make any
payments of management, consulting or other fees for management or similar
services, or of any indebtedness owing to any officer, employee, shareholder,
director or other person affiliated with Borrower except reasonable compensation
to officers, employees and directors for services rendered to Borrower in the
ordinary course of business; excluding, however, from the prohibitions set forth
in clauses (a) and (b) of this Section 9.12, the transactions described on
Schedule 9.12 hereto.
9.13 ADDITIONAL BANK ACCOUNTS. Borrower shall not, directly or
indirectly, open, establish or maintain any deposit account, investment account
or any other account with any bank or other financial institution, other than
the Blocked Accounts and the accounts set forth in Schedule 8.8 hereto, except:
(a) as to any new or additional Blocked Accounts and other such new or
additional accounts which contain any Collateral or proceeds thereof, with the
prior written consent of Lender and subject to such conditions thereto as Lender
may establish and (b) as to any accounts used by Borrower to make payments of
payroll, taxes or other obligations to third parties, after prior written notice
to Lender.
9.14 ADJUSTED NET WORTH. Borrower shall, at all times, maintain
Adjusted Net Worth of not less than the sum of (a) $2,000,000 PLUS
(b) seventy-five (75%) percent of the aggregate amount of net proceeds received
by Borrower in connection with any Equity Offerings permitted pursuant to
Section 9.7.
9.15 COSTS AND EXPENSES. Subject to the limitations with respect to
Inventory Appraisals performed at Borrower's expense set forth in Section 7.3
above, Borrower shall pay to Lender on demand all costs, expenses, filing fees
and taxes paid or payable in connection with the preparation, negotiation,
execution, delivery, recording, administration, collection, liquidation,
enforcement and defense of the Obligations, Lender's rights in the Collateral,
this Agreement, the other Financing Agreements and all other documents related
hereto or thereto, including any amendments, supplements or consents which may
hereafter be contemplated (whether or not executed) or entered into in respect
hereof and thereof, including: (a) all costs and expenses of filing or recording
(including Uniform Commercial Code financing statement filing taxes and fees,
documentary taxes, intangibles taxes and mortgage recording taxes and fees, if
applicable);(b) all insurance premiums, appraisal fees and search fees;(c) costs
and expenses of remitting loan proceeds, collecting checks and other items of
payment, and establishing and maintaining
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the Blocked Accounts, together with Lender's customary charges and fees with
respect thereto; (d) charges, fees or expenses charged by any bank or issuer
in connection with the Letter of Credit Accommodations; (e) costs and
expenses of preserving and protecting the Collateral; (f) costs and expenses
paid or incurred in connection with obtaining payment of the Obligations,
enforcing the security interests and liens of Lender, selling or otherwise
realizing upon the Collateral, and otherwise enforcing the provisions of this
Agreement and the other Financing Agreements or defending any claims made or
threatened against Lender arising out of the transactions contemplated hereby
and thereby (including preparations for and consultations concerning any such
matters); (g) all out-of-pocket expenses and costs heretofore and from time
to time hereafter incurred by Lender during the course of periodic field
examinations of the Collateral and Borrower's operations, plus a per diem
charge at the rate of $600 per person per day for Lender's examiners in the
field and office; and (h) the fees and disbursements of counsel (including
legal assistants) to Lender in connection with any of the foregoing.
9.16 FURTHER ASSURANCES. At the request of Lender at any time and from
time to time, Borrower shall, at its expense, duly execute and deliver, or cause
to be duly executed and delivered, such further agreements, documents and
instruments, and do or cause to be done such further acts as may be necessary or
proper to evidence, perfect, maintain and enforce the security interests and the
priority thereof in the Collateral and to otherwise effectuate the provisions or
purposes of this Agreement or any of the other Financing Agreements. Lender may
at any time and from time to time request a certificate from an officer of
Borrower representing that all conditions precedent to the making of Loans and
providing Letter of Credit Accommodations contained herein are satisfied. In
the event of such request by Lender, Lender may, at its option, cease to make
any further Loans or provide any further Letter of Credit Accommodations until
Lender has received such certificate and, in addition, Lender has determined
that such conditions are satisfied. Where permitted by law, Borrower hereby
authorizes Lender to execute and file one or more UCC financing statements
signed only by Lender.
SECTION 10. EVENTS OF DEFAULT AND REMEDIES
10.1 EVENTS OF DEFAULT. The occurrence or existence of any one or more
of the following events are referred to herein individually as an "EVENT OF
DEFAULT", and collectively as "EVENTS OF DEFAULT":
(a) (i) Borrower fails to pay when due any of the Loans or
interest accrued thereon, (ii) Borrower fails to pay within five (5) days
after demand for payment thereof by Lender any Obligations other than the
Loans and interest accrued thereon, or (iii) Borrower fails to perform any of
the covenants contained in Sections 6.3, 6.4, 6.6 or 7.1 of this Agreement,
or (iv) Borrower fails to perform any of the covenants contained in Section 9
of this Agreement or fails to perform any term, covenant, condition or
provision contained in this Agreement or any of the other Financing
Agreements other than those described in Section 10.1(a)(i), (ii) and (iii)
above, and such failure shall continue for thirty (30) days, PROVIDED THAT,
(A) the thirty (30) day period provided for in this Section 10.1(a)(iv) above
shall not apply in the case of: (1) any failure to observe any such covenant
which is not capable of being cured at all or within such
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thirty (30) day period, or which has been the subject of a prior failure
within a six (6) month period or (2) an intentional breach by Borrower of any
such covenant or (3) any failure to observe any such covenant if as a result
of such failure, any of the Financing Agreements shall terminate (other than
in accordance with its terms or the terms hereof or with the written consent
of Lender) or become void or unenforceable; and (B) the thirty (30) day
period provided for in this Section 10.1(a)(iv) above shall commence on the
earlier of (x) written notice of default being given to Borrower by Lender
and (y) a responsible officer of Borrower obtaining knowledge of such default;
(b) any representation, warranty or statement of fact made by
Borrower to Lender in this Agreement, the other Financing Agreements or any
other agreement, schedule, confirmatory assignment or otherwise shall when made
or deemed made be false or misleading in any way or manner which could
reasonably be expected to result in a Material Adverse Effect;
(c) any Obligor revokes, terminates or fails to perform any of
the terms, covenants, conditions or provisions of any guarantee, endorsement or
other agreement of such party in favor of Lender;
(d) any judgment for the payment of money is rendered against
Borrower or any Obligor in excess of $500,000 in any one case or in excess of
$2,000,000 in the aggregate, exclusive in each case of any portion of such
judgment covered by insurance, and shall remain undischarged or unvacated for a
period in excess of sixty (60) days or execution shall at any time not be
effectively stayed, or any judgment other than for the payment of money, or
injunction, attachment, garnishment or execution is rendered against Borrower or
any Obligor or any of their assets;
(e) any Obligor (being a natural person or a general partner of
an Obligor which is a partnership) dies or Borrower or any Obligor, which is a
partnership, limited liability company, limited liability partnership or a
corporation, dissolves or suspends or discontinues doing business;
(f) Borrower or any Obligor becomes insolvent (however defined
or evidenced), makes an assignment for the benefit of creditors, makes or sends
notice of a bulk transfer or calls a meeting of its creditors or principal
creditors;
(g) a case or proceeding under the bankruptcy laws of the United
States of America now or hereafter in effect or under any insolvency,
reorganization, receivership, readjustment of debt, dissolution or liquidation
law or statute of any jurisdiction now or hereafter in effect (whether at law or
in equity) is filed against Borrower or any Obligor or all or any part of its
properties and such petition or application is not dismissed within sixty (60)
days after the date of its filing or Borrower or any Obligor shall file any
answer admitting or not contesting such petition or application or indicates its
consent to, acquiescence in or approval of, any such action or proceeding or the
relief requested is granted sooner;
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(h) a case or proceeding under the bankruptcy laws of the United
States of America now or hereafter in effect or under any insolvency,
reorganization, receivership, readjustment of debt, dissolution or liquidation
law or statute of any jurisdiction now or hereafter in effect (whether at a law
or equity) is filed by Borrower or any Obligor or for all or any part of its
property; or
(i) (A) any default by Borrower or any Obligor under any
agreement, document or instrument relating to any indebtedness for borrowed
money owing to any person other than Lender, or any capitalized lease
obligations, contingent indebtedness in connection with any guarantee, letter of
credit, indemnity or similar type of instrument in favor of any person other
than Lender, which results in the right of the holder of such obligation or
indebtedness to accelerate indebtedness owing to such holder in an amount equal
to at least $1,000,000; or (B) any default by Borrower or any Obligor under any
material contract, lease, license or other obligation to any person other than
Lender, which default continues for more than the applicable cure period, if
any, with respect thereto, and could reasonably be expected to result in
liability of Borrower to such other person in an amount equal to at least
$2,000,000;
(j) any Change in Control shall occur, EXCEPT THAT it shall
not be an Event of Default if the controlling ownership of Borrower's then
issued and outstanding capital stock is sold and transferred to another
Person (the "BUYER") in a single transaction (the "CONTROLLING STOCK SALE"),
provided that (A) no Event of Default shall exist at the time of the proposed
consummation of the Controlling Stock Sale, (B) the Buyer must have working
capital of not less than $30,000,000 and a tangible net worth of not less
than $30,000,000, each as determined in accordance with GAAP, (C) the Buyer
must be engaged, immediately prior to the consummation of the Controlling
Stock Sale, in the same business or in a business substantially similar to
the business in which Borrower is engaged, and (D) after giving effect to and
at all times from and after the consummation of the Controlling Stock Sale,
(1) there shall be no material change in the Borrower's business operations
and (2) Borrower shall be and remain a wholly owned subsidiary of Buyer,
conducting business independent from the business operations of the Buyer;
(k) the indictment of Borrower or any Obligor under any criminal
statute, or commencement of criminal or civil proceedings against Borrower or
any Obligor, pursuant to which statute or proceedings the penalties or remedies
sought or available include forfeiture of any of the property of Borrower or
such Obligor and which forfeiture could reasonably be expected to result in a
Material Adverse Effect; or
(l) there shall occur a Material Adverse Change with respect to
Borrower or any Obligor after the date hereof.
10.2 REMEDIES.
(a) At any time an Event of Default exists or has occurred and
is continuing, Lender shall have all rights and remedies provided in this
Agreement, the other Financing Agreements, the Uniform Commercial Code and other
applicable law, all of which rights and
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remedies may be exercised without notice to or consent by Borrower or any
Obligor, except as such notice or consent is expressly provided for hereunder or
required by applicable law. All rights, remedies and powers granted to Lender
hereunder, under any of the other Financing Agreements, the Uniform Commercial
Code or other applicable law, are cumulative, not exclusive and enforceable, in
Lender's discretion, alternatively, successively, or concurrently on any one or
more occasions, and shall include, without limitation, the right to apply to a
court of equity for an injunction to restrain a breach or threatened breach by
Borrower of this Agreement or any of the other Financing Agreements. Lender
may, at any time or times, proceed directly against Borrower or any Obligor to
collect the Obligations without prior recourse to the Collateral.
(b) Without limiting the foregoing, at any time an Event of
Default exists or has occurred and is continuing, Lender may, in its
discretion and without limitation, (i) accelerate the payment of all
Obligations and demand immediate payment thereof to Lender (PROVIDED, THAT,
upon the occurrence of any Event of Default described in Sections 10.1(g) and
10.1(h), all Obligations shall automatically become immediately due and
payable), (ii) with or without judicial process or the aid or assistance of
others, enter upon any premises on or in which any of the Collateral may be
located and take possession of the Collateral or complete processing,
manufacturing and repair of all or any portion of the Collateral, (iii)
require Borrower, at Borrower's expense, to assemble and make available to
Lender any part or all of the Collateral at any place and time designated by
Lender, (iv) collect, foreclose, receive, appropriate, setoff and realize
upon any and all Collateral, (v) remove any or all of the Collateral from any
premises on or in which the same may be located for the purpose of effecting
the sale, foreclosure or other disposition thereof or for any other purpose,
(vi) sell, lease, transfer, assign, deliver or otherwise dispose of any and
all Collateral (including entering into contracts with respect thereto,
public or private sales at any exchange, broker's board, at any office of
Lender or elsewhere) at such prices or terms as Lender may deem reasonable,
for cash, upon credit or for future delivery, with the Lender having the
right to purchase the whole or any part of the Collateral at any such public
sale, all of the foregoing being free from any right or equity of redemption
of Borrower, which right or equity of redemption is hereby expressly waived
and released by Borrower and/or (vii) terminate this Agreement. If any of
the Collateral is sold or leased by Lender upon credit terms or for future
delivery, the Obligations shall not be reduced as a result thereof until
payment therefor is finally collected by Lender. If notice of disposition of
Collateral is required by law, five (5) days prior notice by Lender to
Borrower designating the time and place of any public sale or the time after
which any private sale or other intended disposition of Collateral is to be
made, shall be deemed to be reasonable notice thereof and Borrower waives any
other notice. In the event Lender institutes an action to recover any
Collateral or seeks recovery of any Collateral by way of prejudgment remedy,
Borrower waives the posting of any bond which might otherwise be required.
(c) Lender may apply the cash proceeds of Collateral actually
received by Lender from any sale, lease, foreclosure or other disposition of the
Collateral to payment of the Obligations, in whole or in part and in such order
as Lender may elect, whether or not then due. Borrower shall remain liable to
Lender for the payment of any deficiency with interest at the
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highest rate provided for herein and all costs and expenses of collection or
enforcement, including attorneys' fees and legal expenses.
(d) Without limiting the foregoing, upon the occurrence of an
Event of Default or an event which with notice or passage of time or both Lender
has reasonably determined could be expected to result in an Event of Default,
Lender may, at its option, without notice, (i) cease making Loans or arranging
for Letter of Credit Accommodations or reduce the lending formulas or amounts of
Revolving Loans and Letter of Credit Accommodations available to Borrower and/or
(ii) terminate any provision of this Agreement providing for any future Loans or
Letter of Credit Accommodations to be made by Lender to Borrower.
SECTION 11. JURY TRIAL WAIVER; OTHER WAIVERS
AND CONSENTS; GOVERNING LAW
11.1 GOVERNING LAW; CHOICE OF FORUM; SERVICE OF PROCESS; JURY TRIAL
WAIVER.
(a) The validity, interpretation and enforcement of this
Agreement and the other Financing Agreements and any dispute arising out of the
relationship between the parties hereto, whether in contract, tort, equity or
otherwise, shall be governed by the internal laws of the State of California
(without giving effect to principles of conflicts of law).
(b) Borrower and Lender irrevocably consent and submit to the
non-exclusive jurisdiction of the California Superior Court in and for San
Francisco County, and the United States District Court for the Northern District
of California and waive any objection based on venue or FORUM NON CONVENIENS
with respect to any action instituted therein arising under this Agreement or
any of the other Financing Agreements or in any way connected with or related or
incidental to the dealings of the parties hereto in respect of this Agreement or
any of the other Financing Agreements or the transactions related hereto or
thereto, in each case whether now existing or hereafter arising, and whether in
contract, tort, equity or otherwise, and agree that any dispute with respect to
any such matters shall be heard only in the courts described above (except that
Lender shall have the right to bring any action or proceeding against Borrower
or its property in the courts of any other jurisdiction which Lender deems
necessary or appropriate in order to realize on the Collateral or to otherwise
enforce its rights against Borrower or its property).
(c) Borrower hereby waives personal service of any and all
process upon it and consents that all such service of process may be made by
certified mail (return receipt requested) directed to its address set forth on
the signature pages hereof and service so made shall be deemed to be completed
five (5) days after the same shall have been so deposited in the U.S. mails, or,
at Lender's option, by service upon Borrower in any other manner provided under
the rules of any such courts. Within thirty (30) days after such service,
Borrower shall appear in answer to such process, failing which Borrower shall be
deemed in default and judgment may be entered by Lender against Borrower for the
amount of the claim and other relief requested.
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(d) BORROWER AND LENDER EACH HEREBY WAIVES ANY RIGHT TO TRIAL BY
JURY OF ANY CLAIM, DEMAND, ACTION OR CAUSE OF ACTION (i) ARISING UNDER THIS
AGREEMENT OR ANY OF THE OTHER FINANCING AGREEMENTS OR (ii) IN ANY WAY CONNECTED
WITH OR RELATED OR INCIDENTAL TO THE DEALINGS OF THE PARTIES HERETO IN RESPECT
OF THIS AGREEMENT OR ANY OF THE OTHER FINANCING AGREEMENTS OR THE TRANSACTIONS
RELATED HERETO OR THERETO IN EACH CASE WHETHER NOW EXISTING OR HEREAFTER
ARISING, AND WHETHER IN CONTRACT, TORT, EQUITY OR OTHERWISE. BORROWER AND
LENDER EACH HEREBY AGREES AND CONSENTS THAT ANY SUCH CLAIM, DEMAND, ACTION OR
CAUSE OF ACTION SHALL BE DECIDED BY COURT TRIAL WITHOUT A JURY AND THAT BORROWER
OR LENDER MAY FILE AN ORIGINAL COUNTERPART OF A COPY OF THIS AGREEMENT WITH ANY
COURT AS WRITTEN EVIDENCE OF THE CONSENT OF THE PARTIES HERETO TO THE WAIVER OF
THEIR RIGHT TO TRIAL BY JURY.
(e) Lender shall not have any liability to Borrower (whether in
tort, contract, equity or otherwise) for losses suffered by Borrower in
connection with, arising out of, or in any way related to the transactions or
relationships contemplated by this Agreement, or any act, omission or event
occurring in connection herewith, unless it is determined by a final and
non-appealable judgment or court order binding on Lender, that the losses were
the result of acts or omissions constituting gross negligence or willful
misconduct. In any such litigation, Lender shall be entitled to the benefit of
the rebuttable presumption that it acted in good faith and with the exercise of
ordinary care in the performance by it of the terms of this Agreement.
11.2 WAIVER OF NOTICES. Borrower hereby expressly waives demand,
presentment, protest and notice of protest and notice of dishonor with respect
to any and all instruments and commercial paper, included in or evidencing any
of the Obligations or the Collateral, and any and all other demands and notices
of any kind or nature whatsoever with respect to the Obligations, the Collateral
and this Agreement, except such as are expressly provided for herein. No notice
to or demand on Borrower which Lender may elect to give shall entitle Borrower
to any other or further notice or demand in the same, similar or other
circumstances.
11.3 AMENDMENTS AND WAIVERS. Neither this Agreement nor any provision
hereof shall be amended, modified, waived or discharged orally or by course of
conduct, but only by a written agreement signed by an authorized officer of
Lender, and as to amendments, as also signed by an authorized officer of
Borrower. Lender shall not, by any act, delay, omission or otherwise be deemed
to have expressly or impliedly waived any of its rights, powers and/or remedies
unless such waiver shall be in writing and signed by an authorized officer of
Lender. Any such waiver shall be enforceable only to the extent specifically
set forth therein. A waiver by Lender of any right, power and/or remedy on any
one occasion shall not be construed as a bar to or waiver of any such right,
power and/or remedy which Lender would otherwise have on any future occasion,
whether similar in kind or otherwise.
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11.4 WAIVER OF COUNTERCLAIMS. Borrower waives all rights to interpose
any claims, deductions, setoffs or counterclaims of any nature (other then
compulsory counterclaims) in any action or proceeding with respect to this
Agreement, the Obligations, the Collateral or any matter arising therefrom or
relating hereto or thereto.
11.5 INDEMNIFICATION. Borrower shall indemnify and hold Lender, and its
directors, agents, employees and counsel, harmless from and against any and all
losses, claims, damages, liabilities, costs or expenses imposed on, incurred by
or asserted against any of them in connection with any litigation,
investigation, claim or proceeding commenced or threatened related to the
negotiation, preparation, execution, delivery, enforcement, performance or
administration of this Agreement, any other Financing Agreements, or any
undertaking or proceeding related to any of the transactions contemplated hereby
or any act, omission, event or transaction related or attendant thereto,
including amounts paid in settlement, court costs, and the fees and expenses of
counsel. To the extent that the undertaking to indemnify, pay and hold harmless
set forth in this Section may be unenforceable because it violates any law or
public policy, Borrower shall pay the maximum portion which it is permitted to
pay under applicable law to Lender in satisfaction of indemnified matters under
this Section. The foregoing indemnity shall survive the payment of the
Obligations and the termination or non-renewal of this Agreement.
SECTION 12. TERM OF AGREEMENT; MISCELLANEOUS
12.1 TERM.
(a) This Agreement and the other Financing Agreements shall
become effective as of the date set forth on the first page hereof and shall
continue in full force and effect for a term ending on the date three (3) years
from the date hereof (the "RENEWAL DATE"), and from year to year thereafter,
unless sooner terminated pursuant to the terms hereof. Lender or Borrower may
terminate this Agreement and the other Financing Agreements effective on the
Renewal Date or on the anniversary of the Renewal Date in any year by giving to
the other party at least sixty (60) days prior written notice; PROVIDED, THAT,
this Agreement and all other Financing Agreements must be terminated
simultaneously. Upon the effective date of termination or non-renewal of the
Financing Agreements, Borrower shall pay to Lender, in full, all outstanding and
unpaid Obligations and shall furnish cash collateral to Lender in such amounts
as Lender reasonably determines are reasonably necessary to secure Lender from
loss, cost, damage or expense, including attorneys' fees and legal expenses, in
connection with any contingent Obligations, including issued and outstanding
Letter of Credit Accommodations and checks or other payments provisionally
credited to the Obligations and/or as to which Lender has not yet received final
and indefeasible payment. Such payments in respect of the Obligations and cash
collateral shall be remitted by wire transfer in Federal funds to such bank
account of Lender, as Lender may, in its discretion, designate in writing to
Borrower for such purpose. Interest shall be due until and including the next
business day, if the amounts so paid by Borrower to the bank account designated
by Lender are received in such bank account later than 12:00 noon, Los Angeles
time.
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(b) No termination of this Agreement or the other Financing
Agreements shall relieve or discharge Borrower of its respective duties,
obligations and covenants under this Agreement or the other Financing Agreements
until all Obligations have been fully and finally discharged and paid, and
Lender's continuing security interest in the Collateral and the rights and
remedies of Lender hereunder, under the other Financing Agreements and
applicable law, shall remain in effect until all such Obligations have been
fully and finally discharged and paid.
(c) (i) If for any reason this Agreement is terminated prior
to the end of the then current term or renewal term of this Agreement, in view
of the impracticality and extreme difficulty of ascertaining actual damages and
by mutual agreement of the parties as to a reasonable calculation of Lender's
lost profits as a result thereof, Borrower agrees to pay to Lender, upon the
effective date of such termination, an early termination fee in the amount set
forth below if such termination is effective in the period indicated:
<TABLE>
<CAPTION>
Amount Period
------ ------
<S> <C> <C>
(A) 2% of Maximum Credit From the date hereof to and
including May 21, 1999
(B) 1/2% of Maximum Credit From May 22, 1999 to and including
May 21, 2000
(C) 0% of Maximum Credit From May 22, 2000 to and including
May 21, 2001.
</TABLE>
(ii) The early termination fee provided for in this
Section 12.1 shall be presumed to be the amount of damages sustained by Lender
as a result of such early termination and Borrower agrees that it is reasonable
under the circumstances currently existing. In addition, Lender shall be
entitled to such early termination fee upon the occurrence of any Event of
Default described in Sections 10.1(g) and 10.1(h) hereof, even if Lender does
not exercise its right to terminate this Agreement, but elects, at its option,
to provide financing to Borrower or permit the use of cash collateral under the
United States Bankruptcy Code. The early termination fee provided for in this
Section 12.1 shall be deemed included in the Obligations.
12.2 NOTICES. All notices, requests and demands hereunder shall be in
writing and (a) made to Lender at its address set forth below and to Borrower at
its chief executive office set forth below, or to such other address as either
party may designate by written notice to the other in accordance with this
provision, and (b) deemed to have been given or made: if delivered in person,
immediately upon delivery; if by telex, telegram or facsimile transmission,
immediately upon sending and upon confirmation of receipt; if by nationally
recognized overnight courier service with instructions to deliver the next
business day, one (1) business day after sending; and if by certified mail,
return receipt requested, five (5) days after mailing.
12.3 PARTIAL INVALIDITY. If any provision of this Agreement is held to
be invalid or unenforceable, such invalidity or unenforceability shall not
invalidate this Agreement as a whole,
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but this Agreement shall be construed as though it did not contain the
particular provision held to be invalid or unenforceable and the rights and
obligations of the parties shall be construed and enforced only to such extent
as shall be permitted by applicable law.
12.4 SUCCESSORS. This Agreement, the other Financing Agreements and any
other document referred to herein or therein shall be binding upon and inure to
the benefit of and be enforceable by Lender, Borrower and their respective
successors and assigns, except that Borrower may not assign its rights under
this Agreement, the other Financing Agreements and any other document referred
to herein or therein without the prior written consent of Lender. Lender may,
after notice to Borrower, assign its rights and delegate its obligations under
this Agreement and the other Financing Agreements and further may assign, or
sell participations in, all or any part of the Loans, the Letter of Credit
Accommodations or any other interest herein to another financial institution or
other person, in which event, the assignee or participant shall have, to the
extent of such assignment or participation, the same rights and benefits as it
would have if it were the Lender hereunder, except as otherwise provided by the
terms of such assignment or participation, PROVIDED, HOWEVER, that Lender shall
obtain Borrower's prior written consent, which consent shall not be unreasonably
withheld, with respect to any such proposed assignment by Lender, and if the
proposed assignee is a lending institution that is not organized and existing
under the laws of the United States or a political subdivision thereof, such
lending institution must be capable of receiving payments of interest hereunder
without deduction or withholding of United States federal income taxes under the
provisions of an applicable tax treaty concluded by the United States.
12.5 CONFIDENTIALITY.
(a) Lender shall use all reasonable efforts to keep
confidential, in accordance with its customary procedures for handling
confidential information and safe and sound lending practices, (i) any
non-public information supplied to it by Borrower pursuant to this Agreement
prior to the date hereof and (ii) any non-public information supplied to it
by Borrower pursuant to this Agreement after the date hereof which is clearly
and conspicuously marked as confidential at the time such information is
furnished by Borrower to Lender after the date hereof, PROVIDED, THAT,
nothing contained herein shall limit the disclosure of any such information:
(A) to the extent required by statute, rule, regulation, subpoena or court
order, (B) to bank examiners and other regulators, auditors and/or
accountants, (C) in connection with any litigation to which Lender is a
party, (D) to any assignee or participant (or prospective assignee or
participant) so long as such assignee or participant (or prospective assignee
or participant) shall have first agreed in writing to treat such information
as confidential in accordance with this Section 12.5, or (E) to counsel for
Lender or any participant or assignee (or prospective participant or
assignee).
(b) In no event shall this Section 12.5 or any other provision
of this Agreement or applicable law be deemed: (i) to apply to or restrict
disclosure of information that has been or is made public by Borrower or any
third party without breach of this Section 12.5 or otherwise become generally
available to the public other than as a result of a disclosure in violation
hereof,(ii) to apply to or restrict disclosure of information that was or
becomes available to Lender on
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a non-confidential basis from a person other than Borrower, (iii) require
Lender to return any materials furnished by Borrower to Lender or (iv)
prevent Lender from responding to routine informational requests in
accordance with the CODE OF ETHICS FOR THE EXCHANGE OF CREDIT INFORMATION
promulgated by The Robert Morris Associates or other applicable industry
standards relating to the exchange of credit information. The obligations of
Lender under this Section 12.5 shall supersede and replace the obligations of
Lender under any confidentiality letter signed prior to the date hereof.
12.6 ENTIRE AGREEMENT. This Agreement, the other Financing Agreements,
any supplements hereto or thereto, and any instruments or documents delivered or
to be delivered in connection herewith or therewith represents the entire
agreement and understanding concerning the subject matter hereof and thereof
between the parties hereto, and supersede all other prior agreements,
understandings, negotiations and discussions, representations, warranties,
commitments, proposals, offers and contracts concerning the subject matter
hereof, whether oral or written. In the event of any inconsistency between the
terms of this Agreement and any schedule or exhibit hereto, the terms of this
Agreement shall govern.
IN WITNESS WHEREOF, Lender and Borrower have caused these presents to be
duly executed as of the day and year first above written.
LENDER BORROWER
CONGRESS FINANCIAL CORPORATION VALLEY MEDIA, INC.
(NORTHWEST)
By: /s/ Rodney D. Davis By: /s/ J. Randolph Cerf
----------------------------- -----------------------------
Title: First Vice President Title SVP & CFO
-------------------------- --------------------------
ADDRESS: CHIEF EXECUTIVE OFFICE:
One Main Place 1280 Santa Anita Court
101 Southwest Main, Suite 725 Woodland, California 95776
Portland, Oregon 97204
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ASSET PURCHASE AGREEMENT
This ASSET PURCHASE AGREEMENT (this "Agreement") is made and entered
into as of this May 20, 1997 by and between Star Video Entertainment, L.P., a
Delaware limited partnership ("Seller") and Valley Record Distributors, Inc., a
California corporation ("Buyer").
RECITALS
1. Seller is engaged in the business (the "Business") of
distributing prerecorded video cassettes, video games and entertainment
software.
2. The Partners own all of the record and beneficial ownership
interest in Seller.
3. Seller, Star Video Entertainment, Inc., a Delaware corporation
and general partner of the Seller ("SVEI"), Capital Resources Lenders, L.P.
("CRL"), the Federal Deposit Insurance Corporation ("FDIC" and along with CRL
the "Limited Partners" and the Limited Partners and SVEI being referred to
herein as the "Partners"), Arthur Bach and Bernard Herman (individually a
"Founder" and collectively the "Founders") desire that Seller sell the assets
associated with the Business to Buyer, and Buyer desires to acquire such assets
on the terms and conditions hereinafter set forth.
AGREEMENT
NOW, THEREFORE, in consideration of the foregoing and the
representations, warranties and covenants contained herein, the parties hereto
covenant and agree as follows:
1. AGREEMENT TO SELL AND AGREEMENT TO PURCHASE.
1.1 ASSETS TO BE CONVEYED. On the terms and subject to the
conditions set forth in this Agreement, on the Closing Date (as that term is
hereinafter defined) the Seller shall convey, transfer, assign, sell and deliver
to Buyer, and Buyer shall acquire, accept and purchase, all of the following
assets, properties and rights of Seller (hereinafter collectively referred to as
the "Assets"):
(a) All merchandise inventories ("Inventory") and
property and equipment, including all computer equipment, furniture, fixtures
and equipment, leasehold improvements and automobiles, which exist on the
Closing Date;
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<PAGE>
(b) All cash and short term investments, prepaid
items, security deposits, deposits and other similar assets of Seller existing
on the Closing Date;
(c) All accounts, accounts receivable, notes and notes
receivable existing on the Closing Date;
(d) The customer list of the Business and all books,
records and accounts, correspondence, production records, employment records,
and any confidential information which has been reduced to writing relating to
or arising out of the Business;
(e) All rights of Seller under express or implied
warranties from the suppliers of the Seller with respect to the Assets;
(f) All of Seller's right, title and interest in and
to each Contract (as defined in Section 4.10) set forth on Schedule A hereto
(such Contracts being the "Assigned Contracts");
(g) All of Seller's right, title and interest in each
copyright, copyright application, trade name, trademark and trademark
registration, and any goodwill associated with any such copyright or trademark
or copyright or trademark registration (in any such case, whether registered or
to be registered in the United States of America or elsewhere) applied for,
issued to or owned by Seller and each process, invention, trade secret, trade
name, database, computer program and formula owned by Seller or which the Seller
has the right to use and assign to Buyer (collectively, the "Proprietary
Rights");
(h) All goodwill associated with the business of the
Seller, including the names Star Video and Star Video Entertainment; and
(i) Except as specifically provided in Section 1.2
hereof, all other assets and properties of Seller which exist on the Closing
Date whether tangible or intangible.
1.2 EXCLUDED ASSETS. Seller is not selling, and Buyer is not
purchasing, pursuant to this Agreement, any of the following, all of which shall
be retained by Seller (the "Excluded Assets"):
(a) The promissory note in the original principal
amount of $2,500,000 owed to Seller by Star Holdings Acquisition Corp. and the
related security
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<PAGE>
agreement and security interest in stock of SV Holdings, Inc. securing such
note;
(b) All records, correspondence and other information
which relate exclusively to the assets of Seller to be retained by it pursuant
to the terms hereof.
(c) All assets maintained by Seller in the Star Video
Entertainment, L.P. Deferred Compensation Plan Trust (the nonqualified deferred
compensation plan referred to in Section 3.2) with a market value as of
January 1, 1997 of $452,136.
1.3 FURTHER ASSURANCES. From time to time after the Closing,
Seller will execute and deliver to Buyer, at Buyer's cost and expense, such
instruments of sale, transfer, conveyance, assignment and delivery, consents,
assurances, powers of attorney and other instruments as may be reasonably
requested by Buyer in order to vest in Buyer all right, title and interest of
Seller in and to the Assets and otherwise in order to carry out the purpose and
intent of this Agreement.
1.4 CLOSING. The closing of the transactions herein
contemplated ("Closing") shall, unless another place is agreed to in writing by
Seller and Buyer, take place at the offices of Howard, Rice, Nemerovski, Canady,
Falk & Rabkin, A Professional Corporation, Three Embarcadero Center, Seventh
Floor, San Francisco, California 94111 at 9:00 a.m. on May 20, 1997, the
scheduled closing date, provided that either Buyer or Seller may on one or more
occasions, by written notice to the other not later than 5:00 p.m. on the next
day preceding the scheduled closing date, extend the scheduled closing date to a
date not later than May 30, 1997, and the date to which so extended shall
thereafter be, unless further so extended, the scheduled closing date; provided,
however that neither party may so extend the scheduled closing date without the
written consent of the other if the proposed scheduled closing date would occur
after the expiration of the financing commitment provided by the Lender (as
defined in Section 6.4). The date on which the Closing occurs is referred to
herein as the Closing Date.
2. CONSIDERATION TO BE PAID BY BUYER.
2.1 PURCHASE PRICE FOR ASSETS. The purchase price ("Purchase
Price") for the Assets shall be (a) an amount equal to the sum of $7,350,000
plus the excess of (A) the sum of the book values as of the close of business on
the Closing Date of Seller's cash and short term investments, accounts
receivable, net of allowance for doubtful accounts,
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merchandise inventory, other current assets and property and equipment, net of
accumulated depreciation (each such class of assets being referred to as a
"Balance Sheet Asset" and collectively as the "Balance Sheet Assets"), over (B)
the dollar amount as of the close of business on the Closing Date of Seller's
accounts payable, accrued expenses, capitalized lease obligations and
outstanding balance under its revolving credit facility with BTM Financial
Corporation ("BTM") and (b) Buyer's assumption of Seller's accounts payable,
accrued expenses, capitalized lease obligations and outstanding balance under
its revolving credit facility with BTM Financial Corporation (each such class of
liabilities being referred to as an Assumed Liability and collectively as the
"Assumed Liabilities"). For the purpose of the preceding sentence, the Assets
and the Assumed Liabilities shall be deemed to be assets and obligations of
Seller at the close of business on the Closing Date notwithstanding that Buyer
has received such assets and assumed or paid such obligations on the Closing
Date and, further, all prepayment, unused capacity, penalty and other fees due
to BTM in connection with the payment in full of its facility shall be deemed to
be included in Seller's preclosing expenses and therefore a part of the
outstanding balance at the Closing Date of such facility.
2.2 DETERMINATION OF CLOSING DATE STATEMENT.
2.2.1 PREPARATION OF PROPOSED CLOSING DATE STATEMENT.
As soon as reasonably practicable after the Closing Date and in any event no
later than 90 days after the Closing Date, Bloom Hochberg & Co., P.C. ("BH&C")
will present to Seller and Buyer a balance sheet of Seller dated the Closing
Date, along with an opinion of BH&C addressed to Buyer and Seller stating that
they have audited such statement and that in their opinion such statement
presents fairly, in all material respects, the financial condition of the
Seller, as determined in accordance with generally accepted accounting
principles as consistently applied in the preparation of Seller's financial
statements included in Section 4.4.1 of the Seller's Schedule. Prior to
completion of such audit and report, BH&C shall deliver its proposed balance
sheet to Deloitte & Touche, Buyer's auditors, for their review and comment.
2.2.2 REVIEW OF PRELIMINARY CLOSING DATE STATEMENT.
Buyer and its representatives and accountants shall have the right to review the
workpapers of BH&C used in preparing the statement referred to in Section 2.2.1
hereof, and shall have full access to the former books, records, properties and
personnel of Seller for purposes of verifying the accuracy and fairness of
presentation of the statement referred to in Section 2.2.1. The book value of
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<PAGE>
the Balance Sheet Assets and dollar value of the Assumed Liabilities included in
the statement delivered pursuant to Section 2.2.1 hereof shall be binding upon
Buyer and Seller for all purposes, unless Buyer gives written notice of
disagreement with any of said values or amounts within 30 days after the receipt
by Buyer of such statement specifying in reasonable detail, insofar as possible,
the nature and extent of such disagreement. If Buyer and Seller are unable to
resolve any such disagreement within 30 days after Buyer gives Seller notice
thereof, the disagreement shall be referred for final determination to
arbitration before a single arbitrator in accordance with the then-current
commercial arbitration rules of the American Arbitration Association ("AAA") and
the following: (i) the arbitrator shall be directed to render a decision within
45 days of its appointment and, in rendering such decision, if such decision
reaches a different conclusion from that derived from the balance sheet
delivered pursuant to Section 2.2.1, to direct the appropriate adjustments in
such balance sheet to reconcile the balance sheet with such decision; (ii) Buyer
and Seller may submit to such arbitrator any facts they deem relevant to the
determination, and the determination of such arbitrator shall be conclusive,
non-appealable and binding upon Buyer and Seller for all purposes; (iii) Buyer
and Seller agree that judgment may be entered upon the determination of such
arbitrator in any court having jurisdiction over the party against which such
determination is to be enforced; (iv) Buyer and Seller agree that the procedures
established by this Section 2.2 shall constitute the exclusive procedures for
determining the book value of the Balance Sheet Assets and the dollar amount of
the Assumed Liabilities; and (v) Buyer and Seller shall share the costs of
arbitration equally, but shall each bear their own costs and legal fees
associated with the arbitration. The balance sheet as of the Closing Date
finally determined pursuant to this Section 2.2 is referred to herein as the
"Closing Date Statement."
2.2.3 PAYMENT OF CERTAIN EXPENSES. Seller and Buyer
shall each pay the fees and disbursements of their respective internal and
independent accountants (including Seller's payment of the fees of BH&C) and
other personnel incurred in the initial preparation, review and final
determination of the Closing Date Statement.
2.3 PAYMENT OF PURCHASE PRICE FOR ASSETS. The purchase price
for the Assets shall be paid by Buyer as follows:
(a) At the Closing Buyer shall pay to Seller the sum
of $31,728,000, by wire transfer to
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Seller's designated account and shall assume and thereafter discharge when due
the Assumed Liabilities.
(b) On May 22, 2000, Buyer shall pay to Seller the sum
of $3,100,000 by wire transfer, provided, however, that if Buyer makes aggregate
payments (exclusive of interest) of $2,600,000 on or before August 18, 1997 the
amount of payment due under this subparagraph (b) shall be discharged in full,
and further provided that if Buyer makes aggregate payments (exclusive of
interest) of $2,850,000 on or before September 17, 1997 the amount of payment
due under this subparagraph (b) shall be discharged in full. Notwithstanding
the due date provided in the preceding sentence, Buyer shall make partial or
full payment of the amount due under this subparagraph (b) until paid in full on
each day after August 3, 1997 to the extent that such payment will not violate
the Subordination Agreement ("Subordination Agreement") dated May 20, 1997 among
Buyer, Seller and Sanwa Business Credit Corporation as agent under the credit
facility contemplated by Section 6.4 ("Credit Facility"). Buyer shall not agree
in any new credit facility or renewal of the Credit Facility that it may enter
on or after the date hereof to any limitations on its ability to make the
payments contemplated by this subparagraph (b) (including without limitation any
subordination of such payment or limitations on the ability of Seller to receive
such payment) other than affirmative and negative covenants that do not treat
the obligation due under this subparagraph differently from other liabilities of
Buyer, and not withstanding the due date in the first sentence of this
subparagraph (b), Buyer shall make the payment contemplated by this
subparagraph (b) upon the entry into of such new credit facility or renewal of
the Credit Facility. In the event that Buyer receives net proceeds of $20
million or more in a public offering or private placement of equity securities
or debt securities convertible by their terms into equity securities prior to
May 22, 2000 and Buyer has not previously made the payment required by this
subparagraph (b), Buyer shall use its best efforts to amend the Credit Facility
so that it does not contain, or use its best efforts to enter into a new credit
facility that does not contain, limitations on its ability to make the payments
contemplated by this subparagraph (b) (including without limitation any
subordination of such payment or limitations on the ability of Seller to receive
such payment) and, provided it is successful in entering into such amendment or
new facility, make the payment contemplated by this subparagraph (b) with the
proceeds of such equity offering or placement. Simple interest shall accrue on
the outstanding balance of the payment required under this subparagraph (b) at
the rate of ten percent per annum, accruing from the Closing Date until
August 18, 1997 on an outstanding balance of $2,600,000, as
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reduced by any payments hereunder, accruing from August 19, 1997 to
September 17, 1997 on an outstanding balance of $2,850,000, as reduced by any
payments hereunder, and accruing from August 19, 1997 until paid on an
outstanding balance of $3,100,000, as reduced by any payments hereunder. Such
interest shall be payable on August 20, November 20, February 20 and May 20 each
year. Interest shall be paid on the dates set forth in the preceding sentence
to the extent that such payment will not violate the Subordination Agreement
and, if Buyer is prohibited thereunder from making any such payment, on the
first day after any such date when payment can be made without such a violation.
Interest shall accrue at the rate of ten percent per annum on any such interest
payment that is not so paid on its due date until such payment is made.
(c) On May 22, 2000, Buyer shall pay to Seller the sum
of $500,000 by wire transfer. In the event that Buyer receives net proceeds of
$20 million or more in a public offering or private placement of equity
securities prior to May 21, 2000, the Company shall make the payment
contemplated by this subparagraph (c) with the proceeds of such equity offering
or placement, provided that such payment does not constitute a violation of the
Subordination Agreement. Buyer may prepay the amount due under this
subparagraph (c) without penalty, provided such payment does not constitute a
violation of the Subordination Agreement. Simple interest shall accrue on the
outstanding balance of the payments required under this subparagraph (c) at the
rate of ten percent per annum on outstanding principal, and shall be due and
payable on May 22, 2000. Any payment made under this subparagraph (c) shall
first be applied to accrued and unpaid interest.
(d) On May 20, 1998 Buyer shall pay to Seller the sum
of $400,000 by wire transfer and on May 20, 1999 Buyer shall pay to Seller the
sum of $200,000 by wire transfer. If prior to the due date of either of the two
payments due under this subparagraph (d), Buyer shall enter into a new credit
facility or receive net proceeds of $20 million or more in a public offering or
private placement of equity securities or debt securities convertible by their
terms into equity securities, Buyer shall make the then remaining payments due
under this subparagraph (d).
(e) On the fifth business day after final
determination of the Closing Date Statement pursuant to Section 2.2 ("Final
Adjustment Date"), Buyer shall pay to Seller by wire transfer to Seller's
designated bank account an amount equal to the sum of $7,350,000 plus the excess
of the book value of the Balance Sheet Assets over the dollar amount of the
Assumed Liabilities, as set forth on
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the Closing Date Statement, minus $35,428,000, provided that if such amount is a
negative number, Seller shall pay Buyer such amount in such manner.
2.4 ALLOCATION OF PURCHASE PRICE. For federal and state income
tax purposes, the Purchase Price shall be allocated among the Assets and other
rights acquired hereunder in the manner set forth in Schedule B, unless
otherwise required by applicable law.
3. ASSUMPTION OF EXECUTORY AND OTHER LIABILITIES.
3.1 EXECUTORY LIABILITIES AND CERTAIN OTHER LIABILITIES ASSUMED
BY BUYER. As further consideration beyond that provided in Section 2.1 for
consummation of the transactions contemplated hereby, at the Closing Buyer shall
assume (i) the executory liabilities and obligations of Seller under each
Assigned Contract in effect on the Closing Date and assigned to Buyer pursuant
to Section 1.1(g) hereof (other than liabilities and obligations arising
thereunder as a result of any breach by Seller occurring prior to the Closing)
and (ii) liabilities of Seller for product warranty claims made after the
Closing with respect to products sold by Seller prior to the Closing.
3.2 LIABILITIES NOT ASSUMED BY BUYER. Except for Buyer's
assumption of the Assumed Liabilities as expressly provided herein, Buyer does
not and shall not, by reason of this Agreement, provisions of successor
liability, or otherwise, assume, acquire or otherwise become responsible for any
liabilities or obligations of Seller, including, without limitation, any
liability or obligation the existence of which at the Closing Date would
constitute a breach of any of Seller's representations and warranties contained
herein or for any claim set forth in Section 4.9 of the Seller's Schedule, or
any liability or obligation with respect to product liability claims,
environmental matters, labor or employment matters (including without limitation
obligations under Seller's employee savings and protection plans and deferred
compensation plan), or federal, state and local income, payroll, sales, use and
other taxes, whether direct or indirect, accrued or contingent, or otherwise.
4. REPRESENTATIONS AND WARRANTIES OF SELLER. Seller represents and
warrants to Buyer that:
4.1 ORGANIZED AND GOOD STANDING. Seller is a limited
partnership duly organized and validly existing under the laws of the State of
Delaware, with full partnership power to carry on the Business as it is now and
has since its organization been conducted and to own or lease and operate the
Assets. Seller is qualified to do business
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and is in good standing in each jurisdiction in which the nature of the Business
or the character of the Seller's properties makes such qualification necessary.
Seller does not own any capital stock of or other equity interest in any
corporation, partnership or other entity.
4.2 AUTHORIZATION OF AGREEMENT. Seller has all requisite
partnership power and authority to enter into this Agreement and to consummate
the transactions contemplated hereby. This Agreement has been duly executed and
delivered by Seller, has been effectively authorized by all necessary action and
constitutes a legal, valid and binding obligation of Seller enforceable against
it in accordance with its terms, except as the validity, binding nature and
enforceability of the same is limited by the effect of (i) applicable federal or
state bankruptcy, insolvency or other laws or court decisions relating to or
affecting the rights of creditors generally; and (ii) equitable principles of
general applicability, regardless of whether considered in a proceeding in
equity or at law.
4.3 OWNERSHIP OF ASSETS. Seller is the lawful owner of or has
the right to use and transfer to Buyer each of the Assets, and the Assets are
free and clear of all liens, mortgages, pledges, security interests,
restrictions, prior assignments, encumbrances and claims of any kind or nature
whatsoever, except for any of the foregoing disclosed in Section 4.3(a) of the
Seller's Schedule. Except as set forth in Section 4.3(b) of the Seller's
Schedule, the delivery to Buyer of the instruments of transfer of ownership
contemplated by this Agreement will vest good and marketable title to the Assets
in Buyer, free and clear of all liens, mortgages, pledges, security interests,
restrictions, prior assignments, encumbrances and claims of any kind or nature
whatsoever.
4.4 FINANCIAL CONDITION.
4.4.1 FINANCIAL STATEMENTS. Section 4.4.1 of the
Seller's Schedule sets forth the audited balance sheets of Seller as of
December 31, 1996 and 1995, respectively, and the related audited statements of
income and partners' capital and of cash flows for the years then ended. Said
financial statements (i) were prepared in accordance with the books and records
of Seller; (ii) were prepared in accordance with generally accepted accounting
principles consistently applied; and (iii) fairly present Seller's financial
condition and the results of its operations as at the relevant date thereof and
for the period covered thereby.
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4.4.2 ABSENCE OF CERTAIN CHANGES. Except as disclosed
in Section 4.4.2 of the Seller's Schedule, since December 31, 1996 (the "Balance
Sheet Date") there has not been (i) any increase in those liabilities of Seller
that would constitute Assumed Liabilities as of the Closing Date other than for
increases incurred in the ordinary course of business consistent with prior
practices of Seller; (ii) any distribution of assets, whether as a payment of
earnings or capital or otherwise, by Seller to or on behalf of its partners or
any purchase of its partnership or other equity interests by Seller, or any
commitment or reservation of assets for any such distribution or purchase, other
than an aggregate distribution not to exceed $1,912,000 for the payment of
taxes, consistent with Seller's past practices; (iii) any payment by Seller of
any liability of Seller that would not constitute an Assumed Liability if
outstanding at the Closing Date; (iv) any transaction by Seller not in the
ordinary course of the Business; (v) any material adverse change in the Business
or Seller's operations, condition (financial or otherwise), assets or
liabilities (whether absolute, accrued or contingent or otherwise); (vi) any
damage, destruction or loss, whether or not covered by insurance, materially and
adversely affecting the Seller's properties or the Business; (vii) any sale or
transfer of any of Seller's assets except sales in the ordinary course of the
Business of inventory or immaterial amounts of other tangible personal property
not required by the Business; (viii) any mortgage, pledge or subjection to lien,
charge or encumbrance of any kind of any of the assets of Seller, except for
liens for taxes not due; (ix) any material amendment or termination of any
Contract; (x) any increase in, or commitment to increase, the compensation
payable or to become payable to any of Seller's officers, directors, employees
or agents other than customary annual increases to employees other than Founders
made in the ordinary course of business (and other than pursuant to any
agreements or arrangements with any such persons entered into by Buyer to be
effective after the Closing Date); or (xi) any material alteration in the manner
of keeping Seller's books, accounts or records, or in the accounting practices
therein reflected.
4.5 PROPERTY OF SELLER.
4.5.1 REAL PROPERTY. There is listed in Section 4.5.1
of the Seller's Schedule a description of each parcel of real property leased to
Seller or otherwise used by Seller, and an identification of each lease relating
to such parcels of real property. Seller does not own any parcel of real
property. Except as indicated in Section 4.5.1 of the Seller's Schedule:
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(a) Each of the leases described in said Section is a
valid and binding obligation of Seller, and Seller does not have any knowledge
that any of said leases is not a valid and binding obligation of each of the
other parties thereto;
(b) Seller is not, and Seller does not have any
knowledge that any other party to any such lease is, in default with respect to
any material term or condition thereof;
(c) To the best of Seller's knowledge, all of the
buildings, fixtures and other improvements located on the real property
described in said Section of the Seller's Schedule are in good operating
condition and repair.
4.5.2 TANGIBLE PERSONAL PROPERTY. There is listed in
Section 4.5.2 of the Seller's Schedule (i) a description and the location of
each item of tangible personal property (other than inventory) acquired since
January 1, 1992 and owned by Seller or in the possession of Seller which is to
be transferred to Buyer pursuant hereto; (ii) an identification of the owner of,
and any agreement relating to the use of, each item of tangible personal
property that is used by Seller in and material to the Business but not owned by
Seller. Except as indicated in Section 4.5.2 of the Seller's Schedule, to the
best of Seller's knowledge each item of tangible personal property owned by
Seller or in the possession of Seller which is to be transferred to Buyer
pursuant hereto having on the date hereof a depreciated book value per unit in
excess of $2,000 is in good operating condition and repair, reasonable wear and
tear excepted.
4.5.3 INTANGIBLE PERSONAL PROPERTY. There is listed in
Section 4.5.3 of the Seller's Schedule (i) an identification of all items now
owned by Seller or used by it in the Business that constitute Propriety Rights
and (ii) a true and complete list of all licenses or similar agreements or
arrangements to which Seller is a party either as licensee or licensor for each
such item of intangible personal property. Except as indicated in Section 4.5.3
of the Seller's Schedule:
(a) Seller has the right and authority to use said
items of intangible personal property in connection with the conduct of the
Business in the manner presently conducted and to convey such right and
authority to Buyer, and such use does not conflict with, infringe upon or
violate any patent, copyright, trademark or registration of any other person or
entity; and
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(b) There are no outstanding, nor to the best
knowledge of Seller any threatened, disputes or disagreements with respect to
any licenses or similar agreements or arrangements described in Section 4.5.3 of
the Seller's Schedule or to Seller's use of any intangible personal property.
4.6 AGREEMENT NOT IN BREACH OF OTHER INSTRUMENTS. Except as
indicated in Section 4.6 of the Seller's Schedule, the execution and delivery of
this Agreement by Seller and the consummation of the transactions contemplated
hereby will not result in a breach of any of the terms and provisions of, or
constitute a default under, or conflict with, any Contract, the Agreement of
Limited Partnership of Seller, or any judgment, decree, order or award of any
court, governmental body or arbitrator, or any law, rule or regulation,
applicable to Seller or any of its properties.
4.7 LABOR AND EMPLOYMENT MATTERS. Except as set forth in
Sections 4.7 or 4.8 of the Seller's Schedule, there is no (i) collective
bargaining agreement or other labor agreement to which Seller is a party or by
which it is bound; (ii) employment, retainer, consulting, retirement, welfare or
incentive plan or contract to which Seller is a party or by which it is bound;
or (iii) plan or agreement under which "fringe benefits" (including, but not
limited to, vacation plans, including personal days, or programs, sick leave
plans or programs, medical and dental plans and related benefits) are afforded
any employees of Seller. All accrued obligations of Seller with respect to
employee vacation days, personal days, employee bonuses or other similar
accruals existing as of December 31, 1996 are reflected as a liability in
Seller's December 31, 1996 balance sheet included in Section 4.4.1 of the
Seller's Schedule. Seller has complied in all material respects with all
applicable laws, rules and regulations relating to the employment of labor,
including those related to wages, hours, collective bargaining and the payment
and withholding of taxes and other sums as required by appropriate governmental
authorities.
4.8 PENSION AND EMPLOYEE BENEFIT PLANS.
(a) Section 4.8 of the Seller's Schedule contains a
complete list of all employee benefit plans, whether formal or informal, whether
or not set forth in writing, and whether covering one person or more than one
person, currently sponsored or maintained by Seller, including, without
limitation, all plans, funds, programs, policies, arrangements, practices,
customs and understandings providing benefits of economic value to any employee,
former employee, or present or former beneficiary, dependent or
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assignee of any such employee or former employee other than regular salary,
wages or commissions paid substantially concurrently with the performance of the
services for which paid and those matters described in Section 4.7 of the
Seller's Schedule, including, but not limited to, all employee welfare benefit
plans within the meaning of Section 3(1) of the Employee Retirement Income
Security Act of 1974, as amended ("ERISA"); and all employee pension benefit
plans within the meaning of Section 3(2) of ERISA (collectively "Employee
Benefit Plans"). Sellers have delivered or made available to Buyer a true,
correct and complete copy of each Employee Benefit Plan document, trust
agreement, insurance contract, summary plan description and annual report (for
1994 and 1995, the two most recent plan years for which annual reports are
currently available) relating to an Employee Benefit Plan currently maintained
by Seller.
(b) With respect to each Employee Benefit Plan
currently maintained by Seller which is intended to be qualified within the
meaning of Section 401(a) of the Internal Revenue Code of 1986, as amended
("Code"):
(i) The Internal Revenue Service ("IRS") has
issued a favorable letter of determination and any amendments required by the
Code to have been adopted as of the date hereof as a condition of retention of
such qualified status have been timely adopted;
(ii) The IRS has not revoked any letter of
determination to which reference is made in subparagraph (i) hereof, nor has the
IRS notified the Company of its intention or contemplation of doing so; and
(iii) The Company's 401(k) profit-sharing plan
met the requirements for a qualified cash or deferred arrangement as set forth
in Section 401(k)(3) of the Code through the third quarter of 1996 and the
contribution percentage requirement as set forth in Section 401(m)(2) of the
Code in each case with respect to the most recent completed plan year thereof.
(c) (i) There does not exist any accumulated
funding deficiency within the meaning of either Section 412 of the Code or
Section 302 of ERISA as to any Employee Benefit Plan currently maintained by
Seller nor has any waiver of the minimum funding standards imposed by the Code
been granted by the IRS with respect to any such Plan. No Employee Benefit Plan
currently maintained by Seller is subject to Section 412 of the Code or Title IV
of ERISA. Neither the Company nor any entity that, together with the Company,
is treated as a single employer under Section 414(b), 414(c), 414(m) or 414(o)
of the Code (an "ERISA
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Affiliate") has any liability or potential liability under Section 412 of the
Code or Title IV of ERISA as a result of the underfunding or termination of, or
withdrawal from, any plan by the Company or any ERISA Affiliate.
(ii) All contributions payable to any
Employee Benefit Plan for any plan year have been paid in full or are fully
reflected on the December 31, 1996 Balance Sheet included in Section 4.4.1 of
the Seller's Schedule.
(iii) All insurance premiums due or payable
for coverage through the Closing Date with respect to all Employee Benefit Plans
have been or will be paid in full or will be fully reflected on the Closing Date
Statement, and no such premium is overdue or in its grace period.
(d) With respect to all Employee Benefit Plans
currently maintained by Seller, the Company has not incurred, nor engaged in any
transaction which may result in imposition on the Company of, any excise tax
under Sections 4971 through 4980, inclusive, of the Code.
(e) Other than routine claims for benefits, Seller has
not incurred any liability to, nor has Seller received notice of any pending or
threatened action, claim, demand, grievance or allegation of unfair labor
practice of any kind by, any potential claimant or representative of such
claimant under any Employee Benefit Plan where Seller may be either (i) liable
directly on such action, claim or demand; or (ii) obligated to indemnify any
person, group of persons or entity with respect to such action, claim or demand.
Seller has not incurred any liability to, nor has Seller received notice of any
claim pending or threatened by, the IRS or the Department of Labor with respect
to any Employee Benefit Plan. Each Employee Benefit Plan has been maintained,
operated and administered in all material respects in accordance with its terms
and in accordance with all provisions of ERISA and the Code (including rules and
regulations thereunder) and other applicable laws.
(f) To the best knowledge of the Seller, there is no
investigation, proceeding, administrative review or other administrative agency
process which has resulted in or could result in imposition on Seller of any
penalty or other assessment in connection with any of the Employee Benefit
Plans.
(g) Seller has filed or caused to be filed on a timely
basis each return, report, statement, notice, declaration and other document
required by any federal, state or local governmental agency (including, without
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limitation, the IRS and the Department of Labor) with respect to each Employee
Benefit Plan sponsored or maintained by it. Seller has withheld and remitted to
the proper depository all income taxes and wage taxes on benefits under its
Employee Benefit Plans, to the extent such withholding is required by law.
(h) To the best of Seller's knowledge, Seller has
operated, and has caused its appointees and nominees to operate, each and every
Employee Benefit Plan in a manner which is in material compliance with all
applicable laws, regulations and administrative agency rules and requirements
applicable thereto. Every employee, former employee, and every dependent of the
foregoing entitled to continuation of benefit coverage under any Employee
Benefit Plan has been accorded all of the rights to which such person is
entitled as a matter of law or regulation.
4.9 LITIGATION. Except for (i) claims listed in Section 4.9 of
the Seller's Schedule and (ii) claims for the collection of accounts arising out
of the sale of goods or services in the ordinary course of business involving
less than $10,000 individually or $50,000 in the aggregate, there are no claims,
disputes, actions, proceedings or investigations of any nature, whether by any
governmental agency or any other party, pending or, to the best knowledge of
Seller, threatened against or involving the Seller or the Business or any of the
officers, directors, partners or employees of Seller relating to Seller or the
Business.
4.10 CONTRACTS. Section 4.10 of the Seller's Schedule sets forth
a true and correct list of each lease, license, indenture, contract or other
agreement or commitment, written or oral to which Seller is a party or by which
any of the Assets is bound, except:
(a) Any of the foregoing which is specifically
identified in Sections 4.5.1, 4.5.2, 4.5.3, 4.7 or 4.8 of the Seller's Schedule
or which would be required to be disclosed therein but for specific exemptions
contained in any of Sections 4.5.1, 4.5.2, 4.5.3, 4.7 or 4.8 of this Agreement;
(b) Purchase or sale orders for the purchase of
merchandise arising in the ordinary course of the Business; and
(c) Any of the foregoing involving Seller's payment or
receipt of consideration having an aggregate value of $10,000 or less which is
not otherwise material to the Seller.
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The leases, licenses, indentures, contracts, agreements, purchase and
sales orders and commitments required to be set forth in Section 4.5.1, 4.5.2,
4.5.3, 4.7, 4.8 and 4.10 of the Seller's Schedule are referred to as the
"Contracts" and individually as a "Contract."
Except as set forth in Section 4.10 of the Seller's Schedule:
(i) Each Contract is a valid and binding
agreement of Seller, and Seller does not have any knowledge that any of said
Contracts is not a valid and binding agreement of the other parties thereto;
(ii) Seller has fulfilled all material obligations
required pursuant to each Contract to have been performed by Seller on its part
prior to the date hereof and there has not occurred any material default under
any Contract on the part of Seller; Seller does not have any knowledge that any
material default under any Contract on the part of the other parties thereto has
occurred; Seller does not have any knowledge that any event has occurred which
with the giving of notice or the lapse of time, or both, would constitute any
material default under any of the Contracts; and Seller will not enter into any
material amendment of any Contract prior to the Closing Date without Buyer's
consent which will not be unreasonably withheld.
4.11 REGULATORY APPROVALS. All consents, approvals,
authorizations and other requirements prescribed by any law, rule or regulation
which must be obtained or satisfied by Seller and which are necessary for the
execution and delivery by Seller of this Agreement and the documents to be
executed and delivered by Seller in connection herewith have been obtained and
satisfied, or will be obtained and satisfied on or prior to the Closing Date
except for the completion of U.C.C. bulk sales filings in those states set forth
on Section 4.11 of the Seller's Schedule. Without limiting the foregoing, no
filing or notice is required in connection with the sale of the Assets under the
bulk sales provisions of the Uniform Commercial Code of the State of New Jersey.
4.12 COMPLIANCE WITH LAW. Except as set forth in Section 4.12 of
the Seller's Schedule, the Business has been conducted in accordance with and
does not violate any federal, state, local or foreign laws, regulations or
orders (including, but not limited to, any of the foregoing relating to
employment discrimination, occupational safety, environmental protection,
conservation, or corrupt practices), the enforcement of which would have a
material and adverse effect on the results of operations, condition (financial
or otherwise), assets or prospects of Seller, and Seller has not received any
notice within three years of the date hereof of any such violation.
4.13 INVENTORY. Except as set forth in Section 4.13 of Seller's
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Schedule, the Inventory is good and merchantable first quality product and is
saleable in the ordinary course of business without discount from the prices
generally charged for like product of first quality, is in an amount that is
saleable within a period of not to exceed twelve months following the Closing
Date and/or is returnable to the respective vendors of the Company in the
ordinary course of business.
4.14 ACCOUNTS RECEIVABLE. Except as set forth in Section 4.14 of
the Seller's Schedule, to the best of Seller's knowledge, the Accounts
Receivable arose or will have arisen out of the sales of inventory or services
in the ordinary course of business and are collectable in full, net of the
reserve that will be set forth in the Closing Date Statement.
4.15 INDEBTEDNESS TO AND FROM RELATED PARTIES. Except as listed
in Section 4.15 of the Seller's Schedule, Seller is not indebted, directly or
indirectly, to any Partner or either Founder or any person who is an officer or
director of Seller or any affiliate of any of the foregoing in any amount
whatsoever other than for salaries accrued in the ordinary course of business
since Seller's last regularly scheduled payroll or reimbursable business
expenses (which do not exceed $10,000 in the aggregate) and no such Partner,
Founder, officer, director, or affiliate is indebted to Seller.
4.16 POWERS OF ATTORNEY AND SURETYSHIPS. Except as disclosed in
Section 4.16 of the Seller's Schedule, Seller has no general or special powers
of attorney outstanding (whether as grantor or grantee thereof) and has no
obligation or liability (whether actual, accrued, accruing, contingent or
otherwise) as guarantor, surety, co-signer, endorser, co-maker, indemnitor or
otherwise in respect of the obligation of any person, corporation, partnership,
joint venture, association, organization or other entity, except as endorser or
maker of checks or letters of credit, respectively, endorsed or made in the
ordinary course of business.
4.17 INSURANCE. Section 4.17 of the Seller's Schedule sets forth
a true and correct list of all insurance policies of any nature whatsoever
maintained by Seller.
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Except as disclosed in Section 4.17 of the Seller's Schedule, Seller has not
received any notice or other communication from any insurance company within the
three years preceding the date hereof cancelling or materially amending or
materially increasing the annual or other premiums payable under any of said
insurance policies, and to the best knowledge of Seller, no such cancellation,
amendment or increase of premiums is threatened.
4.18 CUSTOMERS. Except as disclosed in Section 4.18 of the
Seller's Schedule, during each of the fiscal years of Seller ended December 31,
1995 and 1996, not more than three percent of the revenues of Seller was
attributable to any single customer or to any group of affiliated customers.
4.19 TAXES. Except as disclosed in Section 4.19 of the Seller's
Schedule, (a) Seller has timely filed or caused to be filed with the appropriate
taxing authorities all correct and complete tax returns for federal, state,
municipal, payroll, withholding, excise, income, sales, use, unemployment
compensation, personal property, use and occupancy, business and occupation,
real estate, and other taxes (all the foregoing taxes, including interest and
penalties thereon and including estimated taxes, being hereinafter collectively
referred to as "Taxes") required to be filed by it so as to prevent any lien or
other encumbrance on any of the Assets. Seller is not and has not been a member
of any consolidated group for tax purposes.
(b) All Taxes, in respect of periods beginning before
the Closing Date, have been timely paid or an adequate reserve has been
established therefor in Seller's December 31, 1996 Balance Sheet included in
Section 4.4.1 of the Seller's Schedule, and Seller does not have any liability
for Taxes in excess of the amounts so paid or reserves so established.
(c) The partnership information returns of Seller have
not been audited by the Internal Revenue Service or any state, local or other
relevant taxing authority within the past five years. No deficiencies for Taxes
have been claimed, proposed or assessed by any taxing or other governmental
authority against Seller within such period. Since inception, there have been
no and, as of the date hereof, there are no pending or, to the best of Seller's
knowledge, threatened audits, investigations or claims for or relating to any
additional liability in respect of Taxes in any jurisdiction, and there are no
matters under discussion with any governmental authorities with respect to Taxes
that in the reasonable judgment of Seller is likely to result in an additional
liability for Taxes. No extension of a statute
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of limitations relating to Taxes is in effect with respect to Seller.
4.20 CONFLICT OF INTEREST. Except as disclosed in Section 4.20
of the Seller's Schedule, no Partner or Founder or officer or director of Seller
or any affiliate of any of the foregoing now has or within the last three years
had, either directly or indirectly:
(a) an equity or debt interest, other than an equity
interest of less than five percent, in any corporation, partnership, joint
venture, association, organization or other person or entity which furnishes or
sells or during such period furnished or sold services or products to Seller, or
purchases or during such period purchased from Seller any goods or services, or
otherwise does or during such period did business with Seller; or
(b) a beneficial interest in any lease, license,
contract, commitment or agreement to which Seller is or was a party or under
which it was obligated or bound or to which its properties may be or may have
been subject, other than commitments or agreements between Seller and such
persons in their capacities as employees of Seller.
4.21 OTHER INFORMATION. The information provided and to be
provided by Seller to Buyer in this Agreement or in the Seller's Schedule does
not contain any untrue statements of a material fact or omit to state a material
fact required to be stated herein or therein or necessary to make the statements
and facts contained herein or therein, in light of the circumstances in which
they are made, not false or misleading. Copies of all documents heretofore or
hereafter delivered or made available to Buyer pursuant hereto were or will be
complete and accurate records of such documents.
5. TERMINATION OF PLANS. Seller agrees to terminate the Star Video
Entertainment L.P. Employee Savings and Protection Plan No. 1 and the Star Video
Entertainment L.P. Employee Savings and Protection Plan No. 2 (the "Plans") and
distribute all of the Plans' assets to the Plans' participants (the
"Participants") so that the Participants may affect a tax-free rollover of their
Plan account balances to Individual Retirement Accounts ("IRA"). Seller will
complete the Plans' termination and distribution of assets as soon as possible
after January 1, 1998. If any Participant has an outstanding Plan loan at the
date of the Plan's termination, Buyer may offer to any such Participant a loan
on terms and conditions equivalent to the terms and conditions of the original
Plan loan (hereinafter referred to as the "Replacement Loan"). Seller shall
provide Buyer with
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copies of all documents filed with or delivered to any governmental authority in
connection with the termination of, or otherwise relating to, the Plans promptly
after the filing or delivery of same and shall promptly provide Buyer with any
correspondence or other communication received from any such governmental
authority. To the extent allowed by applicable law and the terms of its
existing 401(k) plan, Buyer shall permit all Participants to participate in
Buyer's 401(k) Plan without any waiting periods or other conditions.
6. REPRESENTATIONS AND WARRANTIES OF BUYER. Buyer represents and
warrants to Seller that:
6.1 ORGANIZATION AND CORPORATE AUTHORITY. Buyer is duly
organized, validly existing and in good standing under the laws of the State of
California and has all requisite corporate power and authority to enter into
this Agreement and to consummate the transactions contemplated hereby. This
Agreement has been duly executed and delivered by Buyer, has been effectively
authorized by all necessary action, corporate or otherwise, and constitutes a
legal, valid and binding obligation of Buyer enforceable against it in
accordance with its terms, except as the validity, binding nature and
enforceability of the same is limited by the effect of (i) applicable federal or
state bankruptcy, insolvency or other laws or court decisions relating to or
affecting the rights of creditors generally; and (ii) equitable principles of
general applicability, regardless of whether considered in a proceeding in
equity or at law.
6.2 AGREEMENT NOT IN BREACH OF OTHER INSTRUMENTS. The execution
and delivery of this Agreement, the consummation of the transactions
contemplated hereby and the fulfillment of the terms hereof will not result in a
breach of any of the terms or provisions of, or constitute a default under, or
conflict with, any material agreement, indenture or other instrument to which
Buyer is a party or by which it is bound, Buyer's Articles of Incorporation or
Bylaws, any judgment, decree, order or award of any court, governmental body or
arbitrator, or any law, rule or regulation applicable to Buyer.
6.3 REGULATORY APPROVALS. All consents, approvals,
authorizations and other requirements prescribed by any law, rule or regulation
which must be obtained or satisfied by Buyer and which are necessary for the
consummation of the transactions contemplated by this Agreement have been
obtained and satisfied.
6.4 FINANCING. Buyer has received and delivered to Seller a
commitment letter ("Commitment Letter")
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from Sanwa Business Credit Corporation ("Lender") to provide Buyer with the
financing necessary for Buyer's payment of the consideration due to Seller
hereunder, subject to the conditions and other terms thereof. Buyer has not
been advised that Lender does not intend to provide the financing contemplated
by the Commitment Letter and to Buyer's knowledge the conditions to the
financing will be satisfied.
6.5 DISCLOSURE. No representation or warranty made by Buyer
contained in this Agreement or in any other writing furnished pursuant hereto
contains any untrue statement of a material fact or omits or will omit to state
a material fact required to be stated herein or therein or necessary to make the
statements and facts contained herein or therein, in light of the circumstances
which they were or are made, not false or misleading.
7. CERTAIN UNDERSTANDINGS AND AGREEMENTS OF THE PARTIES.
7.1 and 7.2 Intentionally left blank.
7.3 ACCESS TO RECORDS AND FILES. Seller shall have the right
for a period of three years following the Closing Date to have reasonable access
to such books, records and accounts, correspondence, production records,
employment records and other similar information as are transferred to Buyer
pursuant to the terms of this Agreement for the limited purposes of concluding
its involvement in the Business prior to the Closing Date and filing required
tax returns and responding to tax inquiries. Buyer shall have the right for a
period of three years following the Closing Date to have reasonable access to
those books, records and accounts, correspondence, and other records which are
retained by Seller pursuant to the terms of this Agreement to the extent that
any of the foregoing relate to the Business. Upon the reasonable request of
Seller or Buyer, as the case may be, made for bona fide business purposes, the
access period will be extended, provided that if the extended period is for a
longer period than the party holding the documents intends to retain them, then
such retention shall be at the cost of the requesting party.
7.4 TRANSFER OF ASSIGNED CONTRACTS. The Seller has used its
best efforts to obtain the necessary consents to the assignment to Buyer of each
Assigned Contract. At the Closing Buyer may elect to close the transactions
contemplated hereby notwithstanding the fact that Seller may have failed to
obtain consents to the transfer of one or more Assigned Contracts.
Notwithstanding anything herein to the contrary, the parties hereto acknowledge
and agree that at the Closing the Seller will not
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assign to Buyer any such Assigned Contract which by its terms requires the
consent of any other contracting party thereto unless each such consent has been
obtained prior to the Closing Date. With respect to each such unassigned
Assigned Contract, after the Closing Date Seller shall continue to deal with the
other contracting party(ies) to such Contract as the prime contracting party and
shall use its best efforts to obtain the consent of all required parties to the
assignment of such Assigned Contract, but Buyer shall be entitled to the
benefits of such Assigned Contract accruing after the Closing Date to the extent
that Seller may provide Buyer with such benefits without violating the terms of
such Assigned Contract; Buyer agrees to perform at its sole expense all of the
obligations of Seller to be performed under such unassigned Assigned Contract
(other than those arising from Seller's breach of such Assigned Contract) the
benefits of which Buyer is receiving after the Closing Date.
7.5 CHANGE OF NAME. Promptly after the Closing Date each of
Seller and SVEI will change its name to a name no longer containing either of
the words "Star" or "Video."
8. EXPIRATION OF REPRESENTATIONS AND WARRANTIES; NO CLAIMS. The
representations and warranties of the parties contained in Sections 4 and 5
above shall not survive the Closing and no claim may be made on or after the
Closing Date in respect of the inaccuracy or breach of any such representation
or warranty. The preceding sentence shall not preclude a claim that either
party may have for actual legal fraud. Buyer acknowledges that the purchase
price paid for the Assets was reduced in partial consideration for Buyer's
agreeing to the representations and warranties not surviving the Closing.
9. CONDITIONS TO CLOSING.
9.1 CONDITIONS TO OBLIGATIONS OF EACH PARTY. The obligations of
Seller and Buyer to consummate the transactions contemplated hereby shall be
subject to the fulfillment, at or prior to the Closing Date, or to the waiver by
Buyer and Seller of the following conditions:
9.1.1 NO ACTION OR PROCEEDING. No claim, action, suit,
investigation, or other proceeding shall be pending or threatened before any
court or governmental agency which presents a substantial risk of the restraint
or prohibition of the transactions contemplated by this Agreement or the
obtaining of material damages or other relief in connection therewith.
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9.1.2 COMPLIANCE WITH LAW. There shall have been
obtained all permits, approvals, and consents of all governmental bodies or
agencies which counsel for Buyer or for Seller may reasonably deem necessary or
appropriate so that consummation of the transactions contemplated by this
agreement will be in compliance with applicable laws. Without limiting the
foregoing, all waiting, review and investigation periods (and any extensions
thereof) applicable to the transaction contemplated hereby under the
Hart-Scott-Rodino Antitrust Improvements Act of 1976 have expired or been
terminated.
9.2 CONDITIONS TO OBLIGATIONS OF BUYER. The obligations of
Buyer to consummate the transactions contemplated hereby shall be subject to the
fulfillment, at or prior to the Closing Date, or to the waiver by Buyer of the
following additional conditions:
9.2.1 REPRESENTATIONS AND WARRANTIES TRUE. The
representations and warranties of Seller contained in this Agreement shall be
true and correct in all material respects on the Closing Date as though then
made, and at the Closing Seller shall have delivered to Buyer a certificate to
such effect with respect to Seller's representations and warranties signed by
the President and the Secretary of Seller.
9.2.2 Intentionally left blank.
9.2.3 CONSENTS TO ASSIGNMENTS OF CERTAIN CONTRACTS. All
necessary consents to the assignment of all Assigned Contracts shall have been
obtained in written instruments reasonably satisfactory to Buyer.
9.2.4 OPINION OF SELLER'S COUNSEL. Buyer shall have
been furnished at the Closing with an opinion of Budd Larner Gross Rosenbaum
Greenberg & Sade, A Professional Corporation, counsel to Seller, dated the
Closing Date, addressed to Buyer and, at Buyer's request, the Lender in form and
substance satisfactory to Buyer, to the effect that:
(a) Seller is a limited partnership duly organized,
validly existing, and in good standing under the laws of the State of Delaware,
and has full partnership power and authority to carry on the Business and to own
and operate the Assets;
(b) Seller has full partnership power to carry out the
transactions provided for in this Agreement; this Agreement and all other
instruments to be executed by Seller in connection herewith have been duly and
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validly authorized, executed and delivered by Seller and (assuming this
Agreement and such other instruments are binding obligations of Buyer)
constitute valid and binding obligations of Seller enforceable against it in
accordance with its terms, except as the validity, binding nature and
enforceability of the same is limited by the effect of (i) applicable federal or
state bankruptcy, insolvency or other laws or court decisions relating to or
affecting the rights of creditors generally; and (ii) equitable principles of
general applicability, regardless of whether considered in a proceeding in
equity or at law.
(c) the execution and delivery of this Agreement by
Seller and its performance of its obligations hereunder does not violate or
conflict with the Limited Partnership Agreement of Seller or, to the knowledge
of such counsel, violate any order, writ, injunction, decree, statute, rule, or
regulation which has applicability to Seller or any of the Assets;
(d) to the knowledge of such counsel, no consent or
approval of filing, which has not been obtained or made, by or with any
governmental authority is required for execution, delivery and performance by
Seller of this Agreement;
(e) after due inquiry, such counsel has no knowledge
of any facts which indicate that Seller does not have good and marketable title
(subject, however, to any mechanic's or other statutory liens as may then exist)
to the Assets;
(f) the bills of sale, assignments and other
agreements and documents herein contemplated to be issued by Seller to effect
the transfer of the Assets are sufficient to effect the sale, transfer and
assignment of Seller's right, title and interest in such Assets.
9.2.5 KEY EMPLOYEES.
(a) Each of the Founders shall have delivered to Buyer
their respective Employment and Noncompetition Agreements in the forms attached
hereto as Appendices B and C.
(b) Buyer shall be reasonably assured that those key
employees of Seller identified on Schedule D hereto will agree to become
employed by Buyer after the Closing, provided that Buyer shall have offered
employment terms to such key employees no less favorable than those terms on
which such persons were employed by Seller prior to the Closing (it being agreed
for this purpose that
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Buyer's health plan for employees shall be regarded as no less favorable than
the health plan of Seller provided to such employees), and Buyer shall be
reasonably assured that sufficient employees of Seller will agree to become
employed by Buyer after the Closing to enable Buyer to carry on the Business,
provided that Buyer shall have offered employment terms to such employees no
less favorable than those terms on which such employees were employed by Seller
prior to the Closing.
9.2.6 FINANCING. Buyer shall not have failed to receive
the financing contemplated by the Commitment Letter for any reason other than
Buyer's failure to act in good faith to satisfy the conditions to the provision
of such financing.
9.2.7 ADDITIONAL CLOSING DOCUMENTS OF SELLER. Buyer
shall have received at the Closing the following documents, dated the Closing
Date:
(a) Copies, certified by the Secretary of Seller, of
resolutions of Seller and of the Board of Directors of SVEI authorizing Seller's
execution, delivery and performance of this Agreement;
(b) Bills of sale and assignment, in form and
substance reasonably satisfactory to Buyer, covering the items of property
included in the Assets;
(c) Assignments of contract in form reasonably
satisfactory to Buyer for all of the Assigned Contracts to be assigned to Buyer
in accordance with Section 7.4 executed by Seller and the other party or parties
to each of such Assigned Contracts conveying to Buyer Seller's interest therein.
(d) Such further instruments of sale, transfer,
conveyance, assignment or delivery covering the Assets and the Assigned
Contracts as Buyer may reasonably require to assure the full and effective sale,
transfer, conveyance, assignment or delivery to it of the Assets and Assigned
Contracts to be transferred to Buyer under this Agreement.
9.3 CONDITIONS TO OBLIGATIONS OF SELLER. The obligation of
Seller to consummate the transactions contemplated hereby shall be subject to
the fulfillment, at or prior to the Closing Date, or to the waiver by Seller of
the following additional conditions:
9.3.1 REPRESENTATIONS AND WARRANTIES TRUE. The
representations and warranties of Buyer contained
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in this Agreement shall be true and correct in all material respects on the
Closing Date as though then made, and at the Closing Buyer shall have delivered
to Seller a certificate to such effect, signed by the President and the
Secretary of Buyer.
9.3.2 Intentionally left blank.
9.3.3 OPINION OF BUYER'S COUNSEL. Seller shall have
been furnished with an opinion of Howard, Rice, Nemerovski, Canady, Falk &
Rabkin, A Professional Corporation dated the Closing Date, in form and substance
satisfactory to Seller, to the effect that:
(a) Buyer is a corporation duly organized, validly
existing, and in good standing under the laws of the State of California;
(b) Buyer has full corporate power to carry out the
transactions provided for in this Agreement; this Agreement and all other
instruments to be executed by Buyer in connection herewith have been duly and
validly authorized, executed and delivered by Buyer and (assuming this Agreement
and such other instruments are valid and binding obligations of Seller, the
Partners and the Founders) constitute valid and binding obligations of Buyer
except as the validity, binding nature and enforceability of the same is limited
by the effect of (i) applicable federal or state bankruptcy, insolvency or other
laws or court decisions relating to or affecting the rights of creditors
generally; and (ii) equitable principles of general applicability, regardless of
whether considered in a proceeding in equity or at law;
(c) The execution and delivery of this Agreement by
Buyer and its performance of its obligations hereunder does not violate or
conflict with the Articles of Incorporation or Bylaws of Buyer, or to the
knowledge of such counsel, violate any order, writ, injunction, decree, statute,
rule or regulation which has applicability to Buyer; and
(d) to the knowledge of such counsel, no consent or
approval or filing, which has not been obtained or made, by or with any
governmental authority is required for the execution, delivery and performance
by Buyer of this Agreement.
9.3.4 ADDITIONAL CLOSING DOCUMENTS OF BUYER. Seller
shall have received at the Closing the following, with each document dated the
Closing Date:
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(a) Copies, certified by the Secretary of Buyer, of
resolutions of its Board of Directors authorizing the execution, delivery and
performance of this Agreement and all other agreements, documents or instruments
relating hereto and the consummation of the transactions contemplated hereby;
(b) Instruments executed by Buyer, in form and
substance reasonably satisfactory to Seller, pursuant to which Buyer assumes the
Assumed Liabilities;
(c) Wire transfer to Seller required to be delivered
by Buyer at the Closing pursuant to Section 2.3(a) hereof;
(d) Such other closing documents as Seller may
reasonably request.
9.3.5 EMPLOYMENT MATTERS.
(a) Buyer shall have delivered to each of the Founders
their respective Employment and Noncompetition Agreements in the forms attached
hereto as Appendices A and B.
(b) Buyer shall have given written confirmation to
Seller of the minimum number of Seller's employees at each of Seller's
facilities to whom Buyer will offer employment as soon as practicable after the
Closing and Seller shall have concluded that such number of employees to whom
employment is to be so offered shall be sufficient such that there will be no
"employment loss" within the meaning of Section 2101(3)(B) of the Worker
Adjustment and Retraining Notification Act ("WARN Act") and that Seller is not
required to provide the notice that may otherwise be required under the WARN
Act.
10. TERMINATION.
10.1 TERMINATION EVENTS. This Agreement may, by notice given
prior to the Closing, be terminated:
(a) by Buyer if a material breach of any provision of
this Agreement has been committed by Seller, the Partners or the Founders and
such breach has not been waived or by Seller if a material breach of any
provision of this Agreement has been committed by Buyer and not waived;
(b) (i) by Buyer if any of the conditions in
Section 9.2 has not been satisfied as of the scheduled closing date under
Section 1.4 or if satisfaction
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of such a condition is or becomes impossible (other than through the failure of
Buyer to comply with its obligations under this Agreement) and Buyer has not
waived such condition on or before such date; or (ii) by Seller, if any of the
conditions in Section 9.3 has not been satisfied as of the scheduled closing
date under Section 1.4 or if satisfaction of such a condition is or becomes
impossible (other than through the failure of Seller, the Partners or the
Founders to comply with their obligations under this Agreement) and Seller has
not waived such condition on or before such date;
(c) by mutual consent of Buyer and Seller; or
(d) by either Buyer or Seller if the Closing has not
occurred (other than through the failure of any party seeking to terminate this
Agreement to comply fully with its obligations under this Agreement) on or
before May 30, 1997, or such later date as the parties may agree upon.
10.2 EFFECT OF TERMINATION. Each party's right of termination
under Section 10.1 is in addition to any other rights it may have under this
Agreement or otherwise, and the exercise of a right of termination will not be
an election of remedies. If this Agreement is terminated pursuant to Section
10.1, all further obligations of the parties under this Agreement will
terminate, except that the obligations in Section 11.11 will survive; provided,
however, that if this Agreement is terminated by a party because of the breach
of the Agreement by the other party or because one or more of the conditions to
the terminating party's obligations under this Agreement is not satisfied as a
result of the other party's failure to comply with its obligations under this
Agreement, the terminating party's right to pursue all legal remedies will
survive such termination unimpaired.
11. MISCELLANEOUS.
11.1 NOTICES. All notices, requests, demands, and other
communications hereunder shall be in writing and shall be deemed given (a) if
delivered personally, (b) sent by the telecopier (with written confirmation of
receipt having been obtained) or (c) three days after mailed by certified or
registered mail, postage prepaid, return receipt requested, to the parties,
their successors in interest or their assignees at the following addresses, or
at such other addresses as the parties may designate by written notice in the
manner aforesaid.
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If to Buyer:
Valley Record Distributors, Inc.
1280 Santa Anita Court
P.O. Box 2057
Woodland, CA 95776
Attention: Randy Cerf
Telecopy No.: 916/661-7854
With a copy to:
Howard, Rice, Nemerovski, Canady,
Falk & Rabkin
A Professional Corporation
3 Embarcadero Center, 7th Floor
San Francisco, CA 94111
Attention: Daniel J. Winnike
Telecopy No.: 415/399-3041
If to Seller:
Star Video Entertainment, L.P.
550 Grand Street
Jersey City, NJ 07302
With a copy to:
Budd Larner Gross Rosenbaum Greenberg &
Sade, A Professional Corporation
150 John F. Kennedy Parkway, CN 1000
Short Hills, New Jersey
Attention: Mark D. Larner
Telecopy No.: 201/379-7734
11.2 ASSIGNABILITY AND PARTIES IN INTEREST. This Agreement shall
not be assignable by any of the parties hereto, although Buyer may assign the
right to receive the Assets and assume the Assigned Contracts and enter into
employment agreements with the Founders and key employees to a wholly-owned
subsidiary of Buyer, provided no such assignment by Buyer shall relieve it of
its obligations to Seller hereunder. This Agreement shall inure to the benefit
of and be binding upon Buyer and Seller and their respective permitted
successors and assigns and except as provided in this Section 11.2 no other
person or entity shall have or acquire any right by virtue of this Agreement.
11.3 GOVERNING LAW. This Agreement shall be governed by, and
construed and enforced in accordance with, the laws of the State of New Jersey.
Any arbitration contemplated under Section 2.2.2 pursuant to this Agreement
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shall be conducted in San Francisco, California. Buyer and Seller irrevocably
consent to the exclusive personal jurisdiction of the state and federal courts
located in Newark, New Jersey for the resolution of any disputes not subject to
arbitration arising out of this Agreement, and agree to conduct any arbitration
for the resolution of disputes other than those arising under Sections 2.2.2 in
Newark, New Jersey.
11.4 COUNTERPARTS. This Agreement may be executed simultaneously
in one or more counterparts, each of which shall be deemed an original, but all
of which shall constitute but one and the same instrument.
11.5 INDEMNIFICATION FOR BROKERAGE. Buyer on the one hand and
Seller on the other each represent and warrant to the other that no broker or
finder has acted on its behalf in connection with this Agreement or the
transactions contemplated hereby, other than Seller's retention of Chase
Securities Inc. as its financial advisor in connection with the sale of the
Assets. Each party hereto agrees to indemnify and hold and save harmless the
others from any claim or demand for commissions or other compensation by any
broker, finder or similar agent claiming to have been employed by or on behalf
of such party.
11.6 PUBLICITY. Any press releases or other announcement to be
made with respect to the transactions contemplated hereby shall be subject to
mutual agreement of Buyer and Seller. Notwithstanding the foregoing, Seller and
Buyer may respond to inquiries relating to this Agreement and the transactions
contemplated hereby by the press, employees or customers without any notice or
further consent of the other.
11.7 COMPLETE AGREEMENT. This Agreement, the Schedules and
Appendices hereto, the Seller's Schedule and the documents delivered or to be
delivered pursuant to this Agreement contain or will contain the entire
agreement between the parties hereto with respect to the transactions
contemplated herein and shall supersede all previous oral and written and all
contemporaneous oral negotiations, commitments and understandings.
11.8 MODIFICATIONS, AMENDMENTS AND WAIVERS. At any time prior to
the Closing Date or termination of this Agreement, Buyer and Seller may, by
written agreement:
(a) extend the time for the performance of any of the
obligations or other acts of the parties hereto;
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(b) waive any inaccuracies in the representations and
warranties contained in this Agreement or in any document delivered pursuant to
this Agreement; and
(c) waive compliance with any of the covenants or
agreements contained in this Agreement.
11.9 INTERPRETATION. The headings contained in this Agreement
are for reference purposes only and shall not affect in any way the meaning or
interpretation of this Agreement.
11.10 SEVERABILITY. Any provision of this Agreement which is
invalid, illegal, or unenforceable in any jurisdiction shall, as to that
jurisdiction, be ineffective to the extent of such invalidity, illegality, or
unenforceability, without affecting in any way the remaining provisions hereof
in such jurisdiction or rendering that or any other provision of this Agreement
invalid, illegal, or unenforceable in any other jurisdiction.
11.11 EXPENSES OF TRANSACTIONS. Seller shall be responsible
for paying all sales taxes arising out of the transfer of the Assets to Buyer
pursuant to the terms of this Agreement. All other fees, costs and expenses
incurred by Buyer, Seller, any Partner or either Founder in connection with the
transactions contemplated by this Agreement shall be borne by the party
incurring the same.
11.12 LIMIT ON INTEREST. Notwithstanding anything in this
Agreement to the contrary, neither party
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hereto shall be obligated to pay interest at a rate higher than the maximum rate
permitted by applicable law.
IN WITNESS WHEREOF, each of the parties hereto has executed this
Agreement as of the date first above written.
VALLEY RECORD DISTRIBUTORS, INC.
By: /s/ Valley Record Distributors
-------------------------------
Title:
----------------------------
STAR VIDEO ENTERTAINMENT, L.P., a
Delaware limited partnership
By: Star Video Entertainment,
Inc., its general partner
By: /s/ Star Video
-------------------------------
Title:
----------------------------
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STANDARD INDUSTRIAL LEASE -- NET
AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION
1. PARTIES. This Lease, dated, for reference purposes only, October 6, 1988,
is made by and between Kay K. Sagara (herein called "Lessor") and Valley Records
- - Barney Cohen (herein called "Lessee").
2. PREMISES. Lessor hereby leases to Lessee and Lessee leases from Lessor for
the term, at the rental, and upon all of the conditions set forth herein, that
certain real property situated in the County of Yolo, State of California,
commonly known as 1280 Santa Anita Court, Woodland, California 95695 and
described as 63,720 square feet of warehouse and office space and parking spaces
for 95 cars. Lease does not include the unimproved property West of the
existing parking lot (approximately 3.07 acres). (See attached map). Said real
property including the land and all improvements therein, is herein called "the
Premises".
3. TERM.
3.1 TERM. The term of this Lease shall be for 96 months commencing on
November 1, 1988 and ending on October 31, 1996 unless sooner terminated
pursuant to any provision hereof.
3.2 DELAY IN POSSESSION. Notwithstanding said commencement date, if
for any reason Lessor cannot deliver possession of the Premises to Lessee on
said date, Lessor shall not be subject to any liability therefor, nor shall
such failure affect the validity of this Lease or the obligations of Lessee
hereunder or extend the term hereof, but in such case, Lessee shall not be
obligated to pay rent until possession of the Premises is tendered to Lessee;
provided, however, that if Lessor shall not have delivered possession of the
Premises within sixty (60) days from said commencement date, Lessee may, at
Lessee's option, by notice in writing to Lessor within ten (10) days
thereafter, cancel this Lease, in which event the parties shall be discharged
from all obligations hereunder; provided further, however, that if such
written notice of Lessee is not received by Lessor within said ten (10) day
period, Lessee's right to cancel this Lease hereunder shall terminate and be
of no further force or effect.
3.3 EARLY POSSESSION. If Lessee occupies the Premises prior to said
commencement date, such occupancy shall be subject to all provisions hereof,
such occupancy shall not advance the termination date, and Lessee shall pay rent
for such period at the initial monthly rates set forth below.
4. RENT. Lessee shall pay to Lessor as rent for the Premises, monthly
payments of $15,349.00, in advance, on the 1st day of each month of the term
hereof. Lessee shall pay Lessor upon the execution hereof $15,349.00 as rent
for the month of November 1988 Rent for any period during the term hereof which
is for less than one month shall be a pro rata portion of the monthly
installment. Rent shall be payable in lawful money of the United States to
Lessor at the address stated herein or to such other persons or at such other
places as Lessor may designate in writing.
5. SECURITY DEPOSIT. Lessee shall deposit with Lessor upon execution hereof
$15,349.00 as security for Lessee's faithful performance of Lessee's obligations
hereunder. If Lessee fails to pay rent or other charges due hereunder, or
otherwise defaults with respect to any provision of this Lease, Lessor may use,
apply or retain all or any portion of said deposit for the payment of any rent
or other charge in default or for the payment of any other sum to which Lessor
may become obligated by reason of Lessee's default, or to compensate Lessor for
any loss or damage which Lessor may suffer thereby. If Lessor so uses or
applies all or any portion of said deposit, Lessee shall within ten (10) days
after written demand therefor deposit cash with Lessor in an amount sufficient
to restore said deposit to the full amount hereinabove stated and Lessee's
failure to do so shall be a material breach of this Lease. If the monthly rent
shall, from time to time, increase during the term of this Lease, Lessee shall
thereupon deposit with Lessor additional security deposit so that the amount of
security deposit held by Lessor shall at all times bear the same proportion to
current rent as the original security deposit bears to the original monthly rent
set forth in paragraph 4 hereof. Lessor shall not be required to keep said
deposit separate from its general accounts. If Lessee performs all of Lessee's
obligations hereunder, said deposit, or so much thereof as has not theretofore
been applied by Lessor, shall be returned, without payment of interest or other
increment for its use, to Lessee (or, at Lessor's option, to the last assignee,
if any, of Lessee's interest hereunder) at the expiration of the term hereof,
and after Lessee has vacated the Premises. No trust relationship is created
herein between Lessor and Lessee with respect to said Security Deposit.
6. USE.
6.1 USE. The Premises shall be used and occupied only for Office and
Warehouse or any other use which is reasonably comparable and for no other
purpose.
6.2 COMPLIANCE WITH LAW.
(a) Lessor warrants to Lessee that the Premises, in its state
existing on the date that the Lease term commences, but without regard to the
use for which Lessee will use the Premises, does not violate any covenants or
restrictions of record, or any applicable building code, regulation or
ordinance in effect on such Lease term commencement date. In the event it is
determined that this warranty has been violated, then it shall be the
obligation of the Lessor, after written notice from Lessee, to promptly, at
Lessor's sole cost and expense, rectify any such violation. In the event
Lessee does not give to Lessor written notice of the violation of this
warranty within six months from the date that the Lease term commences, the
correction of same shall be the obligation of the Lessee at Lessee's sole
cost. The warranty contained in this paragraph 6.2(a) shall be of no force
or effect if, prior to the date of this Lease, Lessee was the owner or
occupant of the Premises, and, in such event, Lessee shall correct any such
violation at Lessee's sole cost.
(b) Except as provided in paragraph 6.2(a), Lessee shall, at Lessee's
expense, comply promptly with all applicable statutes, ordinances, rules,
regulations, orders, covenants and restrictions of record, and requirements in
effect during the term or any part of the term hereof, regulating the use by
Lessee of the Premises. Lessee shall not use nor permit the use of the Premises
in any manner that will tend to create waste or a nuisance or, if there shall be
more than one tenant in the building containing the Premises, shall tend to
disturb such other tenants.
6.3 CONDITION OF PREMISES.
(a) Lessor shall deliver the Premises to Lessee clean and free of
debris on Lease commencement date (unless Lessee is already in possession) and
Lessor further warrants to Lessee that the plumbing, lighting, air conditioning,
heating, and loading doors in the Premises shall be in good operating condition
on the Lease commencement date. In the event that it is determined that this
warranty has been violated, then it shall be the obligation of Lessor, after
receipt of written notice from Lessee setting forth with specificity the nature
of the violation, to promptly, at Lessor's sole cost, rectify such violation.
Lessee's failure to give such written notice to Lessor within thirty (30) days
after the Lease commencement date shall cause the conclusive presumption that
Lessor has complied with all of Lessor's obligations hereunder. The warranty
contained in this paragraph 6.3(a) shall be of no force or effect if prior to
the date of this Lease, Lessee was the owner or occupant of the Premises.
(b) Except as otherwise provided in this Lease, Lessee hereby
accepts the Premises in their condition existing as of the Lease commencement
date or the date that Lessee takes possession of the Premises, whichever is
earlier, subject to all applicable zoning, municipal, county and state laws,
ordinances and regulations governing and regulating the use of the Premises,
and any covenants or restrictions of record, and accepts this Lease subject
thereto and to all matters disclosed thereby and by any exhibits attached
hereto. Lessee acknowledges that neither Lessor nor Lessor's agent has made
any representation or warranty as to the present or future suitability of the
Premises for the conduct of Lessee's business.
7. MAINTENANCE, REPAIRS AND ALTERATIONS.
7.1 LESSEE'S OBLIGATIONS. Lessee shall keep in good order, condition
and repair the Premises and every part thereof, structural and non
structural, (whether or not such portion of the Premises requiring repair, or
the means of repairing the same are reasonably or readily accessible to
Lessee, and whether or not the need for such repairs occurs as a result of
Lessee's use, any prior use, the elements or the age of such portion of the
Premises) including, without limiting the generality of the foregoing, all
plumbing, heating, air conditioning, (Lessee shall procure and maintain, at
Lessee's expense, an air conditioning system maintenance contract)
ventilating, electrical, lighting facilities and equipment within the
Premises, fixtures, walls (interior and exterior), foundations, ceilings,
roofs (interior and exterior), floors, windows, doors, plate glass and
skylights located within the Premises, and all landscaping, driveways,
parking lots, fences and signs located on the Premises and sidewalks and
parkways adjacent to the Premises.
7.2 SURRENDER. On the last day of the term hereof, or on any sooner
termination, Lessee shall surrender the Premises to Lessor in the same condition
as when received, ordinary wear and tear excepted, clean and free of debris.
Lessee shall repair any damage to the Premises occasioned
NET INITIALS:
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by the installation or removal of Lessee's trade fixtures, furnishings and
equipment. Notwithstanding anything to the contrary otherwise stated in this
Lease, Lessee shall leave the air lines, power panels, electrical
distribution systems, lighting fixtures, space heaters, air conditioning,
plumbing and fencing on the premises in good operating condition.
7.3 LESSOR'S RIGHTS. If Lessee fails to perform Lessee's obligations
under this Paragraph 7, or under any other paragraph of this Lease, Lessor
may at its option (but shall not be required to) enter upon the Premises
after ten (10) days' prior written notice to Lessee (except in the case of an
emergency, in which case no notice shall be required), perform such
obligations on Lessee's behalf and put the same in good order, condition and
repair, and the cost thereof together with interest thereon at the maximum
rate then allowable by law shall become due and payable as additional rental
to Lessor together with Lessee's next rental installment.
7.4 LESSOR'S OBLIGATIONS. Except for the obligations of Lessor under
Paragraph 6.2(a) and 6.3(a) (relating to Lessor's warranty), Paragraph 9
(relating to destruction of the Premises) and under Paragraph 14 (relating to
condemnation of the Premises), it is intended by the parties hereto that
Lessor have no obligation, in any manner whatsoever, to repair and maintain
the Premises nor the building located thereon nor the equipment therein,
whether structural or non structural, all of which obligations are intended
to be that of the Lessee under Paragraph 7.1 hereof. Lessee expressly waives
the benefit of any statute now or hereinafter in effect which would otherwise
afford Lessee the right to make repairs at Lessor's expense or to terminate
this Lease because of Lessor's failure to keep the premises in good order,
condition and repair.
7.5 ALTERATIONS AND ADDITIONS. (a) Lessee shall not, without
Lessor's prior written consent make any alterations, improvements, additions,
or Utility Installations in, on or about the Premises, except for
nonstructural alterations not exceeding $2,500 in cumulative costs during the
term of this Lease. In any event, whether or not in excess of $2,500 in
cumulative cost, Lessee shall make no change or alteration to the exterior of
the Premises nor the exterior of the building(s) on the Premises without
Lessor's prior written consent. As used in this Paragraph 7.5 the term
"Utility Installation" shall mean carpeting, window coverings, air lines,
power panels, electrical distribution systems, lighting fixtures, space
heaters, air conditioning, plumbing, and fencing. Lessor may require that
Lessee remove any or all of said alterations, improvements, additions or
Utility Installations at the expiration of the term, and restore the Premises
to their prior condition. Lessor may require Lessee to provide Lessor, at
Lessee's sole cost and expense, a lien and completion bond in an amount equal
to one and one-half times the estimated cost of such improvements, to insure
Lessor against any liability for mechanic's and materialmen's liens and to
insure completion of the work. Should Lessee make any alterations,
improvements, additions or Utility Installations without the prior approval
of Lessor, Lessor may require that Lessee remove any or all of the same.
(b) Any alterations, improvements, additions or Utility Installations
in, or about the Premises that Lessee shall desire to make and which requires
the consent of the Lessor shall be presented to Lessor in written form, with
proposed detailed plans. If Lessor shall give its consent, the consent shall be
deemed conditioned upon Lessee acquiring a permit to do so from appropriate
governmental agencies, the furnishing of a copy thereof to Lessor prior to the
commencement of the work and the compliance by Lessee of all conditions of said
permit in a prompt and expeditious manner.
(c) Lessee shall pay, when due, all claims for labor or materials
furnished or alleged to have been furnished to or for Lessee at or for use in
the Premises, which claims are or may be secured by any mechanics' or
materialmen's lien against the Premises or any interest therein. Lessee
shall give Lessor not less than ten (10) days' notice prior to the
commencement of any work in the Premises, and Lessor shall have the right to
post notices of non-responsibility in or on the Premises as provided by law.
If Lessee shall, in good faith, contest the validity of any such lien, claim
or demand, then Lessee shall, at its sole expense defend itself and Lessor
against the same and shall pay and satisfy any such adverse judgement that
may be rendered thereon before the enforcement thereof against the Lessor or
the Premises, upon the condition that if Lessor shall require, Lessee shall
furnish to Lessor a surety bond satisfactory to Lessor in an amount equal to
such contested lien claim or demand indemnifying Lessor against liability for
the same and holding the Premises free from the effect of such lien or claim.
In addition, Lessor may require Lessee to pay Lessor's attorneys fees and
costs in participating in such action if Lessor shall decide it is to its
best interest to do so.
(d) Unless Lessor requires their removal, as set forth in
Paragraph 7.5(a), all alterations, improvements, additions and Utility
Installations (whether or not such Utility Installations constitute trade
fixtures of Lessee), which may be made on the Premises, shall become the
property of Lessor and remain upon and be surrendered with the Premises at
the expiration of the term. Notwithstanding the provisions of this Paragraph
7.5(d), Lessee's machinery and equipment, other than that which is affixed to
the Premises so that it cannot be removed without material damage to the
Premises, shall remain the property of Lessee and may be removed by Lessee
subject to the provisions of Paragraph 7.2.
8. INSURANCE INDEMNITY.
8.1 INSURING PARTY. As used in this Paragraph 8, the term "Insuring
Party" shall mean the party who has the obligation to obtain the Property
Insurance required hereunder. The insuring party shall be designated in
Paragraph 46 hereof. In the event Lessor is the insuring party, Lessor shall
also maintain the liability insurance described in paragraph 8.2 hereof, in
addition to, and not in lieu of, the insurance required to be maintained by
Lessee under said paragraph 8.2 but Lessor shall not be required to name
Lessee as an additional insured on such policy. Whether the insuring party
is the Lessor or the Lessee, Lessee shall, as additional rent for the
Premises, pay the cost of all insurance required hereunder, except for that
portion of the cost attributable to Lessor's liability insurance coverage in
excess of $1,000,000 per occurrence. If Lessor is the insuring party Lessee
shall, within ten (10) days following demand by Lessor, reimburse Lessor for
the cost of the insurance so obtained.
8.2 LIABILITY INSURANCE. Lessee shall, at Lessee's expense obtain and
keep in force during the term of this Lease a policy of Combined Single
Limit, Bodily Injury and Property Damage insurance insuring Lessor and Lessee
against any liability arising out of the ownership, use, occupancy or
maintenance of the Premises and all areas appurtenant thereto. Such
insurance shall be a combined single limit policy in an amount not less than
$500,000 per occurrence. The policy shall insure performance by Lessee of
the indemnity provisions of this Paragraph 8. The limits of said insurance
shall not, however, limit the liability of Lessee hereunder.
8.3 PROPERTY INSURANCE. (a) The insuring party shall obtain
and keep in force during the term of this Lease a policy or policies of
insurance covering loss or damage to the Premises, in the amount of the full
replacement value thereof, as the same may exist from time to time, which
replacement value is now $ _________________, but in no event less than the
total amount required by lenders having liens on the Premises, against all
perils included within the classification of fire, extended coverage,
vandalism, malicious mischief, flood (in the event same is required by a
lender having a lien on the Premises), and special extended perils ("all
risk" as such term is used in the insurance industry). Said insurance shall
provide for payment of loss thereunder to Lessor or to the holders of
mortgages or deeds of trust on the Premises. The insuring party shall, in
addition, obtain and keep in force during the term of this Lease a policy of
rental value insurance covering a period of one year, with loss payable to
Lessor, which insurance shall also cover all real estate taxes and insurance
costs for said period. A stipulated value or agreed amount endorsement
deleting the coinsurance provision of the policy shall be procured with said
insurance as well as an automatic increase in insurance endorsement causing
the increase in annual property insurance coverage by 2% per quarter. If the
insuring party shall fail to procure and maintain said insurance the other
party may, but shall not be required to, procure and maintain the same, but
at the expense of Lessee. If such insurance coverage has a deductible clause,
the deductible amount shall not exceed $1,000 per occurrence, and Lessee
shall be liable for such deductible amount.
(b) If the Premises are part of a larger building, or if the
Premises are part of a group of buildings owned by Lessor which are adjacent
to the Premises, then Lessee shall pay for any increase in the property
insurance of such other building or buildings if said increase is caused by
Lessee's acts, omissions, use or occupancy of the Premises.
(c) If the Lessor is the insuring party the Lessor will not insure
Lessee's fixtures, equipment or tenant improvements unless the tenant
improvements have become a part of the Premises under paragraph 7, hereof.
But if Lessee is the insuring party the Lessee shall insure its fixtures,
equipment and tenant improvements.
8.4 INSURANCE POLICIES. Insurance required hereunder shall be in
Companies holding a "General Policyholders Rating" of at least B plus, or
such other rating as may be required by a lender having a lien on the
Premises, as set forth in the most current issue of "Best's Insurance Guide".
The insuring party shall deliver to the other party copies of policies of
such insurance or certificates evidencing the existence and amounts of such
insurance with loss payable clauses as required by this paragraph 8. No such
policy shall be cancellable or subject to reduction of coverage or other
modification except after thirty (30) days' prior written notice to Lessor.
If Lessee is the insuring party Lessee shall, at least thirty (30) days prior
to the expiration of such policies, furnish Lessor with renewals or "binders"
thereof, or Lessor may order such insurance and charge the cost thereof to
Lessee, which amount shall be payable by Lessee upon demand. Lessee shall not
do or permit to be done anything which shall invalidate the insurance
policies referred to in Paragraph 8.3. If Lessee does or permits to be done
anything which shall increase the cost of the insurance policies referred to
in Paragraph 8.3, then Lessee shall forthwith upon Lessor's demand reimburse
Lessor for any additional premiums attributable to any act or omission or
operation of Lessee causing such increase in the cost of insurance. If Lessor
is the insuring party, and if the insurance policies maintained hereunder
cover other improvements in addition to the Premises. Lessor shall deliver to
Lessee a written statement setting forth the amount of any such insurance
cost increase and showing in reasonable detail the manner in which it has
been computed.
8.5 WAIVER OF SUBROGATION. Lessee and Lessor each hereby release and
relieve the other, and waive their entire right of recovery against the other
for loss or damage arising out of or incident to the perils insured against
under paragraph 8.3, which perils occur in, on or about the Premises, whether
due to the negligence of Lessor or Lessee or their agents, employees,
contractors and/or invitees. Lessee and Lessor shall, upon obtaining the
policies of insurance required hereunder, give notice to the insurance
carrier or carriers that the foregoing mutual waiver of subrogation is
contained in this Lease.
8.6 INDEMNITY. Lessee shall indemnify and hold harmless Lessor from and
against any and all claims arising from Lessee's use of the Premises, or from
the conduct of Lessee's business or from any activity, work or things done,
permitted or suffered by Lessee in or about the Premises or elsewhere and
shall further indemnify and hold harmless Lessor from and against any and all
claims arising from any breach or default in the performance of any
obligation on Lessee's part to be performed under the terms of this Lease, or
arising from any negligence of the Lessee, or any of Lessee's agents,
contractors, or employees, and from and against all costs, attorney's fees,
expenses and liabilities incurred in the defense of any such claim or any
action or proceeding brought thereon; and in case any action or proceeding be
brought against Lessor by reason of any such claim. Lessee upon notice from
Lessor shall defend the same at Lessee's expense by counsel satisfactory to
Lessor. Lessee, as a material part of the consideration to Lessor, hereby
assumes all risk of damage to property or injury to persons, in, upon or
about the Premises arising from any cause and Lessee hereby waives all claims
in respect thereof against Lessor.
8.7 EXEMPTION OF LESSOR FROM LIABILITY. Lessee hereby agrees that
Lessor shall not be liable for injury to Lessee's business or any loss of
income therefrom or for damage to the goods, wares, merchandise or other
property of Lessee, Lessee's employees, invitees, customers, or any other
person in or about the Premises, nor shall Lessor be liable for injury to the
person of Lessee, Lessee's employees, agents or contractors, whether such
damage or injury is caused by or results from fire, steam, electricity, gas,
water or rain, or from the breakage, leakage, obstruction or other defects of
pipes, sprinklers, wires, appliances, plumbing, air conditioning or lighting
fixtures, or from any other cause, whether the said damage or injury results
from conditions arising upon the Premises or upon other portions of the
building of which the Premises are a part, or from other sources or places
and regardless of whether the cause of such damage or injury or the means of
repairing the same is inaccessible to Lessee. Lessor shall not be liable for
any damages arising from any act or neglect of any other tenant, if any, of
the building in which the Premises are located.
NET INITIALS:
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9. DAMAGE OR DESTRUCTION.
9.1 DEFINITIONS.
(a) "Premises Partial Damage" shall herein mean damage or destruction
to the Premises to the extent that the cost of repair is less than 50% of the
then replacement cost of the Premises. "Premises Building Partial Damage" shall
herein mean the damage or destruction to the building of which the Premises are
a part to the extent that the cost of repair is less than 50% of the then
replacement cost of such building as a whole.
(b) "Premises Total Destruction" shall herein mean damage or
destruction to the extent that the cost of repair is 50% or more of the then
replacement cost of the Premises. "Premises Building Total Destruction" shall
herein mean damage or destruction to the building of which the Premises are a
part to the extent that the cost of repair is 50% or more of the then
replacement cost of such building as a whole.
(c) "Insured Loss" shall herein mean damage or destruction which was
caused by an event required to be covered by the insurance described in
paragraph 8.
9.2 PARTIAL DAMAGE -- INSURED LOSS. Subject to the provisions of
paragraphs 9.4, 9.5 and 9.6, if at any time during the term of this Lease
there is damage which is an Insured Loss and which falls into the
classification of Premises Partial Damage or Premises Building Partial
Damage, then Lessor shall, at Lessor's expense, repair such damage, but not
Lessee's fixtures, equipment or tenant improvements unless the same have
become a part of the Premises pursuant to Paragraph 7.5 hereof as soon as
reasonably possible and this Lease shall continue in full force and effect.
Notwithstanding the above, if the Lessee is the insuring party, and if the
insurance proceeds received by Lessor are not sufficient to effect such
repair, Lessor shall give notice to the Lessee of the amount required in
addition to the insurance proceeds to effect such repair. Lessee shall
contribute the required amount to Lessor within ten days after Lessee has
received notice from Lessor of the shortage in the insurance. When Lessee
shall contribute such amount to Lessor, Lessor shall make such repairs as
soon as reasonably possibly and this Lease shall continue in full force and
effect. Lessee shall in no event have any right to reimbursement for any such
amounts so contributed.
9.3 PARTIAL DAMAGE -- UNINSURED LOSS. Subject to the provisions of
Paragraphs 9.4, 9.5 and 9.6, if at any time during the term of this Lease
there is damage which is not an Insured Loss and which falls within the
classification of Premises Partial Damage or Premises Building Partial
Damage, unless caused by a negligent or willful act of Lessee (in which event
Lessee shall make the repairs at Lessee's expense), Lessor may at Lessor's
option either (i) repair such damage as soon as reasonably possible at
Lessor's expense, in which event this Lease shall continue in full force and
effect, or (ii) give written notice to Lessee within thirty (30) days after
the date of occurrence of such damage of Lessor's intention to cancel and
terminate this Lease, as of the date of the occurrence of such damage. In the
event Lessor elects to give such notice of Lessor's intention to cancel and
terminate this Lease, Lessee shall have the right within ten (10) days after
the receipt of such notice to give written notice to Lessor of Lessee's
intention to repair such damage at Lessee's expense, without reimbursement
from Lessor, in which event this Lease shall continue in full force and
effect, and Lessee shall proceed to make such repairs as soon as reasonably
possible. If Lessee does not give such notice within such 10-day period this
Lease shall be cancelled and terminated as of the date of the occurrence of
such damage.
9.4 TOTAL DESTRUCTION. If at any time during the term of this Lease
there is damage, whether or not an Insured Loss, (including destruction
required by any authorized public authority), which falls into the
classification of Premises Total Destruction or Premises Building Total
Destruction, this Lease shall automatically terminate as of the date of such
total destruction.
9.5 DAMAGE NEAR END OF TERM.
(a) If at any time during the last six months of the term of this
Lease there is damage, whether or not an Insured Loss, which falls within the
classification of Premises Partial Damage, Lessor may at Lessor's option cancel
and terminate this Lease as of the date of occurrence of such damage by giving
written notice to the Lessee of Lessor's election to do so within 30 days after
the date of occurrence of such damage.
(b) Notwithstanding paragraph 9.5(a), in the event that Lessee has an
option to extend or renew this Lease, and the time within which said option may
be exercised has not yet expired, Lessee shall exercise such option, if it is to
be exercised at all, no later than 20 days after the occurrence of an Insured
Loss falling within the classification of Premises Partial Damage during the
last six months of the term of this Lease. If Lessee duly exercises such option
during said 20 day period, Lessor shall, at Lessor's expense, repair such damage
as soon as reasonably possible and this Lease shall continue to full force and
effect. If Lessee fails to exercise such option during said 20 day period, then
Lessor may at Lessor's option terminate and cancel this Lease as of the
expiration of said 20 day period by giving written notice to Lessee of Lessor's
election to do so within 10 days after the expiration of said 20 day period,
notwithstanding any term or provision in the grant of option to the contrary.
9.6 ABATEMENT OF RENT; LESSEE'S REMEDIES.
(a) In the event of damage described in paragraphs 9.2 or 9.3, and
Lessor or Lessee repairs or restores the Premises pursuant to the provisions of
this Paragraph 9, the rent payable hereunder for the period during such damage,
repair or restoration continues shall be abated in proportion to the degree to
which Lessee's use of the Premises is impaired. Except for abatement of rent, if
any, Lessee have no claim against Lessor for any damage suffered by reason of
any such damage, destruction, repair or restoration.
(b) If Lessor shall be obligated to repair or restore the Premises
under the provisions of this Paragraph 9 and shall not commence such repair or
restoration within 90 days after such obligations shall accure, Lessee may at
Lessee's option cancel and terminate this Lease by giving Lessor written notice
of Lessee's election to do so at any time prior to the commencement of such
repair or restoration. In such event this Lease shall terminate as of the date
of such notice.
9.7 TERMINATION -- ADVANCE PAYMENTS. Upon termination of this Lease
pursuant to this Paragraph 9, an equitable adjustment shall be made concerning
advance rent and any advance payments made by Lessee to Lessor. Lessor shall, in
addition, return Lessee so much of Lessee's security deposit as has not
theretofore been applied to Lessor.
9.8 WAIVER. Lessor and Lessee waive the provisions of any statutes which
relate to termination of leases when leased property is destroyed and agree that
such event shall be governed by the terms of this Lease.
10. REAL PROPERTY TAXES.
10.1 PAYMENT OF TAXES. Lessee shall pay the real property tax, as defined
in paragraph 10.2, applicable to the Premises during the term of this Lease.
All such payments shall be made at least ten (10) days prior to the delinquency
date of such payment. Lessee shall promptly furnish Lessor with satisfactory
evidence that such taxes have been paid. If any such taxes paid by Lessee shall
cover any period of time prior to or after the expiration of the term hereof,
Lessee's share of such taxes shall be equitably prorated to cover only the
period of time within the tax fiscal year during which this Lease shall be in
effect, and Lessor shall reimburse Lessee to the extent required. If Lessee
shall fail to pay any such taxes, Lessor shall have the right to pay the same,
in which case Lessee shall repay such amount to Lessor with Lessee's next rent
installment together with interest at the maximum rate then allowable by law.
10.2 DEFINITION OF "REAL PROPERTY TAX". As used herein, the term "real
property tax" shall include any form of real estate tax or assessment, general,
special, ordinary or extraordinary, and any license fee, commercial rental tax,
improvement bond or bonds, levy or tax (other than inheritance, personal income
or estate taxes) imposed on the Premises by any authority having the direct or
indirect power to tax, including any city, state or federal government, or any
school, agricultural, sanitary, fire, street, drainage or other improvement
district thereof, as against any legal or equitable interest of Lessor in the
Premises or in the real property of which the Premises are a part, as against
Lessor's right to rent or other income therefrom, and as against Lessor's
business of leasing the Premises. The term "real property tax" shall also
include any tax, fee, levy, assessment or charge (i) in substitution of,
partially or totally, any tax, fee, levy, assessment or charge hereinabove
included within the definition of "real property tax," or (ii) the nature of
which was hereinbefore included within the definition of "real property tax," or
(iii) which is imposed for a service or right not charged prior to June 1, 1978,
or, if previously charged, has been increased since June 1, 1978, or (iv) which
is imposed as a result of a transfer, either partial or total, of Lessor's
interest in the Premises or which is added to a tax or charge hereinbefore
included within the definition of real property tax by reason of such transfer,
or (v) which is imposed by reason of this transaction, any modifications or
changes hereto, or any transfers hereof.
10.3 JOINT ASSESSMENT. If the Premises are not separately assessed,
Lessee's liability shall be an equitable proportion of the real property taxes
for all of the land and improvements included within the tax parcel assessed,
such proportion to be determined by Lessor from the respective valuations
assigned in the assessor's work sheets or such other information as may be
reasonably available. Lessor's reasonable determination thereof, in good faith,
shall be conclusive.
10.4 PERSONAL PROPERTY TAXES.
(a) Lessee shall pay prior to delinquency all taxes assessed
against and levied upon trade fixtures, furnishings, equipment and all other
personal property of Lessee contained in the Premises or elsewhere. When
possible, Lessee shall cause said trade fixtures, furnishings, equipment and
all other personal property to be assessed and billed separately from the
real property of Lessor.
(b) If any of Lessee's said personal property shall be assessed
with Lessor's real property, Lessee shall pay Lessor the taxes attributable
to Lessee within 10 days after receipt of a written statement setting forth
the taxes applicable to Lessee's property.
11. UTILITIES. Lessee shall pay for all water, gas, heat, light, power,
telephone, the fire sprinkler system and the monthly cost of monitoring said
system, and other utilities and services supplied to the Premises, together with
any taxes thereon. If any such services are not separately metered to Lessee,
Lessee shall pay a reasonable proportion to be determined by Lessor of all
charges jointly metered with other premises.
12. ASSIGNMENT AND SUBLETTING.
12.1 LESSOR'S CONSENT REQUIRED. Lessee shall not voluntarily or by
operation of law assign, transfer, mortgage, sublet, or otherwise transfer or
encumber all or any part of Lessee's interest in this Lease or in the Premises,
without Lessor's prior written consent, which Lessor shall not unreasonably
withhold. Lessor shall respond to Lessee's request for consent hereunder in a
timely manner and any attempted assignment, transfer, mortgage, encumbrance or
subletting without such consent shall be void, and shall constitute a breach of
this Lease.
12.2 LESSEE AFFILIATE. Notwithstanding the provisions of paragraph 12.1
hereof, Lessee may assign or sublet the Premises, or any portion thereof,
without Lessor's consent, to any corporation which controls, is controlled by or
is under common control with Lessee, or to any corporation resulting from the
merger or consolidation with Lessee, or to any person or entity which acquires
all the assets of Lessee as a going concern of the business that is being
conducted on the Premises, provided that said assignee assumes, in full, the
obligations of Lessee under this Lease. Any such assignment shall not, in any
way, affect or limit the liability of Lessee under the terms of this Lease even
if after such assignment or subletting the terms of this Lease are materially
changed or altered without the consent of Lessee, the consent of whom shall not
be necessary.
12.3 NO RELEASE OF LESSEE. Regardless of Lessor's consent, no subletting
or assignment shall release Lessee of Lessee's obligation or alter the primary
liability of Lessee to pay the rent and to perform all other obligations to be
performed by Lessee hereunder. The acceptance of rent by Lessor from any other
person shall not be deemed to be a waiver by Lessor of any provision hereof.
Consent to one assignment or subletting shall not be deemed consent to any
subsequent assignment or subletting. In the event of default by any assignee of
Lessee or any successor of Lessee, in the performance of any of the terms
hereof, Lessor may proceed directly against Lessee without the necessity of
exhausting remedies against said assignee. Lessor may consent to subsequent
assignments or subletting of this Lease or amendments or modifications to this
Lease with assignees.
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of Lessee, without notifying Lessee, or any successor of Lessee, and without
obtaining its or their consent thereto and such action shall not relieve Lessee
of liability under this Lease.
12.4 ATTORNEY'S FEES. In the event Lessee shall assign or sublet the
Premises or request the consent of Lessor to any assignment or subletting or if
Lessee shall request the consent of Lessor for any act Lessee proposes to do
then Lessee shall pay Lessor's reasonable attorneys fees incurred in connection
therewith, such attorneys fees not to exceed $350.00 for each such request.
13. DEFAULTS; REMEDIES.
13.1 DEFAULTS. The occurrence of any one or more of the following events
shall constitute a material default and breach of this Lease by Lessee:
(a) The vacating or abandonment of the Premises by Lessee.
(b) The failure by Lessee to make any payment of rent or any other
payment required to be made by Lessee hereunder, as and when due, where such
failure shall continue for a period of three days after written notice thereof
from Lessor to Lessee. In the event that Lessor serves Lessee with a Notice to
Pay Rent or Quit pursuant to applicable Unlawful Detainer statutes such Notice
to Pay Rent or Quit shall also constitute the notice required by this
subparagraph.
(c) The failure by Lessee to observe or perform any of the covenants,
conditions or provisions of this Lease to be observed or performed by Lessee,
other than described in paragraph (b) above, where such failure shall continue
for a period of 30 days after written notice thereof from Lessor to Lessee;
provided, however, that if the nature of Lessee's default is such that more than
30 days are reasonably required for its cure, then Lessee shall not be deemed to
be in default if Lessee commenced such cure within said 30-day period and
thereafter diligently prosecutes such cure to completion.
(d) (i) The making by Lessee of any general arrangement or assignment
for the benefit of creditors; (ii) Lessee becomes a "debtor" as defined in 11
U.S.C. Section 101 or any successor statute thereto (unless, in the case of a
petition filed against Lessee, the same is dismissed within 60 days); (iii) the
appointment of a trustee or receiver to take possession of substantially all of
Lessee's assets located at the Premises or of Lessee's interest in this Lease,
where possession is not restored to Lessee within 30 days; or (iv) the
attachment, execution or other judicial seizure of substantially all of Lessee's
assets located at the Premises or of Lessee's interest in this Lease, where such
seizure is not discharged within 30 days. Provided, however, in the event that
any provision of this paragraph 13.1(d) is contrary to any applicable law, such
provision shall be of no force or effect.
(e) The discovery by Lessor that any financial statement given to
Lessor by Lessee, any assignee of Lessee, any subtenant of Lessee, any successor
in interest of Lessee or any guarantor of Lessee's obligation hereunder, and any
of them, was materially false.
13.2 REMEDIES. In the event of any such material default or breach by
Lessee, Lessor may at any time thereafter, with or without notice or demand and
without limiting Lessor in the exercise of any right or remedy which Lessor may
have by reason of such default or breach:
(a) Terminate Lessee's right to possession of the Premises by any
lawful means, in which case this Lease shall terminate and Lessee shall
immediately surrender possession of the Premises to Lessor. In such event
Lessor shall be entitled to recover from Lessee all damages incurred by Lessor
by reason of Lessee's default including, but not limited to, the cost of
recovering possession of the Premises; expenses of reletting, including
necessary renovation and alteration of the Premises, reasonable attorney's fees,
and any real estate commission actually paid; the worth at the time of award by
the court having jurisdiction thereof of the amount by which the unpaid rent for
the balance of the term after the time of such award exceeds the amount of such
rental loss for the same period that Lessee proves could be reasonably avoided;
that portion of the leasing commission paid by Lessor pursuant to Paragraph 15
applicable to the unexpired term of this lease.
(b) Maintain Lessee's right to possession in which case this Lease
shall continue in effect whether or not Lessee shall have abandoned the
Premises. In such event Lessor shall be entitled to enforce all of Lessor's
rights and remedies under this Lease, including the right to recover the rent as
it becomes due hereunder.
(c) Pursue any other remedy now or hereafter available to Lessor
under the laws or judicial decisions of the state wherein the Premises are
located. Unpaid installments of rent and other unpaid monetary obligations of
Lessee under the terms of this Lease shall bear interest from the date due at
the maximum rate then allowable by law.
13.3 DEFAULT BY LESSOR. Lessor shall not be in default unless Lessor
fails to perform obligations required of Lessor within a reasonable time, but in
no event later than thirty (30) days after written notice by Lessee to Lessor
and to the holder of any first mortgage or deed of trust covering the Premises
whose name and address shall have theretofore been furnished to Lessee in
writing, specifying wherein Lessor has failed to perform such obligation;
provided, however, that if the nature of Lessor's obligation is such that more
than thirty (30) days are required for performance then Lessor shall not be in
default if Lessor commences performance within such 30-day period and thereafter
diligently prosecutes the same to completion.
13.4 LATE CHARGES. Lessee hereby acknowledges that late payment by Lessee
to Lessor of rent and other sums due hereunder will cause Lessor to incur costs
not contemplated by this Lease, the exact amount of which will be extremely
difficult to ascertain. Such costs include, but are not limited to, processing
and accounting charges, and late charges which may be imposed on Lessor by the
terms of any mortgage or trust deed covering the Premises. Accordingly, if any
installment of rent or any other sum due from Lessee shall not be received by
Lessor or Lessor's designee within ten (10) days after such amount shall be due,
then, without any requirement for notice to Lessee, Lessee shall pay to Lessor a
late charge equal to 6% of such overdue amount. The parties hereby agree that
such late charge represents a fair and reasonable estimate of the costs Lessor
will incur by reason of late payment by Lessee. Acceptance of such late charge
by Lessor shall in no event constitute a waiver of Lessee's default with respect
to such overdue amount, nor prevent Lessor from exercising any of the other
rights and remedies granted hereunder. In the event that a late charge is
payable hereunder, whether or not collected, for three (3) consecutive
installments of rent, then rent shall automatically become due and payable
quarterly in advance, rather than monthly, notwithstanding paragraph 4 or any
other provision of this Lease to the contrary.
13.5 IMPOUNDS. In the event that a late charge is payable hereunder,
whether or not collected, for three (3) installments of rent or any other
monetary obligation of Lessee under the terms of this Lease, Lessee shall pay to
Lessor, if Lessor shall so request, in addition to any other payments required
under this Lease, a monthly advance installment, payable at the same time as the
monthly rent, as estimated by Lessor, for real property tax and insurance
expenses on the Premises which are payable by Lessee under the terms of this
Lease. Such fund shall be established to insure payment when due, before
delinquency, of any or all such real property taxes and insurance premiums. If
the amounts paid to Lessor by Lessee under the provisions of this paragraph are
insufficient to discharge the obligations of Lessee to pay such real property
taxes and insurance premiums as the same become due, Lessee shall pay to Lessor,
upon Lessor's demand, such additional sums necessary to pay such obligations.
All moneys paid to Lessor under this paragraph may be intermingled with other
moneys of Lessor and shall not bear interest. In the event of a default in the
obligations of Lessee to perform under this Lease, then any balance remaining
from funds paid to Lessor under the provisions of this paragraph may, at the
option of Lessor, be applied to the payment of any monetary default of Lessee in
lieu of being applied to the payment of real property tax and insurance
premiums.
14. CONDEMNATION. If the Premises or any portion thereof are taken under the
power of eminent domain, or sold under the threat of the exercise of said power
(all of which are herein called "condemnation"), this Lease shall terminate as
to the part so taken as of the date the condemning authority takes title or
possession, whichever first occurs. If more than 10% of the floor area of the
building on the Premises, or more than 25% of the land area of the Premises
which is not occupied by any building, is taken by condemnation, Lessee may, at
Lessee's option, to be exercised in writing only within ten (10) days after
Lessor shall have given Lessee written notice of such taking (or in the absence
of such notice, within ten (10) days after the condemning authority shall have
taken possession) terminate this Lease as of the date the condemning authority
takes such possession. If Lessee does not terminate this Lease in accordance
with the foregoing, this Lease shall remain in full force and effect as to the
portion of the Premises remaining, except that the rent shall be reduced in the
proportion that the floor area of the building taken bears to the total floor
area of the building situated on the Premises. No reduction of rent shall occur
if the only area taken is that which does not have a building located thereon.
Any award for the taking of all or any part of the Premises under the power of
eminent domain or any payment made under threat of the exercise of such power
shall be the property of Lessor, whether such award shall be made as
compensation for diminution in value of the leasehold or for the taking of the
fee, or as severance damages; provided, however, that Lessee shall be entitled
to any award for loss of or damage to Lessee's trade fixtures and removable
personal property. In the event that this Lease is not terminated by reason of
such condemnation, Lessor shall to the extent of severance damages received by
Lessor in connection with such condemnation, repair any damage to the Premises
caused by such condemnation except to the extent that Lessee has been reimbursed
therefor by the condemning authority. Lessee shall pay any amount in excess of
such severance damages required to complete such repair.
15. BROKER'S FEE.
(a) Upon execution of this Lease by both parties, Lessor shall pay to
__________________________________________________________________ Licensed real
estate broker(s), a fee as set forth in a separate agreement between Lessor and
said broker(s), or in the event there is no separate agreement between Lessor
and said broker(s), the sum of $_______________, for brokerage services rendered
by said broker(s) to Lessor in this transaction.
(b) Lessor further agrees that if Lessee exercises any Option as defined
in paragraph 39.1 of this Lease, which is granted to Lessee under this Lease, or
any subsequently granted option which is substantially similar to an Option
granted to Lessee under this Lease, or if Lessee acquires any rights to the
Premises or other premises described in this Lease which are substantially
similar to what Lessee would have acquired had an Option herein granted to
Lessee been exercised, or if Lessee remains in possession of the Premises after
the expiration of the term of this Lease after having failed to exercise an
Option, or if said broker(s) are the procuring cause of any other lease or sale
entered into between the parties pertaining to the Premises and/or any adjacent
property in which Lessor has an interest, then as to any of said transactions,
Lessor shall pay said broker(s) a fee in accordance with the schedule of said
broker(s) in effect at the time of execution of this Lease.
(c) Lessor agrees to pay said fee not only on behalf of Lessor but also on
behalf of any person, corporation, association, or other entity having an
ownership interest in said real property or any part thereof, when such fee is
due hereunder. Any transferee of Lessor's interest in this Lease, whether such
transfer is by agreement or by operation of law, shall be deemed to have assumed
Lessor's obligation under this Paragraph 15. Said broker shall be a third party
beneficiary of the provisions of this Paragraph 15.
16. ESTOPPEL CERTIFICATE.
(a) Lessee shall at any time upon not less than ten (10) days' prior
written notice from Lessor execute, acknowledge and deliver to Lessor a
statement in writing (i) certifying that this Lease is unmodified and in full
force and effect (or, if modified, stating the nature of such modification and
certifying that this Lease, as so modified, is in full force and effect) and the
date to which the rent and other charges are paid in advance, if any, and (ii)
acknowledging that there are not, to Lessee's knowledge, any uncured defaults on
the part of Lessor hereunder, or specifying such defaults if any are claimed.
Any such statement may be conclusively relied upon by any prospective purchaser
or encumbrancer of the Premises.
(b) At Lessor's option, Lessee's failure to deliver such statement within
such time shall be a material breach of this Lease or shall be
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conclusive upon Lessee (i) that this Lease is in full force and effect,
without modification except XXXXX represented by Lessor, (ii) that there are
no uncured defaults in Lessor's performance, and (iii) that not more than one
month's rent has been paid in advance or such failure may be confirmed by
Lessor as a default by Lessee under this Lease.
(c) If Lessor desires to finance, refinance, or sell the Premises, or
any part thereof, Lessee hereby agrees to deliver to any lender or purchaser
designated by Lessor such financial statements of Lessee as may be reasonably
required by such lender or purchaser. Such statements shall include the past
three years' financial statements of Lessee. All such financial statements
shall be received by Lessor and such lender or purchaser in confidence and
shall be used only for the purposes herein set forth.
17. LESSOR'S LIABILITY. The term "Lessor" as used herein shall mean only the
owner or owners at the time in question of the fee title or a lessee's
interest in a ground lease of the Premises, and except as expressly provided
in Paragraph 15, in the event of any transfer of such title or interest,
Lessor herein named (and in case of any subsequent transfers then the
grantor) shall be relieved from and after the date of such transfer of all
liability as respects Lessor's obligations thereafter to be performed,
provided that any funds in the hands of Lessor or the then grantor at the
time of such transfer, in which Lessee has an interest, shall be delivered to
the grantee. The obligations contained in this Lease to be performed by
Lessor shall, subject as aforesaid, be binding on Lessor's successors and
assigns, only during their respective periods of ownership.
18. SEVERABILITY. The invalidity of any provision of this Lease as
determined by a court of competent jurisdiction, shall in no way affect the
validity of any other provision hereof.
19. INTEREST ON PAST-DUE OBLIGATIONS. Except as expressly herein provided,
any amount due to Lessor not paid when due shall bear interest at the
maximum rate then allowable by law from the date due. Payment of such
interest shall not excuse or cure any default by Lessee under this Lease,
provided, however, that interest shall not be payable on late charges
incurred by Lessee nor on any amounts upon which late charges are paid by
Lessee.
20. TIME OF ESSENCE. Time is of the essence.
21. ADDITIONAL RENT. Any monetary obligations of Lessee to Lessor under the
terms of this Lease shall be deemed to be rent.
22. INCORPORATION OF PRIOR AGREEMENTS; AMENDMENTS. This Lease contains all
agreements of the parties with respect to any matter mentioned herein. No
prior agreement or understanding pertaining to any such matter shall be
effective. This Lease may be modified in writing only, signed by the parties
in interest at the time of the modification. Except as otherwise stated in
this Lease, Lessee hereby acknowledges that neither the real estate broker
listed in Paragraph 15 hereof nor any cooperating broker on this transaction
nor the Lessor or any employees or agents of any of said persons has made any
oral or written warranties or representations to Lessee relative to the
condition or use by Lessee of said Premises and Lessee acknowledges that
Lessee assumes all responsibility regarding the Occupational Safety Health
Act, the legal use and adaptability of the Premises and the compliance
thereof with all applicable laws and regulations in effect during the term of
this Lease except as otherwise specifically stated in this Lease.
23. NOTICES. Any notice required or permitted to be given hereunder shall be
in writing and may be given by personal delivery or by certified mail, and
if given personally or by mail, shall be deemed sufficiently given if
addressed to Lessee or to Lessor at the address noted below the signature of
the respective parties, as the case may be. Either party may by notice to the
other specify a different address for notice purposes except that upon
Lessee's taking possession of the Premises, the Premises shall constitute
Lessee's address for notice purposes. A copy of all notices required or
permitted to be given to Lessor hereunder shall be concurrently transmitted
to such party or parties at such addresses as Lessor may from time to time
hereafter designate by notice to Lessee.
24. WAIVERS. No waiver by Lessor or any provision hereof shall be deemed a
waiver of any other provision hereof or of any subsequent breach by Lessee
of the same or any other provision. Lessor's consent to, or approval of,
any act shall not be deemed to render unnecessary the obtaining of Lessor's
consent to or approval of any subsequent act by Lessee. The acceptance of rent
hereunder by Lessor shall not be a waiver of any preceding breach by Lessee
of any provision hereof, other than the failure of Lessee to pay the
particular rent so accepted, regardless of Lessor's knowledge of such
preceding breach at the time of acceptance of such rent.
25. RECORDING. Either Lessor or Lessee shall, upon request of the other,
execute, acknowledge and deliver to the other a "short form" memorandum of
this Lease for recording purposes.
26. HOLDING OVER. If Lessee, with Lessor's consent, remains in possession of
the Premises or any part thereof after the expiration of the term hereof,
such occupancy shall be a tenancy from month to month upon all the provisions
of this Lease pertaining to the obligations of Lessee, but all options and
rights of first refusal, if any, granted under the terms of this Lease shall
be deemed terminated and be of no further effect during said month to month
tenancy.
27. CUMULATIVE REMEDIES. No remedy or election hereunder shall be deemed
exclusive but shall, wherever possible, be cumulative with all other remedies
at law or in equity.
28. COVENANTS AND CONDITIONS. Each provision of this Lease performable by
Lessee shall be deemed both a covenant and a condition.
29. BINDING EFFECT; CHOICE OF LAW. Subject to any provisions hereof
restricting assignment or subletting by Lessee and subject to the provisions
of Paragraph 17, this Lease shall bind the parties, their personal
representatives, successors and assigns. This Lease shall be governed by the
laws of the State wherein the Premises are located.
30. SUBORDINATION.
(a) This Lease, at Lessor's option, shall be subordinate to any
ground lease, mortgage, deed of trust, or any other hypothecation or security
now or hereafter placed upon the real property of which the Premises are a
part and to any and all advances made on the security thereof and to all
renewals, modifications, consolidations, replacements and extensions thereof.
Notwithstanding such subordination, Lessee's right to quiet possession of the
Premises shall not be disturbed if Lessee is not in default and so long as
Lessee shall pay the rent and observe and perform all of the provisions of
this Lease, unless this Lease is otherwise terminated pursuant to its terms.
If any mortgagee, trustee or ground lessor shall elect to have this Lease
prior to the lien of its mortgage, deed of trust or ground lease, and shall
give written notice thereof to Lessee, this Lease shall be deemed prior to
such mortgage, deed of trust, or ground lease, whether this Lease is dated
prior or subsequent to the date of said mortgage, deed of trust or ground
lease or the date of recording thereof.
(b) Lessee agrees to execute any documents required to effectuate an
attornment, a subordination or to make this Lease prior to the lien of any
mortgage, deed of trust or ground lease, as the case may be. Lessee's failure
to execute such documents within 10 days after written demand shall
constitute a material default by Lessee hereunder, or, at Lessor's option,
Lessor shall execute such documents on behalf of Lessee as Lessee's
attorney-in-fact. Lessee does hereby make, constitute and irrevocably appoint
Lessor as Lessee's attorney-in-fact and in Lessee's name, place and stead, to
execute such documents in accordance with this paragraph 30(b).
31. ATTORNEY'S FEES. If either party or the broker named herein brings an
action to enforce the terms hereof or declare rights hereunder, the prevailing
party in any such action, on trial or appeal, shall be entitled to his
reasonable attorney's fees to be paid by the losing party as fixed by the
court. The provisions of this paragraph shall inure to the benefit of the
broker named herein who seeks to enforce a right hereunder.
32. LESSOR'S ACCESS. Lessor and Lessor's agents shall have the right to enter
the Premises at reasonable times for the purpose of inspecting the same,
showing the same to prospective purchasers, lenders, or lessees, and making
such alterations, repairs, improvements or additions to the Premises or to
the building of which they are a part as Lessor may deem necessary or
desirable. Lessor may at any time place on or about the Premises any ordinary
"For Sale" signs and Lessor may at any time during the last 120 days of the
term hereof place on or about the Premises any ordinary "For Lease " signs,
all without rebate of rent or liability to Lessee.
33. AUCTIONS. Lessee shall not conduct, nor permit to be conducted, either
voluntarily or involuntarily, any auction upon the Premises without first
having obtained Lessor's prior written consent. Notwithstanding anything to
the contrary in this Lease, Lessor shall not be obligated to exercise any
standard of reasonableness in determining whether to grant such consent.
34. SIGNS. Lessee shall not place any sign upon the Premises without Lessor's
prior written consent except that Lessee shall have the right, without the
prior permission of Lessor to place ordinary and usual for rent or sublet
signs thereon.
35. MERGER. The voluntary or other surrender of this Lease by Lessee, or a
mutual cancellation thereof, or a termination by Lessor, shall not work a
merger, and shall, at the option of Lessor, terminate all or any existing
subtenancies or may, at the option of Lessor, operate as an assignment to
Lessor of any or all of such subtenancies.
36. CONSENTS. Except for paragraph 33 hereof, wherever in this Lease the
consent of one party is required to an act of the other party such consent
shall not be unreasonably withheld.
37. GUARANTOR. In the event that there is a guarantor of this Lease, said
guarantor shall have the same obligations as Lessee under this Lease.
38. QUIET POSSESSION. Upon Lessee paying the rent for the Premises and
observing and performing all of the covenants, conditions and provisions on
Lessee's part to be observed and performed hereunder, Lessee shall have quiet
possession of the Premises for the entire term hereof subject to all of the
provisions of this Lease. The individuals executing this Lease on behalf of
Lessor represent and warrant to Lessee that they are fully authorized and
legally capable of executing this Lease on behalf of Lessor and that such
execution is binding upon all parties holding an ownership interest in the
Premises.
39. OPTIONS.
39.1 DEFINITION. As used in this paragraph the word "Options" has the
following meaning: (1) the right or option to extend the term of this Lease
or to renew this Lease or to extend or renew any lease that Lessee has on
other property of Lessor; (2) the option or right of first refusal to lease
the Premises or the right of first offer to lease the Premises or the right
of first refusal to lease other property of Lessor or the right of first
offer to lease other property of Lessor; (3) the right or option to purchase
the Premises, or the right of first refusal to purchase the Premises, or the
right of first offer to purchase the Premises or the right or option to
purchase other property of Lessor, or the right of first refusal to purchase
other property of Lessor or the right of first offer to purchase other
property of Lessor.
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39.2 OPTIONS PERSONAL. Each Option granted to Lessee in this Lease are
personal to Lessee and may not be exercised or be assigned voluntarily or
involuntarily, by or to any person or entity other than Lessee, provided,
however, the Option may be exercised by or assinged to any Lessee Affiliate
as defined in paragraph 12.2 of this Lease. The Options herein granted to
Lessee are not assignable separate and apart from this Lease.
39.3 MULTIPLE OPTIONS. In the event that Lessee has any multiple options
to extend or renew this Lease a later option cannot be exercised unless the
prior option to extend or renew this Lease has been so exercised.
39.4 EFFECT OF DEFAULT ON OPTIONS.
(a) Lessee shall have no right to exercise an Option,
notwithstanding any provision in the grant of Option to the contrary, (i)
during the time commencing from the date Lessor gives to Lessee a notice of
default pursuant to paragraph 13.1(b) or 13.1(c) and continuing until the
default alleged in said notice of default is cured, or (ii) during the period
of time commencing on the day after a monetary obligation to Lessor is due
from Lessee and unpaid (without any necessity for notice thereof to Lessee)
continuing until the obligation is paid, or (iii) at any time after an event
of default described in paragraphs 13.1(a), 13.1(d), or 13.1(e) (without any
necessity of Lessor to give notice of such default to Lessee), or (iv) in the
event that Lessor has given to Lessee three or more notices of default under
paragraph 13.1(b), where a late charge has become payable under paragraph
13.4 for each of such defaults, or paragraph 13.1(c), whether or not the
defaults are cured, during the 12 month period prior to the time that Lessee
intends to exercise the subject Option.
(b) The period of time within which an Option may be exercised shall
not be extended or enlarged by reason of Lessee's inability to exercise an
Option because of the provisions of paragraph 39.4(a).
(c) All rights of Lessee under the provisions of an Option shall
terminate and be of no further force or effect, notwithstanding Lessee's due
and timely exercise of the Option, if, after such exercise and during the
term of this Lease, (i) Lessee fails to pay to Lessor a monetary obligation
of Lessee for a period of 30 days after such obligation becomes due (without
any necessity of Lessor to give notice thereof to Lessee), or (ii) Lessee
fails to commence to cure a default specified in paragraph 13.1(c) within 30
days after the date that Lessor gives notice to Lessee of such default and/or
Lessee fails thereafter to diligently prosecute said cure to completion, or
(iii) Lessee commits a default described in paragraph 13.1(a). 13.1(d) or
13.1(e) (without any necessity of Lessor to give notice of such default to
Lessee), or (iv) Lessor gives to Lessee three or more notices of default
under paragraph 13.1(b), where a late charge becomes payable under paragraph
13.4 for each such default, or paragraph 13.1(c), whether or not the defaults
are cured.
40. MULTIPLE TENANT BUILDING. In the event that the Premises are part of a
larger building or group of buildings then Lessee agrees that it will abide
by, keep and observe all reasonable rules and regulations which Lessor may
make from time to time for the management, safety, care, and cleanliness of
the building and grounds, the parking of vehicles and the preservation of
good order therein as well as for the convenience of other occupants and
tenants of the building. The violations of any such rules and regulations
shall be deemed a material breach of this Lease by Lessee.
41. SECURITY MEASURES. Lessee hereby acknowledges that the rental payable to
Lessor hereunder does not include the cost of guard service or other security
measures, and that Lessor shall have no obligation whatsoever to provide
same. Lessee assumes all responsibility for the protection of Lessee, its
agents and invitees from acts of third parties.
42. EASEMENTS. Lessor reserves to itself the right, from time to time, to
grant such easements, rights and dedications that Lessor deems necessary or
desirable, and to cause the recordation of Parcel Maps and restrictions, so
long as such easements, rights, dedications, Maps and restrictions do not
unreasonably interfere with the use of the Premises by Lessee. Lessee shall
sign any of the aforementioned documents upon request of Lessor and failure
to do so shall constitute a material breach of this Lease.
43. PERFORMANCE UNDER PROTEST. If at any time a dispute shall arise as to any
amount or sum of money to be paid by one party to the other under the
provisions hereof, the party against whom the obligation to pay the money is
asserted shall have the right to make payment "under protest" and such payment
shall not be regared as a voluntary payment, and there shall survive the
right on the part of said party to institute suit for recovery of such sum.
If it shall be adjudged that there was no legal obligation on the part of said
party to pay such sum or any part thereof, said party shall be entitled to
recover such sum or so much thereof as it was not legally required to pay
under the provisions of this Lease.
44. AUTHORITY. If Lessee is a corporation, trust, or general or limited
partnership, each individual executing this Lease on behalf of such entity
represents and warrants that he or she is duly authorized to execute and
deliver this Lease on behalf of said entity. If Lessee is a corporation,
trust or partnership, Lessee shall, within thirty (30) days after execution
of this Lease, deliver to Lessor evidence of such authority satisfactory to
Lessor.
45. CONFLICT. Any conflict between the printed provisions of this Lease and
the typewritten or handwritten provisions shall be controlled by the
typewritten or handwritten provisions.
46. INSURING PARTY. The insuring party under this lease shall be the Lessee.
47. ADDENDUM. Attached hereto is an addendum or addenda containing paragraphs
51 through 52 which constitutes a part of this Lease.
48. OCCUPANCY: Should any governmental authority require any additional
improvements because of the Lessee's occupancy, other than that which is
stated in this Lease, it shall be at the Lessee's own expense.
49. VANDALISM: Lessee agrees, at Lessee's expense, to maintain in full force
for the term of this lease, a policy of burglary insurance which will insure
Lessor against any damage to the demised premises as the result of break-in
or attempted break-in.
50. This Lease shall replace the Lease dated April 10, 1987 and addendum
dated August 25, 1988. This Lease shall go into effect and become binding at
the time the above mentioned lease and addendum are assigned to Kay K. Sagara.
See addendum attached hereto and incorporated herein, which provides for
changes and additions to this Lease. The Addendum is hereby construed to be
an integral and material part of this Lease.
LESSOR AND LESSEE HAVE CAREFULLY READ AND REVIEWED THIS LEASE AND EACH TERM
AND PROVISION CONTAINED HEREIN AND, BY EXECUTION OF THIS LEASE, SHOW THEIR
INFORMED AND VOLUNTARY CONSENT THERETO. THE PARTIES HEREBY AGREE THAT, AT THE
TIME THIS LEASE IS EXECUTED, THE TERMS OF THIS LEASE ARE COMMERCIALLY
REASONABLE AND EFFECTUATE THE INTENT AND PURPOSE OF LESSOR AND LESSEE WITH
RESPECT TO THE PREMISES.
IF THIS LEASE HAS BEEN FILLED IN IT HAS BEEN PREPARED FOR SUBMISSION TO YOUR
ATTORNEY FOR HIS APPROVAL. NO REPRESENTATION OR RECOMMENDATION IS MADE BY THE
AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION OR BY THE REAL ESTATE BROKER OR ITS
AGENTS OR EMPLOYEES AS TO THE LEGAL SUFFICIENCY, LEGAL EFFECT, OR TAX
CONSEQUENCES OF THIS LEASE OR THE TRANSACTION RELATING THERETO; THE PARTIES
SHALL RELY SOLELY UPON THE ADVICE OF THEIR OWN LEGAL COUNSEL AS TO THE LEGAL
AND TAX CONSEQUENCES OF THIS LEASE.
THE PARTIES HERETO HAVE EXECUTED THIS LEASE AT THE PLACE ON THE DATES
SPECIFIED IMMEDIATELY ADJACENT TO THEIR RESPECTIVE SIGNATURES.
Executed at Woodland, California Kay K. Sagara
-------------------------------- --------------------------------
on By /s/ Kay K. Sagara
----------------------------------------- ------------------------------
Address P.O. Box 1345 By
------------------------------------- ------------------------------
Woodland, CA 95695
- -------------------------------------------- "LESSOR" (Corporate seal)
Executed at Woodland, California Valley Records Company
--------------------------------- --------------------------------
on 10-12-88 By /s/ Barnet J. Cohen
------------------------------------------ ------------------------------
Address 1280 Santa Anita Court By
------------------------------------- ------------------------------
Woodland, California 95695
- -------------------------------------------- "LESSEE" (Corporate seal):
FOR THESE FORMS WRITE OR CALL THE AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION,
345 SOUTH FIGUEROA ST., M-1, LOS ANGELES, CA 90071
(213) 687-8777 FORM 204N 780
<PAGE>
ADDENDUM TO LEASE
51. TENANT IMPROVEMENTS.
The Lessee intends to make improvements to the building including but not
limited to insulating the entire West wall of the building (excepting the
office area wall), construct a covered patio area, add 5,000 square feet of
office space including bathrooms and install skylights and roof insulation
in the North warehouse section of the building. The Lessee shall provide
the Lessor a copy of the proposed detailed plans and costs.
52. TENANT IMPROVEMENT COSTS.
Upon completion of the above improvements the Lessor will pay to the
Licensed General Contractor responsible for said improvements, an amount
not to exceed One Hundred and Fifty Thousand Dollars ($150,000.00). The
actual amount paid by the Lessor for the Tenant Improvements shall be
returned to the Lessor by the Lessee paying additional rent amortized over
a four (4) year period including twelve (12%) percent interest. EXAMPLE: If
the Tenant Improvements cost is One Hundred and Fifty Thousand Dollars
($150,000.00), the rent increase beginning upon Lessor's payment for the
Tenant Improvements, will be Three Thousand Nine Hundred and Fifty Dollars
and Seven Cents ($3,950.07) per month for forty eight (48) months.
LESSOR: LESSEE:
KAY K. SAGARA BARNEY COHEN/VALLEY RECORDS
BY: /s/ Kay K. Sagara BY: /s/ Barnet J. Cohen
--------------------------- ---------------------------
DATE: 11/17/88 DATE: 10-12-88
------------------------- -------------------------
<PAGE>
SECOND ADDENDUM TO LEASE
This Addendum relates to that certain Lease dated October 6, 1988, between
KAY K. SAGARA ("Lessor") and VALLEY RECORDS--BARNEY COHEN ("Lessee"), the term
of which was originally scheduled to begin November 1, 1988, and which was
executed by BARNEY COHEN on October 12, 1988 (the "Lease").
RECITALS
A. Lessor is the owner of the premises described in paragraph 2 of the
Lease (the "Premises").
B. Lessor has leased the Premises to PANATTONI, OATES & MASSIE
DEVELOPMENT COMPANY, a general partnership ("Panattoni"), pursuant to a lease
dated June 20, 1986, and expiring on June 30, 1991 (the "Master Lease").
C. Lessee is the Subtenant under a Sublease dated April 10, 1987,
pursuant to which PANATTONI DEVELOPMENT COMPANY subleased approximately 41,600
square feet of the Premises to Lessee for a term commencing on June 1, 1987, and
ending on June 30, 1991 (the "Sublease").
D. Pursuant to paragraph 54 of the Master Lease, Lessor has the right to
terminate the Master Lease upon 30 days' written notice to Panattoni. In such
event, the Sublease shall be assigned by Panattoni to Lessor without
consideration except for the proration of commissions.
E. Pursuant to paragraph 57 of the Master Lease, in the event the
Sublease has tenant improvements amortized beyond the
<PAGE>
termination of the Master Lease, Lessor may reimburse Panattoni for the
unamortized principal of such tenant improvements or may continue to amortize
such payments until the principal of such tenant improvements has been paid in
full.
F. Subject to Lessor's termination of the Master Lease and the
assignment of the Sublease by Panattoni to Lessor, Lessor and Lessee desire
to terminate the Sublease and to enter into the Lease effective December 1,
1988.
ADDENDUM
1. DEPOSIT. Lessee represents and warrants to Lessor that Lessee has
deposited a security deposit with Panattoni pursuant to the Sublease in the
amount of Eleven Thousand Seven Hundred Fifty Dollars ($11,750). Lessor agrees
to give Lessee credit for such deposit against the security deposit required
under paragraph 5 of the Lease immediately upon Lessor's receipt of such deposit
from Panattoni.
2. TENANT IMPROVEMENTS.
A. Lessee represents and warrants to Lessor that Panattoni made
tenant improvements pursuant to the Sublease in the amount of Three Hundred
Thousand Dollars ($300,000), which tenant improvements are being amortized over
forty-four (44) months at the rate of Six Thousand Eight Hundred Eighteen and
18/100ths Dollars ($6,818.18) per month.
B. Lessee further represents and warrants to Lessor that twelve (12)
payments of Six Thousand Eight Hundred Eighteen and 18/100ths Dollars
($6,818.18) have been made by Lessee to Panattoni through October 1, 1988, and
that Lessee shall make an
- 2 -
<PAGE>
additional payment of Six Thousand Eight Hundred Eighteen and 18/100ths Dollars
($6,818.18) to Panattoni on November 1, 1988.
C. Lessee further represents and warrants to Lessor that no
additional tenant improvements have been made by Panattoni on behalf of Lessee
pursuant to the Sublease, and that upon payment of thirty-two (32) additional
payments of Six Thousand Eight Hundred Eighteen and 18/100ths Dollars
($6,818.18) to Panattoni, the tenant improvements made to the Premises pursuant
to the Sublease will have been fully amortized.
D. Lessor agrees to pay to Panattoni from the rent received under
paragraph 4 of the Lease the sum of Six Thousand Eight Hundred Eighteen and
18/100ths Dollars ($6,818.18) commencing on December 1, 1988, and terminating on
June 1, 1991, in payment of Lessee's obligation to amortize Lessee's tenant
improvements pursuant to the Sublease.
3. STATUS OF SUBLEASE. Lessee represents and warrants to Lessor that
neither Lessee nor Panattoni is in default under the Sublease.
In all other respects, the Lease executed by Lessee on October 6, 1988,
shall remain in full force and effect.
DATED: 10-18, 1988.
/s/ Barnet J. Cohen
----------------------------------------
BARNEY COHEN/VALLEY RECORDS
/s/ Kay K. Sagara
----------------------------------------
KAY K. SAGARA
- 3 -
<PAGE>
TENANT'S OFFSET AND ESTOPPEL CERTIFICATE
AND PARTIAL AMENDMENT OF LEASE
THIS AGREEMENT is entered into by and between BETTY KUHN ("Buyer"), KAY
SAGARA ("Lessor"), and VALLEY RECORDS - BARNEY COHEN ("Lessee"), with respect to
that certain lease between Lessor and Lessee dated October 6, 1988, covering
those premises commonly known as 1280 Santa Anita Court, Woodland, California,
consisting of a 63,720 square foot warehouse and office space and parking spaces
for 95 cars (the "Lease").
Lessor intends to sell the above described real property and the
improvements thereon to Buyer. Lessee makes the following representations and
agreements for the benefit and protection of Buyer, with the understanding and
intent that Buyer will rely upon Lessee's representations and agreements in
purchasing such real property and improvements and in taking an assignment of
Lessor's interest under the Lease. Lessor, Buyer and Lessee also
desire to amend the Lease to clarify the understanding of the parties as to
several provisions of the Lease, and enter into this Agreement to do so. Lessor,
Buyer and Lessee agree that the terms of this Agreement shall bind the parties
effective upon Buyer's purchase of the real property from Lessor. Lessee hereby
certifies and represents to Buyer, its attorneys and representatives, with
respect to the Lease as follows:
1. Lessee is in full and complete possession of the premises covered by
the Lease (the "Premises"). Lessee accepts and hereby ratifies the determination
of the square footage of the Premises provided in the Lease. Lessee acknowledges
and agrees that the Lease does not include the
<PAGE>
unimproved property west of the existing parking lot, which unimproved property
consists of approximately 3.07 acres (the "Unimproved Property"), and that
Lessee has no rights to use or occupy such Unimproved Property.
2. All space and improvements covered by the Lease have been completed
and furnished in accordance with provisions of the Lease and to the satisfaction
of Lessee, and Lessee has fully accepted the Premises.
3. Lessor has satisfied all commitments, arrangements, lease buy-outs or
understandings made to induce Lessee to enter into the Lease (including, without
limitation, any and all commitments, arrangements, lease buy-outs or
understandings in connection with the substitution of the Lease for the prior
lease dated April 10, 1987, and addendum dated August 25, 1988, which prior
lease and addendum Lessee hereby acknowledges and agrees have terminated), and
Lessor is not in default in any way in the performance of the terms and
provisions of the Lease, nor is there now any fact or condition which, with
notice or the passage of time, or both, would become such a default.
4. Lessee is not in default in any way under the terms and provisions of
the Lease, nor are there any facts or conditions which, with notice or the
passage of time, or both, would become such a default.
5. Lessee has not assigned, sublet, transferred or hypothecated Lessee's
interest under the Lease.
6. The copy of the Lease that is attached hereto as Exhibit A with each
page initialled by the undersigned, is for a total term of ninety-six (96)
months commencing November 1, 1988, and ending on October 31, 1996, and has not
been modified, altered or amended in any respect and contains the entire
agreement between Lessor and Lessee except as follows:
-2-
<PAGE>
A. The current replacement value of the improvements on the
Premises, for the purposes of the insurance policy or policies required by
Section 8.3(a) of the Lease, is ONE MILLION SEVEN HUNDRED THOUSAND DOLLARS
($l,700,000);
B. Pursuant to Sections 51 and 52 of the Lease, Lessee shall cause
certain improvements to be made to the Premises (including, without
limitation, insulation of the entire west wall of the building excepting
the office area wall, construction of a covered patio area, addition of
5,000 square feet of office space, construction of bathrooms, and
installation of skylights and roof insulation in the north warehouse
section of the building) pursuant to the plans and specifications for such
improvements that Lessee shall prepare or obtain. Such plans and
specifications must be approved by Lessor (or, if not approved before
Buyer's purchase of the Premises, then by Buyer) before the commencement of
any work. The Lease requires Lessor to pay directly to the licensed general
contractor making such improvements an amount not to exceed ONE HUNDRED
FIFTY THOUSAND DOLLARS ($150,000) for such improvements, and Lessee hereby
agrees that Lessee shall be solely responsible for all design, construction
and material costs and expenses incurred for such improvements that exceed
the ONE HUNDRED FIFTY THOUSAND DOLLARS ($150,000) to be paid by Lessor. If
and when Buyer purchases the Premises from Lessor, Buyer, as Lessor's
successor under the Lease, shall be responsible for paying the up to ONE
HUNDRED FIFTY THOUSAND DOLLARS ($150,000) required to be paid by Lessor,
which Buyer shall pay as follows: (1) Buyer shall pay FIFTY THOUSAND
DOLLARS ($50,000) on March 1, 1989, by check made payable jointly to
-3-
<PAGE>
Lessee and to the licensed general contractor making such improvements; (2)
Buyer shall pay the second FIFTY THOUSAND DOLLARS ($5O,OOO) on April 1,
1989, by check made payable jointly to Lessee and to the general contractor
making such improvements; and (3) Buyer shall pay the final payment of up
to FIFTY THOUSAND DOLLARS ($5O,OOO) for such improvements by check made
payable jointly to Lessee and to the general contractor making such
improvements when both (a) the City of Woodland and Lessee have
acknowledged their final acceptance and approval of all of the
improvements, and (b) satisfactory waivers of all mechanic's liens and
other lien rights have been delivered to Buyer from all contractors,
subcontractors and material suppliers, or the time for filing such liens
has expired. The amount actually paid by Buyer for such improvements (the
"TI Cost") shall be repaid, with interest at the rate of twelve percent
(12%) per annum, by Lessee as additional rent over forty-eight (48) months
pursuant to Section 52 of the Lease. Lessee hereby agrees that if the Lease
terminates for any reason before Lessee has fully repaid the TI Cost, the
entire unpaid principal balance of the TI Cost and all accrued interest
thereon shall become immediately due and payable. Lessee hereby agrees that
Lessee shall not permit any lien or encumbrance to be placed upon the
Premises as a result of or in connection with Lessee's obligation to pay
for Lessee's share of the cost of the design, construction or materials for
such improvements, and shall indemnify, defend, and hold Buyer and the
Premises harmless therefrom;
C. Lessee is hereby granted the option to extend the term of the
Lease on the same terms and
-4-
<PAGE>
conditions as set forth therein (as modified hereby) excepting only the
rental rate, for one (1) additional period of five (5) years (the "Extended
Term") by giving written notice of Lessee's exercise of this option to
Buyer at least one hundred eighty (180) days prior to the expiration of the
initial lease term provided in the Lease, provided, however, that if Lessee
is in default on the date of giving notice of the exercise of the option,
or if Lessee is in default on the date that the Extended Term is to
commence, the Extended Term shall not commence and the Lease shall expire
at the end of the initial term. The rental rate during the Extended Term
shall be the then current market rent. Lessee and Buyer shall agree upon
the then current market rent within thirty (30) days after Lessee gives
Lessee's notice exercising the option to extend the term of the Lease. In
the event that they are unable to agree as to the then current market rent
within such time, Lessee and Buyer shall each select and retain an MAI
appraiser within fifteen (15) days thereafter. The two appraisers shall
mutually attempt to reach an agreement as to the then current market rent.
In the event that the two appraisers are not able to reach an agreement as
to the then current market rent within thirty (30) days after the last of
such two appraisers is retained, the two appraisers shall select and retain
a third MAI appraiser who shall unilaterally determine the then current
market rent. The determination of the appraiser(s) shall be final, binding
and conclusive upon Lessee and Buyer, and the cost and expense of retaining
the appraisers shall be shared equally by Lessee and Buyer; and
-5-
<PAGE>
D. Lessee is hereby granted a right of first refusal to lease and
develop the remaining approximately 3.07 acres described in Section 1 above
as the "Unimproved Property." The term of the right of first refusal
granted hereby shall commence upon Buyer's purchase of the Premises and the
Unimproved Property and shall terminate one hundred eighty (180) days prior
to the expiration of the initial term of the Lease or upon the sooner
termination of the Lease for any reason. During the term of this right of
first refusal, Buyer shall give Lessee written notice whenever Buyer
receives a bona fide offer to lease and develop the Unimproved Property,
and Lessee shall have ten (10) working days thereafter in which to notify
Buyer in writing that Lessee shall exercise Lessee's right to lease and
develop the Unimproved Property on the same terms and conditions specified
in Buyer's notice. If Lessee does not deliver such notice to Buyer, Buyer
shall be free to enter into a lease with any other person or entity on the
terms and conditions specified in Buyer's notice and the right of first
refusal granted herein shall terminate; provided, however, that if a lease
is not entered into on the same terms and conditions specified in the
notice given by Buyer to Lessee, Lessee's right of first refusal shall not
be terminated and Buyer shall be required to give Lessee a new notice and a
new opportunity to exercise Lessee's right of first refusal in the matter
specified above before leasing the Unimproved Property on different terms.
7. As of the date of this Offset and Estoppel Certificate, the annual
base rent under the Lease is FIFTEEN THOUSAND THREE HUNDRED FORTY-NINE DOLLARS
($15,349), and Lessee is current in the payment of rent to
-6-
<PAGE>
Lessor. The amount of the base annual rent will not decrease at any time during
the term of the Lease. In addition to the base rent, Lessee pays all maintenance
costs and expenses (and is responsible for performing all maintenance and
repairs) and for all utilities and services supplied to the Premises, all
personal property taxes on Lessee's personal property, and all real property
taxes, assessments and payments on bonds for that portion of the real property
occupied by the Premises (i.e., (a) one-half (1/2) of all real property taxes,
assessments and payments on bonds levied against the entire real property of
which the Premises are a part, and (b) all taxes on the building and all other
improvements located on the real property). The annual base rent does not
include the additional rent Lessee shall pay to repay the TI Cost, as described
in subparagraph 6B above.
8. There are no offsets or credits against annual base rent, additional
rent or any other payments payable by Lessee under the Lease, and Lessee has not
made any payment to Lessor as advance or prepaid rent, although Lessee has paid
to Lessor a security deposit of FIFTEEN THOUSAND THREE HUNDRED FORTY-NINE
DOLLARS ($15,349) pursuant to Section 5 of the Lease.
9. Notwithstanding the provisions of Section 39 (including subsections
39.1 through and including 39.4) of the Lease, Lessee does not have (a) any
option or other right to renew or extend the term of the Lease, (b) any option
or preferential right to purchase all or any part of the Premises or all or any
part of the real property of which the Premises are a part, or (c) any right,
title, or interest with respect to the Premises other than as Lessee under the
Lease. There are no understandings, contracts, agreements or commitments of any
kind whatsoever with
-7-
<PAGE>
respect to the Lease for the Premises, except as expressly provided in the Lease
or as set forth in paragraph 6 above.
10. The Lease is in full force and effect. Lessee has no defenses,
setoffs, counterclaims or credits against Lessor or against the payments
required to be made by Lessee under the Lease, including, without limitation,
defenses, offsets, counterclaims or credits arising out of the Lease or the
operation or maintenance of the Premises or of the real property of which the
Premises are a part or in any way relating thereto or arising out of any other
transaction between Lessee and either Lessor or Panattoni, Oates & Massie
Development Company, a general partnership. Lessee waives any and all claims it
might have against Lessor or Buyer (as Lessor's successor as to Lessor's
interest in the Lease and the Premises) which arise out of any acts or omissions
of Lessor or Panattoni, Oates & Massie Development Company, a general
partnership, arising prior to the date of this Offset and Estoppel Certificate,
including, without limitation, the computation, allocation and charging of any
or all costs and expenses to Lessee, and Lessee hereby certifies that such costs
and expenses have been properly computed, allocated and charged.
11. Lessee has received no notice of a prior sale, transfer, assignment,
hypothecation or pledge of the Lease or of the rents or other payments required
to be made thereby.
12. Lessee represents and warrants to Buyer that Lessee has not caused or
permitted any hazardous or toxic material, substance or waste, to be used,
stored, brought upon, disposed of or created on the Premises or the real
property of which the Premises are a part, and Lessee hereby agrees to
indemnify, defend and hold Buyer harmless from any and all claims, judgments,
damages, penalties, fines, costs, liabilities or losses (including, without
-8-
<PAGE>
limitation, diminution in value of the Premises, damages arising from loss of
use of all or any part of the Premises or of such real property, and sums paid
in settlement of claims, attorneys' fees, consultant fees and expert fees) that
arise during or after the term of this Lease as a result of either breach by
Tenant of the above representation and warranty or contamination of such real
property by hazardous or toxic materials, substances or wastes for which Lessee
is legally liable. For the purposes of this paragraph, the terms "hazardous or
toxic material, substance or waste" shall mean any hazardous or toxic material,
substance or waste which is or becomes regulated by any local, state or federal
law, statute, act, ordinance, regulation or rule.
DATED: 2/1, 1989.
LESSEE:
VALLEY RECORDS COMPANY
By /s/ Barnet J. Cohen
---------------------------------
Its President
--------------------------------
-----------------------------------
BARNEY COHEN
LESSOR:
/s/ Kay K. Sagara
-----------------------------------
KAY K. SAGARA
/s/ Shuny H. Sagara
-----------------------------------
SHUNY H. SAGARA
-- AND --
-9-
<PAGE>
YOLO PROPERTIES, INC., a California
corporation
By /s/ Yolo Properties
---------------------------------
Its
--------------------------------
BUYER:
/s/ Betty Kuhn
-----------------------------------
BETTY KUHN
By Barbara McNairn
Attorney In Fact
-10-
<PAGE>
ADDENDUM TO LEASE
This Addendum to Lease is dated the 21st of May, 1992, and herewith made part of
that certain Lease dated October 6, 1988, by and between Kay K. Sagara,
Landlord, and Barney Cohen, Valley Record Distributors, Inc., Tenant. Betty Kuhn
is recognized as the successor to the original lessor pursuant to that certain
Tenant's Offset and Estoppel Certificate and Partial Amendment of Lease dated
February 1, 1989.
It is agreed that should there be any conflict between the provisions of this
Addendum to Lease and the provisions of said Lease, the provisions of this
Amendment to Lease shall prevail.
SECTION 3: TERM
The Lease shall be extended to a term consistent with the terms contained in the
Lease for the Pacific Grain Building, executed between Panatonni Development
Company as Landlord and Valley Record Distributors, Inc., as Tenant. The
extended lease term shall begin November 1, 1996, and run through May 31, 2003.
Tenant reserves the right to terminate this extension should the Pacific Grain
Lease be terminated.
SECTION 4: RENT
Lessee shall pay to Lessor as rent for the premises monthly payments of
$16,623.00 in advance, on the first day of each month of the extension of the
term.
SECTION 7: MAINTENANCE, REPAIRS AND ALTERATIONS
7.4 Lessor's Obligations
Lessor will be responsible for replacing the roof prior to October 1, 1993.
The parties hereto have executed this Amendment to Lease on the day and year
first written above.
"Landlord" Betty Kuhn
By: /s/ Betty Kuhn
-------------------------------
"Tenant" Valley Record Distributors, Inc.
By: /s/ Robert R. Cain
-------------------------------
<PAGE>
BUILD-TO-SUIT FACILITY
ABSOLUTE NET LEASE
ARTICLE ONE: BASIC TERMS
This Article One contains the Basic Terms of this Lease between the
Landlord and Tenant named below. Other Articles, Sections and Paragraphs of the
Lease referred to in this Article One explain and define the Basic Terms and
are to be read in conjunction with the Basic Terms.
Section 1.01. DATE OF LEASE: October 3, 1989.
Section 1.02. LANDLORD: CARL D. PANATTONI
Address of Landlord:
7728 Wilbur Way, Suite A
Sacramento, California 95828
Section 1.03. TENANT: PACIFIC RICE PRODUCTS, INC., A CALIFORNIA
CORPORATION
Address of Tenant:
1250 Harter Avenue
Woodland, California, 95695
Section 1.04. PROPERTY: An approximately but not greater than 60,000
square foot building located on the northernmost 5.65 PLUS OR MINUS acre
portion of Assessor's Parcel Number 27-045-55 located on Santa Anita Court
together with easements for ingress and egress to and from the building to
the nearest public highway(s), and easement for parking purposes in
accordance with Section 1.12, in Yolo County, California further described in
Exhibit "A".
Section 1.05. LEASE TERM: Ten (10) years, COMMENCING UPON SUBSTANTIAL
COMPLETION, or such other date as is specified in this Lease, and ENDING ON MAY
31, 2000.
Section 1.06. PERMITTED USES: (See Section 5.01). Any reasonable and legal
use consistent with current zoning, Tenant's current business and which is
permitted by reason of any laws, rules and regulations of local, state and
Federal governments, districts, agencies, commissions and boards, and other
standard and rule-making bodies.
Initials
-----
-----
1
<PAGE>
Section 1.07. LANDLORD'S BROKER: (See Article Fourteen) Landlord has not
entered into an agreement for payment of commissions currently or in arrears to
any broker.
Section 1.08. TENANT'S BROKER: (See Article Fourteen) Tenant has not
entered into an agreement for payment of commissions currently or in arrears to
any broker.
Section 1.09. COMMISSION PAYABLE TO BROKERS: (See Article Fourteen) In
conjunction with the above Sections 1.08 and 1.09, no agreements exist for
commissions payable to brokers.
Section 1.10. INITIAL SECURITY DEPOSIT: [See Paragraphs 3.03 and 13.03
(c)] Thirteen Thousand Five Hundred Thirty Dollars Even ($13,530.00).
Section 1.11. VEHICLE PARKING SPACES ALLOCATED TO TENANT: at lease
fifty-two (52) spaces, including visitor parking, or per applicable Code.
Section 1.12. RENT AND OTHER CHARGES PAYABLE BY TENANT: (a) BASE RENT:
Thirteen Thousand Five Hundred Thirty Dollars Even ($13,530.00) per month for
the first sixty (60) months, as provided in Section 3.01, and shall be increased
to Fifteen Thousand Nine Hundred Thirty Dollars Even ($15,930.00) for months 61
through 120 after the Commencement Date; (b) OTHER PERIODIC PAYMENTS: (i) Real
Property Taxes (See Section 4.02) ; (ii) Utilities (See Section 4.03) ; (iii)
Insurance Premiums. (See Section 4.04) ; Multiple Tenant Buildings (See Section
4.05) and other such payment that are required of a triple net tenant.
Section 1.13. DESCRIPTION AND CONSTRUCTION OF IMPROVEMENTS BY LANDLORD:
(a) DESCRIPTION OF IMPROVEMENTS. Landlord shall at Landlord's expense
construct certain improvements on or about the property (the "Work") in
accordance with certain plans and specifications to be prepared by Landlord for
approval by Tenant, a summary of which is attached hereto as Exhibit "B" ("Plans
a Specifications").
(b) COMPLETION OF THE WORK. Landlord shall use all reasonable efforts to
complete as promptly as possible the work described in Exhibit "B" prior to
the scheduled commencement date set forth in Section 1.05 of the Lease.
Notwithstanding the date set forth in Section 1.05, the commencement date shall
be the date upon which the work is substantially completed and the Property and
completed improvements are delivered to Tenant. For the purposes of this
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Lease, the work shall be conclusively deemed to be substantially completed when
all work described in the final plans is completed except for minor items of
work, e.g. pickup work which can be completed with only minor interference with
Tenant's conduct of business on the property. If Landlord fails to deliver
possession of the Property with the improvements completed within ninety (90)
days of the date set forth in Section 1.05 hereof, Landlord shall be in default
hereunder unless such delay is directly caused by the acts of Tenant or Force
Majeure.
(c) CHANGES. Except as otherwise provided in Section 15.16, Landlord's
obligation to prepare the property for Tenant's occupancy is limited to
completion of the work set forth in Exhibit "B". If Tenant requests any change,
addition, or alternation ("Changes") in such plans and specifications or in the
construction of the work, Landlord shall promptly give Tenant an estimate of the
cost of such changes and the resulting delay in the delivery of the property to
Tenant. Within three (3) days after receipt of such estimates, Tenant shall give
Landlord written notice of whether or not Tenant elects to proceed with such
changes. If Tenant fails to notify Landlord in writing, Landlord at its election
may either:
1. Make such changes at Tenant's expense; or
2. Complete the work without making such changes. Tenant shall pay or
reimburse Landlord for the cost of such changes within thirty (30) days after
billing. Any delay caused by Tenant's request for any changes or from the
construction of any changes shall not in any event delay the Commencement Date
which shall occur on the date it would have occurred but for such changes. The
work shall be the property of Landlord and shall remain upon and be surrendered
with the property upon the expiration of the Lease term.
(d) OPTION TO CANCEL. Both Tenant and Landlord recognize that this Lease
has been executed prior to Tenant's approval of plans and specifications. Tenant
also recognizes that Landlord will be incurring substantial costs to expedite
the construction of the building. Tenant shall have the right to cancel this
contract anytime prior to approving plans and specifications. If Tenant does
cancel this contract, Tenant shall reimburse Landlord for all documented
reasonable expenses.
ARTICLE TWO: LEASE TERM
Section 2.01. LEASE OF PROPERTY FOR LEASE TERM. Landlord leases the
Property to Tenant and Tenant leases the Property from Landlord for the Lease
Term. The Lease Term is for the period stated in Section 1.05 above and shall
begin and end on the dates specified in Section 1.05 above, unless the beginning
or end of
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the Lease Term is changed under any provision of this Lease, in which case the
expiration of the Lease Term shall be adjusted accordingly. The "Commencement
Date" shall be the date specified in Section 1.05 above for the beginning of the
Lease Term, unless advanced or delayed under any provision of this Lease, in
which case the expiration of the Lease Term shall be adjusted accordingly,
however payment of the first (1st) month's Base Rent under Paragraph 1.12 and
the Initial Security Deposit under Paragraph 1.10 shall occur upon execution of
the Lease.
Section 2.02. DELAY IN COMMENCEMENT. Landlord shall not be liable to
Tenant if Landlord does not deliver possession of the Property to Tenant on the
first date specified in Section 1.05 above. Landlord's non-delivery of the
Property to Tenant on that date shall not affect this Lease or the obligations
of Tenant under this Lease. However, the Commencement Date shall be delayed
until possession of the Property is delivered to Tenant. The Lease Term shall be
extended for a period equal to the delay in delivery of possession of the
Property to Tenant, plus the number of days necessary to end the Lease Term on
the last day of a month. If Landlord does not deliver possession of the Property
to Tenant within ninety (90) days after the date first specified in Section 1.05
above, Tenant may elect to cancel this Lease by giving written notice within
thirty (30) days after the 90-day period ends. If Tenant give such notice, the
Lease shall be canceled and neither Landlord nor Tenant shall have any further
obligations to the other. If Tenant does not give such notice, Tenants' right to
cancel the Lease shall expire and the Lease Term shall commence upon the
delivery of possession of the Property to Tenant. If delivery of possession of
the Property to Tenant is delayed, Landlord and Tenant shall, upon such
delivery, execute an amendment to this Lease setting forth the Commencement Date
and expiration date of the Lease. Tenant's aforementioned right to cancel and
the effect of any other delays in commencement shall be subject to Section
15.05(a) regarding "Force Majeure."
Section 2.03. EARLY OCCUPANCY. If Tenant occupies the Property prior to
the Commencement Date except if such occupancy is reasonably necessary in
connection with any preparation of the Property by Tenant for Tenant's
occupancy, and provided Tenant does not interfere with Landlord's work in
progress or construction, and further provided that Tenant use the utmost care
for the safety of its employees and agents and others on the Property in
allowing then early occupancy of the Property (failure to adhere to the above
provisions shall terminate any right Tenant has to early occupancy), Tenant's
occupancy of the Property shall be subject to all of the provisions of this
Lease. Early occupancy Of the Property shall not advance the expiration date of
this Lease.
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Section 2.04. HOLDING OVER. Tenant shall vacate the Property upon the
expiration or earlier termination of the Lease. Tenant shall reimburse Landlord
for and indemnify Landlord against all damages incurred by Landlord resulting
from any delay by Tenant in vacating the Property. If Tenant does not vacate the
Property upon the expiration or earlier termination of the Lease and Landlord
thereafter accepts rent from Tenant, Tenant's occupancy of the Property shall
be a "month-to-month" tenancy, subject to all of the terms of this Lease
applicable to a month-to-month tenancy, except that the Base Rent then in effect
shall be increased by twenty-five percent (25%).
Section 2.05. OPTION TO RENEW. Lessee shall have the option to renew this
Lease for two (2) additional five (5) year periods provided Lessee has complied
with each of the following conditions: (1) At the time of exercise of the option
in accordance with the notification provisions set forth hereinbelow, Lessee is
not in default of any of the terms and conditions of this Lease; and (2) Lessee
has not been in default of any term or condition of this Lease within the four
(4) month period immediately preceding the required notification of exercise.
Lessee must exercise its option to renew by giving written notice ninety (90)
days prior to expiration of this Lease of its intention to extend for each of
the additional five (5) year periods. All the terms and conditions shall remain
the same with the exception of rent, which shall be ninety-five percent (95%) of
the Fair Market Rent. For purposes hereof, "Fair Market Rent" shall mean the
first year's effective rental rates then being received for like premises in
like buildings in the area for leases of approximately five years and on
otherwise substantially similar terms of this Lease. For purposes hereof,
adjustments to such effective rental rates applicable after the first year of
the term shall not be taken into account in determining Fair Market Rent.
Landlord and Tenant shall have thirty (30) days after Tenant notifies Landlord
of the exercise of its Option to Extend in which to agree to the Fair Market
Rent.
If the parties cannot agree to the Fair Market Rent within such thirty (30)
day period, each party shall appoint an Appraiser (hereinafter defined) and
shall give notice to the other party of the identity of the Appraiser within ten
(10) days after the expiration of said thirty (30) day period. For purposes
hereof, "Appraiser" means a real estate broker or MAI designated appraiser, in
either case with not less than five (5) years of full time commercial appraisal
or brokerage experience in the area in which
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the Premises are located and with no prior business dealings with the party
appointing such Appraiser.
If either party fails to appoint an Appraiser, the sole Appraiser appointed
shall make the determination of Fair Market Rent. If two Appraisers are
appointed, they shall immediately meet and attempt to agree upon the Fair Market
Rent. If they are unable to do so within fifteen (15) days after their first
meeting, they shall jointly appoint a third Appraiser to make such
determination, and the third Appraiser shall make such determination within ten
(10) days of his/her appointment. If the two Appraisers are unable to agree upon
such third Appraiser, either party may petition the Presiding Judge of the
Superior Court of Yolo County to appoint such third Appraiser.
The determination of Fair Market Rent as provided herein shall be binding
upon the parties hereto. Promptly upon such determination, the parties shall
execute an amendment specifying ninety-five percent (95%) of the Fair Market
Rent.
ARTICLE THREE: BASE RENT
Section 3.01. TIME AND MANNER OF PAYMENT. Upon execution of this Lease,
Tenant shall pay Landlord the Base Rent in the amount stated in Paragraph
1.13(a) above for the first month of the Lease Term, and the Security Deposit in
the amount stated in Paragraph 1.11. On the first (1st) day of the second month
of the Lease Term and each month thereafter, Tenant shall pay Landlord the Base
Rent, in advance, without offset, deduction or prior demand. The Base Rent shall
be payable at Landlord's address or at such other place as Landlord may
designate in writing.
Section 3.02. BASE RENT INCREASES. The Base Rent shall be increased at
the times specified in Paragraph 1.12 (a) above. Landlord shall notify Tenant of
each increase in writing. Tenant shall pay the new Base Rent from its effective
date until the next periodic increase. Landlord's notice may be given after the
effective date of the increase. In such event, Tenant shall pay Landlord the
necessary rental adjustment for the months elapsed between the effective date of
the increase and Landlord's notice of such increase within ten (10) days After
Landlord's notice.
Section 3.03. SECURITY DEPOSIT INCREASES. Each time the Base Rent is
increased, Tenant shall deposit additional funds with Landlord sufficient to
increase the Security Deposit to an amount which bears the same relationship to
the adjusted Base Rent as the initial Security Deposit bore to the initial Base
Rent. The initial Security Deposit shall be paid by Tenant to Landlord upon
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execution of the Lease.
Section 3.04. TERMINATION; ADVANCE PAYMENTS. Upon termination of this
Lease under Article Seven (Damage or Destruction), Article Eight (Condemnation)
or any other termination not resulting from Tenant's default, and after Tenant
has vacated the Property in the manner required by this Lease, a pro rata
adjustment shall be made concerning advance rent, any other advance payments
made by Tenant to Landlord, and accrued real property taxes.
ARTICLE FOUR: OTHER CHARGES PAYABLE BY TENANT
Section 4.01. ADDITIONAL RENT. All charges payable by Tenant other than
Base Rent are called "Additional Rent." Unless this Lease provides otherwise,
all Additional Rent shall be paid with the next monthly installment of Base
Rent. The term "Rent" shall mean Base Rent and Additional Rent.
Section 4.02. REAL PROPERTY TAXES.
(a) PAYMENT OF TAXES. Tenant shall pay all real property taxes on the
Property during the Lease Term. Subject to Paragraph 4.02(c) and Section 4.08
below, such payment shall be made at least ten (10) days prior to the
delinquency date of the taxes. Tenant shall promptly furnish Landlord with
satisfactory evidence that the real property taxes have been paid. Landlord
shall reimburse Tenant for any real property taxes paid by Tenant covering any
period of time prior to or after the Lease Term. If Tenant fails to pay the real
property taxes when due, Landlord may pay the taxes and Tenant shall reimburse
Landlord for the amount of such tax payment as Additional Rent within fifteen
(15) days after Tenant receives written notice of same from Landlord.
(b) DEFINITION OF "REAL PROPERTY TAX". "Real Property Tax" means: (i) any
fee, license fee, license tax, business license fee, commercial rental tax,
levy, charge, assessment, penalty or tax imposed by any taxing authority against
the Property or land upon which the Property is located; (ii) any Real Property
tax on the Landlord's right to receive, or the receipt of, rent or income from
the Property or against Landlord's business of leasing the Property; (iii) any
tax or charge for fire protection, streets, sidewalks, road maintenance, refuse
or other services provided to the Property by any governmental agency; (iv) any
Real Property tax imposed upon this transaction, or based upon a reassessment of
the property due to a change of ownership or transfer of all or part of
Landlord's interest in the Property; and (v) any charge or fee replacing any tax
previously included within the definition of real
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property tax. "Real property tax" does not, however, include Landlord's federal
or state income, franchise, inheritance or estate taxes.
(c) JOINT ASSESSMENT. If the Property is not separately assessed,
Tenant's share of the real property tax payable by Tenant under Paragraph
4.02(a) shall be determined from the assessor's worksheets or other reasonable
available information. Landlord shall make a reasonable determination of
Tenant's proportionate share of such real property tax and Tenant shall pay such
share to Landlord within fifteen (15) days after receipt of Landlord's written
statement.
(d) PERSONAL PROPERTY TAXES.
(i) Tenant shall pay all taxes charged against trade fixtures,
equipment or any other personal property belonging to Tenant. Tenant shall try
to have personal property taxed separated from the Property..
(ii) In the event Landlord pays taxes on the Property, if any of
Tenant's personal property is taxed with the Property, Tenant shall pay Landlord
the taxes for the personal property within fifteen (15) days after Tenant
receives a written statement from Landlord for such personal property taxes.
(e) TENANT'S RIGHT TO CONTEST TAXES. Tenant may attempt to have the
assessed valuation of the Property reduced or may initiate proceedings to
contest the real property taxes. If required by law, Landlord shall join in the
proceedings brought by Tenant. However, Tenant shall pay all costs of the
proceedings, including any costs incurred by Landlord. Upon the final
determination of any proceeding or contest, Tenant shall immediately pay the
real property taxes due, together with all costs, charges, interest and
penalties incidental to the proceedings. If Tenant does not pay the real
property taxes when due and contests such taxes, Tenant shall not be in default
under this Lease for nonpayment of such taxes if Tenant deposits funds with
Landlord or opens an interest-bearing account reasonably acceptable to Landlord
in the joint names of Landlord and Tenant. The amount of such deposit shall be
sufficient to pay the real property taxes plus a reasonable estimate of the
interest, costs, charges and penalties which may accrue if Tenant's action is
unsuccessful, less any applicable tax impounds previously paid by Tenant to
Landlord. The deposit shall be applied to the real property taxes due, as
determined at such proceedings. The real property taxes shall be paid under
protest from each deposit if such payment under protest is necessary to prevent
to Property from being sold under a "tax sale" or similar
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enforcement proceeding.
Section 4.03. UTILITIES. Tenant shall pay, directly to the appropriate
supplier, the cost of all natural gas, heat, light, power, sewer service,
telephone, water, refuse disposal, fire monitoring (if applicable), and other
utilities and services supplied to the Property. However, if any services or
utilities are jointly metered with other property, Landlord will, upon request
by Tenant, separately meter the Property. In the absence of Tenant's request,
Landlord shall make a reasonable determination of Tenant's proportionate share
of the cost of such utilities and services and Tenant shall pay such share to
Landlord within fifteen (15) days after receipt of Landlord's written statement.
Section 4.04. INSURANCE PREMIUMS.
(a) LIABILITY INSURANCE. During the Lease Term, Tenant shall maintain a
policy of comprehensive public liability insurance, at Tenant's expense,
insuring Landlord against liability arising out of the ownership, use, occupancy
or maintenance of Tenant's proportionate share of the Property. The initial
amount of such insurance shall be at least $3,000,000, and shall be subject to
periodic increase based upon inflation, increased liability awards,
recommendation of professional insurance advisers, and other relevant factors.
However, the amount of such insurance shall not limit Tenant's liability nor
relieve Tenant of any obligation hereunder. The policy shall contain
cross-liability endorsements, if applicable, and shall insure Tenant's
performance of the indemnity provisions of Paragraphs 5.05(a), (b) and (e).
Tenant shall, at Tenant's expense, maintain such other liability insurance as
Tenant deems necessary to protect Tenant.
(b) HAZARD AND RENTAL INCOME INSURANCE. During the Lease Term, Landlord
shall maintain policies of insurance at Tenant's expense, covering loss of or
damage to the Property in the full amount of its replacement value. Such
policies shall provide protection against all perils included within the
classification of fire, extended coverage, vandalism, malicious mischief,
special extended perils (all risk), sprinkler leakage, earthquake sprinkler
leakage, and Inflation Guard endorsement, and any other perils (except flood
unless required by a lender holding a security interest in the Property) which
Landlord reasonably deems necessary. Landlord may obtain insurance coverage for
Tenant at Tenant's expense, maintain such primary or additional insurance on its
fixtures, equipment and building improvements as Tenant deems necessary to
protect its interest. During the Lease Term, Landlord shall also maintain a
rental income insurance policy at Tenant's expense, with loss payable to
Landlord in an amount equal to one
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(1) year's Base Rent, estimated real property taxes and insurance premiums.
Tenant shall not do or permit to be done anything which invalidates any such
insurance policies.
(c) PAYMENT OF PREMIUMS; INSURANCE POLICIES. Subject to Section 4.05
Tenant shall pay all premiums for the insurance policies described in Paragraph
4.04(a) and (b) within fifteen (15) days after receipt by Tenant of a copy of
the premium statement or other evidence of the amount due. If the insurance
policies maintained by landlord cover improvements or real property other than
the Property, Landlord shall also deliver to Tenant a statement of the amount of
the premiums applicable to the Property showing, in reasonable detail, how such
amount was computed. If the Lease Term expires before the expiration of the
insurance policy period, Tenant's Liability for insurance premiums shall be
prorated on an annual basis. All insurance shall be maintained with companies
holding a "General Policyholder's Rating" of B+ or better, as set forth in the
most current issue of "Best's Insurance Guide." Tenant shall be liable for the
payment of any deductible amount under Landlord's insurance policies; said
deductible shall in no event be greater than $1,000. All policies required to be
maintained hereunder may be maintained under Tenant's existing umbrella
policies.
Section 4.05. MULTIPLE TENANT BUILDINGS; RULES AND REGULATIONS. If the
Property is part of a larger building or group of buildings, Tenant shall pay
monthly, in advance, its pro rata share of common area maintenance and repair
costs as reasonably determined by Landlord. Tenant shall also comply with
Landlord's rules and regulations respecting the management, care and safety of
the common areas of such buildings and grounds, including parking areas,
landscaped areas, walkways, hallways and other facilities provided for the
common use and convenience of other occupants. Notice of such rules and
regulations will be posted or given to Tenant. Tenant shall pay for any increase
in the property insurance premiums for such buildings caused by Tenant's acts,
omissions, use or occupancy of the Property.
Section 4.06. LATE CHARGES. Tenant's failure to pay rent promptly may
cause Landlord to incur unanticipated costs. The exact amount of such costs are
impractical or extremely difficult to ascertain. Such costs may include, but are
not limited to, processing and accounting charges and late charges which may be
imposed on Landlord by any ground lease, mortgage or trust deed encumbering the
Property. Therefore, if Landlord does not receive any rent payment on or before
the day it becomes due, Landlord shall have the option to notify Tenant verbally
or in writing of Landlord's failure to receive the rent payment, and Tenant
shall
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have ten (10) days from the receipt of such notice within which to make the rent
payment to Landlord. If Tenant does not make the rent payment within the ten-day
period following receipt of the notice, Tenant shall pay landlord a late charge
equal to five percent (5%) of the overdue amount. During the course of this
Lease if Tenant fails to pay the rent payment by the day it becomes due more
than three (3) times in any lease year, then the required notice from Landlord
to Tenant as provided hereinabove is hereby waived by Tenant and any such notice
requirement is dispensed with so that Tenant shall thereafter automatically pay
Landlord a late charge equal to five percent (5%) of the overdue amount. A rent
payment is deemed overdue if not paid on or before the due date. The parties
agree that such late charge represents a fair and reasonable estimate of the
costs Landlord will incur by reason of such late payment. Any payment made by
Tenant to Landlord under this section shall be considered additional rent.
Section 4.07. INTEREST ON PAST DUE OBLIGATIONS. Any amount owed by Tenant
to Landlord which is not paid when due shall bear interest at the rate of ten
percent (10%) per annum from the due date of such amount. The payment of
interest on such amounts shall not excuse the payment of late charges under
Section 4.06. If the interest rate specified in this Lease is higher than the
rate permitted by law, the interest rate is hereby decreased to the maximum
legal interest rate permitted by law. Any such payment under this section shall
be considered additional rent.
Section 4.08. IMPOUNDS FOR INSURANCE PREMIUMS AND REAL PROPERTY TAXES. If
requested by any ground lessor or lender to whom Landlord has granted a security
interest in the Property, or if Tenant is more than ten (10) days late in the
payment of rent more than once in any consecutive twelve (12) month period,
Tenant shall pay Landlord a sum equal to one-twelfth (1/12) of the annual real
property taxes and insurance premiums payable by Tenant under this Lease,
together with each payment of Base Rent. Such payments shall be held by Landlord
in a non-interest bearing impound account. The amount of real property taxes and
insurance premiums when unknown shall be reasonably estimated by Landlord. Funds
in the impound account shall be applied by Landlord to the payment of real
property taxes and insurance premiums when due. Any deficiency of funds in the
impound account shall be paid by Tenant to Landlord upon written request. If
Tenant defaults under this Lease, Landlord may apply any funds in the impound
account to any obligation then due under this Lease.
Section 4.09. IMPROVEMENTS REQUIRED BY CODE OR LAW. In the event the
responsible fire department, or any other governmental agency, governmental
entity, public district, public council or
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any other standard or rule making body requires additional changes in
construction or improvements to be constructed on the property due to Tenant's
proposed use of said property, such changes or improvements and any and all
related costs shall be the sole cost, expense and responsibility of Tenant.
ARTICLE FIVE: USE OF PROPERTY
Section 5.01. PERMITTED USES. Tenant nay use the Property only for the
Permitted Uses set forth in Section 1.06 above.
Section 5.02. MANNER OF USE. Tenant shall not cause or permit the
Property to be used in any way which constitutes a violation of any law,
ordinance, or government regulation or order, which annoys or interferes with
the rights of tenants or the development of which the Property is part, or which
constitutes a nuisance or waste. Except as otherwise provided in Section 15.17
hereof, Tenant shall promptly take all substantial and non-substantial actions
necessary to comply with all applicable statutes, ordinances, rules,
regulations, orders and requirements regulating the use by Tenant of the
Property, including the Occupational Safety and Health Act, and other safety
statutes, Administrative Codes or safety orders.
Section 5.03. SIGNS, AUCTIONS. Tenant shall not place any signs on the
Property without Landlord's prior written consent, which consent shall not be
unreasonably withheld or delayed. Tenant shall not conduct or permit any
auctions or sheriff's sales at the Property.
Section 5.04. HAZARDOUS MATERIALS.
(a) REPORTING REQUIREMENTS. Tenant or any occupant, sublessee or
assignee (collectively "User") shall be required to report to the City or
County Division of Environmental Health or other applicable governmental
agency, all hazardous and extremely hazardous materials handled, stored,
used, generated, manufactured by the user in the Property, or which, to
Tenant's actual knowledge, or constructive knowledge pursuant to applicable
law, are otherwise occurring on the premises as required by the California
Health and Safety Code, and all other Federal, State and local statutes and
regulations. Any such User shall be required to clean up and abate any
environmental pollution and/or contamination resulting from the use,
generation, storage, manufacture, handling, spillage, or other consequence of
the presence of hazardous and/or extremely hazardous materials upon the
Property by the user. Tenant shall be required to adhere to all Federal and
State statutes, laws, rules, regulations and orders regulating the presence,
use, storage and disposal of toxic or hazardous materials.
(b) ENVIRONMENTAL COMPLIANCE. Tenant shall not cause or permit any
Hazardous Material to be brought upon, kept or used in
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or about the Property by Tenant, its agents, employees, contractors or
invitees, without the prior written consent of Landlord (which consent
Landlord shall not unreasonably withhold as long as Tenant demonstrates to
Landlord's reasonable satisfaction that such Hazardous Material is necessary
or useful to Tenant's business and will be used, kept and stored in a manner
that complies with all laws relating to any such Hazardous Material so
brought upon or used or kept in or about the Property). If Tenant breaches
the obligations stated in the preceding sentence, or if the presence of
Hazardous Material on the Property caused by Tenant results in contamination
of the Property, or if contamination of the Property by Hazardous Material
otherwise occurs for which Tenant is legally liable to Landlord for damage
resulting therefrom, then Tenant shall indemnify, defend and hold Landlord
harmless from any and all claims, judgments, damages, penalties, fines,
costs, liabilities or losses (including, without limitation, diminution in
value of the Property, damages for the losses or restriction on use of
rentable or usable space or of any amenity of the Property, and sums paid in
settlement of claims, attorneys' fees, consultant fees and expert fees) which
arise during or after the lease term as a result of such contamination. The
indemnification set forth herein shall run to the benefit of any bank or
other lender to which Landlord or Landlords' successors and assigns may
grant a security interest in the Property and/or the Property. This
indemnification of Landlord by Tenant includes, without limitation, costs
incurred in connection with any investigation of site conditions or any
cleanup, remedial, removal or restoration work required by any federal, state
or local governmental agency or political subdivision because of Hazardous
Material present in the soil or ground water on or under the Property.
Without limiting the foregoing, if the presence of any Hazardous Material on
the Property caused or permitted by Tenant results in any contamination of
the Property, Tenant shall promptly take all actions at its sole expense as
are necessary to return the Property to the condition existing prior to the
introduction of any such Hazardous Material to the Property; provided that
Landlord's approval of such actions shall first be obtained, which approval
shall not be unreasonably withheld or delayed so long as such actions would
not potentially have any material adverse long-term or short-term effect on
the Property. Landlord and Tenant shall indemnify, defend and hold harmless
each other from and against all claims, judgments, damages, penalties, fines,
costs, liabilities or losses, including reasonable attorneys' fees, arising
in connection with the contamination of the Property proximately caused by
the either of them.
As used herein, the term "Hazardous Material" means any hazardous or toxic
substance, material or waste which is or becomes
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regulated by any local governmental authority, the State of California or the
United States Government. The term "Hazardous Material" includes, without
limitation, any material or substance which is (i) defined as a "hazardous
waste," "extremely hazardous waste" or "restricted hazardous waste" under
Sections 25115, 25117 or 25122.7, or listed pursuant to Section 25140 of the
California Health and Safety Code, Division 20, Chapter 6.5 (Hazardous Waste
Control Law); (ii) defined as a "hazardous substance" under Section 25316 of
the California Health and Safety Code, Division 20, Chapter 6.8
(Carpenter-Presley-Tanner Hazardous Substance Account Act); (iii) defined as a
"hazardous material," "hazardous substance" or "hazardous waste" under Section
25501 of the California Health and Safety Code, Division 20, Chapter 6.95
(Hazardous Materials Release Response Plans and Inventory); (iv) defined as a
"hazardous substance" under Section 25281 of the California Health and Safety
Code, Division 20, Chapter 6.7 (Underground Storage of Hazardous Substances);
(v) petroleum; (vi) asbestos; (vii) listed under Article 9 or defined as
hazardous or extremely hazardous pursuant to Article 11 of Title 22 of the
California Administrative Code, Division 4, Chapter 20; (viii) designated as a
"hazardous substance" pursuant to Section 1004 of the Federal Resource
Conservation and Recovery Act, 42 U.S.C. Section 6901 et seq. (42 U.S.C. Section
6903); (ix) defined as a "hazardous substance" pursuant to Section 101 of the
Comprehensive Environmental Response, Compensation and Liability Act, 42 U.S.C.
Section 9601 et seq. (42 U.S.C. Section 9601); or (x) any substance requiring
remediation under any federal, state, municipal or other governmental
statute, ordinance, rule, regulation or policy.
Section 5.05. INDEMNITY. Tenant shall indemnify Landlord against and hold
Landlord harmless from any and all costs, claims, suits, damages, expenses or
liability of any kind arising from: (a) Tenant's use of the Property; (b) the
conduct of Tenant's business or anything else done or permitted by Tenant to be
done in, on or about the Property, including any of User's activities as
pertaining to Hazardous Materials pursuant to Section 5.03 hereinabove or any
other section contained in this Lease; (c) any breach or default in the
performance of Tenant's obligations under this Lease; (d) any misrepresentation
or breach of warranty by Tenant under this Lease; or (e) other acts or omissions
of Tenant, or Tenant's permitees, employees, agents and licensees. Tenant shall
defend Landlord against any such cost, claim, suit, damage, expense or liability
at Tenant's expense with counsel reasonably acceptable to Landlord or, at
Landlord's elections, Tenant shall reimburse Landlord for any legal fees or
costs incurred by Landlord in connection with any such claim.
Section 5.06. LANDLORD'S ACCESS. Landlord or its agents may
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enter the Property at all reasonable times to show the Property to potential
buyers, investors or tenants or other parties, or for any other purpose Landlord
deems necessary. Landlord shall give Tenant prior notice of such entry, except
in the case of an emergency. Landlord may place customary "For Sale" or "For
Lease" signs on the Property.
Section 5.07. QUIET POSSESSION. If Tenant pays the rent and complies with
all other terms of this Lease, Tenant may occupy and enjoy the Property for the
full Lease Term, subject to the provisions of this Lease.
ARTICLE SIX: CONDITION OF PROPERTY; MAINTENANCE, REPAIRS AND ALTERATIONS
Section 6.01. EXISTING CONDITIONS. Except as set forth in any exhibit or
rider requiring Landlord to perform work on the Property prior to the
Commencement Date, Tenant accepts the Property in its condition as of the
execution of the Lease, subject to all recorded matters, laws, ordinances, and
governmental regulations and orders. Tenant acknowledges that neither Landlord
nor any agent of Landlord has made any representation as to the condition of the
Property or the suitability of the Property for Tenant's specific intended use.
Section 6.02. EXEMPTION OF LANDLORD FROM LIABILITY. Landlord shall not be
liable for any damage or injury to the person, business (or any loss of income
therefrom), goods, wares, merchandise or other property of Tenant, Tenant's
employees, invitiees, customers or any other person in or about the Property,
whether such damage or injury is caused by or results from: (a) fire, steam,
electricity, water, gas or rain; (b) the breakage, leakage, obstruction or other
defects of pipes, sprinklers, wires, appliances, plumbing, air conditioning or
lighting fixtures or any other cause; (c) conditions arising in, on or about the
Property or upon other portions of any building of which the Property is a part,
or from other sources or places; or (d) any act or omission of any other tenant
of any building of which the Property is a part unless such loss or damage shall
be the result of Landlord's negligence or intentional acts, including without
limitation, Landlord's failure to construct the improvements in a good and
workmanlike manner. The aforesaid limitation and exemption of Landlord from
liability is based on Tenant's covenant and promise to maintain policies of
insurance sufficient to cover any such damage, injury or loss pursuant to
paragraph 4.04 above.
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Section 6.03. TENANT'S OBLIGATIONS.
(a) Tenant shall keep the Property (including all structural
nonstructural, interior, exterior, and landscaped areas, portions, systems and
equipment) in good order, condition and repair during the Lease Term. Tenant
shall promptly replace any portion of the Property or system or equipment in the
Property which cannot be fully repaired, regardless of whether the benefit of
such replacement extends beyond the Lease Term. Tenant shall also maintain a
preventive maintenance contract providing for the regular inspection and
maintenance of the heating and air conditioning system, at Tenant's expense. It
is the intention of Landlord and Tenant that, at all times during the Lease
Term, Tenant shall maintain the Property in an attractive, first-class and
fully operative condition.
(b) All of Tenant's obligations to maintain and repair shall be
accomplished at Tenant's sole expense. If Tenant fails to maintain and repair
the Property, Landlord may, on ten (10) days prior notice, except that no notice
shall be required in case of emergency, enter the Property and perform such
repair and maintenance on behalf of Tenant. In such case, Tenant shall reimburse
Landlord for all costs so incurred immediately upon written demand.
Section 6.04. LANDLORD'S OBLIGATIONS. Subject to the provisions of
Article Seven (Damage or Destruction) and Article Eight (Condemnation), Landlord
shall have absolutely no responsibility to repair, maintain or replace any
portion of the Property at any time. Tenant waives the benefit of any present or
future law which might give Tenant the right to repair the Property at
Landlord's expense or to terminate the Lease due to the condition of the
Property.
Section 6.05. ALTERATIONS, ADDITIONS AND IMPROVEMENTS.
(a) Except as otherwise set forth in Section 6.05(c) below, Tenant shall
not make any alterations, additions, or improvements to the Property without
Landlord's prior written consent, except for non-structural alterations which do
not exceed One Hundred Thousand Dollars ($100,000) in cost cumulatively over the
Lease Term and which are not visible from the outside of any building of which
the Property is part. Consent for non-structural alterations, other alterations,
additions, or improvements to the property will not be unreasonably withheld.
Landlord may require Tenant to provide demolition and/or lien and completion
bonds in form and amount satisfactory to Landlord. Tenant shall promptly
removeany alterations, additions, or improvements constructed in violation of
this Paragraph 6.05(a) upon Landlord's written request. All alterations,
additions, and improvements will be accomplished in
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a good and workmanlike manner, in conformity with all applicable laws and
regulations, and by a contractor reasonably approved in writing by Landlord.
Upon completion of any such work, Tenant shall provide Landlord with "as built"
plans, copies of all construction contracts, and proof of payment of all labor
and materials.
(b) Tenant shall pay when due all claims for labor and material furnished
to the Property. Tenant shall give Landlord at least ten (10) days' prior
written notice of the commencement of any work on the Property. Landlord may
elect to record and post notice of non-responsibility on the Property.
(c) Upon substantial completion of the construction of the Property,
Tenant may install food processing equipment and fixtures without securing
Landlord's prior consent, as reasonably necessary or appropriate for Tenant's
contemplated use of the Property, however, Tenant shall not interfere with
Landlord's work in progress or construction, and Tenant shall use the utmost
care for the safety of its employees and agents and others on the Property in
their installation activities.
Section 6.06. CONDITION UPON TERMINATION. Upon the termination of the
Lease, Tenant shall surrender the Property to Landlord, broom clean and in
the same condition as received except for ordinary wear and tear which Tenant
was not otherwise obligated to remedy under any provision of this Lease.
However, Tenant shall not be obligated to repair any damage which Landlord is
required to repair under Article Seven (Damage or Destruction). Tenant shall
have a right to remove any or all of its machinery, equipment and trade
fixtures, provided Tenant leaves the Property in pre-removal condition
excepting reasonable wear and tear. In addition, Landlord may require Tenant
to remove any alterations, additions or improvements prior to the termination
of the Lease and to restore the Property to its prior condition excepting
reasonable wear and tear, provided that Landlord notified Tenant of its
decision to require removal at the time of installation. Tenant shall give
written notice of installation to Landlord prior to the commencement of any
work thereon. Landlord shall give written notice of removal to Tenant within
twenty (20) days of receiving Tenant's notice of installation. If Tenant
fails to give notice of installation to Landlord, then Landlord shall have
the option to require Tenant to remove alterations, additions or
improvements. All alterations, additions and improvements which Landlord has
not required Tenant to remove shall become Landlord's property and shall be
surrendered to Landlord upon the termination of the Lease, Tenant shall
repair, at Tenant's expense, any damage to the Property caused by the removal
of any such trade fixtures,
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machinery or equipment. In no event, however, shall Tenant remove any of the
following materials or equipment without Landlord's prior written consent: any
power wiring or power panels; lighting or lighting fixtures; wall coverings;
drapes; blinds or other window coverings; carpets or other floor coverings;
heaters, air conditioners or any other heating or air conditioning equipment;
fencing or security gates; or other similar building operating equipment and
decorations unless owned and installed by Tenant.
ARTICLE SEVEN: DAMAGE OR DESTRUCTION
Section 7.01. PARTIAL DAMAGE TO PROPERTY. Tenant shall notify Landlord in
writing immediately upon the occurrence of any damage to the Property. If the
Property is only partially damaged and if the proceeds received by Landlord from
the insurance policies described in Paragraph 4.04(b) are sufficient to pay for
the necessary repairs, this Lease shall remain in effect and Landlord shall
repair the damage as soon as reasonably possible. Landlord may elect to repair
any damage to Tenant's fixtures, equipment or improvements. If the insurance
proceeds received by Landlord are not sufficient to pay the entire cost of
repair, or if the damage was due to a cause not covered by the insurance
policies which Landlord maintains under Paragraph 4.04(b), Landlord may elect
either to (a) repair the damage as soon as reasonably possible in which case
this Lease shall remain in full force and effect, or (b) if Tenant has not
otherwise elected to pay the difference between the cost of repairs and the
amount of insurance proceeds or to repair the Property, terminate this Lease as
of the date the damage occurred. Landlord shall notify Tenant within thirty (30)
days after receipt of notice of the occurrence of the damage, whether Landlord
elects to repair the damage. If Landlord elects to repair the damage, Tenant
shall pay Landlord the "deductible amount" (if any) under Landlord's insurance
policies, and, if the damage was due to an act or omission of Tenant, the
difference between the actual cost of repair and any insurance proceeds received
by Landlord. If Landlord does not give notice of intention to repair the damage
within thirty (30) days, then Tenant may elect to repair the damage by notifying
Landlord in writing within thirty (30) days of the intention to do so. If Tenant
notifies Landlord of the intention to repair the damage, Tenant shall pay the
cost of such repairs, except that Tenant shall be entitled to any insurance
proceeds received by Landlord for damage repaired by Tenant at the time such
proceeds are received by Landlord. If neither Landlord not Tenant exercises the
option to repair the damage, this Lease shall terminate. If the damage to the
Property occurs during the last six (6) months of the Lease Term, as same may be
extended pursuant to Section 2.05, Landlord may elect to terminate this Lease as
of the date the damage occurred regardless of the sufficiency of any insurance
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proceeds. In such event, Landlord shall not be obligated to repair or restore
the property and Tenant shall have no right to continue this Lease. Landlord
shall notify Tenant of its election within thirty (30) days after receipt of
notice of the occurrence of the damage.
Section 7.02. TOTAL OR SUBSTANTIAL DESTRUCTION. If the Property is
totally or substantially destroyed by any cause whatsoever, or if the Property
is in a building which is substantially destroyed (even though the Property is
not totally or substantially destroyed), this Lease shall terminate as of the
date the destruction occurred regardless of whether Landlord receives any
insurance proceeds. However, if the Property can be rebuilt within one (1) year
after the date of destruction, Landlord may elect to rebuild the Property at
Landlord's own expense, in which case, this Lease shall remain in full force and
effect. Landlord shall notify Tenant of such election within thirty (30) days
after the occurrence of total or substantial destruction. If the destruction was
caused by an act or omission of Tenant, Tenant shall pay Landlord the difference
between the actual cost of rebuilding and any insurance proceeds received by
Landlord.
Section 7.03. TEMPORARY REDUCTION OF RENT. If the Property is destroyed
or damaged and Landlord or Tenant repairs or restores the Property pursuant to
the provisions of this Article Seven, any rent payable during the period of such
damage, repair and/or restoration shall be reduced according to the degree, if
any, to which Tenant's use of the Property is impaired, unless such destruction
or damage is caused in whole or in part by Tenant's negligence or wilful
misconduct, in which case there shall be no reduction in rent or by the amount
of any rental income insurance proceeds received by Landlord. Except for such
possible reduction in Base Rent, insurance premiums and real property taxes,
Tenant shall not be entitled to any compensation, reduction, or reimbursement
from Landlord as a result of any damage, destruction, repair, or restoration of
or to the Property.
ARTICLE EIGHT: CONDEMNATION
If all or any portion of the Property is taken under the power of eminent
domain or sold under the threat of that power (all of which are called
"Condemnation"), this Lease shall terminate as to the part taken or sold on the
date the condemning authority takes title or possession, whichever occurs first.
If more than twenty percent (20%) of the floor area of the building in which the
Property is located, or which is located on the Property, is taken, either
Landlord or Tenant may terminate this Lease as of the date the condemning
authority takes title or possession, by delivering
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written notice to the other within ten (10) days after receipt of written notice
of such taking or in the absence of such notice, within ten (10) days after the
condemning authority takes possession. If neither Landlord nor Tenant terminates
this Lease, this Lease shall remain in effect as to the portion of the Property
not taken, except that the Base Rent shall be reduced in proportion to the
reduction in the area of the Property. Any Condemnation award or payment shall
be distributed in the following order: (1) first, to any ground lessor,
mortgagee or beneficiary under a deed of trust encumbering the Property, the
amount of its interest in the Property; (b) second, to Tenant, only the amount
of any award specifically designated for the value of Tenant's leasehold
interest, relocation costs, and/or loss of or damage to Tenant's trade fixtures
or removable personal property; and (c) third, to Landlord, the remainder of
such award, whether as compensation for reduction in the value of the leasehold,
the taking of the fee, or otherwise. If this Lease is not terminated, Landlord
shall repair any damage to the Property caused by the Condemnation, except that
Landlord shall not be obligated to repair any damage for which Tenant has been
reimbursed by the condemning authority. If the severance damages received by
Landlord are not sufficient to pay for such repair, Landlord shall have the
right to either terminate the Lease or make such repair at Landlord's expense.
ARTICLE NINE: ASSIGNMENT AND SUBLETTING
Section 9.01. LANDLORD'S CONSENT REQUIRED. No portion of the Property or
of Tenant's interest in this Lease may be acquired by any other person or
entity, whether by assignment, mortgage, sublease, transfer, operation of law,
or act of Tenant, without Landlord's prior written consent, which consent shall
not be unreasonably withheld or delayed except as provided in Section 9.02
below. Landlord shall grant or withhold its consent as provided in Section 9.04
below. Any attempted transfer without consent shall be void and shall constitute
a non-curable breach of this Lease. If Tenant is a partnership, any cumulative
transfer of more than twenty percent (20%) of the partnership interest shall
require Landlord's consent. If Tenant is a corporation, any change in a
controlling interest of the voting stock of the corporation shall require
Landlord's consent.
Section 9.02. TENANT'S AFFILIATE. Tenant may assign this Lease or
sublease the Property to any corporation which controls, is controlled by or is
under common control with Tenant, or to any corporation resulting from the
merger of or consolidation with Tenant or to any entity engaged in a joint
venture with Tenant; or to any entity which acquires substantially all of the
stock or assets of Tenant, as a going concern, with respect to the business
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that is being conducted in the Premises ("Tenant's Affiliate"). Tenant shall
provide to Landlord reasonable written proof of identity or assignee or
sublessee. In such case, any Tenant's Affiliate shall assume in writing all of
Tenant's obligations under this Lease.
Section 9.03. NO RELEASE OF TENANT. No transfer permitted by this Article
Nine, whether with or without Landlord's consent, shall release Tenant or change
Tenant's primary liability to pay the rent and to perform all other obligations
of Tenant under this Lease. Landlord's acceptance of rent from any other person
is not a waiver of any provision of this Article Nine. Consent to one transfer
is not a consent to any subsequent transfer. If Tenant's transferee defaults
under this Lease, Landlord may proceed directly against Tenant without pursuing
remedies against the transferee.
Section 9.04. LANDLORD'S ELECTION. Tenant's request for consent to any
transfer described in Section 9.01 above shall be accompanied by a written
statement setting forth the details of the proposed transfer, including the
name, business and financial condition of the prospective transferee, financial
details of the proposed transfer (e.g., the term of and rent and security
deposit payable under any assignment or sublease), and any other information
Landlord reasonably deems relevant. Landlord shall have the right (a) to
withhold consent, if reasonable; or (b) to grant consent.
Section 9.05. NO MERGER. No merger shall result from Tenant's sublease of
the Property under this Article Nine, Tenant's surrender of this Lease or the
termination of this Lease in any other manner. In any such event, Landlord may
terminate any or all subtenancies or succeed to the interest of Tenant or
sublandlord thereunder.
ARTICLE TEN: DEFAULTS REMEDIES
Section 10.01. COVENANTS AND CONDITIONS. Tenant's performance of each of
Tenant's obligations under this Lease is a condition as well as a covenant.
Tenant's right to continue in possession of the Property is conditioned upon
such performance. Time is of the essence in the performance of all covenants and
conditions.
Section 10.02. DEFAULTS. Tenant shall be in material default under this
Lease:
(a) If Tenant abandons the Property or if Tenant's vacation
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of the Property results in the cancellation of any insurance described in
Section 4.04;
(b) If Tenant fails to pay rent or any other charge required to be paid
by Tenant, as and when due except that Landlord shall give written notice of
failure to receive rent and Tenant shall have five (5) days to pay from
receipt of said notice. However, whether or not Tenant received said notice,
rent must be received by Landlord no later than fifteen (15) days from the
due date. If Landlord gives notice of failure to receive rent more than three
(3) times in any twelve (12) month period, then, thereafter, any failure of
Tenant to pay rent on or before the date due shall be a material breach, and
no further notice must be given by Landlord;
(c) If Tenant fails to perform any of Tenant's non-monetary obligations
under this Lease for a period of thirty (30) days after receipt of written
notice from Landlord; provided that if more than thirty (30) days are required
to complete such performance, Tenant shall not be in default if Tenant commences
such performance within the thirty (30) day period and thereafter diligently
pursues its completion. The notice required by this Paragraph is intended to
satisfy any and all notice requirements imposed by law on Landlord and is not in
addition to any such requirement;
(d) (i) If Tenant makes a general assignment or general arrangement for
the benefit of creditors; (ii) if a petition for adjudication of bankruptcy or
for reorganization or rearrangement is filed by or against Tenant and is not
dismissed within thirty (30) days; (iii) if a trustee or receiver is appointed
to take possession of substantially all of Tenant's assets located at the
Property or of Tenant's interest in this Lease and possession is not restored to
Tenant within thirty (30) days; or (iv) if substantially all of Tenant's assets
located at the Property or of Tenant's interest in this Lease is subjected to
attachment, execution or other judicial seizure which is not discharged within
thirty (30) days. If a court of competent jurisdiction determines that any of
the acts described in this subparagraph (d) is not a default under this Lease,
and a trustee is appointed to take possession (or if Tenant remains a debtor in
possession) and such trustee or Tenant transfers Tenant's interest hereunder,
then Landlord shall receive, as Additional Rent, the difference between the rent
(or any other consideration) paid in connection with such assignment or sublease
and the rent payable by Tenant hereunder.
Section 10.03. REMEDIES. On the occurrence of any material default by
Tenant, Landlord may, at any time thereafter, with or without notice or demand
and without limiting Landlord in the exercise of any right or remedy which
Landlord may have:
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(a) Terminate Tenant's right to possession of the Property by any lawful
means, in which case this Lease shall terminate and Tenant shall immediately
surrender possession of the Property to Landlord. In such event, Landlord shall
be entitled to recover from Tenant all damages incurred by Landlord by reason of
Tenant's default, including (i) the worth at the time of the award of the unpaid
Base Rent, Additional Rent and other charges which had been earned at the time
of the termination; (ii) the worth at the time of the award of the amount by
which the unpaid Base Rent, Additional Rent and other charges which would have
been earned after termination until the time of the award exceeds the amount of
such rental loss that Tenant proves could have been reasonably avoided; (iii)
the worth at the time of the award of the amount by which the unpaid Base Rent,
Additional Rent and other charges which would have been paid for the balance of
the term after the time of award exceeds the amount of such rental loss that
Tenant proves could have been reasonably avoided; and (iv) any other amount
necessary to compensate Landlord for all the detriment actually and proximately
caused by Tenant's failure to perform its obligations under the Lease or which
in the ordinary course of things would be likely to result therefrom, including,
but not limited to, any costs or expenses incurred by Landlord in maintaining or
preserving the Property after such default, the cost of recovering possession of
the Property, expenses of reletting, including necessary renovation or
alteration of the Property, Landlord's reasonable attorneys' fees incurred in
connection therewith, and any real estate commission paid or payable. As used in
subparts (i) and (ii) above, the "worth at the time of the award" is computed by
allowing interest on unpaid amounts at the rate of ten percent (10%) per annum,
or such lesser amount as may then be the maximum lawful rate. As used in
subpart (iii) above, the "worth at the time of the award" is computed by
discounting such amount at the discount rate of the Federal Reserve Bank of San
Francisco at the time of the award, plus 1%. If Tenant shall have abandoned the
Property for a period in excess of sixty (60) days, Landlord shall have the
option of (i) retaking possession of the Property and recovering from Tenant the
amount specified in this paragraph 10.03(a), or (ii) proceeding under Paragraph
10.03(b);
(b) Maintain Tenant's right to possession, in which case this Lease shall
continue in effect whether or not Tenant shall have abandoned the Property. In
such event, Landlord shall be entitled to enforce all of Landlord's rights and
remedies under this Lease, including the right to recover the rent as it becomes
due hereunder;
(c) Pursue any other remedy now or hereafter available to
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Landlord under the laws or judicial decisions of the state in which the property
is located.
Section 10.04. CUMULATIVE REMEDIES. Landlord's exercise of any right or
remedy shall not prevent it from exercising any other right or remedy.
ARTICLE ELEVEN: PROTECTION OF LENDERS
Section 11.01. SUBORDINATION. Landlord shall have the right to subordinate
this Lease to any ground lease, deed of trust or mortgage encumbering the
Property, any advances made on the security thereof and any renewals,
modifications, consolidations, replacements or extensions thereof, whenever made
or recorded. landlord shall obtain a non-disturbance agreement, in a form
reasonably satisfactory to Tenant's counsel, from the holder(s) of any interest
in the Property having priority over this Lease. However, Tenant's right to
quiet possession of the Property during the Lease Term shall not be disturbed if
Tenant pays the rent and performs all of Tenant's obligations under this Lease
and is not otherwise in default. If any ground lessor, beneficiary or mortgagee
elects to have this Lease prior to the lien of its ground lease, deed of trust
or mortgage and gives written notice thereof to Tenant, this Lease shall be
deemed prior to such ground lease, deed of trust or mortgage whether this Lease
is dated prior or subsequent to the date of said ground lease, deed of trust or
mortgage or the date of recording thereof.
Section 11.02. ATTORNMENT. If Landlord's interest in the Property is
acquired by any ground lessor, beneficiary under a deed of trust, mortgagee, or
purchaser at a foreclosure sale, Tenant shall attorn to the transferee of or
successor to Landlord's interest in the Property and recognize such transferee
or successor as Landlord under this Lease, provided Landlord shall obtain a
nondisturbance agreement, in a form reasonably satisfactory to Tenant's counsel,
in connection with each such attornment. Tenant waives the protection of any
statute or rule of law which gives or purports to give Tenant any right to
terminate this Lease or surrender possession of the Property upon the transfer
of Landlord's interest.
Section 11.03. SIGNING OF DOCUMENTS. Tenant shall sign and deliver any
instrument or document necessary or appropriate to evidence any such attornment
or subordination or agreement to do so. Such subordination and attornment
documents may contain such provisions as are customarily required by any ground
lessor, beneficiary under a deed of trust or mortgagee.
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Section 11.04. ESTOPPEL CERTIFICATES.
(a) Upon Landlord's written request, Tenant shall execute, acknowledge and
deliver to Landlord a written statement certifying: (i) that none of the terms
or provisions of this Lease have been changed (or if they have been changed,
stating how they have been changed); (ii) that this Lease has not been cancelled
or terminated; (iii) the last date of payment of the Base Rent and other charges
and the time period covered by such payment; (iv) that Landlord is not in
default under this Lease (or, if Landlord is claimed to be in default, stating
why); and (v) such other matters as may be reasonably required by Landlord or
the holder of a mortgage, deed of trust or lien to which the Property is or
becomes subject. Tenant shall deliver such statement to Landlord within ten (10)
days after Landlord's request. Any such statement by Tenant may be given by
Landlord to any prospective purchaser or encumbrancer of the Property. Such
purchaser or encumbrancer may rely conclusively upon such statement as true and
correct.
(b) If Tenant does not deliver such statement to Landlord within such ten
(10) day period, Landlord, and any prospective purchaser or encumbrancer, may
conclusively presume and rely upon the following facts: (i) that the terms and
provisions of this Lease have not been changed except as otherwise represented
by Landlord; (ii) that this Lease has not been canceled or terminated except as
otherwise represented by Landlord; (iii) that not more than one month's Base
Rent or other charges have been paid in advance; and (iv) that Landlord is not
in default under the Lease. In such event, Tenant shall be estopped from denying
the truth of such facts.
Section 11.05. TENANT'S FINANCIAL CONDITION. Within fifteen (15) days,
Tenant shall deliver to any lender designated by Landlord any financial
statements required by such lender to facilitate the financing or refinancing of
the Property. Tenant represents and warrants to Landlord that each such
financial statement is a true and accurate statement as of the date of such
statement. All financial statements shall be confidential and shall be used only
for the purposes set forth herein.
ARTICLE TWELVE: LEGAL COSTS
Section 12.01. LEGAL PROCEEDINGS. Each party shall reimburse other party,
upon demand, for any costs or expenses incurred by such other party in
connection with any breach or default of each party under this Lease, whether or
not suit is commenced or judgment entered. Such costs shall include legal fees
and costs incurred for the negotiation of a settlement, enforcement of rights
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or otherwise. Furthermore, if any action for breach of or to enforce the
provisions of this Lease is commenced, the court in such action shall award to
the party in whose favor a judgment is entered, a reasonable sum for attorneys'
fees and costs. Such attorneys' fees and costs shall be paid by the losing party
in such action. Each party shall also indemnify the other party against and hold
such other party harmless from all claims, suits, damages, costs, expenses,
demands and liability incurred by such party if such party becomes or is made a
party to any claim or action (a) instituted by the other party, except for
claims or actions based on gross negligence, willful misconduct or breach of
this Lease, so long as the each party's claim or action is legally adjudicated
in favor of each party and against the other party; or by any third party
against each party, or by or against any person holding any interest under or
using the Property by license of or agreement with each party; (b) for
foreclosure of any lien for labor or material furnished to or for Tenant or such
other person; otherwise arising out of or resulting from any act, transaction,
or omission of each party or such other person; or (d) necessary to protect each
party's interest under this Lease in a bankruptcy proceeding, or other
proceeding under Title 11 of the United States Code, as amended. Each party
shall reimburse the other party for any legal fees or costs incurred by such
other party in any such claim or action, except for legal fees and costs
involving claims or actions by each party against the other party in which case
all legal fees and costs will be paid by the non-prevailing party.
Section 12.02. LANDLORD'S CONSENT. Tenant shall pay Landlord's reasonable
attorneys' fees incurred in connection with Tenant's request for Landlord's
consent under Article Nine (Assignment and Subletting), or in connection with
any other act which Tenant proposes to do and which requires Landlord's consent.
ARTICLE THIRTEEN: MISCELLANEOUS PROVISIONS
Section 13.01. NON-DISCRIMINATION. Tenant promises, and it is a condition
to the continuance of this Lease, that there will be no discrimination against,
or segregation of, any person or group of persons on the basis of race, Color,
sex, creed, national origin or ancestry in the leasing, subleasing,
transferring, occupancy, tenure or use of the Property or any portion thereof.
Section 13.02. WAIVER OF SUBROGATION. Landlord and Tenant each hereby
waive any and all rights of recovery against the other, or against the officers,
employees, agents or representatives of the other, for loss of or damage to its
property or the property of others under its control, if such loss or damage is
covered by any insurance policy in force (whether or not described in this
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Lease) at the time of such loss or damage. Upon obtaining the policies of
insurance described herein, Landlord and Tenant shall give notice to the
insurance carrier or carriers of the foregoing mutual waiver of subrogation.
Section 13.03. LANDLORD'S LIABILITY; CERTAIN DUTIES.
(a) As used in this Lease, the term "Landlord" means only the current
owner or owners of the fee title to the Property or the leasehold estate under a
ground lease of the Property at the time in question. Each Landlord is obligated
to perform the obligations of Landlord under this Lease only during the time
such Landlord owns such interest or title. Any Landlord who transfers its title
or interest is relieved of all liability with respect to the obligations of
Landlord under this Lease to be performed on or after the date of transfer.
However, each Landlord shall deliver to its transferee all funds previously paid
by Tenant if such funds have not yet been applied under the terms of this Lease.
(b) Tenant shall give written notice of any failure by Landlord to perform
any of its obligations under this Lease to Landlord and to any ground lessor,
mortgagee or beneficiary under any deed of trust encumbering the Property whose
name and address have been furnished to Tenant in writing. Landlord shall not be
in default under this Lease unless Landlord (or such ground lessor, mortgagee or
beneficiary) fails to cure such non-performance within thirty (30) days after
receipt of Tenant's written notice. However, if such non-performance reasonably
requires more than thirty (30) days to cure, Landlord shall not be in default if
such cure is commenced within such thirty (30) day period and thereafter
diligently pursued to completion. Notwithstanding the foregoing, in the event of
an emergency Tenant shall have the right, without giving prior notice to
Landlord, to take such action as Tenant deems reasonably necessary in the
circumstances. Tenant shall notify Landlord or such action taken as soon as is
reasonably practical and, in the event such action was the responsibility of
Landlord hereunder, shall be entitled to reimbursement from Landlord of any
costs incurred by Tenant in taking such action.
Upon the execution of this Lease, Tenant shall deposit with Landlord a
cash Security Deposit in the amount set forth in Section 1.11 above. Landlord
may apply all or part of the Security Deposit to any unpaid rent or other
charges due from Tenant or to cure any other defaults of Tenant. If Landlord
uses any part of the Security Deposit, Tenant shall restore the Security Deposit
to its full amount within ten (10) days after Landlord's written request.
Tenant's failure to do so shall be a material default under this Lease. No
interest shall be paid on the Security
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Deposit. Landlord shall not be required to keep the Security Deposit separate
from its other accounts and no trust relationship is created with respect to the
Security Deposit.
Section 13.04. SEVERABILITY. A determination by a court of competent
jurisdiction that any provision of this Lease or any part thereof is illegal or
unenforceable shall not cancel or invalidate the remainder of such provisions of
this Lease, which shall remain in full force and effect.
Section 13.05. INTERPRETATION. The captions of the Articles or Sections of
this Lease are to assist the parties in reading this Lease and are not a part of
the terms or provisions of this Lease. Whenever required by the context of this
Lease, the singular shall include the plural and the plural shall include the
singular. The masculine, feminine and neuter genders shall each include the
other. In any provision relating to the conduct, acts or omissions of Tenant,
the term "Tenant" shall include Tenant's agents, employees, contractors,
invitees, successors or others using the Property with Tenant's expressed or
implied permission.
Section 13.06. INCORPORATION OF PRIOR AGREEMENTS; AMENDMENTS AND
MODIFICATIONS. This Lease is the only agreement between the parties pertaining
to the lease of the Property and no other agreements are effective. All
amendments and modifications to this Lease shall be in writing and signed by all
parties. Any other attempted amendment or modification shall be void.
Section 13.07. NOTICES. All notices required or permitted under this Lease
shall be in writing and shall be personally delivered or sent by overnight
courier. Notices to Tenant shall be delivered to the address specified in
Section 1.03. above, except that upon Tenant's taking possession of the
Property, the Property shall be Tenant's address for notice purposes. Notices to
Landlord shall be delivered to the address specified in Section 1.02 above. All
notices shall be effective upon receipt or when proper delivery is refused in
accordance with this Section 13.07. Either party may change its notice address
upon written notice to other party.
Section 13.08. WAIVERS. All waivers must be in writing and signed by the
waiving party. Landlord's failure to enforce any provision of this Lease or its
acceptance of rent shall not be a waiver and shall not prevent Landlord from
enforcing that provision or any other provision of this Lease in the future. No
statement on a payment check from Tenant or in a letter accompanying a payment
check shall be binding on Landlord. Landlord may, with or without notice to
Tenant, negotiate such check without being bound
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to the conditions of such statement.
Section 13.09. NO RECORDATION. Tenant shall not record this Lease without
prior written consent from Landlord. However, either Landlord or Tenant may
require that a "Short Form" memorandum of this Lease executed by both parties be
recorded.
Section 13.10. BINDING EFFECT; CHOICE OF LAW. This Lease binds any party
who legally acquires any rights or interest in this Lease from Landlord or
Tenant. However, Landlord shall have no obligation to Tenant's successor unless
the rights or interests of Tenant's successor are acquired in accordance with
the terms of this Lease. The laws of the state in which the Property is located
shall govern this Lease, without respect to the principles of conflicts of laws
thereof.
Section 13.11. CORPORATE AUTHORITY; PARTNERSHIP AUTHORITY. If Tenant is a
Corporation, each person signing this Lease on behalf of Tenant represents and
warrants that he has full authority to do so and that this Lease binds the
corporation. Within thirty (30) days after this Lease is signed, Tenant shall
deliver to Landlord a certified copy of a resolution of Tenant's Board of
Directors authorizing the execution of this Lease or other evidence of such
authority reasonably acceptable to Landlord. If Tenant is a partnership, each
person signing this Lease for Tenant represents and warrants that he is a
general partner of the partnership, that he has full authority to sign for the
partnership and that this Lease binds the partnership and all general partners
of the partnership. Tenant shall give written notice to Landlord of any general
partner's withdrawal or addition. Within thirty (30) days after this Lease is
signed Tenant shall deliver to landlord a copy of Tenant's recorded statement of
partnership or certificate of limited partnership.
Section 13.12. JOINT AND SEVERAL LIABILITY. All parties signing this
Lease as Tenant shall be jointly and severally liable for all obligations of
Tenant.
Section 13.13. EXECUTION OF LEASE. This Lease may be executed in
counterparts, and, when all counterpart documents are executed, the counterparts
shall constitute a single binding instrument. The delivery of this Lease by
Landlord to Tenant shall not be deemed to be an offer and shall not be binding
upon either party until executed and delivered by both parties.
Section 13.14. RELATIVE POSITION OF THE PARTIES. It is agreed and
understood by Landlord and Tenant that each is knowledgeable and sophisticated
in matters of business and real
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estate, including the matters set out in each section of this Lease. It is also
agreed that this Lease and each section thereof shall not be interpreted against
the drafting party but shall be interpreted equally for and against each party
hereto.
ARTICLES FOURTEEN: BROKERS
Section 14.01. BROKERS. Except as set forth in Sections 1.08, 1.09 and
1.10, the parties each represent and warrant that no agent, broker, finder or
other party is entitled to a commission or fee with respect to this Lease or the
property by reason of any relationship with Tenant. The parties each shall and
does hereby indemnify and hold the other harmless from all claims, actions,
damages, liabilities, costs and expenses of or occasioned by any such
relationship.
Section 14.02. BROKER'S COMMISSIONS. Except as set forth in Section 1.10,
Landlord shall not be responsible or liable for any broker's commission, charge,
percentage, contingency or fee with reference to the negotiation, procurement
or execution of this Lease.
ARTICLE FIFTEEN: LANDLORD'S CONSTRUCTION OF IMPROVEMENTS
Section 15.01. PREPARATION FOR OCCUPANCY. Both Landlord and Tenant
understand and acknowledge that, upon mutual execution of this Lease, Landlord
will expend money, material and labor to prepare the Property for Tenant's
occupancy, and except as otherwise provided in this Lease, that Tenant is
obligated under this Lease as of the date and time of Execution.
Section 15.02. REASONABLE COMPLIANCE WITH SPECIFICATIONS. Landlord and
Tenant further understand and acknowledge that minor changes in square footage
and construction could be necessitated prior to occupancy, and both parties
agree that this Lease will remain in full force and effect upon delivery of
possession by Landlord to Tenant, so long as there is reasonable compliance with
the Plans and Specifications set out in Exhibit "B". Any additional cost of
changes in size, design or construction necessitated by any rule, regulation,
code or ruling of any governmental agency, district, commission, board or other
authoritative body, or at the request of Tenant, will be paid by Tenant prior to
occupancy, and upon written demand of Landlord, which demand will include the
total additional cost chargeable to Tenant and the method of calculation of such
cost.
Section 15.03. SCOPE OF WORK. Landlord agrees to furnish all labor,
services, materials, tools, equipment, and supplies required
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for the prompt and efficient completion of the Property, including all work
necessary or incidental thereto, as more particularly described in the Plans and
Specifications.
It is acknowledged and understood that the Plans and specifications
summarized in Exhibits B through C are not fully completed and/or agreed upon as
of the Execution Date of this Lease. Regardless of the status of the Plans and
Specifications as of the Execution Date of this Lease, it is the understanding
and intention of the parties that the Property shall be of a type and quality
consistent with current industry standards for "concrete tilt-up industrial
buildings", as such term is commonly used in the real estate development
business.
Section 15.04. COMPLETION OF THE PROPERTY.
(a) SUBSTANTIAL COMPLETION. Subject to the provisions of Section 1.13
hereof, "Substantial Completion" shall mean the point in the progress of the
Property when construction is sufficiently complete so that no item of work
remaining to be Performed would prevent Tenant from using the Property for the
purposes contemplated by this Lease. Landlord shall, as construction of the
Property nears completion, provide Tenant with advance notice of the approximate
date at which Substantial Completion may occur. Then, upon notification by
Landlord that he considers the Property according to the Plans and
Specifications as being substantially complete, Tenant and Landlord's engineer
("Engineer") shall promptly inspect the Property and the Plans and
Specifications to determine whether it is substantially complete. If the
Engineer reasonably determines and Tenant reasonably agrees that the Plans and
Specifications are substantially complete, he or she shall issue a Certificate
of Substantial Completion indicating that substantial completion has been
achieved. If Tenant reasonably disagrees or if the Engineer's inspection
discloses any item which prevents a determination of substantial completion
("Major Item"), then Landlord shall complete such item before the Engineer
issues his Certificate of Substantial Completion or call for arbitration as set
forth in subparagraph (d). Landlord shall execute and record a Notice of
Completion within fifteen (15) days after Substantial Completion of the Work.
Landlord agrees to furnish in connection with the Engineer's issuance of
the Certificate of Substantial Completion, Conditional Lien Waiver and Release
Forms Upon Final Payment which conform to Civil Code Section 3262, for work,
labor and materials used in performance of this Lease, from Landlord and each
subcontractor and supplier that has served a preliminary 20-day notice.
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(b) PUNCH LIST. At the time of Substantial Completion, Tenant and
Landlord shall prepare, and Engineer shall approve, a written list of minor
items ("Punch List") which must be completed by Landlord in order to achieve
final completion of the Plans and Specifications by Landlord under this Lease.
In the event Tenant and Landlord are unable to agree upon the minor items to be
included on the Punch List, Engineer's reasonable determination and
classification shall be conclusive, subject however to the parties' rights to
arbitrate any dispute regarding such determination in accordance with the
provisions of subsection (d) immediately hereinbelow. Unless otherwise agreed
upon in writing by the parties, Landlord shall complete Punch List work within
thirty (30) days after receipt of the agreed upon Punch List. If Landlord fails
to complete the Punch List within thirty (30) days, Tenant shall be entitled to
complete the Punch List itself and deduct the cost thereof from any payments
remaining to be made by Tenant under this Lease. Engineer shall review the Punch
List and determine the estimated cost of completing the Punch List work.
(c) RETENTION. Tenant shall be entitled to withhold from payment of
rent, as defined in Section 4.01, an amount equal to one hundred fifty
percent (150%) of the estimated cost of completing the Punch List work
("Retention") pending completion of the Punch List work. Within seven (7)
days after notification of Engineer's certification of completion of the
Punch List work, Tenant shall pay Landlord all sums due hereunder. If Tenant
is late in paying Landlord, Tenant shall pay Landlord a late charge equal to
five percent (5%) of the amount due plus interest on such amount due at the
lesser of that maximum legal interest rate allowed by law or fifteen percent
(15%) until such amounts are paid.
(d) ARBITRATION. In the event of a dispute or disagreement regarding
Engineer's determination of those minor items to be included on the Punch List
or other matters set forth in subparagraph (a) above, said dispute shall be
submitted to binding arbitration for decision. Upon either party's written
notice to the other party of its "Intention to Arbitrate Dispute", each party
shall designate one (1) arbitrator. If any party neglects or refuses to appoint
an arbitrator within ten (10) days after receipt of such request, he shall lose
his or her right to such appointment but shall still be bound by the decision of
the arbitrators. If it is necessary to create an odd number of arbitrators, the
arbitrators shall choose another arbitrator. If such arbitrator is not chosen
within five (5) days of the arbitrators' appointments, on application by either
party, another arbitrator (or two, if necessary) shall be promptly appointed by
the then presiding Judge of the Superior Court of the State of California in and
for the County of Sacramento, acting in his or her
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individual capacity. The party making the application shall give the other
parties three (3) days notice of his or her application. The arbitrators shall
then meet in formal session to take evidence and hear arguments in accordance
with the rules of the American Arbitrators Association. Within thirty (30) days
of the formal session, the arbitrators will give written notice to all
interested parties of their "Collective Decision" by which each such party
hereby agrees to be bound. Should there be a disagreement among arbitrators, the
"Collective Decision" will be that favored by a majority of the arbitrators.
While any such arbitration is pending, Seller may at its sole discretion,
continue to perform under the terms and conditions of this Agreement. Any
arbitration proceeding conducted hereunder shall take place in Sacramento
County.
Section 15.05. TIME OF PERFORMANCE. Time is of the essence of this Lease.
Landlord agrees to begin work immediately upon execution of this Lease, to
prosecute construction of the Property energetically and in full cooperation
with Tenant and other contractors, and to complete the Property within five (5)
months of the date of issuance of the final shell building permit, subject to
any extensions granted pursuant to this Section (the "Completion Date").
Landlord shall submit a progress schedule for its work and shall cooperate, when
requested, in preparing progress schedules for the Property.
(a) FORCE MAJEURE. If Landlord is delayed in the prosecution or
completion of its obligations hereunder by the act, neglect or default of
Tenant, acts of God, including but not limited to flood, earthquake, tornado or
the like, wind, or other adverse weather including rain delays, governmental
entities, lock-outs, unavoidable casualties, war, civil commotion, strikes,
materials interruptions, fire or other casualty, or any similar matters, both
foreseeable and unforeseeable, beyond Landlord's control, or by delay in
issuance of any building or other required permit for a period in excess of
thirty (30) days from submittal of the final drawings for plan check or similar
review, then the time herein fixed for completion of such obligations shall be
extended by the number of days that Landlord has thus been delayed. Landlord
shall provide Tenant with written notice of any delay within ten (10) days after
commencement of such delay; provided, however, that only one notice is necessary
in the case of a continuing delay. Notwithstanding the occurrence of any of the
foregoing, Landlord shall use all due diligence to complete the Property by the
Completion Date.
(b) LIQUIDATED DAMAGES. THE PARTIES ACKNOWLEDGE THAT IF LANDLORD DOES NOT
COMPLETE THE PROPERTY BY THE COMPLETION DATE (AS
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SUCH DEADLINE MAY BE EXTENDED PURSUANT TO THIS SECTION), TENANT SHALL SUFFER
SUBSTANTIAL DAMAGE, PROOF OF WHICH WOULD BE COSTLY, DIFFICULT AND
IMPRACTICAL. THEREFORE, LANDLORD SHALL PAY TO TENANT LIQUIDATED DAMAGES IN
THE AMOUNT OF FIVE HUNDRED DOLLARS EVEN ($500.00) PER DAY FOR EACH DAY
BETWEEN THE ADJUSTED DEADLINE FOR COMPLETION AND THE ACTUAL DATE OF
SUBSTANTIAL COMPLETION OF THE PROPERTY. THE PARTIES AGREE THAT SUCH AMOUNT
REPRESENTS A REASONABLE SUM CONSIDERING ALL OF THE CIRCUMSTANCES EXISTING ON
THE DATE OF THIS LEASE AND REPRESENTS A FAIR AND REASONABLE ESTIMATE OF THE
DAMAGES WHICH WILL BE INCURRED BY REASON OF LATE COMPLETION PERIOD THE
PARTIES HEREBY EXPLICITLY ACKNOWLEDGE AND AGREE THAT THIS LIQUIDATED DAMAGES
PROVISION SHALL NOT APPLY IF SUBSTANTIAL COMPLETION, AS SUCH TERM IS DEFINED
HEREINABOVE, IS REACHED BY THE ADJUSTED DEADLINE FOR COMPLETION. THE PARTIES
WITNESS THEIR LEASE TO THIS LIQUIDATED DAMAGES PROVISION BY EXECUTION OF THIS
SECTION 15.05(b).
LANDLORD: /s/ Panattoni Development Company
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By:
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TENANT:
---------------------------------
By: /s/ Pacific Rice Products
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Its:
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Section 15.06. CHANGES/EXTRA WORK. Tenant, without invalidating this
Lease, may order changes in the Plans and Specifications within the general
scope of this Lease consisting of additions, deletions, or other revisions
("Change Order"). The rent and the Completion Date shall be adjusted
accordingly. All such changes in the Plans and Specifications, including changes
in the rent and the Completion Date, shall be authorized only by written Change
Order, signed by Tenant and Landlord. Landlord, prior to the commencement of
such changed or revised work, shall submit promptly to Tenant written notice of
any claim for adjustment to the rent and Completion Date for such revised work
in a manner consistent with terms of this Lease. Any changes in the rent
resulting from any such Change Orders shall not affect the amount of any
brokerage commission(s), as set forth at Section 14.02 hereinabove.
If Landlord claims that performance of certain work entitles it to
additional compensation or to an extension of the Completion Date, Landlord
shall submit a request for Change Order, along with a cost estimate (including
Landlord's reasonable profit thereon) not to exceed fifteen percent (15%) of the
cost of such changes of performing the work. If the Tenant refuses to issue a
Change Order for such work, Landlord shall have no obligation to perform that
work, provided, however, Landlord may at its sole option perform
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the work and submit a claim for additional compensation and/or extension of the
agreed upon Completion Date within fifteen (15) days after such work is
completed. In the event Tenant and landlord do not agree on the amount of the
adjustment to the rent as a result of the changed work, then in the event it is
later determined that Landlord is entitled to compensation on account of its
claim, by negotiation, arbitration, or otherwise, Landlord shall be entitled to
payment of all actual costs, including but not limited to, labor, equipment,
subcontractors, engineering, interest, fees and materials incurred, together
with a fee of thirteen percent (13%) thereon. Nothing contained in this section
shall be construed as an authorization by Tenant for Landlord to perform work
not within the scope of work described in Section 15.03 above; specifically,
this second paragraph of this Section 15.06 is intended to provide Landlord a
method for performing and receiving payment for any work which may be required
by any government agency.
Section 15.07. CHANGED CONDITIONS. In the event Landlord, prior to the
Commencement Date, discovers any toxic substance or Hazardous Material, as such
terms are defined at Section 5.04 (b) hereinabove, Landlord shall promptly
advise Tenant of the existence of such condition and suspend its operations on
the Property. Upon such discovery, Tenant and Landlord shall, at Landlord's sole
cost perform a soil analysis or other needed site assessment (hereinafter "Site
Assessment") to determine the extent, nature and origin of the Hazardous
Materials; the Site Assessment shall be performed by a party to be mutually
agreed upon by Tenant and Landlord. In the event the Site Assessment reasonably
determines that the Hazardous Materials came onto the Property prior to the
execution date of this Lease, then Tenant may elect to terminate this Lease
unless Landlord agrees to pay for the costs of any and all remedial or removal
action necessary or required to clean-up any such toxic substance or Hazardous
Material. In the event of such termination, all deposits previously made by
Tenant shall be returned to Tenant and neither party shall have any further
rights or obligations hereunder as to each other.
In the event Tenant does not elect to terminate, the parties shall
equitably adjust the rent and the Completion Date to provide for any increase or
decrease costs resulting from such condition, provided, however, Tenant shall
not be obligated to bear the cost of any remedial action necessary to clean up
any Hazardous Materials which came onto the Property prior to the execution date
of this Lease which costs shall remain the sole responsibility of Landlord. In
the event the Tenant has not elected to terminate and the parties are unable to
agree as to the existence of changed or unknown conditions, or on an appropriate
price or time
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adjustment, Landlord may elect to proceed with the Property, and such election
shall not constitute a waiver of claims for additional compensation or time by
Landlord, nor an admission by either party of the validity of Landlord's
contention, or the amount, if any, of the price or time adjustment requested.
In the event the Site Assessment reasonably determines that the Hazardous
Materials came onto the Property after the Commencement Date of this Lease, then
Tenant shall bear the cost of any remedial action necessary to clean up any such
Hazardous Materials, and further, shall equitably adjust the base rent and the
Completion Date to provide for any increased or decreased costs to Landlord
resulting from such condition.
Section 15.08. LIENS. Landlord shall defend, indemnify and hold Tenant
harmless against any and all claims, liability, loss, damage, cost or expenses,
including reasonable attorneys' fees, awards and judgments, arising by reason of
any claims, liens, stop notices or bond claims (collectively "Liens") asserted
for labor, materials, or equipment used or furnished to be used on the Property,
or union trust fund payments. Landlord agrees to cause the effect Liens to be
eliminated within thirty (30) days after written demand is made by Tenant,
provided, however, Landlord retains the right to bond around any such Liens
pending final disposition and release of said Liens.
Section 15.09. QUALITY OF THE WORK. Landlord warrants to Tenant that all
materials and equipment furnished shall be new, unless otherwise specified in
the Plans and Specifications, Change Orders or other written notification to
Tenant, and that all work under this Lease shall be of good quality, free from
faults and defects and in conformance with the Plans and Specifications and
terms of the Lease and all applicable governmental codes in effect on the date
the building permit is issued for the Plans and Specifications. All work not
conforming to these requirements, including substitutions not properly approved
and authorized, may be considered defective.
Section 15.10. PROTECTION OF WORK. Landlord shall secure and protect the
work done hereunder and assume full responsibility for the condition thereof
until Substantial Completion. If the Property is destroyed or damaged, however,
by any cause for which Tenant, its contractors, agents or anyone directly or
indirectly employed by any of them or for whose acts any of them may be liable
is responsible, Tenant shall pay Landlord for all work performed prior to the
destruction or damage and for any work done by Landlord in rebuilding or
restoring the Property. Landlord agrees to provide such protection as is
necessary to protect the Property
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and the workers of Landlord and Tenant, from Landlord's operations.
Section 15.11. INSURANCE. Landlord shall procure at Landlord's sole cost
and expense and keep in effect at all times during progress of the work either
Comprehensive General Liability insurance or Commercial General Liability
insurance, which shall insure Landlord and Tenant from the following claims
which may arise out of or result from Landlord's acts, omissions or operations
under this Lease, whether such be by Landlord or by any subcontractor or
employee: all activities occurring on the Property; workers' compensation and
disability benefit claims; claims for damages because of bodily injury,
occupational sickness or disease, or death; claims for damages because of injury
to or destruction of tangible property; and claims for damages because of bodily
injury or death or any personal property damage arising out of the ownership,
maintenance or use of any motor vehicle. Such insurance coverage shall include
Broad Form Contractual liability insurance coverage insuring all of Landlord's
indemnity obligations under this Lease. Such coverage shall have a minimum
combined single limit of liability of at least Five Million Dollars Even
($5,000,000.00) and a general aggregate limit of Five Million Dollars Even
($5,000,000.00). All such policies shall be written to apply to all bodily
injury, property damage, personal injury and other covered loss, however,
occasioned, occurring during the policy term, shall be endorsed to add Tenant as
an additional insured, to provide that such coverage shall be primary and that
any insurance maintained by Tenant shall be excess insurance only. Such coverage
shall also contain endorsements: (a) deleting any employee exclusion of personal
injury coverage; (b) including employees as additional insureds; and providing
for coverage of employer's automobile non-ownership liability. All such
insurance shall provide for severability of interests; shall provide that an act
or omission of one of the named insureds shall not reduce or avoid coverage to
the other named insureds; and shall afford coverage for all claims based on
acts, omissions, injury and damage, which claims occurred or arose (or the onset
of which occurred or arose) in whole or in part during the policy period.
Landlord shall also maintain workers' compensation insurance in accordance with
California law, and employer's liability insurance with a limit not less than
One Million Dollars Even ($1,000,000.00) per employee and one Million Dollars
Even ($1,000,000.00) per occurrence. Such coverage shall be endorsed to waive
the insurer's rights of subrogation against Tenant. Further, Landlord shall
provide a copy of such insurance certificates which name Tenant as an additional
insured under said policies.
Landlord shall purchase and maintain property insurance upon the Property
to the full insurable value thereof. This insurance
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shall include the interests of Tenant, Landlord and all contractors and
subcontractors in the Property and shall insure against the perils of fire and
extended coverage and shall include "all-risk" insurance for physical loss or
damage, including, without duplication of coverage, theft, vandalism and
malicious mischief. If not covered under the all-risk insurance, Landlord shall
effect and maintain similar property insurance on portions of the material
related to the Property stored off the Property or in transit. Any loss insured
under this paragraph shall be settled and adjusted with the insurance company
and paid to the appropriate parties only upon the prior written consent of
Tenant, which consent shall not be unreasonably withheld.
Landlord shall carry and shall also require all of Landlord's
subcontractors to obtain workmen's compensation insurance as required by law,
and broad form public liability insurance in prudent and reasonable amounts, as
reasonably determined by Landlord on a case-by-case basis.
Section 15.12. INDEMNITY. Landlord shall, with respect to all work which
is covered by or incidental to this Lease defend, indemnify, and hold Tenant and
Tenant's agents and employees harmless from and against any and all claims,
liability, loss, damage, costs, or expenses, including reasonable attorneys'
fees, awards, fines, or judgments arising by reason of the death or bodily
injury to persons or injury to property, arising out of or resulting from
construction of the Property according to the Plans and Specifications, provided
that such injury is caused in whole or in part by the negligence or wilful
misconduct of Landlord, its subcontractors or employees, regardless of whether
or not it is caused in part by a party indemnified hereunder. Provided, however,
Landlord shall not be obligated under this Lease to indemnify Tenant with
respect to any claim, liability, loss, damage, cost or expense caused in whole
or in part by any wilful misconduct or negligence of Tenant or anyone employed
directly or indirectly by Tenant, including subcontractors, or anyone for whose
acts any one of them may be liable, regardless of whether or not it was caused
in part by Landlord.
Section 15.13. CLEANUP. Landlord shall perform its work so as to maintain
the site in a clean, safe and orderly condition. Upon completion of the
Property, Landlord shall remove from the site all temporary structures, debris
and waste incident to its operation.
Section 15.14. GUARANTEE. Landlord guarantees all materials and
workmanship and agrees to replace, at is sole cost and expense, and to the
reasonable satisfaction of Tenant, any and all materials
Initials
-----
-----
38
<PAGE>
or work adjudged defective or improperly installed, and all adjacent work and
materials which may be disrupted in so doing during a period of two years from
Substantial Completion of the Property. To the extent any such replacement
interferes with Tenant's reasonable use of the Property as contemplated in this
Lease, the rent shall be abated accordingly. In the event Tenant and landlord
cannot agree on whether the material or work is defective or improperly
installed, Engineer's determination shall be final. This guarantee shall not
reduce, and is in addition to, Landlord's liability under the other provisions
of this Lease.
Section 15.15. COMPLIANCE WITH APPLICABLE GOVERNMENTAL STATUTES AND
REGULATIONS.
(a) Landlord, his employees, subcontractors, and all others acting under
his discretion or control, shall at all times observe and comply with, insofar
as they may be applicable, any and all laws, ordinances, statutes, rules and
regulations of the United States and the State of California, of their executive
and administrative agencies and of any and all other governmental agencies
having any jurisdiction over the work to be done hereunder, including, but not
limited to all building codes and labor, health and safety laws and regulations.
(b) It shall be the responsibility of the Landlord to insure that the
complete structure meets and passes the inspection and approval of appropriate
city, county and state building inspection agencies. Landlord agrees that the
completed structure shall strictly conform in every regard to all federal and
state laws and any and all other applicable ordinances, rules and regulations.
Section 15.16. PERMITS, LICENSES AND FEES. Landlord agrees to secure and
pay for all necessary permits and licenses necessary to comply with all laws,
ordinances, rules, regulations, orders and requirements of any city, county,
state, federal or other public body having jurisdiction as may be required for
the proper execution, performance and completion of the Property under this
Lease or which may effect or apply to the Property. Landlord shall pay all
applicable fees and charges, all utility connection fees, inspection fees and
other fees which may be required by law and imposed by any such public body for
the performance and completion of the Plans and Specifications under this Lease.
Landlord's obligation to pay for any permits, licenses and/or fees relating to
construction and completion of the Property shall be limited to a maximum of
Ninety-Thousand Dollars Even ($90,000.00).
Section 15.17. TAXES. Landlord agrees to accept full and exclusive
liability for the payment of all sales, use, withholding,
Initials
-----
-----
39
<PAGE>
income, excise, and similar taxes, transportation taxes, and of all
contributions and taxes for unemployment insurance and old age retirement
benefits, annuities or pensions or similar taxes or contributions now or
hereafter imposed by the United States or any state or governmental subdivision
thereof or labor organization measured by the wages, salaries or other
remuneration paid persons employed by Landlord and engaged in the performance of
the Plans and Specifications, or because of the Plans and Specifications to be
done under the Lease or because of the use of any equipment, supplies, material
or labor in the performance of this Lease; and Landlord further agrees to comply
with all rules and regulations applicable thereto. In the event Tenant is held
liable to pay any such taxes or contributions, Landlord agrees to supply Tenant
with all records necessary to compute the same and to fully reimburse Tenant
upon demand for the amount thereof paid by Tenant and Tenant shall have the
right to deduct any amount so paid from any sums due Landlord hereunder.
Section 15.18. LICENSE. Landlord represents and warrants that he is a duly
licensed general contractor by the State in which the project shall be
constructed, that the shall maintain said license in good standing during the
term of this Lease and that all subcontractors shall be duly licensed by said
State. Landlord further represents and warrants that he is experienced and
qualified to perform the construction of the Property in accordance with the
Plans and Specifications.
Landlord and Tenant have signed this Lease at the place and on the dates
specified adjacent to their signatures below and have initialed all Lease Pages
and Exhibit Pages which are attached hereto and incorporated herein by
reference.
DATED: Oct. 3, 1989 LANDLORD:
---------------
PANATTONI DEVELOPMENT COMPANY
By: /s/ Carl D. Panattoni
---------------------------
Carl D. Panattoni
Its:
--------------------------
DATED: October 4, 1989 TENANT:
----------------
PACIFIC RICE PRODUCTS, INC.
By: /s/ Curtis M. Rocca
---------------------------
Curtis M. Rocca
Its: President
By: /s/ Edward L. Parker
---------------------------
Edward L. Parker
Its: Chief Executive Officer
40
<PAGE>
By: /s/ Mark A. Graham
---------------------------
Mark A. Graham
Its: Executive Vice President
41
<PAGE>
ADDENDUM TO LEASE
DATED OCTOBER 3, 1989
BETWEEN CARL D. PANATTONI D/B/A
PANATTONI DEVELOPMENT COMPANY, AS LANDLORD
AND PACIFIC RICE PRODUCTS, INC.,
AS TENANT
Landlord hereby acknowledges that Tenant may require additional space for its
business purposes prior to the expiration of the term of this Lease.
Accordingly, notwithstanding anything to the contrary contained in this Lease,
Tenant shall have the option to lease additional space within Santa Anita Court,
as and when the same may be constructed by Landlord throughout the term hereof,
upon the following terms and conditions:
(a) As and when such additional space becomes available throughout the
term of this Lease, Landlord shall first offer such space to Tenant at the then
prevailing fair market rent. The parties hereto agree to negotiate in good faith
with respect to the determination of fair market rent.
(b) In the event Tenant does not elect to accept such space at the then
prevailing fair market rent as set forth in section (a) above, and Landlord
shall thereafter receive a bona fide offer from a third party to lease such
additional space at a rent which Landlord is willing to accept, Landlord shall
provide Tenant with written notice of such third party offer, specifying the
rent set forth therein, and Tenant shall thereafter have ten (10) days within
which to elect to lease such additional space at the same rent as set forth in
said third party offer.
(c) In the event Tenant elects to lease the additional space in accordance
with either section (a) or section (b) above, the leasing of such additional
space shall otherwise be on the same terms and conditions as contained in this
Lease.
IN WITNESS WHEREOF, the parties have executed this Addendum this 4th day of
October, 1989.
LANDLORD:
PANATTONI DEVELOPMENT COMPANY
BY: /s/ Panattoni Development Company
-----------------------------------
TENANT:
PACIFIC RICE PRODUCTS, INC.
BY: /s/ Mark Graham
-----------------------------------
Title: Executive Vice President
<PAGE>
FIRST AMENDMENT
to ABSOLUTE NET LEASE
Dated October 3, 1989
By and Between
CARL D. PANATTONI, LESSOR
and
PACIFIC RICE PRODUCTS, INC., LESSEE
The parties above acknowledge and hereby agree that the lease as
reference above, the lease riders, the addendum and the exhibits attached
thereto are hereby amended as follows:
1. The rent as stated on page 2 in Section 1.12 shall be amended to be
$16,105 per month for the first 60 months of the lease term and $18,505 for the
second 60 months of the lease term.
All other terms and conditions of the lease shall remain in full force
and effect.
In witness whereof the parties have executed this amendment as of the
dates signed below.
LESSOR LESSEE
CARL D. PANATTONI PACIFIC RICE PRODUCTS, INC.
By: /s/ Carl D. Panattoni By: /s/ Mark Graham
-------------------------------- ----------------------------------
Its: Partner Its: Exec VP
-------------------------------- ----------------------------------
Date: 11/14/90 Date: 11/9/90
-------------------------------- ----------------------------------
<PAGE>
SECOND AMENDMENT
to ABSOLUTE NET LEASE
Dated
October 3, 1989
By and Between
CARL D. PANATTONI, LESSOR
and
PACIFIC RICE PRODUCTS, INC., LESSEE
The parties above acknowledge and hereby agree that the lease as referenced
above, the lease riders, the addendum and the exhibits attached thereto are
hereby amended as follows:
1. The commencement date of the lease shall be July 18, 1990 and the
expiration of the lease shall be May 31, 2000.
All other terms and conditions of the lease shall remain in full force and
effect.
In witness whereof the parties have executed this amendment as of the dates
signed below.
"Lessor" "Lessee"
CARL D. PANATTONI PACIFIC RICE PRODUCTS, INC.
By: /s/ By: /s/ Mark Graham
------------------------------- --------------------------------
Its: Partner Its: Exec VP
------------------------------- --------------------------------
Date: 11/8/90 Date: 10/31/90
------------------------------- --------------------------------
<PAGE>
PANATTONI
- --------------------
DEVELOPMENT COMPANY
March 15, 1990
Mr. Mark Graham
Pacific Rice Products
1250 Harter Avenue
Woodland, CA 95695
Dear Mark:
This letter is to confirm your telephone conversation with Rod Johnson of our
company regarding the financing for change orders to be constructed within our
approximately 109,000 square foot building on Santa Anita Court in Woodland,
California.
Per Rod, you would like to amortize the value of the Change Order improvements
over the term of the underlying lease, i.e. ten years commencing upon
substantial completion, or such other date as specified in the Lease executed on
October 3, 1989, using an annual interest rate of 12%. From our construction
department, I received an intercompany memo summarizing your Change Orders. As
you can see from the attached, the total to be included within your monthly rent
and amortized per the terms above, is $179,535.50, with one additional Change
Order, a switch gear, to be paid directly to PDC and not included in your
monthly rent.
Based on the above, your monthly rental, as described in the executed lease,
section 1.12, will be increased by $2,575 per month or approximately $.043
per square foot for a total of $16,105 per month for the first sixty (60)
months and shall be increased to $18,505 for months sixty one (61) through
one hundred twenty (120).
Please indicate your approval, as well as authorize the preparation and
execution of an amendment to the existing lease, for the above terms and
conditions by signing the bottom of this correspondence and returning the
original to me as soon as possible, keeping a copy for your records.
<PAGE>
Mark Graham
Pacific Rice Products
March 15, 1990
page 2
I have also spoken to Scott Lee of our Company regarding possible additional
space you may require in the south end of the building in the near future. I'll
be contacting you soon with more information. Until then, if you have any
further questions or if I can be of any further assistance, please don't
hesitate to call me at (916) 689-6522. Thank you in advance for your prompt
response to this agreement.
Sincerely,
/s/ Michael A. Grant
Michael A. Grant
Marketing Coordinator
Approved and Accepted:
PACIFIC RICE PRODUCTS
/s/ Mark Graham 3/22/90
- ------------------------------------------- -------------------
NAME DATE
Executive VP
- -------------------------------------------
TITLE
enclosure
CC: Tom McClure
Rod Johnson
Scott Lee
<PAGE>
ASSIGNMENT, ASSUMPTION AND CONSENT AGREEMENT
THIS ASSIGNMENT, ASSUMPTION AND CONSENT AGREEMENT (this "Agreement") is entered
into as of the 9th day of MAY 1994 by and between BETTY KUHN ("Lessor"),
PACIFIC GRAIN RICE PRODUCTS, INC., a California corporation ("Assignor"), and
VALLEY RECORD DISTRIBUTORS, a California corporation ("Assignee"), with
reference to the following facts:
A. Carl O. Panattoni ("Panattoni"), as predecessor-in-interest to Lessor,
and Assignor have heretofore entered into that certain Build-To-Suit Facility
Absolute Net Lease ("Absolute Net Lease") dated as of October 3, 1989, pursuant
to which Panattoni leased to Tenant a building consisting of approximately
60,000 square feet of rentable space located on Santa Anita Court, Woodland,
California, together with easements for ingress and egress and parking
(collectively, the "Property"), as more particularly described therein.
B. The Absolute Net Lease was amended by that certain First Amendment to
Absolute Net Lease dated November 14, 1990, that certain Second Amendment to
Absolute Net Lease dated November 8, 1990, and that certain letter agreement
dated March 15, 1990 (as amended, the "Lease").
C. Pursuant to Section 13.03 of the Lease, Lessor presently holds a
security deposit (the "Security Deposit") in the amount of Sixteen Thousand
One Hundred Five and No/100 Dollars--($16,105.00) as security for the
performance of the obligations of the tenant under the Lease.
D. Assignor now desires to assign to Assignee all of its rights, title
and interest in the Lease, and Lessor is willing to consent to said assignment
on the conditions set forth below.
NOW, THEREFORE, in consideration of the mutual covenants and promises of
the parties and as otherwise provided herein, the parties hereto hereby agree as
follows:
1. EFFECTIVE DATE OF ASSIGNMENT. The assignment in this Agreement shall
take effect (the "Effective Date") on the earlier to occur of (i) July 31, 1994
or (ii) the date determined by Assignor upon not less than thirty (30) days'
prior written notice to Assignee and Lessor, and Assignor shall have delivered
possession of the Property to Assignee on such date.
2. ASSIGNMENT AND ASSUMPTION. Assignor hereby assigns and transfers to
Assignee all of its rights, title and interest in the Lease (including, without
limitation, Assignor's right to recover the Security Deposit held by Lessor at
the end of the
1.
<PAGE>
term of the Lease), and Assignee accepts the assignment and assumes and agrees
to perform, as a direct obligation to Lessor, all the obligations of the tenant
under the Lease arising from and after the Effective Date.
3. PAYMENT TO ASSIGNEE. On or prior to the Effective Date, Assignor shall
pay to Assignee the amount of Seventy-Three Thousand Four Hundred Fifty and
Dollars ($73,450.00) as consideration for Assignee's obligations hereunder.
4. INDEMNITY BY ASSIGNEE. Assignor shall indemnify, protect, defend by
counsel reasonably satisfactory to Assignee and hold Assignee harmless from and
against any and all losses, costs, liabilities, damages and expenses, including,
without limitation, reasonable attorneys' fees, occurring prior to the Effective
Date and arising out of Assignor's obligations under the Lease.
5. INDEMNITY BY ASSIGNEE. Assignee shall indemnify, protect, defend by
counsel reasonably satisfactory to Assignor and hold Assignor harmless from and
against any and all losses, costs, liabilities, damages and expenses, including,
without limitation, reasonable attorneys' fees, occurring on and after the
Effective Date and arising out of Assignee's obligations under the Lease.
6. LESSOR'S CONSENT. Lessor consents to the assignment and assumption of
the Lease pursuant to this Agreement.
7. ASSIGNOR'S LIABILITY. Lessor hereby releases Assignor from all of its
obligations and liabilities as tenant under the Lease accruing on or after the
Effective Date.
8. SECURITY DEPOSIT. The parties acknowledge that Lessor presently holds
the Security Deposit as security for the performance of the obligations of the
tenant under the Lease.
9. RATIFICATION. The Lease as amended is hereby ratified, confirmed and
approved in all respects.
10. ENTIRE AGREEMENT. This Agreement represents the entire understanding
between the parties concerning the subject matter hereof, and there are no
understandings or agreements between them relating to the Lease or the Property
not set forth in writing and signed by the parties hereto. No party hereto has
relied upon any representation, warranty or understanding not set forth herein,
either oral or written, as an inducement to enter into this Agreement.
11. ATTORNEYS' FEES. If any party hereto commences an action against any
other party arising out of or in connection
2.
<PAGE>
with this Agreement, the prevailing party or parties shall be entitled to
recover from the losing party or parties reasonable attorneys' fees and costs of
suit.
12. SUCCESSORS. This Agreement shall be binding on and inure to the
benefit of the parties hereto and their successors and assigns.
13. GOVERNING LAW. This Agreement shall be construed under and shall in all
respects be governed by the laws of the State of California.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the day and year first above written.
LESSOR: ASSIGNOR:
/s/ Betty Kuhn PACIFIC RICE PRODUCTS, INC.,
- -------------------------------- a California corporation
BETTY KUHN
By: /s/ Mark Graham
---------------------------------------
Name: MARK GRAHAM
----------------------------------
Title: Executive Vice President
----------------------------------
By: /s/ Neil Glick
---------------------------------------
Name: NEIL GLICK
----------------------------------
Title: Treasurer
----------------------------------
ASSIGNEE:
VALLEY RECORDS DISTRIBUTORS,
a California corporation
By: /s/ Robert R. Cain
---------------------------------------
Name: ROBERT R. CAIN
----------------------------------
Title: PRESIDENT
----------------------------------
By: /s/ Patricia L. Wright
---------------------------------------
Name: Patricia L. Wright
----------------------------------
Title: C.F.O.
----------------------------------
3.
<PAGE>
[LOGO] CALIFORNIA CHAPTERS OF THE
SOCIETY OF INDUSTRIAL AND OFFICE REALTORS-Registered Trademark-, INC.
INDUSTRIAL REAL ESTATE LEASE
(MULTI-TENANT FACILITY)
ARTICLE ONE: BASIC TERMS
This Article One contains the Basic Terms of this Lease between the
Landlord and Tenant named below. Other Articles, Sections and Paragraphs of the
Lease referred to in this Article One explain and define the Basic Terms and are
to be read in conjunction with the Basic Terms.
Section 1.01. DATE OF LEASE: May 21, 1992
Section 1.02. LANDLORD (INCLUDE LEGAL ENTITY): PANATTONI DEVELOPMENT
COMPANY
Address of Landlord: 8401 Jackson Road, Sacramento, California 95826
Section 1.03. TENANT (INCLUDE LEGAL ENTITY): VALLEY RECORD DISTRIBUTORS,
INC.
Address of Tenant: 1280 Santa Anita Court, Woodland, California 95695
Section 1.04. PROPERTY: The Property is part of Landlord's multi-tenant
real property development know as the Pacific Grain Facility, 1275 Santa Anita
Court, Woodland, California and described or depicted in Exhibit "A" (the
"Project"). The Project includes the land, the buildings and all other
improvements located on the land, and the common areas described in Paragraph
4.05(a). The Property is (include street address, approximate square footage
and description) See Addendum
Section 1.05. LEASE TERM: See Addendum _____ years _____ months
beginning on ______________ or such other date as is specified in this Lease,
and ending on ______________________
Section 1.06. PERMITTED USES: (See Article Five) Storage and distribution
Section 1.07. TENANT'S GUARANTOR: (If none, so state) N/A
Section 1.08. BROKERS: (See Article Fourteen) (If none, so state)
LANDLORD'S BROKER: N/A
TENANT'S BROKER: N/A
Section 1.09. COMMISSION PAYABLE TO LANDLORD'S BROKER: (See Article
Fourteen) $ N/A
Section 1.10. INITIAL SECURITY DEPOSIT: (See Section 3.03) $ N/A
Section 1.11. VEHICLE PARKING SPACES ALLOCATED TO TENANT: (See Section
4.05) Per Code
Section 1.12. RENT AND OTHER CHARGES PAYABLE BY TENANT:
(a) BASE RENT: See Addendum Dollars ($ _________) per month for the
first __________ months, as provided in Section 3.01, and shall be increased on
the first day of the ______________ month(s) after the Commencement Date, either
(i) as provided in Section 3.02, or (ii) _______________________________________
___________________________. (If (ii) is completed, then (i) and Section 3.02
are inapplicable.)
(b) OTHER PERIODIC PAYMENTS: (i) Real Property Taxes (See Section 4.02);
(ii) Utilities (See Section 4.03); (iii) Insurance Premiums (See Section 4.04);
(iv) Tenant's Initial Pro Rata Share of Common Area Expenses * % (See Section
4.05); (v) Impounds for insurance Premiums and Property Taxes (See Section
4.08); (vi) Maintenance, Repairs and Alterations (See Article Six). Phase I:
45.1%; Phases I & II: to be calculated upon determination of square footage.
Section 1.13. LANDLORD'S SHARE OF PROFIT ON ASSIGNMENT OR SUBLEASE: (See
Section 9.05) N/A ____________ percent (_______ %) of the Profit (the
"Landlord's Share").
Section 1.14. RIDERS: The following Riders are attached to and made a
part of this Lease: (If none, so state)
Addendum to Lease
Exhibit "A" : Property Description
Exhibit "1" : Phase I Tenant Improvements
Exhibit "2" : Phase II Tenant Improvements
1 Initials ________________
(MULTI-TENANT NET FORM) ________________
<PAGE>
ARTICLE TWO: LEASE TERM
Section 2.01. LEASE OF PROPERTY FOR LEASE TERM. Landlord leases the
Property to Tenant and Tenant leases the Property from Landlord for the Lease
Term. The Lease Term is for the period stated in Section 1.05 above and
shall begin and end on the dates specified in Section 1.05 above, unless the
beginning or end of the Lease Term is changed under any provision of this
Lease. The "Commencement Date" shall be the date specified in Section 1.05
above for the beginning of the Lease Term, unless advanced or delayed under
any provision of this Lease.
Section 2.02. DELAY IN COMMENCEMENT FOR PHASE I. Landlord shall not be
liable to Tenant if Landlord does not deliver possession of the Property to
Tenant on the Commencement Date. Landlord's non-delivery of the Property to
Tenant on that date shall not affect this Lease or the obligations of Tenant
under this Lease except that the Commencement Date shall be delayed until
Landlord delivers possession of the Property to Tenant and the Lease Term shall
be extended for a period equal to the delay in delivery of possession of the
Property to Tenant, plus the number of days necessary to end the Lease Term on
the last day of a month. If Landlord does not deliver possession of the
Property to Tenant within sixty (60) days after the Commencement Date, Tenant
may elect to cancel this Lease by giving written notice to Landlord within ten
(10) days after the sixty (60) -day period ends. If Tenant gives such notice,
the Lease shall be cancelled and neither Landlord nor Tenant shall have any
further obligations to the other. If Tenant does not give such notice, Tenant's
right to cancel the Lease shall expire and the Lease Term shall commence upon
the delivery of possession of the Property to Tenant. If delivery of possession
of the Property to Tenant is delayed, Landlord and Tenant shall, upon such
delivery, execute an amendment to this Lease setting forth the actual
Commencement Date and expiration date of the Lease. Failure to execute such
amendment shall not affect the actual Commencement Date and expiration date of
the Lease. See Addendum Section 1.05 for Delay of Commencement for Phase I and
II.
Section 2.03. EARLY OCCUPANCY. If Tenant occupies the Property prior
to the Commencement Date, Tenant's occupancy of the Property shall be subject
to all of the provisions of this Lease. Early occupancy of the Property
shall not advance the expiration date of this Lease. Tenant shall pay Base
Rent and all other charges specified in this Lease for the early occupancy
period.
Section 2.04. HOLDING OVER. Tenant shall vacate the Property upon the
expiration or earlier termination of this Lease. Tenant shall reimburse
Landlord for and indemnify Landlord against all damages which Landlord incurs
from Tenant's delay in vacating the Property. If Tenant does not vacate the
Property upon the expiration or earlier termination of the Lease and Landlord
thereafter accepts rent from Tenant, Tenant's occupancy of the Property shall be
a "month-to-month" tenancy, subject to all of the terms of this Lease applicable
to a month-to-month tenancy except that the Base Rent then in effect shall be
increased by twenty-five percent (25%).
Section 2.05. EARLY TERMINATION. See Addendum.
ARTICLE THREE: BASE RENT
Section 3.01. TIME AND MANNER OF PAYMENT. Upon execution of this Lease,
Tenant shall pay Landlord the Base Rent in the amount stated in Paragraph
1.12(a) above for the first month of the Lease Term. On the first day of the
second month of the Lease Term and each month thereafter, Tenant shall pay
Landlord the Base Rent, in advance, without offset, deduction or prior demand.
The Base Rent shall be payable at Landlord's address or at such other place as
Landlord may designate in writing.
2 Initials ________________
(MULTI-TENANT NET FORM) ________________
<PAGE>
Section 3.03. SECURITY DEPOSIT; INCREASES.
Section 3.04. TERMINATION; ADVANCE PAYMENTS. Upon termination of this
Lease under Article Seven (Damage or Destruction), Article Eight (Condemnation)
or any other termination not resulting from Tenant's default, and after Tenant
has vacated the Property in the manner required by this Lease, Landlord shall
refund or credit to Tenant (or Tenant's successor) the unused portion of the
Security Deposit, any advance rent or other advance payments made by Tenant to
Landlord, and any amounts paid for real property taxes and other reserves which
apply to any time periods after termination of the Lease.
ARTICLE FOUR: OTHER CHARGES PAYABLE BY TENANT
Section 4.01. ADDITIONAL RENT. All charges payable by Tenant other than
Base Rent are called "Additional Rent." Unless this Lease provides otherwise,
Tenant shall pay all Additional Rent then due with the next monthly installment
of Base Rent. The term "rent" shall mean Base Rent and Additional Rent.
Section 4.02. PROPERTY TAXES.
(a) REAL PROPERTY TAXES. Tenant shall pay all real property taxes on the
Property (including any fees, taxes or assessments against, or as a result of,
any tenant improvements installed on the Property by or for the benefit of
Tenant) during the Lease Term. Subject to Paragraph 4.02(c) and Section 4.08
below, such payment shall be made at least ten (10) days prior to the
delinquency date of the taxes. Within such ten (10) -day period, Tenant shall
furnish Landlord with satisfactory evidence that the real property taxes have
been paid. Landlord shall reimburse Tenant for any real property taxes paid by
Tenant covering any period of time prior to or after the Lease Term. If Tenant
fails to pay the real property taxes when due, Landlord may pay the taxes and
Tenant shall reimburse Landlord for the amount of such tax payment as Additional
Rent.
(1) PROPERTY TAX ASSESSMENT. See Addendum
(b) DEFINITION OF "REAL PROPERTY TAX." "Real property tax" means: (i)
any fee, license fee, license tax, business license fee, commercial rental tax,
levy, charge, assessment, penalty or tax imposed by any taxing authority against
the Property; (ii) any tax on the Landlord's right to receive, or the receipt
of, rent or income from the Property or against Landlord's business of leasing
the Property; (iii) any tax or charge for fire protection, streets, sidewalks,
road maintenance, refuse or other services provided to the Property by any
governmental agency; (iv) any tax imposed upon this transaction or based upon a
re-assessment of the Property due to a change of ownership, as defined by
applicable law, or other transfer of all or part of Landlord's interest in the
Property; and (v) any charge or fee replacing any tax previously included within
the definition of real property tax. "Real property tax" does not, however,
include Landlord's federal or state income, franchise, inheritance or estate
taxes.
(c) JOINT ASSESSMENT. If the Property is not separately assessed,
Landlord shall reasonably determine Tenant's share of the real property tax
payable by Tenant under Paragraph 4.02(a) from the assessor's worksheets or
other reasonably available information. Tenant shall pay such share to
Landlord within fifteen (15) days after receipt of Landlord's written
statement.
(d) PERSONAL PROPERTY TAXES.
(i) Tenant shall pay all taxes charged against trade fixtures,
furnishings, equipment or any other personal property belonging to
Tenant. Tenant shall try to have personal property taxed separately
from the Property.
(ii) If any of Tenant's personal property is taxed with the
Property, Tenant shall pay Landlord the taxes for the personal
property within fifteen (15) days after Tenant receives a written
statement from Landlord for such personal property taxes.
Section 4.03. UTILITIES. Tenant shall pay, directly to the appropriate
supplier, the cost of all natural gas, heat, light, power, sewer service,
telephone, water, refuse disposal and other utilities and services supplied to
the Property. However, if any services or utilities are jointly metered with
other property. Landlord shall make a reasonable determination of Tenant's
proportionate share of the cost of such utilities and services and Tenant shall
pay such share to Landlord within fifteen (15) days after receipt of Landlord's
written statement.
3 INITIALS ________________
(MULTI-TENANT NET FORM) ________________
<PAGE>
Section 4.04. INSURANCE POLICIES.
(a) LIABILITY INSURANCE. During the Lease Term, Tenant shall maintain a
policy of commercial general liability insurance (sometimes known as broad form
comprehensive general liability insurance) insuring Tenant against liability for
bodily injury, property damage (including loss of use of property) and personal
injury arising out of the operation, use or occupancy of the Property. Tenant
shall name Landlord as an additional insured under such policy. The initial
amount of such insurance shall be One Million Dollars ($1,000,000) per
occurrence and shall be subject to periodic increase based upon inflation,
increased liability awards, recommendation of Landlord's professional insurance
advisers and other relevant factors. The liability insurance obtained by Tenant
under this Paragraph 4.04(a) shall (i) be primary and non-contributing; (ii)
contain cross-liability endorsements; and (iii) insure Landlord against Tenant's
performance under Section 5.05, if the matters giving rise to the Indemnity
under Section 5.05 result from the negligence of Tenant. The amount and
coverage of such insurance shall not limit Tenant's liability nor relieve Tenant
of any other obligation under this Lease. Landlord may also obtain
comprehensive public liability insurance in an amount and with coverage
determined by Landlord insuring Landlord against liability arising out of
ownership, operation, use or occupancy of the Property. The policy obtained by
Landlord shall not be contributory and shall not provide primary insurance.
(b) PROPERTY AND RENTAL INCOME INSURANCE. During the Lease Term,
Landlord shall maintain policies of insurance covering loss of or damage to
the Property in the full amount of its replacement value. Such policy shall
contain an Inflation Guard Endorsement and shall provide protection against
all perils included within the classification of fire, extended coverage,
vandalism, malicious mischief, special extended perils (all risk), sprinkler
leakage and any other perils which Landlord deems reasonably necessary,
Landlord shall have the right to obtain flood and earthquake insurance if
required by any lender holding a security interest in the Property. Landlord
shall not obtain insurance of Tenant's fixtures or equipment or building
improvements installed by Tenant on the Property. During the Lease Term,
Landlord shall also maintain a rental income insurance policy, with loss
payable to Landlord, in an amount equal to one year's Base Rent, plus
estimated real property taxes and insurance premiums. Tenant shall be liable
for the payment of any deductible amount under Landlord's or Tenant's
insurance policies maintained pursuant to this Section 4.04, in an amount not
to exceed Ten Thousand Dollars ($10,000). Tenant shall not do or permit
anything to be done which invalidates any such insurance policies.
(c) PAYMENT OF PREMIUMS. Subject to Section 4.08, Tenant shall pay all
premiums for the insurance policies described in Paragraphs 4.04(a) and (b)
(whether obtained by Landlord or Tenant) within fifteen (15) days after
Tenant's receipt of a copy of the premium statement or other evidence of the
amount due, except Landlord shall pay all premiums for non-primary
comprehensive public liability insurance which Landlord elects to obtain as
provided in Paragraph 4.04(a). For insurance policies maintained by Landlord
which cover improvements on the entire Project, Tenant shall pay Tenant's
prorated share of the premiums, in accordance with the formula in Paragraph
4.05(a) for determining Tenant's share of Common Area costs. If insurance
policies maintained by Landlord cover improvements on real property other
than the Project, Landlord shall deliver to Tenant a statement of the premium
applicable to the Property showing in reasonable detail how Tenant's share of
the premium was computed. If the Lease Term expires before the expiration of
an insurance policy maintained by Landlord, Tenant shall be liable for
Tenant's prorated share of the insurance premiums. Before the Commencement
Date, Tenant shall deliver to Landlord a copy of any policy of insurance
which Tenant is required to maintain under this Section 4.04. At least
thirty (30) days prior to the expiration of any such policy, Tenant shall
deliver to Landlord a renewal of such policy. As an alternative to providing
a policy of insurance, Tenant shall have the right to provide Landlord a
certificate of insurance, executed by an authorized officer of the insurance
company, showing that the insurance which Tenant is required to maintain
under this Section 4.04 is in full force and effect containing such other
information which Landlord reasonably requires.
(d) GENERAL INSURANCE PROVISIONS.
(i) Any insurance which Tenant is required to maintain under this
Lease shall include a provision which requires the insurance carrier to
give Landlord not less than thirty (30) days' written notice prior to any
cancellation or modification of such coverage.
(ii) If Tenant fails to deliver any policy, certificate or renewal to
Landlord required under this Lease within the prescribed time period or if
any such policy is canceled or modified during the Lease Term without
Landlord's consent, Landlord may obtain such insurance, in which case
Tenant shall reimburse Landlord for the cost of such insurance within
fifteen (15) days after receipt of a statement that indicates the cost of
such insurance.
(iii) Tenant shall maintain all insurance required under this Lease
with companies holding a "General Policy Rating" of A-12 or better, as set
forth in the most current issue of "Best Key Rating Guide". Landlord and
Tenant acknowledge the insurance markets are rapidly changing and that
insurance in the form and amounts described in this Section 4.04 may not be
available in the future. Tenant acknowledges that the insurance described
in this Section 4.04 is for the primary benefit of Landlord. If at any
time during the Lease Term, Tenant is unable to maintain the insurance
required under the Lease, Tenant shall nevertheless maintain insurance
coverage which is customary and commercially reasonable in the insurance
industry for Tenant's type of business, as that coverage may change from
time to time, Landlord makes no representation as to the adequacy of such
insurance to protect Landlord's or Tenant's interests. Therefore, Tenant
shall obtain any such additional property or liability insurance which
Tenant deems necessary to protect Landlord and Tenant.
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(iv) Unless prohibited under any applicable insurance policies
maintained, Landlord and Tenant each hereby waive any and all rights of
recovery against the other, or against the officers, employees, agents or
representatives of the other, for loss of or damage to its property or the
property of others under its control, if such loss or damage is covered by
any insurance policy in force (whether or not described in this Lease) at
the time of such loss or damage. Upon obtaining the required policies of
insurance, Landlord and Tenant shall give notice to the insurance carriers
of this mutual waiver of subrogation.
Section 4.05. COMMON AREAS; USE, MAINTENANCE AND COSTS.
(a) COMMON AREAS. As used in this Lease, "Common Areas" shall mean all
areas within the Project which are available for the common use of tenants of
the Project and which are not leased or held for the exclusive use of Tenant or
other tenants, including, but not limited to, parking areas, driveways,
sidewalks, loading areas, access roads, corridors, landscaping and planted
areas. Landlord, from time to time, may change the size, location, nature and
use of any of the Common Areas, convert Common Areas into leaseable areas,
construct additional parking facilities (including parking structures) in the
Common Areas, and increase or decrease Common Areas land and/or facilities.
Tenant acknowledges that such activities may result in inconvenience to Tenant.
Such activities and changes are permitted if they do not materially affect
Tenant's use of the Property.
(b) USE OF COMMON AREAS. Tenant shall have the nonexclusive right (in
common with other tenants and all others to whom Landlord has granted or may
grant such rights) to use the Common Areas for the purposes intended, subject to
such reasonable rules and regulations as Landlord may establish from time to
time. Tenant shall abide by such rules and regulations and shall use its best
effort to cause others who use the Common Areas with Tenant's express or implied
permission to abide by Landlord's rules and regulations. At any time, Landlord
may close any Common Areas to perform any acts in the Common Areas as, in
Landlord's judgment, are desirable to improve the Project. Landlord shall give
Tenant advance notice and shall try to minimize inconvenience or impact on
Tenant. Tenant shall not interfere with the rights of Landlord, other tenants
or any other person entitled to use the Common Areas.
(c) SPECIFIC PROVISION FOR VEHICLE PARKING. Tenant shall be entitled to
use the number of vehicle parking spaces in the Project allocated to Tenant
in Section 1.11 of the Lease without paying any additional rent. Tenant's
parking shall not be reserved and shall be limited to vehicles no larger
than standard size automobiles or pickup utility vehicles. Tenant shall not
cause large trucks or other large vehicles to be parked within the Project or
on the adjacent public streets that block access to other vehicles.
Temporary parking of large delivery vehicles in the Project maybe permitted
by the rules and regulations established by Landlord. Vehicles shall be
parked only in striped parking spaces and not in driveways, loading areas or
other locations not specifically designated for parking. Handicapped spaces
shall only be used by those legally permitted to use them. If Tenant parks
more vehicles in the parking area than the number set forth in Section 1.11
of this Lease, such conduct may be a material breach of this Lease.
(d) MAINTENANCE OF COMMON AREAS. Landlord shall maintain the Common
Areas in good order, condition and repair and shall operate the Project, in
Landlord's sole discretion, as a first-class industrial/commercial real
property development. Tenant shall pay Tenant's pro rata share (as
determined below) of all costs incurred by Landlord for the operation and
maintenance of the Common Areas. Common Area costs include, but are not
limited to, costs and expenses for the following: gardening and landscaping;
utilities, water and sewage charges; maintenance of signs (other than
tenants' signs); premiums for liability, property damage, fire and other
types of casualty insurance on the Common Areas and worker's compensation
insurance; all property taxes and assessments levied on or attributable to
the Common Areas and all Common Area Improvements; all personal property
taxes levied on or attributable to personal property used in connection with
the Common Areas; straight-line depreciation on personal property owned by
Landlord which is consumed in the operation or maintenance of the Common
Areas; rental or lease payments paid by Landlord for rented or leased
personal property used in the operation or maintenance of the Common Areas;
fees for required licenses and permits; repairing, resurfacing, repaving,
maintaining, painting, lighting, cleaning, refuse removal, security and
similar items; and a reasonable allowance to Landlord for Landlord's
supervision of the Common Areas (not to exceed two percent (2%) of the gross
rents of the Project for the calendar year). Landlord may cause any or all
of such services to be provided by third parties and the cost of such
services shall be included in Common Area costs. Common Area costs shall not
include depreciation of real property which forms part of the Common Areas.
Landlord shall give Tenant advance notice of any repairs greater than
$25,000.00. Tenant shall have six (6) months from notice to pay any
assessment greater than $10,000.00.
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(e) TENANT'S SHARE AND PAYMENT. Tenant shall pay Tenant's annual pro rata
share of all Common Area costs (prorated for any fractional month) upon written
notice from Landlord that such costs are due and payable, and in any event prior
to delinquency. Tenant's pro rata share shall be calculated by dividing the
square foot area of the Property, as set forth in Section 1.04 of the Lease, by
the aggregate square foot area of the Project which is leased or held for lease
by tenants, as of the date on which the computation is made. Tenant's initial
pro rata share is set out in Paragraph 1.13(b). Any changes in the Common Area
costs and/or the aggregate area of the Project leased or held for lease during
the Lease Term shall be effective on the first day of the month after such
change occurs. Landlord may, at Landlord's election, estimate in advance and
charge to Tenant as Common Area costs, all real property taxes for which Tenant
is liable under Section 4.02 of the Lease, all insurance premiums for which
Tenant is liable under Section 4.04 of the Lease, all maintenance and repair
costs for which Tenant is liable under Section 8.04 of the Lease, and all other
Common Area costs payable by Tenant hereunder. At Landlord's election, such
statements of estimated Common Area costs shall be delivered monthly, quarterly
or at any other periodic intervals to be designated by Landlord. Landlord may
adjust such estimates at any time based upon Landlord's experience and
reasonable anticipation of costs. Such adjustments shall be effective as of the
next rent payment date after notice to Tenant. Within sixty (60) days after the
end of each calendar year of the Lease Term, Landlord shall deliver to Tenant a
statement prepared in accordance with generally accepted accounting principles
setting forth, in reasonable detail, the Common Area costs paid or incurred by
Landlord during the preceding calendar year and Tenant's pro rata share. Upon
receipt of such statement, there shall be an adjustment between Landlord and
Tenant, with payment to or credit given by Landlord (as the case may be) so that
Landlord shall receive the entire amount of Tenant's share of such costs and
expenses for such period.
Section 4.06. LATE CHARGES. Tenant's failure to pay rent promptly may
cause Landlord to incur unanticipated costs. The exact amount of such costs
are impractical or extremely difficult to ascertain. Such costs may include,
but are not limited to, processing and accounting charges and late charges
which may be imposed on Landlord by any ground lease, mortgage or trust deed
encumbering the Property. Therefore, if Landlord does not receive any rent
payment within ten (10) days after it becomes due, Tenant shall pay Landlord
a late charge equal to ten percent (10%) of the overdue amount. The parties
agree that such late charge represents a fair and reasonable estimate of the
costs Landlord will incur by reason of such late payment.
Section 4.07. INTEREST ON PAST DUE OBLIGATIONS. Any amount owed by Tenant
to Landlord which is not paid when due shall bear interest at the rate of
fifteen percent (15%) per annum from the due date of such amount. However,
interest shall not be payable on late charges to be paid by Tenant under this
Lease. The payment of interest on such amounts shall not excuse or cure any
default by Tenant under this Lease. If the interest rate specified in this
Lease is higher than the rate permitted by law, the interest rate is hereby
decreased to the maximum legal interest rate permitted by law.
Section 4.08. IMPOUNDS FOR INSURANCE PREMIUMS AND REAL PROPERTY TAXES. If
requested by any ground lessor or lender to whom Landlord has granted a security
interest in the Property, or if Tenant is more than ten (10) days late in the
payment of rent more than once in any consecutive twelve (12)-month period,
Tenant shall pay Landlord a sum equal to one-twelfth (1/12) of the annual real
property taxes and insurance premiums payable by Tenant under this Lease,
together with each payment of Base Rent. Landlord shall hold such payments in a
non-interest bearing impound account. If unknown, Landlord shall reasonably
estimate the amount of real property taxes and insurance premiums when due.
Tenant shall pay any deficiency of funds in the impound account to Landlord upon
written request. If Tenant defaults under this Lease, Landlord may apply any
funds in the impound account to any obligation then due under this Lease.
ARTICLE FIVE: USE OF PROPERTY
Section 5.01. PERMITTED USES. Tenant may use the Property only for the
Permitted Uses set forth in Section 1.06 above.
Section 5.02. MANNER OF USE. Tenant shall not cause or permit the
Property to be used in any way which constitutes a violation of any law,
ordinance, or governmental regulation or order, which annoys or interferes with
the rights of tenants of the Project, or which constitutes a nuisance or waste.
Tenant shall obtain and pay for all permits, including a Certificate of
Occupancy, required for Tenant's occupancy of the Property and shall promptly
take all actions necessary to comply with all applicable statues, ordinances,
rules, regulations, orders and requirements regulating the use by Tenant of the
Property, including the Occupational Safety and Health Act.
Section 5.03. HAZARDOUS MATERIALS. See Addendum
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Section 5.04. SIGNS AND AUCTIONS. Tenant shall not place any signs on
the Property without Landlord's prior written consent. Tenant shall not conduct
or permit any auctions or sheriff's sales at the Property.
Section 5.05. INDEMNITY. Tenant shall indemnify Landlord against and hold
Landlord harmless from any and all costs, claims or liability arising from: (a)
Tenant's use of the Property; (b) the conduct of Tenant's business or anything
else done or permitted by Tenant to be done in or about the Property, including
any contamination of the Property or any other property resulting from the
presence or use of Hazardous Material caused or permitted by Tenant; (c) any
breach or default in the performance of Tenant's obligations under this Lease;
(d) any misrepresentation or breach of warranty by Tenant under this Lease; or
(e) other acts or omissions of Tenant. Tenant shall defend Landlord against any
such cost, claim or liability at Tenant's expense with counsel reasonably
acceptable to Landlord or, at Landlord's election, Tenant shall reimburse
Landlord for any legal fees or costs incurred by Landlord in connection with any
such claim. As a material part of the consideration to Landlord, Tenant assumes
all risk of damage to property or injury to persons in or about the Property
arising from any cause, and Tenant hereby waives all claims in respect thereof
against Landlord, except for any claim arising out of Landlord's gross
negligence or willful misconduct. As used in this Section, the term "Tenant"
shall include Tenant's employees, agents, contractors and invitees if
applicable.
Section 5.06. LANDLORD'S ACCESS. Landlord or its agents may enter the
Property at all reasonable times to show the Property to potential buyers,
investors or tenants or other parties; to do any other act or to inspect and
conduct tests in order to monitor Tenant's compliance with all applicable
environmental laws and all laws governing the presence and use of Hazardous
Material; or for any other purpose Landlord deems necessary. Landlord shall
give Tenant prior notice of such entry, except in the case of an emergency.
Landlord may place customary "For Sale" or "For Lease" signs on the Property.
Section 5.07. QUIET POSSESSION. If Tenant pays the rent and complies with
all other terms of this Lease, Tenant may occupy and enjoy the Property for the
full Lease Term, subject to the provisions of this Lease.
ARTICLE SIX: CONDITION OF PROPERTY; MAINTENANCE, REPAIRS AND ALTERATIONS
Section 6.01. EXISTING CONDITIONS. Tenant accepts the Property in its
condition as of the execution of the Lease, subject to all recorded matters,
laws, ordinances, and governmental regulations and orders. Except as provided
herein, Tenant acknowledges that neither Landlord nor any agent of Landlord has
made any representation as to the condition of the Property or the suitability
of the Property for Tenant's intended use. Tenant represents and warrants that
Tenant has made its own inspection of and inquiry regarding the condition of the
Property and is not relying on any representations of Landlord or any Broker
with respect thereto. If Landlord or Landlord's Broker has provided a Property
Information Sheet or other Disclosure Statement regarding the Property, a copy
is attached as an exhibit to the Lease.
Section 6.02. EXEMPTION OF LANDLORD FROM LIABILITY. Landlord shall not be
liable for any damage or injury to the person, business (or any loss of income
therefrom), goods, wares, merchandise or other property of Tenant, Tenant's
employees, invitees, customers or any other person in or about the Property,
whether such damage or injury is caused by or results from: (a) fire, steam,
electricity, water, gas or rain; (b) the breakage, leakage, obstruction or other
defects of pipes, sprinklers, wires, appliances, plumbing, air conditioning or
lighting fixtures or any other cause; (c) conditions arising in or about the
Property or upon other portions of the Project, or from other sources or places;
or (d) any act or omission of any other tenant of the Project. Landlord shall
not be liable for any such damage or injury even though the cause of or the
means of repairing such damage or injury are not accessible to Tenant. The
provisions of this Section 6.02 shall not, however, exempt Landlord from
liability for Landlord's gross negligence or willful misconduct.
Section 6.03. LANDLORD'S OBLIGATIONS.
(a) Except as provided in Article Seven (Damage or Destruction) and
Article Eight (Condemnation), Landlord shall keep the following in good order,
condition and repair: the foundations, exterior walls and roof of the Property
(including painting the exterior surface of the exterior walls of the Property
not more often than once every five (5) years, if necessary) and all components
of electrical, mechanical, plumbing, heating and air conditioning systems and
facilities located in the Property which are concealed or used in common by
tenants of the Project. However, Landlord shall not be obligated to maintain or
repair windows, doors, plate glass or the interior surfaces of exterior walls.
Landlord shall make repairs under this Section 6.03 within a reasonable time
after receipt of written notice from Tenant of the need for such repairs.
(b) Tenant shall pay or reimburse Landlord for all costs Landlord incurs
under Paragraph 6.03(a) above as Common Area costs as provided for in Section
4.05 of the Lease.
(c) Right of First Refusal. See Addendum
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Section 6.04. TENANT'S OBLIGATIONS.
(a) Except as provided in Section 6.03, Article Seven (Damage or
Destruction) and Article Eight (Condemnation), Tenant shall keep all portions of
the Property (including structural, nonstructural, interior, systems and
equipment) in good order, condition and repair (including interior repainting
and refinishing, as needed). If any portion of the Property or any system or
equipment in the Property which Tenant is obligated to repair cannot be fully
repaired or restored, Tenant shall promptly replace such portion of the
Property or system or equipment in the Property, regardless of whether the
benefit of such replacement extends beyond the Lease Term; but if the benefit or
useful life of such replacement extends beyond the Lease Term (as such term may
be extended by exercise of any options), the useful life of such replacement
shall be prorated over the remaining portion of the Lease Term (as extended),
and Tenant shall be liable only for that portion of the cost which is applicable
to the Lease Term (as extended). Tenant shall maintain a preventive maintenance
contract providing for the regular inspection and maintenance of the heating and
air conditioning system by a licensed heating and air conditioning contractor,
unless Landlord maintains such equipment under Section 6.03 above. If any part
of the Property or the Project is damaged by any act or omission of Tenant,
Tenant shall pay Landlord the cost of repairing or replacing such damaged
property, whether or not Landlord would otherwise be obligated to pay the cost
of maintaining or repairing such property. It is the intention of Landlord and
Tenant that at all times Tenant shall maintain the portions of the Property
which Tenant is obligated to maintain in an attractive, first-class and fully
operative condition.
(b) Tenant shall fulfill all of Tenant's obligations under this Section
6.04 at Tenant's sole expense. If Tenant fails to maintain, repair or replace
the Property as required by this Section 6.04, Landlord may, upon ten (10) days'
prior notice to Tenant (except that no notice shall be required in the case of
an emergency), enter the Property and perform such maintenance or repair
(including replacement, as needed) on behalf of Tenant. In such case, Tenant
shall reimburse Landlord for all costs incurred in performing such maintenance
or repair immediately upon demand.
Section 6.05. ALTERATIONS, ADDITIONS, AND IMPROVEMENTS.
(a) Tenant shall not make any alterations, additions, or improvements to
the Property without Landlord's prior written consent, except for non-structural
alterations which do not exceed Forty Thousand Dollars ($40,000) in cost
cumulatively over the Lease Term and which are not visible from the outside of
any building of which the Property is part. Landlord may require Tenant to
provide demolition and/or lien and completion bonds in form and amount
satisfactory to Landlord. Tenant shall promptly remove any alterations,
additions, or improvements constructed in violation of this Paragraph 6.05(a)
upon Landlord's written request. All alterations, additions, and improvements
shall be done in a good and workmanlike manner, in conformity with all
applicable laws and regulations, and by a contractor approved by Landlord.
Upon completion of any such work, Tenant shall provide Landlord with "as built"
plans, copies of all construction contracts, and proof of payment for all labor
and materials.
(b) Tenant shall pay when due all claims for labor and material furnished
to the Property. Tenant shall give Landlord at least twenty (20) days' prior
written notice of the commencement of any work on the Property, regardless of
whether Landlord's consent to such work is required. Landlord may elect to
record and post notices of non-responsibility on the Property. (c) Tenant
Improvements and (d) Improvements Required by Code or Law. See Addendum.
Section 6.06. CONDITION UPON TERMINATION. Upon the termination of the
Lease, Tenant shall surrender the Property to Landlord, broom clean and in the
same condition as received except for ordinary wear and tear which Tenant was
not otherwise obligated to remedy under any provision of this Lease. However,
Tenant shall not be obligated to repair any damage which Landlord is required to
repair under Article Seven (Damage or Destruction). In addition, Landlord may
require Tenant to remove any alterations, additions or improvements (whether or
not made with Landlord's consent) prior to the expiration of the Lease and to
restore the Property to its prior condition, all at Tenant's expense. All
alterations, additions and improvements which Landlord has not required Tenant
to remove shall become Landlord's property and shall be surrendered to Landlord
upon the expiration or earlier termination of the Lease, except that Tenant may
remove any of Tenant's machinery or equipment which can be removed without
material damage to the Property. Tenant shall repair, at Tenant's expense, any
damage to the Property caused by the removal of any such machinery or equipment.
In no event, however, shall Tenant remove any of the following materials or
equipment (which shall be deemed Landlord's property) without Landlord's prior
written consent: any power wiring or power panels; lighting or lighting
fixtures; wall coverings; drapes, blinds or other window coverings; carpets or
other floor coverings; heaters, air conditioners or any other heating or air
conditioning equipment; fencing or security gates; or other similar building
operating equipment and decorations.
ARTICLE SEVEN: DAMAGE OR DESTRUCTION
Section 7.01. PARTIAL DAMAGE TO PROPERTY.
(a) Tenant shall notify Landlord in writing immediately upon the
occurrence of any damage to the Property. If the Property is only partially
damaged (i.e. less than fifty percent (50%) of the Property is untenantable as a
result of such damage or less than fifty percent (50%) of Tenant's operations
are materially impaired) and if the proceeds received by Landlord from the
insurance policies described in Paragraph 4.04(b) are sufficient to pay for the
necessary repairs, this Lease shall remain in effect and Landlord shall repair
the damage as soon as reasonably possible. Landlord may elect (but is not
required) to repair any damage to Tenant's fixtures, equipment, or improvements.
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(b) If the insurance proceeds received by Landlord are not sufficient to
pay the entire cost of repair, or if the cause of the damage is not covered by
the insurance policies which Landlord maintains under Paragraph 4.04(b),
Landlord may elect either to (i) repair the damage as soon as permitted by
governing authorities, in which case this Lease shall remain in full force and
effect, or (ii) terminate this Lease as of the date the damage occurred.
Landlord shall notify Tenant within Ten (10) working days after receipt of
notice of the occurrence of the damage whether Landlord elects to repair the
damage or terminate the Lease. If Landlord elects to repair the damage, Tenant
shall pay Landlord, if the damage was due to an act or omission of Tenant, or
Tenant's employees, agents, contractors or invitees, the difference between the
actual cost of repair and any insurance proceeds received by Landlord. If
Landlord elects to terminate this Lease, Tenant may elect to continue this Lease
in full force and effect, in which case Tenant shall repair any damage to the
Property and any building in which the Property is located. Tenant shall pay
the cost of such repairs, except that upon satisfactory completion of such
repairs, Landlord shall deliver to Tenant any insurance proceeds received by
Landlord for the damage repaired by Tenant. Tenant shall give Landlord written
notice of such election within ten (10) days after receiving Landlord's
termination notice.
(c) If the damage to the Property occurs during the last six (6) months of
the Lease Term and such damage will require more than thirty (30) days to
repair, either Landlord or Tenant may elect to termination this Lease as of the
date the damage occurred, regardless of the sufficiency of any insurance
proceeds. The party electing to terminate this Lease shall given written
notification to the other party of such election within thirty (30) days after
Tenant's notice to Landlord of the occurrence of the damage.
Section 7.02. SUBSTANTIAL OR TOTAL DESTRUCTION. If the Property is
substantially or totally destroyed by any cause whatsoever (i.e., the damage to
the Property is greater than partial damage as described in Section 7.01), and
regardless of whether Landlord receives any insurance proceeds, this Lease shall
terminate as of the date the destruction occurred. Notwithstanding the
preceding sentence, if the Property can be rebuilt with six (6) months after the
date of destruction, Landlord may elect to rebuild the Property at Landlord's
own expense, in which case this Lease shall remain in full force and effect.
Landlord shall notify Tenant of such election within thirty (30) days after
Tenant's notice of the occurrence of total or substantial destruction. If
Landlord so elects, Landlord shall rebuild the Property at Landlord's sole
expense, except that if the destruction was caused by an act or omission of
Tenant, Tenant shall pay Landlord the difference between the actual cost of
rebuilding and any insurance proceeds received by Landlord.
Section 7.03. TEMPORARY REDUCTION OF RENT. If the Property is destroyed
or damaged and Landlord or Tenant repairs or restores the Property pursuant to
the provisions of this Article Seven, any rent payable during the period of such
damage, repair and/or restoration shall be reduced according to the degree, if
any, to which Tenant's use of the Property is impaired. However, the reduction
shall not exceed the sum of one year's payment of Base Rent, insurance premiums
and real property taxes. Except for such possible reduction in Base Rent,
insurance premiums and real property taxes, Tenant shall not be entitled to any
compensation, reduction, or reimbursement from Landlord as a result of any
damage, destruction, repair, or restoration of or to the Property.
Section 7.04. WAIVER. Tenant waives the protection of any statute, code
or judicial decision which grants a tenant the right to terminate a lease in the
event of the substantial or total destruction of the leased property. Tenant
agrees that the provisions of Section 7.02 above shall govern the rights and
obligations of Landlord and Tenant in the event of any substantial or total
destruction to the Property.
ARTICLE EIGHT: CONDEMNATION
If all or any portion of the Property is taken under the power of
eminent domain or sold under the threat of that power (all of which are
called "Condemnation"), this Lease shall terminate as to the part taken or
sold on the date the condemning authority takes title or possession,
whichever occurs first. If more than twenty percent (20%) of the floor area
of the building in which the Property is located, or which is located on the
Property, is taken, either Landlord or Tenant may terminate this Lease as of
the date the condemning authority takes title or possession, by delivering
notice to the other within ten (10) days after receipt of written notice of
such taking (or in the absence of such notice, within ten (10) days after the
condemning authority takes title or possession). If neither Landlord nor
Tenant terminates this Lease, this Lease shall remain in effect as to the
portion of the Property not taken, except that the Base Rent and Additional
Rent shall be reduced in proportion to the reduction in the floor area of the
Property. Any Condemnation award or payment shall be distributed in the
following order: (a) first, to any ground lessor, mortgage or beneficiary
under a deed of trust encumbering the Property, the amount of its interest in
the Property; (b) second, to Tenant, only the amount of any award
specifically designated for loss of or damage to Tenant's trade fixtures or
removable personal property; and (c) third, to Landlord, the remainder of
such award, whether as compensation for reduction in the value of the
leasehold, the taking of the fee, or otherwise. If this Lease is not
terminated, Landlord shall repair any damage to the Property caused by the
Condemnation, except that Landlord shall not be obligated to repair any
damage for which Tenant has been reimbursed by the condemning authority. If
the severance damages received by Landlord are not sufficient to pay for such
repair, Landlord shall have the right to either terminate this Lease or make
such repair at Landlord's expense.
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ARTICLE NINE: ASSIGNMENT AND SUBLETTING
Section 9.01. LANDLORD'S CONSENT REQUIRED. No portion of the Property or
of Tenant's interest in this Lease may be acquired by any other person or
entity, whether by sale, assignment, mortgage, sublease, transfer, operation of
law, or act of Tenant, without Landlord's prior written consent, except as
provided in Section 9.02 below. Landlord has the right to grant or withhold its
consent as provided in Section 9.05 below. Any attempted transfer without
consent shall be void and shall constitute a non-curable breach of this Lease.
If Tenant is a partnership, any cumulative transfer of more than twenty percent
(20%) of the partnership interests shall require Landlord's consent. If Tenant
is a corporation, any change in the ownership of a controlling interest of the
voting stock of the corporation shall require Landlord's consent.
Section 9.02. TENANT AFFILIATE. Tenant may assign this Lease or sublease
the Property, without Landlord's consent, to any corporation which controls, is
controlled by or is under common control with Tenant, or to any corporation
resulting from the merger of or consolidation with Tenant ("Tenant's
Affiliate"). In such case, any Tenant's Affiliate shall assume in writing all
of Tenant's obligations under this Lease.
Section 9.03 NO RELEASE OF TENANT. No transfer permitted by this Article
Nine, whether with or without Landlord's consent, shall release Tenant or change
Tenant's primary liability to pay the rent and to perform all other obligations
of Tenant under this Lease. Landlord's acceptance of rent from any other person
is not a waiver of any provision of this Article Nine. Consent to one transfer
is not a consent to any subsequent transfer. If Tenant's transferee defaults
under this Lease, Landlord may proceed directly against Tenant without pursuing
remedies against the transferee. Landlord may consent to subsequent assignments
or modifications of this Lease by Tenant's transferee, without notifying tenant
or obtaining its consent. Such action shall not relieve Tenant's liability
under this Lease.
Section 9.04. OFFER TO TERMINATE. If Tenant desires to assign the Lease
or sublease the Property, Tenant shall have the right to offer, in writing, to
terminate the Lease as of a date specified in the offer. If Landlord elects in
writing to accept the offer to terminate within twenty (20) days after notice of
the offer, the Lease shall terminate as of the date specified and all the terms
and provisions of the Lease governing termination shall apply. If Landlord does
not so elect, the Lease shall continue in effect until otherwise terminated and
the provisions of Section 9.05 with respect to any proposed transfer shall
continue to apply.
Section 9.05. LANDLORD'S CONSENT.
(a) Tenant's request for consent to any transfer described in Section 9.01
shall set forth in writing the details of the proposed transfer, including the
name, business and financial condition of the prospective transferee, financial
details of the proposed transfer (e.g., the term of and the rent and security
deposit payable under any proposed assignment or sublease), and any other
information Landlord deems relevant. Landlord shall have the right to withhold
consent, if reasonable, or to grant consent, based on the following factors: (i)
the business of the proposed assignee or subtenant and the proposed use of the
Property; (ii) the net worth and financial reputation of the proposed assignee
or subtenant; (iii) Tenant's compliance with all of its obligations under the
Lease; and (iv) such other factors as Landlord may reasonable deem relevant. If
Landlord objects to a proposed assignment solely because of the net worth and/or
financial reputation of the proposed assignee, Tenant may nonetheless sublease
(but not assign), all or a portion of the Property to the proposed transferee,
but only on the other terms of the proposed transfer.
Section 9.06. NO MERGER. No merger shall result from Tenant's sublease of
the Property under this Article Nine, Tenant's surrender of this Lease or the
termination of this Lease in any other manner. In any such event Landlord may
terminate any or all subtenancies or succeed to the interest of Tenant as
sublandlord under any or all subtenancies.
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ARTICLE TEN: DEFAULTS; REMEDIES
Section 10.01. COVENANTS AND CONDITIONS. Tenant's performance of each of
Tenant's obligations under this Lease is a condition as well as a covenant.
Tenant's right to continue in possession of the Property is conditioned upon
such performance. Time is of the essence in the performance of all covenants
and conditions.
Section 10.02. DEFAULTS. Tenant shall be in material default under this
Lease:
(a) If Tenant abandons the Property or if Tenant's vacation of the
Property results in the cancellation of any insurance described in Section 4.04;
(b) If Tenant fails to pay rent or any other charge when due;
(c) If Tenant fails to perform any of Tenant's non-monetary obligations
under this Lease for a period of thirty (30) days after written notice from
Landlord; provided that if more than thirty (30) days are required to complete
such performance, Tenant shall not be in default if Tenant commences such
performance within the thirty (30)-day period and thereafter diligently pursues
its completion. However, Landlord shall not be required to give such notice if
Tenant's failure to perform constitutes a non-curable breach of this Lease. The
notice required by this Paragraph is intended to satisfy any and all notice
requirements imposed by law on Landlord and is not in addition to any such
requirement.
(d) (i) If Tenant makes a general assignment or general arrangement for
the benefit of creditors; (ii) if a petition for adjudication of bankruptcy or
for reorganization or rearrangement is filed by or against Tenant and is not
dismissed within thirty (30) days; (iii) if a trustee or receiver is appointed
to take possession of substantially all of Tenant's assets located at the
Property or of Tenant's interest in this Lease and possession is not restored to
Tenant within thirty (30) days; or (iv) if substantially all of Tenant's assets
located at the Property or of Tenant's interest in this Lease is subjected to
attachment, execution or other judicial seizure which is not discharged within
thirty (30) days. If a court of competent jurisdiction determines that any of
the acts described in this subparagraph (d) is not a default under this Lease,
and a trustee is appointed to take possession (or if Tenant remains a debtor in
possession) and such trustee or Tenant transfers Tenant's interest hereunder,
then Landlord shall receive, as Additional Rent, the excess, if any, of the rent
(or any other consideration) paid in connection with such assignment or sublease
over the rent payable by Tenant under this Lease.
(e) If any guarantor of the Lease revokes or otherwise terminates, or
purports to revoke or otherwise terminate, any guaranty of all or any portion of
Tenant's obligations under the Lease. Unless otherwise expressly provided, no
guaranty of the Lease is revocable.
Section 10.03. REMEDIES. On the occurrence of any material default by
Tenant, Landlord may, at any time thereafter, with or without notice or demand
and without limiting Landlord in the exercise of any right or remedy which
Landlord may have:
(a) Terminate Tenant's right to possession of the Property by any lawful
means, in which case this Lease shall terminate and Tenant shall immediately
surrender possession of the Property to Landlord. In such event, Landlord shall
be entitled to recover from Tenant all damages incurred by Landlord by reason of
Tenant's default, including (i) the worth at the time of the award of the unpaid
Base Rent, Additional Rent and other charges which Landlord had earned at the
time of the termination; (ii) the worth at the time of the award of the amount
by which the unpaid Base Rent, Additional Rent and other charges which Landlord
would have earned after termination until the time of the award exceeds the
amount of such rental loss that Tenant proves Landlord could have reasonably
avoided; (iii) the worth at the time of the award of the amount by which the
unpaid Base Rent, Additional Rent and other charges which Tenant would have paid
for the balance of the Lease term after the time of award exceeds the amount of
such rental loss that Tenant proves Landlord could have reasonably avoided; and
(iv) any other amount necessary to compensate Landlord for all the detriment
proximately caused by Tenant's failure to perform its obligations under the
Lease or which in the ordinary course of things would be likely to result
therefrom, including, but not limited to, any costs or expenses Landlord incurs
in maintaining or preserving the Property after such default, the cost of
recovering possession of the Property, expenses of reletting, including
necessary renovation or alteration of the Property, Landlord's reasonable
attorneys' fees incurred in connection therewith, and any real estate commission
paid or payable. As used in subparts (i) and (ii) above, the "worth at the time
of the award" is computed by allowing interest on unpaid amounts at the rate of
fifteen percent (15%) per annum, or such lesser amount as may then be the
maximum lawful rate. As used in subpart (iii) above, the "worth at the time of
the award" is computed by discounting such amount at the discount rate of the
Federal Reserve Bank of San Francisco at the time of the award, plus one percent
(1%). If Tenant has abandoned the Property, Landlord shall have the option of
(i) retaking possession of the Property and recovering from Tenant the amount
specified in this Paragraph 10.03(a), or (ii) proceeding under Paragraph
10.03(b);
(b) Maintain Tenant's right to possession, in which case this Lease shall
continue in effect whether or not Tenant has abandoned the Property. In such
event, Landlord shall be entitled to enforce all of Landlord's rights and
remedies under this Lease, including the right to recover the rent as it becomes
due;
(c) Pursue any other remedy now or hereafter available to Landlord under
the laws or judicial decisions of the state in which the Property is located.
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Section 10.04. REPAYMENT OF "FREE" RENT. If this Lease provides for a
postponement of any monthly rental payments, a period of "free" rent or other
rent concession, such postponed rent or "free" rent is called the "Abated Rent".
Tenant shall be credited with having paid all of the Abated Rent on the
expiration of the Lease Term only if Tenant has fully, faithfully, and
punctually performed all of Tenant's obligations hereunder, including the
payment of all rent (other than the Abated Rent) and all other monetary
obligations and the surrender of the Property in the physical condition required
by this Lease. Tenant acknowledges that its right to receive credit for the
Abated Rent is absolutely conditioned upon Tenant's full, faithful and punctual
performance of its obligations under this Lease. If Tenant defaults and does
not cure within any applicable grace period, the Abated Rent shall immediately
become due and payable in full and this Lease shall be enforced as if there were
no such rent abatement or other rent concession. In such case Abated Rent shall
be calculated based on the full initial rent payable under this Lease.
Section 10.05. AUTOMATIC TERMINATION. Notwithstanding any other term or
provision hereof to the contrary, the Lease shall terminate on the occurrence of
any act which affirms the Landlord's intention to terminate the Lease as
provided in Section 10.03 hereof, including the filing of an unlawful detainer
action against Tenant. On such termination, Landlord's damages for default
shall include all costs and fees, including reasonable attorneys' fees that
Landlord incurs in connection with the filing, commencement, pursuing and/or
defending of any action in any bankruptcy court or other court with respect to
the Lease; the obtaining of relief from any stay in bankruptcy restraining any
action to evict Tenant; or the pursuing of any action with respect to Landlord's
right to possession of the Property. All such damages suffered (apart from Base
Rent and other rent payable hereunder) shall constitute pecuniary damages which
must be reimbursed to Landlord prior to assumption of the Lease by Tenant or any
successor to Tenant in any bankruptcy or other proceeding.
Section 10.06. CUMULATIVE REMEDIES. Landlord's exercise of any right or
remedy shall not prevent it from exercising any other right or remedy.
ARTICLE ELEVEN: PROTECTION OF LENDERS
Section 11.01. SUBORDINATION. Landlord shall have the right to
subordinate this Lease to any ground lease, deed of trust or mortgage
encumbering the Property, any advances made on the security thereof and any
renewals, modifications, consolidations, replacements or extensions thereof,
whenever made or recorded. Tenant shall cooperate with Landlord and any lender
which is acquiring a security interest in the Property or the Lease. Tenant
shall execute such further documents and assurances as such lender may require,
provided that Tenant's obligations under this Lease shall not be increased in
any material way (the performance of ministerial acts shall not be deemed
material), and Tenant shall not be deprived of its rights under this Lease.
Tenant's right to quiet possession of the Property during the Lease Term shall
not be disturbed if Tenant pays the rent and performs all of Tenant's
obligations under this Lease and is not otherwise in default. If any ground
lessor, beneficiary or mortgagee elects to have this Lease prior to the lien of
its ground lease, deed of trust or mortgage and gives written notice thereof to
Tenant, this Lease shall be deemed prior to such ground lease, deed of trust or
mortgage whether this Lease is dated prior or subsequent to the date of said
ground lease, deed of trust or mortgage or the date of recording thereof.
Section 11.02. ATTORNMENT. If Landlord's interest in the Property is
acquired by any ground lessor, beneficiary under a deed of trust, mortgagee, or
purchaser at a foreclosure sale, Tenant shall attorn to the transferee of or
successor to Landlord's interest in the Property and recognize such transferee
or successor as Landlord under this Lease. Tenant waives the protection of any
statute or rule of law which gives or purports to give Tenant any right to
terminate this Lease or surrender possession of the Property upon the transfer
of Landlord's interest.
Section 11.03. SIGNING OF DOCUMENTS. Tenant shall sign and deliver any
instrument or documents necessary or appropriate to evidence any such attornment
or subordination or agreement to do so. If Tenant fails to do so within ten
(10) days after written request, Tenant hereby makes, constitutes and
irrevocably appoints Landlord, or any transferee or successor of Landlord, the
attorney-in-fact of Tenant to execute and deliver any such instrument or
document.
Section 11.04. ESTOPPEL CERTIFICATES.
(a) Upon Landlord's written request, Tenant shall execute, acknowledge and
deliver to Landlord a written statement certifying: (i) that none of the terms
or provisions of this Lease have been changed (or if they have been changed,
stating how they have been changed); (ii) that this Lease has not been cancelled
or terminated; (iii) the last date of payment of the Base Rent and other charges
and the time period covered by such payment; (iv) that Landlord is not in
default under this Lease (or, if Landlord is claimed to be in default, stating
why); and (v) such other representations or information with respect to Tenant
or the Lease as Landlord may reasonably request or which any prospective
purchaser or encumbrancer of the Property may require. Tenant shall deliver
such statement to Landlord within ten (10) days after Landlord's request.
Landlord may give any such statement by Tenant to any prospective purchaser or
encumbrancer of the Property. Such purchaser or encumbrancer may rely
conclusively upon such statement as true and correct.
(b) If Tenant does not deliver such statement to Landlord within such
ten (10)-day period, Landlord, and any prospective purchaser or encumbrancer,
may conclusively presume and rely upon the following facts: (i) that the
terms and provisions of this Lease have not been changed except as otherwise
represented by Landlord; (ii) that this Lease has not been cancelled or
terminated except as otherwise represented by Landlord; (iii) that not more
than one month's Base Rent or other charges have been paid in advance; and
(iv) that Landlord is not in default under the Lease. In such event, Tenant
shall be estopped from denying the truth of such facts.
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Section 11.05. TENANT'S FINANCIAL CONDITION. Within ten (10) days after
written request from Landlord, Tenant shall deliver to Landlord such financial
statements as Landlord reasonably requires to verify the net worth of Tenant or
any assignee, subtenant, or guarantor of Tenant. In addition, Tenant shall
deliver to any lender designated by Landlord any financial statements required
by such lender to facilitate the financing or refinancing of the Property.
Tenant represents and warrants to Landlord that each such financial statement is
a true and accurate statement as of the date of such statement. All financial
statements shall be confidential and shall be used only for the purposes set
forth in this Lease.
ARTICLE TWELVE: LEGAL COSTS
Section 12.01 LEGAL PROCEEDINGS. If Tenant or Landlord shall be in breach
or default under this Lease, such party (the "Defaulting Party") shall reimburse
the other party (the "Nondefaulting Party") upon demand for any costs or
expenses that the Nondefaulting Party incurs in connection with any breach or
default of the Defaulting Party under this Lease, whether or not suit is
commenced or judgment entered. Such costs shall include legal fees and costs
incurred for the negotiation of a settlement, enforcement of rights or
otherwise. Furthermore, if any action for breach of or to enforce the
provisions of this Lease is commenced, the court in such action shall award to
the party in whose favor a judgment is entered, a reasonable sum as attorneys'
fees and costs. The losing party in such action shall pay such attorneys' fees
and costs. Tenant shall also indemnify Landlord against and hold Landlord
harmless from all costs, expenses, demands and liability Landlord may incur if
Landlord becomes or is made a party to any claim or action (a) instituted by
Tenant against any third party, or by any third party against Tenant, or by or
against any person holding any interest under or using the Property by license
of or agreement with Tenant; (b) for foreclosure of any lien for labor or
material furnished to or for Tenant or such other person; (c) otherwise arising
out of or resulting from any act or transaction of Tenant or such other person;
or (d) necessary to protect Landlord's interest under this Lease in a bankruptcy
proceeding, or other proceeding under Title 11 of the United States Code, as
amended. Tenant shall defend Landlord against any such claim or action at
Tenant's expense with counsel reasonably acceptable to Landlord or, at
Landlord's election, Tenant shall reimburse Landlord for any legal fees or costs
Landlord incurs in any such claim or action.
Section 12.02. LANDLORD'S CONSENT. Tenant shall pay Landlord's reasonable
attorneys' fees incurred in connection with Tenant's request for Landlord's
consent under Article Nine (Assignment and Subletting), or in connection with
any other act which Tenant proposes to do and which requires Landlord's consent.
ARTICLE THIRTEEN: MISCELLANEOUS PROVISIONS
Section 13.01. NON-DISCRIMINATION. Tenant promises, and it is a condition
to the continuance of this Lease, that there will be no discrimination against,
or segregation of, any person or group of persons on the basis of race, color,
sex, creed, national origin or ancestry in the leasing, subleasing,
transferring, occupancy, tenure or use of the Property or any portion thereof.
Section 13.02. LANDLORD'S LIABILITY; CERTAIN DUTIES.
(a) As used in this Lease, the term "Landlord" means only the current
owner or owners of the fee title to the Property or Project or the leasehold
estate under a ground lease of the Property or Project at the time in question.
Each Landlord is obligated to perform the obligations of Landlord under this
Lease only during the time such Landlord owns such interest or title. Any
Landlord who transfers its title or interest is relieved of all liability with
respect to the obligations of Landlord under this Lease to be performed on or
after the date of transfer. However, each Landlord shall deliver to its
transferee all funds that Tenant previously paid if such funds have not yet been
applied under the terms of this Lease.
(b) Tenant shall give written notice of any failure by Landlord to perform
any of its obligations under this Lease to Landlord and to any ground lessor,
mortgagee or beneficiary under any deed of trust encumbering the Property whose
name and address have been furnished to Tenant in writing. Landlord shall not
be in default under this Lease unless Landlord (or such ground lessor, mortgagee
or beneficiary) fails to cure such non-performance within thirty (30) days after
receipt of Tenant's notice. However, if such non-performance reasonably
requires more than thirty (30) days to cure, Landlord shall not be in default if
such cure is commenced within such thirty (30)-day period and thereafter
diligently pursued to completion.
(c) Notwithstanding any term or provision herein to the contrary, the
liability of Landlord for the performance of its duties and obligations under
this Lease is limited to Landlord's interest in the Property and the Project,
and neither the Landlord nor its partners, shareholders, officers or other
principals shall have any personal liability under this Lease.
Section 13.03. SEVERABILITY. A determination by a court of competent
jurisdiction that any provision of the Lease or any part thereof is illegal or
unenforceable shall not cancel or invalidate the remainder of such provision to
this Lease, which shall remain in full force and effect.
Section 13.04. INTERPRETATION. The captions of the Articles or Sections
of this Lease are to assist the parties reading this Lease and are not a part of
the terms or provisions of this Lease. Whenever required by the context of the
Lease, the singular shall include the plural and the plural shall include the
singular. The masculine, feminine and neuter genders shall each include the
other. In any provision relating to the conduct, acts or omissions of Tenant,
the term "Tenant" shall include Tenant's agents, employees, contractors,
invitees, successors or others using the Property with Tenant's expressed or
implied permission.
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Section 13.05. INCORPORATION OF PRIOR AGREEMENTS; MODIFICATIONS. This
Lease is the only agreement between the parties pertaining to the lease of the
Property and no other agreements are effective. All amendments to this Lease
shall be in writing and signed by all parties. Any other attempted amendment
shall be void.
Section 13.06. NOTICES. All notices required or permitted under this
Lease shall be in writing and shall be personally delivered or sent by certified
mail, return receipt requested, postage prepaid. Notices to Tenant shall be
delivered to the address specified in Section 1.03 above, except that upon
Tenant's taking possession of the Property, the Property shall be Tenant's
address for notice purposes. Notices to Landlord shall be delivered to the
address specified in Section 1.02 above. All notices shall be effective upon
delivery. Either party may change its notice address upon written notice to the
other party.
Section 13.07. WAIVERS. All waivers must be in writing and signed by the
waiving party. Landlord's failure to enforce any provision of this Lease or its
acceptance of rent shall not be a waiver and shall not prevent Landlord from
enforcing that provision or any other provision of this Lease in the future. No
statement on a payment check from Tenant or in a letter accompanying a payment
check shall be binding on Landlord. Landlord may, with or without notice to
Tenant, negotiate such check without being bound to the conditions of such
statement.
Section 13.08. NO RECORDATION. Tenant shall not record this Lease without
prior written consent from Landlord. However, either Landlord or Tenant may
require that a "Short Form" memorandum of this Lease executed by both parties be
recorded. The party requiring such recording shall pay all transfer taxes and
recording fees.
Section 13.09. BINDING EFFECT; CHOICE OF LAW. This Lease binds any party
who legally acquires any rights or interest in this Lease from Landlord or
Tenant. However, Landlord shall have no obligation to Tenant's successor unless
the rights or interests of Tenant's successor are acquired in accordance with
the terms of this Lease. The laws of the state in which the Property is located
shall govern this Lease.
Section 13.10. CORPORATE AUTHORITY; PARTNERSHIP AUTHORITY. If Tenant is a
corporation, each person signing this Lease on behalf of Tenant represents and
warrants that he has full authority to do so and that this Lease binds the
corporation. Within thirty (30) days after this Lease is signed, Tenant shall
deliver to Landlord a certified copy of a resolution of Tenant's Board of
Directors authorizing the execution of this Lease or other evidence of such
authority reasonably acceptable to Landlord. If Tenant is a partnership, each
person or entity signing this Lease for tenant represents and warrants that he
or it is a general partner of the partnership, that he or it has full authority
to sign for the partnership and that this Lease binds the partnership and all
general partners of the partnership. Tenant shall give written notice to
Landlord of any general partner's withdrawal or addition. Within thirty (30)
days after this Lease is signed, Tenant shall deliver to Landlord a copy of
Tenant's recorded statement of partnership or certificate of limited
partnership.
Section 13.11. JOINT AND SEVERAL LIABILITY. All parties signing this
Lease as Tenant shall be jointly and severally liable for all obligations of
Tenant.
Section 13.12. FORCE MAJEURE. If Landlord cannot perform any of its
obligations due to events beyond Landlord's control, the time provided for
performing such obligations shall be extended by a period of time equal to the
duration of such events. Events beyond Landlord's control include, but are not
limited to, acts of God, war, civil commotion, labor disputes, strikes, fire,
flood or other casualty, shortages of labor or material, government regulation
or restriction and weather conditions.
Section 13.13. EXECUTION OF LEASE. This Lease may be executed in
counterparts and, when all counterpart documents are executed, the counterparts
shall constitute a single binding instrument. Landlord's delivery of this Lease
to Tenant shall not be deemed to be an offer to lease and shall not be binding
upon either party until executed and delivered by both parties.
Section 13.14. SURVIVAL. All representations and warranties of Landlord
and Tenant shall survive the termination of this Lease.
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<PAGE>
ADDITIONAL PROVISIONS MAY BE SET FORTH IN A RIDER OR RIDERS ATTACHED HERETO
OR IN THE BLANK SPACE BELOW. IF NO ADDITIONAL PROVISIONS ARE INSERTED, PLEASE
DRAW A LINE THROUGH THE SPACE BELOW.
Section 15.01. Lease Subject to Execution of Sales Agreement. See
Addendum.
Section 16.01. Landlord shall be responsible for all roof repairs
exceeding $2,000.00 per year through May 31, 2000 for phase one only.
Landlord and Tenant have signed this Lease at the place and on the dates
specified adjacent to their signatures below and have initiated all Riders which
are attached to or incorporated by reference in this Lease.
"LANDLORD"
Signed on May 21, 1992 PANATTONI DEVELOPMENT COMPANY
------------------------------ -----------------------------------
at Sacramento, CA .
------------------------------------- -----------------------------------
By: /s/ Carl Panattoni
--------------------------------
Its:
-------------------------------
By:
--------------------------------
Its:
-------------------------------
"TENANT"
Signed on May 21, 1992 VALLEY RECORD DISTRIBUTORS, INC.
------------------------------ -----------------------------------
at Woodland, CA .
------------------------------------- -----------------------------------
By: /s/ Robert R. Cain
--------------------------------
Its: COO
-------------------------------
By:
--------------------------------
Its:
-------------------------------
IN ANY REAL ESTATE TRANSACTION, IT IS RECOMMENDED THAT YOU CONSULT WITH A
PROFESSIONAL, SUCH AS A CIVIL ENGINEER, INDUSTRIAL HYGIENIST OR OTHER PERSON
WITH EXPERIENCE IN EVALUATING THE CONDITION OF THE PROPERTY, INCLUDING THE
POSSIBLE PRESENCE OF ASBESTOS, HAZARDOUS MATERIALS AND UNDERGROUND STORAGE
TANKS.
THIS PRINTED FORM LEASE HAS BEEN DRAFTED BY LEGAL COUNSEL AT THE
DIRECTION OF THE SOUTHERN CALIFORNIA CHAPTER OF THE SOCIETY OF INDUSTRIAL AND
OFFICE REALTORS,-Registered Trademark- INC. NO REPRESENTATION OR
RECOMMENDATION IS MADE BY THE SOUTHERN CALIFORNIA CHAPTER OF THE SOCIETY OF
INDUSTRIAL AND OFFICE REALTORS,-Registered Trademark- INC., ITS LEGAL
COUNSEL, THE REAL ESTATE BROKERS NAMED HEREIN, OR THEIR EMPLOYEES OR AGENTS,
AS TO THE LEGAL SUFFICIENCY, LEGAL EFFECT OR TAX CONSEQUENCES OF THIS LEASE
OR OF THIS TRANSACTION. LANDLORD AND TENANT SHOULD RETAIN LEGAL COUNSEL TO
ADVISE THEM ON SUCH MATTERS AND SHOULD RELY UPON THE ADVICE OF SUCH LEGAL
COUNSEL.
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<PAGE>
ADDENDUM TO LEASE
BY AND BETWEEN
PANATTONI DEVELOPMENT COMPANY "LANDLORD"
AND
VALLEY RECORD DISTRIBUTORS, INC.
Section 1.04. PROPERTY: (continued)
Phase I: 49,320 s/f located in the Southeast portion of the 109,385 s/f
facility at 1275 Santa Anita Court, Woodland, California.
Phase II: A minimum of 40,000 s/f of newly constructed space to be located
on the Southeast portion of the existing facility at 1275 Santa
Anita Court, Woodland, California.
Section 1.05. LEASE TERM:
Phase I: Lease shall commence June 1, 1992 or upon completion of tenant
improvements, and shall run concurrently with the term specified
for Phase II. Landlord shall complete all improvements per
Exhibit "1" (except office improvements) by August 1, 1992. The
office improvements shall be completed sixty (60) days from
issuance of a building permit. In the event the tenant
improvements (except office improvements) are not completed by
August 1, 1992, Tenant shall have the right to notify Landlord
by August 10, 1992 that this Lease is null and void.
Phase II: Lease shall commence June 1, 1993 and run through May 31, 2003.
In the event that Phase II is not completed by August 1, 1993,
Tenant shall cease paying rent on Phase I until the Phase II
space is completed. Completion is hereby defined as the date
when a Certificate of Occupancy can be issued for the Phase II
improvements as specified in Exhibit "2" of this Lease. If
requested by Tenant, Landlord shall make its best effort to
locate and lease 40,000 square feet of temporary space if Phase
II is not completed by August 1, 1993. Landlord shall be
responsible for the rent of the temporary space. Tenant reserves
the right
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<PAGE>
to terminate this Lease, and Landlord reserves the right to
terminate Phase II of this Lease if Phase II is not completed by
December 1, 1993. Landlord shall give Tenant two (2) months
advance written notice of the estimated occupancy date.
Section 1.12. (continued)
(a) BASE RENT: Rent shall be as scheduled below:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
TERM PHASE I PHASE II
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<S> <C> <C>
June 1, 1992 - May 31, 1993 $ 7,891/mo. --
- --------------------------------------------------------------------------------
June 1, 1993 - November 31, 1995 $13,612/mo. $10,200/mo.
- --------------------------------------------------------------------------------
December 1, 1995 - May 31, 1998 $14,599/mo. $11,000/mo.
- --------------------------------------------------------------------------------
June 1, 1998 - November 31, 2000 $16,078/mo. $12,200/mo.
- --------------------------------------------------------------------------------
December 1, 2000 - May 31, 2003 $17,065/mo. $13,000/mo.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
</TABLE>
Section 2.05. EARLY TERMINATION: Tenant shall have the right to terminate
the Lease any time after the completion of the seventh (7th) year of occupancy
of Phase II. Tenant shall give Landlord twelve (12) months advance written
notice of termination if Tenant elects to terminate this Lease pursuant to this
provision. Tenant shall continue paying rent and fulfilling its other
obligations under this Lease until the termination date of this Lease.
Section 4.02. (continued)
(a)(1) PROPERTY TAX ASSESSMENT: Tenant recognizes that Landlord intends to
sell the Project. Tenant shall not be responsible for any additional property
tax levied against the property due to any subsequent sale of the Project.
Section 5.03. HAZARDOUS MATERIALS:
Tenant shall not cause or permit any hazardous material to be brought upon, kept
or used in or about the Project by Tenant, its agents, employees, contractors or
invitees, without the prior written consent of Landlord (which consent Landlord
shall not reasonably withhold as long as Tenant demonstrates to Landlord's
reasonable satisfaction that such hazardous material is necessary or useful to
Tenant's business and will be used and stored in a manner that complies with all
laws relating to any such hazardous
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<PAGE>
material so brought upon or used or kept in or about the Project). If Tenant
breaches the obligations stated in the preceding sentence, or if hazardous
material caused or permitted by Tenant on the Project results in contamination
of the Project by hazardous material, or the presence of hazardous material
otherwise occurs for which Tenant is legally liable to Landlord for damage
resulting therefrom, then Tenant shall indemnify, defend and hold Landlord
harmless from any and all claims, judgments, damages, penalties, fines, costs,
liabilities or losses (including, without limitation, diminution of value of the
Project, damages for the loss or restriction on use of rentable or usable space
or of any amenity of the Project, damages arising from any adverse impact on
marketing of the Project, and sums paid in settlement of claims, attorneys'
fees, consultants' fees and experts' fees) which arise during or after the lease
term as a result of such contamination. The indemnification set forth herein
shall run to the benefit of any bank or other lender to which Landlord or
Landlord's successors and assigns may grant a security interest in the Project
and/or the Property. This indemnification of Landlord by Tenant includes,
without limitation, costs incurred in connection with any investigation of site
conditions or any cleanup, remedial, removal or restoration work required by any
federal, state or local governmental agency or political subdivision because of
hazardous material present in the soil or ground water on or under the Project.
Without limiting the foregoing, if the presence of any hazardous material on the
Project caused or permitted by Tenant results in any contamination of the
Project, Tenant shall, at its sole expense, promptly take all actions as are
necessary to return the Project to the condition existing prior to the
introduction of any such hazardous material to the Project; provided that
Landlord's approval of such actions shall first be obtained, which approval
shall not be unreasonably withheld so long as such actions would not potentially
have any material adverse long-term or short-term effect on the Project.
As used herein, the term "hazardous material" means any hazardous or toxic
substance, material or waste which is or becomes regulated by any local
governmental authority, the State of California or the United States Government.
The term "hazardous material" includes, without limitation, any material or
substance which is (i) defined as a "hazardous waste," "extremely hazardous
waste" or "restricted hazardous waste," under Sections 25115, 25117 or 25122.7,
or listed pursuant to Section 25140 of the California Health and Safety Code,
Division 20, Chapter 6.5 (Hazardous Waste Control Law); (ii) defined as a
"hazardous waste" under Section 25316 of the California Health and Safety Code,
Division 20, Chapter 6.8 (Carpenter-Presley-Tanner Hazardous Substance Account
Act); (iii) defined as a "hazardous material," "hazardous substance" or
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<PAGE>
"hazardous waste" under Section 25501 of the California Health and Safety
Code, Division 20, Chapter 6.95 (Hazardous Materials Release Response Plans
and Inventory); (iv) defined as a "hazardous substance" under Section 25281
of the California Health and Safety Code, Division 20, Chapter 6.7
(Underground Storage of Hazardous Substances); (v) petroleum; (vi) asbestos;
(vii) listed under Article 9 or defined as hazardous or extremely hazardous
pursuant to Article 11 of Title 22 of the California Administrative Code,
Division 4, Chapter 20; (viii) designated as a "hazardous substance" pursuant
to Section 311 of the Federal Water Pollution Control Act (33 U.S.C. Section
1317); (ix) defined as a "hazardous waste" pursuant to Section 1004 of the
Federal Resource Conservation and Recovery Act, 42 U.S.C. Section 6901 et
seq. (42 U.S.C. Section 6903) ; (x) defined as a "hazardous substance"
pursuant to Section 101 of the Comprehensive Environmental Response,
Compensation and Liability Act, 42 U.S.C. Section 9601 et seq. (42 U.S.C.
Section 9601); or (xi) any substance requiring remediation under any federal,
state, municipal or other governmental statute, ordinance, rule, regulation
or policy.
Section 6.03. (continued)
(c) RIGHT OF FIRST REFUSAL: If Tenant is not in default in the performance
of any of its obligations under this Lease, Tenant shall have the right of first
refusal to lease any adjacent space in the building or any addition to the
building under the same terms and conditions as set forth in any third party
offer to lease said space that is acceptable to Landlord. Tenant shall have
three (3) business days to respond to actual notice that a third party has
offered to lease said space. If Landlord does not receive Tenant's written
agreement to lease said space upon said terms and conditions within such three
(3) business day period, then Landlord shall have the right to lease the space
to the third party. Tenant's right of first refusal shall run concurrently with
this Lease.
Section 6.05. (continued)
(c) TENANT IMPROVEMENTS: Landlord shall be responsible for constructing
the improvements specified in the following exhibits:
Exhibit "1": Phase I Tenant Improvements
Exhibit "2": Phase II Tenant Improvements
(d) IMPROVEMENTS REQUIRED BY CODE OR LAW: In the event that the City of
Woodland, the Woodland Fire Department, or any other governmental agency,
requires additional improvements to the building due to Tenant's proposed use of
said building, such
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<PAGE>
improvements, including all related costs, shall be the sole responsibility of
Tenant.
Section 15.01. LEASE SUBJECT TO EXECUTION OF SALES AGREEMENT: Tenant
recognizes that this Lease is subject to the execution of a sales agreement
between Landlord and Betty Kuhn for the Project described in this Lease. If said
sales agreement is not executed by the parties on or before May 22, 1992, this
Lease will be considered null and void.
Dated: May 21, 1992 Dated: May 21, 1992
LANDLORD: TENANT:
PANATTONI DEVELOPMENT COMPANY VALLEY RECORD DISTRIBUTORS, INC.
By: /s/ Carl D. Panattoni By: /s/ Robert R. Cain
------------------------- -----------------------------
Carl D. Pannattoni
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<PAGE>
MEMORANDUM OF UNDERSTANDING
AMENDMENT TO LEASE
On May 21, 1992, Valley Records Distributors, Inc. (Valley Records) entered
into a lease agreement with Panattoni Development Company to lease 49,320 s/f
(Phase I) at 1275 Santa Anita Court, Woodland, California and 40,000 s/f (Phase
II) of to-be-built space on the southeast portion of the existing facility at
1275 Santa Anita Court, Woodland, California. Panattoni Development Company in
entering the lease agreement also contracted to sell the building at 1275 Santa
Anita Court and the to-be-built space to Betty Kuhn.
Valley Records Distributors, Inc. has requested that the construction and lease
of the 40,000 s/f be indefinitely postponed. Panattoni Development Company and
Betty Kuhn shall agree to the request under the following terms and conditions:
- - The base lease rate of Phase I shall be increased by $750.00 per month
effective October 1, 1992.
- - Valley Records shall not be responsible for the cost of Phase II that has
been incurred to date.
- - Valley Records shall be responsible for the necessary legal costs to modify
all agreements due to the postponement of the construction and leasing of
Phase II. The cost shall not exceed $3,000.00.
- - Valley Records, Panattoni Development Company, and Betty Kuhn agree to sign
all necessary documents as required to amend the Lease and Purchase and
Sales Agreement.
VALLEY RECORDS DISTRIBUTORS PANATTONI DEVELOPMENT COMPANY
/s/ Robert R. Cain /s/ Panattoni Development Company
- ----------------------------------- -----------------------------------
Date 11/25/92 Date 12/7/92
------------------------------ ------------------------------
BETTY KUHN
/s/ Betty Kuhn
- -----------------------------------
Date 12/10/92
------------------------------
<PAGE>
SECOND AMENDMENT TO LEASE
BY AND BETWEEN
PANATTONI DEVELOPMENT COMPANY "LANDLORD"
AND
VALLEY RECORD DISTRIBUTORS, INC.
This Second Amendment to Lease ("Second Amendment") is made and entered
into to be effective as of December 23, 1992, by and between Panattoni
Development Company ("Landlord") and Valley Records Distributors, Inc.
("Tenant"), for the purpose of amending that certain Industrial Real Estate
Lease (Multi-Tenant Facility) entered into by and between Landlord and Tenant
and dated May 21, 1992, as previously amended by that certain First Amendment to
Multi-Tenant Net Form Lease entered into by and between Landlord and Tenant and
last dated September 9,1992 (as so amended, the "Lease").
Landlord and Tenant hereby agree as follows:
1. PURPOSE OF AMENDMENT. Tenant has asked Landlord to release Tenant from
its obligation to lease the "Phase II" (also referred to as the "Phase 2") space
(hereafter, the "Phase II space") described in the Lease. The Phase II space was
to consist of a minimum of 40,000 square feet of space to be newly constructed
and located on the Southeast portion of the existing facility at 1275 Santa
Anita Court, Woodland, California. Landlord has agreed to release Tenant from
Tenant's obligation to lease the Phase II space, on the terms and conditions
specified herein.
2. AMENDMENT TO LEASE. Landlord and Tenant hereby amend the Lease as
follows:
A. ELIMINATION OF RIGHT AND OBLIGATION TO LEASE THE PHASE II SPACE:
Landlord hereby releases Tenant from Tenant's obligation to lease the Phase
II space, and Tenant relinquishes any and all right to lease the Phase II
space. The Phase 2 Tenant Improvements described in the Lease shall not be
made.
B. TENANT TO CONTINUE TO OCCUPY PHASE I SPACE: Tenant shall continue
to occupy the "Phase I" (also referred to as the "Phase 1") space described
in the Lease (hereafter, the "Phase I space"). The Phase I space consists
of approximately 49,320 square feet located in the Southeast portion of the
109,385 square foot facility at 1275 Santa Anita Court, Woodland,
California.
C. ADJUSTMENT OF RENTAL FOR PHASE I SPACE: The Base Rent to be paid
by Tenant for the Phase I space is hereby increased by Seven Hundred Fifty
Dollars ($750.00) per month during each period, commencing on October 1,
1992, as follows.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------
- --------------------------------------------------------------------------
Term Phase I (per month)
- --------------------------------------------------------------------------
- --------------------------------------------------------------------------
<S> <C>
October 1, 1992 - May 31, 1993 $8,641.00
June 1, 1993 - November 31,1995 $14,362.00
December 1, 1995 - May 31,1998 $15,349.00
June 1, 1998 - November 31, 2000 $16,828.00
December 1, 2000 - May 31, 2003 $17,815.00
- --------------------------------------------------------------------------
- --------------------------------------------------------------------------
</TABLE>
D. TERMINATION DATE FOR PHASE I SPACE UNCHANGED: The termination date
of the Lease is not changed by this Second Amendment and shall continue to
be May 31, 2003. (However, the termination date of the Lease may be
extended pursuant to section 2F below if the Phase II space is built and
leased to Tenant.)
E. AMENDMENT TO RIGHT TO EARLY TERMINATION: Tenant shall not have the
right to terminate the Lease early pursuant to Section 2.05 of the Lease;
instead, Tenant shall have the following rights:
(1) TERMINATION IF LANDLORD DECLINES TO BUILD PHASE II
SPACE: If Tenant requests in writing that Landlord build the Phase II space
and lease the Phase II space to Tenant, and Landlord declines to build the
Phase II space or to lease it to Tenant, then Tenant shall have the right
to terminate this Lease as of January 31, 2000 by giving written notice of
such termination to Landlord at least 180 days prior to January 31, 2000.
(2) TERMINATION SEVEN YEARS AFTER OCCUPANCY OF PHASE II
SPACE: If Tenant requests in writing that Landlord build the Phase II space
and lease the Phase II space to Tenant, and Landlord builds the Phase II
space and leases it to Tenant, and thereafter Tenant requests in writing
that Landlord build additional space and lease it to Tenant and Landlord
declines or is unable to build such additional space and lease it to
Tenant, then Tenant shall have the right to terminate the Lease of the
Phase I and Phase II spaces as of the date that is seven (7) years after
the date that Tenant takes occupancy of the Phase II space, by giving
written notice of such termination to Landlord at least 180 days prior to
such termination date.
-1-
<PAGE>
F. PHASE II SPACE: If Tenant requests in writing that Landlord
build the Phase II space and lease the Phase II space to Tenant, and
Landlord builds the Phase II space and leases it to Tenant, then:
(1) LEASE TO COVER BOTH SPACES: The terms and provisions
of this Lease shall apply to both the Phase I space and the Phase II space;
(2) TEN (10) YEAR EXTENDED TERM OF LEASE: Commencing on the
date that Tenant takes occupancy of the Phase II space, the term of the
Lease for both the Phase I space and the Phase II space shall be extended
to be ten (10) years from the date of occupancy of the Phase II space;
(3) RENT FOR PHASE I AND PHASE II SPACES: Landlord and
Tenant shall determine, separately for the Phase I space and for the Phase
II space, the "market rent" then in effect for similar space (considering,
without limitation, permitted uses, square footage, building specifications
and age) in the Woodland area. If Landlord and Tenant cannot agree on the
"market rent," it shall be determined by an appraiser selected by Tenant
from a list of five appraisers selected and approved by Landlord, and the
cost of such appraisal shall be shared equally by Landlord and Tenant.
(a) PHASE II SPACE RENT: The initial Base Rent to be
paid by Tenant for the Phase II space each month shall be equal to the
market rent so determined for the Phase II space; provided, however, that
the Base Rent for the Phase II space shall not be lower than the amount
required to give Landlord a nine and one-half percent (9.5%) annual return
of the total cost of building the Phase II space.
The determination of the "market rent" shall include a
determination of the amount of future increases in the market rent every
thirty (30) months for the ten (10) year term of the lease of the Phase II
space, and the Base Rent for the Phase II space shall be increased every
thirty (30) months accordingly.
(b) PHASE I SPACE RENT: The Base Rent for the Phase I
space shall be as set forth under section 2C above through May 31, 2003.
The determination of the "market rent" shall include a determination of the
amount of future increases in the rent for the Phase I space every thirty
(30) months beginning on June 1, 2003 through the end of the extended term
of the Lease, and the Base Rent for the Phase I space shall be increased
every thirty (30) months accordingly.
G. REIMBURSEMENT OF COSTS: To accommodate Tenant's request to be
released from its obligation to lease the Phase II space, it has been
necessary to document this amendment to the Lease and also to modify a
purchase and sale contracts between Landlord and Betty Kuhn and to
terminate a separate purchase and sale agreement between Landlord and Betty
Kuhn that related to the land on which the Phase II space was to be built.
Tenant shall pay the attorneys' fees charged by the firm of Hackard &
Taylor to prepare this Second Amendment to the Lease and to modify the two
separate purchase and sale contracts between Landlord and Betty Kuhn, and
any escrow cancellation charges, not to exceed the aggregate amount of
$3,000. However, Valley Records shall not be responsible for any costs
incurred by Landlord to date in connection with the Phase II space.
3. REMAINDER OF LEASE UNCHANGED: Except as specifically amended hereby,
the terms and provisions of the Lease remain unchanged and in full force and
effect.
4. COUNTERPARTS: This Second Amendment may be executed in one or more
duplicate counterparts, each of which shall be deemed to be an original, but all
of which taken together shall constitute one and the same instrument.
LANDLORD: TENANT:
Panattoni Development Company Valley Records Distributors, Inc.
By /s/ Panattoni Development Company By /s/ Robert R. Cain
---------------------------------- -------------------------------
By Its President
---------------------------------- -----------------------------
Date: July 12, 1993 Date: 7/16/93
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<PAGE>
- -------------------------------------------------------------------------------
BUILD TO SUIT LEASE AGREEMENT
-----------------------------------
BY AND BETWEEN
PIZZUTI EQUITIES INC.
("LANDLORD")
AND
VALLEY RECORD DISTRIBUTORS, INC.
("TENANT")
- -------------------------------------------------------------------------------
<PAGE>
CONFIDENTIAL
BUILD TO SUIT LEASE AGREEMENT
THIS BUILD TO SUIT LEASE AGREEMENT ("Lease") is dated as of October 1st,
1997 for reference purposes only and is made and entered into by and between
PIZZUTI EQUITIES INC. ("Landlord") and VALLEY RECORD DISTRIBUTORS, INC., a
California corporation ("Tenant").
1. RECITALS. This Lease is entered into on the basis of the following
facts, intentions and understandings of the parties:
1.1. Landlord is a real estate developer with experience and
expertise in the development of land and the construction of
industrial and commercial buildings of the type hereafter
described as the "Premises."
1.2. Tenant is in the business of distributing compact disks, videos
and other media products.
1.3. Tenant desires to lease, with an option to purchase, a
warehouse and distribution facility with associated office
space to be constructed in the Jefferson Riverport
International Industrial Park at Louisville, Kentucky (the
"Park"). The facility will be comprised of approximately
331,088 usable square feet of space, situated on approximately
16.8131 acres of land, and provide parking for approximately
300 automobiles.
1.4. Tenant has heretofore entered into an Option Agreement and
Contract for Sale dated August 12, 1997 ("Land Sale and Option
Agreement") with the Riverport Authority ("Authority") pursuant
to which Tenant agreed to purchase approximately 16.8131 acres
of land and was granted an option to purchase an additional
parcel of approximately 4.4578 acres (the "Land") within the
Park.
1.5. Tenant has heretofore prepared and distributed a Request for
Proposal ("RFP") soliciting offers from qualified developers to
purchase a portion of the Land, to construct hereon to Tenant's
specifications a building of the nature described in Section
1.3 above, to lease the building to Tenant with an option to
purchase the same, and to provide a means for future expansion
should such expansion be required by Tenant. This Lease
supersedes all provisions of the RFP.
1.6. From among the developers responding to the RFP, Tenant has
selected Landlord's proposal as set forth in Exhibit A.
-2-
<PAGE>
CONFIDENTIAL
1.7. Landlord and Tenant now desire, and intend hereby, to set forth
the terms by which Landlord will construct a building on a
portion of the Land to Tenant's specifications, lease the Land
and building to Tenant with an option to purchase the same, and
provide for Tenant's possible future expansion into an
additional building to be constructed by Landlord.
2. PREMISES.
2.1. ASSIGNMENT OF CONTRACT. Not later than ten (10) days after the
date on which both Landlord and Tenant have executed this
Lease, Tenant shall assign to Landlord, by an instrument in
writing mutually agreeable to Landlord and Tenant, all of
Tenant's rights and obligations in the Land Sale and Option
Agreement and Landlord shall accept such assignment and assume
and agree to hold Tenant free and harmless from all obligations
and liabilities arising under or pursuant to such Agreement.
Concurrent with such assignment and acceptance, Landlord shall
reimburse Tenant for all deposits made and other sums expended
by Tenant in connection with the Land Sale and Option Agreement
as detailed in an itemized accounting thereof to be prepared by
Tenant and delivered to Landlord at the time of such
assignment.
2.2. PURCHASE OF INITIAL PARCEL. No later than ten (10) days after
assignment of the Land Sale and Option Agreement, Landlord
shall, at Landlord's sole cost and expense, either (a)
purchase, pursuant to the terms and conditions of said
agreement, fee title to approximately 16.8 acres of the Land
("Initial Parcel") or (b) execute an agreement with the
landowner for immediate commencement of preliminary clearing
and site grading. At the closing of Landlord's purchase of the
Initial Parcel, Landlord shall cause to be recorded in the
official records of the county where the Land is situated a
Memorandum of Lease in the form of Exhibit B hereto and a
Memorandum of Option in the form of Exhibit C hereto which
Memoranda shall for purposes of title priority constitute
encumbrances on the Initial Parcel which are senior to all
other liens or encumbrances except those which are specifically
approved in writing by Tenant. Not later than ten (10) days
after the closing of Landlord's purchase of the Initial Parcel,
Landlord shall provide Tenant, at Landlord's expense, with a
copy of the recorded deed by which Landlord has taken title to
the Initial Parcel, certified copies of the recorded Memoranda
and evidences of title, to Tenant's reasonable satisfaction,
showing fee title vested in Landlord and the encumbrances of
the Memoranda with priority of title as above stated. In
connection with its purchase of the Initial Parcel, Landlord
shall conduct such tests and inspections of the Land and of all
relevant matters pertaining to the development of the Land as
contemplated by this Lease as would a prudent developer of
similar properties and as are necessary to satisfy the terms
and conditions of this Lease. Landlord shall provide Tenant,
within five (5) working days after Landlord's initial receipt
thereof, with copies of all reports
-3-
<PAGE>
CONFIDENTIAL
and test results it obtains regarding the Land, including, but
not limited to, soils reports, environmental assessment
reports, and test results of soil or water samples taken from
the Land. Landlord acknowledges and agrees that the foregoing
items are provided to Tenant for Tenant's information only,
that Tenant shall have no duty to act or inquire with respect
to any matter disclosed or recommended by any such reports, and
that Tenant's receipt of any such report shall not relieve
Landlord of any duty to Tenant at law or under this or any
other agreement between Landlord and Tenant or be the basis of
any defense by Landlord against any claim by Tenant arising out
of any alleged failure or breach by Landlord.
2.3. CONTINUING OPTION. Until the earlier of (a) three (3) years
after the commencement Date or (b) Landlord's receipt of a
written notice from Tenant that Tenant irrevocably waives its
rights hereunder to acquire the Additional Premises, Landlord
shall keep in full force and effect, and do all things required
of Landlord to maintain as operative, the Land Sale and Option
Agreement as it pertains to the remaining 4.5 acres of Land
("Second Parcel") on which the Additional Premises will be
constructed if Tenant shall exercise its option to expand as
provided in this Lease. Tenant shall reimburse Landlord for
any money expended to keep the option in effect.
2.4. CONSTRUCTION OF PREMISES. From and after the closing of
Landlord's purchase of the Initial Parcel, Landlord shall, at
Landlord sole cost and expense, commence and diligently pursue
to completion development and construction of the Premises as
provided in Exhibit D and other provisions of this Lease.
3. LEASE TERM.
3.1. INITIAL TERM. The term of this Lease ("Term") shall be ten
(10) years commencing on the Commencement Date.
3.2. COMMENCEMENT DATE. The Commencement Date shall be the earlier
of (a) the first day of the first calendar month following the
calendar month in which construction of the Tenant Improvements
has been substantially completed or (b) seventy-five (75) days
after delivery of a water-tight building as described in
Exhibit D. Within thirty (30) days after the Commencement
Date, Landlord and Tenant shall execute, acknowledge, and
record a Commencement Date Memorandum in the form of Exhibit E
hereto, setting forth therein the actual Commencement Date of
this Lease.
3.3. DELAY. If the Commencement Date has not occurred by August 15,
1998, Tenant may, at anytime thereafter, upon written notice to
Landlord, ("Termination Notice") terminate this Lease whereupon
neither party shall have any rights or obligations hereunder
except for those which by the express terms of this Lease
survive such termination. If Tenant does not deliver a
Termination Notice, this Lease shall remain in full force and
effect.
-4-
<PAGE>
CONFIDENTIAL
3.4. OPTIONS TO EXTEND. Tenant may extend the Term of this Lease
upon the following terms and conditions:
3.4.1. Provided that Tenant is not then in default of any
material term of this Lease, Tenant may, at any
time prior to the last day of the one hundred
fourteenth (114th) month of the Lease Term, by
written notice to Landlord, extend the Term of this
Lease for an additional period of five (5) years
commencing at the end of the Term provided in
Section 3.1 above ("First Extension Term").
3.4.2. Provided that Tenant has exercised its option for
the First Extension Term and is not then in default
of any material term of this Lease, Tenant may, at
any time after commencement of the First Extension
Term and prior to the last day of the fifty-fourth
(54th) month of the First Extension Term, by
written notice to Landlord, extend the Term of this
Lease for an additional period of five (5) years
commencing at the end of the First Extension Term
provided in Section 3.4.1 above ("Second Extension
Term").
3.4.3. Provided that Tenant has exercised its options for
the First Extension Term and the Second Extension
Term and is not then in default of any material
term of this Lease, Tenant may, at any time after
commencement of the Second Extension Term and prior
to the last day of the fifty-fourth (54th) month of
the Second Extension Term, by written notice to
Landlord, extend the Term of this Lease for an
additional period of five (5) years commencing at
the end of the Second Extension Term provided in
Section 3.4.2 above ("Third Extension Term").
3.4.4. In the event that Tenant exercises any of its
options to extend the Term of this Lease, as
hereinabove provided, the word "Term" as used in
this Lease shall, as applicable, include the First
Extended Term, Second Extended Term, and Third
Extended Term.
4. RENT.
MONTHLY RENT. Tenant shall pay to Landlord, at Landlord's address for
notices set forth in Section 24 hereof, in lawful money of the United States,
for each calendar month of the Term, Monthly Rent in advance, on the first day
of each calendar month, without abatement, deduction, claim, offset, prior
notice or demand, except as otherwise provided for herein. Any payment of rent
received more than twenty (20) days past its due date shall be assessed a late
payment penalty of three (3) percent. Monthly rent for the Initial Term shall
be as follows:
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<PAGE>
CONFIDENTIAL
<TABLE>
<CAPTION>
LEASE MONTH MONTHLY RENT AMOUNT
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<S> <C>
1-60 $71,735.73
61-120 $78,357.50
</TABLE>
Monthly Rent during the Extended Terms, if any, shall be as provided below.
4.1.1. MONTHLY RENT - FIRST EXTENDED TERM. Monthly Rent payable during
each month of the First Extended Term, if applicable, shall be no
greater than 115% of the Monthly Rent in effect during the last
year of the initial lease term.
4.1.2. MONTHLY RENT - SECOND EXTENDED TERM. Monthly Rent payable during
each month of the Second Extended Term, if applicable, shall be
no greater than 115% of the Monthly Rent in effect during the
last year of the First Extended Term.
4.1.3. MONTHLY RENT - THIRD EXTENDED TERM. Monthly Rent payable during
each month of the Third Extended Term, if applicable, shall be no
greater than 115% of the Monthly Rent in effect during the last
year of the Second Extended Term.
5. CHANGE ORDERS. Any change orders must be agreed to in writing by both
Landlord and Tenant in order to be effective. Any change to the land or
construction costs in connection with any such change orders shall be multiplied
by a factor of 0.12 to calculate the change in annual rent. All costs
associated with change orders will be identified to Tenant on an open book
basis.
6. SECURITY DEPOSIT. On the Commencement Date, Tenant shall deposit with
Landlord an amount equal to half the Monthly Rent payable for the first month of
the Term as a Security Deposit for the full and faithful performance of every
provision of this Lease to be performed by Tenant. If Tenant defaults with
respect to any provisions of this Lease, Landlord may apply all or any part of
the Security Deposit to the payment of any Rent or other sum in default, the
repair of any damage to the Premises, the payment of any other amount which
Landlord may spend or become obligated to spend by reason of Tenant's default,
or to compensate Landlord for any other loss or damage which Landlord may suffer
by reason of Tenant's default to the full extent permitted by law. Landlord's
obligations with respect to the Security Deposit are those of a trustee and not
a debtor and Tenant shall be entitled to interest on the Security Deposit. If
Tenant is not otherwise in default, the Security Deposit and all interest earned
thereon shall be returned to Tenant within twenty-one (21) days of termination
of the Lease.
7. CONSTRUCTION AND DELIVERY OF IMPROVEMENTS. Upon the occurrence of any
Delay Event, the targeted date for the substantial completion of the
construction of the Improvements will be extended by a number of days equal to
the number of days of the actual delay caused by the occurrence of such Delay
Event. For the purposes of this Lease, the Improvements will be deemed
"substantially completed" on the earlier of: (a) the date on
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which Tenant occupies the Building for the conduct of all aspects of its
business operation; or (b) the date on which a temporary or permanent
certificate of occupancy for the improvements is issued by the appropriate
governmental authority, which certificate of occupancy will permit Tenant to
operate its business in the normal course. Landlord shall construct the
improvements and deliver possession of the Premises no later than May 1, 1998,
subject only to delays caused by events which are beyond its control ("Delay
Events"). Such Delay Events are agreed to be limited to the following: (a)
Tenant's failure to respond to the drawings, plans, and specifications submitted
for its review and approval within a five day period; (b) Tenant's change
orders, but only to the minimum extent absolutely necessary; (c) any
governmental authority's refusal to issue the requisite approvals for the
Improvements, which refusal is directly and solely attributable to Tenant's
failure to complete any improvements or installations to the interior of the
premises, which are to be undertaken as Tenant's sole responsibility and
expense; (d) acts of God, such as major natural disasters; (e) failure by the
Authority to complete the various infrastructure improvements by the times
indicated in the Land Sale and Option Agreement; provided however, that if
Landlord uses a delay in infrastructure improvements as a Delay Event, Landlord
will pass any and all liquidated damages received from the Authority through to
Tenant; and (f) seriously adverse weather conditions, but only to the minimum
extent that such seriously adverse weather-related Delay Events actually affect
the schedule. Any Delay Event resulting from seriously adverse weather under
sub-paragraph (f) above is limited to a total of 30 days. All Delay Events
shall be considered concurrent (not cumulative or consecutive), unless in the
totality of circumstances, any individual Delay Event shall be considered to
have an individually adverse affect on the critical path schedule.
7.1. LIQUIDATED DAMAGES. Landlord will use its best efforts to proceed
with the construction of the Improvements, so as to facilitate the
achievement of Tenant's operational objectives as set forth in Exhibit
D. If, for any reason other than the occurrence of a Delay Event,
Landlord fails to meet the required level of construction for each
operational objective set forth in Exhibit D, then Landlord shall pay
to Tenant as liquidated damages and not as a penalty the sum of
$5,000.00 for each and every day Landlord fails to meet the required
level of construction or the operational objective is delayed by
Landlord's failure. These liquidated damages are intended to
reimburse Tenant for its lost opportunity costs resulting from such
delay.
7.2. EXPANSION OPTION. Landlord will construct the Improvements to
facilitate the future construction of an additional 88,000 square feet
of warehouse space (the "Expansion"), and will keep the adjacent land
between the building and the western property line and Second Parcel
free of any easements or construction to facilitate the construction
of such expansion. Tenant shall have the option for the first three
(3) years of the lease to require the Landlord to develop and
construct the Expansion, which shall be built on substantially the
same specifications and materials as the initial Improvements and
which shall be integrated into the initial Improvements in an
essentially seamless manner. The lease rate for the
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Expansion shall be calculated by multiplying Landlord's total project
cost, including hard, soft and land costs (which shall be identified
to Tenant on an open book basis) by a constant which is equal to
the greater of 11% or 300 basis points over the corresponding
like-term treasury rate for the remaining term of this Agreement.
7.3. REPRESENTATIONS AND WARRANTIES. Landlord represents and warrants to
Tenant that the Premises are constructed entirely with new materials
and in strict compliance with the Final Plans. Landlord further
represents and warrants to Tenant that on the Commencement Date the
Premises complies with all applicable covenants or restrictions of
record, and with all applicable building codes, regulations,
ordinances, laws and statutes in effect on the Commencement Date,
including, without limitation, the Americans with Disabilities Act
("Legal Requirements"). In the event of non-compliance with said
warranty, Landlord shall promptly and in all events within thirty (30)
days after receipt of written notice from Tenant at any time during
the Term setting forth with specificity the nature and extent of such
non-compliance with this warranty, rectify same in a good and
workmanlike manner and in compliance with all Legal Requirements at
Landlord's sole cost and expense.
8. USE OF THE PREMISES; HAZARDOUS MATERIALS.
8.1. TENANT'S USE. Tenant may use the Premises for any lawful purpose.
8.2. COMPLIANCE. Tenant shall not use the Premises or suffer or permit
anything to be done in or about the Premises which will in any way
conflict with any law, statute, zoning restriction, private covenant
or restriction of record ordinance or governmental law, rule,
regulation or requirement of duly constituted public authorities now
in force or which may hereafter be in force, or the requirements of
the Board of Fire Underwriters or other similar body now or hereafter
constituted relating to or affecting the condition, use or occupancy
of the Premises. Tenant shall not commit any public or private
nuisance or any other act or thing which might or would unreasonably
disturb the quiet enjoyment of any occupant of nearby property.
Tenant shall place no loads upon the floors, walls or ceilings in
excess of the maximum designed load determined by Landlord or which
endanger the structure; nor place any harmful liquids in the drainage
systems; nor dump or store waste materials or refuse or allow such to
remain outside the building proper, except in the enclosed trash areas
provided. Tenant shall not store or permit to be stored or otherwise
placed any other material of any nature whatsoever outside the
building, except in storage areas approved by Landlord.
8.3. HAZARDOUS MATERIALS.
8.3.1. TENANT'S COMPLIANCE. From and after the Commencement Date,
Tenant shall comply with all statutes, laws, ordinances, rules
and regulations now or hereinafter promulgated by any federal,
state, local or other governmental agency with respect to the
use, generation, storage or
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disposal of Hazardous Materials (as hereinafter defined) on or
about the Premises. Tenant (including Tenants employees, agents
and contractors) shall not cause any Hazardous Materials, other
than in compliance (which shall be at Tenant's sole cost and
expense) with all applicable local, state and federal laws,
codes, statutes, ordinances, regulations and permits now or
hereafter in effect and using all necessary and appropriate
precautions, to be used, generated, stored or disposed of on,
under or about, or transported to or from the Premises
("Hazardous Materials Activities"). Landlord shall not be liable
to Tenant for any Hazardous Materials Activities by Tenant,
Tenant's employees, agents, contractors, licensees or invitees.
Tenant shall indemnify, defend with counsel acceptable to
Landlord and hold Landlord harmless from any claims, costs and
liabilities arising out of Hazardous Materials Activities by
Tenant, Tenant's employees, agents, contractors, licensees or
invitees on, under or about the Premises, whether during the Term
or after the expiration thereof, and Landlord shall provide to
Tenant reasonable access to the Premises following expiration of
the Term to perform remedial work arising with respect to
Tenant's use of Hazardous Materials. For purposes of this Lease,
the term "Hazardous Materials" shall include, but not be limited
to, any flammable, corrosive or ignitable materials, any
explosives, petroleum or petroleum by-products, any radioactive
materials, wastes or substances, or any toxic substances and
other substances defined as "hazardous substances," "hazardous
wastes," "extremely hazardous wastes," "hazardous materials" or
"toxic substances" in the Comprehensive Environmental Response,
Compensation and Liability Act of 1980, as amended, 42 U.S.C.
Section 9601, ET SEQ.; the Hazardous Materials Transportation
Act, 49 U.S.C. Section 1801, ET SEQ.; the Resource Conservation
and Recovery Act, 42 U.S.C. Section 6901, ET SEQ.; and/or in
regulations, compliance and guideline documents promulgated
pursuant to said laws and any similar federal, state or local
law.
8.3.2. LANDLORD'S REPRESENTATION AND INDEMNITY - HAZARDOUS MATERIALS.
Landlord hereby represents for the benefit of Tenant that as of
the Commencement Date there are no Hazardous Materials located on
or beneath the Premises. Landlord shall indemnify, defend with
counsel reasonably acceptable to Tenant, and hold Tenant harmless
from any claims, liabilities or costs (including reasonable
attorneys' fees) arising out of any governmental, administrative,
regulatory or private action or proceeding involving (1) any
Hazardous Materials which are located on or under the Premises as
of the Commencement Date and (2) any Hazardous Materials which
are located on or under the Premises at any time during the Term
and that were caused by the use, generation, disposal or storage
of Hazardous Materials by Landlord (including its employees,
agents and contractors) during the Term. The obligations of
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Landlord hereunder shall inure to the benefit of any assignee or
sublessee of Tenant. This obligation shall survive expiration or
termination of this Lease.
8.3.3. PREMISES RENDERED UNTENANTABLE. If (1) all or any material
portion of the Premises are rendered untenantable as a result of
Hazardous Materials on, under or about the Premises, (2) the
presence of the Hazardous Materials is not the result of
Tenant's, its agents', employees', contractors', or invitees'
Hazardous Materials Activities, and (3) all or a material portion
of the Premises remain untenantable for more than five (5)
consecutive business days, Tenant shall have the right to abate
Rent for the portion or portions of the Premises so affected, and
if the Premises or applicable portion thereof remain untenantable
for more than thirty (30) consecutive days, Tenant shall have the
right to terminate the Lease as to the affected portion, upon
thirty (30) days' prior written notice to Landlord.
9. QUIET ENJOYMENT. Landlord covenants that Tenant, upon performing the
terms, conditions and covenants of this Lease, shall have quiet and
peaceful possession of the Premises as against any person claiming the same
by, through or under Landlord.
10. ALTERATIONS.
10.1. PERMITTED ALTERATIONS. After the Commencement Date, Tenant shall
not make or permit any Major Alterations in, on or about the
Premises, except with the prior written consent of Landlord,
which consent shall not be unreasonably withheld or delayed.
Notwithstanding the foregoing, Tenant shall not, without the
prior written consent of Landlord, which consent shall not be
unreasonably withheld or delayed, make any:
10.1.1. Alterations to the structure or systems of the building;
10.1.2. Alterations to or penetrations of the roof of the building; or
10.1.3. Alterations that affect the exterior aesthetics of the building.
The term "Alterations" as used herein means additions or improvements to
the Premises which are not in a nature of ordinary maintenance or repair and do
not constitute trade fixtures. The term "Major Alteration" means an Alteration
the cost of which is in excess of $25,000.00.
All Alterations shall be installed at Tenant's sole expense, in compliance
with all applicable laws, by a licensed contractor, shall be done in a good and
workmanlike manner conforming in quality and design with the Premises existing
as of the Commencement Date and shall not diminish the value of the Premises.
All Alterations made by Tenant shall be the property of Tenant. Landlord may,
at its option, and provided that Landlord so notifies Tenant in writing at the
time Landlord consents to such item, require that Tenant, at Tenant's expense,
upon
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the expiration or earlier termination of the Term, remove any Major Alteration
installed by Tenant. Notwithstanding any other provision of this Lease, Tenant
shall be solely responsible for the maintenance and repair of any and all
Alterations made by it to the Premises after the Commencement Date.
10.2. NOTICE. Tenant shall give Landlord written notice at least ten
(10) days' prior to the commencement of such work of Tenant's
intention to perform work on the Premises which might result in
any claim of lien to enable Landlord to post and record a Notice
of Nonresponsibility or other notice deemed proper before the
commencement of any such work.
11. SURRENDER OF THE PREMISES. Except as otherwise provided in this Lease,
upon the expiration or earlier termination of this Lease, Tenant shall
surrender the Premises to Landlord in its condition existing as of the date
the Premises or any portion thereof were delivered to Tenant, normal wear
and tear and fire or other casualty excepted. Tenant shall remove from the
Premises all of Tenant's Major Alterations required to be removed pursuant
to Section 9, and all of Tenant's personal property and repair any damage
and perform any restoration work caused by such removal.
12. REAL PROPERTY TAXES.
12.1. PAYMENT BY TENANT. Tenant shall pay, as Additional Rent, all
real property taxes and personal property taxes levied against
the Premises and Tenant's personal property during the Term as
they shall respectively become due and payable. Landlord agrees
to forward to Tenant all notices and tax bills pertaining to real
property taxes on the Premises upon receipt or at least sixty
(60) days before the due dates. Tenant shall provide Landlord
with satisfactory evidence that such taxes and assessments have
been timely paid in full. Landlord's failure to timely deliver
any notice or tax bill as prescribed in this Section shall not
relieve Tenant of its obligation to pay all real property taxes
called for herein but such failure shall relieve Tenant of any
obligation to pay any late payment charges or interest
attributable to that installment of real property taxes. Tenant
may contest the amount or validity of any real property taxes by
appropriate proceeding; provided that Tenant shall promptly pay
such taxes unless such proceeding shall operate to prevent or
stay the collection of the tax so contested. Landlord shall
join in any such proceeding if any law shall so require,
providing that Tenant shall indemnify Landlord against any
liability, cost or expense in connection therewith, including
attorneys' fees and costs.
12.2. SEPARATE ALLOCATION. If any real property tax is levied against
real property, including the Premises, in which Landlord has an
interest and such tax is not separately allocated to Tenant's
operations or to the Premises, then Landlord shall equitably
apportion the real property taxes so assessed among all such real
property, including the Premises, according to the measure used
by the taxing authorities to levy the tax and shall disclose the
basis of such determination to
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Tenant, provide Tenant with copies of all notices and tax bills
relating to such tax, and permit Tenant a reasonable right to
review Landlord's books and records relating to the basis of such
allocation.
12.3. PRORATION. Tenant's liability to pay real property taxes shall
be prorated on the basis of a 365-day year to account for any
fractional portion of a fiscal tax year included at the
commencement or expiration of the Term. With respect to any
assessments which may be levied against or upon the Premises, or
which under the laws then in force may be evidenced by
improvement or other bonds or may be paid in annual installments,
only the amount of such annual installment (with appropriate
proration for any partial year) and interest due thereon, if any,
shall be included within the computation of the annual real
property taxes levied against the Premises.
12.4. PAYMENT ON EXPIRATION OF TERM. If this Lease terminates on a
date earlier than the end of a fiscal tax year, Landlord shall
deliver to Tenant a statement setting forth the amount of real
property taxes to be paid by Tenant, together with reasonable
supporting evidence for the amount set forth therein, adjusted to
the date of termination which shall be paid within fifteen (15)
days of such receipt.
12.5. PERSONAL PROPERTY TAXES. Tenant shall pay prior to delinquency
all taxes assessed or levied against Tenant's personal property
in, on or about the Premises or elsewhere. When possible, Tenant
shall cause its personal property to be assessed and billed
separately from the real or personal property of Landlord.
13. UTILITIES AND SERVICES. Tenant shall be responsible for and shall pay
promptly all charges for water, gas, electricity, telephone, refuse pick
up, janitorial service and all other utilities, materials, and services
furnished directly to or used by Tenant in, on or about the Premises during
the Term, together with any taxes thereon. Except as otherwise provided
herein, Landlord shall not be liable in damages or otherwise for any
failure or interruption of any utility service or other service furnished
to the Premises, except that resulting from the willful misconduct or
negligence of Landlord. Notwithstanding the foregoing, if the interruption
of utilities from any cause renders the Premises or any part thereof
untenantable, Tenant shall be entitled to rent abatement for the portion of
the Premises that is rendered untenantable.
14. REPAIR AND MAINTENANCE.
14.1. BUILDING.
14.1.1. LANDLORD'S OBLIGATIONS. Landlord shall at all times
promptly and at its own expense repair any defects in
materials or workmanship for the Improvements to be
constructed by Landlord, as set forth in Exhibit A to this
Agreement. Landlord shall also promptly and its own expense
keep in good order, condition and repair the structural
parts of the building, foundation, exterior and interior
load-bearing walls, and roof of the
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Premises, except for any damage thereto caused by the
negligence or willful acts or omissions of Tenant.
14.1.2. TENANT'S OBLIGATIONS. Tenant shall at all times and at
its own expense clean, keep and maintain in good, safe
and sanitary order, condition and repair the building and
Premises and every part thereof which is not within
Landlord's obligation pursuant to Section 13.1.1 above.
Tenant shall have the benefit of all warranties and
insurance available to Landlord regarding the portions
and components of the Premises to which Tenant's repair
obligation applies, including the outside areas described
below.
14.2. OUTSIDE AREAS. Tenant shall at all times and at its own expense
clean, keep and maintain in good, safe and sanitary order,
condition and repair the outside areas and every part thereof.
Tenant's repair and maintenance obligations shall include,
without limitation, the landscaping (including such replacement
thereof as may be necessary to maintain the landscaping in its
condition as of the Commencement Date), sprinkler system,
walkways, signs and site lighting, pest control and sweeping.
14.3. COMPLIANCE WITH GOVERNMENTAL REGULATIONS. Tenant shall, at its
own cost and expense, promptly and properly observe and comply
with, including the making by Tenant of any Alteration to the
Premises, all present and future orders, regulations, directions,
rules, laws, ordinances, and requirements of all governmental
authorities (including, without limitation, state, municipal,
county and federal governments and their departments, bureaus,
boards and officials) arising from Tenant's use or occupancy of
the building or the Premises or privileges appurtenant to or in
connection with Tenant's enjoyment of the building or Premises.
Notwithstanding the foregoing, to the extent any modification to
the building or a building system or the common area is required
because of an obligation to comply with existing or new laws,
except to the extent same is required because of the actual
physical use of the Premises by Tenant or its assigns or
subtenants for the particular purpose requiring said modification
and compliance, nothing set forth in this Lease shall require
Tenant to make any modifications or additions to the building or
building systems or the common area, as the case may be. In such
event, Landlord shall promptly make the modification to effect
such compliance in a good and workmanlike manner and in
compliance with all legal requirements at Landlord's sole cost
and expense.
14.4. OPTION TO PURCHASE. Landlord hereby grants to Tenant the
exclusive right, privilege and option to purchase the Premises in
accordance with the following terms and conditions:
<TABLE>
<S> <C>
At delivery $ 9,307,000
End of Year 5 $ 9,897,800
</TABLE>
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<TABLE>
<S> <C>
End of Year 10 $10,748,000
</TABLE>
15. LIENS. Tenant shall keep the Premises free from any liens arising out of
any work performed, materials furnished or obligations incurred by or on
behalf of Tenant and hereby agrees to indemnify and hold Landlord harmless
from all liability and cost, including attorneys' fees and costs, in
connection with or arising out of any such lien or claim of lien. Tenant
shall cause any such lien imposed to be released of record by payment or
posting of a proper bond reasonably acceptable to Landlord within thirty
(30) days after the earlier of Tenant's actual knowledge of the imposition
of the lien or written request by Landlord, but in any event, before the
foreclosure of the lien. If Tenant fails to so remove said lien within the
prescribed period, then Landlord may do so at Tenant's expense and Tenant's
reimbursement to Landlord for such amounts shall be deemed Additional Rent.
Such reimbursement shall include all sums disbursed, incurred or deposited
by Landlord, including Landlord's costs, expenses and reasonable attorneys'
fees with interest thereon.
16. LANDLORD'S RIGHT TO ENTER THE PREMISES. Tenant shall permit Landlord and
its agents to enter the Premises at all reasonable times with reasonable
prior notice, to inspect the same, to post Notices of Nonresponsibility, to
make necessary Alterations or repairs, and to discharge Landlord's
obligations hereunder. The above rights are subject to reasonable security
regulations of Tenant, and to the requirement that Landlord shall at all
times act in a manner to cause the least possible interference with
Tenant's business.
17. SIGNS. Tenant shall have the right to place, construct and maintain in the
interior and exterior of the Premises one or more signs advertising its
business at the Premises, with Landlord's written consent, which consent
shall not be unreasonably withheld or delayed. The size, design, color and
other physical aspects of Tenant's signs shall be subject to any
appropriate municipal or other governmental approvals. The cost of any
sign, its installation, maintenance and removal expense shall be Tenant's
sole expense. If Tenant fails to maintain its sign, or, if Tenant fails to
remove its sign upon termination of this Lease, Landlord may do so at
Tenant's expense and Tenant's reimbursement to Landlord for such amounts
shall be deemed Additional Rent. Such reimbursement shall include all sums
disbursed, incurred or deposited by Landlord, including Landlord's costs,
expenses and reasonable attorneys' fees with interest thereon.
18. INSURANCE.
18.1. INDEMNIFICATION.
18.1.1. TENANT'S OBLIGATION TO INDEMNIFY. Tenant shall
indemnify and hold Landlord harmless from and against
any and all claims, demands, liabilities and expenses,
including attorneys' fees, arising from the negligence
or wrongful act of Tenant or its agents, employees,
invitees or contractors or from any breach by Tenant of
this Lease, provided that Tenant's obligations under
this Subsection shall not apply to the extent such
claims, demands, liabilities or expenses (a) arise out
of or relate to
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the negligence or wrongful act of Landlord, its agents,
employees, invitees or contractors or the breach of
this Lease by Landlord; or (b) relate to losses
covered by casualty insurance. In the event any action
or proceeding shall be brought against Landlord by
reason of any such indemnified claim, Tenant shall
defend the action or proceeding at Tenant's expense by
counsel reasonably satisfactory to Landlord. Landlord
may participate in any such action or proceeding
through counsel employed at its own expense.
18.1.2. LANDLORD'S OBLIGATION TO INDEMNIFY. Landlord shall
indemnify and hold Tenant harmless from and against any
and all claims, demands, liabilities and expenses,
including attorneys' fees, arising from the negligence
or wrongful act of Landlord, its agents, employees,
invitees, or contractors or from any breach of this
Lease by Landlord, provided that Landlord's obligations
under this Subsection shall not apply to the extent
such claims, demands, liabilities or expenses (a) arise
out of or relate to the negligence or wrongful act of
Tenant, its agents, employees, invitees or contractors
or the breach of this Lease by Tenant; or (b) relate
to losses covered by casualty insurance. In the event
any action or proceeding shall be brought against
Tenant by reason of any such indemnified claim,
Landlord shall defend the action or proceeding at
Landlord's expense by counsel reasonably satisfactory
to Tenant. Tenant may participate in any such action
or proceeding through counsel employed at its own
expense.
18.1.3. SURVIVAL. The provisions of this Subparagraph shall
survive the expiration or termination of this Lease
with respect to any claims or liability occurring prior
to such expiration or termination.
18.2. TENANT'S INSURANCE. Tenant agrees to maintain in full force and
effect at all times during the Term, at its own expense, for the
protection of Tenant and Landlord, as their interests may appear,
policies of insurance issued by a responsible carrier or carriers
reasonably acceptable to Landlord which afford the following
coverages:
18.2.1. Worker's compensation - statutory limits.
18.2.2. Employer's liability - not less than One Million
Dollars ($1,000,000).
18.2.3. Comprehensive general liability insurance including
blanket contractual liability broad form property
damage, personal injury, completed operations, products
liability, fire damage, and legal, in an amount not
less than One Million Dollars ($1,000,000) combined
single limit for both bodily injury and property damage
naming Landlord as additional insureds.
18.2.4. "All Risk" property insurance (including, without
limitation, business interruption, vandalism, malicious
mischief, inflation endorsement,
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sprinkler leakage endorsement, and boiler and machinery
coverage) on the Premises, including, without
limitation, the building, tenant improvements, Tenant's
personal property located on or in the Premises, and
any Alterations constructed or installed on the
Premises. Such insurance shall be in the full amount
of the replacement cost, as the same may from time to
time increase as a result of inflation or otherwise,
and shall be in a form providing coverage comparable to
the coverage provided in the standard ISO All-Risk
form. The insurance shall name Landlord as named
insured and include a lender's loss payable endorsement
in favor of Landlord's lender (Form 438 BFU
Endorsement). As long as this Lease is in effect, the
proceeds of the policy on Tenant's personal property
shall be used for the repair and replacement of such
items. Landlord shall have no interest in the
insurance proceeds on Tenant's personal property r
inventory. Any dispute between the parties regarding
the value of such portion of tenant improvements shall
be resolved by arbitration.
18.2.5. Machinery insurance including the HVAC equipment.
18.3. DEDUCTIBLES. Tenant shall be liable for any deductible amounts
under any insurance policies required to be maintained pursuant
to this Lease.
18.4. CERTIFICATES. Tenant shall deliver to Landlord, at least ten
(10) days prior to the time such insurance is first required to
be carried by Tenant, and thereafter at least thirty (30) days
prior to expiration of each such policy, certificates of
insurance evidencing the above coverage, together with
satisfactory evidence of payment of the premium thereon, with
limits not less than those specified above. The certificates
shall expressly provide that the interest of Landlord therein
shall not be affected by any breach of Tenant of any policy
provision for which such certificates evidence coverage.
Further, all certificates shall expressly provide that no less
than thirty (30) days' prior written notice shall be given
Landlord in the event of cancellation or material alteration of
the coverages evidenced by such certificates.
18.5. WAIVER OF SUBROGATION. Landlord and Tenant each hereby waive all
rights of recovery against the other on account of loss and
damage occasioned to such waiving party for its property or the
property of others under its control to the extent that such loss
or damage is insured against under any insurance policies which
may be in force at the time of such loss or damage. Tenant and
Landlord shall, upon obtaining policies of insurance required
hereunder, give notice to the insurance carrier that the
foregoing mutual waiver of subrogation is contained in this Lease
and Tenant and Landlord shall cause each insurance policy
obtained by such party to provide that the insurance company
waives all right of recovery by way of subrogation against either
Landlord or Tenant in connection with any damage covered by such
policy.
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19. DAMAGE OR DESTRUCTION.
19.1. INSURED DAMAGE. If the Premises are partially or completely
damaged or destroyed, and if such peril is covered by insurance
carried under the terms of this Lease, then Landlord shall
promptly and diligently repair and restore the Premises to the
same condition they were in immediately before such partial or
complete damage or destruction, subject to such modifications as
may be required by applicable law, code or ordinance. Tenant
shall replace or restore any of its personal property which is
damaged or destroyed and shall be entitled to receive proceeds of
insurance equal to the replacement cost. Rent shall abate for
the period and to the extent that the Premises are rendered
untenantable by reason of the damage or destruction.
19.2. UNINSURED DAMAGE. If the Premises are partially or completely
damaged or destroyed, and if such peril is not covered by any
insurance required to be maintained under this Lease, then the
obligation to reconstruct the Premises hereunder shall be
governed by this subparagraph.
19.2.1. If the uninsured damage or destruction is proximately
caused by the willful act or negligence of Tenant or
Tenant's employees, agents, visitors, invitees, or
contractors, then Tenant shall pay to Landlord, within
thirty (30) days of written notice, the amount
determined by Landlord as necessary to reconstruct the
Premises to the same condition as they were in
immediately prior to such damage or destruction. Upon
receipt of the amount set forth above, Landlord shall
commence and diligently pursue to completion
reconstruction of the Premises to the same condition
they were in immediately prior to such damage or
destruction, subject to such modifications as may be
required by applicable law, code or ordinance. If the
cost of actual reconstruction is less than the amount
estimated by Landlord in its notice(s) to Tenant,
Landlord shall promptly refund such excess funds to
Tenant, with interest. If the uninsured damage or
destruction is proximately caused by the willful acts
or negligence of Landlord, Landlord's employees,
agents, visitors, invitees, or contractors, then
Landlord shall promptly commence and diligently pursue
to completion, at Landlord's sole expense,
reconstruction of the Premises to the same condition
they were in immediately before such damage or
destruction, subject to such modifications as may be
required by applicable law, code, or ordinance. Rent
shall abate for the period and to the extent that the
Premises are rendered untenantable by reason of such
damage or destruction.
19.2.2. If the uninsured damage or destruction is proximately
caused by causes other than the willful act or
negligence of Landlord or Tenant; or Landlord's or
Tenant's employees, agents, visitors, invitees, or
contractors, then Tenant shall have the option,
exercisable in writing
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within ninety (90) days of such damage or destruction,
to pay the cost of any reconstruction. If Tenant
elects not to pay the cost of reconstruction, Landlord
shall have until ninety (90) days from the date of such
damage or destruction to elect to pay the cost of such
reconstruction. During the election periods set forth
above, this Lease shall continue in full force and
effect; provided, however, that rent shall abate to the
extent that the Premises are rendered untenantable. If
neither party elects to pay the costs of the
reconstruction, this Lease shall terminate.
19.2.2.1. If Tenant elects to pay the cost of any
reconstruction, Tenant shall deposit with
Landlord, within ninety (90) days of the date
of such damage or destruction, the estimated
cost of such reconstruction. Thereafter,
Landlord shall commence, and diligently
pursue to completion reconstruction of the
Premises to the same condition they were in
immediately prior to such damage or
destruction, subject to such modifications as
may be required by any applicable law, code,
or ordinance.
19.2.2.2. If Landlord elects to pay the cost of any
reconstruction, Landlord shall immediately
commence and diligently pursue to completion
reconstruction of the Premises to the same
condition they were in immediately prior to
such damage or destruction, subject to such
modifications as may be required by any
applicable law, code, or ordinance.
19.2.2.3. Rent shall abate during any reconstruction to
the extent that the Premises are rendered
untenantable.
19.3. RIGHT TO TERMINATE. Notwithstanding any other provision in this
Lease to the contrary, either Landlord or Tenant shall have the
right to terminate this Lease in the event any of the following
events occurs:
19.3.1. The Premises cannot be safely repaired because of the
presence of hazardous factors, including, but not
limited to, earthquake faults, radiation, chemical
waste and other similar dangers;
19.3.2. The replacement or repair thereof cannot be completed
within one hundred thirty-five (135) days of the damage
or or destruction;
19.3.3. The Premises cannot be replaced or restored except in a
substantially different structural and functional form
than existed before the damage or destruction; or
19.3.4. The existing laws, code or ordinances do not permit the
use of the Premises in all respects as required for the
conduct of Tenant's business.
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19.3.5. The damage or destruction occurs within the last twelve
(12) months of the Term.
If either party elects to terminate this Lease, the electing party shall
give the other party written notice of its election to terminate within sixty
(60) days after such damage or destruction, and this Lease shall terminate
fifteen (15) days after the date of such notice. All insurance proceeds,
excluding proceeds for trade fixtures, equipment inventory and other personal
property of Tenant, and excluding proceeds for moving expenses or other costs
incurred by Tenant and specifically itemized and reimbursed to Tenant under such
insurance, shall be disbursed and paid to Landlord.
19.4. TENANT'S PARAMOUNT PURCHASE OPTION RIGHT. Notwithstanding any
terms set forth in this section to the contrary, Tenant's
purchase option right described in Section 14 shall remain in
full force and effect and, should Tenant elect to exercise said
right following any such destruction or damage and before the
reconstruction of the Premises, Tenant shall keep all insurance
proceeds resulting from the destruction and damage.
20. CONDEMNATION.
20.1. TOTAL TAKING - TERMINATION. If title to all of the Premises or
so much thereof is taken for any public or quasi-public use under
any statute or by right of eminent domain so that reconstruction
of the Premises will not result in the Premises being reasonably
suitable for Tenant's continued occupancy for the uses and
purposes permitted by this Lease, this Lease shall terminate as
of the date that possession of the Premises or part thereof be
taken.
20.2. PARTIAL TAKING. If any part of the Premises is taken and the
remaining part is reasonably suitable for Tenant's continued
occupancy for the purposes and uses permitted by this Lease, this
Lease shall, as to the part so taken, terminate as of the date
that possession of such part of the Premises is taken and the
Rent and other sums payable hereunder shall be reduced in the
same proportion that the area of the portion of the Premises so
taken bears to the original area of the Premises. Landlord
shall, at its own cost and expense, make all necessary repairs or
alterations to the Premises so as to make the portion of the
Premises not taken a complete and functional architectural unit.
Rent and other sums payable hereunder shall be temporarily abated
during such restoration proportionately in the degree to which
Tenant's use of the Premises is impaired. Each party hereby
waives any applicable provisions of law allowing either party to
terminate this Lease in the event of a partial taking of the
Premises.
20.3. ALLOCATION OF AWARD.
20.3.1. LANDLORD'S RIGHT TO AWARD. Except as otherwise
provided herein in connection with a taking:
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20.3.1.1. Landlord shall be entitled to receive all compensation
and anything of value awarded, paid, or received in
settlement or otherwise ("Award"); and
20.3.1.2. Tenant irrevocably assigns and transfers to Landlord
all rights to and interests in the Award and fully
releases and relinquishes any claim to, right to make a
claim on, or interest in the Award.
20.3.1.3. TENANT'S RIGHT TO COMPENSATION. Despite subsection
20.3.1, Tenant shall have the right to make a separate
claim in the condemnation proceeding for:
20.3.1.3.1. The taking of the unamortized or
undepreciated value of any leasehold
improvements owned by Tenant that Tenant
has the right to remove at the end of
the Term and that Tenant elects not to
remove;
20.3.1.3.2. Reasonable removal and relocation costs
for any leasehold improvements that
Tenant has the right to remove and
elects to remove (if condemnor approves
of the removal);
20.3.1.3.3. Loss of goodwill;
20.3.1.3.4. Relocation costs for Tenant's business;
20.3.1.3.5. Any other amount in addition to the
foregoing that does not reduce the
amount of the Award payable to Landlord.
Tenant shall have the right to negotiate directly with condemnor for the
recovery of the portion of the Award that Tenant is entitled to under this
Subsection 20.3.2.
20.4. TEMPORARY TAKING. No temporary taking of the Premises shall
terminate this Lease or give Tenant any right to any abatement of
Rent. For the purpose of this subsection, a temporary taking
shall be deemed to have occurred only in the event there is a
taking for any period less than the remaining Term of this Lease.
Any award made by reason of such temporary taking shall belong
entirely to Tenant and Landlord shall not be entitled to share
therein. Each party agrees to execute and deliver to the other
all instruments that may be required to effectuate the provisions
of this subparagraph.
21. ASSIGNMENT AND SUBLETTING.
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21.1. SUBLETTING. Tenant shall not sublet more than thirty-three and a
third percent (33 1/3%) of the Premises without Landlord's prior
written consent, which consent shall not be unreasonably withheld
or delayed. Tenant shall not be relieved of any of its duties or
obligations under this Lease by reason of any subletting and
shall be entitled to receive all rent or other consideration paid
by any subtenant.
21.2. ASSIGNMENT. Tenant shall not assign this Lease without the prior
written consent of Landlord, which consent will not be
unreasonably withheld or delayed. Notwithstanding the foregoing,
Tenant may assign this Lease and all of its rights hereunder and
to the Premises without the prior written consent of Landlord to
any parent, subsidiary, affiliate or successor in interest of
Tenant so long as Tenant remains financially responsible.
22. DEFAULT.
22.1. TENANT'S DEFAULT. At the option of Landlord, a default under
this Lease by Tenant shall exist if any of the following events
shall occur:
22.1.1. If Tenant shall have failed to pay Rent or any other sum
required to be paid hereunder within twenty (20) days after
receipt of written notice from Landlord that payment is past
due; provided, however, that Tenant may cure said default at
any time prior to a termination of this Lease by Landlord by
paying all Rent and other expenses or charges then due
together with interest through the date of payment; or
22.1.2. If Tenant shall have failed to perform any term, covenant or
condition of this Lease except those requiring the payment
of money, and Tenant shall have failed to cure such breach
within thirty (30) days after written notice from Landlord
where such breach could reasonably be cured within such
thirty (30) day period; provided, however, that where such
failure could not reasonably be cured within the thirty (30)
day period, that Tenant shall not be in default if it has
commenced such performance within the thirty (30) day period
and diligently thereafter prosecutes the same to completion;
or
22.1.3. If Tenant shall have assigned its assets for the benefit of
its creditors pursuant to any proceeding under the United
States Bankruptcy Code; or
22.1.4. If the sequestration or attachment of or execution on any
material part of Tenant's personal property essential to the
conduct of Tenant's business shall have occurred, and Tenant
shall have failed to obtain a return or release of such
personal property within sixty (60) days thereafter, or
prior to sale pursuant to such sequestration, attachment or
levy, whichever is earlier; or
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22.1.5. If a court shall have made or entered any decree or order
other than under the bankruptcy laws of the United States
adjudging Tenant to be insolvent; or approving as properly
filed a petition seeking reorganization of Tenant; or
directing the winding up or liquidation of Tenant and such
decree or order shall have continued for a period of sixty
(60) days; or
22.2. LANDLORD'S DEFAULT. Landlord shall not be deemed to be in
default in the performance of any obligation required to be
performed by it hereunder unless and until it has failed to
perform such obligation within ten (10) days after receipt of
written notice by Tenant to Landlord specifying the nature of
such default; provided, however, that if the nature of Landlord's
obligation is such that more than ten (10) days are required for
its performance, then Landlord shall be deemed to be in default
if it fails to commence such performance within such ten (10) day
period and thereafter diligently prosecutes the same to
completion.
23. SUBORDINATION.
23.1. Landlord shall have the right to cause this Lease to be and
become and remain subject and subordinate to any mortgage or deed
of trust covering the Premises which does not in the reasonable
judgment of Tenant impair Tenant's rights and benefits under its
option to purchase the Premises set forth in Section 14 hereof
provided Landlord first obtains from the lender a written
agreement that provides that in the event of a foreclosure or of
any other action or proceeding for the enforcement thereof, or of
any sale thereunder, this Lease will not be barred, terminated,
cut off or foreclosed, nor will the rights and possession of
Tenant thereunder be disturbed if Tenant shall not then be in
default in the payment of rent, and Tenant shall attorn to the
purchaser at such foreclosure, sale or other action or
proceeding.
24. NOTICES. Unless otherwise specifically permitted by this Lease, all
notices or other communications required or permitted under this lease
shall be in writing, and shall be personally delivered or sent by facsimile
transmission with hard copy to follow by mail, by overnight receipted
courier (such as Federal Express), or by registered or certified mail,
postage prepaid, return receipt requested, and shall be deemed received:
(i) if personally delivered, upon the date of delivery to the address of
the person to receive such notice, (ii) if sent by overnight courier, one
(1) business day after delivery to such courier, (iii) if mailed in
accordance with the provisions of this Section, four (4) business days
after the date placed in the United States mail, (iv) if mailed other than
in accordance with the provisions of this Section or mailed from outside
the United States, upon the date of delivery to the address of the person
to receive such notice, or (v) if transmitted by facsimile, upon telephonic
or automatic confirmation of receipt. Notices shall be given at the
following addresses:
IF TO LANDLORD: Pizzuti Equities, Inc.
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CONFIDENTIAL
250 East Broad Street, Suite 1900
Columbus, Ohio 43215
with copy to: Richard Daley
IF TO TENANT: Valley Record Distributors, Inc.
1280 Santa Anita Court
Woodland California 95776
with copy to: Chief Financial Officer in Woodland, California
and
Director of Operations in Louisville, Kentucky
25. ATTORNEYS' FEES. If either party brings any action or legal proceeding for
damages for an alleged breach of any provision of this Lease, to recover
Rent or other sums due, to terminate the tenancy of the Premises, or to
enforce, protect or establish any term, condition or covenant of this Lease
or right of either party, the prevailing party shall be entitled to recover
as a part of such action or proceedings, or in a separate action brought
for that purpose, reasonable attorneys' fees and costs.
26. ESTOPPEL CERTIFICATES. Within seven (7) days following written request by
either Landlord or Tenant, the requested party shall execute and deliver to
the requesting party any documents, including estoppel certificates, in the
form prepared by the requesting party (a) certifying that this Lease is
unmodified and in full force and effect or, if modified, stating the nature
of such modification and certifying that this Lease, as so modified, is in
full force and effect and the date to which the Rent and other charges are
paid in advance, if any, (b) acknowledging that there are not, to the
requested party's knowledge, any uncured defaults on the part of the
requesting party, or, if there are uncured defaults on the part of the
requesting party, stating the nature of such uncured defaults, (c)
evidencing the status of the Lease; and (d) acknowledging any other fact as
may reasonably be required either by a lender making a loan to Landlord to
be secured by deed of trust or mortgage covering the Premises, a lender
making a loan to Tenant to be secured by a collateral assignment of this
Lease, or a sublessee or assignee of Tenant, or as may be reasonably
requested by Tenant in connection with any disclosures required pursuant to
state or federal securities laws.
If either party fails to so deliver a requested estoppel certificate
within the prescribed time, such failure shall constitute an irrevocable
appointment of the other party as its attorney-in-fact to act in its name,
place and stead to execute such estoppel certificate, such appointment
being coupled with an interest.
27. BROKERS. Landlord and Tenant each represents to the other that it has had
no dealings with any real estate broker or agent in connection with the
negotiation of this Lease and that they know of no real estate broker or
agent who is entitled to a commission or finder's fee in connection with
this Lease. Each party shall indemnify, protect, defend,
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CONFIDENTIAL
and hold harmless the other party against all claims, demands, losses,
liabilities, lawsuits, judgments, and costs and expenses (including
reasonable attorneys' fees) for any leasing commission, finder's fee, or
equivalent compensation alleged to be owing on account of the indemnifying
party's dealings with any real estate broker; provided, however, that both
parties acknowledge that a broker is involved in the Land Sale and Option
Agreement. The terms of this subsection shall survive the expiration or
earlier termination of this Lease.
28. ARBITRATION OF DISPUTES
28.1. WHEN ARBITRATION IS REQUIRED. Any dispute between Landlord and
Tenant (other than disputes solely concerning the payment of
rent) shall be settled by arbitration in accordance with the
Commercial Arbitration Rules then obtaining of the American
Arbitration Association, and judgment upon the award rendered in
such arbitration may be entered in any court having jurisdiction
thereof.
28.2. RULES AND PROCEDURES. The following provisions shall apply to
any arbitration conducted hereunder:
28.2.1. Before either party initiates an arbitration hereunder,
such party shall request in writing a meeting with a
designated representative of the other party, to occur
within ten (10) business days after the giving of such
notice, at the place of business of the initiating
party or such other place as the parties may agree, for
the purpose of attempting to resolve the dispute
without arbitration. If the other party refuses to
meet or if the dispute cannot be settled at the
meeting, the initiating party may, after the expiration
of the aforesaid ten (10) day period, commence an
arbitration hereunder.
28.2.2. The arbitrator or arbitrators may not change any of the
terms of this Lease or deprive any party to this Lease
of any right or remedy expressly or impliedly reserved
in this Lease.
28.2.3. There shall be no right of discovery except by
stipulation of the parties or pursuant to the
discretion of the arbitrator upon petition by either of
the parties.
28.2.4. The costs of the proceeding shall be borne equally
between the parties; provided, however, that such
costs, including attorneys' fees, shall be subject to
award, in whole or in part, by the arbitrator, in the
arbitrator's discretion, to the prevailing party.
Unless the arbitrator so awards attorneys' fees, each
party shall be responsible for its own attorneys' fees.
28.2.5. To the extent possible, the arbitration hearings shall
be conducted on consecutive days, excluding Saturdays,
Sundays, and holidays, until the completion of the
case.
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CONFIDENTIAL
28.2.6. Any party shall have the right to join any third
parties in such proceedings in order to resolve any
other similar disputes, the facts of which are related
to the matters submitted for arbitration hereunder.
29. GENERAL.
29.1. CAPTIONS. The captions and headings used in this Lease are for
the purpose of convenience only and shall not be construed to
limit or extend the meaning of any part of this Lease.
29.2. EXECUTED COPY. Any fully executed copy of this Lease shall be
deemed an original for all purposes.
29.3. TIME. Time is of the essence for the performance of each term,
condition and covenant of this Lease.
29.4. SEVERABILITY. In case any one or more of the provisions
contained herein, except for the payment of Rent, shall for any
reason be held to be invalid, illegal or unenforceable in any
respect, such invalidity, illegality, or unenforceability shall
not affect any other provision of this Lease, but this Lease
shall be construed as if such invalid, illegal or unenforceable
provision had not been contained herein.
29.4. CHOICE OF LAW. This Lease shall be construed and enforced in
accordance with the laws of the State of Kentucky.
29.6. GENDER; SINGULAR, PLURAL. When the context of this Lease
requires, the neuter gender includes the masculine, the feminine,
a partnership or corporation or joint venture, and the singular
includes the plural.
29.7. BINDING EFFECT. The covenants and agreements contained in this
Lease shall be binding on the parties hereto and on their
respective successors and assigns to the extent this Lease is
assignable.
29.8. ENTIRE AGREEMENT. This Lease is the entire agreement between the
parties and there are no agreements or representations between
the parties except as expressed herein. Except as otherwise
provided herein, no subsequent change or addition to this Lease
shall be binding unless in writing and signed by the parties
hereto.
29.9. AUTHORITY. Each individual executing this Lease on behalf of an
entity represents and warrants that he is duly authorized to
execute and deliver this Lease on behalf of said entity in
accordance with its corporate bylaws, statement of partnership or
certificate of limited partnership, as the case may be, and that
this Lease is binding upon said entity in accordance with its
terms.
29.10. EXHIBITS. All exhibits, amendments, riders and addenda attached
hereto are hereby incorporated herein and made a part hereof.
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CONFIDENTIAL
29.11. REASONABLENESS. Except as specifically proved elsewhere in
this Lease, whenever the consent or approval of either party
hereto is required, such consent or approval shall not be
unreasonably withheld or delayed, and whenever this Lease
grants to either party hereto the right to take action,
exercise discretion, make a judgment or other determination,
or request or require documents or other items or
information, such party shall act reasonably and in good
faith. Any costs, expenses, fees or charges incurred by one
party hereto and to be paid by the other party shall be
limited in type and amount to those reasonably incurred.
29.12. PAYMENT UNDER PROTEST. If at any time a dispute shall arise
as to any amount or sum of money to be paid by one party to
the other under the provisions of the Lease, the party
against whom the obligation to pay the money is asserted
shall have the right to make payment "under protest" and
such payment shall not be regarded as a voluntary payment,
and there shall survive the right on the part of said party
to institute suit for recovery of such sum. If it shall be
adjudged that there was no legal obligation on the part of
said party to pay such sum or any part thereof, said party
shall be entitled to recover such sum or so much thereof as
it was not legally required to pay under the provisions of
the Lease with interest thereon at the Interest Rate from
the date of payment through the date of recovery.
THIS LEASE is effective as of the date the last signatory necessary to
execute the Lease shall have executed this Lease.
LANDLORD: TENANT:
By: /s/ Richard C. Daley By: /s/Robert R. Cain
------------------- -----------------------
Name: Richard C. Daley Name: ROBERT R. CAIN
------------------- -----------------------
Title: VP Title: PRESIDENT
------------------- -----------------------
Dated: 9/25/97 Dated: Sept. 22. 1997
------------------- -----------------------
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DRAFT DATED NOVEMBER 26, 1997
VALLEY MEDIA, INC.
INDEMNIFICATION AGREEMENT
This indemnification agreement ("Agreement") is effective as of
____________, 199_, by and between Valley Media, Inc., a Delaware corporation
(the "Company"), and ____________________________________ ("Indemnitee").
WHEREAS, the Company and Indemnitee recognize the substantial increase
in corporate litigation subjecting directors, officers, employees, agents and
fiduciaries to expensive litigation risks;
WHEREAS, Indemnitee desires to have the indemnification provided
hereunder as a condition to further serving as a director, officer, employee,
agent or fiduciary of the Company, as the case may be;
WHEREAS, the Company desires to attract and retain the services of
highly qualified individuals, such as Indemnitee, to serve the Company and, in
part, in order to induce Indemnitee to continue to provide services to the
Company, wishes to provide for the indemnification and advancing of expenses to
Indemnitee to the maximum extent permitted by law; and
WHEREAS, in view of the considerations set forth above, the Company
desires that Indemnitee shall be indemnified by the Company as set forth herein.
NOW, THEREFORE, the Company and Indemnitee agree as follows:
1. INDEMNIFICATION.
(a) INDEMNIFICATION OF EXPENSES. The Company shall indemnify
Indemnitee to the fullest extent permitted by law if Indemnitee was or is or
becomes a party to or witness or other participant in, or is threatened to be
made a party to or witness or other participant in, any threatened, pending or
completed action, suit, proceeding or alternative dispute resolution mechanism,
or any hearing, inquiry or investigation that Indemnitee in good faith believes
might lead to the institution of any such action, suit, proceeding or
alternative dispute resolution mechanism, whether civil, criminal,
administrative, investigative or other (hereinafter a "Claim") by reason of (or
arising in part out of) any event or occurrence related to the fact that
Indemnitee is or was a director, officer, employee, agent or fiduciary of the
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Company, or any subsidiary of the Company, or is or was serving at the request
of the Company as a director, officer, employee, agent or fiduciary of another
corporation, partnership, limited liability company, joint venture, trust or
other enterprise, or by reason of any action or inaction on the part of
Indemnitee while serving in such capacity (hereinafter an "Indemnifiable
Event"), against any and all expenses (including attorneys' fees and all other
costs, expenses, and obligations incurred in connection with investigating,
defending, being a witness in or participating in (including on appeal), or
preparing to defend, be a witness in or participate in, any such action, suit,
proceeding, alternative dispute resolution mechanism, hearing, inquiry or
investigation), judgments, fines, penalties and amounts paid in settlement (if
such settlement is approved in advance by the Company, which approval shall not
be unreasonably withheld) of such Claim and any federal, state, local or foreign
taxes imposed on the Indemnitee as a result of the actual or deemed receipt of
any payments under this Agreement (collectively, hereinafter "Expenses"),
including all interest assessments and other charges paid or payable in
connection with or in respect of such Expenses. Such payment of Expenses shall
be made by the Company as soon as practicable but in any event no longer than
five days after written demand by Indemnitee therefor is presented to the
Company.
(b) REVIEWING PARTY. Notwithstanding the foregoing, (i) the
obligations of the Company under Section 1(a) shall be subject to the conditions
that the Reviewing Party (as described in Section 8(e) hereof), shall not have
determined (in a written opinion, in any case in which the Independent Legal
Counsel referred to in Section 1(c) hereof is involved) that Indemnitee would
not be permitted to be indemnified under applicable law, and (ii) the obligation
of the Company to make an advance payment of Expenses to Indemnitee pursuant to
Section 2(a) (an "Expense Advance") shall be subject to the condition that, if,
when and to the extent that the Reviewing Party determines that Indemnitee would
not be permitted to be so indemnified under applicable law, the Company shall be
entitled to be reimbursed by Indemnitee (who hereby agrees to reimburse the
Company) for all such amounts theretofore paid; provided, however, that if
Indemnitee has commenced or thereafter commences legal proceedings in a court of
competent jurisdiction to secure a determination that Indemnitee should be
indemnified under applicable law, any determination made by the Reviewing Party
that Indemnitee would not be permitted to be indemnified under applicable law
shall not be binding and Indemnitee shall not be required to reimburse the
Company for any Expense Advance until a final judicial determination is made
with respect thereto (as to which all rights of appeal therefrom have been
exhausted or lapsed). Indemnitee's obligation to reimburse the Company for any
Expense Advance shall be unsecured and no interest shall be charged thereon. If
there has not been a Change in Control (as defined in Section 8(c)
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hereof), the Reviewing Party shall be selected by the Board of Directors, and if
there has been such a Change in Control (other than a Change in Control which
has been approved by a majority of the Company's Board of Directors who were
directors immediately prior to such Change in Control), the Reviewing Party
shall be the Independent Legal Counsel referred to in Section 1(c) hereof. If
there has been no determination by the Reviewing Party or if the Reviewing Party
determines that Indemnitee substantively would not be permitted to be
indemnified in whole or in part under applicable law, Indemnitee shall have the
right to commence litigation seeking an initial determination by the court or
challenging any such determination by the Reviewing Party or any aspect thereof,
including the legal or factual basis therefor, and the Company hereby consents
to service of process and to appear in any such proceeding. Any determination
by the Reviewing Party otherwise shall be conclusive and binding on the Company
and Indemnitee.
(c) CHANGE IN CONTROL. The Company agrees that if there is a
Change in Control of the Company (other than a Change in Control which has been
approved by a majority of the Company's Board of Directors who were directors
immediately prior to such Change in Control) then with respect to all matters
thereafter arising concerning the rights of Indemnitee to payments of Expenses
and Expense Advances under this Agreement or any other agreement or under the
Company's Certificate of Incorporation or Bylaws as now or hereafter in effect,
Independent Legal Counsel (as defined in Section 8(d) hereof) shall be selected
by Indemnitee and approved by the Company (which approval shall not be
unreasonably withheld). Such counsel, among other things, shall render its
written opinion to the Company and Indemnitee as to whether and to what extent
Indemnitee would be permitted to be indemnified under applicable law and the
Company agrees to abide by such opinion. The Company agrees to pay the
reasonable fees of the Independent Legal Counsel referred to above and to fully
indemnify such counsel against any and all expenses (including attorneys' fees),
claims, liabilities and damages arising out of or relating to this Agreement or
its engagement pursuant hereto.
(d) MANDATORY PAYMENT OF EXPENSES. Notwithstanding any other
provision of this Agreement, to the extent that Indemnitee has been successful
on the merits or otherwise, including, without limitation, the dismissal of an
action without prejudice, in defense of any action, suit, proceeding, inquiry or
investigation referred to in Section 1(a) hereof or in the defense of any claim,
issue or matter therein, Indemnitee shall be indemnified against all Expenses
incurred by Indemnitee in connection therewith.
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2. EXPENSES; INDEMNIFICATION PROCEDURE.
(a) ADVANCEMENT OF EXPENSES. Subject to Section 1(b), the
Company shall advance all Expenses incurred by Indemnitee. The advances to be
made hereunder shall be paid by the Company to Indemnitee as soon as practicable
but in any event no later than fifteen days after written demand by Indemnitee
therefor to the Company.
(b) NOTICE/COOPERATION BY INDEMNITEE. Indemnitee shall give the
Company notice in writing as soon as practicable of any Claim made against
Indemnitee for which indemnification will or could be sought under this
Agreement. Notice to the Company shall be directed to the Chief Executive
Officer of the Company at the address shown on the signature page of this
Agreement (or such other address as the Company shall designate in writing to
Indemnitee). In addition, Indemnitee shall give the Company such information
and cooperation as it may reasonably require and as shall be within Indemnitee's
power.
(c) NO PRESUMPTIONS; BURDEN OF PROOF. For purposes of this
Agreement, the termination of any Claim by judgment, order, settlement (whether
with or without court approval) or conviction, or upon a plea of nolo contendere
or its equivalent, shall not create a presumption that Indemnitee did not meet
any particular standard of conduct or have any particular belief or that a court
has determined that indemnification is not permitted by applicable law. In
addition, neither the failure of the Reviewing Party to have made a
determination as to whether Indemnitee has met any particular standard of
conduct or had any particular belief, nor an actual determination by the
Reviewing Party that Indemnitee has not met such standard of conduct or did not
have such belief, prior to the commencement of legal proceedings by Indemnitee
to secure a judicial determination that Indemnitee should be indemnified under
applicable law, shall be a defense to Indemnitee's claim or create a presumption
that Indemnitee has not met any particular standard of conduct or did not have
any particular belief. In connection with any determination by the Reviewing
Party or otherwise as to whether the Indemnitee is entitled to be indemnified
hereunder, the burden of proof shall be on the Company to establish that
Indemnitee is not so entitled.
(d) NOTICE TO INSURERS. If, at the time of the receipt by the
Company of a notice of a Claim pursuant to Section 2(b) hereof, the Company has
liability insurance in effect which may cover such Claim, the Company shall give
prompt notice of the commencement of such Claim to the insurers in accordance
with the procedures set forth in the respective policies. The Company shall
thereafter take all necessary or desirable action to cause such insurers to pay,
on behalf of the Indemnitee, all amounts payable as a result of
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such action, suit, proceeding, inquiry or investigation in accordance with the
terms of such policies.
(e) SELECTION OF COUNSEL. In the event the Company shall be
obligated hereunder to pay the Expenses of any Claim, the Company, if
appropriate, shall be entitled to assume the defense of such Claim with counsel
approved by Indemnitee, upon the delivery to Indemnitee of written notice of
its election so to do. After delivery of such notice, approval of such counsel
by Indemnitee and the retention of such counsel by the Company, the Company will
not be liable to Indemnitee under this Agreement for any fees of counsel
subsequently incurred by Indemnitee with respect to the same Claim; provided
that, Indemnitee shall have the right to employ separate counsel in any such
Claim at Indemnitee's expense. If (i) the employment of separate counsel by
Indemnitee has been previously authorized by the Company, (ii) Indemnitee shall
have reasonably concluded that there may be a conflict of interest between the
Company and Indemnitee in the conduct of any such defense, or (iii) the Company,
in breach of its obligation under this Agreement, shall not continue to retain
such separate counsel to defend such Claim, then the fees and expenses of
Indemnitee's counsel shall be at the expense of the Company.
3. ADDITIONAL INDEMNIFICATION RIGHTS; NONEXCLUSIVITY.
(a) SCOPE. The Company hereby agrees to indemnify the
Indemnitee to the fullest extent permitted by law, notwithstanding that such
indemnification is not specifically authorized by the Company's Certificate of
Incorporation or Bylaws or by statute. In the event of any change after the
date of this Agreement in any applicable law, statute or rule which expands the
right of a Delaware corporation to indemnify a member of its board of directors
or an officer, employee, agent or fiduciary, it is the intent of the parties
hereto that Indemnitee shall enjoy by this Agreement the greater benefits
afforded by such change. In the event of any change in any applicable law,
statute or rule which narrows the right of a Delaware corporation to indemnify a
member of its board of directors or an officer, employee, agent or fiduciary,
such change, to the extent not otherwise required by such law, statute or rule
to be applied to this Agreement, shall have no effect on this Agreement or the
parties' rights and obligations hereunder except as set forth in Section 6(a)
hereof.
(b) NONEXCLUSIVITY. The indemnification provided by this
Agreement shall be in addition to any rights to which Indemnitee may be entitled
under the Company's Certificate of Incorporation, its Bylaws, any other
agreement, any vote of stockholders or disinterested directors, the General
Corporation Law of the State of Delaware, or otherwise. The
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indemnification provided under this Agreement shall continue as to Indemnitee
for any action taken or not taken while serving in an indemnified capacity even
though Indemnitee may have ceased to serve in such capacity.
4. NO DUPLICATION OF PAYMENTS. The Company shall not be liable
under this agreement to make any payment in connection with any Claim made
against Indemnitee to the extent Indemnitee has otherwise actually received
payment (under any insurance policy, Certificate of Incorporation, Bylaw or
otherwise) of the amounts otherwise indemnifiable hereunder.
5. PARTIAL INDEMNIFICATION. If Indemnitee is entitled under any
provision of this Agreement to indemnification by the Company for some portion
of Expenses incurred in connection with any Claim, but not, however, for all of
the total amount thereof, the Company shall nevertheless indemnify Indemnitee
for the portion of such Expenses to which Indemnitee is entitled.
6. MUTUAL ACKNOWLEDGEMENT. Both the Company and Indemnitee
acknowledge that in certain instances, Federal law or applicable public policy
may prohibit the Company from indemnifying its directors, officers, employees,
agents or fiduciaries under this Agreement or otherwise. Indemnitee understands
and acknowledges that the Company has undertaken or 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 indemnity
Indemnitee.
7. EXCEPTIONS. Any other provision herein to the contrary
notwithstanding, the Company shall not be obligated pursuant to the terms of
this Agreement:
(a) EXCLUDED ACTION OR OMISSIONS. To indemnify Indemnitee for
acts, omissions or transactions from which Indemnitee may not be relieved of
liability under applicable law.
(b) CLAIMS INITIATED BY INDEMNITEE. To indemnify or advance
expenses to Indemnitee with respect to Claims initiated or brought voluntarily
by Indemnitee and not by way of defense, except (i) with respect to actions or
proceedings brought to establish or enforce a right to indemnification under
this Agreement or any other agreement or insurance policy or under the Company's
Certificate of Incorporation or Bylaws now or hereafter in effect relating to
Claims for Indemnifiable Events, (ii) as otherwise required under Section 145 of
the Delaware General Corporation Law.
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(c) LACK OF GOOD FAITH. To indemnify Indemnitee for any
expenses incurred by the Indemnitee with respect to any proceeding instituted by
Indemnitee to enforce or interpret this Agreement, if a court of competent
jurisdiction determines that each of the material assertions made by the
Indemnitee in such proceeding was not made in good faith or was frivolous.
(d) CLAIMS UNDER SECTION 16(b). To indemnify Indemnitee for
expenses and the payment of profits arising from the purchase and sale by
Indemnitee of securities in violation of Section 16(b) of the Securities and
Exchange Act of 1934, as amended, or any similar successor statute.
8. CONSTRUCTION OF CERTAIN PHRASES.
(a) For purposes of this Agreement, reference to the "Company"
shall include, in addition to the resulting corporation, any constituent
corporation (including any constituent of a constituent) absorbed in a
consolidation or merger which, if its separate existence had continued, would
have had power and authority to indemnify its directors, officers, employees,
agents or fiduciaries, so that if Indemnitee is or was a director, officer,
employee, agent or fiduciary of such constituent corporation, or is or was
serving at the request of such constituent corporation as a director, officer,
employee, agent or fiduciary of another corporation, partnership, limited
liability company, joint venture, employee benefit plan, trust or other
enterprise, Indemnitee shall stand in the same position under the provisions of
this Agreement with respect to the resulting of surviving corporation as
Indemnitee would have with respect to such constituent corporation if its
separate existence had continued.
(b) For purposes of this Agreement, references to "other
enterprises" shall include employee benefit plans; references to "fines" shall
include any excise taxes assessed on Indemnitee with respect to an employee
benefit plan; and references to "serving at the request of the Company" shall
include any service as a director, officer, employee, agent or fiduciary of the
Company which imposes duties on, or involves services by, such director,
officer, employee, agent or fiduciary with respect to an employee benefit plan,
its participants or its beneficiaries; and if Indemnitee acted in good faith and
in a manner Indemnitee reasonably believed to be in the interest of the
participants and beneficiaries of an employee benefit plan, Indemnitee shall be
deemed to have acted in a manner "not opposed to the best interests of the
Company" as referred to in this Agreement.
(c) For purposes of this Agreement a "Change in Control" shall
be deemed to have occurred if (i) any "person" (as such term is used in Sections
13(d) and 14(d) of the Securities Exchange Act of 1934, as amended),
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other than Barnet and Barbara Cohen and their children, or their estates or
administrators, or any trust or other entity of which they are the primary
beneficiaries or own a majority of the voting rights, a trustee or other
fiduciary holding securities under an employee benefit plan of the Company or a
corporation owned directly or indirectly by the stockholders of the Company in
substantially the same proportions as their ownership of stock of the Company
acting in such capacity, is or becomes the "beneficial owner" (as defined in
Rule 13d-3 under said Act), directly or indirectly, of securities of the Company
representing more than fifty percent (50%) of the total voting power represented
by the Company's then outstanding Voting Securities, (ii) during any period of
two consecutive years or less, individuals who at the beginning of such period
constitute the Board of Directors of the Company and any new director whose
election by the Board of Directors or nomination for election by the Company's
stockholders was approved by a vote of at least two thirds (2/3) of the
directors then still in office who either were directors at the beginning of the
period or whose election or nomination for election was previously so approved,
cease for any reason to constitute a majority thereof, or (iii) the stockholders
of the Company approve a merger or consolidation of the Company with any other
corporation other than a merger or consolidation which would result in the
Voting Securities of the Company outstanding immediately prior thereto
continuing to represent (either by remaining outstanding or by being converted
into Voting Securities of the surviving entity) at least 50% of the total voting
power represented by the Voting Securities of the Company or such surviving
entity outstanding immediately after such merger or consolidation in the same
proportions as the Voting Securities of the Company were owned prior to such
merger or consolidation, or the stockholders of the Company approve a plan of
complete liquidation of the Company or an agreement for the sale or disposition
by the Company of (in one transaction or a series of related transactions) all
or substantially all of the Company's assets.
(d) For purposes of this Agreement, "Independent Legal Counsel"
shall mean an attorney or firm of attorneys, selected in accordance with the
provisions of Section 1(c) hereof, who shall not have otherwise performed
services for the Company or Indemnitee within the last three years (other than
with respect to matters concerning the rights of Indemnitee under this
Agreement, or of other indemnitees under similar indemnity agreements).
(e) For purposes of this Agreement, a "Reviewing Party" shall
mean any appropriate person or body consisting of a member or members of the
Company's Board of Directors or any other person or body appointed by the Board
of Directors who is not a party to the particular Claim for which Indemnitee is
seeking indemnification, or Independent Legal Counsel.
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(f) For purposes of this Agreement, "Voting Securities" shall
mean any securities of the Company that vote generally in the election of
directors.
9. COUNTERPARTS. This Agreement may be exercised in one or more
counterparts, each of which shall constitute an original.
10. BINDING EFFECT; SUCCESSORS AND ASSIGNS. This Agreement shall be
binding upon and inure to the benefit of and be enforceable by the parties
hereto and their respective successors, assigns, including any direct or
indirect successor by purchase, merger, consolidation or otherwise to all of
substantially all of the business or assets of the Company, spouses, heirs, and
personal and legal representatives.
11. ATTORNEYS' FEES. In the event that any action is instituted by
Indemnitee under this Agreement or under any liability insurance policies
maintained by the Company to enforce or interpret any of the terms hereof or
thereof, Indemnitee shall be entitled to be paid all Expenses incurred by
Indemnitee with respect to such action, regardless of whether Indemnitee is
ultimately successful in such action, and shall be entitled to the advancement
of Expenses with respect to such action, unless as a part of such action a court
of competent jurisdiction over such action determines that each of the material
assertions made by Indemnitee as a basis for such action were not made in good
faith or were frivolous. In the event of an action instituted by or in the name
of the Company under this Agreement to enforce or interpret any of the terms of
this Agreement, Indemnitee shall be entitled to be paid all Expenses incurred by
Indemnitee in defense of such action (including costs and expenses incurred with
respect to Indemnitee's counterclaims and cross-claims made in such action), and
shall be entitled to the advancement of Expenses with respect to such action,
unless as a part of such action a court having jurisdiction over such action
determines that each of Indemnitee's material defenses to such action were made
in bad faith or were frivolous.
12. NOTICE. All notices, requests, demands and other communications
under this Agreement shall be in writing and shall be deemed duly given (i) if
personally delivered on the date of such delivery, or (ii) if mailed by domestic
certified or registered mail with postage prepaid, on the third business day
after the date postmarked. Addresses for notice to either party are as shown on
the signature page of this Agreement, or as subsequently modified by written
notice.
13. SEVERABILITY. The provisions of this Agreement shall be
severable in the event that any of the provisions hereof (including any
provision within a single section, paragraph or sentence) are held by a court
of
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competent jurisdiction to be invalid, void or otherwise unenforceable, and the
remaining provisions shall remain enforceable to the fullest extent permitted by
law. Furthermore, to the fullest extent possible, the provisions of this
Agreement (including, without limitations, each portion of this Agreement
containing any provision held to be invalid, void or otherwise unenforceable,
that is not itself invalid, void or unenforceable) shall be construed so as to
give effect to the intent manifested by the provision held invalid, illegal or
unenforceable.
14. CHOICE OF LAW. This Agreement shall be governed by and its
provisions construed and enforced in accordance with the laws of the State of
Delaware, as applied to contracts between Delaware residents, entered into and
to be performed entirely within the State of Delaware, without regard to the
conflict of laws principles thereof.
15. SUBROGATION. In the event of payment under this Agreement, the
Company shall be subrogated to the extent of such payment to all of the rights
of recovery of Indemnitee, who shall execute all documents required and shall do
all acts that may be necessary to secure such rights and to enable the Company
effectively to bring suit to enforce such rights.
16. AMENDMENT AND TERMINATION. No amendment, modification,
termination or cancellation of this Agreement shall be effective unless it is in
writing signed by both the parties hereto. No waiver of any of the provisions
of this Agreement shall be deemed or shall constitute a waiver of any other
provisions hereof (whether or not similar) nor shall such waiver constitute a
continuing wavier.
17. INTEGRATION AND ENTIRE AGREEMENT. This Agreement sets forth the
entire understanding between the parties hereto and supersedes and merges all
previous written and oral negotiations, commitments, understandings and
agreements relating to the subject matter hereof between the parties hereto.
18. NO CONSTRUCTION AS EMPLOYMENT AGREEMENT. Nothing contained in
this Agreement shall be construed as giving Indemnitee any right to be retained
in the employ of the Company or any of its subsidiaries.
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IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the date first above written.
VALLEY MEDIA, INC.
By:
----------------------------
Title:
-------------------------
Address:
-----------------------
-------------------------------
-------------------------------
AGREED TO AND ACCEPTED
INDEMNITEE:
- ----------------------------
(signature)
- ----------------------------
(name of Indemnitee)
- ----------------------------
- ----------------------------
(address)
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VALLEY RECORD DISTRIBUTORS, INC.
1994 STOCK OPTION PLAN
1. ADOPTION AND PURPOSE OF THE PLAN. The purpose of the Valley Record
Distributors, Inc. 1994 Stock Option Plan ("Plan") is to advance the interests
of Valley Record Distributors, Inc. ("Company") and its shareholders by enabling
the Company to attract and retain qualified employees, including officers and
directors who are employees, directors and consultants by providing them an
opportunity for investment in the Company. The options that may be granted
hereunder ("OPTIONS") represent the right by the grantee thereof (each,
including any permitted transferee, an "OPTIONEE") to acquire shares of the
Company's common stock (the "STOCK") subject to the terms and conditions of this
Plan and a written agreement between the Company and the Optionee to evidence
the Option (an "OPTION AGREEMENT").
2. CERTAIN DEFINITIONS. The defined terms set forth in EXHIBIT A attached
hereto and incorporated herein (together with other capitalized terms defined
elsewhere in this Plan) will govern the construction of this Plan.
3. ELIGIBILITY. The Company may grant Options under this Plan only to persons
who are directors and/or employees (including officers) of, or consultants to,
the Company or any of its Subsidiaries, at the time of such grant ("ELIGIBLE
PARTICIPANTS").
4. OPTION POOL; SHARES RESERVED FOR OPTIONS. Options may be granted hereunder
from time to time only to the extent that the aggregate number of shares of
Stock (i) that may be issued pursuant to the exercise of all outstanding and
unexpired Options granted hereunder ("OPTION STOCK"), and (ii) that have been
issued and are outstanding pursuant to the exercise of Options granted hereunder
does not exceed 110,000 shares (the "OPTION POOL"). At all times while this
Plan is in effect, the Company will reserve for issuance hereunder the number of
authorized and unissued shares of Stock that is equal to the Option Pool, less
the number of shares of Option Stock that have been issued and are outstanding
pursuant to the exercise of Options granted hereunder.
5. ADMINISTRATION. This Plan will be administered and interpreted by the Board,
or by a committee consisting of two or more members of the Board, appointed by
the Board for such purpose (the Board, or such committee, referred to herein as
the "ADMINISTRATOR"). Subject to the express terms and conditions hereof, the
Administrator is authorized to prescribe, amend and rescind rules and
regulations relating to this Plan, and to make all other determinations
necessary or advisable for its administration and interpretation. Specifically,
the Administrator will have full and final authority in its discretion, subject
to the specific limitations on that discretion as are set forth herein and in
the Articles of Incorporation and Bylaws of the Company, at any time and from
time to time:
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(a) to select and approve the Eligible Participants to whom Options
will be granted from time to time hereunder, provided that no Option shall
be granted to an Eligible Participant unless that grant shall be approved
by the Chief Executive Officer of the Company (whose approval will be
deemed to have occurred if the Chief Executive Officer is a member of the
Board or committee that approved such grant and the Chief Executive Officer
voted for or consented to such grant);
(b) to determine the Fair Market Value of the Stock as required
hereunder;
(c) with respect to each Option it decides to grant, to determine the
terms and conditions of that Option, to be set forth in the Option
Agreement evidencing that Option (the form of which also being subject to
approval by the Administrator), including at a minimum the following:
(i) the total number of shares of Option Stock that may be
acquired by the Optionee pursuant to that Option (the "TOTAL AWARD
OPTION SHARES");
(ii) whether that Option will be an "incentive stock option" as
defined in Section 422 of the Code (an "ISO"); if not, that Option
will be referred to as a "non-qualified stock option" or "NSO";
provided that an ISO may be granted only to Eligible Participants who
are employees of the Company and/or its Subsidiaries as of the Grant
Date thereof; provided further that to the extent that the Fair Market
Value of Option Stock with respect to which all ISOs are exercisable
for the first time by any individual during any calendar year
(pursuant to this Plan and all other plans of the Company and/or its
Subsidiaries) exceeds $100,000, the Option will be treated as an NSO;
(iii) the per share purchase price to be paid by the Optionee
to the Company to acquire the Option Stock issuable upon exercise of
that Option (the "OPTION PRICE"); provided that in the case of an ISO,
the Option Price will be greater than or equal to the Fair Market
Value (or, if the Optionee is a 10% shareholder, 110% of such Fair
Market Value) of the Option Stock as of the Grant Date and in the case
of an NSO, the Option Price will be greater than or equal to 85% of
the Fair Market Value (or, if the Optionee is a 10% shareholder, 110%
of such Fair Market Value) of the Option Stock as of the Grant Date;
(iv) the maximum period or term during which that Option will be
exercisable (the "OPTION TERM") and/or the last date on which that
Option may be exercised (the "EXPIRATION DATE"), provided that in no
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event may the Expiration Date be later than, or the Option Term be
longer than, ten years (except in case the Optionee of an ISO is a 10%
shareholder, five years) from the Grant Date; and provided further
that unless otherwise provided in the Option Agreement, the Option
will terminate, to the extent not previously exercised PRIOR TO the
Expiration Date or end of the Option Term, (A) 90 days after the date
that the original holder of that Option ceases to be an Eligible
Participant for any reason, other than by reason of death or
Disability, or (B) 12 months after the date that the original holder
of that Option ceases to be an Eligible Participant by reason of his
or her death or disability; and
(v) the period or periods of time ("VESTING PERIODS") during
which Options become exercisable ("VESTED"); provided further, that if
the Option Agreement does not otherwise specify, the Vesting Period
for the Total Award Option Shares pursuant to such Option Agreement
will be as follows: (x) 25% of such Total Award Option Shares will
become Vested on the first anniversary of the Grant Date, provided
that the original holder of the Option is and remains an Eligible
Participant through and including such date; and (y) twenty-five
twelfths of one percent of such Total Award Option Shares will become
Vested as of each full month that elapses after such first anniversary
date, provided that such holder is and remains an Eligible Participant
through and including such date.
(d) to determine the form or forms of legal consideration in addition
to cash, including without limitation, Stock, unexercised Options and
promissory notes, that the Company will accept as payment of all or a
portion of the Option Price and/or Tax Withholding Liability to be paid by
the Optionee upon the exercise of an Option granted hereunder, and to
determine the fair market value of such consideration; and
(e) to the extent allowed by law and the Company's Articles of
Incorporation and Bylaws, to delegate all or a portion of its authority
under this Plan to one or more members of the Board who also are executive
officers of the Company.
6. ADDITIONAL TERMS AND CONDITIONS OF STOCK OPTION AGREEMENTS. In addition to
the terms and conditions thereof to be determined by the Administrator pursuant
to section 5(c) above, unless otherwise stated therein each Option Agreement
will be deemed to include the following terms and conditions:
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(a) EXERCISE OF THE OPTION. With respect to that portion of the Total
Award Option Shares that is Vested, the Option may be exercised by giving
written notice thereof to the Company, on such form as may be specified by the
Administrator, if any, but in any event stating the number of full shares of
Option Stock to be purchased and giving such assurances of the Optionee's
investment intent as the Company may require to ensure that the transaction
complies in all respects with the requirements of the 1933 Act and other
applicable securities laws. The notice of exercise will be accompanied by full
payment of the Option Price for the number of shares of Option Stock to be
purchased, in United States dollars, in cash, by check made payable to the
Company, or in the form of such other legal consideration for the purchase of
Stock as may be approved by the Administrator, in its discretion. In addition,
if the Option being exercised is an NSO, as a condition to that exercise, the
Optionee will tender to the Company the amount of the applicable Tax Withholding
Liability in connection with that exercise, in cash, by check made payable to
the Company, or in the form of such other payment as may be approved by the
Administrator, in its discretion.
(b) OPTIONS NONTRANSFERABLE. No Option will be transferable by the
Optionee otherwise than by will or the laws of descent and distributions except
that the Option Agreement may provide that an NSO may be transferable during the
lifetime of the Optionee to the extent allowed for transfers of Option Stock in
(e)(i)(2) below.
(c) BUSINESS COMBINATIONS. In the event of a Business Combination, all
Options that are not then vested shall become vested immediately prior to the
consummation of such Business Combination and the Board, in its sole discretion,
may take all appropriate action to:
(i) cancel all outstanding Options granted hereunder effective as of
the consummation of the Business Combination and, in connection with each
Option, either (A) notify the holder of the Option of the proposed Business
Combination not less than 20 days prior to its consummation so that the
holder will have an opportunity to exercise that Vested portion immediately
prior to such consummation, or (B) make a payment to the Optionee equal to
the amount, if any, by which the Fair Market Value per share of the Option
Stock subject to the Option exceeds the Option Price, multiplied by the
number of Total Award Option Shares that are Vested, such payment to be
made either in cash or in Stock having a Fair Market Value as of the date
of issuance equal to such excess amount; or
(ii) require the successor corporation (including in the case of a
Business Combination involving a sale of all or substantially all of the
assets of the Company, the corporation acquiring such assets) to assume the
outstanding Options or substitute therefor comparable options of such
successor corporation or a parent or Subsidiary of such successor
corporation.
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(d) COMPLIANCE WITH LAW. Notwithstanding any other provision of this Plan,
Options may be granted pursuant to this Plan, and Option Stock may be issued
pursuant to the exercise thereof by an Optionee, only after and on the condition
that there has been compliance with all applicable federal and state securities
laws. The Company will not be required to list, register or qualify any shares
of Option Stock upon any securities exchange, under any state or federal law, or
with the Securities and Exchange Commission or any State agency, or secure the
consent or approval of any governmental regulatory authority.
(e) RESTRICTIONS ON TRANSFER OF OPTION STOCK.
(i) GENERAL RULE ON PERMISSIBLE AND PROHIBITED TRANSFERS OF OPTION
STOCK. A holder of shares of Option Stock may Transfer such shares only after
compliance with the specific limitations and conditions set forth in this
section 6(e), provided that the Company's rights of first refusal and repurchase
set forth in subsections (iii) and (iv) of this section 6(e) will terminate upon
the occurrence of a First Public Offering. The only Transfers of shares of
Option Stock ("PERMITTED TRANSFERS") permitted prior to a First Public Offering
without regard to the Company's rights of first refusal are as follows:
(1) a Transfer by will or under the laws of descent and
distribution; and
(2) a Transfer by a holder of Option Stock to his or her
ancestors, descendants or spouse (other than pursuant to a decree of
divorce, dissolution or separate maintenance, a property settlement, or a
separation agreement or any similar agreement or arrangement with a spouse,
except for BONA FIDE estate planning purposes), or to a trust, partnership,
custodianship or other fiduciary account for the benefit of the holder
and/or such ancestors, descendants or spouse, including any Transfer in the
form of a distribution from any such trust, partnership, custodianship or
other fiduciary account to any of the foregoing permitted beneficiaries
thereof.
Any prohibited Transfer is void and of no effect, and no purported transferee
thereof will be recognized as a shareholder of the Company for any purpose
whatsoever. Should such a Transfer purport to occur, the Company may refuse to
carry out the Transfer on its books, attempt to set aside the Transfer, enforce
any undertakings or rights under this section 6(e), or exercise any other legal
or equitable remedy.
(ii) CONDITIONS TO TRANSFERS. It will be a condition to the Company
transferring any shares of Option Stock on its books and issuing a new stock
certificate in the name of the transferee, or causing or allowing the Company's
transfer agent to do so, that in the case of either a Permitted Transfer or the
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Company's failure or refusal to exercise its rights of first refusal under
subsections 6(e)(iii) below:
(1) the transferee of such Option Stock will execute such
documents as the Company may reasonably require to ensure that the
Company's rights under an Option Agreement and this Plan are adequately
protected with respect to such Option Stock, including, without limitation,
the transferee's agreement to be bound by all of the terms and conditions
of this Plan, and of the applicable Option Agreement; and
(2) the Company satisfies itself that such Transfer complies in
all respects with the requirements imposed by applicable state or federal
securities laws.
(iii) COMPANY'S RIGHT OF FIRST REFUSAL. If shares of Option Stock are
Transferred or are proposed to be Transferred, the Company will have an
assignable right (but not an obligation) to purchase such shares of Option Stock
on the terms and conditions set out in this subsection 6(e)(iii).
Notwithstanding anything in this Plan to the contrary, the right of first
refusal under this subsection 6(e)(iii) will be exercisable only on an
all-or-nothing basis as to any particular Transfer or proposed Transfer of
Option Stock by the holder thereof. The transferor of any shares of Option
Stock subject to this subsection 6(e)(iii) will provide to the Company a notice
of proposed Transfer (the "TRANSFEROR NOTICE") stating: the number of shares of
Option Stock that the transferor proposes to Transfer and the transferor's BONA
FIDE intention to Transfer such shares; the name(s) and address(es) of the
transferor(s), the name and address of the transferee (and subsequently such
other information regarding the transferee as the Company reasonably requests),
and the original holder of the Option Stock (if other than the transferor); the
manner and date of such proposed Transfer; and the BONA FIDE cash price and/or
other consideration per share of Option Stock, if any, that the transferee has
offered to pay for such Option Stock (the "OFFERED PRICE"). The Company may
exercise its right of first refusal under this subsection 6(e)(iii) at any time
not more than 30 days after the Company has received the Transferor Notice with
respect to such Option Stock. The Company will exercise its right, if at all,
by informing the transferor in writing of the Company's intention to do so, in a
notice that specifies a closing date that is no more than 60 days (or such later
date as the transferee may have offered or that the Transfer is otherwise
scheduled to occur) after receipt of the Transferor Notice. In exercising its
repurchase rights under this subsection 6(e)(iii), the Company will pay in cash
at such closing, to be held at the Company's principal executive offices, a
price equal to the Offered Price, subject to an appropriate adjustment to take
into account any deferred payment terms and the risk of nonpayment of any future
payments included in the Offered Price. If the Offered Price includes any
non-cash consideration the value thereof for the purposes of this subsection
shall be determined in good faith by the Board. If the Transfer or proposed
Transfer occurs other than in connection with a bona fide offer from a third
party to purchase the Option Shares,
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<PAGE>
including, without limitation, from any of the following circumstances, then the
purchase price for the Option Shares being repurchased will be their Fair Market
Value; an assignment of the Option Stock for the benefit of creditors of the
transferor; a Transfer by operation of law, except in connection with a
Permitted Transfer; an execution of judgment against the Option Stock or the
acquisition of record or beneficial ownership of Option Stock by a lender or
creditor; a Transfer pursuant to any decree of divorce, dissolution or separate
maintenance, any property settlement, any separation agreement or any other
agreement with a spouse (except for BONA FIDE estate planning purposes) under
which any shares of Option Stock are Transferred or awarded to the spouse of the
transferor or are required to be sold; or a Transfer resulting from the filing
by the transferor of a petition for relief, or the filing of an involuntary
petition against the transferor, under the bankruptcy laws of the United States
or of any other nation.
(iv) REPURCHASE RIGHTS IN COMPANY. In addition to the rights set
forth in subsection (iii) above, the Company shall have the assignable right
(but not the obligation), exercisable from and after the date that the original
holder of an Option ceases (for any reason) to be an Eligible Participant and
prior to the date that is 120 days thereafter, except if such holder ceases to
be an Eligible Participant by reason of his or her death or Disability then 90
days after the expiration of the 12 month period referred to in section
5(c)(iv)(B), to purchase from the current holder of any shares of Option Stock
that were issued upon the exercise of that Option any or all of such shares for
a purchase price that is equal to their Fair Market Value at the time of such
termination of employment. The Company may elect to exercise such right by
delivering a written notice to such holder of shares of Option Stock, such
notice specifying the date on which such repurchase will take place (which will
be no more than 90 days after the giving of such notice). The repurchase price
shall be paid in the form of cash, including the Company's check, or, at the
Company's election if the aggregate repurchase price exceeds $500,000, the
Company's three year promissory note bearing interest at an annual rate equal to
the greater of twelve percent or the prime rate (as reported in The Wall Street
Journal) plus two percentage points.
(v) ESCROW. For purposes of facilitating the enforcement of the
restrictions on Transfer set forth in this Plan or in any Option Agreement, the
Administrator may require the holder of shares of Option Stock to deliver the
certificate(s) for such shares with a stock power executed by him or her and by
his or her spouse (if required for Transfer), in blank, to the Secretary of the
Company or his or her designee, to hold said certificate(s) and stock power(s)
in escrow and to take all such actions and to effectuate all such Transfers
and/or releases as are in accordance with the terms of this Plan. The
certificates may be held in escrow so long as the shares of Option Stock whose
ownership they evidence are subject to any right of repurchase or of first
refusal under this Plan or under an Option Agreement. Each Optionee, by
exercising an Option, thereby acknowledges that the Secretary of the Company (or
his or her designee) is so appointed as the escrow holder with the foregoing
authorities as a material inducement to the grant
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<PAGE>
of an Option under this Plan, that the appointment is coupled with an interest,
and that it accordingly will be irrevocable. The escrow holder will not be
liable to any party to an Option Agreement (or to any other party) for any
actions or omissions unless the escrow holder has failed to act in good faith
relative thereto. The escrow holder may rely upon any letter, notice or other
document executed by any signature purported to be genuine. Notwithstanding
the deposit of any certificates into escrow hereunder, the respective holders of
such shares of Option Stock shall be the registered owners of such Option Stock
with all rights to vote such shares and receive any distributions in respect
thereof. The escrow holder shall deliver to such holders as soon as practicable
any cash or other property or rights distributed in respect of their respective
shares, provided that if any securities are distributed that constitute Option
Stock pursuant to Section 8, the escrow holder shall retain possession of the
certificates representing such securities, and the respective holders may be
required to execute any stock powers or other appropriate documents as are
required to give effect to the purpose of the escrow.
(f) ADDITIONAL RESTRICTIONS ON TRANSFER; INVESTMENT INTENT. By accepting
an Option under this Plan, the Optionee will be deemed to represent, warrant and
agree with respect thereto and the Option Stock issuable on exercise thereof
that (i) those shares may only be transferred pursuant to registration under the
1933 Act or an exemption from such registration; (ii) the Company is under no
obligation to register those shares of Option Stock; (iii) upon exercise of that
Option, the Optionee will purchase the shares of Option Stock for his or her own
account and not with a view to distribution within the meaning of the 1933 Act,
other than as may be effected in compliance with the 1933 Act and the rules and
regulations promulgated thereunder and any applicable state securities laws; and
(iv) the Optionee has no present intention of disposing of the Option Stock at
any particular time.
(g) STOCK CERTIFICATES. Certificates representing the shares of Option
Stock issued pursuant to the exercise of Options will bear all legends required
by law and necessary or appropriate in the Administrator's discretion to
effectuate the provisions of this Plan and of the applicable Option Agreement.
The Company may place a "stop transfer" order against shares of Option Stock
until full compliance with all restrictions and conditions set forth in this
Plan and in the legends referred to in this section 6(g).
(h) MARKET STANDOFF. To the extent requested by the Company in connection
with a firm commitment underwritten public offering of securities of the
Company, each Optionee and the holder of any shares of Option Stock will:
(i) not sell or otherwise Transfer any such shares not included in such
underwriting during the 180 day period (or such shorter or longer period as the
underwriter may require of the principal security holders of the Company)
following the effective date of the registration statement filed with the
Securities and Exchange Commission in connection with such offering; and
(ii) execute such instruments as
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the underwriter may reasonably require to evidence compliance with this
section 6(h).
(i) NOTICES. Any notice to be given to the Company under the terms of an
Option Agreement will be addressed to the Company at its principal executive
office, Attention: Corporate Secretary, or at such other address as the Company
may designate in writing. Any notice to be given to an Optionee will be
addressed to him or her at the address provided to the Company by the Optionee.
Any such notice will be deemed to have been duly given if and when delivered
personally or when enclosed in a properly sealed envelope, addressed as
aforesaid, deposited, postage prepaid, in a post office or branch post office
regularly maintained by the United States Government.
(j) OTHER PROVISIONS. The Option Agreement may contain such other terms,
provisions and conditions, including restrictions on the Transfer of Option
Stock and rights of the Company to repurchase shares of Option Stock, not
inconsistent with this Plan, as may be determined by the Administrator in its
sole discretion.
7. TERM OF THE PLAN. This Plan will become effective on the date of its
adoption by the Board, provided this Plan is approved by the shareholders of the
Company (excluding shares of Option Stock issued by the Company pursuant to the
exercise of Options granted under this Plan) within 12 months before or after
that date. If this Plan is not so approved by the shareholders of the Company
within that 12 month period of time, any Options granted under this Plan will be
rescinded and will be void. This Plan will remain in effect until the tenth
anniversary of the date of its adoption by the Board or its approval by the
shareholders of the Company, whichever is earlier, unless it is terminated
earlier pursuant to section 9 of this Plan.
8. ADJUSTMENTS UPON CHANGES IN STOCK. In the event of any change in the
outstanding Stock of the Company as a result of a stock split, reverse stock
split, stock dividend, recapitalization, combination or reclassification,
appropriate proportionate adjustments will be made in: (i) the aggregate number
of shares of authorized and unissued Stock that are reserved for issuance,
pursuant to section 4 above, under outstanding Options or future Options granted
hereunder; (ii) the Option Price and the number of unexercised Total Award
Option Shares of each outstanding Option granted hereunder; (iii) the shares of
Option Stock outstanding pursuant to the exercise of Options; and (iv) other
rights and matters determined on a per share basis under this Plan or any Option
Agreement evidencing an outstanding Option granted hereunder.
9. MODIFICATION, EXTENSION AND RENEWAL OF OPTIONS; GOVERNING LAW. Subject to
the terms and conditions and within the limitations of this Plan, the
Administrator may modify, extend or renew outstanding Options granted under this
Plan, or accept the surrender of outstanding Options (to the extent not
theretofore exercised) and authorize the granting of new Options in substitution
therefor (to the extent not theretofore
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<PAGE>
exercised). Notwithstanding the foregoing, however, no modification of any
Option will, without the consent of the Optionee, alter or impair any rights or
obligations under any outstanding Option. This Plan will be governed by, and
construed in accordance with, the laws of the State of California.
10. AMENDMENT AND DISCONTINUANCE. The Board may amend, suspend or discontinue
this Plan at any time or from time to time; provided that no action of the Board
will cause ISOs granted under this Plan not to comply with Section 422 of the
Code unless the Board specifically declares such action to be made for that
purpose and provided further that no such action may, without the approval of
the shareholders of the Company, materially increase (other than by reason of an
adjustment pursuant to section 8 hereof) the maximum aggregate number of shares
of Option Stock in the Option Pool, or materially modify the category of, or
eligibility requirements for, persons who are Eligible Participants. However,
no such action may alter or impair any Option previously granted under this Plan
without the consent of the holder thereof, nor may the number of shares of
Option Stock in the Option Pool be reduced to a number that is less than the
aggregate number of shares of Option Stock (i) that may be issued pursuant to
the exercise of all outstanding and unexpired Options granted hereunder, and
(ii) that have been issued and are outstanding pursuant to the exercise of
Options granted hereunder (net of any such shares that have been reacquired by
the Company by repurchase or otherwise).
11. INFORMATION PROVIDED BY COMPANY; AGREEMENT TO MAINTAIN CONFIDENTIALITY.
Prior to a First Public Offering: the Company annually will make available to
each Optionee the Company's financial statements (which statements need not be
audited), and each Optionee (and any investment advisers to whom the Optionee
proposes to make such information available) shall, by virtue of entering into
an Option Agreement, be deemed to have agreed to keep such information
confidential and not use such information for any purpose whatsoever (other than
determining whether to exercise an Option).
* * *
Date Plan Adopted by Board of Directors: December 16, 1994
Date Plan Approved by the Shareholders: February 1, 1995
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VALLEY RECORD DISTRIBUTORS, INC.
1994 STOCK OPTION PLAN
EXHIBIT A
DEFINITIONS
1. "10% shareholder" means a person who owns, either directly or indirectly by
virtue of the ownership attribution provisions set forth in Section 424(d) of
the Code at the time he or she is granted an Option, stock possessing more than
ten percent (10%) of the total combined voting power or value of all classes of
stock of the Company and/or of its Subsidiaries.
2. "1933 Act" means the Securities Act of 1933, as amended.
3. "Administrator" means the Board or the committee appointed by the Board to
administer and interpret the Plan pursuant to section 5 of the Plan.
4. "Board" means the Board of Directors of the Company.
5. "Business Combination" means a transaction resulting in the sale of all or
substantially all of the assets of the Company, or in more than 35% of the
outstanding voting power of the Company being held by any person other than
Barnet Cohen, Barbara Cohen, the children of Barnet and Barbara Cohen, or any
trust or other entity in which such persons have a majority of the beneficial
interests, voting power, partnership interests or other indicia of beneficial or
equitable ownership, or the Company's Employee Stock Ownership Plan.
6. "Code" means the Internal Revenue Code of 1986, as amended (references
herein to Sections of the Code are intended to refer to Sections of the Code as
enacted at the time of the Plan's adoption by the Board and as subsequently
amended, or to any substantially similar successor provisions of the Code
resulting from recodification, renumbering or otherwise).
7. "Disability" means "permanent and total disability" within the meaning of
Section 22(e)(3) of the Code, provided that the reference therein to a
determination by the "Secretary" shall refer to a determination by the Board.
8. "Fair Market Value" means, with respect to the Stock (i) the most recent
closing price of the Stock if the same trades on a securities exchange or is
quoted on an automated system that reports closing sale prices, (ii) the average
of the most recent "bid" and "asked" prices of the Stock if the same trades on
an over-the-counter market that does not report closing sale prices, (iii) if
neither (i) or (ii) are applicable, a price based on a recent private sale of
the Stock in a negotiated arm's length transaction or based on the most recently
completed valuation of the Stock performed for the Company's Employee Stock
Ownership Plan, in either
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case as determined by the Administrator with such adjustments from either of
such prices as the Administrator determines in good faith to be appropriate in
light of events or results occurring subsequent to such private sale or
valuation, as the case may be.
9. "First Public Offering" means the closing of the first sale of Stock to the
public, through a firm commitment underwriting, for an aggregate price
(exclusive of underwriters' discounts and commissions and expenses of the
offering) of at least five million dollars ($5,000,000), pursuant to an
effective registration statement filed with the Securities and Exchange
Commission under the 1933 Act.
10. "Grant Date" means, with respect to an Option, the date as of which the
Option Agreement evidencing that Option is entered into between the Company and
the Optionee, or such other date as may be set forth in that Option Agreement as
the "Grant Date" which will be the effective date of that Option Agreement.
11. "Subsidiary" has the same meaning as "subsidiary corporation" as defined in
Section 424(f) of the Code.
12. "Tax Withholding Liability" in connection with the exercise of any NSO
means all federal and state income taxes, social security tax, and any other
taxes applicable to the compensation income arising from the transaction
required by applicable law to be withheld by the Company.
13. "Transfer," with respect to shares of Option Stock, includes, without
limitation, a voluntary or involuntary sale, assignment, transfer, conveyance,
pledge, hypothecation, encumbrance, disposal, loan, gift, attachment or levy of
those shares, including without limitation an assignment for the benefit of
creditors of the transferor, a transfer by operation of law, such as a transfer
by will or under the laws of descent and distribution, an execution of judgment
against those shares or the acquisition of record or beneficial ownership
thereof by a lender or creditor, a transfer pursuant to any decree of divorce,
dissolution or separate maintenance, any property settlement, any separation
agreement or any other agreement with a spouse (except for estate planning
purposes) under which a part or all of the shares of that Option Stock are
transferred or awarded to the spouse of the transferor or are required to be
sold; or a transfer resulting from the filing by the transferor of a petition
for relief, or the filing of an involuntary petition against the transferor,
under the bankruptcy laws of the United States or of any other nation.
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VALLEY MEDIA, INC.
STOCK OPTION AGREEMENT
FOR THE 1994 STOCK OPTION PLAN
THIS AGREEMENT is made as of __________________, ____, by and between
Valley Media, Inc., a Delaware corporation ("Company"), and __________________
("Optionee").
WITNESSETH:
WHEREAS, there has been granted to Optionee, effective as of the date
hereof, a stock option under the Valley Media, Inc. 1994 Stock Option Plan
("Plan"); and
WHEREAS, the terms of such option are governed by this Agreement and
the Plan, and capitalized terms used herein and not otherwise defined shall have
the meaning ascribed thereto in the Plan.
NOW, THEREFORE, it is mutually agreed as follows:
1. The Optionee shall have a stock option to acquire
___________________ shares of common stock of the Company (the "Total Award
Option Shares") at a price ("Option Price") of $ _____ per share. Said option
expires on _____________________, 20___, provided that expiration shall occur at
an earlier date if Optionee shall cease to be an Eligible Participant prior to
such date as further provided in the Plan. The options granted hereby shall be
deemed to be Vested at the rate of _________________________ of the Total Award
Option Shares as of the last day of each calendar month, commencing with
___________________________, 199__. In addition, all options which have not yet
become Vested will become Vested if Optionee dies while an Eligible Employee.
At the discretion of the Board, options which have not become Vested may become
Vested upon optionee's disability while an Eligible Participant. [OPTIONAL: The
Option is intended to be an Incentive Stock Option ("ISO") within the meaning of
Section 422 of the Internal Revenue Code of 1986, as amended.]
2. The option granted hereby may not be exercised prior to
_________________, 199__ except in the event that (i) a Business Combination
occurs prior to such date, in which event the option, to the extent it is then
or becomes Vested, shall become exercisable 15 days prior to the consummation of
such Business Combination or (ii) Optionee ceases to be an Eligible Participant
prior to such time, in which event the option, to the extent it is then or
becomes Vested, may be exercised from the time that Optionee ceases
<PAGE>
to be an Eligible Participant through and including the date that the option
terminates under section 5(c)(iv) of the Plan.
3. The Vested portion of the option may be exercised, in whole or in
part, at any time from the date hereof, by delivery of written notice from
Optionee to the Company as provided in (a) below, accompanied by (i) cash or
check made payable to the Company in an amount equal to the number of shares
being purchased multiplied by the Option Price, (ii) means of a cancellation of
rights as provided in (b) below, (iii) Optionee's promissory note due three
years from the date of issuance or, if sooner, one year after Optionee ceases to
be an Eligible Participant and bearing interest at the prime rate (as reported
in The Wall Street Journal on the date of issuance) with interest payable on the
last day of each calendar quarter, and secured by a pledge of the shares
purchased therewith (all in form satisfactory to the Administrator), or (iv)
such other form of consideration allowable under the Plan and approved by the
Administrator at the time of exercise.
(a) Optionee or Optionee's representative may exercise the
option by giving written notice to the Company specifying the election to
exercise the option, which notice will include the date of exercise, the number
of shares for which it is being exercised, and the amount and permissible form
of payment. The notice will be signed by the person or persons exercising the
Option. In the event that the Option is being exercised by the representative
of Optionee, the notice will be accompanied by proof satisfactory to the Company
of the representative's right to exercise the option.
(b) Optionee may elect to pay all or any portion of the
aggregate Option Price by means of cancelling a portion of the option (the
"CANCELLED RIGHTS"), the intrinsic value of such portion being equal to the
aggregate Option Price for the number of shares being purchased using such
alternative payment method. The intrinsic value of the Cancelled Rights shall
be calculated based upon the Fair Market Value of the shares subject to such
Cancelled Rights as of the date of exercise, less the aggregate Option Price
applicable to such number of shares. By way of example only, and without
limiting the generality of the foregoing: if the Option Price is $20.00 per
share and the Fair Market Value is $30.00, the intrinsic value per share is
equal to the difference between those values, or $10.00 per share; and if the
number of shares subject to the Option is 1,000, Optionee's notice of exercise
is for 250 shares, and Optionee elects to pay the aggregate Option Price
entirely with Cancelled Rights, then the Option will be reduced by the 250
Shares so acquired (having an aggregate Option Price of $5,000) AND by
<PAGE>
the 500 Shares subject to the Cancelled Rights (having an aggregate intrinsic
value equal to $5,000).
4. The Company hereby represents and warrants that it has reserved,
and will at all times keep reserved for so long as the option remains
outstanding, out of its authorized shares of common stock, a number of shares of
common stock sufficient to provide for the exercise of the option. The Company
further represents and warrants that the shares, when issued pursuant to the
exercise of the option, will be duly and validly issued, fully paid and
nonassessable.
5. Optionee hereby represents and warrants that:
(a) Optionee is acquiring the option granted hereby, and will
acquire any shares obtained upon exercise of the option, for investment purposes
only, for Optionee's own account, and with no view to the distribution thereof
other than in accordance with the 1933 Act.
(b) Optionee understands that the option and the Option Stock
that may be acquired by exercising the option have not been and will not be
registered under the 1933 Act, and that the option and the Option Stock is not
freely tradeable and must be held indefinitely unless registered under the 1933
Act or an exemption from such registration is available. Optionee understands
that the Company is under no obligation to register the option or the Option
Stock. Optionee also understands that the option and the Option Stock have not
been qualified under the securities laws of any state and are to be offered and
sold pursuant to an exception from qualification under applicable state
securities laws.
(c) Optionee is an officer or senior manager of the Company and
(check each paragraph that is applicable):
_____ Has a pre-existing business or personal relationship with the
Company and its officers, directors or controlling persons;
_____ By reason of Optionee's business or financial experience has the
capacity to protect Optionee's own interests in connection with
the acquisition of the option and the Option Stock.
<PAGE>
6. The other terms of this option, including, without limitation,
section 6(e)(ii)-(iv) of the Plan which limits Optionee's ability to transfer
the Option Stock and gives the Company certain rights to purchase Option Stock,
shall be the same as those provided for in the Plan, except as otherwise
provided herein. The Plan is attached hereto as EXHIBIT A and is incorporated
herein by this reference. Optionee has read EXHIBIT A and agrees to be bound by
its terms (other than as otherwise provided herein).
7. This Agreement shall be construed and enforced in accordance with
the laws of the State of California.
8. The terms of this Agreement shall be binding upon the executors,
administrators, heirs, successors, transferees and assignees of the Optionee.
9. In any action at law or in equity to enforce any of the provisions
or rights under this Agreement or the Plan, the unsuccessful party to such
litigation, as determined by the court in a final judgment or decree, shall pay
the successful party or parties all costs, expenses and reasonable attorneys'
fees incurred by the successful party or parties (including without limitation
costs, expenses and attorneys' fees on any appeals), and if the successful party
recovers judgment in any such action or proceeding, such costs, expenses and
attorneys' fees shall be included as part of the judgment.
10. The Optionee agrees to perform all acts and execute and deliver
any documents that may be reasonably necessary to carry out the provisions of
this Agreement, including but not limited to all acts and documents relating to
compliance with federal and/or state securities laws.
11. For convenience this Agreement may be executed in any number of
identical counterparts, each of which shall be deemed a complete original in
itself and may be introduced in evidence or used for other purpose without the
production of any other counterparts.
12. In the event that any provision of this Agreement is found to be
invalid or otherwise unenforceable under any applicable law, such invalidity or
unenforceability shall not be construed as rendering any other provisions
contained herein invalid or unenforceable, and all such other provisions shall
be given full force and effect to the same extent as though the invalid and
unenforceable provision was not contained herein.
<PAGE>
13. Nothing in this Agreement will be construed as giving Optionee
the right to be retained as an employee of the Company and/or its subsidiaries.
The Company reserves the right to terminate Optionee's employment at any time
for any reason.
14. This Agreement constitutes the final and complete expression of
all of the terms of the understanding and agreement between the parties hereto
and this Agreement replaces and supersedes any other similar agreements,
contracts, obligations or commitments between the parties hereto, including any
equity or profit sharing rights that Optionee may have in the Company. This
Agreement may not be modified, amended, altered or supplemented except by means
of the execution and delivery of a written agreement mutually executed by the
Company and Optionee.
[FOR INCENTIVE STOCK OPTIONS ONLY: 15. Optionee acknowledges,
understands and agrees that the existence of the Plan and the execution of this
Agreement are not sufficient by themselves to cause any exercise of the option
evidenced hereby to qualify for favorable tax treatment through the application
of Section 422 of the Internal Revenue Code; that Optionee must, in order to so
qualify, individually meet by his or her own action all applicable requirements
of Section 422, including without limitation the following holding period
requirements: no disposition of a Share may be made by Optionee within two years
from the date of the granting of the option(s) nor within one year after the
transfer of such Share to him or her on exercise of the option.]
IN WITNESS WHEREOF, the parties have caused this Agreement to be
executed as of the day and year referred to above.
VALLEY MEDIA, INC.
By:
-----------------------------------------
("Company")
----------------------------------------------
[NAME OF OPTIONEE] ("Optionee")
Attachment: 1994 Stock Option Plan
<PAGE>
VALLEY RECORD DISTRIBUTORS, INC.
1994 STOCK OPTION PLAN
AMENDMENT NO. 1
1. The name of the Plan is hereby changed to "Valley Media, Inc.
1994 Stock Option Plan."
2. Section 5(a) of the Plan is hereby deleted in its entirety and
replaced with the following:
(a) to select and approve the Eligible Participants to whom Options
will be granted from time to time hereunder;
3. Section 6(c) of the Plan is hereby deleted in its entirety and
replaced with the following:
(c) CHANGE IN CONTROL TRANSACTIONS. In the event of a Change in
Control Transaction, all Options that are not then vested shall become
vested immediately prior to the consummation of such Change in Control
Transaction and the Board, in its sole discretion, may take all appropriate
action to:
(i) cancel all outstanding Options granted hereunder effective as of
the consummation of the Change in Control Transaction and, in connection
with each Option, either (A) notify the holder of the Option of the
proposed Change in Control Transaction not less than twenty (20) days prior
to its consummation so that the holder will have an opportunity to exercise
that Vested portion immediately prior to such consummation, or (B) make a
payment to the Optionee equal to the amount, if any, by which the Fair
Market Value per share of the Option Stock subject to the Option exceeds
the Option Price, multiplied by the number of Total Award Option Shares
that are Vested, such payment to be made either in cash or in Stock having
a Fair Market Value as of the date of issuance equal to such excess amount;
or
(ii) require the Successor Entity with respect to such
Change in Control Transaction, if any (including in the case of a Change in
Control Transaction involving a sale of all or substantially all of the
assets of the Company, the Person acquiring such assets), to assume the
outstanding Options or substitute therefor comparable options of such
Successor Entity or a parent or Subsidiary of such Successor Entity.
4. The definition of "Business Combination contained in Exhibit A to
the Plan is hereby deleted in its entirety and replaced with the following:
"Business Combination" means a merger or consolidation of the Company
and one or more other Persons in which the Company or a subsidiary of the
Company is a merging or consolidating party.
<PAGE>
5. The following definitions are hereby added to Exhibit A to the
Plan:
A. "Affiliate" means, with respect to a first Person, a second
Person that directly, or indirectly through one or more intermediaries,
controls, or is controlled by, or is under common control with, the first
Person.
B. "Associate" means, with respect to a Person, (a) any corporation
or organization of which such Person is an officer or partner or, directly
or indirectly, the beneficial owner of ten percent (10%) or more of any
class of equity securities, (b) any trust or other estate in which such
Person has a substantial beneficial interest or as to which such Person
serves as trustee or in a similar fiduciary capacity, and (c) any relative
or spouse of such Person, or any relative of such spouse, who has the same
home as such Person.
C. "Change in Control Transaction" means (a) the sale of all or
substantially all of the assets of the Company; (b) any change in ownership
or control of the outstanding voting securities of the Company following
which any Person other than Barnet J. Cohen, Barbara C. Cohen, any
Affiliate or Associate of Barnet J. Cohen or Barbara C. Cohen, or the
Company's Employee Stock Ownership Plan, beneficially owns, together with
its Affiliates and Associates, thirty five percent (35%) or more of the
outstanding voting securities of the Company; (c) any change in the
membership of the Company's Board of Directors after the closing date of
the Company's Initial Public Offering following which Continuing Directors
do not constitute a majority of the Board; or (d) a Business Combination
immediately following which the shareholders of the Company immediately
prior to such Business Combination do not hold more than sixty five percent
(65%) of the outstanding voting securities of the Successor Entity in the
same proportion as such shareholders held Common Stock of the Company
immediately prior to such Business Combination.
D. "Continuing Director" means, at any given time, a member of the
Company's Board of Directors who was (a) a member of the Board on the
closing date of the Company's Initial Public Offering, (b) elected to the
Board by the Board after the closing date of the Company's Initial Public
Offering, provided that a majority of the Continuing Directors voted in
favor of such election, or (c) nominated to the Board by the Board after
the closing date of the Company's Initial Public Offering, provided that a
majority of the Continuing Directors voted in favor of such nomination, and
subsequently elected to the Board by the shareholders of the Company.
E. "Person" means any individual, corporation, partnership, limited
liability company, sole proprietorship, joint venture or other
organization.
F. "Successor Entity" means a corporation or other entity other than
the Company that acquires all or substantially all of the assets of the
Company, or which is the surviving or parent entity resulting from a
Business Combination.
2
<PAGE>
VALLEY RECORD DISTRIBUTORS
1997 STOCK OPTION PLAN
1. ADOPTION AND PURPOSE OF THE PLAN. This stock option plan, to be known
as the "Valley Record Distributors 1997 Stock Option Plan" (the "PLAN") has been
adopted by the board of directors (the "BOARD") of Valley Record Distributors,
Inc., a California corporation (the "COMPANY"), and is subject to the approval
of its shareholders pursuant to section 8 below. The purpose of this Plan is to
advance the interests of the Company and its shareholders by enabling the
Company to attract and retain qualified directors, officers, employees,
independent contractors, consultants and advisers by providing them with an
opportunity for investment in the Company. The options that may be granted
hereunder ("OPTIONS") represent the right by the grantee thereof (each,
including any permitted transferee pursuant to section 7.3 below, an "OPTIONEE")
to acquire shares of the Company's common stock ("SHARES" which if acquired
pursuant to the exercise of an Option will be referred to as "OPTION STOCK")
subject to the terms and conditions of this Plan and a written agreement between
the Company and the Optionee to evidence each such Option (an "OPTION
AGREEMENT").
2. CERTAIN DEFINITIONS. The defined terms set forth in EXHIBIT A
attached hereto and incorporated herein (together with other capitalized terms
defined elsewhere in this Plan) will govern the interpretation of this Plan.
3. ELIGIBILITY. The Company may grant Options under this Plan only to
(i) persons who, at the time of such grant, are directors, officers or employees
of the Company or any of its Subsidiaries, and (ii) persons who, and entities
which, at the time of such grant, are independent contractors, consultants or
advisers of the Company or any of its Subsidiaries ("ELIGIBLE PARTICIPANTS").
Subject to the provisions of section 4 of this Plan, there is no limitation on
the number of Options that may be granted to an Eligible Participant.
4. OPTION POOL; SHARES RESERVED FOR OPTIONS. In no event will the
Company issue, in the aggregate, more than 50,000 Shares (the "OPTION POOL")
pursuant to the exercise of all Options granted under this Plan; PROVIDED THAT
in order to comply with the requirements of Section 260.140.45 of Title 10 of
the California Code of Regulations (the "30% Rule"), at no time will the total
number of Shares that either (x) may be acquired pursuant to the exercise of all
outstanding Options granted hereunder or under any other outstanding options or
warrants issued by the Company (exclusive of certain excluded rights and
warrants described in the 30% Rule), or (y) are provided for under any stock
bonus or similar plan of the Company, in the aggregate exceed 30% of the total
number of then issued and outstanding Shares of the Company (including shares of
convertible preferred stock or convertible senior common stock on an as
converted basis). At all times while Options granted under this Plan are
outstanding, the Company will reserve for issuance for the purposes hereof a
sufficient number of authorized and unissued Shares to fully satisfy the
Company's obligations under all such outstanding Options.
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5. ADMINISTRATION. This Plan will be administered and interpreted by the
Board, or by a committee consisting of two or more members of the Board,
appointed by the Board for such purpose (the Board, or such committee, referred
to herein as the "ADMINISTRATOR"). Subject to the express terms and conditions
hereof, the Administrator is authorized to prescribe, amend and rescind rules
and regulations relating to this Plan, and to make all other determinations
necessary or advisable for its administration and interpretation. Specifically,
the Administrator will have full and final authority in its discretion, subject
to the specific limitations on that discretion as are set forth herein and in
the Articles of Incorporation and Bylaws of the Company, at any time:
(a) to select and approve the Eligible Participants to whom Options
will be granted;
(b) to determine the Fair Market Value of the Shares as of the Grant
Date for any Option;
(c) with respect to each Option, to determine the terms and
conditions of that Option, to be set forth in the Option Agreement
evidencing that Option (the form of which also being subject to approval by
the Administrator), including at a minimum the following:
(i) the total number of Shares of Option Stock that may be
acquired by the Optionee pursuant to that Option;
(ii) whether that Option will be designated an "incentive
stock option" as defined in Section 422 of the Code (an "ISO"), in
which case the Option will be subject to all of the special provisions
set forth in section 6 below;
(iii) the per share purchase price to be paid to the Company by
the Optionee to acquire the Option Stock issuable upon exercise of the
Option (the "OPTION PRICE"); PROVIDED THAT the Option Price will not
be less than eighty-five percent (85%) of the Fair Market Value of the
Shares as of the Grant Date, unless the Optionee is a 10% shareholder,
in which case the Option Price will not be less than one hundred ten
percent (110%) of such Fair Market Value;
(iv) the maximum period or term during which that Option will
be exercisable (the "OPTION TERM") and/or the last date on which that
Option may be exercised (the "EXPIRATION DATE"), PROVIDED THAT in no
event may the Expiration Date be later than, or the Option Term be
longer than, 10 years from the Grant Date;
(v) the maximum period after any person ceases, for any
reason, to be an Eligible Person (a "LOSS OF ELIGIBILITY STATUS"),
whether
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resulting from his or her death, disability or any other reason,
during which period (the "GRACE PERIOD") the Option will be
exercisable, subject to the earlier end of the Option Term, PROVIDED
THAT if the Administrator fails to specify such Grace Periods, but
subject to the provisions of section 6(e) below with respect to ISOs,
the following Grace Periods will apply (and in no event may the
Administrator select Grace Periods that are shorter than the
following): (A) 30 days after such Loss of Eligibility Status, OTHER
THAN by reason of the Original Holder's death or disability, (B) 180
days after such Loss of Eligibility Status by reason of the Original
Holder's death or disability;
(vi) the form or forms of legal consideration in addition to
cash (including without limitation Shares and unexercised Vested
Options, and, for an Optionee who is an employee and/or director only,
unsecured promissory notes) that the Company will accept as payment of
all or a portion of the Option Price or Tax Withholding Liability to
be paid by the Optionee upon the exercise of an Option granted
hereunder, and the fair market value of such non-cash consideration;
(vii) the conditions (e.g., the passage of time or the
occurrence of events), if any, that must be satisfied prior to the
vesting of the right to exercise all, or specified portions of an
Option (such portions being described as a percentage of the total
number of Shares of Option Stock that may be acquired by the Optionee
pursuant to that Option; the vested portion being referred to as a
"VESTED OPTION" and the unvested portion being referred to as an
"UNVESTED OPTION"); PROVIDED THAT no such conditions (except the Loss
of Eligibility Status of the Original Holder, after which no Unvested
Option will become a Vested Option) may be imposed which prevents an
Optionee from purchasing at least twenty percent (20%) of the Shares
of Option Stock initially subject to the Option as of the first
anniversary of the Grant Date, and as of each anniversary thereafter,
such that by the fifth anniversary of the Grant Date (assuming no such
Loss of Eligibility Status) the entire Option would be deemed a Vested
Option; PROVIDED FURTHER THAT if the Option Agreement does not
otherwise specify, the Option will initially be deemed an entirely
Unvested Option but portions of the Option will become a Vested Option
on the following schedule: one-forty eighth (1/48) will become a
Vested Option as of the last day of each successive calendar month
beginning with the calendar month in which the Grant Date occurs,
subject to the condition that the Original Holder does not suffer a
Loss of Eligibility Status prior to each such vesting date; and
(viii) in addition, or as an alternative, to imposing Vesting
conditions on the RIGHT to exercise an Option as provided in section
5(c)(vii) above, whether any portion of the Shares of Option Stock
acquired by an Optionee upon exercise of an Option will be subject to
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<PAGE>
repurchase by the Company or its assigns pursuant to section 7.4(b)
below at the Option Price paid for such Shares or at some other price
that may be less than the Fair Market Value of such Shares (such
Shares, if subject to repurchase at less than Fair Market Value, being
referred to as "UNVESTED SHARES") following a Loss of Eligibility
Status or other designated event, and the conditions (e.g., the
passage of time or the occurrence of events), if any, that must be
satisfied for such Shares to be no longer subject to such rights of
repurchase at less than Fair Market Value (such Shares being referred
to as "VESTED SHARES"); PROVIDED THAT no such conditions (except the
Loss of Eligibility Status of the Original Holder, after which no
Unvested Shares will become Vested Shares) may be imposed which
prevent Unvested Shares from becoming Vested Shares at the rate of at
least twenty percent (20%) per year following the Grant Date, such
that by the fifth anniversary of the Grant Date (assuming no such Loss
of Eligibility Status) all of the Shares would be deemed Vested
Shares; PROVIDED FURTHER THAT no Shares acquired upon the exercise of
an Option will be deemed Unvested Shares unless specified in the
Option Agreement; and
(d) to delegate all or a portion of the Administrator's authority
under sections 5(a), (b) and (c) above to one or more members of the Board
who also are executive officers of the Company, and subject to such
restrictions and limitations as the Administrator may decide to impose on
such delegation.
6. SPECIAL PROVISIONS RELATING TO ISOS. Notwithstanding anything else in
this Plan to the contrary, the following provisions will apply to each Option
granted hereunder that is designated as an ISO pursuant to section 5(c)(ii)
above and that is intended to qualify for the treatment available pursuant to
Section 422 of the Code:
(a) such ISO may be granted only to Eligible Participants who, as of
the Grant Date, are employees of the Company or its Subsidiaries (as
determined by Section 3401(c) of the Code);
(b) to the extent that the Fair Market Value of Option Stock
(determined as of the Grant Date) with respect to which all ISOs are
exercisable for the first time by any individual during any calendar year
(pursuant to this Plan and all other plans of the Company and/or its
Subsidiaries) exceeds $100,000, the Option will NOT be treated as an ISO;
(c) the Option Price of an ISO will not be less than 100% of the Fair
Market Value of the Shares as of the Grant Date, except as set forth in
section 6(d) below;
(d) in the case of an ISO granted to an Optionee who is a 10%
shareholder: (i) the Option Price will not be less than one hundred ten
percent
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<PAGE>
(110%) of the Fair Market Value of the Shares as of the Grant Date; and
(ii) the Option Term may not be more than five years; and
(e) notwithstanding any Grace Period selected by the Administrator
pursuant to section 5(c)(v) above, the tax treatment available pursuant to
Section 422 of the Code upon the exercise of an ISO will not be available
to an Optionee who exercises any ISO more than (i) three months following
the Original Holder's Loss of Eligibility Status OTHER THAN by reason of
his or her death or permanent and total disability within the meaning of
Section 22(e)(3) of the Code, or (ii) twelve (12) months following such
Original Holder's Loss of Eligibility Status by reason or his or her
permanent and total disability, whichever case may be applicable.
7. ADDITIONAL TERMS AND CONDITIONS OF STOCK OPTION AGREEMENTS. No Option
will be deemed granted hereunder merely upon the authorization thereof by the
Administrator, but will be deemed granted hereunder only upon the execution of
an Option Agreement evidencing the same by both the Optionee and a duly
authorized officer of the Company. In addition to the terms and conditions
thereof to be determined by the Administrator pursuant to section 5(c) above,
unless otherwise stated therein, each Option Agreement will be deemed to include
the following terms and conditions unless expressly waived by the Company in the
Option Agreement:
7.1 EXERCISE OF THE OPTION; ISSUANCE OF SHARE CERTIFICATE. That
portion of the Option that is a Vested Option may be exercised by giving written
notice thereof to the Company, on such form as may be specified by the
Administrator, but in any event stating: the Optionee's intention to exercise
the Option; the date of exercise; the number of full Shares of Option Stock to
be purchased (which number will be no less than 100 Shares, without regard to
adjustments to the number of Shares subject to the Option pursuant to section 9
below, or, if less, all of the remaining Shares subject to the Option); the
amount and form of payment of the Option Price; and such assurances of the
Optionee's investment intent as the Company may require to ensure that the
transaction complies in all respects with the requirements of the 1933 Act and
other applicable securities laws. The notice of exercise will be signed by the
person or persons exercising the Option. In the event that the Option is being
exercised by the representative of Optionee, the notice will be accompanied by
proof satisfactory to the Company of the representative's right to exercise the
Option. The notice of exercise will be accompanied by full payment of the
Option Price for the number of Shares of Option Stock to be purchased, in United
States dollars, in cash, by check made payable to the Company, or in the form of
such other legal consideration for the purchase of Shares as may be approved by
the Administrator, in its discretion pursuant to section 5(c)(vi) above. In
addition, to the extent required by applicable federal, state, local or foreign
law, and as a condition to the Company's obligation to issue any Shares upon the
exercise of the Option in full or in part, Optionee will make arrangements
satisfactory to the Company for the payment of any applicable Tax Withholding
Liability that may arise by reason of or in connection with such exercise. Such
arrangements may include, in the Company's sole discretion, that the Optionee
tender to the
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Company the amount of such Tax Withholding Liability, in cash, by check made
payable to the Company, or in the form of such other payment as may be approved
by the Administrator, in its discretion pursuant to section 5(c)(vi) above.
After receiving a proper notice of exercise and payment of the applicable Option
Price and withholding taxes, the Company will cause to be issued a certificate
or certificates for the Shares of Option Stock as to which the Option has been
exercised, registered in the name of the person rightfully exercising the Option
and, subject to sections 7.5 and 7.8 below, the Company will cause such
certificate or certificates to be delivered to such person.
7.2 COMPLIANCE WITH LAW. Notwithstanding any other provision of this
Plan, Options may be granted pursuant to this Plan, and Option Stock may be
issued pursuant to the exercise thereof by an Optionee, only after and on the
condition that there has been compliance with all applicable federal and state
securities laws. The Company will not be required to list, register or qualify
any Shares of Option Stock upon any securities exchange, under any state or
federal law, or with the Securities and Exchange Commission or any State agency,
or secure the consent or approval of any governmental regulatory authority,
except that if at any time the Board determines, in its discretion, that such
listing, registration or qualification of the Shares of Option Stock, or any
such consent or approval, is necessary or desirable as a condition of or in
connection with the exercise of an Option and the purchase of Shares of Option
Stock thereunder, that Option may not be exercised, in whole or in part, unless
and until such listing, registration, qualification, consent or approval is
effected or obtained free of any conditions that are not acceptable to the
Board, in its discretion. However, the Company will seek to register or qualify
with, or as may be provided by applicable local law, file for and secure an
exemption from such registration or qualification requirements from, the
applicable securities administrator and other officials of each jurisdiction in
which an Eligible Participant would be granted an Option hereunder prior to such
grant.
7.3 RESTRICTIONS ON TRANSFER.
(a) OPTIONS AND UNVESTED SHARES NONTRANSFERABLE. No Option or
Unvested Shares will be transferable by the Original Holder otherwise than by
will or the laws of descent and distribution. During the lifetime of the
Original Holder, the Option will be exercisable only by the Original Holder.
(b) PROHIBITED TRANSFERS. In addition to any other limitation
on Transfer created by applicable securities laws, prior to the Initial Public
Offering, a Holder of any Shares of Option Stock may Transfer such Shares, or
any interest therein, only after compliance with the specific limitations and
conditions set forth in this section 7 and with all applicable securities laws.
All Transfers of Option Stock not complying with the specific limitations and
conditions set forth in this section 7 are expressly prohibited. Any prohibited
Transfer is void and of no effect, and no purported transferee in connection
therewith will be recognized as a Holder of Option Stock for any purpose
whatsoever. Should such a Transfer purport to occur, the Company may refuse to
carry out the Transfer on its books, attempt to set aside the
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<PAGE>
Transfer, enforce any undertakings or rights under this section 7, or exercise
any other legal or equitable remedy. For purposes of this section 7, the term
"OPTION STOCK" includes all Shares issued by the Company to a Holder (or his,
her or its predecessor) by reason of such holdings, including any securities
which may be acquired as a result of a stock split, stock dividend, and other
distributions of Shares in the Company made upon, or in exchange for, other
securities of the Company.
(c) CONDITIONS TO TRANSFER. It will be a condition to any
Transfer of any Shares of Option Stock other than Unvested Shares occurring
prior to the Initial Public Offering and to any Transfer of Unvested Shares
occurring at any time, that:
(i) the transferee of the Shares will execute such documents
as the Company may reasonably require to ensure that the Company's rights
under this Plan, and any applicable Option Agreement, are adequately
protected with respect to such Shares, including, without limitation, the
transferee's agreement to be bound by all of the terms and conditions of
this Plan and such Agreement, as if he or she were the original Holder of
such Shares; and
(ii) the Company is satisfied that such Transfer complies in
all respects with the requirements imposed by applicable state and federal
securities laws and regulations.
(d) MARKET STANDOFF. If in connection with any public offering
of securities of the Company (or any Successor Entity), the underwriter or
underwriters managing such offering so requests, then each Optionee and each
Holder of Shares of Option Stock will agree to not sell or otherwise Transfer
any such Shares (other than Shares included in such underwriting) without the
prior written consent of such underwriter, for such period of time as may be
requested by the underwriter (not to exceed 210 days) commencing on the
effective date of the registration statement filed with the Securities and
Exchange Commission in connection with such offering.
7.4 COMPANY RIGHTS OF REPURCHASE. Following any Loss of Eligibility
Status by the Original Holder of an Option, the Company will have each of the
assignable right (but not the obligation) to:
(a) where the Loss of Eligibility Status occurs prior to the
Initial Public Offering, purchase from the the current Holder of any
shares of Option Stock (other than Unvested Shares) that were issued
upon the exercise of the Option any or all of such shares for a
purchase price that is equal to their Fair Market Value at the time of
the Loss of Eligibility Status by the Original Holder of the Option;
and
(b) purchase the Holder of Unvested Shares acquired pursuant to
the exercise of the Option pursuant to section 5(c)(viii) above, all
or a portion of such Unvested Shares for a purchase price that is
equal to the
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Option Price paid for such Shares or such other repurchase price as
has been established under section 5(c)(viii) above.
The rights specified in this section 7.4 will be exercisable in the following
manner:
(i) The Company (or its assignee) may exercise its right to
repurchase under this section 7.4 at any time not more than 90 days
after the effective date of the Loss of Eligibility Status of the
Original Holder of the Option (or if such Loss of Eligibility Status
results from the Original Holder's death or disability, a period of 90
days after the expiration of the Grace Period determined by the
Administrator pursuant to section 5(c)(v) above during which the
Optionee would be able to exercise any Vested Option). If the Company
(or its assignee) elects to exercise such purchase rights it will do
so by delivering to the Holder of such Shares a notice of such
election, specifying the number of Shares to be purchased and a
closing date that is within such 90 days period.
(ii) At such closing, to be held at the Company's principal
executive offices, the Company (or its assignee) will pay the Holder
of the Shares, the purchase price, as specified in this section 7.4,
in cash, or by cancellation of indebtedness to the Company, if any,
incurred by the original purchaser of the Option Stock to purchase the
same, or both, at a closing to be held at the Company's principal
executive offices on the date specified in such notice.
(iii) Any assignment by the Company of its rights to purchase
Option Shares under this section 7.4 will be subject to the
requirements of Section 260.140.41(k) of Title 10 of the California
Code of Regulations.
7.5 ESCROW. For purposes of facilitating the enforcement of the
restrictions on Transfer set forth in this Plan or in any Option Agreement, the
Administrator may, at its discretion, require the Holder of Shares of Option
Stock to deliver the certificate(s) for such Shares with a stock power executed
by him or her and by his or her spouse (if required for Transfer), in blank, to
the Secretary of the Company or his or her designee, to hold said certificate(s)
and stock power(s) in escrow and to take all such actions and to effectuate all
such Transfers and/or releases as are in accordance with the terms of this Plan.
The certificates may be held in escrow so long as the Shares of Option Stock
whose ownership they evidence are subject to any right of repurchase under this
Plan or under an Option Agreement. Each Optionee, by exercising an Option,
thereby acknowledges that the Secretary of the Company (or his or her designee)
is so appointed as the escrow holder with the foregoing authorities as a
material inducement to the grant of an Option under this Plan, that the
appointment is coupled with an interest, and that it accordingly will be
irrevocable. The escrow holder will not be liable to any party to an Option
Agreement (or to any other party) for any actions or omissions unless the escrow
holder is grossly negligent relative thereto.
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The escrow holder may rely upon any letter, notice or other document executed by
any signature purported to be genuine.
7.6 CHANGE OF CONTROL TRANSACTIONS. Notwithstanding any other
provision of this Plan, in the event of a Change of Control Transaction (as
defined herein):
(a) with respect to all Options that have been granted hereunder
and that are outstanding as of the consummation of such Change of Control
Transaction, the Board, in its sole discretion, may determine that it is in the
best interests of the Company, and if so may take all appropriate action either
to:
(i) cancel all such Options effective immediately prior to
the consummation of the Change of Control Transaction and, in
connection with each Option, any portion of which is a Vested Option,
notify the Optionee of the proposed Change of Control Transaction
reasonably prior to its consummation so that the Optionee will have an
opportunity to exercise the Vested Option immediately prior to such
consummation; or
(ii) require the Successor Entity in such Change of Control
Transaction to assume the outstanding Options or substitute therefor
comparable options of such Successor Entity (or of its parent or its
Subsidiary); and
(b) with respect to all Shares of Option Stock that have been
issued and that are outstanding as of the consummation of such Change of Control
Transaction, the Company will have the right (but not the obligation) to
repurchase all (but not less than all) of the Shares by paying the Holder
thereof cash, or cancelling any indebtedness of such Holder to the Company, or
both, at a closing to be held contemporaneously with the consummation of the
Change of Control Transaction, PROVIDED THAT the repurchase price for such
Shares (other than Unvested Shares pursuant to section 5(c)(viii) above for
which the purchase price will be the Option Price for such Shares) for which the
repurchase price will be an amount per share that is equal to the Fair Market
Value of the Shares based on the Board's good faith estimate of the valuation of
the Company implied by the estimated fair market value of the total
consideration to be paid in connection with the Change of Control Transaction.
(c) For purposes of this section 7.6: the term "CHANGE OF
CONTROL TRANSACTION" means a Business Combination in which less than 66.67% of
the outstanding voting securities of the Successor Entity immediately following
the consummation of the Business Combination transaction are beneficially held
by those persons and entities in the same proportion as such persons and
entities beneficially held the voting securities of the Company immediately
prior to such transaction; the term "BUSINESS COMBINATION" means a transaction
or series of transactions consummated within any period of 90 days resulting in
(A) the sale of all or substantially all of the assets of the Company, (B) a
merger or consolidation or other
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reorganization of which the Company or a subsidiary of the Company is a merging
or consolidating party, or (C) the sale or other change of beneficial ownership
of at least 33.33% of the outstanding voting securities of the Company.
7.7 ADDITIONAL RESTRICTIONS ON TRANSFER; INVESTMENT INTENT. By
accepting an Option and/or Shares of Option Stock under this Plan, the Optionee
will be deemed to represent, warrant and agree that, unless a registration
statement is in effect with respect to the offer and sale of Shares of Option
Stock: (i) neither the Option nor any such Shares will be freely tradeable and
must be held indefinitely unless such Option and such Shares are either
registered under the 1933 Act or an exemption from such registration is
available; (ii) the Company is under no obligation to register the Option or any
such Shares; (iii) upon exercise of the Option, the Optionee will purchase the
Shares of Option Stock for his or her own account and not with a view to
distribution within the meaning of the 1933 Act, other than as may be effected
in compliance with the 1933 Act and the rules and regulations promulgated
thereunder; (iv) no one else will have any beneficial interest in the Option
Stock; (v) the Optionee has no present intention of disposing of the Option
Stock at any particular time; and (vi) neither the Option nor the Shares have
been qualified under the securities laws of any state and may only be offered
and sold pursuant to an exception from qualification under applicable state
securities laws.
7.8 STOCK CERTIFICATES; LEGENDS. Certificates representing Shares of
Option Stock will bear all legends required by law and necessary or appropriate
in the Administrator's discretion to effectuate the provisions of this Plan and
of the applicable Option Agreement. The Company may place a "stop transfer"
order against Shares of Option Stock until full compliance with all restrictions
and conditions set forth in this Plan, in any applicable Option Agreement and in
the legends referred to in this section 7.8.
7.9 NOTICES. Any notice to be given to the Company under the terms
of an Option Agreement will be addressed to the Company at its principal
executive office, Attention: Corporate Secretary, or at such other address as
the Company may designate in writing. Any notice to be given to an Optionee
will be addressed to him or her at the address provided to the Company by the
Optionee. Any such notice will be deemed to have been duly given if and when
enclosed in a properly sealed envelope, addressed as aforesaid, deposited,
postage prepaid, in a post office or branch post office regularly maintained by
the United States Postal Service.
7.10 OTHER PROVISIONS. Each Option Agreement may contain such other
terms, provisions and conditions, including restrictions on the Transfer of
Shares of Option Stock, and rights of the Company to repurchase such Shares, not
inconsistent with this Plan, as may be determined by the Administrator in its
sole discretion.
7.11 SPECIFIC PERFORMANCE. Under those circumstances in which the
Company chooses to timely exercise its rights to repurchase Shares of Option
Stock as provided herein, the Company will be entitled to receive such Shares in
specie in order
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<PAGE>
to have the same available for future issuance without dilution of the holdings
of other shareholders of the Company. By accepting Shares of Option Stock, the
Holder thereof therefore acknowledges and agrees that money damages will be
inadequate to compensate the Company and its shareholders if such a repurchase
is not completed as contemplated hereunder and that the Company will, in such
case, be entitled to a decree of specific performance of the terms hereof or to
an injunction restraining such holder (or such Holder's personal representative)
from violating this Plan or Option Agreement, in addition to any other remedies
that may be available to the Company at law or in equity.
7.12 NO SHAREHOLDER RIGHTS. No rights or privileges of a shareholder
in the Company are conferred by reason of the granting of the Option. No
Optionee will become a shareholder in the Company with respect to any Shares of
Option Stock unless and until the Option has been properly exercised and the
Option Price fully paid as to the portion of the Option exercised.
8. TERM OF THE PLAN. This Plan will become effective on the date of its
adoption by the Board, provided this Plan is approved by the shareholders of the
Company (excluding Shares of Option Stock issued by the Company pursuant to the
exercise of Options granted under this Plan) within 12 months before or after
that date. If this Plan is not so approved by the shareholders of the Company
within that 12 month period of time, any Options granted under this Plan will be
rescinded and will be void. This Plan will remain in effect until the tenth
(10th) anniversary of the date of its adoption by the Board or its approval by
the shareholders of the Company, whichever is earlier, unless it is terminated
earlier pursuant to section 11 of this Plan.
9. ADJUSTMENTS UPON CHANGES IN STOCK. In the event of any change in the
outstanding Shares of the Company as a result of a stock split, reverse stock
split, stock dividend or distribution, recapitalization, combination or
reclassification, appropriate proportionate adjustments will be made in:
(i) the aggregate number of Shares that are reserved for issuance in the Option
Pool pursuant to section 4 above, under outstanding Options or future Options
granted hereunder; (ii) the Option Price and the number of Shares of Option
Stock that may be acquired under each outstanding Option granted hereunder; and
(iii) other rights and matters determined on a per share basis under this Plan
or any Option Agreement evidencing an outstanding Option granted hereunder. Any
such adjustments will be made only by the Board, and when so made will be
effective, conclusive and binding for all purposes with respect to this Plan and
all Options then outstanding. No such adjustments will be required by reason of
the issuance or sale by the Company for cash or other consideration of
additional Shares or securities convertible into or exchangeable for Shares.
10. MODIFICATION, EXTENSION AND RENEWAL OF OPTIONS; GOVERNING LAW.
Subject to the terms and conditions and within the limitations of this Plan, the
Administrator may modify, extend or renew outstanding Options granted under this
Plan, or accept the surrender of outstanding Options (to the
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<PAGE>
extent not theretofore exercised) and authorize the granting of new Options in
substitution therefor (to the extent not theretofore exercised).
Notwithstanding the foregoing, however, no modification of any Option will,
without the consent of the Optionee, alter or impair any rights or obligations
under any outstanding Option. This Plan will be governed by, and construed in
accordance with, the laws of the State of [California].
11. AMENDMENT AND DISCONTINUANCE. The Board may amend, suspend or
discontinue this Plan at any time or from time to time; PROVIDED THAT no action
of the Board will cause ISOs granted under this Plan not to comply with
Section 422 of the Code unless the Board specifically declares such action to be
made for that purpose and PROVIDED FURTHER that no such action may, without the
approval of the shareholders of the Company, materially increase (other than by
reason of an adjustment pursuant to section 9 hereof) the maximum aggregate
number of Shares of Option Stock in the Option Pool, or materially modify the
category of, or eligibility requirements for persons who are Eligible
Participants. However, no such action may alter or impair any Option previously
granted under this Plan without the consent of the Optionee, nor may the number
of Shares of Option Stock in the Option Pool be reduced to a number that is less
than the aggregate number of Shares of Option Stock (i) that may be issued
pursuant to the exercise of all outstanding and unexpired Options granted
hereunder, and (ii) that have been issued and are outstanding pursuant to the
exercise of Options granted hereunder (net of any such Shares that have been
reacquired by the Company by repurchase or otherwise).
12. INFORMATION PROVIDED BY COMPANY. Prior to an Initial Public Offering,
the Company annually will make available to each Optionee the Company's
financial statements (which statements need not be audited), and each Optionee
will, by virtue of entering into an Option Agreement, be deemed to have agreed
(and to cause any investment advisers to whom the Optionee proposes to make such
information available to agree) to keep such information confidential and not to
use such information for any purpose whatsoever other than determining whether
to exercise an Option.
13. COPIES OF PLAN. A copy of this Plan will be delivered to each
Optionee at or before the time he or she executes an Option Agreement.
* * *
Date Plan Adopted by Board of Directors: June ___, 1997
Date Plan Approved by the Shareholders: February ___, 1998
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<PAGE>
VALLEY RECORD DISTRIBUTORS
1997 STOCK OPTION PLAN
EXHIBIT A
DEFINITIONS
1. "10% SHAREHOLDER" means a person who owns, either directly or
indirectly by virtue of the ownership attribution provisions set forth in
Section 424(d) of the Code at the time he or she is granted an Option, stock
possessing more than ten percent (10%) of the total combined voting power or
value of all classes of stock of the Company and/or of its Subsidiaries.
2. "1933 ACT" means the Securities Act of 1933, as amended.
3. "CODE" means the Internal Revenue Code of 1986, as amended (references
herein to Sections of the Code are intended to refer to Sections of the Code as
enacted at the time of the Plan's adoption by the Board and as subsequently
amended, or to any substantially similar successor provisions of the Code
resulting from recodification, renumbering or otherwise).
4. "DONATIVE TRANSFER" with respect to Shares of Option Stock means any
Transfer, other than a Permitted Transfer or an Involuntary Transfer, without
the receipt of cash or other legal consideration in payment therefor.
5. "FAIR MARKET VALUE" means, with respect to the Shares and as of the
date that is relevant to such a determination (e.g., on the Grant Date), the
market price per share of such Shares determined by the Administrator,
consistent with the requirements of Section 422 of the Code and to the extent
consistent therewith, as follows: (a) if the Shares are traded on a stock
exchange on the date in question, then the Fair Market Value will be equal to
the closing price reported by the applicable composite-transactions report for
such date; (b) if the Shares are traded over-the-counter on the date in question
and are classified as a national market issue, then the Fair Market Value will
be equal to the last-transaction price quoted by the NASDAQ system for such
date; (c) if the Shares are traded over-the-counter on the date in question but
are not classified as a national market issue, then the Fair Market Value will
be equal to the mean between the last reported representative bid and asked
prices quoted by the NASDAQ system for such date; and (d) if none of the
foregoing provisions is applicable, then the Fair Market Value will be
determined by the Administrator in good faith on such basis as it deems
appropriate, taking into consideration the provisions of Section 260.141.50 of
Title 10 of the California Code of Regulations.
6. "GRANT DATE" means, with respect to an Option, the date on which the
Option Agreement evidencing that Option is entered into between the Company and
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<PAGE>
the Optionee, or such other date as may be set forth in that Option Agreement as
the "Grant Date" which will be the effective date of that Option Agreement.
7. "HOLDER" means the holder of any Shares of Option Stock.
8. "INITIAL PUBLIC OFFERING" means the closing of the first sale of
securities of the Company, or of any Successor Entity, to the public, through a
firm commitment underwriting, for an aggregate price (exclusive of underwriters'
discounts and commissions and expenses of the offering) of at least seven
million five hundred thousand dollars ($7,500,000), pursuant to an effective
registration statement (other than on Form S-8 or S4 or successor forms to
either of such forms) filed with the Securities and Exchange Commission under
the 1933 Act.
9. "INVOLUNTARY TRANSFER" with respect to Shares of Option Stock
includes, without limitation, any of the following: (A) an assignment of the
Shares for the benefit of creditors of the transferor; (B) a Transfer by
operation of law; (C) an execution of judgment against the Shares or the
acquisition of record or beneficial ownership of Shares by a lender or creditor;
(D) a Transfer pursuant to any decree of divorce, dissolution or separate
maintenance, any property settlement, any separation agreement or any other
agreement with a spouse (except for BONA FIDE estate planning purposes) under
which any Shares are Transferred or awarded to the spouse of the transferor or
are required to be sold; or (E) a Transfer resulting from the filing by the
transferor of a petition for relief, or the filing of an involuntary petition
against the transferor, under the bankruptcy laws of the United States or of any
other nation.
10. "JUST CAUSE TERMINATION" means a termination by the Company and/or any
of its Subsidiaries of the Original Holder's employment or services (or if the
Original Holder is a director, removal of him or her from the Board by action of
the shareholders or, if permitted by applicable law and the Bylaws of the
Company, the other directors), in connection with the good faith determination
of the Board (or of the Company's shareholders if the Original Holder is a
director and the removal of him or her from the Board is by action of the
shareholders, but in either case excluding the vote of the subject individual if
he or she is a director or a shareholder) that the Original Holder has engaged
in any acts involving dishonesty or moral turpitude or in any acts that
materially and adversely affect the business, affairs or reputation of the
Company or any of its Subsidiaries.
11. "ORIGINAL HOLDER" means the original Eligible Participant to whom an
Option is granted under the Plan, even if such Option is transferred pursuant to
section 7.3 of the Plan.
12. "SUBSIDIARY" has the same meaning as "subsidiary corporation" as
defined in Section 424(f) of the Code.
13. "SUCCESSOR ENTITY" means a corporation or other entity that acquires
all or substantially all of the assets of the Company, or which is the surviving
or parent entity
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<PAGE>
resulting from a Business Combination, as that term is defined in section 7.5 of
the Plan.
14. "TAX WITHHOLDING LIABILITY" in connection with the exercise of any
Option means all federal and state income taxes, social security tax, and any
other taxes applicable to the compensation income arising from the transaction
required by applicable law to be withheld by the Company.
15. "TRANSFER" with respect to Shares of Option Stock, includes, without
limitation, a voluntary or involuntary sale, assignment, transfer, conveyance,
pledge, hypothecation, encumbrance, disposal, loan, gift, attachment or levy of
those Shares, including without limitation any Involuntary Transfer.
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<PAGE>
STOCK OPTION AGREEMENT
UNDER THE 1997 STOCK OPTION PLAN
OF VALLEY MEDIA
THIS AGREEMENT is made effective as of ________ ___, 199__ (the "GRANT
DATE"), between Valley Media, Inc., a Delaware corporation (the
"COMPANY"), and the undersigned Optionee.
THE PARTIES AGREE AS FOLLOWS:
1. OPTION GRANT. Subject to all of the terms and conditions of this
Agreement and of the Company's 1997 STOCK OPTION PLAN (the "OPTION PLAN"),
Optionee will have an option (the "OPTION") to purchase __________ shares of the
Company's common stock (the "SHARES"), for an exercise price per share equal to
$________ (the "OPTION PRICE"). The Option will expire on _______________,
____, _____, and will be of no further force or effect thereafter. [OPTIONAL:
The Option is intended to be an Incentive Stock Option ("ISO") within the
meaning of Section 422 of the Internal Revenue Code of 1986, as amended.]
2. VESTING AND EXERCISE. The Option will become a Vested Option [on the
following schedule: [ALTERNATIVE VESTING SCHEDULE] [on the schedule set forth
in Section 5(a)(vii) of the Option Plan]; PROVIDED THAT in each case the
Original Holder of the Option does not suffer a Loss of Eligibility Status prior
to each such vesting date.
3. REPRESENTATIONS AND WARRANTIES OF OPTIONEE. Optionee represents and
warrants that he or she is acquiring the Option, and will acquire any Shares
obtained upon exercise of the Option, for investment purposes only, for
Optionee's own account, and with no view to the distribution thereof.
4. NO EMPLOYMENT RIGHTS. This Agreement gives Optionee no right to be
retained as an employee of the Company and/or its Subsidiaries.
5. TERMS OF THE OPTION PLAN. Optionee understands that the Option Plan
includes important terms and conditions that apply to the Option. Capitalized
terms used and not otherwise defined herein shall have the meanings ascribed to
such terms in the Option Plan. Those terms include: important conditions to
the right of Optionee to exercise the Option; important restrictions on the
ability of Optionee to transfer the Option or to Transfer any of the Shares of
Option Stock received upon exercise of the Option; and early termination of the
Option following the occurrence of certain events. OPTIONEE HAS READ THE OPTION
PLAN, AGREES TO BE BOUND BY ITS TERMS, AND MAKES EACH OF THE REPRESENTATIONS
REQUIRED TO BE MADE BY OPTIONEE UNDER IT. OPTIONEE FURTHER ACKNOWLEDGES THAT
THE COMPANY HAS GIVEN NO TAX ADVICE CONCERNING THE OPTION AND HAS ADVISED
OPTIONEE TO CONSULT WITH HIS OR HER OWN TAX OR FINANCIAL ADVISOR ABOUT THE TAX
TREATMENT OF THE OPTION AND ITS EXERCISE.
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<PAGE>
6. MISCELLANEOUS. Neither this Agreement nor the Option is assignable by
either party, except as expressly provided herein. All of the covenants and
provisions of this Agreement by or for the benefit of the Company or Optionee
shall bind and inure to the benefit of their respective successors. This
Agreement (including the Option Plan) constitutes the final and complete
expression of all of the terms of the understanding and agreement between the
parties hereto concerning the subject matter hereof. This Agreement may not be
modified, amended, altered or supplemented except by means of the execution and
delivery of a written instrument mutually executed by the Company and Optionee.
This Agreement shall be construed and governed by the substantive laws of the
State of California.
The parties hereby have entered into this Agreement as of the Grant Date.
VALLEY MEDIA, INC.
By:
-------------------------------------
Title:
----------------------------------
"OPTIONEE"
----------------------------------------
Address:
----------------------------------------
----------------------------------------
Social Security No.:
--------------
Attachments: (1) Consent of Spouse
(2) 1997 Stock Option Plan
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<PAGE>
CONSENT OF SPOUSE
I am the spouse of _________________, who together with Valley
Media, Inc. (the "COMPANY"), have entered into the Stock Option Agreement, to
which this Consent is attached. Capitalized terms not defined herein will
have the meaning set forth in such agreement.
I have read and understand the Stock Option Agreement, and the
Company's 1997 Stock Option Plan (the "Option Plan"). I acknowledge that, by
execution hereof, I am bound by the Stock Option Agreement, and the Option
Plan, as to any and all interests I may have in the Option Shares. In
particular, I understand and agree that the Option Shares (including any
interest that I may have therein) are subject to certain repurchase rights in
the Company and certain restrictions on transfer.
I also agree with my spouse and the Company that if my spouse and I
ever get divorced or enter into any marital property settlement agreement, or if
my spouse or I ever seek a decree of separate maintenance, to the extent my
spouse has or can obtain assets other than the Option Shares in amounts and of
value sufficient to settle or satisfy any marital property claims I may have in
the value of the Option Shares, I will accept such other assets in settlement of
those claims.
I agree that I will not do anything to try to prevent the operation of
any part of the Stock Option Agreement or the Option Plan. I acknowledge that I
have had an opportunity to obtain independent counsel to advise me concerning
the matters contained herein.
SIGNATURE
--------------------------------------
Name:
---------------------------------
Date:
---------------------------------
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<PAGE>
VALLEY RECORD DISTRIBUTORS, INC.
1997 STOCK OPTION PLAN
AMENDMENT NO. 1
1. The name of the Plan is hereby changed to "Valley Media, Inc. 1997
Stock Option Plan."
2. Section 4 of the Plan is hereby deleted in its entirety and replaced
with the following:
4. OPTION POOL; SHARES RESERVED FOR OPTIONS. In no event will the
Company issue, in the aggregate, more than 150,000 Shares (the "OPTION
POOL") pursuant to the exercise of all Options granted under this
Plan; PROVIDED THAT in order to comply with the requirements of
Section 260.140.45 of Title 10 of the California Code of Regulations
(the "30% Rule"), at no time will the total number of Shares that
either (x) may be acquired pursuant to the exercise of all outstanding
Options granted hereunder or under any other outstanding options or
warrants issued by the Company (exclusive of certain excluded rights
and warrants described in the 30% Rule), or (y) are provided for under
any stock bonus or similar plan of the Company, in the aggregate
exceed 30% of the total number of then issued and outstanding Shares
of the Company (including shares of convertible preferred stock or
convertible senior common stock on an as converted basis). At all
times while Options granted under this Plan are outstanding, the
Company will reserve for issuance for the purposes hereof a sufficient
number of authorized and unissued Shares to fully satisfy the
Company's obligations under all such outstanding Options.
3. Section 7.6 of the Plan is hereby deleted in its entirety and replaced
with the following:
7.6 CHANGE OF CONTROL TRANSACTIONS. Notwithstanding any other
provision of this Plan, in the event of a Change of Control Transaction (as
defined herein):
(a) immediately prior to the consummation of such Change in
Control Transaction (i) all Options that are not then vested shall become
vested and (ii) all Unvested Shares of Option Stock shall become Vested
Shares;
(b) with respect to all Options that are outstanding as of the
consummation of such Change of Control Transaction, the Board, in its sole
discretion, may determine that it is in the best interests of the Company,
and if so may take all appropriate action either to:
(i) cancel all such Options effective immediately prior to the
consummation of the Change of Control Transaction and, in connection
with each Option, notify the Optionee of the proposed Change of
Control Transaction reasonably prior to its consummation so that the
Optionee will have an opportunity to exercise the Option immediately
prior to such consummation; or
<PAGE>
(ii) require the Successor Entity in such Change of Control
Transaction to assume the outstanding Options or substitute therefor
comparable options of such Successor Entity (or of its parent or its
Subsidiary); and
(c) with respect to all Shares of Option Stock that have been
issued and that are outstanding as of the consummation of such Change of
Control Transaction, the Company will have the right (but not the
obligation) to repurchase all (but not less than all) of the Shares by
paying the Holder thereof cash, or canceling any indebtedness of such
Holder to the Company, or both, at a closing to be held contemporaneously
with the consummation of the Change of Control Transaction, PROVIDED THAT
the repurchase price for such Shares will be an amount per share that is
equal to the Fair Market Value of the Shares based on the Board's good
faith estimate of the valuation of the Company implied by the estimated
fair market value of the total consideration to be paid in connection with
the Change of Control Transaction.
(d) For purposes of this section 7.6: the term "CHANGE OF
CONTROL TRANSACTION" means (i) the sale of all or substantially all of the
assets of the Company; (ii) any change in ownership or control of the
outstanding voting securities of the Company following which any Person
other than Barnet J. Cohen, Barbara C. Cohen, any Affiliate or Associate of
Barnet J. Cohen or Barbara C. Cohen, or the Company's Employee Stock
Ownership Plan, beneficially owns, together with its Affiliates and
Associates, thirty five percent (35%) or more of the outstanding voting
securities of the Company; (iii) any change in the membership of the
Company's Board of Directors after the closing date of the Company's
Initial Public Offering following which Continuing Directors do not
constitute a majority of the Board; or (iv) a Business Combination
immediately following which the shareholders of the Company immediately
prior to such Business Combination do not hold more than sixty five percent
(65%) of the outstanding voting securities of the Successor Entity in the
same proportion as such shareholders held Common Stock of the Company
immediately prior to such Business Combination; the term "BUSINESS
COMBINATION" means a merger or consolidation of the Company and one or more
other Persons in which the Company or a subsidiary of the Company is a
merging or consolidating party.
4. The following definitions are hereby added to Exhibit A to the
Plan:
A. "AFFILIATE" means, with respect to a first Person, a second
Person that directly, or indirectly through one or more intermediaries,
controls, or is controlled by, or is under common control with, the first
Person.
B. "ASSOCIATE" means, with respect to a Person, (a) any corporation
or organization of which such Person is an officer or partner or, directly
or indirectly, the beneficial owner of ten percent (10%) or more of any
class of equity securities, (b) any trust or other estate in which such
Person has a substantial beneficial interest or as to which such Person
serves as trustee or in a similar fiduciary capacity, and (c) any relative
or spouse of such Person, or any relative of such spouse, who has the same
home as such Person.
2
<PAGE>
C. "CONTINUING DIRECTOR" means, at any given time, a member of the
Company's Board of Directors who was (a) a member of the Board on the
closing date of the Company's Initial Public Offering, (b) elected to the
Board by the Board after the closing date of the Company's Initial Public
Offering, provided that a majority of the Continuing Directors voted in
favor of such election, or (c) nominated to the Board by the Board after
the closing date of the Company's Initial Public Offering, provided that a
majority of the Continuing Directors voted in favor of such nomination, and
subsequently elected to the Board by the shareholders of the Company.
D. "PERSON" means any individual, corporation, partnership, limited
liability company, sole proprietorship, joint venture or other
organization.
3
<PAGE>
SEVERANCE AND CHANGE IN CONTROL AGREEMENT
[Bracketed substitute language for the CEO]
THIS AGREEMENT, made this ____ day of __________, 1998, by and between
_________________ (the "Executive") and VALLEY MEDIA, INC., a California
corporation (the "Corporation").
W I T N E S S E T H:
WHEREAS, the Executive is _____________________ of the Corporation;
WHEREAS, the Corporation considers it essential to the best interests of
its shareholders to take steps to retain key personnel such as the Executive and
recognizes particularly that uncertainty might arise among personnel in the
context of any possible or actual Change in Control, as hereinafter defined,
which could result in the departure or distraction of key personnel to the
detriment of the Corporation and its shareholders; and
WHEREAS, the Corporation has determined that appropriate steps should be
taken to reinforce and encourage the continued attention and dedication of key
personnel of the Corporation including the Executive to their assigned duties
without distraction in the face of potentially disturbing circumstances arising
from any possible or actual Change in Control.
NOW, THEREFORE, in consideration of the covenants, terms, and conditions
contained herein, the Corporation and the Executive agree:
1. DEFINITIONS. For purposes of this Agreement, the following terms
shall have the meanings set forth in this Article I.
a. "Administrative Committee" shall mean the Board of Directors of
the Corporation or a committee appointed by such Board of Directors to
administer this Agreement.
b. "Affiliate" shall mean, with respect to a first Person, a second
Person that directly, or indirectly through one or more
intermediaries, controls, or is controlled by, or is under common
control with, the first Person.
c. "Associate" shall mean, with respect to a Person, (a) any
corporation or organization of which such Person is an officer or
partner or, directly or indirectly, the beneficial owner of ten
percent (10%) or more of any class of equity securities, (b) any trust
or other estate in which such Person has a substantial beneficial
interest or as to which such Person serves as trustee or in a similar
fiduciary capacity, and (c) any relative or spouse of such Person, or
any relative of such spouse, who has the same home as such Person.
d. "Benefit Continuation Period" shall mean the period beginning on
the date of the Severance of Employment or Non-Change in Control
Termination, as the case may be, and ending on the earlier to occur of
(a) the six (6) month anniversary of
<PAGE>
the date of such Severance of Employment or Non-Change in Control
Termination, or (b) the date that the Executive and the Executive's
dependents are eligible and elect coverage under the plans of a
subsequent employer that provide substantially equivalent or greater
benefits to the Executive and the Executive's dependents.
e. "Business Combination" shall mean a merger or consolidation of
the Corporation and one or more other entities in which the
Corporation or a subsidiary of the Corporation is a merging or
consolidating party.
f. "Change in Control" shall mean (a) the sale of all or
substantially all of the assets of the Corporation; (b) any change in
ownership or control of the outstanding voting securities of the
Corporation following which any Person other than Barnet J. Cohen,
Barbara C. Cohen, any Affiliate or Associate of Barnet J. Cohen or
Barbara C. Cohen, or the Corporation's Employee Stock Ownership Plan,
beneficially owns, together with its Affiliates and Associates, thirty
five percent (35%) or more of the outstanding voting securities of the
Corporation; (c) any change in the membership of the Corporation's
Board of Directors after the closing date of the Corporation's Initial
Public Offering following which Continuing Directors do not constitute
a majority of the Board; or (d) a Business Combination immediately
following which the shareholders of the Company immediately prior to
such Business Combination do not hold more than sixty five percent
(65%) of the outstanding voting securities of the Successor Entity in
the same proportion as such shareholders held Common Stock of the
Company immediately prior to such Business Combination.
g. "Code" shall mean the Internal Revenue Code of 1986, as amended
to date.
h. "Constructive Discharge" shall mean (a) without the Executive's
express written consent, the assignment to the Executive of any
duties, or the removal from or reduction or limitation of the
Executive's duties or responsibilities, which is inconsistent with the
Executive's position, organization level, duties, responsibilities or
compensation status with the Corporation immediately prior to such
assignment, removal, reduction or limitation; (b) without the
Executive's express written consent, a substantial reduction of the
facilities and perquisites (including office space and location)
available to the Executive; (c) a reduction by the Corporation in the
base cash salary of the Executive; (d) a material reduction by the
Corporation in the kind and level of employee benefits to which the
Executive is entitled, with the result that the Executive's overall
benefit package is materially reduced; (e) without the Executive's
express written consent, the relocation of the Executive to a facility
or location more than thirty five (35) miles from the Executive's then
present location; or (f) the failure of the Corporation to obtain the
assumption of this Agreement by any Successor Entity.
i. "Continuing Director" shall mean, at any given time, a member of
the Corporation's Board of Directors who was (a) a member of the Board
on the closing date of the Corporation's Initial Public Offering, (b)
elected to the Board by the Board after the closing date of the
Corporation's Initial Public Offering,
2
<PAGE>
provided that a majority of the Continuing Directors voted in favor of
such election, or (c) nominated to the Board by the Board after the
closing date of the Corporation's Initial Public Offering, provided
that a majority of the Continuing Directors voted in favor of such
nomination, and subsequently elected to the Board by the shareholders
of the Corporation.
j. "Initial Public Offering" shall mean the closing of the first
sale of securities of the Corporation to the public, through a firm
commitment underwriting, for an aggregate price (exclusive of
underwriters' discounts and commissions and expenses of the offering)
of at least seven million five hundred thousand dollars ($7,500,000),
pursuant to an effective registration statement (other than on
Form S-8 or S-4 or successor forms to either of such forms) filed with
the Securities and Exchange Commission under the Securities Act of
1933, as amended.
k. "Just Cause Termination" shall mean a termination by the
Corporation of the Executive's employment in connection with the good
faith determination of the Corporation's Board of Directors that the
Executive has engaged in (a) any acts involving dishonesty or moral
turpitude, or (b) any acts, other than acts taken by the Executive in
the good faith belief that such acts are in the Company's best
interests, that materially and adversely affect the business, affairs
or reputation of the Company and its subsidiaries taken as a whole.
l. "Non-Change in Control Termination" shall mean that either (i)
the Executive's employment is terminated by the Corporation and the
termination is not a Just Cause Termination and is not by reason of
the Executive's death or disability, or (ii) the Executive terminates
his or her employment with the Corporation by resignation following a
Constructive Discharge, and, in either event, no Change of Control has
occurred within the two (2) year period immediately preceding such
termination or resignation.
m. "Non-Change in Control Termination Year" shall mean, with respect
to a Non-Change in Control Termination, the fiscal year of the
Corporation during which such Non-Change in Control Termination
occurs.
n. "Person" shall mean any individual, corporation, partnership,
limited liability company, sole proprietorship, joint venture or other
organization.
o. "Severance of Employment" shall mean (a) the termination of the
Executive's employment with the Corporation within two (2) years after
the date of a Change in Control by (i) discharge by the Corporation or
(ii) resignation of the Executive following a Constructive Discharge,
or (b) the termination of the Executive's employment with the
Corporation by resignation of the Executive within the thirty (30) day
period immediately following the first anniversary of a Change in
Control. Despite the foregoing, neither of the following will
constitute a Severance of Employment:
3
<PAGE>
i. The termination of the Executive's employment by reason of
death or disability.
ii. A Just Cause Termination of the Executive's employment.
p. "Severance Year" shall mean, with respect to a Severance of
Employment, the fiscal year of the Corporation during which such
Severance of Employment occurs.
q. "Successor Entity" shall mean a corporation or other entity other
than the Corporation that acquires all or substantially all of the
assets of the Corporation, or which is the surviving or parent entity
resulting from a Business Combination.
2. ADMINISTRATION.
The Administrative Committee shall administer this Agreement and
shall have the power and the duty to make all determinations necessary for the
implementation of this Agreement, including by way of example and not as a
limitation, the occurrence of a Change in Control and the date of such change.
Any such determination (a) shall be made on the basis of all information known
to the persons making the determination, after reasonable inquiry, (b) may be
made prospectively and subject to one or more contingent events, and (c) will be
binding on the Corporation but not the Executive. Any disagreement between the
Corporation and the Executive concerning any such determination or the
administration, implementation or interpretation of this Agreement shall be
subject to the claims and arbitration procedures set forth in Article XV.
3. OBLIGATIONS OF THE CORPORATION UPON SEVERANCE OF EMPLOYMENT.
a. Within fifteen (15) days after a Severance of Employment or at
such earlier time as may be required by law, the Corporation shall pay
to the Executive:
i. The full amount of any earned but unpaid base salary through
the date of the Severance of Employment, plus a cash payment for
(a) all unused vacation time which the Executive has accrued as
of the Severance of Employment, and (b) all reasonable travel,
entertainment and other expenses properly incurred by the
Executive in connection with his or her employment by the
Corporation to the extent the Executive has not already been
reimbursed for such expenses.
ii. If the Executive's bonus for any fiscal year of the
Corporation prior to the Severance Year has not been paid prior
to the Severance of Employment, the amount of such bonus.
b. Within thirty (30) days after a Severance of Employment, the
Corporation shall pay to the Executive an amount equal to two (2)
[THREE (3)] times the aggregate of the Executive's annual base salary
immediately prior to the Severance of Employment and the Executive's
target bonus for the Severance Year. The Executive shall be eligible
to make contributions to the Corporation's Section
4
<PAGE>
401(k) plan from amounts payable to the Executive under Article III.A
and this Article III.B.
c. Within forty-five (45) days after the end of the Severance Year,
the Corporation shall pay to the Executive an amount equal to the
Executive's target bonus for the Severance Year, prorated to reflect
the portion of the Severance Year that elapsed prior to the Severance
of Employment.
4. OBLIGATIONS OF THE CORPORATION UPON NON-CHANGE IN CONTROL
TERMINATION.
a. Within fifteen (15) days after a Non-Change in Control
Termination or at such earlier time as may be required by law, the
Corporation shall pay to the Executive:
i. The full amount of any earned but unpaid base salary through
the date of the Non-Change in Control Termination, plus a cash
payment for (a) all unused vacation time which the Executive has
accrued as of the Non-Change in Control Termination, and (b) all
reasonable travel, entertainment and other expenses properly
incurred by the Executive in connection with his or her
employment by the Corporation to the extent the Executive has not
already been reimbursed for such expenses.
ii. If the Executive's bonus for any fiscal year of the
Corporation prior to the Non-Change in Control Termination Year
has not been paid prior to the Non-Change in Control Termination,
the amount of such bonus.
b. For a period of six (6) months following a Non-Change in Control
Termination, the Corporation shall continue to pay the Executive his
or her base salary.
c. Within forty-five (45) days after the end of the Non-Change in
Control Termination Year, the Corporation shall pay to the Executive
an amount equal to the Executive's target bonus for the Non-Change in
Control Termination Year, prorated to reflect the portion of the
Non-Change in Control Termination Year that elapsed prior to the
Non-Change in Control Termination.
5. TERMINATION DUE TO DEATH OR DISABILITY. Within fifteen (15) days
after the Executive is terminated due to death or disability, or at such
earlier time as may be required by law, the Corporation shall pay (a) to
the Executive, if the Executive has been terminated due to disability, or
(b) if the Executive has died, to the Executive's surviving spouse, issue
by right of representation or estate, in that order:
a. The full amount of any earned but unpaid base salary through the
date of termination, plus a cash payment for (a) all unused vacation
time which the Executive has accrued as of the date of termination,
and (b) all reasonable travel, entertainment and other expenses
properly incurred by the Executive in connection
5
<PAGE>
with his or her employment by the Corporation to the extent the
Executive has not already been reimbursed for such expenses.
b. If the Executive's bonus for any fiscal year of the Corporation
prior to the fiscal year during which the termination occurs has not
been paid prior to the termination, the amount of such bonus.
6. OTHER TERMINATION. Within fifteen (15) days after (a) a Just Cause
Termination of the Executive or (b) the voluntary resignation of the
Executive, other than a resignation following a Constructive Discharge or a
resignation that constitutes a Severance of Employment, or at such earlier
time as may be required by law, the Corporation shall pay to the Executive
the full amount of any earned but unpaid base salary through the date of
such termination or resignation, plus a cash payment for (i) all unused
vacation time which the Executive has accrued as of date of such
termination or resignation, and (ii) all reasonable travel, entertainment
and other expenses properly incurred by the Executive in connection with
his or her employment by the Corporation to the extent the Executive has
not already been reimbursed for such expenses.
7. CONTINUATION OF BENEFITS AFTER TERMINATION.
a. After a Severance of Employment or a Non-Change in Control
Termination, the Executive and the Executive's eligible dependents
shall continue to be eligible to participate during the Benefit
Continuation Period in the medical, dental, vision, health,
disability, life and other similar plans and arrangements applicable
to the Executive immediately prior to the Severance of Employment or
Non-Change in Control Termination. The Executive shall participate on
the same terms and conditions in effect throughout the Benefit
Continuation Period for active employees of the Corporation.
b. If, at the conclusion of the Benefit Continuation Period, the
Executive is not eligible to receive coverage under the plans of a
subsequent employer that provide substantially equivalent or greater
benefits to the Executive and the Executive's dependents, the
Executive may exercise his or her right under the Consolidated Omnibus
Budget Reconciliation Act of 1985, as amended ("COBRA"), to continue
to participate in the Corporation's medical, dental, vision, health,
disability, life and other similar plans and arrangements applicable
to the Executive, subject to the terms and conditions set forth in
COBRA and any rules and regulations promulgated thereunder.
8. GROSS-UP PAYMENT If it is determined, in connection with the
aggregate value of the payments made and benefits provided to the Executive
hereunder, that the Executive is subject to the excise tax imposed by
Section 4999 of the Code, or any successor provision thereto, and/or any
interest or penalties are incurred by the Executive with respect to such
excise tax (such excise tax, together with any such interest and penalties,
are collectively referred to as the "Excise Tax"), the Company shall pay to
the Executive an additional cash payment (a "Gross-Up Payment") in an
amount equal to the sum of (a) the Excise Tax (including any Excise Tax
payable by the Executive with respect to
6
<PAGE>
Gross-Up Payments) plus (b) all taxes (including any interest or penalties
imposed with respect to such taxes), including, without limitation, any
income taxes (and any interest and penalties imposed with respect thereto),
but excluding the Excise Tax, payable by the Executive with respect to the
Gross-Up Payment.
9. OUTPLACEMENT ASSISTANCE Following a Severance of Employment or a
Non-Change in Control Termination, for a period of six (6) months or until
the Executive obtains a position with a new employer, whichever is shorter,
the Corporation shall pay for the Executive to utilize the standard
outplacement services of an outplacement firm designated by the Corporation
to assist the Executive in finding a position with a new employer.
7
<PAGE>
10. TAXES The Corporation shall deduct from any payments to the Executive
under this Agreement amounts that the Corporation is required to withhold
and pay either to government agencies on behalf of the Executive or under
court order to any Person.
11. DEATH PRIOR TO PAYMENT OF AMOUNTS DUE In the event of the Executive's
death after a Severance of Employment or Non-Change in Control Termination
but prior to payment to the Executive of amounts due under this Agreement,
such payment shall be made to the Executive's surviving spouse, issue by
right of representation or estate, in that order.
12. CONFIDENTIALITY AGREEMENT At the time the Corporation and the
Executive enter into this Agreement, they shall simultaneously enter into a
Employee Confidential Information and Inventions Agreement substantially in
the form attached hereto as EXHIBIT A.
13. TERM OF AGREEMENT. This Agreement is effective from the date hereof
and shall remain in effect until three (3) years from the date hereof (the
"Initial Term"). After the Initial Term, this Agreement shall
automatically be renewed for consecutive (1) one year periods (each a
"Renewal Term") unless either party gives the other party written notice
("Nonrenewal Notice") ninety (90) days prior to the expiration of the
Initial Term or any Renewal Term that the Agreement will not be renewed, in
which event this Agreement will terminate. Notwithstanding the expiration
provisions set out in this Article XII:
a. No termination of this Agreement following a Change in Control
shall affect the Executive's rights hereunder arising from or based
upon such Change in Control.
b. Any Nonrenewal Notice given by the Corporation shall be void
and of no effect, and this Agreement shall be reinstated in full, if a
Change of Control occurs within one hundred eighty (180) days after
the date this Agreement expires pursuant to any Nonrenewal Notice
given by the Corporation.
14. BINDING EFFECT.
This Agreement shall be binding upon and shall inure to the benefit
of the parties hereto and the successors and assigns of the Corporation.
15. NON-ASSIGNMENT BY THE EXECUTIVE.
The Executive shall not assign, hypothecate, or transfer any of the
rights herein to any Person other than pursuant to the laws of descent and
distribution. Any attempt to assign, hypothecate or transfer the rights
hereunder shall immediately terminate all of the Executive's rights under this
Agreement.
16. CLAIMS PROCEDURE AND ARBITRATION.
a. In the event of a disagreement between the Corporation and the
Executive on any matter arising under this Agreement, the Executive,
in claiming a benefit or requesting an interpretation or ruling under
this Agreement, shall submit the claim
8
<PAGE>
or request in writing to the Administrative Committee, which shall
respond in writing as soon as practicable.
b. If a claim or request is denied, the Administrative Committee
shall prepare and deliver to the Executive a written notice of denial
which shall state (a) the reason for denial, with specific reference
to the provisions of this Agreement on which denial is based; (b) a
description of any additional material or information required to
prevail with the claim or request and an explanation of why it is
necessary; and (c) an explanation of the Agreement's claim review
procedure.
c. If the Administrative Committee fails to respond in writing to
any claim or request within thirty (30) days of the date such claim or
request is submitted, such failure to respond shall constitute a
denial of the claim or request.
d. If a claim or request is denied, the Executive may submit the
claim or request to mandatory and binding arbitration (an
"Arbitration"). The Executive may initiate an Arbitration by sending
the Corporation an Arbitration demand in writing. The Arbitration
shall be presided over by a single arbitrator (the "Arbitrator")
selected in accordance with the Commercial Arbitration Rules (the
"Arbitration Rules") of the American Arbitration Association. Any
Arbitration shall be conducted in San Francisco, California in
accordance with the Arbitration Rules and the substantive law of the
State of California; provided, however, that the Arbitrator will have
no power or authority, under the Arbitration Rules or otherwise, to
relieve the parties from their obligation hereunder to arbitrate, or
otherwise to amend or disregard any provision of this Agreement.
Judgment upon any award rendered in an Arbitration may be entered in
any court of competent jurisdiction.
17. ATTORNEYS' FEES.
In the event that any Arbitration, suit, action or proceeding
(including any appeal therefrom, but excluding any and all proceedings before
the Administrative Committee) is brought by the Executive to review any decision
of the Administrative Committee pertaining to this Agreement or to enforce any
right hereunder, and the Executive is the prevailing party in such Arbitration,
suit, action or proceeding, the Executive shall be entitled to recover from the
Corporation his or her attorneys' fees and other reasonable costs incurred in
connection therewith. During the pendency of any such Arbitration, suit, action
or proceeding, the Corporation shall promptly pay all of the Executive's
attorneys' fees and reasonable costs incurred by the Executive with respect to
such Arbitration, suit, action or proceeding, subject to the Executive's
obligation hereunder to repay all such sums if the Corporation is the prevailing
party in such Arbitration, suit, action or proceeding.
18. PARTIAL INVALIDITY.
Invalidity of any part or provision of this Agreement shall not
affect the enforceability of any other part or provision of this Agreement.
9
<PAGE>
19. NO RIGHT TO CONTINUED EMPLOYMENT.
Nothing herein shall confer, nor shall it be construed to confer, on
the Executive any right to, guarantee of, or contract for a continued employment
by the Corporation, or in any way limit the right of the Corporation to
terminate the employment of the Executive.
20. GOVERNING LAW.
This Agreement shall be governed by and construed in accordance with
the laws of the State of California, as applied to contracts executed and
performed entirely in California.
21. NOTICES.
Any notices given hereunder must be in writing and may be delivered
in person or by certified or registered mail, return receipt requested, postage
prepaid. Notices to Corporation should be delivered to Valley Media, Inc., 1280
Santa Anita Court, Woodland, CA 95776, Attn: President, or to such other
address as Corporation from time to time furnishes to the Executive in a notice.
Notices to Executive should be delivered to the address shown beneath
Executive's signature below, or to such other address as the Executive from time
to time furnishes to the Corporation in a notice.
22. ENTIRE AGREEMENT.
This Agreement sets forth the entire agreement between the parties
hereto. This Agreement fully supersedes any and all prior agreements or
understandings pertaining to similar benefits.
23. AMENDMENTS.
This Agreement may not be modified except by a writing signed by
both parties.
IN WITNESS WHEREOF, this Agreement has been executed by the parties
hereto on the day and year first above written.
10
<PAGE>
EXECUTIVE VALLEY MEDIA, INC.
(signature) By:
-----------------------------------
Robert R. Cain
President and Chief Executive
Street Address Officer
(One of Two Required and
City, State and Zip Code Authorized Signatures)
And By:
-------------------------------
J. Randoplh Cerf
Secretary
11
<PAGE>
VALLEY MEDIA INC.
MANAGEMENT INCENTIVE PLAN
PLAN SUMMARY
PURPOSE
Valley Media Inc. (the "Company") strives to provide a total compensation
program that compares favorably to the compensation provided by our principal
competitors, and enables us to attract and retain the high quality employees
needed to be successful over the long term. A key component of this
compensation program is the Management Incentive Program or "MIP" (the
"Plan"). The MIP is an annual cash incentive award program for eligible
management staff as determined by outstanding individual contributions and
company performance.
DEFINITIONS
- - BASE SALARY: Base compensation as determined on the last day of the
Plan Year, excluding without limitation, incentives,
bonuses, overtime, expense reimbursement, and employee
and fringe benefits.
- - ELIGIBLE POSITION: Manager, Director, Vice President as determined by
the Sr. Vice President.
- - EXECUTIVE STAFF: Senior management group made up of CEO and Vice
Presidents.
- - FISCAL YEAR: The 12 month period commencing on April 1, 1998 and
continuing through March 31, 1999.
- - PARTICIPANT: A member of management who is eligible for an
Incentive Award under the Plan.
- - PLAN YEAR: Same is Fiscal Year.
- - NET INCOME: Operating profit less interest, taxes and bonuses.
May be adjusted at the Executive Committee's discretion
for certain unplanned events.
- - INCENTIVE AWARD: The cash compensation paid to a Participant under the
Plan.
- - INCENTIVE OPPORTUNITY: The amount of an Incentive Award a Participant is
eligible for. Expressed as a percent of Base Salary.
- - THRESHOLD: The minimum amount of Net Income that must be
achieved before any Incentive Award will be paid.
ELIGIBILITY
- - Members of the management team at Valley Media Inc. who are in a position
of manager level or above as determined the Sr. Vice President of the
respective function.
- - Is not a participant in a sales incentive/commission plan or any other
separate incentive program that is substantially similar to this Plan
<PAGE>
Page 2
MIP Plan summary
- - Is hired or promoted into an Eligible Position on or before October 1, 1998.
If an individual is hired or promoted into an Eligible Position after
October 1, 1998, they will be eligible to participate in the MIP during the
next fiscal year.
- - Participants must be actively employed at the time incentive awards are
disbursed in order to receive an award payout.
INCENTIVE AWARD OPPORTUNITY AND PERFORMANCE WEIGHTING
- - A Participant's Incentive Opportunity is expressed and calculated as a
percentage of a Participant's Base Salary.
- - The Incentive Award for a Participant who has not been in an Eligible
Position (either through being hired or promoted) for the entire Fiscal Year
shall be determined by pro-rating their Base Salary on the basis of the
portion of Plan Year spent in the eligible position.
- - The incentive award payout is based on both corporate and individual
performance. Each component is weighted 50%
PERFORMANCE MEASURES
CORPORATE
The corporate portion of the incentive award is directly linked to Valley's
Net Income. For the 1999 Plan Year, the Net Income target is $4.2 million.
The following table shows the incentive award payout opportunity based on
actual Net Income results for the fiscal year.
<TABLE>
<CAPTION>
-----------------------------------------------------------------
AWARD PAYOUT
NET INCOME PERCENTAGE OF TARGET INCENTIVE
PAYABLE
-----------------------------------------------------------------
<S> <C>
less than $3.8M 0%
GREATER THAN= $3.8M 50%
$4.2M 100%
$5M 150%
-----------------------------------------------------------------
</TABLE>
- - The Company's Net Income must reach a threshold of $3.8 million for the
coporate portion of the award to payout. At the threshold, the corporate
portion is paid at 50% of the corporate target payout.
- - Between $3.8 million and $4.2 million, the level of award payout is
prorated between 50% and 100% of the corporate target payout.
- - At $4.2 million, the award payout is 100% of the corporate portion.
- - If actual Net Income exceeds $4.2 million, the level of award payout
continues to increase.
<PAGE>
Page 3
MIP Plan summary
INDIVIDUAL
The individual portion for the MIP is based upon individual performance
against pre-established goals. The actual payout may range from 0% to 100% of
the individual portion.
The Company must reach its Net Income threshold of $3.8 million before any
individual awards will be paid.
Participants establish goals in support of the Company's annual objectives.
Individual goals are approved by each function's Senior Vice President and a
copy submitted to Human Resources. At year-end, the Participant's manager and
Senior Vice President recommend the individual's award percentage based upon
goal achievement. The Executive Staff reviews and approves actual award
payouts. The Table below indicates the Incentive Opportunity by
organizational level expressed as a percent of base salary.
<TABLE>
<CAPTION>
-------------------------------------------------------------------
INCENTIVE OPPORTUNITY PERFORMANCE
POSITION % OF BASE SALARY WEIGHTING
-------------------------------------------------------------------
<S> <C> <C>
Director 15% 50% Corporate
50% Individual
-------------------------------------------------------------------
Manager 10% 50% Corporate
50% Individual
-------------------------------------------------------------------
</TABLE>
APPROVAL AND PAYMENT OF AWARDS
- - As soon as practicable following the end of the Plan Year, the Executive
Committee, after taking into account evaluations and recommendations of the
CEO, shall evaluate the degree to which the performance objectives have been
achieved for purposes of determining the amounts of any Incentive Awards
payable under the Plan.
- - Incentive Awards shall be payable to Participants no later than 30 days
following acceptance of the Company's year-end external audit report.
- - Incentive Awards shall be paid in cash and are subject to payroll
deductions for tax and other withholdings.
- --------------------------------------------------------------------------------
THE MIP MAY BE AMENDED OR TERMINATED FOR ANY REASON AT ANY TIME BY THE
EXECUTIVE COMMITTEE. THE PLAN IS SPECIFICALLY DESIGNED TO GUIDE THE COMPANY
IN GRANTING INCENTIVE AWARDS AND DOES NOT CREATE ANY CONTRACTUAL RIGHT OF ANY
EMPLOYEE TO ANY INCENTIVE AWARD OR CONTINUED EMPLOYMENT.
- --------------------------------------------------------------------------------
<PAGE>
EXHIBIT 23.2
INDEPENDENT AUDITORS' CONSENT AND REPORT ON SCHEDULE
We consent to the use in this Registration Statement of Valley Media, Inc. on
Form S-1 of our report dated July 22, 1998 on the consolidated financial
statements of Valley Media, Inc., appearing in the Prospectus, which is part of
this Registration Statement, and to the references to us under the headings
"Selected Consolidated Financial Data" and "Experts" in such Prospectus.
Our audits of the consolidated financial statements of Valley Media, Inc.
referred to in our aforementioned report also included the consolidated
financial statement schedule of Valley Media, Inc., listed in Item 16(b). This
consolidated 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 financial statement schedule, when considered in relation to
the basic financial statements taken as a whole, presents fairly in all material
respects the information set forth therein.
/s/ Deloitte & Touche LLP
San Francisco, California
December 18, 1998
<PAGE>
EXHIBIT 23.3
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Registration Statement of Valley Media, Inc. on
Form S-1 of our report dated July 22, 1998 on the consolidated financial
statements of the net assets acquired from Star Video Entertainment, L.P.,
appearing in the Prospectus, which is part of this Registration Statement.
/s/ Deloitte & Touche LLP
San Francisco, California
December 18, 1998
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C> <C> <C>
<PERIOD-TYPE> 12-MOS 12-MOS 6-MOS
<FISCAL-YEAR-END> MAR-29-1997 MAR-28-1998 APR-03-1999
<PERIOD-END> MAR-29-1997 MAR-28-1998 SEP-26-1998
<CASH> 310 394 796
<SECURITIES> 0 0 0
<RECEIVABLES> 36,900 113,705 153,589
<ALLOWANCES> (825) (5,276) (6,850)
<INVENTORY> 44,351 95,365 159,564
<CURRENT-ASSETS> 82,746 208,717 311,718
<PP&E> 13,618 22,733 29,555
<DEPRECIATION> (4,533) (7,052) (8,698)
<TOTAL-ASSETS> 94,591 245,062 352,766
<CURRENT-LIABILITIES> 82,946 226,329 333,619
<BONDS> 2,257 3,166 4,845
0 0 0
0 0 0
<COMMON> 1 1 1
<OTHER-SE> 7,772 10,976 9,643
<TOTAL-LIABILITY-AND-EQUITY> 94,591 245,062 352,766
<SALES> 199,231 583,492 343,351
<TOTAL-REVENUES> 199,231 583,492 343,351
<CGS> 175,706 516,627 305,405
<TOTAL-COSTS> 175,706 516,627 305,405
<OTHER-EXPENSES> 19,902 51,511 31,627
<LOSS-PROVISION> 650 3,672 2,583
<INTEREST-EXPENSE> 1,745 6,627 5,967
<INCOME-PRETAX> 1,021 5,055 (2,231)
<INCOME-TAX> 410 2,034 (898)
<INCOME-CONTINUING> 611 3,021 (1,333)
<DISCONTINUED> 0 0 0
<EXTRAORDINARY> 0 0 0
<CHANGES> 0 0 0
<NET-INCOME> 611 3,021 (1,333)
<EPS-PRIMARY> 1.02 5.07 (2.22)
<EPS-DILUTED> 0.95 4.60 (1.92)
</TABLE>
