<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended February 28, 1997
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______ to _______
Commission File Number 0-27852
PLATINUM ENTERTAINMENT, INC.
(Exact name of registrant as specified in its charter)
Delaware 36-3802328
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2001 Butterfield Road
Downers Grove, Illinois 60515
(Address of principal executive offices, including zip code)
(630) 769-0033
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
----- -----
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date:
5,171,439 Shares of Common Stock, par value $.001 per share, at April 11, 1997
<PAGE>
PLATINUM ENTERTAINMENT, INC.
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED FEBRUARY 28, 1997
TABLE OF CONTENTS
Page
----
Part I - FINANCIAL INFORMATION
Item 1. Consolidated Balance Sheets as of February 28, 1997 (Unaudited)
and May 31, 1996 . . . . . . . . . . . . . . . . . . . . . . . 3-4
Consolidated Statements of Operations for the three and nine
months ended February 28, 1997 and February 29, 1996
(Unaudited) . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Consolidated Statements of Cash Flows for the nine months
ended February 28, 1997 and February 29, 1996 (Unaudited) . . . 6
Notes to Unaudited Consolidated Financial Statements. . . . . . 7-9
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations . . . . . . . . . . . . . . . . . . . 10-18
Part II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K. . . . . . . . . . . . . . . . 19-20
Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Exhibits
<PAGE>
Part I - FINANCIAL INFORMATION
Item 1. Financial Statements.
PLATINUM ENTERTAINMENT, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
FEBRUARY 28, MAY 31,
1997 1996
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents. . . . . . . . . . $ 139,462 $ 8,222,173
Accounts receivable, less allowances of
$3,528,155 and $1,033,433, respectively . . 14,819,276 3,302,803
Artist advances. . . . . . . . . . . . . . . 2,863,565 1,581,390
Inventories, less allowances of $350,228
and $100,000, respectively. . . . . . . . . 5,003,922 1,538,108
Notes receivable . . . . . . . . . . . . . . 141,603 1,467,007
Other. . . . . . . . . . . . . . . . . . . . 419,499 472,457
------------- -------------
Total current assets . . . . . . . . . . . . 23,387,327 16,583,938
Artist advances, net of current amounts, less
allowances of $8,312,230 and
$4,942,021, respectively. . . . . . . . . . . 3,924,954 2,093,224
Arts and masters, less accumulated amortization
of $2,623,490 and $ -, respectively . . . . . 1,148,472 -
Property and equipment, net. . . . . . . . . . . 1,248,506 698,251
Music publishing rights and artist masters,
less accumulated amortization of
$168,912 and $90,443, respectively . . . . . . 3,772,726 349,557
Equity investment in joint venture . . . . . . . 3,061,815 -
Due from joint venture . . . . . . . . . . . . . 756,160 -
Excess cost over net assets acquired, less
accumulated amortization of $148,184
and $ -, respectively . . . . . . . . . . . . 23,702,067 -
Deferred financing costs, less accumulated
amortization of $452,062 and $ -, respectively 910,519 -
Other. . . . . . . . . . . . . . . . . . . . . . 177,999 18,568
------------- -------------
Total assets . . . . . . . . . . . . . . . . . . $ 62,090,545 $ 19,743,538
------------- -------------
------------- -------------
</TABLE>
See accompanying notes to financial statements
3
<PAGE>
PLATINUM ENTERTAINMENT, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
February 28, May 31,
1997 1996
(Unaudited)
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Revolving line of credit . . . . . . . . . . . . . . . . . . . . $ 3,855,727 $ -
Term loan, less loan discount of $826,396 and $ -,
respectively . . . . . . . . . . . . . . . . . . . . . . . . . . 24,173,604 -
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . 3,723,540 997,378
Accrued liabilities and other . . . . . . . . . . . . . . . . . 1,710,361 2,104,015
Reserve for future returns . . . . . . . . . . . . . . . . . . . 2,194,273 -
Royalties payable. . . . . . . . . . . . . . . . . . . . . . . . 6,647,308 1,427,588
------------- -------------
Total current liabilities. . . . . . . . . . . . . . . . . . . . 42,304,812 4,528,981
Convertible debentures . . . . . . . . . . . . . . . . . . . . . . . 5,000,000 -
------------- -------------
Total liabilities. . . . . . . . . . . . . . . . . . . . . . . . . . 47,304,812 4,528,981
Stockholders' equity:
Preferred stock:
Preferred stock ($.001 par value); 10,000,000 shares authorized,
no shares issued and outstanding at February 28, 1997
and at May 31, 1996. . . . . . . . . . . . . . . . . . . . . . . - -
Common stock:
Common stock ($.001 par value); 40,000,000 shares authorized,
5,171,439 shares issued and outstanding at February 28,
1997 and 5,063,207 shares issued and outstanding at
May 31, 1996 . . . . . . . . . . . . . . . . . . . . . . . . . . 5,151 5,063
Additional paid-in capital. . . . . . . . . . . . . . . . . . . . . 37,390,027 35,253,724
Accumulated deficit . . . . . . . . . . . . . . . . . . . . . . . . (22,609,445) (20,044,230)
------------- -------------
Stockholders' equity. . . . . . . . . . . . . . . . . . . . . . . . 14,785,733 15,214,557
------------- -------------
Total liabilities and stockholders' equity . . . . . . . . . . . . . $ 62,090,545 $ 19,743,538
------------- -------------
------------- -------------
</TABLE>
See accompnaying notes to financial statements
4
<PAGE>
PLATINUM ENTERTAINMENT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE THREE NINE NINE
MONTHS ENDED MONTHS ENDED MONTHS ENDED MONTHS ENDED
FEBRUARY 28, FEBRUARY 29, FEBRUARY 28, FEBRUARY 29,
1997 1996 1997 1996
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Gross product sales. . . . . . . . . . . . . $ 10,812,681 $ 3,903,964 $ 22,421,886 $ 14,274,175
Less: Returns and allowances . . . . . . . . (1,808,385) (1,211,345) (4,079,759) (2,878,765)
Less: Discounts. . . . . . . . . . . . . . . (963,661) (114,653) (1,727,035) (547,806)
------------ ------------ ------------ ------------
Net product sales . . . . . . . . . . . . . 8,040,635 2,577,966 16,615,092 10,847,604
Cost of product sales . . . . . . . . . . . 3,851,890 1,581,016 9,271,566 5,619,480
------------ ------------ ------------ ------------
4,188,745 996,950 7,343,526 5,228,124
Gross artist project revenues . . . . . . . 566,885 1,319,140 2,677,995 3,858,312
Less: (Allowance for) recovery of
unrecoupable artist advances . . . . . . . (143,459) (83,365) (465,418) 99,290
------------ ------------ ------------ ------------
Net artist project revenues . . . . . . . . 423,426 1,235,775 2,212,577 3,957,602
Licensing, publishing and other revenues . . 334,471 637,513 753,878 1,415,606
------------ ------------ ------------ ------------
Net artist project and other revenues . . . 757,897 1,873,288 2,966,455 5,373,208
Cost of artist project and
other revenues . . . . . . . . . . . . . . 461,865 826,400 2,585,041 3,788,374
------------ ------------ ------------ ------------
296,032 1,046,888 381,414 1,584,834
------------ ------------ ------------ ------------
Gross profit . . . . . . . . . . . . . . . . 4,484,777 2,043,838 7,724,940 6,812,958
Other operating expenses:
Selling, general and
administrative expenses . . . . . . . . . 3,416,680 2,020,008 8,160,066 6,007,267
Merger and restructuing costs. . . . . . . . 608,472 - 611,472 -
Depreciation and amortization. . . . . . . . 315,291 30,501 481,382 91,831
------------ ------------ ------------ ------------
4,340,443 2,050,509 9,252,920 6,099,098
------------ ------------ ------------ ------------
Operating income (loss) . . . . . . . . . . 144,334 (6,671) (1,527,980) 713,860
Interest income . . . . . . . . . . . . . . 12,532 - 138,817 402
Interest expense . . . . . . . . . . . . . . (302,918) (227,573) (308,024) (530,242)
Financing costs . . . . . . . . . . . . . . (865,187) - (865,187) -
Equity loss . . . . . . . . . . . . . . . . (1,368) - (1,368) -
------------ ------------ ------------ ------------
Income (loss) from
operations before income
taxes . . . . . . . . . . . . . . . . . . (1,012,607) (234,244) (2,563,742) 184,020
Provision for income taxes . . . . . . . . . - - - -
------------ ------------ ------------ ------------
Net income (loss) . . . . . . . . . . . . . $ (1,012,607) $ (234,244) $ (2,563,742) 184,020
------------ ------------ ------------
------------ ------------ ------------
Less - Cumulative preferred
dividends . . . . . . . . . . . . . . . . (301,250)
------------
------------
Loss applicable to common
shares . . . . . . . . . . . . . . . . . . $ (117,230)
------------
------------
Net loss per common share . . . . . . . . . $ (0.20) $ (0.10) $ (0.50) $ (0.05)
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
Weighted average number of common
shares outstanding . . . . . . . . . . . . 5,171,439 2,334,949 5,125,124 2,334,949
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
</TABLE>
See acompanying notes to financial statements
5
<PAGE>
PLATINUM ENTERTAINMENT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
NINE NINE
MONTHS ENDED MONTHS ENDED
FEBRUARY 28, FEBRUARY 29,
1997 1996
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
OPERATING ACTIVITIES
Net income (loss). . . . . . . . . . . . . . . . $ (2,563,742) $ 184,020
Adjustments to reconcile net income (loss) to net
cash used in continuing operating activities:
Provision for (recovery of) doubtful
accounts. . . . . . . . . . . . . . . . . . (204,955) -
Charge for (recovery of) future returns. . . (394,801) (193,000)
Charge for (recovery of) co-op advertising . (153,330) -
Charge for (recovery of) unrecoupable
artist balances . . . . . . . . . . . . . . 380,788 (99,290)
Depreciation and amortization. . . . . . . . 481,760 91,831
Amortization of loan discount. . . . . . . . 403,993 -
Changes in operating assets and liabilities:
Accounts receivable. . . . . . . . . . . . . . (2,695,445) (2,196,675)
Inventories. . . . . . . . . . . . . . . . . . (1,034,895) (466,359)
Notes receivable . . . . . . . . . . . . . . . 1,056,457 42,324
Artist advances. . . . . . . . . . . . . . . . (2,437,397) (3,225,810)
Arts and masters . . . . . . . . . . . . . . . (124,585) -
Accounts payable . . . . . . . . . . . . . . . (745,738) (25,109)
Accrued liabilities and other. . . . . . . . . (1,215,245) 454,569
Royalties payable. . . . . . . . . . . . . . . 3,532,275 1,312,253
Other. . . . . . . . . . . . . . . . . . . . . (43,600) (397,157)
------------ ------------
Net cash used in continuing operating
activities . . . . . . . . . . . . . . . . . . (5,758,462) (4,518,403)
Discontinued operations:
Change in net liabilities. . . . . . . . . . . - (1,184,628)
------------ ------------
Net cash used in
discontinued operating activities. . . . . . . - (1,184,628)
------------ ------------
Net cash used in operating activities. . . . (5,758,462) (5,703,031)
INVESTING ACTIVITIES
Investment in joint venture. . . . . . . . . . . (3,817,975) -
Purchases of property and equipment. . . . . . . (238,948) (49,840)
Prepaid acquisition costs. . . . . . . . . . . . (46,833) -
Acquisitions of businesses, net of cash acquired (31,165,700) -
------------ ------------
Net cash used in investing activities. . . . . . (35,269,456) (49,840)
FINANCING ACTIVITIES
Net proceeds from related parties. . . . . . . . - 4,209,974
Net proceed from revolving
line of credit . . . . . . . . . . . . . . . . 3,855,727 1,980,000
Proceeds from bank term loan . . . . . . . . . . 25,000,000 -
Proceeds from convertible debt . . . . . . . . . 5,000,000 -
Payment of bank term loan. . . . . . . . . . . . - (500,000)
Deferred financing cost, net . . . . . . . . . . (910,520) -
------------ ------------
Net cash provided by financing activities. . . . 32,945,207 5,689,974
------------ ------------
Net decrease in cash . . . . . . . . . . . . . . (8,082,713) (62,897)
Cash, beginning of period. . . . . . . . . . . . 8,222,173 87,368
------------ ------------
Cash, end of period. . . . . . . . . . . . . . . $ 139,460 $ 24,471
------------ ------------
------------ ------------
</TABLE>
See accompanying notes to financial statements
6
<PAGE>
PLATINUM ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATMENTS
1. BASIS OF PRESENTATION
The financial statements included herein are unaudited and have been
prepared in accordance with generally accepted accounting principles for interim
financial reporting and Securities and Exchange Commission regulations. In the
opinion of management, the financial statements reflect all adjustments (of a
normal and recurring nature) which are necessary to present fairly the financial
position, results of operations and cash flows for the interim periods
presented. These financial statements should be read in conjunction with the
audited consolidated financial statements and notes thereto for the fiscal year
ended May 31, 1996 of Platinum Entertainment, Inc. ("Company") included in the
Annual Report on Form 10-K. The interim results presented are not necessarily
indicative of the results that may be expected for the year ending May 31, 1997.
2. NET LOSS PER COMMON SHARE
Net loss per common share is computed based upon the weighted average
number of common shares outstanding. Common and common equivalent shares issued
during the 12-month period prior to the March 12, 1996 public offering have been
included in the calculation for the three and nine months ended February 29,
1996 as if they were outstanding for those periods using the treasury stock
method and the public offering price of $13 per share. In addition, all
convertible preferred stock and convertible Class A common stock and Class B
common stock are treated as if converted into common shares at the date of
issuance.
3. ACQUISITIONS
On June 20, 1996, the Company acquired substantially all of the assets of
R.E.X. Music, Inc. ("REX") for $480,000 (which approximated the indebtedness of
REX to the Company, which primarily arose prior to May 31, 1996) and $100,000 in
accrued liabilities. REX produces, licenses and markets recorded music,
primarily in the Gospel format. The acquisition has been accounted for by the
purchase method of accounting and the purchase price of $580,000 approximates
the fair value of the assets acquired. The assets acquired include accounts
receivable, artist advances, inventory, copyrights and artist contracts. The
value allocated to music publishing rights and artist masters totaled $440,000
and is being amortized over 15 years using the straight-line method.
On September 19, 1996, the Company acquired substantially all of the assets
of Double J Music Group ("Double J") for 88,000 shares of common stock of the
Company and the assumption of approximately $100,000 of debt and $75,000 of
accrued liabilities. Double J develops and acquires ownership of musical
compositions and exploits those compositions by means of recordings,
performances, audio-visual works, print publications and other licenses. The
acquisition has been accounted for by the purchase method of accounting and the
purchase price of $1,081,000 approximates the fair value of the assets
acquired. The purchase value was primarily allocated to music publishing rights
and is being amortized over 15 years using the straight-line method.
Effective January 1, 1997, the Company purchased substantially all of the
assets of Intersound, Inc. ("Intersound" or the "Intersound Acquisition") for
consideration of $24,000,000 in cash, $5,000,000 in convertible promissory
notes and the assumption of certain liabilities. See Notes 5 and 6 below for
details of the financing. Intersound produces, licenses, markets and
distributes recorded music for the Gospel, Adult Contemporary, Country,
Urban, Dance, Classical and Themed Productions formats. The Intersound
Acquisition has been accounted for by the purchase method of accounting and
the purchase price of $36,000,000
7
<PAGE>
approximates the fair value of the assets acquired. The purchase value was
allocated to the acquired assets based upon their estimated respective fair
market values; the amounts allocated to music publishing rights and excess cost
over net assets acquired (goodwill) are being amortized over 25 years using the
straight-line method.
4. JOINT VENTURE
The Company and House of Blues Records, Inc. ("HOB") formed the House of
Blues Music Company, a joint venture between HOB and the Company (the
"Venture"), effective November 1, 1996 upon the purchase by the Company of a
fifty percent (50%) interest from Private, Inc., a subsidiary of Bertelsman
Music Group, Inc. ("Seller"), in the joint venture between Seller and HOB
formed pursuant to a prior agreement. The payment for such 50% interest was
made on November 12, 1996 in the cash amount of $3,063,000, which is deemed a
cash capital contribution by the Company to the Venture. HOB contributed to
the Venture a license in HOB's trademarks, logo and other intellectual
property in consideration for its 50% interest in the Venture. HOB is a
subsidiary of House of Blues Entertainment, Inc. The Chairman and Chief
Executive Officer of House of Blues Entertainment, Inc. is also a director of
the Company.
The Venture develops and produces recordings and related film and video
properties featuring Blues, Gospel and other music. The Venture, exclusively
through the Company, manufactures, distributes, performs, exhibits and sells
sound recordings and related audiovisual works under the "House of Blues" label.
The Company distributes the Venture's products through its normal distribution
channels for a fee to the Venture.
The Company has agreed to fund the operations of the Venture. Such funding
is deemed a cash contribution by the Company to the Venture. All income and
gain of the Venture is allocated fifty percent (50%) to HOB and fifty percent
(50%) to the Company. Any loss of the Venture is allocated among the parties
pro rata based upon the sum of their relative cash capital contributions and
their outstanding loans to the Venture; thereafter, income or gains of the
Venture will be allocated to the parties pro rata based upon their relative
share of the losses previously allocated until each party has been allocated
income and gain equal to the losses previously allocated to them. All capital
distributions will be allocated 100% to the Company until it recovers its
original investment plus all other amounts expended to fund the operations of
the Venture, except for certain tax distributions. After the Company recovers
one hundred percent (100%) of its original investment plus all other amounts
expended to fund the operations of the Venture, distributions will be allocated
fifty percent (50%) to HOB and fifty percent (50%) to the Company.
The Company records the activity of the Venture under the equity method of
accounting for investments in joint ventures.
5. DEBT
Convertible debentures were issued to certain selling shareholders of
Intersound on January 31, 1997, mature on January 31, 2004 and bear interest
at the seven-year Treasury rate plus one percent per annum (7.48% at February
28, 1997) and are convertible, in whole or in part, at any time prior to
maturity into the Company's Common Stock at a conversion price of $9.80 per
share, subject to adjustment as provided in the notes.
On January 31, 1997, the Company entered into a Credit Agreement with
Bank of Montreal ("BOM"), individually and as agent, to provide a 90-day term
loan in the amount of $25,000,000 and a 90-day revolving credit facility in
the amount of $10,000,000 (of which $6,144,000 is available at February 28,
1997) (the "Credit Agreement"). Borrowings under the Credit Agreement bear
interest at LIBOR plus 6% per annum (11.4375% at February 28, 1997) and are
secured by substantially all of the assets of the Company. The Credit
8
<PAGE>
Agreement contains financial and other covenants applicable to the Company.
The Credit Agreement is personally guaranteed for $12,500,000 by an officer
and director of the Company. See Note 6 below for financing fees related to
the Credit Agreement.
6. WARRANT
The Company issued to BOM a warrant to purchase 258,571.95 shares of Common
Stock at an exercise price of $.01 per share in connection with the Credit
Agreement. The value of the warrants amounted to $1,239,594, the balance of
which is included in additional paid-in capital at February 28, 1997. The
warrant expires on January 31, 2002 and is subject to antidilution adjustment
if, during the term of the Credit Agreement, the Company issues shares of Common
Stock and does not use the proceeds of such issuance to pay borrowings under the
Credit Agreement.
7. RECLASSIFICATIONS
Certain amounts in the three and nine months ended February 29, 1996
consolidated statements of operations have been reclassified to conform with the
three and nine months ended February 28, 1997 presentation.
8. SUBSEQUENT EVENT
On March 3, 1997, the Company and K-tel International, Inc. ("K-tel")
signed a purchase and sale agreement (the "Agreement") pursuant to which the
Company will acquire K-tel's worldwide music business assets, except for
K-tel's European music business, through the purchase of the stock of K-tel
International (USA), Inc. ("K-tel (USA)") and Dominion Entertainment, Inc.
("Dominion"), both wholly-owned subsidiaries of K-tel. The purchase price is
$35 million subject to certain adjustments. Subject to satisfaction of the
closing conditions specified in the Agreement, including the Company's
obtaining financing for the acquisition and the approval K-tel's
shareholders, the transaction is expected to close within 120 to 180 days
after the signing of the Agreement.
Pursuant to the Agreement, the Company deposited $1,750,000 in escrow which
will be applied to the purchase price or paid to K-tel in the event the
transaction is not consummated under certain circumstances, including the
failure of the Company to obtain financing for the transaction.
9
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
The information in this section should be read together with the
consolidated financial statements and notes thereto that are included elsewhere
in the filing.
OVERVIEW
The Company significantly increased its operations during the three
months ended February 28, 1997 through the activities of Intersound, which is
included in the Company's results of operations, since January 1, 1997.
Intersound is one of the largest independent record companies in the United
States. Intersound's music divisions focus on most major music formats,
including Gospel, Adult Contemporary, Country, Urban, Dance, Classical and
Themed Productions, all of which are released under the "Intersound" label.
Products are distributed through Intersound's own proprietary distribution
system, enabling Intersound to maintain control over the marketing and
promotion of its products, selling and fulfilling its orders on a direct
basis. Intersound's more notable artists under contract include Kansas, the
Bellamy Brothers, Crystal Gayle, The Ohio Players, Gap Band, William Becton
and The Mighty Clouds of Joy. See "Significant Matters" below for more
details.
In addition to the Intersound Acquisition, operations for the three months
ended February 28, 1997 include the release of LET'S GO TO CHURCH, a live Gospel
album by National Baptist Convention USA, Inc., which has 8.5 million members.
Gross revenues generated during the three and nine months ended February 28,
1997 from this release totaled $3,830,000 and $3,913,000, respectively; the
majority of this activity was product sales direct to member churches which
resulted in higher gross margins due to the lack of a third-party distribution
fee.
The Company also signed a definitive agreement with K-tel on March 3, 1997
by which the Company will acquire K-tel's worldwide music business assets,
except for K-tel's European music business. K-tel is one of the largest
independent record companies in the United States and is also one of the world's
leading compilation packagers and marketers of pre-recorded music. K-tel's
catalog of over 3,500 owned or controlled recordings includes performances by
classic artists such as Chubby Checker, Bobby Sherman, Leslie Gore, Percy
Sledge, Lee Greenwood and hundreds of others. See "Significant Matters" below
for details of the agreement.
The Company records revenues for music products, other than telemarketing
C.O.D. sales, when such products are shipped to retailers. In accordance with
industry practice, the Company's music products are sold on a returnable basis.
The Company's allowance for future returns is based upon its historical results
of operations, SOUNDSCAN data and the historical returns experience of the
Company's primary distributor, PolyGram Group Distribution, Inc.
The Company recognizes revenues from the shipment of telemarketing C.O.D.
sales when cash is received from the customer. C.O.D. product shipments began
during the first quarter of fiscal 1995 and were discontinued in mid-February
1996, when the Company determined that C.O.D. orders would no longer be
accepted.
A significant recurring funding requirement of the Company is for
repertoire expenses, which include recording costs and advances to artists. The
Company makes substantial payments each period for recording costs and advances
in order to maintain and enhance its artist roster. These costs are recouped
from the artists' royalties, to the extent possible, from future album sales.
Artist advances are capitalized as an asset when the current popularity and past
performance of the artist provides a sound basis for estimating the probable
future recoupment of such advances from earnings otherwise payable to the
artist.
The Company has an international licensing agreement with MCA Records, Ltd.
("MCA"). Revenues derived from the licensing are calculated as a percentage of
retail sales by the licensee net of returns and are recognized by the Company
upon notification of retail sales net of returns by the licensee.
10
<PAGE>
Results of operations for the three and nine months ended February 29, 1996
include international licensing revenues; however, no international licensing
revenues have been recorded for the first nine months of fiscal 1997 as the
Company has not been notified for such period by MCA regarding international
sales generated during this period. Manufacturing and related costs (other than
artist royalties, which are paid by the Company) are borne by the licensee.
Artist royalties paid by the Company in connection with international sales are
recorded as costs of artist project and other revenues and are calculated as a
percentage of net licensed proceeds.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, certain items derived
from the Company's consolidated statements of operations as a percentage of
gross revenues:
<TABLE>
<CAPTION>
THREE THREE NINE NINE
MONTHS ENDED MONTHS ENDED MONTHS ENDED MONTHS ENDED
FEBRUARY 28, FEBRUARY 29, FEBRUARY 28, FEBRUARY 29,
1997 1996 1997 1996
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Total gross revenues. . . . . . . $ 11,714,000 100.0% $ 5,861,000 100.0% $ 25,854,000 100.0% $ 19,548,000 100.0%
Less: Returns and allowances. . . (1,808,000) 15.4% (1,211,000) 20.7% (4,080,000) 15.8% (2,878,000) 14.7%
Less: Discounts . . . . . . . . . (964,000) 8.2% (115,000) 2.0% (1,727,000) 6.7% (548,000) 2.8%
Less: (Allowance for)
recovery of unrecoupable
artist advances . . . . . . . . (143,000) 1.2% (83,000) 1.4% (465,000) 1.8% 99,000 -0.5%
------------ ------------ ------------ ------------
Total net revenues. . . . . . . . 8,799,000 75.2% 4,452,000 75.9% 19,582,000 75.7% 16,221,000 83.0%
Cost of product sales . . . . . . 3,852,000 32.9% 1,581,000 27.0% 9,272,000 35.9% 5,620,000 28.7%
Cost of artist project and
other revenues. . . . . . . . . 462,000 3.9% 826,000 14.1% 2,585,000 10.0% 3,788,000 19.4%
------------ ------------ ------------ ------------
Total cost of sales and
services. . . . . . . . . . . . 4,314,000 36.8% 2,407,000 41.1% 11,857,000 45.9% 9,408,000 48.1%
------------ ------------ ------------ ------------
Gross profit. . . . . . . . . . . 4,485,000 38.4% 2,045,000 34.8% 7,725,000 29.8% 6,813,000 34.9%
Other operating expenses:
Selling, general and
administrative expenses . . . . 3,417,000 29.2% 2,020,000 34.5% 8,160,000 31.6% 6,007,000 30.7%
Merger and restructuring costs. . 609,000 5.2% -- -- 612,000 2.4% -- --
Depreciation and amortization . . 315,000 2.7% 31,000 0.5% 481,000 1.9% 92,000 0.5%
------------ ------------ ------------ ------------
4,341,000 37.1% 2,051,000 35.0% 9,253,000 35.9% 6,099,000 31.2%
------------ ------------ ------------ ------------
Operating income (loss) . . . . . 144,000 1.3% (6,000) -0.2% (1,528,000) -6.1% 714,000 3.7%
Interest income . . . . . . . . . 12,000 0.1% -- -- 138,000 0.5% -- --
Interest expense. . . . . . . . . (303,000) -2.6% (228,000) -3.9% (308,000) -1.2% (530,000) -2.7%
Financing costs . . . . . . . . . (865,000) -7.4% -- -- (865,000) -3.3% -- --
Equity loss . . . . . . . . . . . (1,000) -- -- -- (1,000) -- -- --
------------ ------------ ------------ ------------
Net income (loss) applicable
to common shares. . . . . . . . $ (1,013,000) 8.6% $ (234,000) -4.1% $ (2,564,000) -10.1% $ 184,000 1.0%
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
</TABLE>
References made in the following discussion include: (i) Gospel format -
activity under the CGI Records, Light Records, Lexicon Music, R.E.X. Music and
Flying Tart labels, as well as Gospel activity under the House of Blues label;
(ii) Country format - activity under the River North Nashville label; (iii)
Adult Contemporary format - activity under the River North Records label; (iv)
Blues and other format - primarily non-Gospel activity under the House of Blues
label and all activity from the Intersound Acquisition is referenced
"Intersound" so that effects of the Intersound Acquisition can be understood.
GROSS REVENUES
Gross revenues increased $5,853,000 or 99.9% to $11,714,000 for the three
months ended February 28, 1997 compared to the three months ended February 29,
1996; $4,219,000 or 72.1% of this increase related to the activities of
Intersound since January 1, 1997. Gross revenues increased $6,306,000 or 32.3%
to $25,854,000 for the nine months ended February 28, 1997 compared to the nine
months ended February 29, 1996; $4,219,000 or 66.9% of this increase related to
the activities of Intersound since January 1, 1997. No international licensing
revenues have been recorded for the first nine months of fiscal
11
<PAGE>
1997 as the Company has not been notified to date by MCA regarding international
sales generated during this period. International licensing revenues for the
three and nine months ended February 29, 1996 approximated $119,000 and
$759,000, respectively; such licensing revenues may not be indicative of the
licensing revenues earned for the current or future periods.
Gross revenues generated from Gospel, Country, Adult Contemporary, Blues
and other, and Intersound activity as a percentage of total gross revenues for
the three months ended February 28, 1997 were 50.1%, 6.9%, 2.8%, 4.2% and 36.0%
compared to 61.4%, 23.1%, 10.8%, 4.7% and 0.0% for the three months ended
February 29, 1996. Gross revenues from Gospel, Country, Adult Contemporary,
Blues and other, and Intersound activity as a percentage of total gross revenues
for the nine months ended February 28, 1997 were 46.8%, 24.5%, 6.6%, 5.8% and
16.3% compared to 56.7%, 12.9%, 25.4%, 5.0% and 0.0% for the nine months ended
February 29, 1996.
The changes in the percentages are due principally to the activities of
Intersound since January 1, 1997 as noted above, and the following
significant releases: The Beach Boys' STARS AND STRIPES, VOLUME I (which
generated approximately $3,024,000 of Country revenues for the nine months
ended February 28, 1997, primarily prior to the current fiscal quarter);
Crystal Bernard's THE GIRL NEXT DOOR (which generated approximately $309,000
and $1,330,000 of Country revenues for the three and nine months ended
February 28, 1997); Alan Parsons' ON AIR (which generated approximately
$59,000 and $640,000 of Adult Contemporary revenues for the three and nine
months ended February 28, 1997) and National Baptist Convention's LET'S GO TO
CHURCH (which generated approximately $3,830,000 and $3,913,000 of Gospel
revenues for the three and nine months ended February 28, 1997). These
increases were offset in part by a decrease in telemarketing sales, which
typically generate Gospel revenues, that were discontinued due to the
increased costs of television advertising, and by the incremental revenue
recognized in the first nine months of fiscal 1996 from the release of Peter
Cetera's ONE CLEAR VOICE.
RETURNS AND ALLOWANCES
Returns and allowances increased a net of $597,000 or 49.3% to $1,808,000
for the three months ended February 28, 1997 compared to the three months
ended February 29, 1996; $992,000 of this net increase related to the
activities of Intersound since January 1, 1997, offset by a decrease of
$395,000 from the Company's remaining operations. Returns and allowances
increased $1,202,000 or 41.8% to $4,080,000 for the nine months ended
February 28, 1997 compared to the nine months ended February 29, 1996;
$992,000 or 82.5% of this increase related to the activities of Intersound
since January 1, 1997.
Returns and allowances as a percentage of gross product sales, less
discounts, decreased to 18.4% for the three months ended February 28, 1997
from 32.0% for the three months ended February 29, 1996 and decreased to
19.7% for the nine months ended February 28, 1997 from 21.0% for the
comparable period of the prior fiscal year. The decrease in the current
quarter is attributable primarily to a change in buying habits of the
Company's retail customers which have reduced initial order quantities to
better manage receivable and inventory levels.
DISCOUNTS
Discounts increased $849,000 or 738.3% to $964,000 for the three months
ended February 28, 1997 compared to the three months ended February 29, 1996;
$122,000 or 14.4% of this increase related to the activities of Intersound
since January 1, 1997 and $633,000 or 74.6% of this increase related to the
Company's arrangement with the National Baptist Convention USA, Inc. and the
sales of LET'S GO TO CHURCH directly to local churches. Discounts increased
$1,179,000 or 215.1% to $1,727,000 for the nine months ended February 28,
1997 compared to the nine months ended February 29, 1996; $122,000 or 10.3%
of this increase related to the activities of Intersound since January 1,
1997 and $633,000 or 53.7% of this increase related to LET'S GO TO CHURCH as
discussed above.
12
<PAGE>
Discounts as a percentage of gross product sales increased to 8.9% for the
three months ended February 28, 1997 from 2.9% for the three months ended
February 29, 1996 and to 7.7% for the nine months ended February 28, 1997 from
3.8% for the comparable period of the prior fiscal year. The increases relate
primarily to the increase in new releases volume, particularly in the Country
and Adult Contemporary formats, as it is industry practice to extend discounts
on new release orders, compared to reorders of previously released albums.
Also, additional discounts were extended to the member churches which purchased
the National Baptist Convention's LET'S GO TO CHURCH release directly from the
Company to avoid a third-party distribution fee.
ALLOWANCE FOR UNRECOUPABLE ARTIST ADVANCES
The allowances for unrecoupable artist advances were $143,000 and $465,000
for the three and nine months ended February 28, 1997, respectively, compared to
$83,000 and a net recovery of artist advances of $99,000 for the three and nine
months ended February 29, 1996, respectively. The changes were not
significantly affected by the activities of Intersound since January 1, 1997.
During the nine months ended February 29, 1996, the Company renegotiated certain
artist contracts to allow additional costs previously expensed by the Company in
fiscal 1995 to be included in recoupable artist advances, resulting in the net
recovery. The current period balances primarily relate to several Gospel and
Country projects released during the current periods or to be released later in
fiscal 1997.
COST OF PRODUCT SALES
Cost of product sales increased $2,271,000 or 143.6% to $3,852,000 for the
three months ended February 28, 1997 compared to the three months ended February
29, 1996; $650,000 or 28.6% of this increase related to the activities of
Intersound since January 1, 1997. Cost of product sales increased $3,652,000 or
65.0% to $9,272,000 for the nine months ended February 28, 1997 compared to the
nine months ended February 29, 1996; $650,000 or 17.8% of this increase related
to the activities of Intersound since January 1, 1997.
Cost of product sales as a percentage of gross revenues increased to 32.9%
for the three months ended February 28, 1997 from 27.0% for the three months
ended February 29, 1996, and to 35.9% for the nine months ended February 28,
1997 from 28.7% for the comparable period of the prior fiscal year. The
increase is primarily attributable to increased royalty costs associated with
albums released during the current periods, featuring established artists in
non-Gospel formats. Further, the reduction in telemarketing sales negatively
impacted this percentage due to the lower cost of product sales attributable to
telemarketing sales compared with other distribution channels.
COST OF ARTIST PROJECT AND OTHER REVENUES
Cost of artist project and other revenues decreased $364,000 or 44.1%, net
of increases, to $462,000 for the three months ended February 28, 1997 compared
to the three months ended February 29, 1996; the activities of Intersound since
January 1, 1997 contributed $200,000 to the increase in such costs. Cost of
artist project and other revenues decreased $1,203,000 or 31.8% to $2,585,000
for the nine months ended February 28, 1997 compared to the nine months ended
February 29, 1996.
The decrease relates primarily to the timing of project releases and the
related costs incurred to complete those projects. Significant cost of projects
released in fiscal 1997, such as albums by The Beach Boys, Crystal Bernard and
Alan Parsons, were incurred in fiscal 1996. The projects in production during
the current periods are less costly relative to the projects in production
during the comparable periods of the prior fiscal year.
In addition, cost of artist project and other revenues includes the
royalties paid by the Company to artists in connection with its first
international sales through MCA which occurred during fiscal 1996. The
Company's liability for such royalties is based on MCA's retail sales of the
Company's products net of
13
<PAGE>
returns, and equaled approximately 10% of such net sales. When presented as a
percentage of licensing revenues received by the Company, however, royalties
were equal to approximately 50% of such revenues. No such activity has been
recorded by the Company during the current periods as MCA has not provided final
sales data for the current periods. Such costs approximated $60,000 and
$380,000 for the three and nine months ended February 29, 1996, respectively;
such costs may not be indicative of the licensing costs owed for the current or
future periods.
GROSS PROFIT
Gross profit increased $2,440,000 or 119.3% to $4,485,000 for the three
months ended February 28, 1997 compared to the three months ended February 29,
1996; $2,254,000 or 92.4% of this increase related to the activities of
Intersound since January 1, 1997. Gross profit increased $912,000 or 13.4% to
$7,725,000 for the nine months ended February 28, 1997 compared to the nine
months ended February 29, 1996; the activities of Intersound since January 1,
1997 contributed to an increase in such profits of $2,254,000.
As a percentage of gross revenues, gross profit increased to 38.4% for the
three months ended February 28, 1997 from 34.8% for the three months ended
February 29, 1996, and decreased to 29.8% for the nine months ended February 28,
1997 from 34.9% for the comparable period of the prior fiscal year. The
increase for the three months ended February 28, 1997 is attributable to the
National Baptist Convention release and the inclusion of Intersound activity,
both of which contribute higher gross profits due to the lack of third-party
distribution fees. The decrease for the nine months ended February 28, 1997 is
attributable to a decrease in telemarketing revenues which provide higher gross
profits due to the lack of third-party distribution fees (telemarketing revenues
for the nine months ended February 28, 1997 and February 29, 1996 were $50,000
and $1,342,000, respectively), an increase in reserves for artist advances and
an increase in sales discounts offered. In addition, no international licensing
revenues have been recorded for the first nine months of fiscal 1997 as the
Company has not been notified to date by MCA regarding international sales
generated during this period. International licensing revenues typically
generate a 50% gross margin.
In addition, gross profit on product sales varies from project to project
due to differences in royalty rates and the greater profit margins achieved for
compact discs over cassettes. As a result, gross profit margins are affected in
any period by the mix of releases sold during that period.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses increased $1,397,000 or 69.2%
to $3,417,000 for the three months ended February 28, 1997 compared to the three
months ended February 29, 1996; $1,060,000 or 75.9% of this increase related to
the activities of Intersound since January 1, 1997. Selling, general and
administrative expenses increased $2,153,000 or 35.8% to $8,160,000 for the nine
months ended February 28, 1997 compared to the nine months ended February 29,
1996; $1,060,000 or 49.2% of this increase related to the activities of
Intersound since January 1, 1997.
Selling, general and administrative expenses as a percentage of gross
revenues decreased to 29.2% for the three months ended February 28, 1997 from
34.5% for the three months ended February 29, 1996, and remained relatively
unchanged at 31.6% for the nine months ended February 28, 1997 from 30.7%
for the comparable period of the prior fiscal year. The decrease for the three
months ended February 28, 1997 is primarily attributable to the reduction of the
Company's Country radio promotional staff and a larger revenue base compared to
fixed overhead costs.
MERGER AND RESTRUCTURING COSTS
Nonrecurring merger and restructuring costs of $609,000 and $612,000 for
the three and nine months ended February 28, 1997 were incurred due to the
Intersound Acquisition. The nature of the costs
14
<PAGE>
include severance payments to terminated employees and costs associated with
consolidating the offices of the Company and Intersound. As of February 28,
1997, cash paid for such costs approximated $538,000 with the remainder included
in accrued liabilities on the face of the balance sheet; management anticipates
the accrued costs to be fully paid within the next twelve months.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization increased to $315,000 from $31,000 for the
three months ended February 28, 1997 and increased to $481,000 from $92,000 for
the nine months ended February 28, 1997 compared to comparable periods of the
prior fiscal year. The increases are attributable to increased amortization
related to the approximate $23,600,000 of music publishing rights and excess
cost over net assets acquired resulting from the activities of Intersound since
January 1, 1997 and $1,500,000 of music publishing rights and artist contracts
acquired from Double J and REX during the first nine months of fiscal 1997.
OPERATING INCOME/LOSS
As a result of the factors described above, operating income of $144,000
and an operating loss of $1,528,000 were experienced for the three and nine
months ended February 28, 1997, respectively; an operating loss of $6,000 and
operating income of $714,000 were experienced for the three and nine months
ended February 29, 1996, respectively.
INCOME TAX
No tax expense or benefit has been recorded through February 28, 1997
due to the Company's net operating loss carryforward and related valuation
allowance at May 31, 1996, as required under generally accepted accounting
principles. Pursuant to Section 382 of the Internal Revenue Code of 1986, as
amended, the Company's net operating loss carryforward of approximately
$12,523,000 at May 31, 1996, expiring in years 2007 through 2011, is subject
to annual limitations due to a change in ownership as a result of the initial
public offering in March 1996. Consequently, approximately $3,700,000 of the
loss carryforward at May 31, 1996 will be available to offset fiscal 1997
taxable income.
INTEREST INCOME
Interest income for the three and nine months ended February 28, 1997
totaled $12,000 and $138,000 compared to no interest income for the comparable
periods of the prior fiscal year. The interest income for the current periods
is primarily attributable to earnings on net proceeds remaining in such periods
from the initial public offering.
INTEREST EXPENSE
Interest expense for the three and nine months ended February 28, 1997
totaled $303,000 and $308,000 compared to $228,000 and $530,000 for the
comparable periods of the prior fiscal year. See "Capital Resources" below
for details of the Company's current debt structure. All debt outstanding
during the three and nine months ended February 29, 1996 was retired with the
net proceeds received from the initial public offering.
FINANCING COSTS
Financing costs of $865,000 were incurred during the three months ended
February 28, 1997 due to the funding of the Intersound Acquisition. These costs
include the warrants issued BOM and the bank's origination fee, which are being
amortized over the 90-day term of the loan.
15
<PAGE>
NET INCOME/LOSS
The net loss attributable to common shares for the three and nine months
ended February 28, 1997 totaled $1,013,000 and $2,564,000 compared to net loss
attributable to common shares of $234,000 and net income attributable to common
shares of $184,000 for the comparable periods of the prior fiscal year. The
loss is attributable to the factors discussed above. In addition, no
international licensing revenues have been recorded for the nine months ended
February 28, 1997 as the Company has not been notified to date by MCA regarding
international sales generated during this period.
SIGNIFICANT MATTERS
Effective January 1, 1997, the Company purchased substantially all of the
assets of Intersound for consideration of $24,000,000 in cash, $5,000,000 in
convertible promissory notes and the assumption of certain liabilities. See
"Capital Resources" below for further details. The activities of
Intersound since January 1, 1997 has been accounted for by the purchase method
of accounting and the purchase price of $36,000,000 approximates the fair value
of the assets acquired. The purchase value was allocated to the acquired assets
based upon their estimated respective fair market values; the amounts allocated
to music publishing rights and excess cost over net assets acquired (goodwill)
are being amortized over 25 years using the straight-line method.
On March 3, 1997, the Company and K-tel signed a purchase and sale
agreement (the "Agreement") pursuant to which the Company will acquire
K-tel's worldwide music business assets, except for K-tel's European music
business, through the purchase of the stock of K-tel (USA) and Dominion, both
wholly-owned subsidiaries of K-tel. The purchase price is $35 million
subject to certain adjustments. Subject to satisfaction of the closing
conditions specified in the Agreement, including the Company's obtaining
financing for the activities of Intersound since January 1, 1997 and the
approval of K-tel's shareholders, the transaction is expected to close within
120 to 180 days after the signing of the Agreement.
Pursuant to the Agreement, the Company deposited $1,750,000 in escrow which
will be applied to the purchase price or paid to K-tel in the event the
transaction is not consummated under certain circumstances, including the
failure of the Company to obtain financing for the transaction.
RECENTLY ISSUED ACCOUNTING STANDARDS
In October 1995, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 123, "Accounting for Stock-Based Compensation"("FAS 123"). This
Statement establishes financial accounting and reporting standards for
stock-based employee compensation plans as well as transactions in which the
Company issues its equity instruments to acquire services from nonemployees.
The Statement defines a fair value based method of measuring compensation costs
for such activity, but does not require accounting compliance under this method
and allows compensation costs for such activity to be measured using the
intrinsic value based method prescribed by APB Opinion No. 25, "Accounting for
Stock Issued to Employees,"("Opinion 25") the method currently utilized by the
Company. Entities electing to remain with the accounting for Opinion 25 must
make pro forma disclosures of net income and earnings per share as if the fair
value based method of accounting defined in FAS 123 had been applied. This
Statement is effective for the Company's fiscal year ending May 31, 1997.
Management intends to continue accounting for stock options pursuant to Opinion
25 and has not yet determined what impact this Statement will have on the
Company's financial disclosures.
SEASONALITY
The Company's results of operations are subject to seasonal variations. In
accordance with industry practice, the Company records revenues for music
product, except those related to the telemarketing C.O.D. sales, when such
products are shipped to retailers. The Company has historically
16
<PAGE>
experienced a decline in revenues and net income in its third fiscal quarter
(December, January and February) due to the fact that retailers purchase
products from the Company in the quarter ending November 30 in anticipation of
holiday sales. As a result, sales are traditionally lower during December and
the post holiday period.
LIQUIDITY
The Company's cash balances were $139,000 and $8,222,000 at February 28,
1997 and May 31, 1996, respectively. Net cash used in operating activities
was $5,758,000 for the nine months ended February 28, 1997. The uses reflect
net cash used to fund trade receivables of $2,695,000, inventories of
$1,035,000, artist advances of $2,437,000, trade payables of $746,000 and
accrued liabilities and other of $1,215,000, attributable to releases by such
artists as The Beach Boys, Crystal Bernard, Alan Parsons and National Baptist
Convention and scheduled future releases including albums by Peter Cetera and
a tribute to Janis Joplin featuring established Blues artists. Net cash
provided by notes receivable of $1,057,000 results from an agreement dated
May 1996, whereby the Company sold certain video rights for $401,000 and its
right to free future studio usage for $850,000 to a minority stockholder and
former officer of the Company. The net cash provided by royalties payable
arose from the current period sales of albums in the non-Gospel format, which
typically command a higher royalty rate. Royalties are not paid to the
artist until all advances made to the artist have been recouped by the
Company. Also, the Company establishes and maintains reserves relative to
royalty payments for a period of approximately 12 months to allow for product
returns activity as royalties are not owed on returned product.
Investing activities for the nine months ended February 28, 1997 include
$3,818,000 relating to the Company's investment in a joint venture with HOB.
See "Results of Operations - Significant Matters." The Company paid
approximately $31,000,000 for the Intersound Acquisition, funded with outside
financing - see financing activity discussion below. Approximately $100,000
was paid in connection with the Company's purchase of Double J, with the
remainder of the purchase settled with shares of the Company's common stock.
In addition, the Company acquired substantially all of the assets of REX for
$480,000 during June 1996. The purchase price approximated the indebtedness
of REX to the Company and cash payments relating to this purchase during the
current period were not significant. Purchases of property and equipment of
$239,000 relate primarily to office equipment, computers and software.
Financing activities for the nine months ended February 28, 1997 includes
$25,000,000 in short-term borrowings from BOM for the Intersound Acquisition;
such Acquisition was also financed with $5,000,000 in convertible debentures and
approximately $1,500,000 in borrowings under the revolving line of credit with
BOM. The Company also borrowed approximately $1,400,000 and $900,000 under the
revolving line of credit to fund financing costs to BOM in connection with the
Acquisition and Company operations, respectively. See "Capital Resources."
CAPITAL RESOURCES
On January 31, 1997, the Company entered into the Credit Agreement with
BOM, individually and as agent, to provide a 90-day term loan in the amount
of $25,000,000 and a 90-day revolving credit facility in the amount of
$10,000,000. Borrowings under the Credit Agreement bear interest at LIBOR
plus 6% per annum (11.4375% at February 28, 1997) and are secured by
substantially all of the assets of the Company. At February 28, 1997, the
Company had approximately $6,100,000 available under the revolving credit
facility. The Credit Agreement contains financial and other covenants
applicable to the Company. The Credit Agreement is personally guaranteed for
up to $12,500,000 by an officer and director of the Company. The Company
issued to BMO a warrant to purchase 258,571.95 shares of Common Stock at an
exercise price of $.01 per share in connection with the Credit Agreement.
The warrant expires on January 31, 2002 and is subject to antidilution
adjustment if, during the term of the Credit Agreement, the Company issues
shares of Common Stock and does not use the proceeds of such issuance to pay
borrowings under the Credit Agreement. The Company is in the process of
seeking long-term financing.
17
<PAGE>
In connection with the Intersound Acquisition, the Company also issued
convertible debentures totaling $5,000,000. The convertible debentures were
issued to certain selling shareholders of Intersound on January 31,
1997, mature on January 31, 2004 and bear interest at the seven-year Treasury
rate plus one percent per annum (7.48% at February 28, 1997) and are
convertible, in whole or in part, at any time prior to maturity into the
Company's Common Stock at a conversion price of $9.80 per share, subject to
adjustment as provided in the notes.
The Company's near and long-term capital requirements will depend on
numerous factors, including the rate at which the Company grows and acquires new
artists and products. The Company has various ongoing needs for capital,
including working capital for operations, artist advances and project
development costs and capital expenditures to maintain and expand its
operations. In addition, as part of its strategy, the Company evaluates
potential acquisitions of music catalogs, publishing rights and labels. The
Company may in the future consummate acquisitions which may require the Company
to make additional capital expenditures, and such expenditures may be
significant. Future acquisitions, as well as other ongoing capital needs, may
be funded with institutional financing, seller financing and/or additional
equity or debt offerings.
Stockholders' equity at February 28, 1997 totaled $14,690,000 compared to
$15,215,000 at May 31, 1996. This decrease of $525,000 or 3.5% is primarily due
to net losses experienced by the Company during the nine months ended February
28, 1997, offset by a $1,240,000 increase to additional paid-in capital related
to warrants issued in connection with the financing of the Intersound
acquisition and a $906,000 increase to common stock and additional paid-in
capital related to the purchase of Double J Music Group.
INFLATION
The impact of inflation on the Company's operating results has been
moderate in recent years, reflecting generally lower rates of inflation in the
economy. While inflation has not had a material impact on operating results,
there is no assurance that the Company's business will not be affected by
inflation in the future.
SAFE HARBOR PROVISION
This Report contains certain forward-looking statements (within the
meaning of the Private Securities Litigation Reform Act of 1995) that involve
substantial risks and uncertainties. When used in this Report, the words
"anticipate," "believe," "estimate" and "expect" and similar expressions as
they relate to the Company or its management are intended to identify such
forward-looking statements. A number of important factors could cause the
Company's actual results, performance or achievements for fiscal 1997 and
beyond to differ materially from those expressed in such forward-looking
statements. These factors include, without limitation, commercial success of
the Company's repertoire, charges and costs related to acquisitions, the
results of financing efforts, relationships with artists and producers,
attraction and retention of key personnel, general economic and business
conditions and enhanced competition and new competitors in the recorded music
industry.
18
<PAGE>
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
A. Exhibits.
4.1 Registration Rights Agreement, dated as of January 31, 1997,
between Registrant and Intersound, Inc. is herein
incorporated by reference to the Registrant's Form 8-K
filed with the Commission on February 18, 1997 pursuant to
Section 13 of the Securities Exchange Act of 1934 (the
"8-K").
4.2 Convertible Promissory Note, dated January 31, 1997, issued
by the Registrant in the principal amount of $3,125,000 is
herein incorporated by reference to the 8-K.
4.3 Convertible Promissory Note, dated January 31, 1997, issued
by the Registrant in the principal amount of $1,875,000 is
herein incorporated by reference to the 8-K.
4.4 Warrant to Purchase Shares of Common Stock of the
Registrant, dated January 31, 1997 is herein incorporated by
reference to the 8-K.
10.1 First Amendment to Asset Purchase Agreement, dated January
31, 1997, between River North Studios, Inc. and Intersound,
Inc. is herein incorporated by reference to the 8-K.
10.2 Employment Agreement of Don Johnson, dated February 1, 1997
is herein incorporated by reference to the 8-K.
10.3 Credit Agreement, dated as of January 31, 1997, among the
Registrant, Bank of Montreal and the Banks who are or may
become parties thereto is herein incorporated by reference
to the 8-K.
10.4 Security Agreement, dated as of January 31, 1997, among the
Registrant, Bank of Montreal and the Banks who are or may
become parties thereto is herein incorporated by reference
to the 8-K.
10.5 Security Agreement re: Intellectual Property, dated as of
January 31, 1997, among the Registrant, its subsidiaries and
Bank of Montreal is herein incorporated by reference to the
8-K.
10.6 Pledge Agreement, dated as of January 31, 1997, between the
Registrant and Bank of Montreal is herein incorporated by
reference to the 8-K.
19
<PAGE>
10.7 Guaranty, dated as of January 31, 1997, made by Steven
Devick is herein incorporated by reference to the
8-K.
10.8 Term Credit Note, dated January 31, 1997, issued by the
Registrant in the principal amount of $25,000,000 is herein
incorporated by reference to the 8-K.
10.9 Revolving Credit Note, dated January 31, 1997, issued by the
Registrant in the principal amount of $10,000,000 is herein
incorporated by reference to the 8-K.
10.10 Purchase and Sale Agreement, dated March 3, 1997, between
Platinum Entertainment, Inc. and K-tel International, Inc.
10.11 Earnest Money Escrow Agreement, dated March 3, 1997, among
Platinum Entertainment, Inc., K-tel Entertainment, Inc. and
Midwest Trust Services, Inc.
10.12 Voting Agreement, dated March 3, 1997, among Platinum
Entertainment, Inc., Mr. Philip Kives and K-5 Leisure
Products, Inc. and National Development Ltd.
27. Financial Data Schedule.
B. Form 8-K.
On February 18, 1997, a Form 8-K was filed by the Company reporting the
purchase of substantially all of the assets of Intersound, Inc. for
consideration of $24,000,000 in cash, $5,000,000 in convertible
promissory notes and the assumption of certain liabilities. As of the
date of filing of the Current Report on Form 8-K, it was impracticable
for the Registrant to provide the financial statements required by
Item 7(a) of Form 8-K. In accordance with Item 7(a)(4) of Form 8-K,
such financial statements shall be filed by amendment as soon as
practicable and in no event later than 60 days after the filing date
of the Report on Form 8-K.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, Platinum
Entertainment, Inc. has duly caused this Report to be signed on its behalf by
the undersigned, thereunto duly authorized, on this 11th day of March, 1997.
PLATINUM ENTERTAINMENT, INC.
By: /s/ STEVEN DEVICK
---------------------------------------
Steven Devick
Chairman of the Board, President and Chief
Executive Officer
By: /s/ DOUGLAS C. LAUX
---------------------------------------
Douglas C. Laux
Chief Financial Officer
(Principal Financial and Accounting Officer)
20
<PAGE>
PURCHASE AND SALE AGREEMENT
by and between
PLATINUM ENTERTAINMENT, INC.
and
K-TEL INTERNATIONAL, INC.
as of March 3, 1997
<PAGE>
TABLE OF CONTENTS
PAGE
ARTICLE I
PURCHASE AND SALE OF STOCK . . . . . . . . . . . . . . . . . . . . . . . . . 1
1.1 STOCK. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
1.2 EXCLUDED BUSINESSES AND EXCLUDED ASSETS. . . . . . . . . . . . . . 2
ARTICLE II
CONSIDERATION AND MANNER OF PAYMENT. . . . . . . . . . . . . . . . . . . . . 3
2.1 PURCHASE PRICE . . . . . . . . . . . . . . . . . . . . . . . . . . 3
2.2 ESCROWS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
2.3 NET TANGIBLE BOOK VALUE. . . . . . . . . . . . . . . . . . . . . . 4
ARTICLE III
CLOSING. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
3.1 CLOSING. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
3.2 DELIVERIES BY SELLER . . . . . . . . . . . . . . . . . . . . . . . 5
3.3 DELIVERIES BY BUYER. . . . . . . . . . . . . . . . . . . . . . . . 7
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF SELLER . . . . . . . . . . . . . . . . . . 7
4.1 ORGANIZATION, GOOD STANDING AND CAPITALIZATION . . . . . . . . . . 7
4.2 AUTHORITY; NO CONFLICT; APPROVALS. . . . . . . . . . . . . . . . . 9
4.3 FINANCIAL STATEMENTS . . . . . . . . . . . . . . . . . . . . . . . 10
4.4 BOOKS AND RECORDS. . . . . . . . . . . . . . . . . . . . . . . . . 10
4.5 TITLE TO ASSETS; ENCUMBRANCES; SUFFICIENCY . . . . . . . . . . . . 10
4.6 TANGIBLE ASSETS AND REAL PROPERTY. . . . . . . . . . . . . . . . . 11
4.7 ACCOUNTS RECEIVABLE. . . . . . . . . . . . . . . . . . . . . . . . 12
4.8 INVENTORY. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
4.9 NO UNDISCLOSED LIABILITIES . . . . . . . . . . . . . . . . . . . . 13
4.10 TAXES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
4.11 NO MATERIAL ADVERSE CHANGE . . . . . . . . . . . . . . . . . . . . 13
4.12 EMPLOYEE BENEFITS. . . . . . . . . . . . . . . . . . . . . . . . . 13
4.13 COMPLIANCE WITH LEGAL REQUIREMENTS; GOVERNMENTAL AUTHORIZATIONS. . 14
4.14 LEGAL PROCEEDINGS; ORDERS. . . . . . . . . . . . . . . . . . . . . 15
4.15 ABSENCE OF CERTAIN CHANGES AND EVENTS. . . . . . . . . . . . . . . 16
4.16 CONTRACTS; NO DEFAULTS; KEY CUSTOMERS. . . . . . . . . . . . . . . 17
4.17 INSURANCE. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
4.18 ENVIRONMENTAL MATTERS. . . . . . . . . . . . . . . . . . . . . . . 20
4.19 EMPLOYEES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
i
<PAGE>
4.20 LABOR DISPUTES; COMPLIANCE . . . . . . . . . . . . . . . . . . . . 21
4.21 INTELLECTUAL PROPERTY. . . . . . . . . . . . . . . . . . . . . . . 22
4.22 BANK ACCOUNTS. . . . . . . . . . . . . . . . . . . . . . . . . . . 24
4.23 DISCLOSURE . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
4.24 RELATIONSHIPS WITH RELATED PERSONS . . . . . . . . . . . . . . . . 24
4.25 BROKERS OR FINDERS . . . . . . . . . . . . . . . . . . . . . . . . 25
4.26 CERTAIN PAYMENTS . . . . . . . . . . . . . . . . . . . . . . . . . 25
4.27 CHANGE OF CONTROL PAYMENTS . . . . . . . . . . . . . . . . . . . . 25
ARTICLE V
REPRESENTATIONS AND WARRANTIES OF BUYER. . . . . . . . . . . . . . . . . . . 25
5.1 ORGANIZATION AND GOOD STANDING . . . . . . . . . . . . . . . . . . 25
5.2 AUTHORITY; NO CONFLICT . . . . . . . . . . . . . . . . . . . . . . 26
5.3 CERTAIN PROCEEDINGS. . . . . . . . . . . . . . . . . . . . . . . . 26
5.4 BROKERS OR FINDERS . . . . . . . . . . . . . . . . . . . . . . . . 27
5.5 INVESTMENT REPRESENTATIONS . . . . . . . . . . . . . . . . . . . . 27
ARTICLE VI
COVENANTS OF SELLER. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
6.1 ACCESS AND INVESTIGATION . . . . . . . . . . . . . . . . . . . . . 27
6.2 OPERATION OF THE BUSINESSES OF SELLER. . . . . . . . . . . . . . . 28
6.3 NEGATIVE COVENANT. . . . . . . . . . . . . . . . . . . . . . . . . 28
6.4 APPROVALS OF GOVERNMENTAL BODIES . . . . . . . . . . . . . . . . . 29
6.5 NOTIFICATION . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
6.6 BEST EFFORTS . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
6.7 KIVES VOTING AGREEMENT . . . . . . . . . . . . . . . . . . . . . . 30
ARTICLE VII
COVENANTS OF BUYER . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
7.1 APPROVALS OF GOVERNMENTAL BODIES . . . . . . . . . . . . . . . . . 30
7.2 BEST EFFORTS . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
7.3 NOTIFICATION . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
ARTICLE VIII
ADDITIONAL AGREEMENTS. . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
8.1 PUBLIC DISCLOSURE AND CONFIDENTIALITY. . . . . . . . . . . . . . . 31
8.2 AUDITORS' LETTERS. . . . . . . . . . . . . . . . . . . . . . . . . 31
8.3 FILINGS; OTHER ACTION. . . . . . . . . . . . . . . . . . . . . . . 32
8.4 LICENSES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
8.5 TAXES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
8.6 MEETING OF STOCKHOLDERS. . . . . . . . . . . . . . . . . . . . . . 34
ii
<PAGE>
8.7 RESTRICTIVE COVENANTS/NONCOMPETE . . . . . . . . . . . . . . . . . 35
8.8 DELIVERY OF DISCLOSURE LETTER. . . . . . . . . . . . . . . . . . . 35
8.9 TRANSITION ARRANGEMENT . . . . . . . . . . . . . . . . . . . . . . 35
8.10 SELLER'S EMPLOYEES . . . . . . . . . . . . . . . . . . . . . . . . 36
ARTICLE IX
MUTUAL CONDITIONS PRECEDENT TO
PARTIES' OBLIGATION TO CLOSE . . . . . . . . . . . . . . . . . . . . . . . . 36
9.1 MUTUAL CONDITIONS. . . . . . . . . . . . . . . . . . . . . . . . . 36
ARTICLE X
CONDITIONS PRECEDENT TO BUYER'S OBLIGATIONS TO CLOSE . . . . . . . . . . . . 37
10.1 ACCURACY OF REPRESENTATIONS. . . . . . . . . . . . . . . . . . . . 37
10.2 THE SELLER'S PERFORMANCE . . . . . . . . . . . . . . . . . . . . . 37
10.3 NO PROCEEDINGS . . . . . . . . . . . . . . . . . . . . . . . . . . 37
10.4 NO PROHIBITION . . . . . . . . . . . . . . . . . . . . . . . . . . 37
10.5 MATERIAL ADVERSE CHANGE. . . . . . . . . . . . . . . . . . . . . . 38
10.6 FINANCING. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
ARTICLE XI
CONDITIONS PRECEDENT TO SELLER'S OBLIGATION TO CLOSE . . . . . . . . . . . . 38
11.1 ACCURACY OF REPRESENTATIONS. . . . . . . . . . . . . . . . . . . . 38
11.2 BUYER'S PERFORMANCE. . . . . . . . . . . . . . . . . . . . . . . . 38
11.3 NO PROCEEDINGS . . . . . . . . . . . . . . . . . . . . . . . . . . 38
11.4 NO PROHIBITION . . . . . . . . . . . . . . . . . . . . . . . . . . 39
ARTICLE XII
TERMINATION. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
12.1 TERMINATION BY MUTUAL CONSENT. . . . . . . . . . . . . . . . . . . 39
12.2 TERMINATION BY EITHER SELLER OR BUYER. . . . . . . . . . . . . . . 39
12.3 TERMINATION BY SELLER. . . . . . . . . . . . . . . . . . . . . . . 39
12.4 TERMINATION BY BUYER . . . . . . . . . . . . . . . . . . . . . . . 40
12.5 EFFECT OF TERMINATION; EARNEST MONEY ESCROW. . . . . . . . . . . . 40
12.6 BREAK-UP FEE . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
ARTICLE XIII
INDEMNIFICATION. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42
13.1 SURVIVAL AND LIMITATIONS . . . . . . . . . . . . . . . . . . . . . 42
13.2 INDEMNIFICATION OF BUYER . . . . . . . . . . . . . . . . . . . . . 43
13.3 INDEMNIFICATION OF SELLER. . . . . . . . . . . . . . . . . . . . . 44
iii
<PAGE>
13.4 INDEMNIFICATION PROCEDURE FOR THIRD PARTY CLAIMS . . . . . . . . . 44
13.5 HARRY FOX MATTERS. . . . . . . . . . . . . . . . . . . . . . . . . 46
ARTICLE XIV
DEFINITIONS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47
"AFFILIATES" . . . . . . . . . . . . . . . . . . . . . . . . . . . 47
"ACCOUNTANTS". . . . . . . . . . . . . . . . . . . . . . . . . . . 47
"ACCOUNTS RECEIVABLE". . . . . . . . . . . . . . . . . . . . . . . 47
"BEST EFFORTS" . . . . . . . . . . . . . . . . . . . . . . . . . . 47
"BREACH" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47
"BUSINESS" . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47
"BUYER'S CLOSING DOCUMENTS". . . . . . . . . . . . . . . . . . . . 47
"CLOSING". . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47
"CLOSING BALANCE SHEETS" . . . . . . . . . . . . . . . . . . . . . 47
"CLOSING DATE" . . . . . . . . . . . . . . . . . . . . . . . . . . 48
"CODE" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48
"CONFIDENTIALITY AGREEMENT". . . . . . . . . . . . . . . . . . . . 48
"CONSENTS" . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48
"CONTEMPLATED TRANSACTIONS". . . . . . . . . . . . . . . . . . . . 48
"CONTRACT" . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48
"DISCLOSURE LETTER". . . . . . . . . . . . . . . . . . . . . . . . 48
"DOMINION" . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48
"DOMINION STOCK" . . . . . . . . . . . . . . . . . . . . . . . . . 48
"ENCUMBRANCE". . . . . . . . . . . . . . . . . . . . . . . . . . . 48
"ENVIRONMENTAL AND SAFETY REQUIREMENTS". . . . . . . . . . . . . . 48
"ERISA". . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48
"EXCHANGE ACT" . . . . . . . . . . . . . . . . . . . . . . . . . . 48
"EXCLUDED BUSINESSES". . . . . . . . . . . . . . . . . . . . . . . 48
"FACILITIES" . . . . . . . . . . . . . . . . . . . . . . . . . . . 49
"FINANCIAL STATEMENTS" . . . . . . . . . . . . . . . . . . . . . . 49
"GAAP" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49
"GOVERNMENTAL AUTHORIZATION" . . . . . . . . . . . . . . . . . . . 49
"GOVERNMENTAL BODY". . . . . . . . . . . . . . . . . . . . . . . . 49
"HAZARDOUS MATERIALS". . . . . . . . . . . . . . . . . . . . . . . 49
"HSR ACT". . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49
"INSURANCE POLICIES" . . . . . . . . . . . . . . . . . . . . . . . 49
"INTELLECTUAL PROPERTY". . . . . . . . . . . . . . . . . . . . . . 49
"INTERIM BALANCE SHEET". . . . . . . . . . . . . . . . . . . . . . 50
"INVENTORY". . . . . . . . . . . . . . . . . . . . . . . . . . . . 50
"IRS". . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50
"KTI". . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50
"KTI STOCK". . . . . . . . . . . . . . . . . . . . . . . . . . . . 50
"KNOWLEDGE". . . . . . . . . . . . . . . . . . . . . . . . . . . . 50
iv
<PAGE>
"LEGAL REQUIREMENT". . . . . . . . . . . . . . . . . . . . . . . . 50
"LICENSE AGREEMENTS" . . . . . . . . . . . . . . . . . . . . . . . 50
"MATERIAL CONTRACT". . . . . . . . . . . . . . . . . . . . . . . . 50
"MAUREEN CATALOG". . . . . . . . . . . . . . . . . . . . . . . . . 50
"MBCA" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50
"NET TANGIBLE BOOK VALUE". . . . . . . . . . . . . . . . . . . . . 50
"NON-EXCLUSIVE TERRITORY". . . . . . . . . . . . . . . . . . . . . 51
"NTBV SCHEDULE". . . . . . . . . . . . . . . . . . . . . . . . . . 51
"OLD TOWN CATALOG" . . . . . . . . . . . . . . . . . . . . . . . . 51
"ORDER". . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51
"ORDINARY COURSE OF BUSINESS". . . . . . . . . . . . . . . . . . . 51
"ORGANIZATIONAL DOCUMENTS" . . . . . . . . . . . . . . . . . . . . 51
"PERSON" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51
"PRELIMINARY BOOK VALUE" . . . . . . . . . . . . . . . . . . . . . 51
"PROCEEDING" . . . . . . . . . . . . . . . . . . . . . . . . . . . 51
"PROPRIETARY RIGHTS AGREEMENT" . . . . . . . . . . . . . . . . . . 52
"PROTEST NOTICE. . . . . . . . . . . . . . . . . . . . . . . . . . 52
"PURCHASE PRICE" . . . . . . . . . . . . . . . . . . . . . . . . . 52
"RELATED PERSON" . . . . . . . . . . . . . . . . . . . . . . . . . 52
"REPRESENTATIVE" . . . . . . . . . . . . . . . . . . . . . . . . . 52
"RETAINED MUSIC BUSINESS". . . . . . . . . . . . . . . . . . . . . 52
"REVIEW PERIOD". . . . . . . . . . . . . . . . . . . . . . . . . . 52
"SECURITIES ACT" . . . . . . . . . . . . . . . . . . . . . . . . . 52
"SEC". . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52
"STOCK". . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52
"SUBSIDIARIES" . . . . . . . . . . . . . . . . . . . . . . . . . . 52
"SELLERS CLOSING DOCUMENTS". . . . . . . . . . . . . . . . . . . . 53
"SELLER TRANSACTION DOCUMENTS" . . . . . . . . . . . . . . . . . . 53
"SELLER GOVERNMENTAL AUTHORIZATIONS" . . . . . . . . . . . . . . . 53
"TAX OR TAXES" . . . . . . . . . . . . . . . . . . . . . . . . . . 53
"THREATENED" . . . . . . . . . . . . . . . . . . . . . . . . . . . 53
ARTICLE XV
GENERAL PROVISIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53
15.1 EXPENSES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53
15.2 NOTICES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53
15.3 FURTHER ASSURANCES . . . . . . . . . . . . . . . . . . . . . . . . 54
15.4 WAIVER . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54
15.5 ENTIRE AGREEMENT AND MODIFICATION. . . . . . . . . . . . . . . . . 54
15.6 ASSIGNMENTS, SUCCESSORS, AND NO THIRD-PARTY RIGHTS . . . . . . . . 55
15.7 SEVERABILITY . . . . . . . . . . . . . . . . . . . . . . . . . . . 55
15.8 SECTION HEADINGS, CONSTRUCTION . . . . . . . . . . . . . . . . . . 55
15.9 GOVERNING LAW. . . . . . . . . . . . . . . . . . . . . . . . . . . 55
v
<PAGE>
15.10 COUNTERPARTS. . . . . . . . . . . . . . . . . . . . . . . . . 55
15.11 NO STRICT CONSTRUCTION. . . . . . . . . . . . . . . . . . . . 55
ARTICLE I PURCHASE AND SALE OF STOCK. . . . . . . . . . . . . . . . . . 1
1.1 Stock. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
1.2 Excluded Businesses and Excluded Assets. . . . . . . . . . . . . . 2
ARTICLE II CONSIDERATION AND MANNER OF PAYMENT. . . . . . . . . . . 3
2.1 Purchase Price . . . . . . . . . . . . . . . . . . . . . . . . . . 3
2.2 Escrows. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
2.3 Net Tangible Book Value. . . . . . . . . . . . . . . . . . . . . . 4
ARTICLE III CLOSING. . . . . . . . . . . . . . . . . . . . . . . . . 5
3.1 Closing. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
3.2 Deliveries by Seller . . . . . . . . . . . . . . . . . . . . . . . 5
3.3 Deliveries by Buyer. . . . . . . . . . . . . . . . . . . . . . . . 7
ARTICLE IV REPRESENTATIONS AND WARRANTIES OF SELLER. . . . . . . . . . . 7
4.1 Organization, Good Standing and Capitalization . . . . . . . . . . 7
4.2 Authority; No Conflict; Approvals. . . . . . . . . . . . . . . . . 9
4.3 Financial Statements . . . . . . . . . . . . . . . . . . . . . . . 10
4.4 Books and Records. . . . . . . . . . . . . . . . . . . . . . . . . 10
4.5 Title to Assets; Encumbrances; Sufficiency . . . . . . . . . . . . 10
4.6 Tangible Assets and Real Property. . . . . . . . . . . . . . . . . 11
4.7 Accounts Receivable. . . . . . . . . . . . . . . . . . . . . . . . 12
4.8 Inventory. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
4.9 No Undisclosed Liabilities . . . . . . . . . . . . . . . . . . . . 13
4.10 Taxes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
4.11 No Material Adverse Change . . . . . . . . . . . . . . . . . . . . 13
4.12 Employee Benefits. . . . . . . . . . . . . . . . . . . . . . . . . 13
4.13 Compliance with Legal Requirements; Governmental Authorizations. . 14
4.14 Legal Proceedings; Orders. . . . . . . . . . . . . . . . . . . . . 15
4.15 Absence of Certain Changes and Events. . . . . . . . . . . . . . . 16
4.16 Contracts; No Defaults; Key Customers. . . . . . . . . . . . . . . 17
4.17 Insurance. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
4.18 Environmental Matters. . . . . . . . . . . . . . . . . . . . . . . 20
4.19 Employees. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
4.20 Labor Disputes; Compliance . . . . . . . . . . . . . . . . . . . . 21
4.21 Intellectual Property. . . . . . . . . . . . . . . . . . . . . . . 22
4.22 Bank Accounts. . . . . . . . . . . . . . . . . . . . . . . . . . . 24
4.23 Disclosure . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
4.24 Relationships with Related Persons . . . . . . . . . . . . . . . . 24
4.25 Brokers or Finders . . . . . . . . . . . . . . . . . . . . . . . . 25
4.26 Certain Payments . . . . . . . . . . . . . . . . . . . . . . . . . 25
4.27 Change of Control Payments . . . . . . . . . . . . . . . . . . . . 25
vi
<PAGE>
ARTICLE V REPRESENTATIONS AND WARRANTIES OF BUYER . . . . . . . . . . . 25
5.1 Organization and Good Standing . . . . . . . . . . . . . . . . . . 25
5.2 Authority; No Conflict . . . . . . . . . . . . . . . . . . . . . . 26
5.3 Certain Proceedings. . . . . . . . . . . . . . . . . . . . . . . . 26
5.4 Brokers or Finders . . . . . . . . . . . . . . . . . . . . . . . . 27
5.5 Investment Representations . . . . . . . . . . . . . . . . . . . . 27
ARTICLE VI COVENANTS OF SELLER . . . . . . . . . . . . . . . . . . . . . 27
6.1 Access and Investigation . . . . . . . . . . . . . . . . . . . . . 27
6.2 Operation of the Businesses of Seller. . . . . . . . . . . . . . . 28
6.3 Negative Covenant. . . . . . . . . . . . . . . . . . . . . . . . . 28
6.4 Approvals of Governmental Bodies . . . . . . . . . . . . . . . . . 29
6.5 Notification . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
6.6 Best Efforts . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
6.7 Kives Voting Agreement . . . . . . . . . . . . . . . . . . . . . . 30
ARTICLE VII COVENANTS OF BUYER. . . . . . . . . . . . . . . . . . . . . . 30
7.1 Approvals of Governmental Bodies . . . . . . . . . . . . . . . . . 30
7.2 Best Efforts . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
7.3 Notification . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
ARTICLE VIII ADDITIONAL AGREEMENTS . . . . . . . . . . . . . . . . . . . . 31
8.1 Public Disclosure and Confidentiality. . . . . . . . . . . . . . . 31
8.2 Auditors' Letters. . . . . . . . . . . . . . . . . . . . . . . . . 31
8.3 Filings; Other Action. . . . . . . . . . . . . . . . . . . . . . . 32
8.4 Licenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
8.5 Taxes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
8.6 Meeting of Stockholders. . . . . . . . . . . . . . . . . . . . . . 34
8.7 Restrictive Covenants/Noncompete . . . . . . . . . . . . . . . . . 35
8.8 Delivery of Disclosure Letter. . . . . . . . . . . . . . . . . . . 35
8.9 Transition Arrangement . . . . . . . . . . . . . . . . . . . . . . 35
8.10 Seller's Employees . . . . . . . . . . . . . . . . . . . . . . . . 36
ARTICLE IX MUTUAL CONDITIONS PRECEDENT TO PARTIES'
OBLIGATION TO CLOSE . . . . . . . . . . . . . . . . . . . . . 36
9.1 Mutual Conditions. . . . . . . . . . . . . . . . . . . . . . . . . 36
ARTICLE X CONDITIONS PRECEDENT TO BUYER'S OBLIGATIONS TO
CLOSE . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
10.1 Accuracy of Representations. . . . . . . . . . . . . . . . . . . . 37
10.2 The Seller's Performance . . . . . . . . . . . . . . . . . . . . . 37
10.3 No Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . 37
10.4 No Prohibition . . . . . . . . . . . . . . . . . . . . . . . . . . 37
10.5 Material Adverse Change. . . . . . . . . . . . . . . . . . . . . . 38
10.6 Financing. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
vii
<PAGE>
ARTICLE XI CONDITIONS PRECEDENT TO SELLER'S OBLIGATION TO
CLOSE . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
11.1 Accuracy of Representations. . . . . . . . . . . . . . . . . . . . 38
11.2 Buyer's Performance. . . . . . . . . . . . . . . . . . . . . . . . 38
11.3 No Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . 38
11.4 No Prohibition . . . . . . . . . . . . . . . . . . . . . . . . . . 39
ARTICLE XII TERMINATION . . . . . . . . . . . . . . . . . . . . . . . . . 39
12.1 Termination by Mutual Consent. . . . . . . . . . . . . . . . . . . 39
12.2 Termination by either Seller or Buyer. . . . . . . . . . . . . . . 39
12.3 Termination by Seller. . . . . . . . . . . . . . . . . . . . . . . 39
12.4 Termination by Buyer . . . . . . . . . . . . . . . . . . . . . . . 40
12.5 Effect of Termination; Earnest Money Escrow. . . . . . . . . . . . 40
12.6 Break-Up Fee . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
ARTICLE XIII INDEMNIFICATION . . . . . . . . . . . . . . . . . . . . . . . 42
13.1 Survival and Limitations . . . . . . . . . . . . . . . . . . . . . 42
13.2 Indemnification of Buyer . . . . . . . . . . . . . . . . . . . . . 43
13.3 Indemnification of Seller. . . . . . . . . . . . . . . . . . . . . 44
13.4 Indemnification Procedure for Third Party Claims . . . . . . . . . 44
13.5 Harry Fox Matters. . . . . . . . . . . . . . . . . . . . . . . . . 46
ARTICLE XIV DEFINITIONS . . . . . . . . . . . . . . . . . . . . . . . . . 47
"AFFILIATES" . . . . . . . . . . . . . . . . . . . . . . . . . . . 47
"ACCOUNTANTS". . . . . . . . . . . . . . . . . . . . . . . . . . . 47
"ACCOUNTS RECEIVABLE". . . . . . . . . . . . . . . . . . . . . . . 47
"BEST EFFORTS" . . . . . . . . . . . . . . . . . . . . . . . . . . 47
"BREACH" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47
"BUSINESS" . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47
"BUYER'S CLOSING DOCUMENTS". . . . . . . . . . . . . . . . . . . . 47
"CLOSING". . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47
"CLOSING BALANCE SHEETS" . . . . . . . . . . . . . . . . . . . . . 47
"CLOSING DATE" . . . . . . . . . . . . . . . . . . . . . . . . . . 48
"CODE" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48
"CONFIDENTIALITY AGREEMENT". . . . . . . . . . . . . . . . . . . . 48
"CONSENTS" . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48
"CONTEMPLATED TRANSACTIONS". . . . . . . . . . . . . . . . . . . . 48
"CONTRACT" . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48
"DISCLOSURE LETTER". . . . . . . . . . . . . . . . . . . . . . . . 48
"DOMINION" . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48
"DOMINION STOCK" . . . . . . . . . . . . . . . . . . . . . . . . . 48
"ENCUMBRANCE". . . . . . . . . . . . . . . . . . . . . . . . . . . 48
"ENVIRONMENTAL AND SAFETY REQUIREMENTS". . . . . . . . . . . . . . 48
"ERISA". . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48
"EXCHANGE ACT" . . . . . . . . . . . . . . . . . . . . . . . . . . 48
viii
<PAGE>
"EXCLUDED BUSINESSES". . . . . . . . . . . . . . . . . . . . . . . 48
"FACILITIES" . . . . . . . . . . . . . . . . . . . . . . . . . . . 49
"FINANCIAL STATEMENTS" . . . . . . . . . . . . . . . . . . . . . . 49
"GAAP" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49
"GOVERNMENTAL AUTHORIZATION" . . . . . . . . . . . . . . . . . . . 49
"GOVERNMENTAL BODY". . . . . . . . . . . . . . . . . . . . . . . . 49
"HAZARDOUS MATERIALS". . . . . . . . . . . . . . . . . . . . . . . 49
"HSR ACT". . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49
"INSURANCE POLICIES" . . . . . . . . . . . . . . . . . . . . . . . 49
"INTELLECTUAL PROPERTY". . . . . . . . . . . . . . . . . . . . . . 49
"INTERIM BALANCE SHEET". . . . . . . . . . . . . . . . . . . . . . 50
"INVENTORY". . . . . . . . . . . . . . . . . . . . . . . . . . . . 50
"IRS". . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50
"KTI". . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50
"KTI STOCK". . . . . . . . . . . . . . . . . . . . . . . . . . . . 50
"KNOWLEDGE". . . . . . . . . . . . . . . . . . . . . . . . . . . . 50
"LEGAL REQUIREMENT". . . . . . . . . . . . . . . . . . . . . . . . 50
"LICENSE AGREEMENTS" . . . . . . . . . . . . . . . . . . . . . . . 50
"MATERIAL CONTRACT". . . . . . . . . . . . . . . . . . . . . . . . 50
"MAUREEN CATALOG". . . . . . . . . . . . . . . . . . . . . . . . . 50
"MBCA" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50
"NET TANGIBLE BOOK VALUE". . . . . . . . . . . . . . . . . . . . . 50
"NON-EXCLUSIVE TERRITORY". . . . . . . . . . . . . . . . . . . . . 51
"NTBV SCHEDULE". . . . . . . . . . . . . . . . . . . . . . . . . . 51
"OLD TOWN CATALOG" . . . . . . . . . . . . . . . . . . . . . . . . 51
"ORDER". . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51
"ORDINARY COURSE OF BUSINESS". . . . . . . . . . . . . . . . . . . 51
"ORGANIZATIONAL DOCUMENTS" . . . . . . . . . . . . . . . . . . . . 51
"PERSON" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51
"PRELIMINARY BOOK VALUE" . . . . . . . . . . . . . . . . . . . . . 51
"PROCEEDING" . . . . . . . . . . . . . . . . . . . . . . . . . . . 51
"PROPRIETARY RIGHTS AGREEMENT" . . . . . . . . . . . . . . . . . . 52
"PROTEST NOTICE. . . . . . . . . . . . . . . . . . . . . . . . . . 52
"PURCHASE PRICE" . . . . . . . . . . . . . . . . . . . . . . . . . 52
"RELATED PERSON" . . . . . . . . . . . . . . . . . . . . . . . . . 52
"REPRESENTATIVE" . . . . . . . . . . . . . . . . . . . . . . . . . 52
"RETAINED MUSIC BUSINESS". . . . . . . . . . . . . . . . . . . . . 52
"REVIEW PERIOD". . . . . . . . . . . . . . . . . . . . . . . . . . 52
"SECURITIES ACT" . . . . . . . . . . . . . . . . . . . . . . . . . 52
"SEC". . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52
"STOCK". . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52
"SUBSIDIARIES" . . . . . . . . . . . . . . . . . . . . . . . . . . 52
"SELLERS CLOSING DOCUMENTS". . . . . . . . . . . . . . . . . . . . 53
"SELLER TRANSACTION DOCUMENTS" . . . . . . . . . . . . . . . . . . 53
ix
<PAGE>
"SELLER GOVERNMENTAL AUTHORIZATIONS" . . . . . . . . . . . . . . . 53
"TAX OR TAXES" . . . . . . . . . . . . . . . . . . . . . . . . . . 53
"THREATENED" . . . . . . . . . . . . . . . . . . . . . . . . . . . 53
ARTICLE XV GENERAL PROVISIONS. . . . . . . . . . . . . . . . . . . . . . 53
15.1 Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53
15.2 Notices. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53
15.3 Further Assurances . . . . . . . . . . . . . . . . . . . . . . . . 54
15.4 Waiver . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54
15.5 Entire Agreement and Modification. . . . . . . . . . . . . . . . . 54
15.6 Assignments, Successors, and No Third-Party Rights . . . . . . . . 55
15.7 Severability . . . . . . . . . . . . . . . . . . . . . . . . . . . 55
15.8 Section Headings, Construction . . . . . . . . . . . . . . . . . . 55
15.9 Governing Law. . . . . . . . . . . . . . . . . . . . . . . . . . . 55
15.10 Counterparts. . . . . . . . . . . . . . . . . . . . . . . . . . . 55
15.11 No Strict Construction. . . . . . . . . . . . . . . . . . . . . . 55
x
<PAGE>
PURCHASE AND SALE AGREEMENT
This Purchase and Sale Agreement (this "Agreement") is made as of March
3, 1997 by and between PLATINUM ENTERTAINMENT, INC., a Delaware corporation
("Buyer") and K-TEL INTERNATIONAL, INC., a Delaware corporation ("Seller").
Capitalized terms that are not otherwise defined in this Agreement are
defined in Article 14.
The parties, intending to be legally bound, agree as follows:
WHEREAS, Seller is engaged in the business of recording, releasing,
licensing, publishing, distributing and otherwise exploiting recorded music
products on a worldwide basis ("Seller's Music Business");
WHEREAS, Buyer desires to buy, and Seller desires to sell, all of
Seller's Music Business, except for the Retained Music Business (the
"Business");
WHEREAS, Seller engages in the Business solely through two wholly owned
subsidiaries, K-tel International (USA), Inc., a Minnesota corporation
("KTI") and Dominion Entertainment, Inc., a Minnesota corporation
("Dominion", together with KTI, the "Subsidiaries");
WHEREAS, Seller desires to sell to Buyer, and Buyer desires to purchase
from Seller, the Business by acquiring all of the issued and outstanding
capital stock of the Subsidiaries, all upon the terms and subject to the
conditions set forth below; and
WHEREAS, the parties have agreed that the transactions contemplated
hereby be treated as an asset sale pursuant to Sec. 338(h) of the Code.
NOW THEREFORE, in consideration of the mutual covenants of the parties
set forth in this Agreement and other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the parties hereto
agree as follows:
ARTICLE I
PURCHASE AND SALE OF STOCK
1.1 STOCK. On the terms and subject to the conditions set forth in
this Agreement, at the Closing, Seller shall sell to Buyer, free and clear of
all Encumbrances (except for Encumbrances on the subsequent sale or transfer
by Buyer of the Stock under federal and state securities laws or created by
Buyer), and Buyer is purchasing from Seller, all of the issued and
outstanding capital stock of KTI (the "KTI Stock") and Dominion (the
"Dominion Stock", together with the KTI Stock, the "Stock").
<PAGE>
1.2 EXCLUDED BUSINESSES AND EXCLUDED ASSETS.
(a) Buyer and Seller each acknowledge and agree that Buyer is not
acquiring (i) Seller's consumer products business which is not related to
the Business (the "Consumer Products Business"), (ii) Seller's video
business (the "Video Business"), and (iii) Seller's infomercial business,
including infomercials for music and entertainment products (the
"Infomercial Business", together with the Consumer Products Business and
the Video Business, collectively referred to herein as the "Excluded
Businesses"). It is further agreed that Seller or a subsidiary of Seller
other than the Subsidiaries will retain (i) the Old Town Catalog and the
Maureen Catalog, and (ii) the claims arising prior to the Closing Date and
related judgments and settlement proceeds in connection with the pending or
settled actions against Tring, San Juan Music, Marshall Sehorn and related
entities (collectively the "Excluded Assets"). In connection therewith,
Seller agrees that it will, prior to the Closing, (A) transfer and assign
to the Subsidiaries all of the right, title and interest in and to the
assets (including, without limitation, all licenses and other related
contracts) related to the Business which are not owned by the Subsidiaries
as of the date hereof and (B) transfer and assign to Seller or one of its
other subsidiaries, as may be determined by Seller, all right, title and
interest in and to the Excluded Businesses or any assets specifically
related thereto and the Excluded Assets to the extent owned by the
Subsidiaries. In connection with the transfers and assignments by the
Subsidiaries contemplated in the immediately preceding sentence, Seller
shall provide Buyer with all documentation used to effect such transfers
and assignments immediately upon such documentation becoming available.
Notwithstanding the above, the parties specifically agree that the "Country
101" property/music rights will be acquired by Buyer hereunder and be
deemed to be part of the Business. In connection with the Excluded Assets
referred to in clause (ii) above of the sentence defining Excluded Assets
and after Closing, Buyer shall, and shall cause the Subsidiaries to, take
such reasonable action, at Seller's expense, as Seller may reasonably
request to effect recovery of such claims, judgments and settlements and to
deliver to Seller promptly upon receipt any funds received by Buyer or the
Subsidiaries with respect to such claims, judgments and settlements.
(b) The parties acknowledge and agree that the Business being
acquired by Buyer includes, but is not limited to, the worldwide rights to
all trademarks, service marks, and trade names, and all registrations
therefore, used in connection with the Business worldwide, with the
exception of the Retained Territory and the exclusive use of the name "K-
tel" solely in the corporate name of Seller or its Affiliates.
Notwithstanding the foregoing, Buyer agrees that promptly after the
Closing, it will take those steps required to change the corporate name of
KTI to delete the words "K-tel". Seller further agrees that, except as
otherwise specifically provided for herein, at no time after the Closing
will it or any of its subsidiaries, Affiliates, or Related Persons use, in
any manner, the words "K-tel", or any other name or mark similar thereto,
in connection with the manufacture, distribution, advertising, promotion,
or sale of consumer entertainment products (other than non-musical videos)
(i) except to truthfully disclose the correct corporate name of Seller or
its Affiliates solely on the packaging of such products where Seller's or
its Affiliate's direct connection with such product is described (i.e.,
"manufactured by ..." or "distributed by ....") and (ii) except for the
2
<PAGE>
Retained Music Business or in the Retained Territory. The display of
Seller's corporate name shall be in a manner customary to the trade and
without differentiation or emphasis (such as, but not limited to, different
color, typeface, size, or boxing). Seller and its subsidiaries (other than
the Subsidiaries) shall also be entitled to export phonorecords bearing the
"K-tel" name solely from the Retained Territories to the Non-Exclusive
Territory; provided, however, that (i) such phonorecords shall have been
originally commercially released in the Retained Territories, (ii) such
phonorecords are solely in finished manufactured form, and (iii) the use of
the "K-tel" name on such phonorecords shall be limited to the identical
form and manner of display of the "K-tel" name as used on the original
release by Seller of such phonorecords in the Retained Territories. After
Closing, Buyer agrees that Buyer and its subsidiaries (including the
Subsidiaries), Affiliates or Related Persons will not use the word "K-tel"
in their respective corporate names or the assumed business name under
which it conducts business. Seller and its Affiliates agree, at the
Closing, to assign to Buyer the intellectual property rights provided under
this SECTION 1.2(b).
ARTICLE II
CONSIDERATION AND MANNER OF PAYMENT
2.1 PURCHASE PRICE. The aggregate purchase price for the Stock (the
"Purchase Price") to be paid by Buyer to Seller shall be (i) $35,000,000 to be
paid at Closing, and (ii) plus the amount of the aggregate positive Net Tangible
Book Value (as defined below) or minus the amount of the aggregate negative Net
Tangible Book Value, as the case may be, of the Subsidiaries on the Closing Date
to be paid pursuant to SECTION 2.3 below (the "Final Net Tangible Book Value").
The portion of the Purchase Price to be paid at Closing shall be paid by wire
transfer of immediately available funds to an account designated, in writing, to
the Buyer.
2.2 ESCROWS.
(a) The parties hereto agree that upon execution of this Agreement,
Buyer will deposit into an interest bearing escrow account with a lending
institution an earnest money deposit equal to $1,750,000 (the "Earnest
Money Escrow") pursuant to the terms of an Earnest Money Escrow Agreement,
attached hereto as EXHIBIT 2.2(a) (the "Earnest Money Escrow Agreement").
(b) The parties hereto acknowledge that the Harry Fox Agency is
currently auditing the Business for the period of October 6, 1984 through
June 30, 1994 (the "Harry Fox Audit") and that Seller has established a
reserve for such audits (as set forth in PART 2.3(a) OF THE DISCLOSURE
LETTER) which will be used in connection with the calculation of the Final
Net Tangible Book Value (the "Harry Fox Reserve"). In connection
therewith, the parties hereto agree that $1,000,000 of the Purchase Price
due at Closing to Seller shall be placed in an interest bearing escrow
account (the "Harry Fox Escrow") pursuant to the terms of a Harry Fox
Escrow Agreement, attached hereto as EXHIBIT 2.2(b) (the "Harry Fox Escrow
Agreement).
3
<PAGE>
(c) The parties hereto agree that $2,000,000 of the Purchase Price
due at Closing to Seller shall be placed in an interest bearing escrow
account (the "Indemnity Escrow"), pursuant to the terms of an Indemnity
Escrow Agreement, attached hereto as EXHIBIT 2.2(c) which escrowed funds
shall secure Seller's indemnification obligations to Buyer and its
Affiliates under this Agreement.
2.3 NET TANGIBLE BOOK VALUE.
(a) For purposes of this Agreement, the term "Net Tangible Book
Value" shall mean all of the tangible net assets of the Subsidiaries less
all of the liabilities of the Subsidiaries set forth on the unaudited
balance sheets of the Subsidiaries as of the Closing Date (the "Closing
Balance Sheets"), determined using GAAP, consistently applied by Seller.
The parties agree that the Final Net Tangible Book Value calculation shall
specifically (i) exclude all Excluded Assets and all assets and liabilities
associated with the Excluded Businesses and the Retained Music Business,
(ii) exclude all intercompany payables and receivables to or from Seller
and Affiliates of the Seller which shall be written-off, distributed to or
purchased by Seller (as Seller may determine) or assumed by Seller, as the
case may be, prior to the Closing and (iii) include the reserves referred
to in PART 2.3(a) OF THE DISCLOSURE LETTER.
(b) PART 2.3(b) OF THE DISCLOSURE LETTER sets forth the balance
sheets for each of the Subsidiaries as of January 31, 1997 (the
"Preliminary Balance Sheets") and a calculation of the Net Tangible Book
Value as of such date (the "Preliminary Net Tangible Book Value") in
accordance with SECTION 2.3(a) indicating a negative Preliminary Net
Tangible Book Value of $4,874,000. The parties agree that the Purchase
Price due at Closing shall be equal to $30,126,000 ($35 million less the
negative Preliminary Net Tangible Book Value); provided that the parties
shall use all reasonable efforts, in good faith, to reach agreement on the
Net Tangible Book Value as of a date closer to the Closing Date which
utilizes the same assumptions and methodology as used in PART 2.3(b) OF THE
DISCLOSURE LETTER. If such an agreement can be reached, the amount agreed
to shall become the "Preliminary Net Tangible Book Value" as set forth
herein. If the parties are unable to reach such an agreement, the
Preliminary Net Tangible Book Value (as used herein) shall be the amount
set forth above in this SECTION 2.3(b).
(c) As soon as practicable following the Closing, but in no event
later than 60 days following the Closing, Buyer and Seller each agree to
cause the Minneapolis office of Arthur Andersen, LLP ("AA") to prepare and
deliver to Buyer and Seller the Closing Balance Sheets and the calculation
of Final Net Tangible Book Value which utilizes the same assumptions and
methodology as used in PART 2.3(b) OF THE DISCLOSURE LETTER (the "NTBV
Schedule") promptly upon their completion. The Final Net Tangible Book
Value shall be determined as follows:
(i) For a period of 10 business days (the "Review Period") after
delivery of Closing Balance Sheet and the NTBV Schedule, Seller and
Buyer shall each have an opportunity to review and substantiate the
Closing Balance Sheets and NTBV Schedule. During the Review Period,
each party agrees to provide to the other all necessary accounting
4
<PAGE>
records and supporting documentation, as may be requested, so that
each of the Buyer and Seller may complete its review of the Closing
Balance Sheets and NTBV Schedule. Upon expiration of the Review
Period, Seller and Buyer shall each have 5 business days to deliver
written notice (the "Protest Notice") to the other of any objections,
and the basis therefor, that it may have to the Closing Balance Sheets
and the NTBV Schedule.
(ii) If Buyer and Seller are unable to resolve any disagreement
between them within 15 days following receipt of any Protest Notice,
then the items in dispute will be referred to the Minneapolis office
of Ernst & Young, L.L.P. (the "Accountants") for final determination.
The determination made by the Accountants shall be final and binding
on the parties.
(iii) If the Final Net Book Value is greater (i.e., a higher
positive amount on the positive side or less negative on the negative
side) than the Preliminary Net Tangible Book Value, Buyer shall pay to
Seller the amount of such excess by wire transfer of immediately
available funds to an account designated, in writing, by Seller. If
the Final Net Book Value is less than the Preliminary Net Book Value
(i.e, lower positive amount on the positive side or a larger negative
amount on the negative side), Seller shall pay to Buyer the amount of
such deficiency by wire transfer of immediately available funds to an
account designated, in writing, by Buyer. All such payments due under
this SECTION 2.3(c) shall be paid within 5 business days after final
determination of the Final Net Tangible Book Value.
The fees and expenses of the AA and the Accountants incurred pursuant to
this SECTION 2.3(c) will be borne one-half by Buyer and one-half by Seller.
ARTICLE III
CLOSING
3.1 CLOSING. The closing (the "Closing") of the transactions contemplated
by this Agreement will take place at the offices of Katten Muchin & Zavis,
counsel to Buyer, at 525 West Monroe, Suite 1600, Chicago, Illinois 60661, at
10:00 a.m. (local time) on a date to be specified by the parties, which shall be
no earlier than five (5) business days and no later than ten (10) business days
after the satisfaction or waiver of the conditions set forth in Articles 9, 10
and 11 or at such other time, date and location as the parties may agree (the
"Closing Date"). Subject to the provisions of Article 12, failure to consummate
the Contemplated Transactions on the Closing Date will not result in the
termination of this Agreement and will not relieve any party of any obligation
under this Agreement.
3.2 DELIVERIES BY SELLER. At the Closing, Seller shall deliver to Buyer
(the "Seller's Closing Documents"):
5
<PAGE>
(a) certificates representing the Stock, duly endorsed (or
accompanied by duly executed stock powers) for transfer to Buyer;
(b) A certificate executed by Seller to the effect that (i) the
Seller's representations and warranties in this Agreement were accurate as
stated herein as of the date of this Agreement and are accurate as stated
herein as of the Closing Date as if made on the Closing Date (giving full
effect to any supplements delivered by the Seller to Buyer prior to the
Closing Date in accordance with SECTION 6.5), except to the extent to which
such representations and warranties are specifically stated to be as of a
different date, and (ii) the Seller has performed and complied in all
material respects with all covenants and conditions required to be
performed, or complied with, by it hereunder prior to or at the Closing;
(c) Resignations of all officers and directors of each of KTI and
Dominion;
(d) A Good Standing Certificate (dated within five business days
prior to the Closing Date) for KTI and Dominion from all states in which
they are authorized to do business;
(e) A copy of the KTI's and Dominion's Articles of Incorporation and
all amendments thereto, certified by the Secretary of State of Minnesota,
and a copy of KTI's and Dominion's By-laws, and all amendments thereto,
certified by the Secretary of each of KTI and Dominion; and
(f) An opinion of Kaplan, Strangis and Kaplan, P.A., legal counsel
to Seller and the Subsidiaries, dated the Closing Date, covering the
matters set forth in EXHIBIT 3.2(f) attached hereto;
(g) The License Agreements, duly executed by Seller;
(h) The Harry Fox Escrow Agreement, duly executed by Seller;
(i) The Indemnity Escrow Agreement, duly executed by Seller;
(j) A release in the form attached hereto as EXHIBIT 3.2(d), whereby
Seller and its subsidiaries (other than the Subsidiaries) shall release the
Subsidiaries from any and all liabilities or obligations of the
Subsidiaries except for the License Agreements;
(k) The noncompetition agreements in the form attached hereto as
EXHIBIT 8.7 from Seller and Philip Kives, duly executed by each of them;
(l) A pay-off letter from TCF Bank Minnesota fsb, the secured lender
of the Subsidiaries; and
(m) Such other documents as Buyer may reasonably request for the
purpose of consummating the Contemplated Transactions, each in form and
substance reasonably acceptable to Buyer's and Seller's counsel.
6
<PAGE>
3.3 DELIVERIES BY BUYER. At the Closing, Buyer shall deliver to Seller
(the "Buyer's Closing Deliveries"):
(a) The Purchase Price, as provided in SECTION 2.1 (provided, in
part, by the release of the Earnest Money Escrow to Seller), less (i) the
amount of the Harry Fox Escrow which shall be funded by Buyer at Closing
out of the Purchase Price due to Seller, and (ii) the amount of the
Indemnity Escrow which shall be funded by Buyer at Closing out of the
Purchase Price due to Seller;
(b) A certificate executed by Buyer to the effect that (A) each of
Buyer's representations and warranties in this Agreement was accurate as
stated herein as of the date of this Agreement and is accurate as stated
herein as of the Closing Date as if made on the Closing Date and (B) Buyer
has performed and complied in all material respects with all covenants and
conditions required to be performed or complied with by it prior to or at
the Closing;
(c) An opinion of Katten Muchin & Zavis, legal counsel to Buyer,
dated the Closing Date, covering the matters set forth in EXHIBIT 3.3(c)
attached hereto;
(d) The License Agreements, duly executed by Dominion and KTI;
(e) The Harry Fox Escrow Agreement, duly executed by Seller and the
escrow agent named therein;
(f) The Indemnity Escrow Agreement, duly executed by Seller and the
escrow agent named therein; and
(g) Such other documents as Seller may reasonably request for the
purpose of consummating the Contemplated Transactions, each in form and
substance reasonably acceptable to Buyer's and Seller's counsel.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF SELLER
Seller represents and warrants to Buyer, as of the date of this Agreement
and as of the Closing Date (except to the extent such representations or
warranties are specifically stated to be as of a different date), as follows:
4.1 ORGANIZATION, GOOD STANDING AND CAPITALIZATION.
(a) Seller is a corporation duly organized, validly existing, and in
good standing under the laws of the State of Minnesota with full corporate
power and authority to conduct its business as it is now being conducted,
to own, hold under lease, or otherwise possess or use the properties and
assets that it purports to own, hold under lease, or otherwise possess or
use, and to perform all its obligations under the contracts to which it is
a party or by which it is bound. Each of KTI and Dominion is a corporation
7
<PAGE>
duly organized, validly existing, and in good standing under the laws of
the State of Minnesota, with full corporate power and authority to conduct
its business as it is now being conducted, to own, hold under lease, or
otherwise possess or use the properties and assets that it purports to own,
hold under lease, or otherwise possess or use, and to perform all its
obligations under the contracts to which it is a party or by which it is
bound. PART 4.1(a) OF THE DISCLOSURE LETTER sets forth each other
jurisdiction in which each of KTI and Dominion is qualified to do business
in accordance with the laws of such jurisdiction. The Subsidiaries are
duly qualified to do business as foreign corporations and are in good
standing under the laws of each state or other jurisdiction in which such
qualification is required by virtue of the nature of the activities
conducted by them, except where the failure to be so qualified,
individually or in the aggregate, would not have a material adverse effect
on the Business as a whole.
(b) PART 4.1(b) OF THE DISCLOSURE LETTER includes copies of the
Organizational Documents of each of KTI and Dominion, as currently in
effect.
(c) The authorized equity securities of KTI consists of 5,000,000
shares of common stock, $.01 par value, of which 1,000 shares are issued
and outstanding and constitute the KTI Stock. The authorized equity
securities of Dominion consists of 5,000,000 shares of common stock, $.01
par value, of which 1,000 shares are issued and outstanding and constitute
the Dominion Stock. Seller is, and on the Closing Date will be, the sole
record and beneficial owner and holder of the Stock, free and clear of all
Encumbrances, except as set forth in PART 4.1(c) OF THE DISCLOSURE LETTER.
Upon consummation of the Contemplated Transactions, Buyer will be vested
with good and valid title to the Stock, free and clear of all Encumbrances,
except for Encumbrances on the subsequent sale or transfer by Buyer of the
Stock under federal and state securities laws or created by Buyer. Except
as set forth in PART 4.1(c) OF THE DISCLOSURE LETTER, no legend or other
reference to any purported Encumbrance appears upon any certificate
representing the Stock. All of the Stock have been duly authorized and
validly issued and are fully paid and nonassessable. Except as set forth
in PART 4.1(c) OF THE DISCLOSURE LETTER, there are not as of the date
hereof, and there will not be on the Closing Date, any outstanding or
authorized options, warrants, calls, rights (including preemptive rights),
commitments or any other agreements of any character which Seller or any of
the Subsidiaries is a party to, or may be bound by, requiring it to issue,
transfer, grant, sell, purchase, redeem or acquire any shares of capital
stock or any securities or rights convertible into, exchangeable for, or
evidencing the right to subscribe for, any shares of capital stock of the
Subsidiaries. Except as set forth in PART 4.1(c) OF THE DISCLOSURE LETTER,
there are not as of the date hereof, and there will not be at the Closing
Date, any stockholder agreements, voting trusts or other agreements or
understandings to which Seller or either of the Subsidiaries is a party or
to which it is bound relating to the voting of any shares of the capital
stock of the Subsidiaries. None of the outstanding equity securities or
other securities of the Subsidiaries was issued, redeemed or repurchased in
violation of the Securities Act or any securities or "blue sky" Legal
Requirements. Neither of the Subsidiaries own, and has no contract or
agreement, written or oral, to acquire, any equity securities or other
securities of any Person or any direct or indirect equity or ownership
interest in any other business.
8
<PAGE>
(d) PART 4.1(d) OF THE DISCLOSURE LETTER contains a complete and
accurate list of the current directors and officers of each of KTI and
Dominion.
4.2 AUTHORITY; NO CONFLICT; APPROVALS.
(a) This Agreement constitutes and, when executed and delivered by
Seller at Closing, the Seller's Closing Documents (collectively, the
"Seller Transaction Documents"), to which Seller is a party, will
constitute the legal, valid, and binding obligations of the Seller,
enforceable against Seller in accordance with their respective terms except
as such enforcement may be limited by bankruptcy, insolvency, moratorium,
reorganization, or similar laws affecting creditor's rights generally and
by general equitable principles. Seller has the corporate power and
authority to execute and deliver this Agreement and each of the Seller
Transaction Documents to which it is a party and to perform its obligations
under this Agreement and each of the Seller Transaction Documents. This
Agreement has been, and the Seller Transaction Documents to which it is a
party at Closing will be, duly executed and delivered by Seller.
(b) The Board of Directors of Seller has approved the Contemplated
Transaction. Except for the approval of the holders of the stockholders of
Seller required by the Minnesota Business Corporation Act (the "MBCA"), no
other approval of the stockholders of Seller or other corporate approval of
Seller (or the Subsidiaries) is required in order for Seller to consummate
the transactions contemplated by this Agreement.
(c) Neither the execution and delivery of this Agreement nor the
consummation by Seller of the Contemplated Transaction will (i) conflict
with or result in any breach of any provision of the respective
Organizational Documents of Seller or any of the Subsidiaries; (ii) require
any consent, approval, authorization or permit of, or registration or
filing with or notification to, any Governmental Body, except (A) in
connection with the applicable requirements, if any, of the Hart-Scott-
Rodino Antitrust Improvements Act of 1976, as amended (the "HSR Act") or
(B) pursuant to the applicable requirements of the Securities Act, and the
rules and regulations promulgated thereunder, and the Exchange Act, and the
rules and regulations promulgated thereunder, including, without,
limitation, a proxy statement and a Form 8-K; (iii) result in a violation
or breach of, or constitute (with or without notice or lapse of time or
both) a default (or give rise to any right of termination, cancellation or
acceleration or lien or other charge or Encumbrance) under any of the
terms, conditions or provisions of any indenture, note, license, lease,
agreement or other instrument or obligation to which Seller or either of
the Subsidiaries or any of their assets may be bound, except for such
violations, breaches and defaults (or rights of termination, cancellation
or acceleration or lien or other charge or encumbrance) as to which
requisite waivers or consents will have been obtained prior to Closing or
which, in the aggregate, would not have a material adverse effect on the
Business as a whole or adversely affect the ability of Seller to consummate
the transactions contemplated hereby, except as set forth in PART 4.2(c) OF
THE DISCLOSURE LETTER; (iv) except as set forth in PART 4.2(c) OF THE
DISCLOSURE LETTER, cause the suspension or revocation of any
9
<PAGE>
authorizations, consents, approvals or licenses currently in effect which
would have a material adverse effect on the Business as a whole; or
(v) assuming the consents, approvals, authorizations or permits and filings
or notifications referred to in this SECTION 4.2(d) are duly and timely
obtained or made and the approval of the Contemplated Transaction by
Seller's stockholders has been obtained, violate any (A) Legal Requirement
except where such violation would not have a material adverse effect on the
Business as a whole or (B) Order, applicable to Seller or either of the
Subsidiaries or to any of their respective assets.
(d) Except for (i) the approval by the Seller's stockholders of the
Contemplated Transaction, and (ii) except as set forth in PART 4.2(d) OF
THE DISCLOSURE LETTER, the Seller is not, and will not be, required to give
any notice to or obtain any consent or approval from any Person which is
not a Governmental Body in connection with the execution and delivery of
this Agreement or any of the Seller Transaction Documents or the
consummation or performance of any of the Contemplated Transactions.
4.3 FINANCIAL STATEMENTS. Seller has delivered to Buyer (a) audited
balance sheets of each of KTI and Dominion as of June 30 for each of the fiscal
years 1994 through 1996, and the related statements of operations and cash flows
for each of the fiscal years ending June 30, 1994 through 1996, including in
each case the notes thereto and (B) the unaudited balance sheet of each of KTI
and Dominion at December 31, 1996 (the "Interim Balance Sheets") and the related
unaudited/reviewed statements of operations and cash flows for the six-month
period then ended (each of the financial statements delivered to Buyer pursuant
to this SECTION 4.3 shall be referred to herein as the "Financial Statements").
The Financial Statements and notes fairly present the financial condition and
results of operations of each of the Subsidiaries as at the respective dates
thereof and for the periods therein referred to, all in accordance with GAAP,
except that the unaudited financial statements do not include footnote
disclosure of the type associated with audited financial statements and were or
are subject to normal and recurring year-end adjustments which were not or are
not expected to be materially adverse in amount. The Financial Statements
reflect the consistent application of GAAP throughout the periods involved,
except as may otherwise be specifically described therein.
4.4 BOOKS AND RECORDS. The books of account and other records of each of
the Subsidiaries, all of which have been made available to Buyer, are complete
and correct in all material respects and have been maintained in all material
respects in accordance with sound business practices. Without limiting the
generality of the foregoing, the minute books of each of the Subsidiaries
contain complete and accurate records of all official meetings held of, and
corporate action taken by, the shareholders, the boards of directors, and
committees of the boards of directors of such Subsidiary, and no meeting of any
such shareholders, board of directors, or committee has been held for which
minutes have not been prepared and are not contained in such minute books. At
the Closing, all of those books and records will be in the possession of each
Subsidiary or otherwise delivered by Seller to Buyer.
4.5 TITLE TO ASSETS; ENCUMBRANCES; SUFFICIENCY. Except as set forth in
PART 4.5 OF THE DISCLOSURE LETTER, neither Seller, nor any of its subsidiaries
or Affiliates (other than KTI and Dominion) own any of the tangible assets used
10
<PAGE>
in connection with the Business. Each Subsidiary has good and valid title to
all the tangible properties and assets reflected as owned in the books and
records of each Subsidiary, including all of the tangible properties and assets
reflected in the Interim Balance Sheets (except for personal property sold or
disposed of since the date of the Interim Balance Sheets in the Ordinary Course
of Business), free and clear of any Encumbrances, except for any encumbrances,
any mechanics or other statutory liens, any lien of taxes not yet due and
payable, liens or security interests which will be released at or prior to
Closing, and imperfections or irregularities of title, as do not materially
detract from the value of or materially interfere with the use of the properties
or assets subject thereto, or affected thereby). All of the tangible properties
and assets purchased or otherwise acquired by each Subsidiary since the date of
the Interim Balance Sheets (except for supplies, inventory, and personal
property acquired since the date of the Interim Balance Sheets in the Ordinary
Course of Business) are listed in PART 4.5 OF THE DISCLOSURE LETTER. At
Closing, the Subsidiaries will own, lease or license all of the tangible assets
which are necessary for the conduct and operation of the Business as it is
presently conducted, except as set forth in PART 4.5 OF THE DISCLOSURE LETTER.
4.6 TANGIBLE ASSETS AND REAL PROPERTY.
(a) Except as set forth in PART 4.6(a) OF THE DISCLOSURE LETTER, all
of the material tangible assets used by the Subsidiaries are located at the
Facilities, are in operating condition and repair and free of material
defects and are not in need of maintenance or repairs except for ordinary,
routine maintenance and repairs that are not material in nature or costs.
Except as set forth on PART 4.6(a) OF THE DISCLOSURE LETTER, all of the
material tangible assets are either owned by either Subsidiary or held
under a lease. All such material leases are valid and in full force and
effect and neither the Subsidiaries, nor to the knowledge of Seller, any
other party thereto, is in default under any of such leases and no event
has occurred which with the giving of notice or the passage of time or both
could constitute a default under any of such leases. All leases for
material tangible assets used by the Subsidiaries with Affiliates and
related parties, if any, are identified as such on PART 4.6(a) OF THE
DISCLOSURE LETTER, and carry terms and conditions no less favorable nor
more favorable in all material respects to the Subsidiaries than those
which could have obtained in arm's-length transactions with unrelated third
parties.
(b) Neither of the Subsidiaries owns any real property. PART 4.6(b)
OF THE DISCLOSURE LETTER sets forth all of the leasehold and other
interests in real property used in connection with the Business (the
"Facilities") and the leases or other agreements under which the Facilities
are used (the "Facilities Leases"). The Facilities Leases are in full
force and effect and no default by the Subsidiaries or, to the knowledge of
Seller, by any other party thereto has occurred and is continuing under any
of the Facilities Leases. Either of the Subsidiaries (and not the Seller
or its Affiliates) are the lessees under the Facilities Leases. To the
knowledge of Seller except as set forth in PART 4.6(b) OF THE DISCLOSURE
LETTER:
(i) Each of the Subsidiaries has all easements and rights
necessary to conduct the Business on or at the Facilities as presently
conducted;
11
<PAGE>
(ii) No portion of the Facilities is subject to any pending
condemnation proceeding or proceeding by any public or quasi-public
authority materially adverse to the Facilities and there is no
threatened condemnation or proceeding with respect to the Facilities;
(iii) The buildings and fixtures located on the Facilities
including, without limitation, heating, ventilation, mechanical,
electrical, sewer, sprinkler and air conditioning systems, roof,
foundation and floors (the "Building and Fixtures"), have been
properly maintained and are in operating condition in each case in all
material respects. The Building and Fixtures are in operating
condition in each case in all material respects, are substantially fit
for the purposes for which they are being utilized and are not in need
of any material repair or replacement;
(iv) The Facilities (or the use, occupancy and ownership thereof)
do not violate in any material respect any zoning, subdivision,
health, safety, handicapped persons, landmark preservation, wetlands
preservation, building, land use or other ordinances, laws, codes or
regulations or any covenants, restrictions or other documents of
record (including the Americans with Disabilities Act), nor, has any
such violation been claimed by, nor has any notice of any violation
been issued to Seller or either of the Subsidiaries by any
governmental, public or quasi-public authority;
(v) There are no leases, subleases, licenses, concessions or
other agreements, written or oral, granting to any party or parties
the right of use or occupancy of any portion of the Facilities used
exclusively by either Subsidiary; and
(vi) The Facilities are supplied with utilities and other
services necessary for the operation of the Business as presently
conducted, and all such services are adequate to conduct that portion
of the Business presently conducted at the Facilities and are in
accordance with all laws, ordinances, rules and regulations applicable
to each of the Subsidiaries or the Facilities, except where failure to
comply with such laws, ordinances, rules and regulations would not
have individually or in the aggregate a material adverse effect on
either of the Subsidiaries or in the operations of the Business as
presently conducted.
4.7 ACCOUNTS RECEIVABLE. To the knowledge of Seller, except as set forth
in PART 4.7 OF THE DISCLOSURE LETTER, all accounts receivable of each Subsidiary
(without regard to any reserve for bad debts) that are reflected on the Interim
Balance Sheets or on the accounting records of each Subsidiary as of the Closing
Date, which accounts receivable will be part of the calculation of the Final Net
Book Value Calculation (collectively, the "Accounts Receivable") represent or
will represent in all material respects valid obligations arising from sales
actually made, services actually performed or rights granted, in the Ordinary
Course of Business. Except as set forth in PART 4.7 OF THE DISCLOSURE LETTER,
there is no contest, claim, or asserted right of set-off other than returns in
the Ordinary Course of Business in any agreement with any maker of an Accounts
Receivable in a material amount.
12
<PAGE>
4.8 INVENTORY. To the knowledge of Seller, except as set forth in PART
4.8 OF THE DISCLOSURE LETTER, all raw materials, components, work-in-process,
finished products and supplies and merchandise inventory ("Inventory") owned by
each Subsidiary are in good condition in all material respects and consists of
items of a quality and quantity historically useable and saleable in the
Ordinary Course of Business, except for items which are obsolete or below
standard quality, all of which have been determined and written down to net
realizable value in accordance with GAAP.
4.9 NO UNDISCLOSED LIABILITIES. To the knowledge of Seller, except as set
forth in PART 4.9 OF THE DISCLOSURE LETTER, or disclosed in any other Part of
the Disclosure Letter, neither of the Subsidiaries will have liabilities or
obligations (nor does the Seller have any liabilities or obligations for which
either of the Subsidiaries or Buyer could be liable) of any nature (whether
absolute, accrued, contingent, or otherwise) other than (i) liabilities or
obligations which will be reflected or reserved against in the calculation of
the Final Net Tangible Book Value and (ii) obligations under executory Contracts
which are not required to be accrued for under GAAP.
4.10 TAXES. Each of the Seller and the Subsidiaries has filed all federal,
state, local and foreign tax returns, estimates, information statements and
reports ("Tax Returns") that it is required to have filed prior to the Closing.
Seller and each of the Subsidiaries have paid all Taxes, interest and penalties,
if any, shown as due on such Tax Returns or otherwise due and payable by it as
of the Closing. Except for the amounts, if any, specifically included in the
calculation of the Final Net Tangible Book Value, neither Seller nor the
Subsidiaries will have any liability whatsoever for Taxes that, directly or
indirectly, relate to any period prior to the Closing, whether relating to the
Business, the Seller, the Subsidiaries or their respective Affiliates. Any
deficiencies proposed as a result of any governmental audits of such Tax Returns
have been paid or settled, and except as set forth in PART 4.10 OF THE
DISCLOSURE LETTER, there are no present disputes as to Taxes payable by Seller,
the Subsidiaries or their respective Affiliates.
4.11 NO MATERIAL ADVERSE CHANGE. To the knowledge of Seller, except as set
forth in PART 4.11 OF THE DISCLOSURE LETTER, since the date of the June 30, 1996
audited financial statements of the Subsidiaries, there has not been any
material adverse change in the business, operations, properties, prospects,
assets, or condition of either of the Subsidiaries or any event, condition, or
contingency that is likely to result in such a material adverse change.
4.12 EMPLOYEE BENEFITS. Except as set forth in PART 4.12 OF THE DISCLOSURE
LETTER, neither Seller nor any Plan Affiliate has maintained, sponsored,
adopted, made contributions to or obligated itself to make contributions to or
to pay any benefits or grant rights under or with respect to any "Employee
Pension Benefit Plan" (as defined in SECTION 3(2) of ERISA), "Employee Welfare
Benefit Plan" (as defined in SECTION 3(1) of ERISA), "Multi-employer Plan" (as
defined in SECTION 3(37) of ERISA), plan of deferred compensation, medical plan,
life insurance plan, long-term disability plan, dental plan or other plan
providing for the welfare of any of Seller's or any Plan Affiliate's employees
or former employees or beneficiaries thereof, personnel policy (including but
not limited to vacation time, holiday pay, bonus programs, moving expense
reimbursement programs and sick leave), excess benefit plan, bonus or incentive
plan (including but not limited to stock options, restricted stock, stock bonus
13
<PAGE>
and deferred bonus plans), salary reduction agreement, change-of-control
agreement, employment agreement, consulting agreement, or any other benefit,
program or contract (all such plans listed on PART 4.12 OF THE DISCLOSURE LETTER
collectively, "Employee Benefit Plans"), whether written, voluntary or pursuant
to a collective bargaining agreement or law, which could give rise to or result
in Seller or such Plan Affiliate having any debt, liability, claim or obligation
of any kind or nature, whether accrued, absolute, contingent, direct, indirect,
known or unknown, perfected or inchoate or otherwise and whether or not due or
to become due. Correct and complete copies of all Employee Benefit Plans
previously have been furnished to Buyer. For purposes of this Agreement, "Plan
Affiliate" means any person or entity with which Seller constitutes all or part
of a controlled group of corporations, a group of trades or businesses under
common control or an affiliated service group, as each of those terms are
defined in SECTION 414 of the Code. Since June 30, 1996, there has not been any
adoption of, or increase in the payments to or benefits under, any profit
sharing, bonus, deferred compensation, savings, insurance, pension, retirement,
or other Employee Benefit Plan except as set forth in PART 4.12 OF THE
DISCLOSURE LETTER.
4.13 COMPLIANCE WITH LEGAL REQUIREMENTS; GOVERNMENTAL AUTHORIZATIONS.
(a) Except as set forth in PART 4.13(a) OF THE DISCLOSURE LETTER to
the knowledge of Seller:
(i) each of the Subsidiaries and the operations of the Business
are in full compliance with each Legal Requirement that is or was
applicable to it except where failure to comply would not individually
or in the aggregate have a material adverse effect on the Business as
a whole;
(ii) no event has occurred or circumstance exists that may
constitute or result in (with or without notice or lapse of time) a
violation by Seller or its affiliates (with respect to the Business)
or by either of the Subsidiaries of, or a failure to comply with, any
Legal Requirement except where failure to comply would not
individually or in the aggregate have a material adverse effect on the
Business as a whole; and
(iii) neither Seller nor the Subsidiaries have received any notice
or other communication (whether oral or written) from any Governmental
Body or any other Person regarding, and Seller has no knowledge of any
actual, alleged, possible, or potential violation of, or failure to
comply with, any Legal Requirement applicable to the Business, or any
obligation on the part of Seller (with respect to the Business) or
either of the Subsidiaries to undertake, or to bear all or any portion
of the cost of, any remedial action of any nature except where failure
to comply would not individually or in the aggregate have a material
adverse effect on the Business as a whole.
(b) To the knowledge of Seller, the Governmental Authorizations
listed in PART 4.13(b) OF THE DISCLOSURE LETTER (the "Seller Governmental
Authorizations") collectively constitute all of the Governmental
Authorizations necessary to permit each of the Subsidiaries to lawfully
14
<PAGE>
conduct and operate the Business in the manner currently conducted and
operated except where failure to have Governmental Authorizations would not
individually or in the aggregate have a material adverse effect on the
Business as a whole. To the knowledge of Seller, each Seller Governmental
Authorization is valid and in full force and effect. Except as set forth
in PART 4.13(b) OF THE DISCLOSURE LETTER to the knowledge of Seller:
(i) Seller and each Subsidiary is in full compliance with all of
the terms and requirements of each Seller Governmental Authorization
except where failure to comply would not individually or in the
aggregate have a material adverse effect on the Business as a whole;
(ii) no event has occurred or circumstance exists that may
reasonably (with or without notice or lapse of time) (A) constitute or
result in a violation of or a failure to comply with any term or
requirement of any Seller Governmental Authorization, or (B) result in
the revocation, withdrawal, suspension, cancellation, or termination
of, or any modification to, any Seller Governmental Authorization
except where such violation, failure or revocation, withdrawal,
suspension, cancellation or termination would not individually or in
the aggregate have a material adverse effect on the Business as a
whole;
(iii) neither Seller nor the Subsidiaries have received any notice
or other written communication from any Governmental Body or any other
Person regarding (A) any actual, alleged, or potential violation of or
failure to comply with any term or requirement of any Seller
Governmental Authorization, or (B) any actual, proposed, or potential
revocation, withdrawal, suspension, cancellation, termination of, or
modification to any Seller Governmental Authorization except where
such violation, failure or revocation, withdrawal, suspension,
cancellation or termination would not individually or in the aggregate
have a material adverse effect on the Business as a whole; and
(iv) all applications required to have been filed for the renewal
of Seller Governmental Authorizations have been duly filed on a timely
basis with the appropriate Governmental Bodies, and all other filings
required to have been made with respect to such Seller Governmental
Authorizations have been duly made on a timely basis with the
appropriate Governmental Bodies except where failure to so file would
not individually or in the aggregate have a material adverse effect on
the Business as a whole.
4.14 LEGAL PROCEEDINGS; ORDERS.
(a) Except as set forth in PART 4.14(a) OF THE DISCLOSURE LETTER, to
the knowledge of Seller, there is no pending Proceeding:
(i) that has been commenced by or against Seller (relating to
the Business) or either of the Subsidiaries; or
15
<PAGE>
(ii) that challenges, or that may have the effect of preventing,
delaying, making illegal, or otherwise interfering with, any of the
Contemplated Transactions.
Except as set forth in PART 4.14(a) OF THE DISCLOSURE LETTER, to the
knowledge of Seller (A) no such Proceeding has been Threatened, and (B) no
event has occurred or circumstance exists that could reasonably be expected
to give rise to or serve as a basis for the commencement of any such
Proceeding. Seller has delivered to Buyer copies of all pleadings,
correspondence, and other documents relating to each Proceeding listed in
PART 4.14(a) OF THE DISCLOSURE LETTER. Also listed in PART 4.14(a) OF THE
DISCLOSURE LETTER are all Proceedings commenced or, to the knowledge of
Seller, Threatened by or against (i) Seller pertaining to the Business or
(ii) the Subsidiaries, within the last two (2) years, and a description of
the outcome thereof.
(b) Except as set forth in PART 4.14(b) OF THE DISCLOSURE LETTER to
the Seller's knowledge:
(i) there is no Order to which Seller, with respect to the
operations of the Business, or either of the Subsidiaries, is subject;
and
(ii) no officer, director, agent or employee of either of the
Subsidiaries is subject to any Order that prohibits such person from
engaging in or continuing any conduct, activity, or practice relating
to the Business.
(c) Except as set forth in PART 4.14(c) OF THE DISCLOSURE LETTER to
the Seller's knowledge:
(i) Seller, with respect to the operations of the Business, and
each of the Subsidiaries, are in full compliance with all of the terms
and requirements of each Order to which it is or has been subject;
(ii) no event has occurred or circumstance exists that will
constitute or result in (with or without notice or lapse of time) a
violation of or failure to comply with any term or requirement of any
Order to which Seller, with respect to the operations of the Business,
or either of the Subsidiaries, is subject; and
(iii) neither Seller nor either Subsidiary has received any notice
or other written communication from any Governmental Body or any other
Person regarding any actual, alleged, or potential violation of, or
failure to comply with, any term or requirement of any Order to which
Seller, with respect to the operations of the Business, or either of
the Subsidiaries, is or has been subject.
4.15 ABSENCE OF CERTAIN CHANGES AND EVENTS. Except as set forth in
PART 4.15 OF THE DISCLOSURE LETTER, since June 30, 1996, the businesses of each
Subsidiary has been conducted only in the Ordinary Course of Business and there
has not been any:
16
<PAGE>
(i) change in either of the Subsidiary's authorized or issued
capital stock; grant of any stock option or right to purchase shares
of capital stock of either Subsidiary; issuance of any security
convertible into such capital stock; grant of any registration rights;
purchase, redemption, retirement, or other acquisition by either
Subsidiary of any shares of any such capital stock; or declaration or
payment of any non-cash dividend or other non-cash distribution or
payment in respect of shares of capital stock;
(ii) damage to or destruction or loss of any asset or property of
the Subsidiaries, whether or not covered by insurance, materially and
adversely affecting the properties, assets, business or financial
condition of either of the Subsidiaries;
(iii) entry into, termination of, or receipt of notice of
termination of (A) any license, maintenance, distributorship, dealer,
sales representative, consulting, joint venture, credit, or similar
agreement, or (B) any Contract or transaction involving a total
remaining commitment by either Subsidiary of at least $50,000 which is
not in the Ordinary Course of Business;
(iv) loan or advance by either Subsidiary to any Person other
than sales to customers on credit in the Ordinary Course of Business
and loans or advances of $10,000 or less to any Person in the Ordinary
Course of Business;
(v) discharge or satisfy any liability of either Subsidiary in
excess of $50,000, except in the Ordinary Course of Business;
(vi) other than the sale of inventory and licensing of
Intellectual Property in the Ordinary Course of Business, sale, lease,
or other disposition of any asset or property of either Subsidiary or
mortgage, pledge, or imposition of any Encumbrance on any material
asset or property of either Subsidiary, including the sale, lease, or
other disposition of any of either Subsidiary's intellectual property;
(vii) cancellation or waiver of any claims or rights with a value
to either Subsidiary in excess of $50,000;
(vii) change in the accounting methods used by Seller with respect
to the Subsidiaries' operations; or
(viii) agreement, whether oral or written, to do any of the
foregoing.
4.16 CONTRACTS; NO DEFAULTS; KEY CUSTOMERS.
(a) PART 4.16(a) OF THE DISCLOSURE LETTER contains a complete and
accurate list, and Seller has delivered to Buyer true and complete copies
(or forms thereof, where form agreements are used; provided that any and
all deviations or changes to the forms in any individual case are described
17
<PAGE>
in PART 4.16(a) OF THE DISCLOSURE LETTER), of all Contracts relating to the
operation of the Business which are described in (i) through (xiv) below
(the "Material Contracts"):
(i) each Contract that involves executory performance of
services or delivery of goods or materials BY either of the
Subsidiaries which has a specified amount or specified value in excess
of $50,000 and not terminable by such Subsidiary on thirty (30) days
prior notice without liability (without giving effect to renewal
provisions thereof) except for orders of finished goods from either
Subsidiary in the Ordinary Course of Business;
(ii) each Contract that involves executory performance of
services or delivery of goods or materials TO either of the
Subsidiaries of a specified amount or specified value in excess of
$50,000 and not terminable by such Subsidiary on thirty (30) days
prior notice without liability except for licenses of music rights by
either Subsidiary for its use and Contracts for finished goods entered
into in the Ordinary Course of Business;
(iii) each Contract relating to the borrowing of money, the
guaranty of another Person's borrowing of money, or the creation of an
Encumbrance on any of the assets of either Subsidiary;
(iv) each Contract not in the Ordinary Course of Business
involving expenditures or receipts of either of the Subsidiaries in
excess of $50,000;
(v) each lease, rental or occupancy agreement, installment and
conditional sale agreement, and other Contract affecting the ownership
of, leasing of, title to, use of, or any leasehold or other interest
in, (A) any real property or (B) any tangible personal property with a
fair market value in excess of $50,000 or which is otherwise material
to the Business;
(vi) each Contract with employees, officers, and directors of
either Subsidiary, and Contracts with any labor union or other
employee representative of a group of employees relating to wages,
hours, and other conditions of employment;
(vii) each joint venture, partnership, and other Contract (however
named) involving a sharing of profits (other than licenses of music
rights), losses, costs, or liabilities by either Subsidiary with any
other Person;
(viii) each Contract containing covenants that in any way purport
to restrict either Subsidiaries' business activity or limit the
freedom of either Subsidiary to engage in any line of business or to
compete with any Person except for licenses of rights included in the
Subsidiaries' music catalog entered into in the Ordinary Course of
Business;
18
<PAGE>
(ix) each Contract providing for payments to or by any Person
based on sales, purchases, or profits, including distribution,
reseller and sales representative agreements other than licenses of
music rights;
(x) each power of attorney from either Subsidiary that is
currently effective and outstanding;
(xi) each Contract entered into by Seller pertaining to the
businesses of a Subsidiary or a Subsidiary, individually, for capital
expenditures having a remaining amount in excess of $50,000;
(xii) each written warranty, guaranty, and or other similar
undertaking with respect to contractual performance or discharge of
indebtedness of a Person other than the Subsidiaries;
(xiii) each agreement or plan of a Subsidiary, including, without
limitation, any stock option plan, stock appreciation rights plan, or
stock purchase plan, whereby any of the benefits of which will be
increased, or the vesting of benefits of which will be accelerated, by
the occurrence of any of the Contemplated Transactions; and
(xiv) any other Contract relating to the Business, the loss of
which would have a material adverse affect on the Business as a whole.
(b) Except as set forth in PART 4.16(b)(i) OF THE DISCLOSURE LETTER,
all of the Contracts listed or required to be listed in PART 4.16(a) OF THE
DISCLOSURE LETTER are in full force and effect and are valid and
enforceable against the Subsidiaries and, to the knowledge of Seller, the
other party(ies), in accordance with their respective terms (except as
enforceability may be affected by bankruptcy, insolvency, receivership and
other similar laws affecting the rights and remedies of creditors generally
and the effect of general principles of equity), and, to the knowledge of
Seller, no event has occurred or circumstance exists, including, without
limitation, the failure of either Subsidiary or any distributor to meet any
quota or minimum sales or revenue level, that would give any Person
(including either Subsidiary) the right (with or without notice or lapse of
time) to declare a default or exercise any remedy under, or to accelerate
the maturity or performance of, or to cancel, terminate, or modify, any
such Contract which individually or in the aggregate would have a material
adverse effect on the Business as a whole. Except as set forth on PART
4.16(b)(ii) OF THE DISCLOSURE LETTER, none of the Material Contracts
require any approval or consent as a result of the consummation of the
Contemplated Transactions where the failure to obtain such approval or
consent individually or in the aggregate would have a material adverse
effect on the Business as a whole. One of the Subsidiaries and not the
Seller, are party to all of the Contracts pertaining to the operation of
the Business.
(c) There are no renegotiations of, attempts to renegotiate, or
outstanding rights to renegotiate any amounts paid or payable to either
19
<PAGE>
Subsidiary under current or completed Material Contracts with any Person
which is material to the Business, and to the knowledge of Seller, no such
Person has made demands on either Subsidiary for such renegotiation.
(d) PART 4.16(d) OF THE DISCLOSURE LETTER contains a list of the top
twenty-five (25) customers and licensees of both KTI and Dominion
(determined by revenues generated by KTI and Dominion in each of the fiscal
years 1995 and 1996) (the "Customers"). Except as set forth in PART
4.16(d) OF THE DISCLOSURE LETTER, to the knowledge of Seller, none of the
Customers intend to reduce the level of business with such Subsidiary or in
any other manner materially alter their relationship with such Subsidiary
as a result of the Contemplated Transaction or otherwise.
4.17 INSURANCE. PART 4.17 OF THE DISCLOSURE LETTER contains a complete and
accurate list of all insurance policies (including "self-insurance" programs)
now maintained by Seller, with respect to the Business, and the Subsidiaries,
individually, (the "Insurance Policies") and all general liability policies
maintained by Seller, with respect to the Business, and the Subsidiaries,
individually, during the past five years and all claims (except for health
insurance claims) made under any such current or prior insurance policies for
the past five years. The Insurance Policies are in full force and effect,
neither Seller nor either of the Subsidiaries are in default under any Insurance
Policy, and no claim for coverage under any Insurance Policy (except for health
insurance claims) has been denied. All of the Insurance Policies will be
maintained in full force and effect until the Closing Date.
4.18 ENVIRONMENTAL MATTERS.
(a) To the knowledge of Seller, neither Seller nor either of the
Subsidiaries have ever generated, transported, treated, stored, disposed of
or otherwise handled any Hazardous Materials (as defined below) at any
site, location or facility used in connection with the Business (including,
without limitation, the Facilities) (the "Premises") and, to the knowledge
of Seller, no such Hazardous Materials are present on, in or under the
Premises, and the Premises do not contain (including without limitation,
containment by means of any underground storage tank) any Hazardous
Materials, in each case in violation of any applicable Environmental and
Safety Requirement (as defined below). There are no underground storage
tanks on any of the Premises.
(b) To the knowledge of Seller, Seller with respect to the
operations of the Business, and the Subsidiaries, individually, are (i) in
material compliance with all applicable Environmental and Safety
Requirements, the violation of which would reasonably be expected to result
in a liability to either of the Subsidiaries or their respective properties
or assets and (ii) possesses all required permits, licenses, certifications
and approvals and has filed all notices or applications required thereby or
pertaining thereto.
(c) Neither Seller nor the Subsidiaries have ever been subject to,
or received any notice (written or oral) of, any private, administrative or
judicial inquiry, investigation, order or action, or any notice (written or
oral) of any intended or, to the knowledge of Seller, Threatened private,
administrative, or judicial inquiry, investigation, order or action
relating to the presence or alleged presence of Hazardous Materials in,
20
<PAGE>
under or upon the Premises, and to the knowledge of Seller, there is no
reasonable basis for any such inquiry, investigation, order, action or
notice; and to the knowledge of Seller, there are no pending or Threatened
investigations, actions, orders or proceedings (or notices of potential
investigations, actions, orders or proceedings) from any governmental
agency or any other entity regarding any matter relating to Environmental
and Safety Requirements.
(d) To the knowledge of Seller, no facts, events or conditions with
respect to the Premises exist which could reasonably be expected to
interfere with or prevent continued compliance with, or could give rise to
any common law or statutory liability or otherwise form the basis of any
claim, action, suit, proceeding, hearing or investigation against or
involving either of the Subsidiaries, its assets or properties or
the Premises under any Environmental and Safety Requirement or related
common law theories based on any such fact, event or circumstance,
including, without limitation, liability for investigation costs, cleanup
costs, personal injury or property damage.
4.19 EMPLOYEES. PART 4.19 OF THE DISCLOSURE LETTER contains a complete and
accurate list as of February 28, 1997 of the following information for each
employee of each Subsidiary, including each employee on leave of absence or
layoff status: name; job title; base salary, bonus and any change in
compensation since June 30, 1996; vacation accrued; and service credited for
purposes of vesting and eligibility to participate under each Employee Benefit
Plan. To the knowledge of Seller, no current or former employee of either
Subsidiary is a party to, or is otherwise bound by, any agreement or
arrangement, including any confidentiality, non-competition, or proprietary
rights agreement, between such employee and any other Person ("Proprietary
Rights Agreement") that in any way adversely affected, affects, or will affect
(i) the performance of his duties as an employee of such Subsidiary, or (ii) the
ability of such Subsidiary to conduct its business, or otherwise produce,
manufacture and distribute its products, including any Proprietary Rights
Agreement with such Subsidiary by any such employee or director. Since June 30,
1996, other than in the Ordinary Course of Business or as set forth in PART 4.19
OF THE DISCLOSURE LETTER, there has not been (i) payment by either of the
Subsidiaries of any bonuses or compensation other than regular salary payments,
(ii) a nonstandard increase in the salaries of the Subsidiaries' employees,
(iii) payment on any debt of the Subsidiaries to any stockholder, director,
officer, or employee, or (iv) entry into any employment, severance, or similar
Contract with any director, officer, or employee.
4.20 LABOR DISPUTES; COMPLIANCE. Except as set forth in PART 4.20 OF THE
DISCLOSURE LETTER, neither of the Subsidiaries have ever been a party to any
collective bargaining or other labor Contract. There has never been, there is
not presently existing, to the knowledge of Seller, Threatened, any strike,
slowdown, picketing, lockout, work stoppage, labor arbitration, or Proceeding in
respect of the grievance of any employee, application or complaint filed by an
employee or union with the National Labor Relations Board or any comparable
Governmental Body, organizational activity, or other labor dispute against or
affecting either Subsidiary or the Facilities, and no application for
certification of a collective bargaining agent exists or, to the knowledge of
Seller, is Threatened.
21
<PAGE>
4.21 INTELLECTUAL PROPERTY.
(a) SUBSIDIARIES MUSIC CATALOG. PART 4.21(a) OF THE DISCLOSURE
LETTER sets forth a true, correct and complete in all material respects
list of the owned and licensed sound recordings used in the Business (the
"Subsidiaries Music Catalog") indicating, with respect to each such sound
recording whether it is (i) owned by the Subsidiaries or (ii) licensed by
the Subsidiaries pursuant to any oral or written contract, license or other
agreement (all of which written contracts, licenses or other agreements
have been made available to Buyer for review) (the "Music Catalog
Agreements"). The Subsidiaries have good and valid title to the recordings
in the Subsidiaries Music Catalog which are owned by the Subsidiaries.
Subject to PART 4.21(a) OF THE DISCLOSURE LETTER, the Music Catalog
Agreements are in full force and effect (subject to each being enforceable
against the other parties thereto) and represent the valid and legal
obligations, in accordance with their terms, of the respective Subsidiary
which is a party thereto and, to the knowledge of Seller, the other parties
thereto. Except as set forth in PART 4.21(a) OF THE DISCLOSURE LETTER, no
default by either of the Subsidiaries, or to the knowledge of Seller, by
any other party thereto, exists under the Music Catalog Agreements and no
event has occurred which the giving of notice or passage of time or both
could constitute a default under the Music Catalog Agreements, except where
such default would have a material adverse effect on the Business as a
whole. Except as set forth in PART 4.21(a) OF THE DISCLOSURE LETTER and
the Harry Fox Audit, to the knowledge of Seller (i) since January 1, 1995,
there have been no claims that the use of or the rights under the
Subsidiaries Music Catalog infringes, misappropriates or otherwise violates
the rights of any Person and no such claim is pending, and (ii) no Person
is currently infringing, misappropriating or otherwise violating the rights
of the Subsidiaries in the Subsidiaries Music Catalog. To the knowledge of
Seller, neither of the Subsidiaries or the Seller have taken any action
that has materially and adversely impaired or would reasonably be expected
to have materially and adversely impaired the Subsidiaries' right, title or
interest in and to the Subsidiaries Music Catalog. To the knowledge of
Seller, the Subsidiaries ownership or use of the Subsidiaries Music Catalog
do not infringe, misappropriate or conflict with the proprietary rights or
other rights or interests of any Person. Upon consummation of the
Contemplated Transactions, the Subsidiaries will be vested with the same
ownership or use rights in the Subsidiaries Music Catalog which are held by
the Subsidiaries prior to the consummation of the Contemplated Transaction.
(b) LICENSES OF SUBSIDIARIES MUSIC CATALOG. Seller has provided
Buyer with a true, correct and complete list in all material respects of
the contracts, licenses and other agreements pursuant to which rights to
use any part of the Subsidiaries Music Catalog have been granted and are
currently in effect (the "Outbound Licenses") and no other rights of any
kind have been transferred or assigned by Seller or the Subsidiaries in the
recordings comprising the Subsidiaries Music Catalog other than pursuant to
the Outbound Licenses. Subject to PART 4.21(b) OF THE DISCLOSURE LETTER,
the Outbound Licenses are in full force and effect (subject to such
licenses being enforceable against the other parties thereto) and represent
the valid and legal obligations of the respective Subsidiary which is a
party thereto and, to the knowledge of Seller, the other parties thereto.
Except as set forth in PART 4.21(b) OF THE DISCLOSURE LETTER, no default by
22
<PAGE>
either of the Subsidiaries, or to the knowledge of Seller, by any other
party thereto, exists under the Outbound Licenses and no event has occurred
which the giving of notice or passage of time or both could constitute a
default under the Outbound Licenses except where such default would have a
material adverse effect on the Business as a whole. Except as set forth in
PART 4.21(b) OF THE DISCLOSURE LETTER, to the knowledge of Seller, since
January 1, 1995, there have been no claims that either of the Subsidiaries
or any of the other parties to the Outbound Licenses breached or otherwise
failed to perform their respective obligations in any material respect.
(c) TRADEMARKS, TRADE NAMES AND SERVICE MARKS. PART 4.21(c) OF THE
DISCLOSURE LETTER includes a true, correct and complete list in all
material respects of the trademarks, trade names and service marks owned by
Seller or the Subsidiaries which are currently used in the Business (the
"Subsidiaries Marks"). Except as set forth in PART 4.21(c) OF THE
DISCLOSURE LETTER, (i) Seller or the Subsidiaries have good and valid title
to the Subsidiaries Marks in the jurisdictions listed in PART 4.21(c) OF
THE DISCLOSURE LETTER, free and clear of all Encumbrances, (ii) to the
knowledge of Seller, no Person is currently infringing, misappropriating or
otherwise violating the Subsidiaries Marks, and (iii) to the knowledge of
Seller, there is currently no claim outstanding or Threatened against
Seller or either of the Subsidiaries that the Subsidiaries Marks infringe,
misappropriate or otherwise violate any rights of any other Person. To the
knowledge of Seller, neither of the Subsidiaries or the Seller have taken
any action that has materially and adversely impaired or would reasonably
be expected to have materially and adversely impaired the Subsidiaries' or
Seller's right, title or interest in and to the Subsidiaries Marks. To the
knowledge of Seller, the Subsidiaries' or Seller's ownership or use of the
Subsidiaries Marks do not infringe, misappropriate or conflict with the
proprietary rights or other rights or interests of any Person. Upon
consummation of the Contemplated Transaction, the Buyer or the
Subsidiaries, as the case may be, shall be vested with the same ownership
rights in the Subsidiaries Marks which are held by the Seller or the
Subsidiaries, as the case may be, prior to the consummation of the
Contemplated Transaction.
(d) OTHER INTELLECTUAL PROPERTY. To the knowledge of Seller, all
Intellectual Property other than the Intellectual Property referred to in
SECTION 4.21(a), (b) or (c) above (the "Other Intellectual Property") which
is used in the Business is owned or duly licensed to Seller or either of
the Subsidiaries except where the failure to own or license such Other
Intellectual Property would not have a material adverse effect on the
Business as a whole. Except as set forth in PART 4.21(d) of the Disclosure
Letter, the Subsidiaries, or the Seller, as the case may be, have good and
valid title to, or the right to use, the Other Intellectual Property that
is material to the Business which is owned, free and clear of all
Encumbrances. To the extent any of the Other Intellectual Property which is
material to the business are licensed to the Seller or the Subsidiaries, no
default by Seller or either of the Subsidiaries, or to the knowledge of
Seller, by any other party thereto, exists under such licenses and no event
has occurred which the giving of notice or passage of time or both could
constitute a default under such licenses. Except as set forth on PART
4.21(d) OF THE DISCLOSURE LETTER, to the knowledge of Seller, (i) no Person
is currently infringing, misappropriating or otherwise violating the Other
Intellectual Property, and (ii) there is currently no claim outstanding or
23
<PAGE>
Threatened against Seller or either of the Subsidiaries that the use of the
Other Intellectual Property by the Subsidiaries infringes, misappropriates
or otherwise violates any rights of any other Person. To the knowledge of
Seller, neither of the Subsidiaries or the Seller have taken any action
that has adversely impaired or would reasonably be expected to have
adversely impaired the Subsidiaries' right, title or interest in and to the
Other Intellectual Property, except where such impairment would not have a
material adverse effect on the Business as a whole. To the knowledge of
Seller, the Subsidiaries ownership or use of the Other Intellectual
Property do not infringe, misappropriate or conflict with the proprietary
rights or other rights or interests of any Person where such infringement,
misappropriation or conflict would have a material adverse effect on the
Business as a whole. Upon consummation of the Contemplated Transaction,
the Buyer or the Subsidiaries, as the case may be, shall be vested with the
same ownership or use rights in the Other Intellectual Property held by the
Seller or the Subsidiaries, as the case may be, prior to the consummation
of the Contemplated Transaction.
4.22 BANK ACCOUNTS. PART 4.22 OF THE DISCLOSURE LETTER contains a complete
and accurate list of each bank at which each Subsidiary has an account or safe
deposit box, the number of each such account or box, and the names of all
persons authorized to draw on such accounts or to have access to such boxes.
4.23 DISCLOSURE.
(a) To the knowledge of Seller, no representation or warranty
(including the disclosures set forth in the Disclosure Letter) of Seller in
this Agreement or in any of the Seller Transaction Documents omits to state
a material fact necessary to make the statements herein or therein not
misleading.
(b) No notice given pursuant to SECTION 6.5 when taken together with
the disclosure described in the Disclosure Letter will contain any untrue
statement of a material fact or, to the knowledge of Seller, omit to state
a material fact necessary to make the statements therein, in this Agreement
or in any of the Seller Transaction Documents, not misleading as of the
date such notice is given.
4.24 RELATIONSHIPS WITH RELATED PERSONS.
(a) Except as set forth in PART 4.24 OF THE DISCLOSURE LETTER,
neither the Seller nor the directors, officers or employees of the
Subsidiaries, or their Related Persons have any ownership interest in any
of the assets used in connection with the Business and to the knowledge of
Seller, do not own, of record or as a beneficial owner, an equity interest
or any other financial or profit interest in any Person that has (i) had
business dealings or a material financial interest in any transaction with
either of the Subsidiaries, except for less than two percent (2%) of the
outstanding capital stock of such person that is publicly traded on any
recognized exchange or in the over-the-counter market, or (ii) engaged in
competition with the Business (a "Competing Business"), except for less
than two percent (2%) of the outstanding capital stock of any Competing
Business that is publicly traded on any recognized exchange or in the over-
the-counter market. Except as set forth in PART 4.24 OF THE DISCLOSURE
LETTER, no shareholder, officer or director of Seller or either of the
24
<PAGE>
Subsidiaries, and to the knowledge of Seller, none of their Related
Persons, is a party to any Contract with, or has any claim or rights
against, either of the Subsidiaries. Neither of the Subsidiaries is
indebted, in any manner, to Seller or any of its Related Persons.
(b) Except as set forth in PART 4.24 OF THE DISCLOSURE LETTER,
neither Seller or any of Seller's Affiliates provide any services to either
of the Subsidiaries or in connection with the Business.
4.25 BROKERS OR FINDERS. Except as set forth in PART 4.25 OF THE
DISCLOSURE LETTER, Seller and its agents have incurred no obligation or
liability, contingent or otherwise, for brokerage or finders' fees or agents'
commissions or other similar payment in connection with this Agreement.
4.26 CERTAIN PAYMENTS. To the knowledge of Seller, no director, officer,
agent, or employee of either Subsidiary (on behalf of a Subsidiary or otherwise
in connection with the Business) or any other Person associated with or acting
for or on behalf of either Subsidiary, has directly or indirectly (a) made any
contribution, gift, bribe, rebate, payoff, influence payment, kickback, or other
payment to any Person, private or public, regardless of form, whether in money,
property, or services (i) to pay for favorable treatment for business secured,
(ii) to obtain special concessions or for special concessions already obtained,
for or in respect of either Subsidiary or any Affiliate of either Subsidiary, or
(iii) in violation of any Legal Requirements, or (b) established or maintained
any fund or asset that has not been recorded in the books and records of either
Subsidiary.
4.27 CHANGE OF CONTROL PAYMENTS. Except as set forth in PART 4.27 OF THE
DISCLOSURE LETTER, neither the execution and delivery of this Agreement nor the
consummation of the Contemplated Transactions will (i) result in any payment
(including, without limitation, severance, unemployment compensation, golden
parachute, bonus or otherwise) becoming due to any director or employee of
either of the Subsidiaries from either of the Subsidiaries, (ii) materially
increase any benefits otherwise payable under any Employee Benefit Plan, or
(iii) result in the acceleration of the time of payment or vesting of any such
benefits.
ARTICLE V
REPRESENTATIONS AND WARRANTIES OF BUYER
Buyer represents and warrants to Seller as of the date of this Agreement
and as of the Closing Date (except to the extent to which such representations
and warranties are specifically stated to be as of a different date), as
follows:
5.1 ORGANIZATION AND GOOD STANDING. Buyer is a corporation duly
incorporated, validly existing, and in good standing under the laws of Delaware,
with full corporate power and authority to conduct its business as it is now
being conducted, to own, hold under lease, or otherwise possess or use the
properties and assets that it purports to own, hold under lease, or otherwise
possess or use, and to perform all its obligations under the contracts to which
25
<PAGE>
it is a party or by which it is bound. Buyer is duly qualified to do business
as a foreign corporation and is in good standing under the laws of each state or
other jurisdiction in which such qualification is required by virtue of the
nature of the activities conducted by it. Buyer has delivered to Seller copies
of the Organizational Documents of Buyer, as currently in effect.
5.2 AUTHORITY; NO CONFLICT.
(a) This Agreement constitutes, and when executed and delivered by
Buyer at the Closing and the Buyer's Closing Documents, (collectively, the
"Buyer Transaction Documents"), to the extent applicable, will constitute
the legal, valid, and binding obligations of the Buyer, enforceable against
Buyer in accordance with their respective terms except as such enforcement
may be limited by bankruptcy, insolvency, moratorium, reorganization, or
similar laws affecting creditor's rights generally and by general equitable
principles. Buyer has the corporate power and authority to execute and
deliver this Agreement and each of the Buyer Transaction Documents and to
perform its obligations under this Agreement and each of the Seller
Transaction Documents. This Agreement has been, and the Buyer Transaction
Documents at Closing will be, duly executed and delivered by Buyer.
(b) The Board of Directors of Buyer has unanimously approved the
Contemplated Transaction. Except for the approval of the holders of the
stockholders of Buyer which may be required by the rules of the Nasdaq
National Market (depending on the structure of the Financing), no other
approval of the stockholders of Buyer or other corporate approval is
required in order for Buyer to consummate the transactions contemplated by
this Agreement.
(c) Neither the execution and delivery of this Agreement and Buyer's
Closing Documents by Buyer nor the consummation or performance of any of
the Contemplated Transactions by Buyer will give any Person the right to
prevent, delay, or otherwise interfere with any of the Contemplated
Transactions pursuant to: (i) any provision of Buyer's Organizational
Documents; (ii) any resolution adopted by the board of directors or the
stockholders of Buyer; (iii) any Legal Requirement or Order to which Buyer
or any of its respective assets may be subject; or (iv) any Contract to
which Buyer is a party or by which Buyer may be bound. Buyer is not
required to give any notice to or obtain any consent or approval from any
Person in connection with the execution and delivery of this Agreement by
Buyer or the consummation or performance of any of the Contemplated
Transactions by Buyer except for (i) the potential requirement to file with
the SEC a proxy statement and the potential requirement to obtain approval
by Buyer's stockholders of the Contemplated Transactions and the Financing;
(ii) the filing of a Form 8-K with the SEC, (iii) such consents, approvals,
orders, authorizations, registrations, declarations and filings as may be
required under applicable federal and state securities laws and the laws of
any foreign country or as may otherwise be required to consummate the
Financing and (iv) the filings necessary, and termination of any waiting
periods, pursuant to the HSR Act.
5.3 CERTAIN PROCEEDINGS. There is no pending proceeding that has been
commenced against Buyer and that challenges or may have the affect of
26
<PAGE>
preventing, delaying making illegal or otherwise interfering with any of the
Contemplated Transactions. To Buyer's knowledge, no such proceeding has been
Threatened.
5.4 BROKERS OR FINDERS. Buyer and its respective officers and agents have
incurred no obligation or liability, contingent or otherwise, for brokerage or
finders' fees or agents' commissions or other similar payment in connection with
this Agreement.
5.5 INVESTMENT REPRESENTATIONS. Buyer has not seen, received, been
presented with, or been solicited by any leaflet, public promotional meeting,
newspaper or magazine article or advertisement, radio or television
advertisement, or any other form of advertising or general solicitation with
respect to the sale of the Stock. Buyer is acquiring the Stock for its own
account only and not with a view to or for sale in connection with any
distribution of all or any part of the Stock. Buyer acknowledges that the sale
of the Stock hereunder has not been registered under the Securities Act in
reliance, in part, on its representations, warranties and agreement herein.
Buyer understands that the Stock is a "restricted security" under the Securities
Act in that the Stock will be acquired in a transaction not involving a public
offering, and that the Stock may be resold without registration under the
Securities Act only in certain limited circumstances. Buyer represents,
warrants, and agrees that Seller is under no obligation to register or qualify
the Stock under the Securities Act or under any state securities law, or to
assist Buyer in complying with any exemption from registration and
qualification. Buyer acknowledges that there are substantial restrictions on
the transferability of the Stock due to its being a "restricted security", that
there is no public market for the Stock and none is expected to develop.
ARTICLE VI
COVENANTS OF SELLER
6.1 ACCESS AND INVESTIGATION.
(a) During the period from the date of this Agreement to the Closing
Date, Seller and its officers, employees, counsel, accountants and other
authorized representatives ("Representatives") will, (i) afford Buyer and
its Representatives reasonable access to Seller's (with respect to the
Business) and each Subsidiary's senior management personnel, properties,
contracts, books, and records, and other documents and data, (ii) permit
access to or furnish copies to Buyer and its Representative (as requested
by Buyer, provided that if copies are to be furnished it will be furnished
at Buyer's expense) of all such contracts, books and records, and other
existing documents and data as Buyer may reasonably request, and (iii)
furnish Buyer and its Representatives with such additional financial,
operating, and other data and information as Buyer may reasonably request,
including, without limitation periodically reporting to Buyer the status of
the business, operations and finances of the Business. Seller shall also
inform Buyer (upon its request) of any facts or circumstances of which
Seller has knowledge which calls into question the collectibility of any
Accounts Receivable, adequacy of the bad debt reserves that exist as of the
Closing Date and the adequacy of the Harry Fox Reserve. No information or
knowledge obtained in any investigation pursuant to this SECTION 6.1 shall
27
<PAGE>
affect or be deemed to modify any representation or warranty contained
herein or the conditions to the obligations of the parties to consummate
the Consummated Transactions. Buyer agrees that from the date hereof until
the Closing, Buyer will not discuss or negotiate any terms of employment
with any employees of the Subsidiaries (other than disclosing to any such
employee the obligations of Buyer pursuant to SECTION 8.10(b) hereof),
without prior approval by Seller's President or Chairman.
(b) From the date hereof through the Closing Date, Buyer agrees that
if it becomes aware, in the course of its due diligence examination or
otherwise, of a material Breach of Seller's representations, warranties,
covenants or agreements contained herein, Buyer will promptly notify Seller
thereof; provided, however, this SECTION 6.1(b) shall in no manner (i)
obligate Buyer to affirmatively inquire or research whether a Breach by
Seller has occurred or (ii) limit or waive the conditions set forth in
SECTIONS 10.1 and 10.2 herein or any of Buyer's rights hereunder.
6.2 OPERATION OF THE BUSINESSES OF SELLER. During the period from the
date of this Agreement to the Closing Date, Seller will cause each Subsidiary
to:
(a) conduct the Business only in the Ordinary Course of Business,
including but not limited to taking reasonable steps to maintain the
tangible assets of each Subsidiary in reasonable repair, order, and
condition;
(b) use its Best Efforts to preserve intact the current business
organization of each Subsidiary and all rights in connection with the
Business (including, without limitation, all intellectual property and
license rights), keep available the services of the current officers,
employees, and agents of each Subsidiary, and maintain the relations and
goodwill with its suppliers, customers, artists, landlords, creditors,
employees, agents, and others having business relationships with each
Subsidiary; and
(c) confer with Buyer concerning operational matters relating to the
Business which are of a material nature.
6.3 NEGATIVE COVENANT. During the period from the date of this Agreement
to the Closing Date:
(a) Except as set forth in SECTION 6.3(b), neither the Seller or
either Subsidiary will take any affirmative action, or fail to take any
reasonable action within their or its control, as a result of which any of
the changes or events listed in SECTION 4.15 is reasonably likely to occur
or cause a breach of any representation or warranty or Seller hereunder.
In addition, from and after the date of this Agreement until the Closing or
the earlier termination of this Agreement in accordance with its terms, the
Seller will not and the Subsidiaries will not, and will not permit its
directors, officers, employees, representatives, investment bankers, agents
and affiliates to, directly or indirectly, (i) solicit or encourage
submission or any inquiries, proposals or offers by, (ii) participate in
any negotiations with, (iii) afford any access to the properties, books or
records of either of the Subsidiaries to, or (iv) otherwise assist,
facilitate or encourage, or enter into any agreement or understanding with,
28
<PAGE>
any person, entity or group (other than Buyer and its Affiliates,
representatives and agents), in connection with any Acquisition Proposal.
For purposes of this Agreement, an "Acquisition Proposal" shall mean any
proposal relating to the possible acquisition of the Business or the
Subsidiaries, whether by way of merger, purchase of any Stock, purchase of
a substantial portion of the assets of either of the Subsidiaries, or
otherwise. In addition, subject to the terms set forth in SECTION 6.3(b)
below, from and after the date of this Agreement until the Closing or the
earlier termination of this Agreement in accordance with its terms, the
Seller will not and the Subsidiaries will not, and will not permit their
respective directors, officers, employees, representatives, investment
bankers, agents and Affiliates to, directly or indirectly, make or
authorize any statement, recommendation or solicitation in support of any
Acquisition Proposal made by any person, entity or group (other than
Buyer). The Seller and each Subsidiary will immediately cease any and all
existing activities, discussions or negotiations with any parties conducted
heretofore with respect to any of the foregoing.
(b) Anything herein to the contrary notwithstanding, in the event
Seller receives an unsolicited written proposal for, or an unsolicited
written indication of a serious interest in entering into, a transaction
pursuant to an Acquisition Proposal (an "Acquisition Transaction") from a
bona fide, financially capable third party that contains no financing
contingency, (i) Seller in its discretion may furnish to and communicate
with such third party public information requested by such party,
(ii) Seller may enter into discussions and negotiations with such third
party, provided (in the case of this clause (ii)) that (A) Seller gives the
Buyer prompt written notice of the details thereof prior to entering into
such discussions and negotiations (subject to the last sentence of this
SECTION 6.3(b)), (B) Seller's Board of Directors, after consultation with
and based upon the advice of an independent financial advisor, determines
in good faith that such third party is financially capable, without any
financing contingency, of consummating an Acquisition Transaction,
(C) Seller's Board of Directors, after weighing such advice, determines
that taking such action is more likely than not to lead to the consummation
of an Acquisition Transaction with such third party that would yield a
higher value to the Seller's stockholders than will the Contemplated
Transaction, and (D) Seller's Board of Directors shall have been advised in
writing by independent legal counsel, that any failure to enter into such
discussion and negotiations with, and provide such non-public information
to, such third party would more likely than not constitute a breach of the
fiduciary responsibilities of the Board of Directors to the Seller's
stockholders and (iii) Seller may, at the request of such third party,
furnish such third party with non-public information concerning the
Business and the Subsidiaries only if the conditions set forth in (A) and
(B) above are met and Seller obtains from such third party a written and
executed confidentiality agreement in reasonably customary form. The Buyer
and Seller further agree that after receipt of an Acquisition Proposal,
Seller's request for information or clarification from such third party
solely in order to determine whether the conditions in clauses (B), (C),
and (D) above can be met will not be deemed to be a violation of this
SECTION 6.3(b).
6.4 APPROVALS OF GOVERNMENTAL BODIES. As promptly as practicable after
the date of this Agreement, Seller will (i) make any filings required by Legal
Requirements to be made by it and (ii) use its Best Efforts to obtain all
29
<PAGE>
necessary consents or approvals required under the Material Contracts or
otherwise referred to in the Disclosure Letter (the "Consents") in order to
consummate the Contemplated Transactions. Between the date of this Agreement
and the Closing Date, Seller will cooperate with Buyer in connection with any
filings required by Legal Requirements to be made by Buyer in order to
consummate the Contemplated Transactions.
6.5 NOTIFICATION. Between the date of this Agreement and the Closing
Date, Seller will promptly notify Buyer in writing if Seller becomes aware of
any fact or condition that causes or constitutes a Breach of any of Seller's
representations and warranties as of the date of this Agreement, or if or Seller
becomes aware of the occurrence after the date of this Agreement of any fact or
condition that would cause or constitute a Breach of any such representation or
warranty had such representation or warranty been made as of the time of
occurrence or discovery of such fact or condition. Should any such fact or
condition require any change in the disclosure set forth in the Disclosure
Letter, Seller will promptly deliver to Buyer a supplement to the Disclosure
Letter specifying such change and such supplement shall qualify such
representations and warranties; provided, however, that such supplements may
only be made with respect to claims made, events occurring or arising after the
date hereof and not arising out of any Breach by Seller of its covenants or
agreements set forth in this Agreement. During the same period, Seller will
promptly after obtaining knowledge thereof notify Buyer of the occurrence of any
Breach of any agreement, covenant representation or warranty of Seller hereunder
or of the occurrence of any event that may make the satisfaction of the
conditions in ARTICLES 9, 10, or 11 impossible or unlikely upon becoming aware
of such occurrence.
6.6 BEST EFFORTS. Subject to the terms of SECTION 6.3(b) hereof, between
the date of this Agreement and the Closing Date, Seller will use its Best
Efforts to cause the conditions in Article 9, 10 and 11 to be satisfied to the
extent Seller can affect the satisfaction of such conditions or involve Seller
(including, without initiation, providing Buyer with the information and
documentation necessary to consummate the Financing).
6.7 KIVES VOTING AGREEMENT. Simultaneous with the signing hereof, the
Seller shall cause Philip Kives, and those entities controlled by Philip Kives
which own the voting stock of Seller, to deliver a voting agreement (attached
hereto as EXHIBIT 6.7) memorializing the agreement to vote in favor of the
Contemplated Transaction at the meeting of the Seller's stockholders to consider
approval of the Contemplated Transactions (the "Kives Voting Agreement").
ARTICLE VII
COVENANTS OF BUYER
7.1 APPROVALS OF GOVERNMENTAL BODIES. As promptly as practicable after
the date of this Agreement, Buyer will make any filings required by Legal
Requirements to be made by it in order to consummate the Contemplated
Transactions. Between the date of this Agreement and the Closing Date, Buyer
will cooperate with Seller in connection with (i) any filings required by Legal
Requirements to be made by Seller and (ii) obtaining the necessary Consents in
order to consummate the Contemplated Transactions.
30
<PAGE>
7.2 BEST EFFORTS. Between the date of this Agreement and the Closing
Date, Buyer will use its Best Efforts to cause the conditions in Articles 9, 10,
and 11 to be satisfied; provided, however, in no event shall Buyer be deemed to
have Breached this SECTION 7.2 if it is unable to consummate the Financing upon
terms satisfactory to it, in its sole discretion. Buyer shall, upon the prior
reasonable request of Seller, provide Seller and Seller's Representatives with
information concerning the status of the Financing and any other financing which
Buyer proposes to secure to pay the Purchase Price in whole or in part and, in
each instance, upon the prior consent of Buyer (which consent, in each instance,
shall not be unreasonably withheld, delayed or conditioned) permit Seller and
Seller's Representatives to discuss the Financing or such other financing with
Buyer's Representatives, including its investment bankers and lenders.
7.3 NOTIFICATION. Between the date of this Agreement and the Closing
Date, Buyer will promptly notify Seller in writing if Buyer becomes aware of any
fact or condition that causes or constitutes a Breach of any of Buyer's
representations and warranties as of the date of this Agreement, or if Buyer
becomes aware of the occurrence after the date of this Agreement of any fact or
condition that would cause or constitute a Breach of any such representation or
warranty had such representation or warranty been made as of the time of
occurrence or discovery of such fact or condition. Should any such fact or
condition require any change in the disclosures set forth in this Agreement,
Buyer will promptly deliver to Seller a supplement to the Buyer Disclosure
Letter specifying such change, and such supplement shall qualify such
representations and warranties. During the same period, Buyer will promptly
notify Seller of the occurrence of any Breach of any covenant representation or
warranty of Buyer hereunder or of the occurrence of any event that may make the
satisfaction of the conditions in Articles 9, 10 or 11 impossible or unlikely
upon becoming aware of such occurrence.
ARTICLE VIII
ADDITIONAL AGREEMENTS
8.1 PUBLIC DISCLOSURE AND CONFIDENTIALITY. Buyer and Seller shall consult
with each other before issuing any press release or otherwise making any public
statement with respect to the transactions contemplated hereby or this Agreement
and shall not issue any such press release or make any such public statement
prior to such consultation, except as may be required by law or any listing
agreement with a national securities exchange or the Nasdaq National Market.
The parties further agree that the terms of that certain Confidentiality
Agreement, dated November 12, 1996, delivered by Buyer to Seller shall be
incorporated herein by reference and made a part hereof.
8.2 AUDITORS' LETTERS. The Seller shall, at Buyer's expense, use its Best
Efforts to cause Arthur Andersen & Co., L.L.P., independent auditors to Seller,
to (i) deliver letters and consents with respect to the financial statements of
the Subsidiaries, to Buyer, (as may be reasonably requested by Buyer) from time
to time, from and after the Closing Date, in form and substance reasonably
satisfactory to Buyer and customary in scope and substance for letters and
consents delivered by independent auditors in connection with filings with the
SEC, (ii) generally cooperate with Buyer (as may be reasonably requested by
Buyer), for Buyer to comply with its SEC reporting obligations and (iii) provide
31
<PAGE>
Buyer, as promptly as reasonably possible upon Buyer's request, with all
necessary financial information (including, without limitation, audited
financial statements of the Subsidiaries and the Business) in order for Buyer to
consummate the Financing and obtain Buyer's Requisite Stockholder Approval.
8.3 FILINGS; OTHER ACTION. Each of Seller and Buyer shall: (a) promptly
make their respective filings and thereafter make any other required submissions
under the HSR Act, the Securities Act and the Exchange Act with respect to the
Contemplated Transactions; and (b) use their respective Best Efforts promptly to
take, or cause to be taken, all other actions and do, or cause to be done, all
other things necessary, proper or appropriate under applicable laws and
regulations to consummate and make effective the transactions contemplated by
this Agreement as soon as practicable.
8.4 LICENSES. The parties have agreed that Buyer will acquire all right,
title and interest in and to the assets (including the name "K-tel", trademark
and service mark as provided in SECTION 1.2(b) hereof and all other Intellectual
Property) used in connection with the Business; provided however, Seller will be
allowed to (i) continue to use the K-tel name, trademarks and service marks in
connection with the Consumer Products Business in all respects, (ii) continue to
use the name K-tel solely as a corporate name in connection with the other
Excluded Businesses, in the Retained Music Business and otherwise as provided in
SECTION 1.2(b) hereof. The parties hereto also acknowledge and agree that Buyer
is not purchasing, and Seller is retaining, the Business conducted in the
Retained Territories (as defined below) (the "Retained Music Business"). In
connection with the foregoing, the following license agreements will be entered
into at Closing pursuant to terms mutually acceptable to each of Buyer and
Seller but which terms will generally include the following (collectively, the
"License Agreements"):
(a) Seller shall cause K-tel International, Ltd., a Manitoba
corporation, to enter into a license agreement with Buyer for purposes of
licensing to Buyer the mark "K-tel" in connection with music products and
music-related products in Canada for a period of three years from the
Closing Date on an exclusive, royalty free basis.
(b) Buyer and the Subsidiaries will license the exclusive rights to
masters owned or licensed by the Subsidiaries as of the Closing (the
"Masters") to Seller, and Seller may sublicense such rights to K-tel
Entertainment (UK) Limited ("K-tel UK") for exploitation in the territories
attached hereto as EXHIBIT 8.4(b)(i) (the "Retained Territories") and the
non-exclusive rights to the Masters for exportation in the Non-Exclusive
Territory, pursuant to the License Agreement attached hereto as
EXHIBIT 8.4(b)(ii).
(c) K-tel UK will license its catalog of Masters at Closing to Buyer
on a non-exclusive worldwide basis (except for the Retained Territories)
under the same terms as the existing Agreement #9648, dated July 1, 1990,
by and between K-tel UK and Seller. The term of such license will be the
same term as the license set forth in subparagraph (b) above.
32
<PAGE>
(d) All rights associated with the "Old Town" music catalog (the
"Old Town Catalog") and "Maureen Music" music catalog (the "Maureen
Catalog") (in each case, including, without limitation, all masters and
musical compositions) except for synchronization rights, which if acquired
by Seller or a subsidiary of Seller will be licensed to Buyer for retail
sale or distribution on a worldwide (except for the Retained Territories),
non-exclusive and non-sublicensable basis, with no advance. The royalty
rates for the Old Town Catalog for United States sales will be the greater
of (i) four cents and seven cents per track of cassette tapes and compact
discs, respectively or (ii) 10% of the suggested retail price, pro-rated
and reduced by container charges. The rates for territories outside of the
United States will be determined on a comparable basis. Seller also agrees
to provide Buyer with a blanket agreement for all rights in the Maureen
Catalog (except synchronization rights) in the United States at 80% of the
then prevailing statutory rate and at comparable rates outside of the
United States. The term of each such license will be for three years from
the Closing Date with a one-year renewal option.
(e) Buyer will license to Seller the right to use the Masters
included in the collections presently entitled "101 Greatest R & B Love
Songs" (previously known as "Heartbreaker") and "Ultimate History of Rock
and Roll" for sale worldwide through half-hour infomercials (the "TV
Packages") and as permitted under clause (f) below at retail, whereby Buyer
will produce the finished goods on the same terms as set forth in paragraph
3 of the existing contract between KTI and Kent and Speigal; provided,
however, all infomercials will be presented under a name other than "K-
tel", except that the "Ultimate History of Rock and Roll" infomercial will
bear a "K-tel" mark for a period equal to the shorter of (i) three months
after the Closing Date and (ii) the existing inventory of product held by
Kent and Speigal is exhausted. Any new infomercial products will bear a
new trademark with no similarity to "K-tel" or risk of confusion to the
public.
(f) Prior to Closing, KTI will assign its existing contract with
Kent and Speigal to Seller (or a subsidiary designated by Seller) and the
"101 Greatest Love Songs" and "Ultimate History of Rock and Roll" will be
distributed at retail in accordance with the Kent and Speigal contract;
provided, however, KTI (or Buyer, as determined by Buyer) will continue to
perform the distribution services which KTI is currently responsible under
such contract pursuant to the terms thereof (including, without limitation,
the 12.5% fee specified therein). Seller and KTI (or Buyer, as the case
may be) will share equally in the profit participation of K-tel under such
contract for all retail sales by KTI (or Buyer, as the case may be).
Seller will pay all marketing expenses related to such retail sales,
provided that Seller is reimbursed for such reasonable marketing expenses
before the sharing of any profit participation. KTI (or Buyer, as the case
may be) will be compensated for producing the finished goods for these
products in accordance with the terms of the Kent and Speigal Contract.
(g) Buyer shall license to K-tel International, Ltd. the right to
sell and market the Masters contained in the "101 Country Hits" in Canada
solely through television direct response at a royalty fee equal to three
(U.S.) cents per track.
33
<PAGE>
Buyer and Seller agree to use their Best Efforts prior to the Closing to
agree on the form and substance of the License Agreements. The descriptions set
forth above represent general terms to be set forth with more particularity in
the License Agreements. In the event of a conflict between the above terms and
the terms set forth in the License Agreements, the License Agreements shall
govern.
8.5 TAXES.
(a) Seller and Buyer agree that for tax reporting purposes, Seller
and Buyer will elect to treat the consummation of the Contemplated
Transaction as an asset sale pursuant to SECTION 338(h) of the Code.
Seller and Buyer agree to take all reasonable steps and actions necessary
to insure that such tax treatment is received and Seller shall pay any Tax
liability from the taxable income of the Seller and the Subsidiaries which
are incurred as a direct result of such election.
(b) The parties have agreed as follows:
(i) Subject to the terms set forth in (ii) below, Buyer will not
assume or be liable in any manner for any liability or obligation
relating to Taxes of Seller, its Affiliates or its subsidiaries
(including, without limitation, the Subsidiaries). In connection
therewith, subject to the terms set forth in (ii) below, Seller shall
be liable for, and shall indemnify and hold Buyer harmless from, any
Taxes of Seller, its subsidiaries or its Affiliates (including the
Subsidiaries), including, without limitation, Taxes (A) relating to
any period prior to the Closing Date with respect to the Business or
(b) relating to the Excluded Businesses, Excluded Assets, Retained
Music Business or otherwise, regardless of whether such Taxes related
to a period prior to or subsequent to the Closing Date.
(ii) Buyer shall be liable for, and shall indemnify and hold
Seller harmless from any Taxes imposed on the Subsidiaries solely with
respect to the operations of the Business which specifically relate to
periods after the Closing Date.
8.6 MEETING OF STOCKHOLDERS. Seller, on the one hand, and Buyer (if
necessary) on the other, shall each take all action necessary in accordance with
applicable law and its Organizational Documents to convene a meeting of its
stockholders (the "Stockholder Meetings") as promptly as practicable to consider
and vote upon the approval of the Contemplated Transaction. Subject to the
fiduciary duties of the each of Buyer's and Seller's Board of Directors under
applicable law after consultation with and based upon the advice of independent
legal counsel, the Board of Directors of each of Seller, on the one hand, and
Buyer on the other, shall each recommend and declare advisable such approval and
Seller, on the one hand, and Buyer on the other, shall, subject to the fiduciary
duties of their respective Board of Directors, take all lawful action to
solicit, and use its Best Efforts to obtain, such approval (the requisite
approval by the stockholders of each of the Seller and Buyer, hereinafter
referred to as the "Requisite Stockholder Approval"). In connection with such
Stockholder Meetings, each of Buyer and Seller will (i) promptly prepare and
34
<PAGE>
file with the SEC, will use all reasonable efforts to have cleared by the SEC
and will thereafter mail to its stockholders as promptly as possible a proxy
statement and all other proxy materials for such meeting, (ii) will use its Best
Efforts to obtain the necessary approvals by its stockholders of the
Contemplated Transaction and (iii) will otherwise comply with all Legal
Requirements applicable to such meeting.
8.7 RESTRICTIVE COVENANTS/NONCOMPETE. At Closing, each of Philip Kives
and Seller shall enter into a noncompetition agreement with Buyer in the forms
of EXHIBIT 8.7 attached hereto.
8.8 DELIVERY OF DISCLOSURE LETTER. The parties acknowledge that each has
executed and delivered this Agreement prior to the delivery by Seller to Buyer
of the Disclosure Letter except for PARTS 2.3(b) AND 8.10(a) AND (b) OF THE
DISCLOSURE LETTER. Seller acknowledges that Buyer is relying on the disclosures
set forth in the Disclosure Letter in executing this Agreement and consummating
the Contemplated Transactions. In connection therewith, Seller hereby agrees to
deliver a complete and accurate Disclosure Letter within seven (7) business days
of the date hereof. If Buyer is not satisfied with the disclosures set forth on
the Disclosure Letter, and, as a result, terminates this Agreement pursuant to
SECTION 12.4(iii) below, the Earnest Money Escrow shall be released to Seller.
8.9 TRANSITION ARRANGEMENT. As of the date hereof, Seller is using the
Facilities in connection with the operations of the Excluded Businesses and
warehousing inventory relating to the Consumer Products Business. The parties
agree that for a period of 60 days after the Closing (the "Transition Period"),
Seller may continue to use the Facilities to the extent (and for the purposes)
utilized as of the date hereof. During the Transition Period, Seller agrees to
use its Best Efforts to move all operations and inventory relating to the
Excluded Businesses out of the Facilities. In consideration of allowing Seller
to use the Facilities during the Transition Period, the Seller agrees to (i) pay
to Buyer (on a monthly basis) a portion of the amounts due to the lessor of the
Facilities under the Facilities Leases, which amount shall be based on the pro
rata square footage of the Facilities used by Seller and (ii) reimburse Buyer
(on a monthly basis) for all costs and expenses incurred by Buyer in connection
with the use of the Facilities by Seller, including, without limitation,
telephone and other utility expenses.
35
<PAGE>
8.10 SELLER'S EMPLOYEES.
(a) The parties acknowledge that some current employees of KTI have
duties and responsibilities relating to the Excluded Businesses and the
Retained Music Business and some employees of Seller have duties and
responsibilities relating to the Business. PART 8.10(a) OF THE DISCLOSURE
LETTER sets forth (i) all of the employees of KTI and Seller (the
"Employees"), (ii) those Employees who will be employed by Buyer after
Closing and (iii) those Employees who will be employed by Seller (or one of
its subsidiaries, other than the Subsidiaries) after Closing. The parties
further agree that the calculation of the Final Net Tangible Book Value
will (A) include any and all liabilities (including, without limitation,
accrued vacation and salaries) relating to all of such Employees to be
hired by Buyer upon consummation of the Contemplated Transactions and (B)
exclude any and all liabilities relating to such Employees not hired by
Buyer upon consummation of the Contemplated Transactions, pursuant to PART
8.10(a) OF THE DISCLOSURE LETTER.
(b) Buyer agrees that so long as the employees set forth on PART
8.10(b) OF THE DISCLOSURE LETTER remain employed with the Seller or the
Subsidiaries, as the case may be, through the Closing, Buyer shall keep
such employees in its employ in positions with comparable responsibilities
and duties (or the employ of the Subsidiaries, as determined by Buyer in
its sole discretion) in the metropolitan Minneapolis, Minnesota area upon
terms at least as favorable as their current compensation for at least one
year after the Closing; provided, however, this SECTION 8.10(b) shall not,
in any manner, limit Buyer's right (or the Subsidiaries' right, as the case
may be) to terminate such employees prior to the end of such one-year
period for cause, in accordance with the customary employment policies and
procedures established by Buyer. In the event Buyer Breaches the terms of
this SECTION 8.10(b), including without limitation, terminating any such
employee without cause prior to the first anniversary of the Closing, Buyer
shall be liable for paying such employee's salary from the date of
termination until the first anniversary of the Closing.
ARTICLE IX
MUTUAL CONDITIONS PRECEDENT TO
PARTIES' OBLIGATION TO CLOSE
9.1 MUTUAL CONDITIONS. Each of the parties' obligations to consummate the
Contemplated Transactions and to take other actions required to be taken by the
parties at the Closing is subject to the satisfaction at or prior to the
Closing, of each of the following conditions:
(a) No temporary restraining order, preliminary or permanent
injunction or other order issued by any court of competent jurisdiction or
other legal or regulatory restraint or prohibition preventing the
consummation of the transactions contemplated hereby shall be in effect.
36
<PAGE>
(b) The Requisite Stockholder Approval of the Contemplated
Transactions shall have been received by each of Buyer (if necessary) and
Seller.
(c) Counsel for each of Buyer and Seller shall be satisfied with the
steps taken for compliance with all applicable requirements of the
securities, antitrust and regulatory laws and with all other legal matter,
including obtaining all necessary consents from any Governmental
Authorities, including, without limitation, the expiration or early
termination of the waiting period(s), if any, under the HSR Act.
ARTICLE X
CONDITIONS PRECEDENT TO BUYER'S OBLIGATIONS TO CLOSE
Buyer's obligations to consummate the Contemplated Transactions and to take
the other actions required to be taken by Buyer at the Closing is subject to the
satisfaction, at or prior to the Closing, of each of the following conditions
(any of which may be waived by Buyer in whole or in part):
10.1 ACCURACY OF REPRESENTATIONS. Each of Seller's representations and
warranties in this Agreement and must have been accurate in all material
respects as of the date of this Agreement except to the extent to which such
representations and warranties are specifically stated to be as of a different
date, and must be accurate in all material respects as of the Closing Date as if
made on the Closing Date, without giving effect to any supplements pursuant to
SECTION 6.5.
10.2 THE SELLER'S PERFORMANCE.
(a) Each of the covenants and obligations that Seller is required to
perform or to comply with pursuant to this Agreement at or prior to the
Closing must have been duly performed and complied with in all material
respects.
(b) Seller must have delivered or caused to be delivered, each of
the documents required to be delivered or caused to be delivered, by it
pursuant to SECTION 3.2.
(c) Seller shall have obtained all of the Consents.
10.3 NO PROCEEDINGS. Since the date of this Agreement, there must not have
been commenced or Threatened against Buyer, or against any Person affiliated
with Buyer, any Proceeding (i) involving any challenge to, or seeking damages or
other relief in connection with, any of the Contemplated Transactions, or
(ii) that would reasonably be expected to have the effect of preventing,
delaying, making illegal, or in any material respect, otherwise interfering with
any of the Contemplated Transactions.
10.4 NO PROHIBITION. Neither the consummation nor the performance of any
of the Contemplated Transactions will, directly or indirectly (with or without
37
<PAGE>
notice or lapse of time), contravene, or conflict with, or result in a material
violation of, or cause Buyer or any Person affiliated with Buyer to suffer any
adverse consequence under, (i) any applicable Legal Requirement or Order, or
(ii) any Legal Requirement or Order that has been published, introduced, or
otherwise formally proposed by or before any Governmental Body.
10.5 MATERIAL ADVERSE CHANGE. There shall have been no material adverse
change in the assets, liabilities of any kind, operations, condition (financial
or otherwise), operating results, employee, customer or supplier relations,
business activities or prospects of the Subsidiaries taken as a whole since June
30, 1996.
10.6 FINANCING. Buyer shall have consummated and obtained net proceeds of
at least $70 million from a financing which may be in the form of a public or
private placement of convertible debentures to one or more investors, on terms
satisfactory to Buyer in its sole discretion (the "Financing").
ARTICLE XI
CONDITIONS PRECEDENT TO SELLER'S OBLIGATION TO CLOSE
Seller's obligation to consummate the Contemplated Transactions and to take
the other actions required to be taken by Seller at the Closing is subject to
the satisfaction, at or prior to the Closing, of each of the following
conditions (any of which may be waived by Seller, in whole or in part):
11.1 ACCURACY OF REPRESENTATIONS. Each of Buyer's representations and
warranties in this Agreement must have been accurate in all material respects as
of the date of this Agreement (except to the extent to which such
representations and warranties are specifically stated to be as of a different
date) and must be accurate in all material respects as of the Closing Date as if
made on the Closing Date.
11.2 BUYER'S PERFORMANCE.
(a) Each of the covenants and obligations that Buyer is required to
perform or to comply with pursuant to this Agreement at or prior to the
Closing must have been performed and complied with in all material
respects; and
(b) Buyer must have delivered each of the documents and payments
required to be delivered by them pursuant to SECTION 3.3.
11.3 NO PROCEEDINGS. Since the date of this Agreement, there must not have
been commenced or Threatened against Seller, or against any Person affiliated
with Seller, any Proceeding (i) involving any challenge to, or seeking damages
or other relief in connection with, any of the Contemplated Transactions, or
(ii) that would reasonably be expected to have the effect of preventing,
delaying, making illegal, or, in any material respect, otherwise interfering
with any of the Contemplated Transactions.
38
<PAGE>
11.4 NO PROHIBITION. Neither the consummation nor the performance of any
of the Contemplated Transactions will, directly or indirectly (with or without
notice or lapse of time), contravene, or conflict with, or result in a material
violation of, or cause Seller or any Person affiliated with Seller to suffer any
adverse consequence under, (i) any applicable Legal Requirement or Order, or
(ii) any Legal Requirement or Order that has been published, introduced, or
otherwise formally proposed by or before any Governmental Body.
ARTICLE XII
TERMINATION
12.1 TERMINATION BY MUTUAL CONSENT. This Agreement may be terminated and
the Contemplated Transactions may be abandoned at any time prior to the Closing,
before or after gaining Requisite Stockholder Approval, by the mutual written
consent of Seller and Buyer.
12.2 TERMINATION BY EITHER SELLER OR BUYER. This Agreement may be
terminated and the Contemplated Transactions may be abandoned by action of the
Board of Directors of either Seller or Buyer if (i) the Contemplated
Transactions shall not have been consummated within the earlier of (A) 75 days
following Requisite Stockholder Approval of Seller of the Contemplated
Transactions and (B) 180 days from the date hereof (provided that the right to
terminate this Agreement under this SECTION 12.2 shall not be available to any
party whose failure to fulfill a covenant, in any material respect, or
intentional delay, has caused, or resulted in, the failure of the Closing to
occur on or before such date) (the "Termination Date"); (ii) any court of
competent jurisdiction in the United States or some other governmental body or
regulatory authority shall have issued an order, decree or ruling or taken any
other action permanently restraining, enjoining or otherwise prohibiting the
Contemplated Transaction and such order, decree, ruling or other action shall
have become final and nonappealable; or (iii) if necessary, the Contemplated
Transaction shall have been voted on by stockholders of Buyer at the
stockholders meeting of Buyer duly convened therefor and the vote shall not have
been sufficient to obtain the Requisite Stockholder Approval of Buyer.
12.3 TERMINATION BY SELLER. This Agreement may be terminated upon written
notice to Buyer and the Contemplated Transactions may be abandoned at any time
prior to the Closing, before or after the approval by stockholders of Seller, by
action of the Board of Directors of Seller, if (i) Buyer shall have failed to
comply in any material respect with any of the covenants or agreements contained
in this Agreement to be complied with or performed by Buyer at or prior to such
date of termination, which failure to comply has not been cured (provided such
non-compliance or non-performance is capable of being cured) by the Termination
Date, (ii) any representation or warranty of Buyer contained in this Agreement
shall not be true in all material respects when made or, if a representation or
warranty relates to a particular date, shall not be true in all material
respects as of such date (provided such breach is capable of being cured) and
has not been cured by the Termination Date or on and as of the Closing as if
made on and as of the Closing, or (iii) Seller receives an Acquisition Proposal
pursuant to SECTION 6.3(b) above and/or enters into (or desires to enter into)
an agreement relating to an Acquisition Transaction, provided it has complied
with all of the provisions thereof and has made payment of the Termination Fee
required by SECTION 12.5(a) OR 12.6 below.
39
<PAGE>
12.4 TERMINATION BY BUYER. This Agreement may be terminated upon written
notice to Seller and the Contemplated Transactions may be abandoned at any time
prior to the Closing, before or after the approval by stockholders of Buyer, by
action of the Board of Directors of Buyer, if (i) Seller shall have failed to
comply in any material respect with any of the covenants or agreements contained
in this Agreement to be complied with or performed by Seller at or prior to such
date of termination, which failure to comply has not been cured (provided such
non-compliance or non-performance is capable of being cured) by the Termination
Date,(ii) any representation or warranty of Seller contained in this Agreement
shall not be true in all material respects when made or, if a representation or
warranty relates to a particular date, shall not be true in all material
respects as of such date (provided such Breach is capable of being cured,
including without limitation, a cure by providing supplemental disclosure
pursuant to SECTION 6.5, and has not been cured by the Termination Date) or on
and as of the Closing as if made on and as of the Closing or (iii) Buyer desires
to terminate this Agreement for any reason, at its sole discretion, other than
as set forth above or due to the failure of any conditions hereof to be
satisfied.
12.5 EFFECT OF TERMINATION; EARNEST MONEY ESCROW. In the event of
termination of this Agreement by either Seller or Buyer as provided in this
Article XII, the Earnest Money Escrow shall be disposed of as set forth below
and, except as set forth in SECTION 12.5 OR 12.6 below, (i) this Agreement shall
become null and void and (ii) there shall be no liability or obligation on the
part of either Buyer or Seller. In the event this Agreement is terminated or
fails to close by the Termination Date, the Earnest Money Escrow shall be
disposed of as follows:
(a) The Earnest Money Escrow (plus all interest accrued thereon)
shall be distributed to Buyer if the Contemplated Transactions fails to
close (i) due to a termination of this Agreement (A) pursuant to
SECTION 12.1 hereof whereby such mutual termination provides for a return
to Buyer of the Earnest Money Escrow, (B) by Buyer or Seller pursuant to
SECTION 12.2(ii) so long as such order, decree or ruling did not arise as a
direct result of Buyer's conduct (other than solely by being a party to the
Contemplated Transaction), (C) by Seller pursuant to SECTION 12.3(iii) or
(D) by Buyer pursuant to SECTION 12.4(i) OR 12.4(ii), (ii) by the
Termination Date due to the failure of the Seller obtaining the Seller's
Requisite Stockholder Approval for any reason or (iii) due to Seller not
closing due to the conditions set forth in ARTICLE IX OR SECTIONS 11.3 OR
11.4 not being satisfied or waived by Seller.
(b) The Earnest Money Escrow (plus all interest accrued thereon)
shall be distributed to Seller if the Contemplated Transactions fails to
close in all other events except as specifically provided under
SECTION 12.5(a), 12.5(c) OR 12.5(d) hereof.
(c) In the event Seller is prepared and willing to close the
Contemplated Transaction, but the Closing fails to occur due to the
conditions set forth in SECTIONS 9.1(a), 10.3 OR 10.4 not being satisfied
or waived by Buyer prior to the Termination Date, each of Buyer and Seller
agree to discuss, in good faith, and mutually agree to an extension of the
Termination Date (for a period no shorter than 60 days) until (i) such
40
<PAGE>
condition can be satisfied or waived by Buyer or (ii) a permanent, non-
appealable injunction or Order is issued by a court of competent
jurisdiction with respect to such condition making the condition unable to
be satisfied.
(d) Notwithstanding any termination of this Agreement by Seller for
any reason, Seller shall not be entitled to the Earnest Money Escrow if
Seller (or an Affiliate of Seller) has Breached, in any material respect,
any (i) representation or warranty (provided such Breach is capable of
being cured, including without limitation, a cure by providing supplemental
disclosures pursuant to SECTION 6.5 and has not been cured by the
Termination Date) or (ii) covenant or agreement, set forth herein or in any
document executed in connection herewith (including, without limitation, a
Breach of the voting agreement contemplated pursuant to SECTION 6.7
hereof).
(e) The distribution of the funds held in the Earnest Money Escrow
pursuant to this SECTION 12.5 shall be made immediately upon the
termination of this Agreement or the failure to close by the Termination
Date, as the case may be, by wire transfer to an account designated, in
writing, by the recipient of such funds.
(f) In the event this Agreement is terminated by Buyer due to a
material Breach by Seller hereunder, which Breach is not cured prior to the
Termination Date, in addition to the Buyer receiving the Earnest Money
Escrow pursuant to SECTIONS 12.4 AND 12.5 hereof, the Seller shall promptly
pay to Buyer an amount equal to $1,750,000 as reimbursement for all of the
costs, expenses, time and effort incurred and expended by Buyer in
connection with the Contemplated Transaction (the "Buyer's Reimbursement").
Payment of the Buyer's Reimbursement shall be Buyer's sole and exclusive
remedy in connection with such Breach by Seller; provided, however, Buyer
may, in its sole discretion, waive the payment of the Buyer's Reimbursement
and seek any equitable remedies that may be available to it in connection
with such Breach.
12.6 BREAK-UP FEE. The parties agree that Seller shall immediately pay
Buyer a break-up fee in the amount of $1,750,000 (the "Break-Up Fee") if (i)
this Agreement is terminated by Seller pursuant to SECTION 12.3(iii), or (ii)
prior to any termination of this Agreement, if (A) the Seller shall have
entered into, or shall have publicly announced its intention to enter into,
an agreement or an agreement in principle, with respect to any Acquisition
Proposal or (B) the Board of Directors of the Seller (or any special
committee thereof) shall have withdrawn or materially modified its approval
or recommendation of the Contemplated Transaction in connection with the vote
of the Seller's shareholders approving the Contemplated Transaction. In
addition to the above, the parties further agree that if (1) the Closing does
not occur by the Termination Date due to the stockholders of Seller
(including Philip Kives), for any reason, not approving (or voting on) the
Contemplated Transaction by the Termination Date and (2) the Seller enters
into a definitive agreement to sell the Business, in any form, within 12
months after the Termination Date, Seller shall immediately pay Buyer the
Break-Up Fee upon the execution of such definitive agreement.
41
<PAGE>
ARTICLE XIII
INDEMNIFICATION
13.1 SURVIVAL AND LIMITATIONS.
(a) All representations and warranties in this Agreement and any
other certificate or document delivered pursuant to this Agreement will
survive the Closing until the later of the (A) first anniversary of the
Closing Date and (B) August 31, 1998 (the "Sunset Period"); provided,
however, that the representations and warranties set forth in (i) SECTIONS
4.1(c) shall survive indefinitely and (ii) SECTIONS 4.10 AND 4.12 shall
survive until expiration of all applicable statutes of limitations
(including amendments extending said statutes). Notwithstanding the
foregoing, a representation and warranty shall continue in effect in the
event a claim for breach thereof has been made prior to the expiration of
the applicable survival period and shall survive until such claim is
resolved. The right to indemnification, reimbursement, or other remedy
based on such representations and warranties will not be affected by any
investigation conducted by Buyer (unless Buyer breaches, in any material
respect, the terms set forth in SECTION 6.1(b)). Unless a specified period
is set forth in this Agreement (in which event such specified period will
control), all agreements and covenants contained in this Agreement will
survive the Closing and remain in effect indefinitely.
(b) Notwithstanding anything to the contrary set forth in this
Agreement (but subject to the terms of this SECTION 13.1), Seller shall not
be liable hereunder to Buyer as a result any Breach of any representation,
warranty, covenant or agreement contained in this Agreement, unless and
until the Losses incurred by all Buyer Indemnified Parties as a result of
such misrepresentations under this Agreement shall exceed, in the
aggregate, $250,000 (the "Basket Threshold") and once the Basket Threshold
is reached, Seller shall fully indemnify all Buyer Indemnified Parties for
all Losses in excess of the Basket Threshold. The parties agree that the
maximum liability of Seller for any Losses of Buyer shall not exceed, in
the aggregate, $2,000,000 (the "Cap").
(c) Notwithstanding the above, the Cap and Basket Threshold shall in
no event apply to any Losses incurred by a Buyer Indemnified Party which
relate, directly or indirectly, to (i) an indemnification obligation under
SECTIONS 13.2(b), 13.2(d), 13.2(e) OR 13.2(f), (ii) any Losses relating to
the Seller's obligations set forth in SECTION 15.1 below to pay for its own
expenses in connection with the Contemplated Transactions, (iii) any
fraudulent acts committed by Seller, (iv) any amounts due to Buyer which
are held in the Harry Fox Escrow, (v) any amounts due to Buyer pursuant to
ARTICLE XII hereof and (vi) a Breach by Seller of the representations and
warranties contained in SECTIONS 4.1(c), 4.10 OR 4.12. The parties further
agree that the Basket Threshold shall not apply to any Losses incurred by
Buyer or a Buyer Indemnified Party as a result of any Breach of any of
Seller's representations and warranties that are qualified by "material",
"any material respect", "material adverse affect" or similar term;
provided, however, in no event will such agreement be deemed an agreement
or understanding that amounts less than the "Basket Threshold" are
immaterial to the Business.
42
<PAGE>
13.2 INDEMNIFICATION OF BUYER. Seller, on behalf of itself and its
successors and assigns, hereby agrees to indemnify Buyer and its Affiliates,
shareholders, directors, partners, officers, employees, agents, representatives
and successors, permitted assigns of Buyer and their respective Affiliates (the
"Buyer Indemnified Parties") and save and hold them harmless from and against
and, subject to the terms of SECTION 13.4 below, pay on behalf of or reimburse
the Buyer Indemnified Parties as and when incurred for any and all liabilities,
demands, claims, actions, causes of action, assessments, losses, costs, damages,
deficiencies, taxes, fines or expenses (whether or not arising out of third
party claims), including, without limitation, interest, penalties, reasonable
attorneys' fees and all amounts paid in investigation, defense or settlement of
any of the foregoing (collectively, "Losses"), which any Buyer Indemnified Party
may suffer, sustain or become subject to, in connection with, incident to,
resulting from or arising out of or in any way relating to or by virtue of:
(a) Any misrepresentation or breach of warranty on the part of
Seller under Article 4 of this Agreement or any misrepresentation in or
omission from any of the representations, warranties, statements, schedules
and exhibits, certificates, Disclosure Letter (as update prior to Closing
pursuant to SECTION 6.5) or other instruments or documents furnished to
Buyer by Seller made in or pursuant to this Agreement;
(b) Any nonfulfillment or breach of any covenant or agreement on the
part of Seller or its subsidiaries under this Agreement; provided that
Buyer promptly notify Seller of any such nonfulfillment or breach upon
Buyer obtaining actual knowledge of such breach or nonfulfillment;
(c) Any action, demand, proceeding, investigation or claim by any
third party (including any Governmental Body) against or affecting any
Buyer Indemnified Party which, if successful, would give rise to or
evidence the existence of or relate to a misrepresentation or breach of any
of the representations, warranties, agreements or covenants of Seller;
(d) Any claim for payment of fees and/or expenses as a broker or
finder in connection with the origin, negotiation, execution or
consummation of this Agreement based upon any alleged agreement between the
claimant and Seller or any of Seller's Affiliates;
(e) Any claims or Losses relating, directly or indirectly, to (i)
any audit or investigation of the Subsidiaries or the Business by the Harry
Fox Agency (or its Affiliates) for any period prior to the Closing Date,
(ii) Seller's agreement and obligations under SECTION 8.5(b) hereof or
(iii) other than liabilities specifically accrued for, reflected in the
Closing Balance Sheets and reflected in the calculation of the Final Net
Tangible Book Value, any Employee Benefit Plans of the Business, Seller,
the Subsidiaries or their respective Affiliates which claims or Losses
relate, in any manner, to periods prior to the Closing; or
(f) The Excluded Businesses, the Excluded Assets or the Retained
Music Business, regardless of (A) when such Loss arises or (B) whether such
Loss relates to periods before or after the Closing.
43
<PAGE>
The rights of the Buyer Indemnified Parties to indemnification under parts (b),
(d), (e) or (f) of this SECTION 13.2 shall apply notwithstanding that the matter
in question may be disclosed in the Disclosure Letter, in this Agreement or in
any document entered into in connection with the Contemplated Transaction, or
may be the subject of, excluded from or beyond the scope of any representation
or warranty of Seller in this Agreement. In addition to Buyer's right to
indemnification hereunder, Buyer shall also have the right to pursue any
remedies at equity that may be available to it in the event of a Breach of this
Agreement.
13.3 INDEMNIFICATION OF SELLER. Buyer, on behalf of itself and its
respective successors and assigns, hereby agrees to indemnify Seller and its
Affiliates, agents, representatives, successors and permitted assigns (the
"Seller Indemnified Parties") and save and hold each of them harmless from and
against and pay on behalf of or reimburse the Seller Indemnified Party as and
when incurred for any and all Losses which they may suffer, sustain or became
subject to, in connection with, incident to resulting from or arising out of or
in any way relating to or by virtue of:
(a) Any misrepresentation or breach of warranty on the part of Buyer
under Article 5 of this Agreement or any misrepresentation in or omission
from any of the representations, warranties, statements, schedules and
exhibits, certificates or other instruments or documents furnished to
Seller by the Buyer made in or pursuant to this Agreement or any other
Contemplated Agreement;
(b) Any nonfulfillment or breach of any covenant or agreement on the
part of Buyer under this Agreement;
(c) Any action, demand, proceeding, investigation or claim by any
third party (including governmental agencies) against or affecting a Seller
Indemnified Party which, if successful, would give rise to or evidence the
existence of or relate to a misrepresentation or breach of any of the
representations, warranties, agreements or covenants of Buyer;
(d) Any claim for payment of fees and/or expenses as a broker or
finder in connection with the origin, negotiation, execution or
consummation of this Agreement based upon any alleged agreement between
claimant and Buyer or any of Buyer's Affiliates; or
(e) Any claim arising which results from Buyer's conduct of the
Business after Closing or the failure of Buyer to discharge solely the
liabilities included in the calculation of the Final Net Tangible Book
Value (except for matters relating to Harry Fox).
13.4 INDEMNIFICATION PROCEDURE FOR THIRD PARTY CLAIMS. In the event that
subsequent to the Closing any person or entity entitled to indemnification under
this Agreement (an "Indemnified Party") asserts a claim for indemnification or
receives notice of the assertion of any claim or of the commencement of any
action or proceeding by any entity who is not a party to this Agreement or an
44
<PAGE>
Affiliate of a party to this Agreement (including, but not limited to any
domestic or foreign court or Governmental Body, federal, state or local) (a
"Third Party Claim") against such Indemnified Party, against which a party to
this Agreement is required to provide indemnification under this Agreement (an
"Indemnifying Party"), the Indemnified Party shall give written notice together
with a statement of any available information (other than privileged
information) regarding such claim to the Indemnifying Party within twenty (20)
business days after learning of such claim (or within such shorter time as may
be necessary to give the Indemnifying Party a reasonable opportunity to respond
to such claim). The Indemnifying Party shall have the right, upon written
notice to the Indemnified Party (the "Defense Notice") within fifteen days (15)
after receipt from the Indemnified Party of notice of such claim, which notice
by the Indemnifying Party shall specify the counsel it will appoint to defend
such claim ("Defense Counsel"), to conduct at its expense the defense against
such claim in its own name, or if necessary in the name of the Indemnified
Party; provided, however, that the Indemnified Party shall have the right to
approve the Defense Counsel, which approval shall not be unreasonably withheld,
and in the event the Indemnifying Party and the Indemnified Party cannot agree
upon such counsel within ten (10) days after the Defense Notice is provided,
then the Indemnifying Party shall propose an alternate Defense Counsel, which
shall be subject again to the Indemnified Party's approval which approval shall
not be unreasonably withheld. If the parties still fail to agree on the Defense
Counsel, then, at such time, they shall mutually agree in good faith on a
procedure to determine the Defense Counsel. The provisions set forth in this
SECTION 13.4 shall not apply to matters in connection with any Pre-Closing Harry
Fox Matters, which matters are subject to the provisions set forth in
SECTION 13.5 below.
(a) In the event that the Indemnifying Party shall fail to give the
Defense Notice within said 15 day period, it shall be deemed to have
elected not to conduct the defense of the subject claim, and in such event
the Indemnified Party shall have the right to conduct the defense in good
faith and to compromise and settle the claim in good faith without prior
consent of the Indemnifying Party and the Indemnifying Party will be liable
for all reasonable costs, expenses, settlement amounts or other Losses paid
or incurred in connection therewith.
(b) In the event that the Indemnifying Party does deliver a Defense
Notice and thereby elects to conduct the defense of the subject claim, the
Indemnifying Party shall be entitled to have the exclusive control over
said defense settlement of the subject claim and the Indemnified Party will
cooperate with and make available to the Indemnifying Party such
reasonable assistance and reasonable materials (including providing books,
records and reasonable time of personnel) as it may reasonably request, and
the Indemnified Party shall have the right at its expense to participate in
the defense assisted by counsel of its own choosing. If the Indemnified
Party elects to so participate in the defense of the subject claim, the
Indemnifying Party will not settle the subject claim without the prior
written consent of the Indemnified Party, which consent will not be
unreasonably withheld.
(c) Without the prior written consent of the Indemnified Party, the
Indemnifying Party will not enter into any settlement of any Third Party
Claim or cease to defend against such claim, if pursuant to or as a result
of such settlement or cessation, (i) injunctive relief or specific
45
<PAGE>
performance would be imposed against the Indemnified Party, or (ii) such
settlement or cessation would lead to liability or create any financial or
other obligation on the part of the Indemnified Party for which the
Indemnified Party is not entitled to indemnification hereunder.
(d) Notwithstanding paragraph (b) above, the Indemnifying Party
shall not be entitled to control, but may participate in, and the
Indemnified Party shall be entitled to have sole control over, the defense
or settlement of any claim (i) that seeks a temporary restraining order, a
preliminary or permanent injunction or specific performance against the
Indemnified Party, (ii) to the extent such claim involves criminal
allegations against the Indemnified Party, (iii) that if unsuccessful,
would set a precedent that would materially interfere with, or have a
material adverse effect on, the business or financial condition of the
Indemnified Party, or (iv) to the extent such claim imposes liability on
the part of the Indemnified Party for which the Indemnified Party is not
entitled to indemnification hereunder due to the limitations set forth
herein or otherwise. In such an event, the Indemnifying Party will still
have all of its obligations hereunder provided that the Indemnified Party
will not settle the subject claim without the prior written consent of the
Indemnifying Party, which consent will not be unreasonably withheld delayed
or conditioned.
(e) Any final judgment entered or settlement agreed upon in the
manner provided herein shall be binding upon the Indemnifying Party, and
shall conclusively be deemed to be an obligation with respect to which the
Indemnified Party is entitled to prompt indemnification hereunder.
(f) A failure by an Indemnified Party to give timely, complete or
accurate notice as provided in this SECTION 13.4 will not affect the rights
or obligations of any party hereunder except and only to the extent that,
as a result of such failure, any party entitled to receive such notice was
deprived of its right to recover any payment under its applicable insurance
coverage or was otherwise damaged in any material respect, as a result of
such failure to give timely notice.
13.5 HARRY FOX MATTERS. The parties agree that Seller shall have sole
liability for any and all matters, claims, investigations or audits relating to
the Harry Fox Agency for all periods prior to the Closing ("Pre-Closing Harry
Fox Matters"). The parties agree that each of Buyer and Seller may actively
participate (at its own expense) in the negotiation and settlement of such Pre-
Closing Harry Fox Matters (including the Harry Fox Audit) and each of Buyer and
Seller shall, in good faith, cooperate with each other in settling or resolving
such matters. The parties further agree that each of Buyer and Seller must
jointly approve any settlement or resolution of all Pre-Closing Harry Fox
Matters (including the Harry Fox Audit) (such approval shall not be unreasonably
withheld, delayed or conditioned). The parties hereto agree that upon final
determination of all liabilities in connection with the Harry Fox Audit, such
liabilities shall be paid (i) first by Buyer up to the amount of the Harry Fox
Reserve and (ii) second through the amounts held in the Harry Fox Escrow. To
the extent the amount of the Harry Fox Reserve exceeds all amounts due to the
Harry Fox Agency in connection with the Harry Fox Audit, such excess shall,
immediately upon the settlement or resolution of the Harry Fox Audit, be paid by
Buyer to Seller. In addition, immediately upon the settlement or resolution of
the Harry Fox Audit, any amount in the Harry Fox Escrow which is not required to
46
<PAGE>
be used to pay liabilities in connection with the Harry Fox Audit shall be paid
to Seller. In connection with any Pre-Closing Harry Fox Matters, Buyer, the
Subsidiaries and Seller will cooperate, in good faith, with each other and
provide such reasonable assistance and reasonable materials (including providing
books and records and reasonable time of personnel) as may reasonably be
requested in connection with any such Pre-Closing Harry Fox Matters. Until the
Pre-Closing Harry Fox Matters have been completely settled or resolved, Buyer
shall use all reasonable efforts retain all books and records of the
Subsidiaries that may be reasonably required to settle or resolve such matters.
If the amounts due to the Harry Fox Agency in connection with the Harry Fox
Audit are more than the Harry Fox Reserve and Harry Fox Escrow, taken together,
Seller shall be solely liable for any such deficiency and shall immediately
indemnify Buyer, in full, for any Losses incurred by Buyer in connection
therewith, including, without limitation, the amount of any such deficiency.
ARTICLE XIV
DEFINITIONS
For purposes of this Agreement, the following terms have the meanings
specified:
"AFFILIATES" -- means an affiliate as defined in Rule 405 under the
Securities Act, and includes any past and present Affiliate of a Person.
"ACCOUNTANTS" -- as defined in SECTION 2.3(b)(iii).
"ACCOUNTS RECEIVABLE" -- as defined in SECTION 4.7.
"BEST EFFORTS" -- the efforts that a prudent Person desirous of achieving
a result would use in similar circumstances to ensure that such result is
achieved as expeditiously as reasonably possible but without incurring any
extraordinary material expense or any significant obligations not otherwise
contemplated by this Agreement or the Contemplated Transactions.
"BREACH" -- a "Breach" of a representation, warranty, covenant, obligation,
or other provision of this Agreement will be deemed to have occurred if there is
or has been (a) any inaccuracy in or breach of, or any failure to perform or
comply with, such representation, warranty, covenant, obligation, or other
provision, or (b) any valid claim (by any Person) or other occurrence or
circumstance that is or was inconsistent with such representation, warranty,
covenant, obligation, or other provision, and the term "Breach" means any such
inaccuracy, breach, failure, claim, occurrence, or circumstance.
"BUSINESS" -- as defined in the Recitals to this Agreement.
"BUYER'S CLOSING DOCUMENTS" -- as defined in SECTION 3.3.
"CLOSING" -- as defined in SECTION 3.1.
"CLOSING BALANCE SHEETS" -- as defined in SECTION 2.3(a).
47
<PAGE>
"CLOSING DATE" -- the date and time as of which the Closing actually takes
place.
"CODE" -- the Internal Revenue Code of 1986, as amended, or any successor
law, and regulations issued by the IRS pursuant to the Internal Revenue Code or
any successor law.
"CONFIDENTIALITY AGREEMENT" -- that certain letter agreement, dated
November 12, 1996, as amended, by and between Buyer and Seller.
"CONSENTS" -- as defined in SECTION 6.4.
"CONTEMPLATED TRANSACTIONS" -- all of the transactions contemplated by this
Agreement,
(i) the execution, delivery, and performance of Seller's Closing
Documents and Buyer's Closing Documents; and
(ii) the performance by Buyer and Seller of their respective
covenants and obligations under this Agreement and each of the Seller
Transaction Documents and Buyer Transaction Documents.
"CONTRACT" -- any agreement, contract, obligation, promise, or undertaking
(whether written or oral and whether express or implied) that is legally
binding.
"DISCLOSURE LETTER" -- the disclosure letter delivered by Seller to Buyer
concurrently with the execution and delivery of this Agreement.
"DOMINION" -- as defined in the Recitals to this Agreement.
"DOMINION STOCK" -- as defined in Article I.
"ENCUMBRANCE" -- any claim, lien, pledge, charge, security interest,
equitable interest, option, right of first refusal or preemptive right, or other
restriction of any kind, including any restriction on use, voting (in the case
of any security), transfer, receipt of income, or exercise of any other
attribute of ownership.
"ENVIRONMENTAL AND SAFETY REQUIREMENTS" -- means all federal, state and
local statutes, laws, rules, regulations, codes, ordinances, orders, standards,
permits, licenses, actions, policies and requirements (including consent
decrees, judicial decisions and administrative orders) relating to protection,
preservation or conservation of the environment and public or worker health and
safety, all as amended, hereafter amended or reauthorized.
"ERISA" -- the Employee Retirement Income Security Act of 1974, as amended,
or any successor law.
"EXCHANGE ACT" -- the Securities Exchange Act of 1934, as amended.
"EXCLUDED BUSINESSES" -- as defined in Article I.
48
<PAGE>
"FACILITIES" -- as defined in SECTION 4.6(b).
"FINANCIAL STATEMENTS" -- as defined in SECTION 4.3.
"GAAP" -- generally accepted United States accounting principles, applied
on a basis consistent with the basis on which the audited financial statements
referred to in SECTION 5.4 were prepared.
"GOVERNMENTAL AUTHORIZATION" -- any approval, consent, license, permit,
waiver, or other authorization issued, granted, given, or otherwise made
available by or under the authority of any Governmental Body or pursuant to any
Legal Requirement.
"GOVERNMENTAL BODY" -- any:
(i) nation, state, county, city, town, village, district, or
other jurisdiction of any nature;
(ii) federal, state, local, municipal, foreign, or other
government;
(iii) governmental or quasi-governmental authority of any nature
(including any governmental agency, branch, department, official, or
other entity and any court or other tribunal);
(iv) multi-national organization or body; or
(v) body exercising, or entitled or purporting to exercise, any
administrative, executive, judicial, legislative, police, regulatory,
or taxing authority or power of any nature.
"HAZARDOUS MATERIALS" -- means (i) hazardous substances, as defined by the
Comprehensive Environmental Response, Compensation and Liability Act, 42 U.S.C.
Section 9601 ET SEQ.; (ii) hazardous wastes as defined by the Resource
Conservation and Recovery Act, 42 U.S.C. Section 6901 ET SEQ.; (iii) petroleum,
including without limitation, crude oil or any fraction thereof which is liquid
at standard conditions of temperature and pressure (60 degrees Fahrenheit and
14.7 pounds per square inch absolute); (iv) any radioactive material, including,
without limitation, any source, special nuclear, or by-product material as
defined in 42 U.S.C. Section 2011 ET SEQ.; (v) asbestos in any form or
condition; (vi) polychlorinated biphenyls; and (vii) any other material,
substance or waste to which liability or standards of conduct may be imposed
under any Environmental and Safety Requirements.
"HSR ACT" -- as defined in SECTION 4.2(d).
"INSURANCE POLICIES" -- as defined in SECTION 4.17.
"INTELLECTUAL PROPERTY" -- all intellectual property and proprietary
information used in connection with the Business, including, without limitation,
49
<PAGE>
Seller's and the Subsidiaries' names and assumed names, the music catalogue, all
patents, patent applications, patent disclosures and inventions (whether or not
patentable and whether or not reduced to practice); all trademarks, service
marks, trade dress, trade names and corporate names; all registered and
unregistered statutory and common law copyrights; all registrations,
applications and renewals for any of the foregoing; all trade secrets,
confidential information, ideas, formulae, compositions, know-how, manufacturing
and production processes and techniques, research and development information,
drawings, specifications, designs, plans, improvements, proposals, technical and
computer data, documentation and software, financial, business and marketing
plans, and customer and supplier lists and related information and all other
proprietary rights).
"INTERIM BALANCE SHEET" -- as defined in SECTION 4.3.
"INVENTORY" -- as defined in SECTION 4.8.
"IRS" -- the United States Internal Revenue Service.
"KTI" -- as defined in the Recitals to this Agreement.
"KTI STOCK" -- as defined in Article I.
"KNOWLEDGE" -- where any representation or warranty of the Seller in this
Agreement is expressly qualified by "to the knowledge of Seller", "to Seller's
knowledge" or similar reference, it refers the knowledge of the responsible
officers of Seller and the Subsidiaries (after due and adequate inquiry, in good
faith, by such officers of all employees and agents of Seller and the
Subsidiaries who would have knowledge of such matters) to the existence of facts
that are the subject of such representations and warranties.
"LEGAL REQUIREMENT" -- any federal, state, local, municipal, foreign, or
other constitution, ordinance, regulation, statute, treaty, or other law
adopted, enacted, implemented, or promulgated by or under the authority of any
Governmental Body or by the eligible voters of any jurisdiction, and any
agreement, approval, consent, injunction, judgment, license, order, or permit by
or with any Governmental Body or to which Seller, with respect to the operations
of the Subsidiaries, or either of the Subsidiaries is a party or by which
Seller, with respect to the operations of the Subsidiaries, or either of the
Subsidiaries, is bound.
"LICENSE AGREEMENTS" -- as defined in SECTION 8.4.
"MATERIAL CONTRACT" -- as defined in SECTION 4.16(a).
"MAUREEN CATALOG" -- as defined in SECTION 8.4.
"MBCA" -- as defined in SECTION 4.2(b).
"NET TANGIBLE BOOK VALUE" -- as defined in SECTION 2.3(a).
50
<PAGE>
"NON-EXCLUSIVE TERRITORY" -- shall mean (i) the countries of Algeria,
Bahrain, Quatar, Egypt, Iran, Iraq, Israel, Jordan, Kuwait, Lebanon, Libya,
Morocco, Oman, Yemen, Saudi Arabia, Sudan, Syria, Tunisia and the United Arab
Emirates (or any future territory or country comprising the foregoing geographic
areas), and (ii) the remaining countries comprising the continent of Africa.
"NTBV SCHEDULE" -- as defined in SECTION 2.3(b)(i).
"OLD TOWN CATALOG" -- as defined in SECTION 8.4.
"ORDER" -- any award, injunction, judgment, order, ruling, subpoena, or
verdict or other decision entered, issued, made, or rendered by any court,
administrative agency, or other Governmental Body or by any arbitrator.
"ORDINARY COURSE OF BUSINESS" -- an action taken by a Person will be deemed
to have been taken in the "Ordinary Course of Business" only if:
(i) such action is consistent with the past practices of such
Person and is taken in the ordinary course of the normal day-to-day
operations of such Person;
(ii) such action is not required to be authorized by the board of
directors of such Person (or by any Person or group of Persons
exercising similar authority) and does not require any other separate
or special authorization of any nature; and
(iii) such action is similar in nature and magnitude to actions
customarily taken, without any separate or special authorization, in
the ordinary course of the normal day to day operations of other
Persons that are in the same line of business as such Person.
"ORGANIZATIONAL DOCUMENTS" -- (i) the articles or certificate of
incorporation and the bylaws of a corporation; (ii) any charter or similar
document adopted or filed in connection with the creation, formation, or
organization of a Person; and (iii) any amendment to any of the foregoing.
"PERSON" -- any individual, corporation (including any non-profit
corporation), general or limited partnership, limited liability company, joint
venture, estate, trust, association, organization, or other entity or
Governmental Body.
"PRELIMINARY BOOK VALUE" -- as defined in SECTION 2.3.
"PROCEEDING" -- any suit, litigation, arbitration, hearing, audit,
investigation, or other action (whether civil, criminal, administrative,
investigative, or informal) commenced, brought, conducted, or heard by or
before, or otherwise involving, any Governmental Body or arbitrator.
51
<PAGE>
"PROPRIETARY RIGHTS AGREEMENT" -- as defined in SECTION 4.19.
"PROTEST NOTICE -- as defined in SECTION 2.3(b)(iii).
"PURCHASE PRICE" -- as defined in SECTION 2.1.
"RELATED PERSON" -- with respect to a particular individual:
(i) each other member of such individual's Family; and
(ii) any Person that is directly or indirectly controlled by any
one or more members of such individual's Family.
With respect to a specified Person other than an individual:
(i) any Person that, directly or indirectly, controls, is
controlled by, or is under common control with such specified Person;
and
(ii) each Person that serves as a director, executive officer,
general partner, executor, or trustee of such specified Person (or in
a similar capacity);
For purposes of this definition, the "Family" of an individual includes (i) such
individual, (ii) the individual's spouse and former spouses, (iii) any lineal
ancestor or lineal descendant of the individual, or (iv) a trust for the benefit
of the foregoing. A Person will be deemed to control another Person, for
purposes of this definition, if the first Person possesses, directly or
indirectly, the power to direct, or cause the direction of, the management
policies of the second Person, (x) through the ownership of voting securities,
(y) through common directors, trustees or officers, or (z) by contract or
otherwise).
"REPRESENTATIVE" -- with respect to a particular Person, any director,
officer, employee, agent, consultant, advisor, or other representative of such
Person, including legal counsel, accountants, and financial advisors.
"RETAINED MUSIC BUSINESS" -- as defined in SECTION 8.4.
"REVIEW PERIOD" -- as defined in SECTION 2.3(b)(ii).
"SECURITIES ACT" -- the Securities Act of 1933, 15 U.S.C. Section 77a et
seq., as amended, or any successor law.
"SEC" -- the Securities and Exchange Commission.
"STOCK" -- as defined in Article I.
"SUBSIDIARIES" -- as defined in the Recitals to this Agreement.
52
<PAGE>
"SELLERS CLOSING DOCUMENTS" -- as defined in SECTION 3.2.
"SELLER TRANSACTION DOCUMENTS" -- as defined in SECTION 4.2.
"SELLER GOVERNMENTAL AUTHORIZATIONS" -- as defined in SECTION 4.13(b).
"TAX OR TAXES" -- means any and all federal, state, local and foreign
taxes, assessments and other governmental charges, duties, impositions and
liabilities relating to taxes, including taxes based upon or measured by gross
receipts income, profits, sales, use and occupation, and value added, ad
valorem, transfer, franchise, withholding, payroll, recapture, employment,
excise and property taxes, together with all interest, penalties and additions
imposed with respect to such amounts and any obligations under any agreements or
arrangements with any other person with respect to such amounts and including
any liability for taxes of a predecessor entity.
"THREATENED" -- a claim, Proceeding, dispute, action, or other matter will
be deemed to have been "Threatened" if any demand or statement has been made
(orally or in writing) or any notice has been given (orally or in writing).
ARTICLE XV
GENERAL PROVISIONS
15.1 EXPENSES. Each of Buyer, on one hand, and Seller on the other hand,
shall pay all costs and expenses incurred or to be incurred by it in negotiating
and preparing this Agreement and carrying out the Contemplated Transactions. In
the event a filing under the HSR Act is required, the Buyer and Seller shall
each pay one-half of the filing fees.
15.2 NOTICES. All notices, consents, waivers, and other communications
under this Agreement must be in writing and will be deemed to have been duly
given (a) when delivered by hand; (b) when sent by telecopier, provided that a
copy is mailed by U.S. certified mail, return receipt requested; (c) three days
after sent by Certified U.S. Mail, return receipt requested; or (d) one day
after deposit with a nationally recognized overnight delivery service, in each
case to the appropriate addresses and telecopier numbers set forth below (or to
such other addresses and telecopier numbers as a party may designate by notice
to the other parties):
53
<PAGE>
Seller: with copies to:
K-tel International, Inc. Kaplan, Strangis and Kaplan, P.A.
2605 Fernbrook Lane North 5500 Norwest Center
Minneapolis, Minnesota 55447 90 South Seventh Street
Attention: President Minneapolis, Minnesota 55402
Telecopy No.: (612) 509-9409 Attention: Bruce J. Parker, Esq.
Telecopy No.: (612) 375-1143
Philip Kives
K-5 Leisure Products, Inc.
220 Saulteaux Crescent
Winnipeg, Manitoba, Canada R3J 3W2
Telecopy No.: (204) 832-7782
Buyer: with a copy to:
Platinum Entertainment, Inc. Katten Muchin & Zavis
2001 Butterfield Road 525 West Monroe Street
Downers Grove, Illinois 60515 Suite 1600
Attention: Steven Devick Chicago, Illinois 60661-3693
Telecopy No.: (630) 769-0049 Attention: Matthew S. Brown, Esq.
Adam H. Schecter, Esq.
Telecopy No.: (312) 902-1061
15.3 FURTHER ASSURANCES. To the extent consistent with the terms of this
Agreement, the parties agree (a) to furnish upon request to each other such
further information, (b) to execute and deliver to each other such other
documents, and (c) to do such other acts and things, all as the other party may
reasonably request for the purpose of carrying out the intent of the
Contemplated Transactions.
15.4 WAIVER. The rights and remedies of the parties to this Agreement are
cumulative and not alternative. Neither the failure nor any delay by any party
in exercising any right, power, or privilege under this Agreement or the
documents referred to in this Agreement will operate as a waiver of such right,
power, or privilege, and no single or partial exercise of any such right, power,
or privilege will preclude any other or further exercise of such right, power,
or privilege or the exercise of any other right, power, or privilege.
15.5 ENTIRE AGREEMENT AND MODIFICATION. This Agreement supersedes all
prior oral or written agreements between the parties with respect to its subject
matter and constitutes (along with the documents referred to in this Agreement)
as a complete and exclusive statement of the terms of the agreement between the
parties with respect to its subject matter, except that until the Closing, the
Confidentiality Agreement shall remain in full force and effect in accordance
with its terms. This Agreement may not be amended except by a written agreement
executed by the party to be charged with the amendment.
54
<PAGE>
15.6 ASSIGNMENTS, SUCCESSORS, AND NO THIRD-PARTY RIGHTS. None of the
parties may assign any of its rights under this Agreement without the prior
consent of the other parties except that Buyer may assign any of its rights
under this Agreement to any subsidiary of Buyer. Subject to the preceding
sentence, this Agreement will apply to, be binding in all respects upon, and
inure to the benefit of the successors and permitted assigns of the parties.
Nothing expressed or referred to in this Agreement will be construed to give any
Person other than the parties to this Agreement any legal or equitable right,
remedy, or claim under or with respect to this Agreement or any provision of
this Agreement except as provided in SECTION 8.10(b).
15.7 SEVERABILITY. If any provision of this Agreement is held invalid or
unenforceable by any court of competent jurisdiction, the other provisions of
this Agreement will remain in full force and effect. Any provision of this
Agreement held invalid or unenforceable only in part or degree will remain in
full force and effect to the extent not held invalid or unenforceable.
15.8 SECTION HEADINGS, CONSTRUCTION. The headings of Sections in this
Agreement are provided for convenience only and will not affect its construction
or interpretation. All references to "Sections" refer to the corresponding
Sections of this Agreement. All words used in this Agreement will be construed
to be of such gender or number as the circumstances require. Unless otherwise
expressly provided, the word "including" does not limit the preceding words or
terms.
15.9 GOVERNING LAW. This Agreement will be governed by and construed under
the laws of the State of Delaware without regard to conflict of laws principles.
15.10 COUNTERPARTS. This Agreement may be executed in one or more
counterparts, each of which will be deemed to be an original copy of this
Agreement and all of which, when taken together, will be deemed to constitute
one and the same agreement.
15.11 NO STRICT CONSTRUCTION. The language used in this Agreement
will be deemed to be the language chosen by the parties to express their mutual
intent, and no rule of strict construction will be applied against any party.
55
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement as of the date
first written above.
BUYER: SELLER:
PLATINUM ENTERTAINMENT, INC. K-TEL INTERNATIONAL, INC.
By: /s/ Thomas Leavens By: /s/ Philip Kives
____________________________ _______________________________________
Its: COO Its: Chairman & Chief Executive Officer
____________________________ _______________________________________
56
<PAGE>
EARNEST MONEY ESCROW AGREEMENT
EARNEST MONEY ESCROW AGREEMENT (this "Agreement") is made and entered into
as of March 3, 1997, by and among PLATINUM ENTERTAINMENT, INC., a Delaware
corporation ("Buyer"), K-TEL INTERNATIONAL, INC., a Minnesota corporation
("Seller") and MIDWEST TRUST SERVICES, INC., as Escrow Agent ("Escrow Agent").
The parties hereto are entering into this Agreement pursuant to the terms
of that Asset Purchase and Sale Agreement dated as of March 3, 1997 (the
"Purchase Agreement"), by and among Buyer and Seller. Accordingly, the parties
hereto agree as follows:
1. DEFINITION OF TERMS. Terms not otherwise defined herein shall have
the meaning ascribed to such terms in the Purchase Agreement. The Escrow Agent
shall not be responsible for any other provisions of the Purchase Agreement.
2. APPOINTMENT AND ACCEPTANCE. Buyer and Seller hereby appoint Escrow
Agent as escrow agent for the purposes and upon the terms and conditions
hereinafter set forth. Escrow Agent hereby accepts such appointment and agrees
to act as escrow agent hereunder and to hold, invest and dispose of any funds
received by it hereunder in accordance with the terms and conditions hereinafter
set forth.
3. DEPOSIT OF ESCROWED FUNDS. On the date hereof, Buyer shall, as
partial payment of the Purchase Price, deliver to Escrow Agent for deposit in
escrow pursuant to the provisions hereof, a wire transfer of immediately
available funds in the amount of $1,750,000 (the "Escrowed Funds") into an
interest bearing account.
4. PURPOSE OF AGREEMENT. Seller and Buyer represent that this Agreement
has been executed pursuant to SECTION 2.2(a) of the Purchase Agreement. Buyer
represents that it will make the deposit of the Escrowed Funds pursuant to
SECTION 2.2(a) of the Purchase Agreement on Tuesday, March 4, 1997.
5. DELIVERY OF ESCROWED FUNDS. Subject to the terms set forth in ARTICLE
XII of the Purchase Agreement, if at any time Seller or Buyer shall claim that
it is entitled to payment of all or a portion of the Escrowed Funds pursuant to
the terms set forth in the Purchase Agreement (a "Right of Payment"), such party
shall give notice of such Right of Payment (the "Notice of Payment") to the
other party and the Escrow Agent. The Notice of Payment shall be an affidavit
describing the event or circumstances giving rise to the Right of Payment,
specifying the amount of the Escrowed Funds requested and certifying that the
Notice of Payment is being submitted in good faith.
If Escrow Agent shall have received a Notice of Payment, Escrow Agent shall
promptly deliver a copy thereof to the other party hereto. Within fifteen (15)
business days ("Dispute Period") after delivery by Escrow Agent of a copy of
such Notice of Payment to such other
<PAGE>
party, such other party may deliver to Escrow Agent a written notice (the
"Notice of Dispute") disputing the request for payment of Escrowed Funds
stated in the Notice of Payment. The Notice of Dispute shall be an affidavit
specifying the amount being disputed (the "Disputed Amount"), describing in
reasonable detail the reasons for such dispute and certifying that the Notice
of Dispute is being submitted in good faith. If Escrow Agent has not
received a Notice of Dispute prior to the expiration of Dispute Period
referred to above, then Escrow Agent shall immediately pay to such requesting
party, by check or wire transfer of immediately available funds, the full
amount of the Escrowed Funds requested in the Notice of Payment. If Escrow
Agent has received a Notice of Payment during the Dispute Period which
disputes in part the request for payment of Escrowed Funds stated in the
Notice of Payment, then Escrow Agent shall, following receipt of such notice
of claim, immediately pay to such requesting party, by check or wire transfer
of immediately available funds, the amount, if any, of Escrowed Funds
requested in the Notice of Payment which is in excess of the Disputed Amount.
If Escrow Agent receives a Notice of Dispute, Escrow Agent shall promptly
deliver a copy of the Notice of Dispute to the other party hereto, and shall not
deliver all or the portion of the requested amount of Escrowed Funds set forth
in the Notice of Payment constituting the Disputed Amount until Escrow Agent
shall have received one of the following:
(a) A certified copy of an order, decree or judgment issued or
rendered by a court of competent jurisdiction, which order, decree or
judgment has been finally affirmed on appeal or which by lapse of time or
otherwise is no longer subject to appeal (a "Final Decision") directing the
distribution of the Escrow Funds; or
(b) A joint written direction executed by Buyer and Seller directing
the distribution of the Escrowed Funds.
Upon receipt of either (a) or (b) above, Escrow Agent shall immediately
deliver the Escrowed Funds to the proper party(ies) in accordance therewith.
6. INVESTMENT OF ESCROWED FUNDS. Escrow Agent shall invest the Escrowed
Funds, from time to time, in 30-day United States Treasury obligations or
certificates of deposit having a maturity not to exceed 30 days, any
governmental mutual funds, or such other investments jointly designated in
writing by Buyer and Seller. The proceeds of all investments made hereunder
shall be distributed in accordance with this Agreement. Escrow Agent shall
deliver monthly statements to Buyer and Seller in accordance with Escrow Agent's
regular practice; the parties hereby agree that, except for the foregoing,
Escrow Agent shall have no obligations to monitor, or advise the parties with
respect to, such investments. All interest or other income earned on the Escrow
Funds shall be paid to Buyer on a monthly basis.
7. RELEASE DATE AND TERMINATION OF ESCROW.
(a) On the Closing Date or the effective date of an earlier
termination of the Purchase Agreement in accordance with the terms thereof
(the "Release Date"), Escrow
-2-
<PAGE>
Agent shall ascertain the amount of the escrow balance (the "Escrow
Balance"), which amount shall equal the amount of Escrowed Funds (including
all interest or other income attributable thereto and not previously
distributed) then held hereunder LESS the amount of Escrowed Funds, if any,
then (i) covered by a pending Notice of Payment which is subject to a Notice
of Dispute as provided in SECTION 5 hereof, (ii) covered by a pending Notice
of Payment which was delivered by Escrow Agent to a party hereto at any time
prior to the Release Date and which either has not been paid or is subject
to the ability of a party hereto to provide a Notice of Dispute with respect
thereto in accordance with the terms hereof, or (iii) covered by a Notice
of Payment to the extent determined to be valid and no longer subject to a
Notice of Dispute, but not yet paid. On the Release Date (i), if such date
is the Closing Date, Escrow Agent shall deliver to Seller (or its designee)
the Escrow Balance or (ii) if such date is the effective date of an earlier
termination of the Purchase Agreement in accordance with the terms thereof,
the provisions of SECTION 5 above shall apply to any release of the
Escrow Balance.
(b) Notwithstanding the foregoing, this Agreement may be terminated
at any time by and upon the receipt by Escrow Agent of written notice of
termination executed by both Buyer and Seller directing the distribution of
all property then held by Escrow Agent under and pursuant to this
Agreement, and this Agreement shall automatically terminate if and when all
the Escrowed Funds (and all the securities in which any of the Escrowed
Funds shall have been invested) shall have been distributed by Escrow Agent
in accordance with the terms of this Agreement.
(c) Escrow Agent is authorized to liquidate the securities held
hereunder (unless directed in writing by Seller to distribute such
securities in some other specified manner) to the extent necessary to
distribute to Seller (or its designee) the Escrowed Funds as provided in
SECTION 7(a) above and shall have no liability for any loss arising out of
any such liquidation.
8. LIENS ON ESCROWED FUNDS. During the term of this Escrow Agreement,
each of Buyer and Seller agree to keep the Escrowed Funds free and clear of all
liens, claims, encumbrances, levies, garnishments or other attachments arising
with respect to it.
9. NOTICES. Any notices or other communication required to be sent or
given hereunder by any of the parties shall in every case be in writing and
shall be deemed properly served if (a) delivered personally, (b) sent by
registered or certified mail, in all such cases with first class postage
prepaid, return receipt requested, (c) delivered by a recognized overnight
courier service, or (d) sent by facsimile transmission to the parties at the
addresses as set forth below or at such other addresses as may be furnished in
writing.
-3-
<PAGE>
(a) If to Seller:
K-tel International, Inc.
2605 Fernbrook Lane North
Minneapolis, Minnesota 55447
Attention: David Weiner
Telecopy No.: (612) 509-9409
with copies to:
Kaplan Strangis & Kaplan, P.A.
5500 Norwest Center
90 South Seventh Street
Minneapolis, Minnesota 55402
Attention: Bruce J. Parker, Esq.
Telecopy No.: (612) 375-1143
and
Philip Kives
K-5 Leisure Products, Inc.
220 Saulteaux Crescent
Winnipeg, Manitoba, Canada R3J 3W2
Telecopy No.: (204) 832-7782
(b) If to Buyer:
Platinum Entertainment, Inc.
2001 Butterfield Road
Downers Grove, Illinois 60515
Attention: Steven Devick
Telecopy No.: (630) 769-0049
with a copy to:
Katten Muchin & Zavis
525 West Monroe Street
Suite 1600
Chicago, Illinois 60661-3693
Attention: Matthew S. Brown, Esq.
Adam H. Schecter, Esq.
Telecopy No.: (312) 902-1061
-4-
<PAGE>
(c) If to Escrow Agent:
Midwest Trust Services, Inc.
500 West Chestnut Street
Hinsdale, Illinois 60521
Attention: Mary Henthorn
Telecopy No.: (630) 323-0531
Date of service of such notice shall be (w) the date such notice is personally
delivered, (x) three days after the date of mailing if sent by certified or
registered mail, (y) the next succeeding business day after date of delivery to
the overnight courier if sent by overnight courier or (z) the next succeeding
business day after transmission by facsimile.
10. ESCROW AGENT'S LIABILITY. Escrow Agent undertakes to perform such
duties and only such duties as are specifically set forth in this Agreement, and
no implied covenants or obligations shall be read into this Agreement against
Escrow Agent. In the absence of bad faith, gross negligence or wilful
misconduct on its part, Escrow Agent may conclusively rely, as to the truth of
the statements and the correctness of the opinions expressed therein, upon
certificates or opinions furnished to Escrow Agent. Escrow Agent may act upon
any instrument, certificate, opinion or other writing believed by it in good
faith and without gross negligence to be genuine, and shall not be liable in
connection with the performance by it of its duties pursuant to the provisions
of the Agreement, except for its own bad faith, gross negligence or wilful
misconduct. Escrow Agent may consult with counsel of its own choice and shall
have full and complete authorization and protection for any action taken,
suffered or omitted by it hereunder in good faith and in accordance with the
opinion of such counsel. Escrow Agent may execute powers hereunder or perform
any duties hereunder either directly or by or through agents or attorneys.
11. INDEMNIFICATION OF ESCROW AGENT. Buyer and Seller hereby agree
severally and not jointly (one-half to be borne by Buyer and one-half to be
borne by Seller) to indemnify Escrow Agent for, and to hold it harmless against,
any loss, liability or expense incurred without gross negligence, wilful
misconduct or bad faith on the part of Escrow Agent, arising out of or in
connection with its entering into the Agreement, carrying out its duties
hereunder and accepting the Escrowed Funds, including the costs and expenses of
defending itself against any claim of liability in connection with the exercise
or performance of any of its powers or duties hereunder (including reasonable
fees, expenses and disbursements of its counsel).
12. ESCROW AGENT TO FOLLOW INSTRUCTIONS OF BUYER AND SELLER.
Notwithstanding any provision contained herein to the contrary, Escrow Agent
shall at any time and from time to time take such action hereunder with respect
to the Escrowed Funds (and the securities in which any of the Escrowed Funds
shall have been invested) as shall be directed in writing by both Buyer and
Seller, provided that Escrow Agent shall first be indemnified to its
satisfaction with respect to any of its costs or expenses which might be
involved.
-5-
<PAGE>
13. RESIGNATION OF ESCROW AGENT. Escrow Agent, or any successor, may
resign at any time upon giving written notice, thirty (30) days before such
resignation shall take effect, to Buyer and Seller. In the event Escrow Agent
shall resign or be unable to serve, it shall be succeeded by such bank or trust
company as Buyer and Seller shall appoint, or if no appointment is made, by a
bank or trust company appointed by a court of competent jurisdiction. In the
absence of a successor so appointed by Buyer and Seller, Escrow Agent may
petition such a court to appoint a successor escrow agent. The resigning escrow
agent shall transfer to its successor all monies, securities and investments
then held subject to this escrow and all pending notices, instructions and
directions then in its possession, and shall thereupon be discharged, and the
successor shall thereupon succeed to all the rights, powers and duties and shall
assume all of the obligations of the resigning escrow agent.
14. ESCROW AGENT'S FEE AND EXPENSES, ETC.
(a) Escrow Agent shall be entitled to (i) a $50 annual fee, which
annual fee shall be prorated to the date of termination of this Agreement,
for services rendered and for reimbursement of extraordinary expenses
incurred in performance of its duties which expenses are not included in
said fee, plus (ii) out of pocket expenses which expenses shall be charged
as incurred. Such annual fees shall be paid by Buyer and such out-of-pocket
expenses shall be divided equally between the Buyer, on one hand and
Seller, on the other hand.
(b) In case said property shall be attached, garnished, or levied
upon any court order, or the delivery thereof shall be stayed or enjoined
by an order of court, or any order, judgement or decree shall be made or
entered by any court order affecting the property deposited under this
Agreement, or any part thereof, Escrow Agent is hereby expressly authorized
in its sole direction, to obey and comply with all writs, orders or decrees
so entered or issued, which it is advised by legal counsel of its own
choosing is binding upon it, whether with or without jurisdiction, and in
case Escrow Agent obeys or complies with any such writ, order or decree it
shall not be liable to any of the parties hereto or to any other person,
firm or corporation, by reason of such compliance notwithstanding such
writ, order or decree be subsequently reversed, modified, annulled, set
aside or vacated.
(c) In case said Escrow Agent becomes involved in litigation on
account of this deposit or of this Agreement, it shall have the right to
retain counsel and shall have a lien on the property deposited hereunder
for any and all costs, attorneys' fees, charges, disbursements, and
expenses in connection with such litigation; and shall be entitled to
reimburse itself therefor out of the property deposited hereunder, and if
it shall be unable to reimburse itself from the property deposited
hereunder, the parties hereto jointly and severally agree to pay to said
Escrow Agent on demand, its reasonable charges, counsel and attorneys'
fees, disbursements, and expenses in connection with such litigation.
-6-
<PAGE>
(d) In case conflicting demands are made upon it for any situation
not addressed in this Agreement, Escrow Agent may withhold performance of
this escrow until such time as said conflicting demands shall have been
withdrawn or the rights of the respective parties shall have been settled
by court adjudication, arbitration, joint order or otherwise.
(e) The parties acknowledge that Escrow Agent will have no
obligations or responsibilities with respect to tax reporting of the
parties.
15. SUCCESSORS. The obligations imposed and the rights conferred by this
Escrow Agreement shall be binding upon and inure to the benefit of the
respective heirs (including estates), successors and permitted assigns of the
parties hereto, but will not be assignable or delegable by any party without the
prior written consent of the other parties.
16. GOVERNING LAW. This Escrow Agreement shall be governed by and
construed in accordance with the laws of the State of Illinois, without giving
effect to principles of conflicts of law.
17. ENTIRE AGREEMENT. This Agreement contains the entire agreement
between the parties hereto with respect to the transactions contemplated herein.
18. AMENDMENT. This Agreement cannot be terminated, altered or amended
except pursuant to an instrument in writing signed by Buyer, Seller and Escrow
Agent.
19. ENFORCEABILITY. If any provision of the Agreement shall be held
invalid or unenforceable, such invalidity or unenforceability shall attach only
to such provision and shall not in any manner affect or render invalid or
unenforceable any other provision of this Escrow Agreement, and the Agreement
shall be carried out as if any such invalid or unenforceable provision were not
contained herein.
20. COUNTERPARTS. This Agreement may be executed in any number of
counterparts, each of which shall be deemed on original and all of which
together shall constitute one and the same instrument.
21. NO STRICT CONSTRUCTION. The language used in this Agreement will be
deemed to be the language chosen by the parties hereto to express their mutual
intent, and no rule of strict construction will be applied against any party
hereto.
22. ATTORNEYS' FEES. In the event of a dispute between Buyer and Seller
regarding the distribution of the Escrowed Funds, upon the issuance of a
final, non-appealable order or judgment by a court of competent jurisdiction,
the prevailing party's legal fees and related expenses shall be paid by the
non-prevailing party. The determination of which party is the "prevailing"
party shall be made by the court issuing such final, non-appealable order or
judgment.
-7-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
signed as of the date first above written.
K-TEL INTERNATIONAL, INC.,
a Minnesota corporation
By: /s/ P. Kives
----------------------------------------------
Its: Chairman and Chief Executive Officer
PLATINUM ENTERTAINMENT, INC.,
a Delaware corporation
By: /s/ Thomas Leavens
------------------------------------------------
Its: COO
MIDWEST TRUST SERVICES, INC., AS ESCROW AGENT
By: /s/ David M. Augusten
-----------------------------------------------
Its: President
<PAGE>
EXHIBIT 10.12
VOTING AGREEMENT
THIS VOTING AGREEMENT is made and entered into as of this 3rd day of
March, 1997, by and among Platinum Entertainment, Inc. ("Buyer"), Mr. Philip
Kives, an individual, K-5 Leisure Products, Inc., a Minnesota corporation
("K-5"), and National Development Ltd., a Manitoba corporation ("NDL")
(Mr. Kives, K-5 and NDL individually, a "Shareholder" and collectively, the
"Shareholders").
RECITALS:
WHEREAS, this Voting Agreement is being entered into in connection with
that certain Purchase and Sale Agreement, dated of even date herewith, by and
between Buyer and K-tel International, Inc. ("Seller") (the "Purchase
Agreement"), whereby Buyer is purchasing from Seller all of the issued and
outstanding shares of capital stock of two wholly-owned subsidiaries of
Seller, K-tel International (USA), Inc. and Dominion Entertainment, Inc. (the
"Contemplated Transaction").
WHEREAS, the consummation of the Contemplated Transaction requires that
the requisite shareholders of Seller vote upon and approve the Contemplated
Transaction;
WHEREAS, Mr. Kives is the beneficial owner of certain shares of capital
stock of Seller;
WHEREAS, K-5 and NDL are controlled by Mr. Kives and each of K-5 and NDL
are the beneficial owners of certain shares of capital stock of Seller;
WHEREAS, the Shareholders, own in excess of 70% of the of the issued and
outstanding voting capital stock of Seller as of the date hereof; and
WHEREAS, this Voting Agreement is an inducement to, and requirement of,
Buyer entering into the Purchase Agreement, and the Shareholders have agreed
to document their agreement in their capacity as the beneficial owners of
capital stock of Seller (for Mr. Kives, solely in his capacity as a
shareholder of Seller but not in his capacity as an officer or director of
Seller) to vote the outstanding shares of Seller beneficially owned by each
of them for the Contemplated Transaction.
NOW, THEREFORE, in consideration of the foregoing premises and the
following agreements, and other good and valuable consideration, the receipt
and sufficiency of which are hereby acknowledged, the parties to this Voting
Agreement hereby agree as follows:
<PAGE>
I. VOTING FOR THE CONTEMPLATED TRANSACTION
To facilitate the execution and delivery of the Purchase Agreement and
satisfy the condition thereunder that the requisite shareholders of Seller
duly approve the Contemplated Transaction, each of the Shareholders agree on
behalf of themselves and any person to whom any of them transfer any shares
of Voting Stock (as defined herein), during the term hereof, to vote any and
all shares of Voting Stock beneficially owned by them and any and all
outstanding shares of Voting Stock over which each of them has voting control
in favor of the Purchase Agreement and the Contemplated Transaction at the
meeting of Seller's shareholders to consider approval of the Contemplated
Transaction. In the event that such action is proposed in the form of a
written consent thereto, the Shareholders shall execute any consent form
provided for such purpose to approve the Contemplated Transaction. To
facilitate the execution and delivery of the Purchase Agreement and satisfy
the condition thereunder that the requisite shareholders of Seller duly
approve the Contemplated Transaction the Shareholders agree and confirm that,
in connection with the Contemplated Transaction, none of them shall demand an
appraisal of the shares of Voting Stock beneficially owned by each of them in
connection with the Contemplated Transaction in accordance with Section
302A.471 and 302A.473 of the Minnesota Business Corporation Act or any
applicable Canadian corporation law. As used in this Agreement, the term
"Voting Stock" means the voting stock or other securities of any class,
classes or series of the Seller, the holders of which are entitled to vote on
the Contemplated Transaction and the Purchase Agreement.
II. REPRESENTATIONS, WARRANTIES AND COVENANTS
1. REPRESENTATIONS AND WARRANTIES. Each Shareholder severally,
and not jointly and severally, represents and warrants to Buyer that:
a. the execution, delivery and performance of this Voting
Agreement has been duly authorized by all necessary action of the Shareholder
and constitutes the valid and binding obligation of such Shareholder,
enforceable in accordance with the terms hereof except as enforceability may
be limited by applicable bankruptcy, insolvency, reorganization, moratorium
or similar laws affecting creditors' rights generally or by the principles
governing the availability of equitable remedies;
b. the Shareholder has not granted and is not a party to any
proxy, voting trust or other agreement which is inconsistent with, conflicts
with or violates the provisions of this Voting Agreement; and
c. the execution, delivery and performance of this Voting
Agreement will not conflict with or result in the breach or violation of any
of the terms or conditions of, or constitute (or with notice or lapse of time
or both, would constitute) a default under, (i) its organizational documents
to the extent applicable (ii) any instrument, contract or other agreement by
or to which he is a party or his assets are bound or subject; (iii) any
statute or regulation, order, judgment or decree of any court or governmental
or regulatory body; or (iv) any license, permit, order or approval of any
governmental or regulatory body. No approval or consent of any foreign,
Federal, state, county, local or other governmental or regulatory body or
court and no approval or consent of any other person is required in
connection with the execution, delivery or performance of this Voting
Agreement by him or it as the case may be.
-2-
<PAGE>
2. COVENANTS. Each Shareholder severally, and not jointly,
covenants that he or it as the case may be:
a. shall execute such documents and other papers and perform
such further acts as may be reasonably required or desirable to carry out the
provisions of this Voting Agreement;
b. shall not grant any proxy or become party to any voting
trust or other agreement which is inconsistent with, conflicts with or
violates the provisions of this Voting Agreement during the term hereof;
c. shall not during the term hereof sell, transfer, assign,
pledge or otherwise dispose of any interest in any Voting Stock unless and
until the person or entity to whom such security is to be transferred shall
have executed a written agreement, substantially in the form of this Voting
Agreement, pursuant to which such person becomes a party to this Voting
Agreement and agrees to be bound by all the provisions hereof as if such
person were an original party to this Voting Agreement; and
d. shall not and shall not authorize or permit any of his or
its as the case may be, financial advisors, attorneys, accountants or other
representatives retained by him or it as the case may be, (for Mr. Kives,
solely in his capacity as a shareholder of Seller but not in his capacity as
an officer or director of Seller) to solicit, initiate or encourage
(including by way of furnishing information), or take any other action to
facilitate, any inquiries or the making of any proposal which constitutes, or
may reasonably be expected to lead to, any tender or exchange offer, proposal
for a merger, consolidation or other business combination involving the
Subsidiaries or the Business (as such terms are defined in the Purchase
Agreement), or any proposal or offer to acquire in any manner a material
equity interest in, or a material portion of the assets of, the Subsidiaries
or the Business, other than the transactions contemplated by the Purchase
Agreement or agree to or endorse any such proposal, or engage in any
negotiations or discussions with any person relating to any such proposal.
The Shareholders shall promptly advise Buyer orally and in writing of any
inquiries regarding, or offers of, any such proposal.
III. MISCELLANEOUS
a. TRANSFEREES BOUND. This Voting Agreement shall bind and
inure to the benefit of the successors, heirs, personal representatives,
transferees and assigns of the parties hereto.
b. TERMINATION OF VOTING AGREEMENT. This Voting Agreement
shall terminate only upon the first to occur of the following events:
(i) the closing of the Contemplated Transaction; or
-3-
<PAGE>
(ii) the termination of the Purchase Agreement, in
accordance with the terms contained therein.
c. ENTIRE AGREEMENT. This Voting Agreement constitutes the
entire agreement of, and supersedes any prior agreement among, the
undersigned with respect to the subject matter hereof.
d. AMENDMENTS. This Voting Agreement may be amended, or any
provision hereof waived, only if approved by the written consent of all of
the parties hereto.
e. REMEDIES FOR BREACH. It is expressly understood that the
equitable remedies of specific performance and injunction shall be available
for the enforcement of the covenants and agreements herein, and that the
availability of these equitable remedies shall not be deemed to limit any
other right or remedy to which any party to this Voting Agreement otherwise
would be entitled.
f. NOTICES. Any notice permitted or required hereunder
shall be in writing and shall be given by personal delivery or by deposit in
the U.S. registered or certified mail, return receipt requested, addressed,
in the case of the Buyer, to its President, at Buyer's principal place of
business in the State of Illinois, and, in the case of the Shareholders, to
the last address reflected on the records of Seller, or to such other address
as any party may designate by written notice to the others in accordance with
this subsection.
g. WAIVERS. No waiver of any provision of this Voting
Agreement shall be implied, and no express waiver shall be valid, unless in
writing and signed by the party to be charged. No waiver of any breach of
any of the terms, provisions or conditions of this Voting Agreement shall be
construed as, or held to be a waiver of, any other breach or a waiver of,
acquiescence in, or consent to, any further or succeeding breach hereof.
h. SEVERABILITY. If any provision of this Voting Agreement
is determined to be invalid or unenforceable, the remaining provisions of
this Voting Agreement shall not be affected thereby and shall be binding upon
the parties.
i. GOVERNING LAW. This Voting Agreement shall be construed
and enforced, and all questions concerning compliance by any person with its
terms shall be determined, under the laws of the State of Delaware, without
regard to principles of conflicts of law.
j. COUNTERPARTS. This Voting Agreement may be executed in
two or more counterparts, each of which shall be deemed an original, but all
of which together shall constitute one and the same agreement.
k. HEADINGS. The headings contained herein are for
reference purposes only and shall not in any way affect the meaning or
interpretation of this Voting Agreement.
-4-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Voting
Agreement to be signed as of the date first written above.
BUYER:
PLATINUM ENTERTAINMENT, INC.
By: /s/ Thomas Leavens
___________________________________
Its: COO
__________________________________
SHAREHOLDERS:
/s/ Philip Kives
--------------------------------------
Philip Kives, individually
K-5 LEISURE PRODUCTS, INC.
By: /s/ Philip Kives
___________________________________
Its: Chairman
__________________________________
NATIONAL DEVELOPMENT LTD.
By: /s/ Philip Kives
___________________________________
Its: Chairman
__________________________________
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
UNAUDITED CONSOLIDATED BALANCE SHEET AT FEBRUARY 28, 1997, THE UNAUDITED
CONSOLIDATED STATEMENT OF OPERATIONS FOR THE THREE MONTHS ENDED FEBRUARY 28,
1997 AND THE UNAUDITED NOTES THERETO FOR PLATINIUM ENTERTAINMENT.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAY-31-1997
<PERIOD-START> DEC-01-1996
<PERIOD-END> FEB-28-1997
<CASH> 139,562
<SECURITIES> 0
<RECEIVABLES> 18,347,431
<ALLOWANCES> 3,528,155
<INVENTORY> 5,003,922
<CURRENT-ASSETS> 23,387,327<F1>
<PP&E> 2,689,510
<DEPRECIATION> 1,441,004
<TOTAL-ASSETS> 62,090,545<F2>
<CURRENT-LIABILITIES> 42,304,812
<BONDS> 5,000,000
0
0
<COMMON> 5,151
<OTHER-SE> 14,780,582
<TOTAL-LIABILITY-AND-EQUITY> 62,090,545
<SALES> 10,812,681
<TOTAL-REVENUES> 11,714,037
<CGS> 3,851,890
<TOTAL-COSTS> 4,313,755
<OTHER-EXPENSES> 4,340,443
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 302,918
<INCOME-PRETAX> (1,012,607)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,012,607)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,012,607)
<EPS-PRIMARY> (0.20)
<EPS-DILUTED> 0
<FN>
<F1>INCLUDES GROSS ARTIST ADVANCES OF $2,863,565.
<F2>INCLUDES GROSS ARTIST ADVANCES OF $15,100,749, LESS AN ALLOWANCE FOR
UNRECOUPABLE ARTIST ADVANCES OF $8,312,230.
</FN>
</TABLE>
