UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the fiscal year ended March 31, 1997
Commission File Number 0-22982
NAVARRE CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
MINNESOTA 41-1704319
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
7400 49TH AVENUE NORTH, NEW HOPE, MN 55428
(Address of principal executive offices)
Registrant's telephone number, including area code: (612) 535-8333
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK, NO PAR VALUE
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 by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.
Yes ( x ) No ( )
As of June 18, 1997, the aggregate value of the Company's Common Stock held by
non-affiliates of the Company was $22,432,306 based on the closing market price
on that date.
As of June 18, 1997, the Company had outstanding 6,902,248 shares of Common
Stock, no par value.
DOCUMENTS INCORPORATED BY REFERENCE
The Company's Proxy Statement for its 1997 Annual Meeting of Shareholders , a
copy of which will be filed within 120 days of March 31, 1997, is incorporated
by reference into Part III of this Form 10-K.
<PAGE>
PART I
ITEM 1. BUSINESS
GENERAL
Navarre Corporation ("Navarre" or the "Company"), a Minnesota corporation, has
been engaged in the distribution of prerecorded music and personal computer
software since 1983. The Company operated as an independent company from 1983
until January 1990 when it was acquired by a subsidiary of Live Entertainment,
Inc. ("Live Entertainment"). Immediately following the acquisition, the
Company's personal computer software business was transferred to a Live
Entertainment subsidiary while Navarre continued to operate the prerecorded
music business. In October 1991, Live Entertainment sold all of the Common Stock
back to certain of the former shareholders and employees of Navarre. Since the
October 1991 repurchase, the Company has focused its efforts on establishing
itself as a national distributor of independent and major labels in the
prerecorded music industry and reestablishing its personal computer software
distribution business, as well as securing a lead position in the publishing and
distribution of interactive CD-ROM.
The Company operates through two principal divisions, its Music Products
Division and its Computer Products Division. Building upon its strength and
expertise as a leading independent distributor of prerecorded music, the Company
has achieved increasing sales in the growing market for personal computer
software and interactive CD-ROM software. The Company's product line contains
over 20,000 SKU's of compact discs, cassettes, personal computer software and
interactive CD-ROM software sold to over 500 customers with over 9,000 locations
throughout the United States. Its primary customers include (i) music and
computer specialty chains, (ii) membership wholesale clubs, (iii) mass
merchandisers and discount retailers and (iv) wholesalers and rackjobbers.
In 1994 the Company established a CD-ROM publishing company named Digital
Entertainment, Inc., which is now a wholly-owned subsidiary of the Company. All
of the products of Digital Entertainment are exclusively distributed by the
Company through its Computer Products Division.
During fiscal 1997 Net Radio Network, one of the most popular music and
entertainment sites on the Internet, became a subsidary of Navarre and embarked
on a partnership strategy with ValueVision International, Inc. to become an
aggressive participant in the emerging electronic marketplace on the Internet.
THE COMPANY'S MARKETS
PRERECORDED MUSIC
The prerecorded music industry is a relatively new industry which grew largely
during the 1950's and throughout subsequent decades. Prior to the late 1970's,
prerecorded music competed primarily with radio, television and literature for
home entertainment. By the late 1970's and early 1980's, technological advances
brought new forms of home entertainment including video games, video cassettes
and cable television. Even though these types of home entertainment have
developed, the prerecorded music industry in the United States has traditionally
experienced steady growth, with sales increasing in each year since 1982. As
reported by the Recording Industry Association of America ("RIAA"), sales of
prerecorded music and music videos have increased to $12.5 billion in 1996.
<PAGE>
Beginning in the 1970's, a significant amount of consolidation occurred in both
the production and distribution components of the prerecorded music industry.
Industry sources indicate that approximately eighty percent (80%) of the
industry's total revenue is derived from production or distribution by the six
major companies through their recording labels and their affiliated distribution
companies. They are (i) Time-Warner and Warner/Elektra/Atlantic Corporation
(WEA); (ii) Sony Corporation and Sony Music Distribution; (iii) Phillips
N.V./Polygram N.V. and PGD Distribution; (iv) Thorn/EMI and EMI Music
Distribution; (v) Bertelsmann A.G. and BMG Music and (vi) The Seagram Company,
Ltd./MCA, Inc../and UNI Distribution. In addition to these major labels and
their distribution companies, there are a number of independent labels that
produce recordings for artists and a number of independent distribution
companies that enter into exclusive distribution agreements with these labels on
either a regional or national basis. These independent labels and their
distributors currently represent twenty percent (20%) of the industry's total
revenue.
Distributors perform a number of functions in the music industry. Although the
major labels are generally distributed to the retail channel directly by their
affiliated distribution company, there are a number of areas where alternative
distribution methods are required. These include (i) the distribution of labels
other than major labels, which cover recordings by national, regional and local
artists, (ii) the distribution of products to retailers that are too small to
buy in quantity from the major label distribution companies, (iii) distribution
channels that the major label distribution companies choose not to sell to and
(iv) the distribution of products as secondary suppliers filling in temporary
out-of-stock conditions.
PERSONAL COMPUTER SOFTWARE
The distribution of personal computer software is more fragmented than the
distribution process for prerecorded music, in part, because there has been no
equivalent of the six major label distribution companies in the software
industry. As the industry matures, there will be a shift from many smaller
publishers to fewer major publishers. These publishers will have the clout
necessary to influence standards like pricing, packaging and returns. The key
retailers continue to be the mass merchants, computer superstores and warehouse
clubs. However, there are new emerging channels such as music retailers,
bookstores, specialty stores and drug and grocery stores.
Consumer software sales in 1996 increased 18% over 1995 to $2.6 billion
according to P.C. Data. During 1996 the industry did experience a high level of
consolidation. Some of the large companies leading the consolidation efforts
were CUC Software, The Learning Company and Electronic Arts. The customer
profile also underwent significant change in 1996 as NeoStar, the largest
software retailer filed bankruptcy. In addition, Tandy Corporation consolidated
its Incredible Universe stores with its Computer City stores and subsequently
sold or closed down several of its outlets.
The large retailers utilize both distribution and direct publisher relationships
to purchase software. As the publishers grow they develop the operational
efficiencies and capacity to establish direct customer relationships. This has
happened primarily in the entertainment category which has experienced the
greatest growth (25% vs. last year) and the most consolidation. Edutainment is
also a category that is being supplied more and more on a direct basis.
Productivity remains to be a category that is primarily supplied through
distribution.
During the past several years, the Company experienced a pronounced shift in its
product mix. Whereas earlier in its history, the Company's music division had
accounted for more than half the Company's sales, during the fiscal year ended
March 31, 1997, computer software sales accounted for 75.2% of the Company's net
sales.
<PAGE>
THE COMPANY'S STRATEGY AND RECENT ACQUISITIONS
The Company's goal is to publish and distribute on an international basis in
both music and interactive CD-ROM, as well as become a leading content provider
to the Internet. The Company intends to achieve this goal by (i) increasing the
number of exclusive national distribution arrangements with proprietary
prerecorded music artists and labels, (ii) increasing its exclusive personal
computer software and interactive CD-ROM software product lines through licenses
and distribution agreements, (iii) continuing to deliver high levels of service
to the growth channels of retailing, including technological advances such as
Electronic Data Interchange ("EDI"), which is the paperless exchange of business
data such as purchase orders and invoices from one computer to another, (iv)
continuing to expand the sale of prerecorded music and personal computer
software products together in the marketplace, (v) improving its efficiencies
with the consolidation of its facilities into a new single distribution center
and improved technologies in that center (vi) expanding its business through
strategic acquisitions in areas or in businesses that complement the Company's
existing businesses and (vii) utilizing the Internet to expand the appeal of its
products to a broader consumer base internationally.
On May 1, 1996 the Company entered into a stock purchase agreement with Net
Radio Corporation, a Nevada corporation ("Net Radio (Nevada)"),which owned and
operated Net Radio Network, an Internet-only radio network. Under the terms of
the agreement, the Company agreed to pay $1.5 million for one-half of the
outstanding common stock of Net Radio (Nevada). In addition, the Company entered
into an option agreement with the existing shareholders of Net Radio (Nevada)
under which the Company issued 190,000 shares of Common Stock to these
shareholders and received the right to purchase up to twenty percent (20%) of
the outstanding Net Radio (Nevada) stock owned by these shareholders pursuant to
a formula based upon Net Radio (Nevada)'s future earnings before interest and
taxes.
On March 7, 1997 the Company entered into an Agreement and Plan of
Reorganization with Net Radio (Nevada) under which it agreed to acquire Net
Radio (Nevada). Under the terms of the transaction, which closed on March 21,
1997, Net Radio (Nevada) was merged with a wholly-owned subsidiary of the
Company and the Company agreed to issue to the former shareholders of Net Radio
(Nevada) up to 2,100,000 shares of its Common Stock (the "Navarre Shares").
Substantially all of the Navarre Shares to be issued are contingent upon Net
Radio achieving specified levels of sales and profits. In connection with the
execution of the Agreement, certain of the directors, officers and former
shareholders of Net Radio (Nevada) entered into non-compete agreements,
employment or consulting agreements with the Company. In addition, the former
shareholders of Net Radio (Nevada) entered into a voting agreement and a
shareholder rights agreement with Navarre containing certain lock-up
obligations, registration rights and rights of first refusal with respect to the
Navarre shares.
Concurrent with the Company's acquisition of Net Radio, ValueVision
International, Inc. ("ValueVision") agreed to make an investment of $3.0 million
in the Navarre subsidiary, Net Radio Corporation, a Minnesota corporation, ("Net
Radio (Minnesota"), consisting of $1.0 million in cash and an agreement to
provide $2.0 million in advertising time in exchange for acquiring fifteen
percent (15%) of the Net Radio (Minnesota) shares. ValueVision International is
an integrated electronic and print media direct marketing company and the
nation's third-largest television home shopping network. Once Net Radio
(Minnesota), achieves sales revenue of $3.0 million in any rolling, consecutive
four quarter period, (i) Net Radio (Minnesota), at its option, may require
ValueVision to purchase an additional 4.95 percent of Net Radio (Minnesota) for
$500,000 in cash and (ii) ValueVision, at its option, may invest $500,000 in
cash and receive 4.95 percent of Net Radio (Minnesota). In the event that either
Net Radio (Minnesota) or ValueVision exercises its option, the other party's
option expires. ValueVision also has the right to convert its Net Radio
(Minnesota) shares into shares of Navarre's Common Stock in the future upon the
occurrence of certain events.
<PAGE>
In the event that Net Radio has not commenced an initial public offering by
March 2002, ValueVision will have the right to put its investment back to the
Company in exchange for cash or, at the option of the Company, common stock of
the Company.
On June 27, 1996, the Company acquired all the outstanding stock of Record
Service, Inc., and its subsidiary Surfside Distributors, Inc., a Hawaiian-based
distributor of prerecorded music. The Company believes the acquisition will
enable it to expand its national presence and to act as an exclusive distributor
for CEMA and BMG in Hawaii. The Company paid $250,000 in cash and issued 180,000
shares of common stock in connection with the acquisition. Both Record Service
Inc. and Surfside Distributors, Inc. were subsequently merged into Navarre.
On September 3, 1996, the Company entered into a Unit Purchase Agreement and
Operating Agreement (the "Velvel Agreement") with Velvel Musical Industries,
Inc. Under the terms of the Velvel Agreement, Velvel Musical Industries, Inc.
agreed to form Velvel Records LLC, a Delaware limited liability company ("Velvel
Records") and contribute certain of its assets to Velvel Records. The Company
agreed to make a $10.0 million investment in Velvel Records. Of this amount, the
Company made an investment of $5.0 million in Velvel Records on November 15,
1996 and agreed to make an additional investment of $5.0 million in Velvel
Records on or before April 10, 1997.
In connection with its investment, the Company received the right for a period
of five years to distribute substantially all of the Velvel Records products
within the United States. The Company is also entitled to a percent of the
assets of Velvel Records in the event of a liquidation, and in the future, if,
and when Velvel Records obtains profitability, the Company will be entitled to
convert its interest into an additional interest in the share of the profits of
Velvel Records. The Company was unable to make the required $5.0 million payment
on April 10, 1997. On May 8, 1997, Velvel Records replaced the $5.0 million note
due April 10, 1997 with a demand note in the amount of $5.0 million. The Company
intends to pay the $5.0 million note when it had funds available under its new
credit facility with Congress Financial Corporation. Although the Company's
failure to make the $5.0 million payment when due on April 11, 1997 may have
given Velvel Records the ability to terminate the distribution agreement, the
Company continues to work with Velvel Records to increase distribution of the
Velvel products. If Velvel Records calls the demands note in the future at a
time when the Company is unable to pay amounts due under the demand note, Velvel
might have additional rights to cancel the Company's right to distribute the
Velvel Records products.
As a result of lower than expected sales of Velvel Records products, the Company
has determined the carrying value of its $10.0 investment in Velvel Records
exceeded the fair market value of that investment. Accordingly, the Company
decided to write down the value of its Velvel Records investment from $9.2
million to $5.3 million at March 31, 1997.
COMPETITION
Competition in both the personal computer software industry and in the music
industry is intense and based upon a number of factors, including price, breadth
and availability of products, speed of delivery, and various types of support
provided by the distributor to the retailer. In the personal computer industry,
the Company faces competition from a number of distributors including Ingram
Micro, Merisel, Inc., and Tech Data Corporation as well as from manufacturers
that sell directly to retailers.
In the pre-recorded music industry, the Company faces competition from the six
major label distribution companies, from regional distributors including
Alliance Entertainment, Inc. and from other entities that sell directly to
retailers.
<PAGE>
The Company believes that the distribution of both personal computer software
and pre-recorded music will remain highly competitive and the keys to growth and
profitability will be customer service, continued focus on improvements and
operating efficiencies, the ability to develop proprietary products and the
ability to distribute on a national basis. The Company also believes that over
the next several years, both the personal computer software distribution
industry and pre-recorded music distribution industry will experience a trend
towards consolidation.
DEPENDENCE UPON A SINGLE CUSTOMER
In each of the past several years, the Company has had one or more customers
that has accounted for ten percent or more of the Company's net revenues. During
the fiscal year ended March 31, 1997, sales to three customers, Best Buy, Comp
USA and Musicland Stores Corporation, represented more than ten percent of net
revenues. The Company competes with other companies for the business of each of
its customers and there can be no assurance that the Company will continue to
recognize a significant amount of revenue from sales to any specific customers.
If the Company is unable to continue to sell its products to all or any of these
three customers at their current levels, and is unable to find other customers
to replace these sales, there would be an adverse impact on the Company's
revenues and future profitability.
CUSTOMER SERVICE
The success of the Company in part is due to its ability to offer its customers
a flexible range of services. The Company intends to continue this practice as
it encounters new demands and requests from customers in emerging channels of
retailing. The use of EDI technology is one such service which the Company has
implemented to meet customer demands. The Company presently uses EDI technology
with most of its major customers. The Company's goal is to extend its EDI
relationship to substantially all of its customers and vendors in order to
expedite and improve the quality of service, while reducing overhead and
improving employee productivity.
EMPLOYEES
As of June 1, 1997, the Company had 239 employees, including 94 in finance and
administration, 41 in sales and marketing and 104 in distribution.
SEASONALITY
Much of the Company's business is seasonal in nature with a higher percentage of
sales during the second half of the calendar year. As a distributor of products
ultimately sold at retail, the Company's business is affected by the pattern of
seasonality common to many retailers, particularly the holiday selling season.
Historically, more than 70% of the Company's sales occur in the second and third
fiscal quarters. Due to the lower level of sales during the first and fourth
fiscal quarters of the year, the Company has historically operated at lower
levels of profitability or incurred losses during these periods. The Company
expects that its business will continue to be seasonal.
BACKLOG
Because of the Company's products are shipped in response to orders, the Company
does not maintain any significant backlog.
<PAGE>
ITEM 2. PROPERTIES
On September 25, 1995, the Company entered into an operating lease with a
partnership whose two partners are major shareholders and officers of the
Company. The Company leases approximately 100,000 square feet of office and
warehouse space for its principal facilities in suburban Minneapolis. The lease
expires in the year 2005 and provides for a monthly rental of $31,947 over the
lease term, adjusted for the Consumer Price Index annually. In addition, the
Company is responsible for all operating costs associated with the building. The
Company has one additional five-year option to renew the lease.
ITEM 3. LEGAL PROCEEDINGS
In the normal course of its business, the Company is involved in a number of
routine litigation matters that are incidental to the operation of its business.
These matters include collection matters with regard to products distributed by
the Company and accounts receivable owed to the Company. In addition, the
Company's subsidiary Net Radio Corporation, is involved in the following legal
proceeding.
Stephen Kornfeld and William Weiss v. Net Radio Corporation. On April 5, 1996,
Stephen Kornfeld and William Weiss filed a lawsuit against Net Radio in Hennepin
County District Court in the matter of Stephen Kornfeld et al v. Net Radio
Corporation et al (Court File No. CT96-005402) alleging that they had an oral
agreement to acquire an equity interest in Net Radio and requesting specific
performance and damages. On June 6, 1996, the Court denied a motion by Net Radio
to dismiss the complaint. Navarre Corporation has not been named as a defendant
in the lawsuit. The lawsuit is in the discovery stage.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders, through the
solicitation of proxies or otherwise, during the three month period ended March
31, 1997.
<PAGE>
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SECURITY HOLDER
MATTERS
PRICE RANGE OF COMMON STOCK
The Company's Common Stock is traded on the NASDAQ Stock Market under the symbol
NAVR. The following table below presents the range of high and low trading sale
prices for the Company's stock for each period indicated as reported by NASDAQ.
All prices have been adjusted to reflect the Company's two-for-one stock split
in the form of a 100% stock dividend distributed June 21, 1996.
Quarter High Low
Fiscal 1997
First $18.31 $3.81
Second 13.00 5.38
Third 7.13 2.63
Fourth 4.38 2.38
Fiscal 1996
First 4.12 2.44
Second 5.69 4.00
Third 4.25 3.25
Fourth 4.25 2.25
At May 31, 1997, the Company had approximately 2,800 shareholders of record. The
Company has not paid any dividends on its common stock and does not intend to
pay any dividends on its common stock in the foreseeable future. Under terms of
the Company's credit facility, the Company is prohibited from paying cash
dividends without the consent of the lender.
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
(In thousands, except per share data) Three
Year Year Year months Year
ended ended ended ended ended
Mar. 31, Mar. 31, Mar. 31, Mar. 31, Dec. 31,
1997 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Net Sales
Computer software $ 150,859 $105,575 $ 50,223 $ 6,110 $ 25,036
Music 49,838 52,779 69,275 9,307 40,144
---------- -------- -------- ---------- --------
Total 200,697 158,354 119,498 15,417 65,180
Gross profit 23,282 19,851 15,452 1,362 8,304
Income (loss) from operations ( 3,703) 3,889 3,461 (683) 1,650
Interest expense 2,110 1,521 753 65 525
Income taxes (benefit) ( 527) 917 1,061 (296) 442
Equity (loss) in Net Radio ( 719)
Net income (loss) ( 6,189) 1,319 1,607 (445) 701
Earnings (loss) per common share $( .92) $ .20 $ .26 $( .07) $ .17
Weighted average common
and common equivalent
shares outstanding(1) 6,692 6,442 6,288 5,948 4,016
Balance Sheet Data:
Total assets $ 78,397 $ 60,108 $ 45,705 $ 24,076 $ 30,023
Short-term borrowings 25,892 21,115 9,639 3,632 6,723
Long-term debt 315 ---- 455 ---- 93
Shareholders' equity 5,099 9,648 8,215 6,574 6,247
(1) Adjusted to reflect a two-for-one stock split in the form of a 100% stock
dividend distributed on June 21, 1996.
</TABLE>
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
The following table sets forth for the periods indicated the percentage of net
sales represented by certain items included in the Company's "Consolidated
Statements of Operations."
1997 1996 1995
------ ------ ------
Net sales:
Computer software 75.2% 66.7% 42.0%
Music 24.8 33.3 58.0
------ ------ ------
Total net sales 100.0 100.0 100.0
Cost of sales 88.4 87.5 87.1
------ ------ ------
Gross profit 11.6 12.5 12.9
Selling and promotion 2.8 3.1 3.5
Distribution and warehousing 1.3 1.2 1.0
General and administration 6.8 5.7 5.5
Amortization and write down
of intangible assets 2.5
Income from operations (1.8) 2.5 2.9
Interest expense 1.1 1.0 .6
------ ------ ------
Net income (3.1) .8 1.3
Certain of this information in this section contains forward-looking statements.
The Company's actual results could differ materially from the statements
contained in the forward-looking statements as a result of a number of factors,
including risks and uncertainties inherent in the Company's business, the
consumer market for music products and computer software products, retail
customer buying patterns, new or different competition in the Company's
traditional and new markets and the rate of new product development and
commercialization.
FISCAL 1997 COMPARED TO FISCAL 1996
Net sales increased 26.7% from $158.4 million in fiscal 1996 to $200.7 million
in fiscal 1997. Computer software, including CD-ROM software, sales increased by
42.9% from $105.6 million to $150.9 million. Computer software sales increased
from 66.7% of net sales in fiscal 1996 to 75.2% of net sales in fiscal 1997.
These increases were due primarily to the Company's gains in CD-ROM market
share, and formalized agreements with new accounts and major retailers. Price
increases did not materially contribute to the increase in computer software net
sales. Music sales decreased 5.6% from $52.8 million to $49.8 million. Music
sales decreased primarily due to weak major label music sales to both specialty
stores and the membership wholesale club channels.
Gross profit increased $3.5 million or 17.8% from $19.8 million in fiscal 1996
to $23.3 million in fiscal 1997. As a percentage of net sales, gross profit
decreased from 12.5% in fiscal 1996 to 11.6% in fiscal 1997. Overall gross
margins declined due to the fact that lower gross margin computer products sales
accounted for a higher percentage of net sales. The gross profit from computer
software sales was $13.6 million or 9.0% of computer software net sales in
fiscal 1997 compared with $10.2 million or 9.6% of computer
<PAGE>
software net sales in fiscal 1996. This decrease in gross margin percent from
computer software sales was primarily due to increased price competition in the
industry. The gross margin from music sales was $9.7 million or 19.5% of music
net sales in fiscal 1997 compared with $9.5 million or 18.0% of music net sales
in fiscal 1996. The increase in the gross margin percent for music sales was
primarily due to a higher percentage of sales of product by labels under
exclusive contracts, which are at a higher gross profit percent.
Selling and promotion expenses increased from $4.9 million in fiscal 1996 to
$5.7 million in fiscal 1997 but decreased as a percentage of sales from 3.0% in
fiscal 1996 to 2.8% in fiscal 1997. This decrease was primarily due to
efficiencies achieved from higher sales volume.
Distribution and warehousing expense increased from $1.9 million in 1996 to $2.7
million in 1997. It also increased as a percentage of sales from 1.2% in 1996 to
1.3% in 1997. This increase was primarily driven by the increased sales of
computer products which are less efficient to pick and pack.
General and administrative expenses increased from $9.1 million in fiscal 1996
to $18.6 million in fiscal 1997. They also increased as a percentage of sales
from 5.7% in fiscal 1996 to 9.3% in fiscal 1997. This increase was primarily due
to a $3.8 million write down of Navarre's investment in the exclusive
distribution rights of Velvel Records and the $1.1 million of amortization of
intangible assets, and a $1.8 million increase in the provision for allowance
for doubtful accounts. The Company increased its provision for doubtful accounts
because of its concern that some customers may be unable to pay all or a portion
of the amount due with respect to its receivables. Although the Company
maintains constant communication with its customers to support and improve their
ability to meet their obligations to the Company, the Company, in the past, has
incurred bad debt losses in the normal course of its business and expects to
incur them in the future.
Interest expense increased from $1.5 million for the fiscal 1996 period to $2.1
million for the fiscal 1997 period. This increase resulted from substantially
higher borrowing to support the Company's continued gain in market share, growth
in sales and to maintain higher inventory levels. Net income was $1.3 million
for fiscal 1996 compared to a loss of $6.2 million for fiscal 1997. The net loss
for fiscal 1997 was primarily due to previously discussed write down and
amortization of intangible assets and increase of the provision for doubtful
accounts. Also included in the net loss for fiscal 1997 was the equity loss in
Net Radio.
The Company's effective tax rate decreased from 41.0% in fiscal 1996 to 8.8% in
fiscal 1997 as a result of the $1.75 million valuation allowance against
deferred tax assets related to the write down and amortization of Velvel's
distribution rights.
FISCAL 1996 COMPARED TO FISCAL 1995
Net sales increased 32.5% from $119.5 million in fiscal 1995 to $158.4 million
in fiscal 1996. Computer software, including CD-ROM software, sales increased by
110.2% from $50.2 million to $105.6 million. These increases were due primarily
to the Company's gains in CD-ROM market share, and formalized agreements with
new accounts and major retailers. Price increases did not materially contribute
to the increase in computer software net sales. Music sales decreased 23.8% from
$69.3 million to $52.8 million. Music sales decreased primarily due to weak
major label music sales to both specialty stores and the membership wholesale
club channels.
Gross profit increased $4.4 million or 28.5% from $15.5 million in fiscal 1995
to $19.9 million in fiscal 1996. As a percentage of net sales, gross profit
decreased from 12.9% in fiscal 1995 to 12.5% in fiscal 1996. Overall gross
margins declined due to the fact that lower gross margin computer products sales
accounted for a higher
<PAGE>
percentage of net sales. Computer software sales increased from 42.0% of net
sales in fiscal 1995 to 66.7% of net sales in fiscal 1996. The gross profit from
computer software sales was $10.1 million or 9.6% of computer software net sales
in fiscal 1996 compared with $3.9 million or 7.9% of computer software net sales
in fiscal 1995. The increased gross margin percent of computer software sales
was primarily due to reduced product costs.
The gross margin from music sales was $9.3 million or 17.6% of music net sales
in fiscal 1996 compared with $11.5 million or 16.6% of music net sales in fiscal
1995. The increase in the gross margin percent for music sales was primarily due
to a higher percentage of sales of product by labels under exclusive contracts,
which are at a higher gross profit percent.
Selling and promotion expenses increased from $4.2 million in fiscal 1995 to
$4.9 million in fiscal 1996 but decreased as a percentage of sales from 3.5% in
fiscal 1995 to 3.1% in fiscal 1996. This decrease was primarily due to
efficiencies achieved from higher sales volume.
General and administrative expenses increased from $6.6 million in fiscal 1995
to $9.1 million in fiscal 1996. They also increased as a percentage of sales
from 5.5% in fiscal 1995 to 5.7% in fiscal 1996. This increase was the result of
building our production capacity to meet forecasted sales at a higher level than
actually experienced during the first half of the fiscal year. However, during
the second half of the year a decrease resulted from an aggressive cost
reduction program that was put into place during that period.
Distribution and warehousing expense increased from $1.2 million in 1995 to $1.9
million in 1996. It also increased as a percentage of sales from 1.0% in 1995 to
1.2% in 1996. This increase was primarily driven by the increased sales of
computer products which are less efficient to pick and pack.
Interest expense increased from $753,000 for the fiscal 1995 period to $1.5
million for the fiscal 1996 period. This increase resulted from substantially
higher borrowing to support the Company's continued gain in market share, growth
in sales and to maintain higher inventory levels. Net income was $1.6 million
for fiscal 1995 compared to $1.3 million for fiscal 1996.
LIQUIDITY AND CAPITAL RESOURCES
The Company has historically financed its working capital needs through bank
borrowings. The level of borrowings has historically fluctuated significantly
during the year. At March 31, 1997, the Company had net accounts receivable of
$47.2 million and inventory of $16.9 million. These assets are primarily
financed by accounts payable of $45.5 million and bank borrowings of $20.8
million.
On June 11, 1997, the Company entered into a new revolving line of credit with
Congress Financial Corporation. The credit facility has a maximum borrowing
limit of $45 million and is secured by substantially all the Company's assets.
The available amount fluctuates based on an asset borrowing base. In connection
with the new credit facility with Congress Financial Corporation, the Company
paid off all amounts due under its previous revolving line of credit with Heller
Business Credit.
For the fiscal year ended March 31, 1997 net sales were $200.7 million, an
increase of $42.3 million over 1996 fiscal year net sales of $158.4 million. The
Company had a net loss of $6.2 million during this period. The Company financed
this growth in part by cash of $8.0 million provided by operating activities.
Accounts receivable increased by $6.1 million and inventories increased by $2.0
million during the period. These changes were offset partially by a $16.6
million increase in accounts payable and accrued expenses. Investing activities
used $6.6 million of cash, including the payment of $5.0 million for Velvel's
distribution rights and $870,000
<PAGE>
for the purchase of furniture, equipment and leasehold improvements. The Company
used net cash of $700,000 in financing activities during the period primarily
for bank payments.
The Company anticipates it will utilize its credit facility during the next
twelve months to meet seasonal working capital needs. The Company believes that
the funds available under its current credit facility together with cash flow
from operations will be adequate to fund its anticipated working capital
requirements for the next twelve months.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements are included in Item 14.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information required under this item with respect to directors is contained in
the section "Election of Directors" in the Company's Proxy Statement for the
Annual Meeting of Shareholders to be held on September 4, 1997 (the "1997 Proxy
Statement"), a definitive copy of which will be filed with the Commission within
120 days of the close of the past fiscal year, and is incorporated herein by
reference.
ITEM 11. EXECUTIVE COMPENSATION
Information required under this item is contained in the sections entitled
"Executive Compensation," "Employment Agreements" and "Stock Option Plan" in the
Company's 1997 Proxy Statement and is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information required under this item is contained in the section entitled
"Security Ownership for Certain beneficial Owners and Management" in the
Company's 1997 Proxy Statement and is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Information required under this item is contained in the section entitled
"Certain Transactions" in the Company's 1997 Proxy Statement and is incorporated
herein by reference.
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K
(a) Documents filed as part of this report
(1) Financial Statements. The following financial statements of the
Company are set forth at the end of this document.
Report of Independent Auditors
Consolidated Balance Sheets as of March 31, 1997 and 1996
Consolidated Statements of Operations for each of the three years
in the period ended March 31, 1997
Consolidated Statement of Shareholders' Equity as of March 31,
1997
Consolidated Statements of Cash Flows for each of the three years
in the period ended March 31, 1997
Notes to Consolidated Financial Statements
(2) Financial Statement Schedule for each of the three years in the
period ended March 31, 1997
Schedule II - Valuation and Qualifying Accounts and Reserves
Schedules other than those listed above have been omitted because
they are inapplicable or the required information is either
immaterial or shown in the Financial Statements or the notes
thereto.
(3) Exhibits
* Indicates compensatory agreement.
3.1 Articles of Incorporation
3.2 Bylaws, incorporated herein by reference from Exhibit 3.2
to Form S-1, Registration Number 33-68392
10.1 *Employment Agreement, dated October 1, 1996, between the
Company and Eric H. Paulson
10.2 *Employment Agreement, dated October 1, 1996, between the
Company and Charles E. Cheney
10.3 *Employment Agreement, dated November 21, 1996, between the
Company and Guy M. Marsala
10.4 *Employment Agreement with Stuart S. Marlowe, dated June
18, 1996, incorporated by reference from Exhibit 10.14
to Form 10-K for year ended March 31, 1996
10.5 1992 Stock Option Plan, amended and restated, incorporated
herein by reference from Exhibit 10.3 to the Company's
Form 10-Q for the quarter ended December 31, 1996
10.6 Form of Individual Stock Option Agreement under 1992 Stock
Option Plan, from Exhibit 10.4 to Form S-1
10.7 Form of Distribution Agreement, incorporated herein by
reference from Exhibit 10.5 to Form S-1
<PAGE>
10.8 Form of Termination Agreement for Executives of the
Company, incorporated herein by reference from Exhibit
10.6 to Form 10-K for year ended March 31, 1996
10.9 Lease dated September 25, 1995 between Navarre Corporation
and New Hope, LLP with respect to the Corporate
Headquarters in New Hope, MN, incorporated herein by
reference from Exhibit 10.10 to Form 10-Q for quarter
ended September 30, 1995
10.10 May 1, 1996 Stock Purchase Agreement with Net Radio
Corporation, incorporated herein by reference from
Exhibit 10.6 to Form 10-K for year ended March 31, 1996
10.11 Unit Purchase Agreement and Operating Agreement dated
August 28, 1997 of Velvel Records LLC is incorporated
by reference from Exhibit 10.15 to the Form 10-Q for
the quarter ended September 30, 1996
10.12 Demand Promissory Note for Velvel Records, dated May 8,
1997.
10.13 Loan and Security Agreement between Congress Financial
Corporation and Navarre Corporation, dated June 12,
1997
10.14 Agreement and Plan of Reorganization dated March 7, 1997 by
and Among Net Radio Corporation, a Nevada corporation,
Navarre Corporation and Net Radio Corporation, a
Minnesota Corporation.
10.15 Escrow Agreement dated March 20, 1997 between Navarre
Corporation and Net Radio Corporation
10.16 Form of Shareholder Rights Agreement dated March 24, 1997
between former shareholders of Net Radio Corporation
and Navarre Corporation
10.17 Form of Voting Agreement dated March 11, 1997 between
former shareholders of Net Radio Corporation and
Navarre Corporation
10.18 Stock Purchase Agreement dated as of March 7, 1997, by and
among ValueVision International, Inc. Net Radio
Corporation (Minnesota), Navarre Corporation, and Net
Radio Corporation (Delaware)
10.19 Conversion Agreement dated March 20, 1997 by and between
ValueVision International, Inc. and Navarre Corporation
11 Statement re: Computation of Per Share Earnings
21 List of Subsidiaries
23.1 Consent of Ernst & Young LLP
27.1 Financial Data Schedule
(b) Reports on Form 8-K
The Company filed a Form 8-K dated February 8, 1997 in which it reported
(i) its proposed transaction with Net Radio Corporation and (ii) certain
developments with respect to Musicland Stores Corporation.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
NAVARRE CORPORATION
(Registrant)
June 24, 1997 By /S/ Eric H. Paulson
------------------------------------
Eric H. Paulson
Chairman of the Board, President
and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
(Power of Attorney)
Each person whose signature appears below constitutes and appoints Eric H.
Paulson and Charles E. Cheney as his true and lawful attorneys-in-fact and
agents, each acting alone, with full power of substitution and resubstitution,
for him and in his name, place and stead, in any and all capacities, to sign any
of all amendments to this Annual Report on Form 10-K and to file the same, with
all exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorneys-in-fact and
agents, each acting alone, full power and authority to do and perform each and
every act and thing requisite and necessary to be done in and about the
premises, as fully to all intents and purposes as he might or could do in
person, hereby ratifying and confirming all said attorneys-in-fact and agents,
each acting alone, or his substitute or substitutes, may lawfully do or cause to
be done by virtue thereof.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/S/ Eric H. Paulson Chairman of the Board, President June 24, 1997
- ------------------------------------ and Chief Executive Officer
Eric H. Paulson
/S/ Charles E. Cheney Director, Treasurer and Secretary, June 24, 1997
- ------------------------------------ Executive Vice President and
Charles E. Cheney Chief Financial Officer
/S/ Dickinson G. Wiltz Director June 24, 1997
- ------------------------------------
Dickinson G. Wiltz
/S/ James G. Sippl Director June 24, 1997
- ------------------------------------
James G. Sippl
/S/ Michael L. Snow Director June 24, 1997
- ------------------------------------
Michael L. Snow
</TABLE>
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors
Navarre Corporation
We have audited the accompanying consolidated balance sheets of Navarre
Corporation as of March 31, 1997 and 1996, and the related consolidated
statements of operations, shareholders' equity, and cash flows for each of the
three years in the period ended March 31, 1997. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Navarre
Corporation at March 31, 1997 and 1996, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
March 31, 1997, in conformity with generally accepted accounting principles.
/S/ Ernst & Young LLP
Minneapolis, Minnesota
April 25, 1997
<PAGE>
<TABLE>
<CAPTION>
NAVARRE CORPORATION
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
MARCH 31
1997 1996
-------- --------
<S> <C> <C>
ASSETS
Current assets:
Cash $ 655 $ 4
Accounts receivable, less allowance for doubtful accounts
and sales returns of $3,585 in 1997 and $943 in 1996 47,163 41,023
Inventories 16,854 14,816
Note receivable, officer 214 --
Prepaid expenses and other current assets 3,062 897
-------- --------
Total current assets 67,948 56,740
Property and equipment, net of accumulated depreciation of
$2,571 and $1,351, respectively 3,438 2,861
Other assets:
Velvel distribution rights 5,346 --
Goodwill 1,492 52
Other assets 173 455
-------- --------
Total assets $ 78,397 $ 60,108
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Note payable to bank $ 20,750 $ 21,115
Current portion of long-term debt 5,142 --
Accounts payable 45,503 27,715
Accrued expenses 1,453 1,321
Income taxes payable 135 309
-------- --------
Total current liabilities 72,983 50,460
Long-term debt, less current maturities 315 --
Shareholders' equity:
Preferred stock, no par value:
Authorized shares - 5,000,000
Issued and outstanding shares - None -- --
Common stock, no par value:
Authorized shares - 20,000,000
Issued and outstanding shares - 6,902,248 and 6,328,946,
respectively 8,005 6,460
Retained earnings (deficit) (2,584) 3,605
Unearned compensation (322) (417)
-------- --------
Total shareholders' equity 5,099 9,648
-------- --------
Total liabilities and shareholders' equity $ 78,397 $ 60,108
======== ========
SEE ACCOMPANYING NOTES.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
NAVARRE CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
YEAR ENDED MARCH 31
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Net sales:
Computer software $ 150,859 $ 105,575 $ 50,223
Music 49,838 52,779 69,275
--------- --------- ---------
200,697 158,354 119,498
Cost of sales 177,415 138,503 104,046
--------- --------- ---------
Gross profit 23,282 19,851 15,452
Operating expenses:
Selling and promotion 5,669 4,940 4,231
Distribution and warehousing 2,697 1,945 1,182
General and administrative 13,664 9,077 6,578
Amortization and writedown of intangible
assets 4,955 -- --
--------- --------- ---------
26,985 15,962 11,991
--------- --------- ---------
Income (loss) from operations (3,703) 3,889 3,461
Other expense:
Interest expense (2,110) (1,521) (753)
Other expense (184) (132) (40)
--------- --------- ---------
Income (loss) before income taxes and
equity in loss of Net Radio, Inc. (5,997) 2,236 2,668
Income tax expense (benefit) (527) 917 1,061
Equity in loss of Net Radio, Inc. (719) -- --
--------- --------- ---------
Net income (loss) $ (6,189) $ 1,319 $ 1,607
========= ========= =========
Earnings (loss) per common share $ (.92) $ .20 $ .26
========= ========= =========
Weighted average number of common and
common equivalent shares outstanding
6,692 6,442 6,288
========= ========= =========
SEE ACCOMPANYING NOTES.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
NAVARRE CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
RETAINED
SHARES COMMON EARNINGS UNEARNED
ISSUED STOCK (DEFICIT) COMPENSATION
--------- --------- --------- ------------
<S> <C> <C> <C> <C>
Balance at March 31, 1994 5,990,780 $ 5,895 $ 679 $ --
Common stock issued under restricted stock grants 69,250 138 -- (138)
Shares issued upon exercise of stock options 9,316 10 -- --
Net income -- -- 1,607 --
Amortization of unearned compensation -- -- -- 24
--------- --------- --------- ---------
Balance at March 31, 1995 6,069,346 6,043 2,286 (114)
Common stock issued under restricted stock grants 150,000 338 -- (338)
Shares issued upon exercise of stock options 109,600 79 -- --
Net income -- -- 1,319 --
Amortization of unearned compensation -- -- -- 35
--------- --------- --------- ---------
Balance at March 31, 1996 6,328,946 6,460 3,605 (417)
Shares issued in acquisitions 475,000 1,359 -- --
Shares issued upon exercise of stock options 93,302 186 -- --
Net loss -- -- (6,189) --
Amortization of unearned compensation -- -- -- 95
--------- --------- --------- ---------
Balance at March 31, 1997 6,902,248 $ 8,005 $ (2,584) $ (322)
========= ========= ========= =========
SEE ACCOMPANYING NOTES.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
NAVARRE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
YEARS ENDED MARCH 31
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income (loss) $ (6,189) $ 1,319 $ 1,607
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization of leasehold
improvements 871 843 512
Amortization and write down of intangible assets 4,955 -- --
Amortization of unearned compensation 95 35 24
Equity in loss of Net Radio, Inc. 719 -- --
Changes in operating assets and liabilities:
Accounts receivable (6,114) (13,794) (15,349)
Inventories (2,038) 166 (3,781)
Prepaid expenses and other assets (737) (415) (403)
Accounts payable and accrued expenses 16,589 1,799 13,367
Income taxes payable (174) 150 159
--------- --------- ---------
Net cash provided by (used in) operating activities 7,977 (9,897) (3,864)
INVESTING ACTIVITIES
Note receivable, officer (214) 255 (70)
Acquisition of businesses, net of cash received (552) -- --
Payment for Velvel distribution rights (5,000) -- --
Purchases of equipment and leasehold improvements (870) (1,456) (2,538)
--------- --------- ---------
Net cash used in investing activities (6,636) (1,201) (2,608)
FINANCING ACTIVITIES
Payments on long-term debt (511) (629) (333)
Proceeds from bank borrowings -- -- 687
Proceeds from note payable, bank 170,717 142,729 107,138
Payments on note payable, bank (171,082) (130,777) (100,981)
Payment on notes payable, shareholders -- (302) (48)
Proceeds from sale of common stock 186 79 10
--------- --------- ---------
Net cash (used in) provided by financing activities (690) 11,100 6,473
--------- --------- ---------
Net increase in cash 651 2 1
Cash at beginning of year 4 2 1
--------- --------- ---------
Cash at end of year $ 655 $ 4 $ 2
========= ========= =========
SUPPLEMENTAL SCHEDULE OF NONCASH TRANSACTIONS
Velvel distribution rights partially financed by note
payable $ 5,000 $ -- $ --
Note payable and common stock issued for acquired
businesses $ 1,859 $ -- $ --
SEE ACCOMPANYING NOTES.
</TABLE>
<PAGE>
NAVARRE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED MARCH 31, 1997
1. ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS
The Company distributes home entertainment products including prerecorded tapes,
compact discs and personal computer software and interactive CD-ROM computer
software primarily to retailers and wholesalers in the United States.
CONSOLIDATION
The financial statements include the accounts of the Company and its majority
owned subsidiaries, Digital Entertainment, Inc. and Net Radio Inc.
(collectively, the Company). All intercompany accounts and transactions have
been eliminated.
REVENUE RECOGNITION
Revenues from sales of product are recorded upon shipment. Allowances are
provided for estimated sales returns at the time the sale is recorded based on
the Company's trailing twelve months experience by product line.
The Company performs periodic credit evaluations of its customers' financial
condition and generally does not require collateral. Receivables generally are
due within sixty days. Credit losses relating to customers consistently have
been within management's expectations.
INVENTORIES
Inventories are stated at the lower of cost or market with cost determined on
the first-in, first-out (FIFO) method.
PROPERTY AND EQUIPMENT
Property and equipment is stated at cost. Depreciation is computed using the
straight-line method for leasehold improvements and accelerated methods for
equipment.
<PAGE>
NAVARRE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. ACCOUNTING POLICIES (CONTINUED)
ACCOUNTING FOR LONG LIVED ASSETS
The Company records losses on long-lived assets used in operations when
indicators of impairment are present and the undiscounted cash flows estimated
to be generated by those assets are less than the assets' carrying amount.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.
STOCK-BASED COMPENSATION
The Company follows Accounting Principles Board Opinion No. 25, ACCOUNTING FOR
STOCK ISSUED TO EMPLOYEES ("APB 25"), and related interpretations in accounting
for its stock options. Under APB 25, when the exercise price of stock options
equals the market price of the underlying stock on the date of grant, no
compensation expense is recognized.
In October 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION
("Statement 123"). The Company adopted the disclosure only provisions of
Statement 123. Accordingly, the Company has made pro forma disclosures of what
net income and income per share would have been had the provisions of Statement
123 been applied to the Company's stock options.
VELVEL DISTRIBUTION RIGHTS
The carrying value of the Velvel distribution rights is amortized over the
five-year life of the distribution agreement on a straight-line basis.
<PAGE>
NAVARRE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. ACCOUNTING POLICIES (CONTINUED)
GOODWILL
Goodwill primarily represents the excess of the purchase price over the fair
market value of the net assets of acquired businesses and is amortized on a
straight-line basis over 5 to 15 years. Accumulated amortization at March 31,
1997 and 1996 was $321,000 and $20,000, respectively.
INCOME TAXES
Income taxes are recorded under the liability method. Deferred income taxes are
provided for temporary differences between the financial reporting and tax bases
of assets and liabilities.
EARNINGS (LOSS) PER COMMON SHARE
Earnings per common share is computed by dividing net income for the period, by
the weighted average common and common share equivalent shares outstanding
arising from the effect of a convertible debenture and dilutive stock options
using the treasury stock method. Loss per share excludes common equivalent
shares from stock options and warrants as their effect is antidilutive. In
February 1997, the Financial Accounting Standards Board (FASB) issued FASB
Statement No. 128, "EARNINGS PER SHARE." This Statement replaces the
presentation of primary earnings per share (EPS) with basic EPS and also
requires dual presentation of basic and diluted EPS for entities with complex
capital structures. This Statement is effective for financial statements for
period ending after December 15, 1997. For the year ended March 31, 1997, there
is no difference between basic loss per share under Statement No. 128 and loss
per share as reported.
2. ACQUISITIONS
During May 1996, the Company acquired a 50% interest in Net Radio Corp., an
internet radio network. The Company accounted for its investment in Net Radio
Corp. under the equity method. In March 1997, the Company acquired the remaining
50% of Net Radio Corp. In total, the Company paid $1,000,000 in cash, issued a
$500,000 note payable and issued 295,000 shares of the Company's common stock
valued at $954,000.
<PAGE>
NAVARRE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. ACQUISITIONS (CONTINUED)
The purchase price of the remaining 50% interest may be adjusted if Net Radio
Corp. attains certain revenue and income results. The excess of purchase price
over fair value of the assets acquired resulted in goodwill of approximately
$1,263,000 which is being amortized on a straight-line basis over a 5 year
period.
Concurrent with the closing of the second investment in Net Radio Corp., the
Company sold 15% of the common stock of Net Radio Corp. to ValueVision
International, Inc., (ValueVision) for $1,000,000 in the form of cash and
$2,000,000 in future advertising on the ValueVision network valued by the
Company at $1,000,000. In the event that Net Radio Corp. has not commenced an
Initial public offering by March 2002, ValueVision will have the right to put
its investment back to the Company payable to ValueVision in cash or common
stock at the option of the Company.
In May 1996, the Company purchased Record Service, Inc., and its wholly-owned
subsidiary Surfside Distributors, Inc. a Hawaiian based music distributor for
$250,000 in cash and 180,000 shares of the Company's common stock valued at
$405,000. The excess of purchase price over fair value of the assets acquired
resulted in goodwill of approximately $479,000 which is being amortized on a
straight-line basis over a 15 year period.
Both acquisitions have been accounted for as purchases and, accordingly, their
net assets and operating results are included in the Company's financial
statements from the respective dates of acquisition. The pro forma impact of the
acquisitions on the Company's results of operations for all years presented was
not material.
3. VELVEL DISTRIBUTION RIGHTS
In August 1996, the Company entered into a unit purchase agreement (agreement)
with Velvel Records, Inc. (Velvel) to acquire the exclusive distribution rights
of Velvel's wholly-owned labels for a period of five years. The Company's
investment in Velvel is $10 million of which $5 million was paid upon entering
the agreement and the remaining $5 million in the form of a demand promissory
note. Upon payment of the first installment, the Company received a capital
interest in Velvel of 14.2%. The Company will receive an
<PAGE>
NAVARRE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. VELVEL DISTRIBUTION RIGHTS (CONTINUED)
additional capital interest of 14.2% upon payment of the demand promissory note.
The Company has the option of acquiring up to 49% of Velvel. Under the
agreement, owners of capital interest do not participate in earnings or losses
of Velvel.
Amortization of the distribution rights was $834,000 for the year ended March
31, 1997. In March 1997, the Company recorded a write down of $3,820,000 in the
Velvel distribution agreement where the expected future cash flows (undiscounted
and without interest) is less than the carrying amount of the distribution
agreement. Under SFAS 121, the amount of the impairment loss is the excess
carrying amount of the impaired asset over the fair value of the asset
discounted at a rate commensurate with the risks involved. The remaining
carrying value of the distribution rights of $5,346,000 will be amortized over
the remaining life of the distribution agreement.
4. NOTE RECEIVABLE, OFFICER
Officer's note receivable is due on demand, bears interest at 8.75% per year and
is unsecured.
5. BANK FINANCING AND DEBT
The credit facility has a maximum borrowing limit of $35 million and is secured
by substantially all the Company's assets. The amount available to borrow
fluctuates based on an asset borrowing base. Interest is at prime plus .5% (9.0%
at March 31, 1997) and LIBOR rate plus 2.75% (8.562% at March 31, 1997) and is
payable monthly. The weighted average interest rate was 9.5%, 11.5% and 11.2%
for the years ended March 31, 1997, 1996 and 1995, respectively. Annual
commitment fees payable to the lender are .375% per annum on the unused portion
of the credit line.
On June 11, 1997, the Company entered into a new revolving line of credit with
Congress Financial Corporation. The credit facility has a maximum borrowing
limit of $45 million and is secured by substantially all the Company's assets.
The available amount fluctuates based on an asset borrowing base. In connection
with the new credit facility with Congress Financial Corporation, the Company
paid off all amounts due under its revolving line of credit in place at March
31, 1997.
<PAGE>
NAVARRE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. BANK FINANCING AND DEBT (CONTINUED)
<TABLE>
<CAPTION>
Long-term debt consists of the following (in thousands):
MARCH 31
1997 1996
------ ------
<S> <C> <C>
Promissory note payable to Velvel Records LLC, due on
demand, interest at the prime rate on the unpaid balance
only after demand, secured by capital interest $5,000 $ -
Capital equipment leases with monthly payments of $1
to $6, secured by equipment 381 -
Notes payable in monthly installments of $5 through
September 1998, interest at 10%, unsecured 76 -
------ ------
5,457 -
Less current portion 5,142 -
------ ------
Long-term debt $ 315 $ -
====== ======
</TABLE>
Interest paid was $2,112,000, $1,521,000 and $753,000 for the years ended March
31, 1997, 1996 and 1995, respectively.
Maturities of long-term debt are as follows: 1998 - $5,142,000; 1999 - $135,000;
2000 - $81,000; 2001 - $69,000; and 2002 - $30,000.
6. SHAREHOLDERS' EQUITY
The Company has issued warrants to the lead underwriter of the December 16, 1993
public offering, to purchase 180,000 common shares, exercisable for five years
from the date of the public offering at $3.90 per share. No warrants have been
exercised at March 31, 1997.
On May 21, 1996, the Board of Directors declared a two-for-one stock split in
the form of a fifty percent stock dividend distributed on June 21, 1996, to
shareholders of record on June 5, 1996. All earnings (loss) per share and per
share data have been adjusted to reflect the two-for-one stock split.
<PAGE>
NAVARRE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. SHAREHOLDERS' EQUITY (CONTINUED)
Also on June 13, 1996, the Board of Directors resolved to amend the Company's
articles of incorporation to authorize the creation of a class of preferred
stock of 5,000,000 shares. The amendment was approved by the Company's
shareholders on September 5, 1996.
7. STOCK OPTIONS AND GRANTS
The Company has an incentive stock option plan for officers, key employees and
directors. The options are granted at fair market value and expire five years
after the grant date. Option activity is summarized as follows:
PLAN WEIGHTED
OPTIONS PLAN AVERAGE
AVAILABLE FOR OPTIONS EXERCISE PRICE
GRANT OUTSTANDING PER SHARE
------------- ----------- --------------
Balance March 31, 1994 79,746 394,254 $ 1.02
Additional shares 400,000 -- --
Granted (104,574) 104,574 2.03
Canceled 8,222 (8,222) 1.10
Exercised -- (9,316) 1.07
--------- --------- --------
Balance on March 31, 1995 383,394 481,290 1.27
Additional shares 1,300,000 -- --
Granted (847,390) 847,390 2.93
Canceled 17,596 (17,596) 3.15
Exercised -- (123,860) 1.28
--------- --------- --------
Balance on March 31, 1996 853,600 1,187,224 2.43
Granted (141,000) 141,000 5.37
Canceled 99,356 (99,356) 2.29
Exercised -- (98,302) 1.89
--------- --------- --------
Balance on March 31, 1997 811,956 1,130,566 $ 2.85
========= ========= ========
The weighted average fair value of options granted in 1997 and 1996 was $2.45
and $1.63 per share, respectively.
<PAGE>
NAVARRE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. STOCK OPTIONS AND GRANTS (CONTINUED)
The exercise price of options outstanding at March 31, 1997 ranged from $.96 to
$11.38 per share, as summarized in the following table:
<TABLE>
<CAPTION>
WEIGHTED
WEIGHTED AVERAGE
RANGE OF SHARES OUTSTANDING AVERAGE NUMBER OF EXERCISE
EXERCISE AT MARCH 31, REMAINING SHARES PRICE
PRICE 1997 CONTRACTUAL LIFE EXERCISABLE PER SHARE
--------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
$ .96 - $ 2.00 230,006 1.9 years 171,428 $1.08
$2.01 - $ 3.30 513,970 3.9 years 187,228 2.27
$3.31 - $ 6.00 359,590 3.5 years 66,678 4.33
$6.01 - $11.38 27,000 5.3 years - 9.37
--------- -------
Total 1,130,566 3.4 years 425,334 $2.85
========= =======
</TABLE>
The number of options exercisable at March 31, 1997, 1996 and 1995 was 425,334,
322,306 and 129,153, respectively, at a weighted average exercise price of
$2.07, $1.68 and $1.01 per share, respectively.
Pro forma information regarding net income (loss) and earnings (loss) per share
is required by Statement 123, and has been determined as if the Company had
accounted for its employee stock options under the fair value method of
Statement 123. The fair value for these options was estimated at the date of
grant using the Black-Scholes option pricing model with the following
weighted-average assumptions for 1997 and 1996, respectively; risk-free interest
rate of 6.7%, volatility factor of the expected market price of the Company's
Common Stock of .57 and a weighted-average expected life of the option of 5
years.
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions. Because the Company's employee stock options have
characteristics significantly different from those of traded options, and
because changes in the subjective input assumptions can materially affect the
fair value calculation, in management's opinion, the existing models do not
necessarily provide a reliable single measure of the fair value of its employee
stock options.
<PAGE>
NAVARRE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. STOCK OPTIONS AND GRANTS (CONTINUED)
For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over the options' vesting period. The Company's pro
forma information is as follows:
MARCH 31
1997 1996
-------- ------
Pro forma net income (loss) $(6,352) $1,255
Pro forma earnings (loss) per common share (.94) .19
These pro forma amounts may not be indicative of future years' amounts since the
Statement provides for a phase-in of option values beginning with those granted
in fiscal 1996.
The Company has granted restricted common shares to key employees which are
recorded at the market value on the date of the grant. A total of 150,000 and
69,250 common shares were issued under restricted stock grants for the years
ended March 31, 1996 and 1995, respectively. The total market value on the date
of grant of common shares is treated as unearned compensation charged to expense
over the vesting period of five years. Compensation charged to expense was
$95,000, $35,000 and $24,000 for the years ended March 31, 1997, 1996 and 1995,
respectively. The remaining unamortized unearned compensation is expected to be
charged to operations over the five-year vesting period.
8. INCOME TAXES
The components of income tax expense (benefit) are as follows (in thousands):
YEAR ENDED MARCH 31
1997 1996 1995
-------- ----- -------
Current:
Federal $ 560 $850 $1,127
State 120 85 151
-------- ----- -------
680 935 1,278
Deferred (1,207) (18) (217)
-------- ----- -------
Income tax expense (benefit) $ (527) $917 $1,061
======== ===== =======
<PAGE>
NAVARRE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. INCOME TAXES (CONTINUED)
Deferred income taxes reflect the available tax carryforwards and the net tax
effects of temporary differences between the carrying amounts of assets and
liabilities for financial reporting purposes and the amounts used for income tax
purposes. Significant components of the Company's deferred tax assets as of
March 31, 1997 and 1996 included in prepaid expenses and other assets are as
follows (in thousands):
<TABLE>
<CAPTION>
MARCH 31
1997 1996
------- -------
<S> <C> <C>
Amortization of intangible assets $1,750 $ -
Net operating loss carryforward 117 156
Allowance for uncollectible accounts 955 79
Allowance for sales returns 479 297
Book/tax depreciation 50 (18)
Reserve for sales discounts 145 116
Accrued vacations 55 39
Inventory - uniform capitalization 86 76
Inventory - obsolescence 65 -
------- -------
3,702 745
Valuation allowance (1,750) -
------- -------
Total deferred tax assets (included in prepaid expenses
and other current assets) $1,952 $ 745
======= =======
</TABLE>
The net operating loss carryforward of $333,000 is limited to a utilization
limit of $111,000 per year through the year 2000 as a result of the change in
the Company's year end in 1994.
<PAGE>
NAVARRE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. INCOME TAXES (CONTINUED)
A reconciliation of income tax expense to the statutory federal rate is as
follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31
1997 1996 1995
-------- ----- -------
<S> <C> <C> <C>
Tax expense (benefit) at statutory rate $(2,039) $782 $ 907
State income taxes (benefit), net of
federal benefit (365) 80 99
Valuation allowance 1,750 - -
Goodwill amortization 92 - -
Other 35 55 55
-------- ----- -------
$ (527) $917 $1,061
-------- ----- -------
Effective tax rate (8.8)% 41.0% 39.8%
========= ===== =======
</TABLE>
Cash paid for income taxes was $855,000, $791,000, and $263,000 for the years
ended March 31, 1997, 1996 and 1995, respectively.
9. COMMITMENTS
LEASES
On September 25, 1995, the Company entered into an operating lease agreement for
office and warehouse space with a partnership whose two partners are major
shareholders and officers of the Company. The lease expires in 2005 and provides
for monthly payments of $31,947 over the lease term, adjusted for the Consumer
Price Index after five years. In addition, the Company is responsible for all
operating costs associated with the building. The Company has one additional
five-year option to renew the lease.
Total rent expense was $804,000, $546,000, and $472,000 for the years ended
March 31, 1997, 1996, and 1995, respectively.
<PAGE>
NAVARRE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. COMMITMENTS (CONTINUED)
The following is a schedule of future minimum rental payments required under
noncancelable operating leases as of March 31, 1997 (in thousands):
1998 $ 513
1999 499
2000 449
2001 440
2002 376
Thereafter 1,316
--------
$3,593
========
10. MAJOR CUSTOMERS
The Company has three major customers which accounted for 47%, 54% and 51% of
sales in fiscal 1997, 1996, and 1995.
<PAGE>
<TABLE>
<CAPTION>
NAVARRE CORPORATION
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
- --------------------------------------------------------------------------------------------------------------
COL. A COL. B COL. C COL. D COL. E
- -------------------------------------- --------- ------------------------- ----------- ----------
Additions
-------------------------
(2)
(1) Charged to
Balance at Charged to Other Balance at
Beginning Costs and Accounts -- Deductions End of
Description Of Period Expenses Describe -- Describe Period
- -------------------------------------- --------- ---------- ---------- ----------- ----------
<S> <C> <C> <C> <C> <C>
Year ended March 31, 1997:
Deducted from asset accounts:
Allowance for doubtful accounts $196,000 $2,439,000 $508,000(2) $755,000(1) $2,388,000
-------- ---------- ----------
Allowance for sales returns 747,000 450,000 1,197,000
-------- ---------- ---------- ---------- ----------
Totals $943,000 $2,889,000 $508,000 $755,000 $3,585,000
======== ========== ======== ======== ==========
Year ended March 31, 1996:
Deducted from asset accounts:
Allowance for doubtful accounts $325,000 $576,000 $705,000(1) $196,000
Allowance for sales returns 453,000 294,000 747,000
-------- ---------- -------- --------
Totals $778,000 $870,000 $705,000 $943,000
======== ======== ======== ========
Year ended March 31, 1995:
Deducted from asset accounts:
Allowance for doubtful accounts $ 86,000 $528,000 $289,000(1) $325,000
Allowance for sales returns 314,000 139,000 453,000
-------- ---------- -------- --------
Totals $400,000 $667,000 $289,000 $778,000
======== ======== ======== ========
(1) Uncollectible accounts written off, net of recoveries.
(2) Increase in allowance transfered from acquistion of Record Service, Inc.
and Net Radio Inc.
</TABLE>
RESTATED AND AMENDED
ARTICLES OF INCORPORATION OF
NAVARRE CORPORATION
The following constitutes the Restated and Amended Articles of Incorporation of
Navarre Corporation effective as of September 11, 1996.
ARTICLE I.
The name of the Corporation is Navarre Corporation.
ARTICLE II.
The purposes of this Corporation are general business purposes.
ARTICLE III.
This Corporation shall possess all powers necessary to conduct any business in
which it is authorized to engage, including but not limited to all those powers
expressly conferred upon business corporations by Minnesota Statutes, together
with those powers implied therefrom.
ARTICLE IV
The Corporation shall have perpetual duration.
ARTICLE V.
The location and post office address of the registered office of this
Corporation in Minnesota is 7400 49th Avenue North, New Hope, Minnesota 55428.
ARTICLE VI.
The aggregate number of shares that the Corporation has authority to issue shall
be 25,000,000 shares, no par value per share, which shall consist of 20,000,000
shares of common stock and 5,000,000 shares of preferred stock. The Board of
Directors of the Corporation is authorized to establish from the preferred
shares, by resolution adopted and filed in the manner provided by law, one or
more classes or series of shares, to designate each class or series, and to fix
the relative powers, qualifications, restrictions, rights and preferences of
each such class or series, including, without limitation, the right to create
voting, dividend and liquidation rights and preferences greater than those of
common stock. There shall be no cumulative voting by shareholders of the
Corporation. The shareholders of the Corporation shall not have preemptive
rights to subscribe for or acquire securities or rights to purchase securities
of any kind, class of series of the Corporation.
<PAGE>
ARTICLE VII.
Section 1. Number and Term. The business and affairs of this
Corporation shall be managed by or under the direction of a Board of Directors
consisting of not less than three (3) or more than nine (9) directors, as may be
designated by the Board of Directors from time to time. The directors shall be
divided into three (3) classes, as nearly equal in number as the then total
number of directors constituting the whole Board permits, with the term of
office of one class expiring each year at the annual meeting of shareholders.
Except as otherwise provided in this Article VII, each director shall be elected
by the shareholders to hold office for a term of three consecutive years. Each
director shall serve until a successor shall have been duly elected and
qualified, or until the earlier death, resignation, removal, or disqualification
of the director.
Section 2. Transitional Board. Upon the adoption of this new Article
VII to the Articles of Incorporation, one class of directors shall hold office
for a term expiring at the annual meeting of shareholders to be held after the
end of the Corporation's 1997 fiscal year, another class shall hold office for a
term expiring at the annual meeting of shareholders to be held after the end of
the Corporation's 1998 fiscal year and another class shall hold office for a
term expiring at the annual meeting of shareholders to be held after the end of
the Corporation's 1999 fiscal year. After the expiration of each term, the
provisions of Section 1 of this Article VII shall control.
Section 3. Vacancies. Any vacancies occurring in the Board of Directors
for any reason, and any newly created directorships resulting from an increase
in the number of directors, may be filled by a majority of the directors then in
office. Any directors so chosen shall hold office until the next election of the
class for which such directors shall have been chosen and until their successors
shall be elected and qualified subject, however, to prior retirement,
resignation, death or removal from office. Any newly created directorships
resulting from an increase in the authorized number of directors shall be
apportioned by the Board of Directors among the three classes of directors so as
to maintain such classes as nearly equal in number as possible.
Section 4. Quorum. A majority of the members of the Board of Directors
shall constitute a quorum for the transaction of business at any meeting of the
Board of Directors, but if less than such a majority is present at a meeting, a
majority of the directors present may adjourn the meeting from time to time
without further notice. The directors present at a duly organized meeting may
continue to transact business until adjournment notwithstanding that the
withdrawal of enough directors originally present leaves less than the number
otherwise required for a quorum.
Section 5. Nomination. Advance notice of nominations for the election
of directors, other than by the Board of Directors or a committee thereof, shall
be given within the time and in the manner provided in the Bylaws.
<PAGE>
Section 6. Written Action by Directors. Any action required or
permitted to be taken at a meeting of the Board of Directors, or a committee
thereof, may be taken by written action, or counterparts of a written action,
signed by all of the directors or, in cases where the action need not be
approved by the shareholders, by written action, or counterparts of a written
action, signed by the number of directors that would be required to take the
same action at a meeting of the Board or a committee thereof at which all
directors were present.
ARTICLE VIII.
The personal liability of the directors of this Corporation is hereby eliminated
to the fullest extent permitted by Minnesota Statutes, Section 302A.251, as the
same may be amended and supplemented.
EMPLOYMENT AGREEMENT
THIS AGREEMENT is made and entered into as of the 1st day of October, 1996, by
and between NAVARRE CORPORATION, a Minnesota corporation (the "Company"), and
ERIC H. PAULSON, a resident of the State of Minnesota ("Executive").
W I T N E S S E T H:
WHEREAS, Executive has a unique knowledge of the Company's business, and has
special expertise in the management and future planning of its affairs, and has
been a key Executive of the Company, helping to develop the image of the
business; and
WHEREAS, the Company believes that Executive's continued involvement in the
management and affairs of the business are essential to its management and
planning in the future; and
WHEREAS, a previous employment agreement expired as of September 30, 1996 and it
is the desire of the parties to extend the terms thereof.
NOW, THEREFORE, in consideration of the foregoing premises, the mutual covenants
and obligations of this Agreement and other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the parties hereto
agree as follows:
1. EMPLOYMENT. Subject to all of the terms and conditions of this
Agreement, the Company hereby employs Executive, and Executive hereby
accepts employment with the Company, as its President and Chief
Executive Officer.
2. DUTIES.
(a) PRESIDENT/CHIEF EXECUTIVE OFFICER. The services of Executive
are exclusive to the Company. Executive will devote
substantially all of his business hours to, and make the best
use of his energy, knowledge and training in, performing his
duties as President and Chief Executive Officer of the Company
within the general guidelines established by the Board of
Directors of the Company as the same may, from time to time,
be modified by the Company's Board of Directors. Executive
will report to the Board of Directors of the Company and have
all the duties normally subscribed to the Chief Executive
Officer. Notwithstanding anything in this Agreement to the
contrary, the duties of Executive under this Agreement do not
(i) require Executive to relocate his principal office or
residence from the Minneapolis/St. Paul, Minnesota
metropolitan area without the prior written consent of
Executive, or (ii) prevent Executive from owning, directly or
indirectly, securities of, or otherwise participating in the
ownership of, any publicly-owned business, trade, industry or
venture. Executive will perform
<PAGE>
his duties in a competent and professional manner, consistent
with that expected of a chief executive officer of the
Company.
(b) DIRECTOR. During the term of this Agreement, Executive shall
also serve as Chairman of the Board of Directors of the
Company and shall perform all duties incident to services as a
director of the Company.
(c) CONSULTANT. If Executive should make an election as described
in Section 5(d) hereof, the Company agrees to retain Executive
and Executive agrees to serve in a position of consultant and
advisor to the Company (with or without retention of his
position as President or Chief Executive Officer or as a
director, at the election of the Company), for a period
commencing upon such election and ending on October 31, 2001.
During the period of consulting and advising, Executive shall
render consulting and advisory services in connection with
business activities similar to those carried on by the Company
during the period of his employment by the Company. Executive
shall perform such consulting and advisory services and attend
meetings, as and when reasonably requested by the Company in
advance, provided that Executive shall not be required to
devote thereto in the aggregate more than thirty (30) days per
year. Executive shall have discretion in choosing the times
and places of performance of his services to the Company
compatible with his other activities. Compensation to
Executive under this Section 2 (c) shall continue to be due
from the Company as if Executive continued to be employed by
the Company pursuant to Section 2 (a) and (b) hereof.
3. TERM. Subject only to earlier termination in accordance with Section 5
of this Agreement, Executive's term of employment shall commence on the
date hereof and continue for a period of five (5) years (the "Initial
Term"). Upon the expiration of the Initial Term, this Agreement shall
be automatically renewed for successive additional one (1)-year terms
unless this Agreement is terminated in writing by either party hereto
at least ninety (90) days prior to the expiration of the Initial Term
or any subsequent renewal term. The Initial Term and any subsequent
renewal terms shall be referred to collectively herein as the
"Employment Period."
4. COMPENSATION. As compensation for all of Executive's services under
this Agreement, the Company agrees to pay Executive during the
Employment Period and on retirement, and Executive agrees to accept the
following:
(a) BASE SALARY. A base salary of $285,000 per annum (the "Base
Salary"), payable in accordance with the Company's standard
payroll practices. On each anniversary of this Agreement, the
Base Salary shall be adjusted by the Company's Board of
Directors based upon the level of performance by Executive,
provided that in no event shall the Base Salary for any fiscal
year hereunder be less than the sum provided above for the
first full fiscal year. If conditions require and Executive
agrees, temporary cuts in pay can be effected.
<PAGE>
(b) PERFORMANCE BONUS. As additional compensation for Executive,
Executive shall be eligible to receive a bonus determined by
the Board of Directors with a maximum bonus (the "Bonus")
equal to 80% of the Base Salary of Executive. If no Bonus is
otherwise declared by the Board of Directors, Executive will
be entitled to receive a bonus equal to 80% of Executive's
Base Salary. Executive's Bonus shall be paid semi-annually not
later than 45 days after March 31st and September 30th of each
year.
(c) LOAN. At the expiration of the Employment Period and/or the
termination of this Agreement for any reason whatsoever, any
and all sums owed by Executive to Company as of such date
shall be deemed paid and satisfied in full including, without
limitation, the outstanding loan owed by Executive to the
Company in the approximate amount of $200,000.
(d) BENEFITS.
(i) EXPENSES. The Company shall reimburse Executive for
any and all ordinary, necessary and reasonable
business expenses that Executive incurs in connection
with the performance of his duties under this
Agreement, including entertainment, telephone, travel
and miscellaneous expenses, provided that Executive
provides the Company with documentation for such
expenses in a form sufficient to sustain the
Company's deduction for such expenses under Section
162 of the Internal Revenue Code of 1986, as amended.
These expenses include all dues and assessments to
Executive's social, athletic, golf or country club.
(ii) MEDICAL AND DISABILITY INSURANCE. Subject to
Executive taking and passing the physical examination
required by the Company's insurance carrier, the
Company shall provide Executive with full medical and
disability insurance coverage provided to other
officers of the Company.
(iii) LIFE INSURANCE. Subject to the same physical
examination and cost provisions, the Company shall
provide Executive with a $2,000,000 term life
insurance policy insuring Executive's life during the
term of Executive's employment with the Company and
shall pay all premiums thereon. Such policy shall be
owned by the Executive and shall be payable to such
beneficiary or beneficiaries as Executive directs by
written instrument delivered to the Company or the
insurer under the life insurance policy.
(iv) VACATION. Executive shall be entitled to a paid
vacation period of four (4) weeks each year, which
may be taken at any time subject to the Company's
business needs.
(v) AUTOMOBILE EXPENSES. The Company will pay or
reimburse the Executive for all reasonable costs of
licensing, sales taxes, property taxes, maintenance,
repair, oil, gasoline and insurance for his
automobile.
<PAGE>
(vi) BENEFIT CHANGES. No reference in this Agreement to
any policy or any employee benefit plan established
or maintained by the Company shall preclude the
Company from changing any such policies or amending
or terminating any such benefit plans if a
substantially similar benefit is provided to
Executive by the Company.
(vii) OTHER PLANS. Nothing contained herein is intended to
or shall be deemed to be granted to Executive in lieu
of any rights or privileges which Executive may be
entitled to as an employee of the Company under any
other policies or benefit plans that are currently in
effect or that may hereafter be adopted. Executive
shall be entitled to participate in any other
employee benefit plans of the Company generally
applicable to officers of the Company, its divisions
or subsidiaries, occupying similar positions as
Executive, including, but not limited to, any profit
sharing, pension, stock option, stock appreciation
rights, stock ownership, health, medical, dental,
vacation, insurance or other employee benefit plans.
5. TERMINATION. This Agreement may not be terminated prior to the end of
the Employment Period except as follows:
(a) BY THE COMPANY FOR COMPANY CAUSE. The Company may terminate
this Agreement for Company Cause upon Executive's material
breach of this Agreement. Except as to subparagraph (iii)
below, the Company shall give Executive thirty (30) days'
advance written notice of such termination, which notice shall
be via registered mail, return receipt requested, and which
shall describe in detail the acts or omissions which the
Company believes constitute such breach. Notwithstanding the
foregoing, Executive shall not be deemed to have been
terminated for Company Cause unless and until there shall have
been delivered to Executive a copy of a resolution duly
adopted by the affirmative vote of not less than seventy-five
(75%) of the entire membership of the Board of Directors
(certified by the Secretary of the Board of Directors) at a
meeting of the Board of Directors called and held for the
purpose (after reasonable notice to Executive and an
opportunity for Executive, together with Executive's counsel,
to appear before the Board), finding that in the good faith
opinion of the Board of Directors, Executive was guilty of
conduct described in this Section 5(a), and specifying the
particulars thereof in detail. The Company shall not be
allowed to terminate this Agreement pursuant to this Section
5(a) if Executive is able to cure such breach within thirty
(30) days following delivery of such notice. However, in no
event shall a breach of the provisions of Sections 5(a)(iii)
or 7 be subject to cure. Acts or omissions which constitute a
material breach of this Agreement constituting "Company Cause"
shall be limited strictly to the following:
(i) Any material breach by Executive of his obligations
under this Agreement;
<PAGE>
(ii) Gross misconduct of Executive which is manifestly
injurious to Company, or habitual failure or
inability of Executive to perform his duties under
this Agreement; and
(iii) Any fraud, theft or embezzlement by Executive of the
Company's assets, or any other unlawful or criminal
act which is punishable as a felony.
(b) DEATH. Subject to the provisions of Section 6, this Agreement
shall terminate upon Executive's death.
(c) DISABILITY. Subject to the provisions of Section 6, this
Agreement shall terminate upon Executive's Disability. As used
herein, the term "Disability" shall have such meaning as set
forth in the Company's disability policy in effect at the date
hereof and shall include both permanent and temporary
disability, short term and long term disability, and total and
partial disability. If there is no policy in effect at the
date of Executive's potential disability, Disability shall
mean Executive becoming substantially incapable of performing
his duties hereunder for a period of six (6) months or more.
(d) BY EXECUTIVE FOR EXECUTIVE CAUSE. Executive shall have the
right, at his election, to terminate this Agreement or to
change his position to that of consultant and advisor as
described in Section 2(c) herein, upon thirty (30) days'
written notice to the Company upon the occurrence, without
Executive's express written consent, of any one or more of the
following events, provided that Executive shall not have the
right to terminate this Agreement if the Company is able to
cure such event within thirty (30) days following delivery of
such notice:
(i) The Company is in material breach of this Agreement;
(ii) Executive is required to report to or accept
assignments from persons other than the Board of
Directors of the Company or he is removed without his
written consent as the President and Chief Executive
Officer of the Company and such removal is not
pursuant to Section 5(a) hereof;
(iii) The Board of Directors should fail to elect Executive
as President and Chief Executive Officer, or if
Executive should have a policy dispute with the Board
of Directors;
(iv) The Shareholders should fail to elect Executive as a
director;
(v) An adverse change in Executive's status or position
as an executive officer of the Company, including,
without limitation, any adverse change in Executive's
status or position as a result of a material
diminution in Executive's duties, responsibilities or
authority as of the date of this Agreement (or any
status or position to which Executive may be promoted
after the date hereof) or the assignment to Executive
of any duties or responsibilities which, in
Executive's reasonable judgment, are
<PAGE>
inconsistent with Executive's status or position, or
any removal of Executive from or any failure to
reappoint or reelect Executive to such positions
(except in connection with the termination of
Executive's employment in accordance with Section
5(a) hereof);
(vi) A reduction by the Company of Executive's Base Salary
as the same may be increased time to time, or a
change in the eligibility requirements or performance
criteria for any benefit other than salary, which
adversely effects Executive;
(vii) Without replacement by a plan providing benefits to
Executive equal to or greater than those
discontinued, the failure by the Company to continue
in effect, within its maximum stated term, any
employee benefit plan in which Executive is
participating immediately prior to the date of this
Agreement or the taking of any action by the Company
that would adversely effect Executive's participation
or materially reduce Executive's benefits under any
such plan;
(viii) The taking of any action by the Company that would
materially adversely effect the physical conditions
existing immediately prior to this Agreement in or
under which Executive performs his employment duties;
(ix) The Company's requiring Executive to be based
anywhere other than the Minneapolis/St. Paul,
Minnesota metropolitan statistical area, except for
required travel on the Company's business to an
extent substantially consistent with the business
travel obligations which Executive has typically
undertaken on behalf of the Company prior to the date
of this Agreement; or
(x) Any purported termination by the Company of this
Agreement or the employment of Executive by Company
which is not expressly authorized by this Agreement
or any breach of this Agreement by the Company which
is not remedied by the Company within thirty (30)
days after the Company's receipt of notice thereof
from Executive.
(e) RETIREMENT. At such time as Executive reaches the age of 60
and remains as an employee of the Company, Executive may
retire and, subject to the provisions of Section 6 below, this
Agreement shall terminate.
6. PAYMENTS UPON TERMINATION.
(a) DEATH. Upon Executive's death during the Employment Period,
the heirs or legal representatives of Executive shall be
entitled to receive as a lump sum payment payable within sixty
(60) calendar days of his death, 2.99 times the average of the
aggregate base and incentive compensation paid to Executive
over the preceding five years, provided, however, that in no
event shall the amount due and payable
<PAGE>
hereunder constitute a "Parachute Payment" within the meaning
of Section 280G(b)(2) of the Internal Revenue Code of 1986, as
amended.
(b) DISABILITY. In the event that this Agreement is terminated due
to Executive's Disability, Executive shall be paid (i) his
Base Salary for a period of one year following the date of
such Disability or until Executive begins receiving benefits
under the Company's disability benefits plan, whichever occurs
first, (ii) all bonuses to which Executive would have been
entitled for the fiscal year in which such Disability
occurred, prorated to the date of Disability, (iii) his
accrued but unpaid vacation pay for the year in which such
Disability occurred, pro rated to the date of such Disability,
and (iv) any unpaid expense reimbursement.
(c) TERMINATION BY COMPANY FOR COMPANY CAUSE OR BY EXECUTIVE
WITHOUT EXECUTIVE CAUSE. If Executive is terminated pursuant
to Section 5(a) hereof, or Executive terminates this Agreement
other than in accordance with Section 5(d) hereof, the Company
shall pay to Executive (i) his Base Salary through the date
written notice is properly mailed to Executive pursuant to
Section 5(a) hereof, and (ii) all Bonus payments owing to
Executive for the fiscal year prior to the year such written
notice is received by Executive (to the extent that any such
payments were unpaid on the date of termination), and for the
current year.
(d) TERMINATION WITHOUT COMPANY CAUSE OR BY EXECUTIVE FOR
EXECUTIVE CAUSE. In addition to any other rights granted
Executive hereunder, if the Company should terminate this
Agreement other than in accordance with Section 5(a) hereof,
or if Executive should terminate this Agreement pursuant to
Section 5(d) hereof, the Company shall pay to Executive (i)
his Base Salary through the end of the term of this Agreement
or two years, whichever is more, in exchange for a properly
executed non-compete agreement between Executive and the
Company, (ii) any payments owing to Executive pursuant to
Section 4(b) hereof for the fiscal year prior to the year of
termination (to the extent any such payments were unpaid on
the date of termination, as well as for the current year),
(iii) a sum equivalent to any accrued but unpaid vacation for
the year in which he is terminated, and (iv) any unpaid
expense reimbursement. Furthermore, for the remainder of the
term of this Agreement, or one year whichever is more, the
Company shall maintain in full force and effect for the
continued benefit of Executive and his dependents all (i)
pension plans, (ii) medical and disability policies, (iii)
stock option plans, and (iv) life insurance plans in which
Executive participated immediately prior to his termination
(or if such participation is barred, shall arrange for
individual policies of insurance providing benefits
substantially similar, on an after-tax basis, to those which
Executive otherwise would have been entitled hereunder) for
the remainder of the term of this Agreement.
(e) CHANGE OF CONTROL AND OWNERSHIP. In the event that (i)
Executive's employment with the Company is terminated by the
Company other than in accordance with Sections 5(a), (b), or
(c) hereof during the Employment Period and (ii) such
termination occurs after a Change in Control (as defined
<PAGE>
hereinbelow), Company shall pay Executive a cash bonus
("Severance Payment") in an amount equal to Executive's
Average Annual Compensation (as defined hereinbelow),
multiplied by a factor of 2.99, provided, however, that in no
event shall the amount due and payable hereunder constitute a
"Parachute Payment" within the meaning of Section 280G(b)(2)
of the Internal Revenue Code of 1986, as amended. In the event
that any portion of the Severance Payment would be deemed a
Parachute Payment, the amount of the Severance Payment shall
be reduced only to the extent necessary to eliminate any such
treatment or characterization.
For purposes of this Agreement, "Change in Control" shall mean
(i) the sale of all or substantially all of the assets of the
Company, (ii) the acquisition by any means of more than fifty
percent (50%) of the issued and outstanding voting stock of
the Company by any entity, person or group of persons acting
in concert, (iii) the merger of the Company with, or the
consolidation of the Company into, another corporation or
entity, or (iv) the election to the Board of Directors of the
Company without the recommendation or approval of the
incumbent Board of Directors of the Company the lesser of (i)
three directors or (ii) directors constituting a majority of
the number of directors of the Company then in office.
For purposes of this Agreement, "Average Annual Compensation"
shall mean the average of all taxable compensation and fringe
benefits paid to or on behalf of Executive by Company, based
on the five (5) most recent calendar years. Amounts payable
pursuant to this Section 6(e) shall be in addition to, and not
in lieu of, all other compensation, rights and benefits
accruing or afforded to Executive pursuant to this Agreement.
(f) RETIREMENT. Upon Executive's retirement pursuant to Section
5(e) above, Executive and his heirs or legal representatives
shall be entitled to receive the following: (i) average annual
compensation for a period of three (3) years in exchange for a
properly executed non-compete agreement between Executive and
the Company, (ii) any payments owing to Executive pursuant to
Section 4(b) hereof through the date of retirement (to the
extent any such payments were unpaid on the date of
retirement, as well as for the current year), (iii) a sum
equivalent to any accrued but unpaid vacation for the year in
which he retires, and (iv) any unpaid expense reimbursement.
Furthermore, for a period of five (5) years after retirement,
the Company shall maintain in full force and effect for the
continued benefit of Executive and his dependents all (i)
pension plans, (ii) medical and disability policies, (iii)
stock option plans and (iv) life insurance plans in which
Executive participated immediately prior to his termination
(or if such participation is barred, shall arrange for
individual policies of insurance providing benefits
substantially similar, on an after-tax basis, to those which
Executive otherwise would have been entitled hereunder) for
the remainder of the term of this Agreement.
7. OWNERSHIP OF PROPERTIES; CONFIDENTIALITY; EXCLUSIVITY; INVESTMENTS.
<PAGE>
(a) OWNERSHIP OF PROPERTIES. The Company, as employer, shall own,
and Executive hereby transfers and assigns to the Company, all
rights in and to any material and/or ideas written, suggested
or submitted by Executive during the Employment Period and all
other results and proceeds of his services under this
Agreement (the "Properties"). Without limiting the generality
of the foregoing, these rights shall include all motion
picture, television, radio, dramatic, musical, publication and
other rights in and to the Properties, including the sole and
exclusive right to photograph and record the same with or
without dialogue, music and other sounds synchronously
recorded, and to perform, exhibit, distribute, reproduce,
transmit, broadcast or otherwise communicate the same and/or
motion picture, dramatic or other versions or adaptations
thereof, theatrically, non-theatrically and/or by means of
television, radio, the legitimate stage and/or any other means
now known or hereafter devised and to manufacture, publish, or
vend printed and/or recorded versions or adaptations thereof,
either publicly or privately and for profit or otherwise. The
Company and its licensees and assigns shall have the right to
adapt, change, revise, delete from, add to and/or rearrange
the Properties or any part thereof written or submitted by
Executive and to combine the same with other works to any
extent, and to change or substitute the title thereof and in
this connection Executive hereby waives any so-called "moral
rights" of authors. Executive agrees to execute and deliver to
the Company such releases, assignments or other instruments as
the Company may require from time to time to evidence its
ownership of the results and proceeds of Executive's services
hereunder' provided, however, that nothing in this Section
7(a) shall be deemed in any manner to restrict or qualify
Executive's ownership or right to exploit Executive's personal
memoirs.
The requirements of this Section 7(a) do not apply to
Properties for which no equipment, facility or confidential
information of the Company was used and which were developed
entirely on Executive's own time, and which (i) do not relate
directly to the Company's business or to the Company's actual
research or development, or (ii) do not result from any work
Executive performed for the Company. Except as previously
disclosed to the Company in writing, Executive does not have
and will not assert any claims to or rights under any
Properties as having been made, conceived, authored or
acquired by Executive prior to his employment by the Company.
(b) CONFIDENTIALITY. Executive acknowledges that his services
will, throughout the Employment Period, bring Executive in
close contact with many confidential affairs of the Company
and its affiliates, including information about costs,
profits, financial data, markets, trade secrets, sales,
products, computer programs, key personnel, pricing policies,
customer lists, development projects, operational methods,
technical processes, plans for future development, business
affairs and methods and other information not readily
available to the public. Executive further acknowledges that
the businesses of the Company and its affiliates are
international in scope, that their products are marketed
throughout the world, that the Company and its affiliates
compete in nearly all of their business activities with other
organizations which are or could be located in
<PAGE>
nearly any part of the world and that the nature of
Executive's services, position and expertise are such that he
is capable of competing with the Company and its affiliates
from nearly any location in the world. In recognition of the
foregoing Executive covenants and agrees:
(i) that Executive will keep secret all material
confidential matters of the Company and its
affiliates which are not otherwise in the public
domain and will not disclose them to anyone outside
of the Company or its affiliates, either during or
after the Employment Period, except with the
Company's written consent and except for such
disclosure as is necessary in the performance of
Executive's duties during the Employment Period; and
(ii) that Executive will deliver promptly to the Company
on termination of his employment with the Company or
at any other time the Company may so request, at the
Company's expense, all confidential memoranda, notes,
records, reports and other documents (and all copies
thereof) relating to the Company's and its
affiliates' business, which Executive obtained while
employed by, or otherwise serving or acting on behalf
of, the Company or which the Executive may then
possess or have under his control.
(c) EXCLUSIVITY. Executive agrees that during his employment with
the Company, he will not alone, or in any capacity with
another entity or person, (i) engage in any commercial
activity that competes with the Company's business, as it is
conducted during the Employment Period, within any state of
the United States, (ii) in any way interfere or attempt to
interfere with the Company's relationships with any of its
current or potential customers, or (iii) attempt to employ any
of the Company's then employees on behalf of any other
entities competing with the Company. Executive further
acknowledges that all services of Executive shall be exclusive
to the Company, and that Executive's performances and services
hereunder are of a special, unique, unusual, extraordinary and
intellectual character which gives them peculiar value, the
loss of which cannot be reasonably or adequately compensated
in an action at law for damages and that a breach by Executive
of the terms hereof (including without limitation this Section
7) will cause the Company irreparable injury. Executive agrees
that the Company is entitled to injunctive and other equitable
relief to prevent a breach or threatened breach of this
Agreement, which shall be in addition to any other rights or
remedies to which the Company may be entitled. For purposes of
this Section 7(c), the term "Company" shall include the
Company, its successors, assigns and affiliates.
(d) INVESTMENTS. Notwithstanding anything contained herein to the
contrary, during the Employment Period Executive may acquire
and/or retain, solely as an investment, and take customary
actions to maintain and preserve Executive's ownership of:
<PAGE>
(i) securities of any corporation which are registered
under Sections 12(b) or 12(g) of the Securities
Exchange Act of 1934 and which are publicly traded,
so long as Executive is not part of any control group
of such corporation; and
(ii) any securities of a partnership, trust, corporation,
limited liability company or other entity so long as
(i) Executive remains a passive investor in that
entity and does not become part of any control group
thereof (except in a passive capacity) and (ii) such
entity is not, directly or indirectly, in competition
with the Company or its affiliates, regardless of
whether Executive is a passive investor or part of
any control group thereof.
8. REMEDIES. The parties hereto recognize and agree that, because the
material breach of this Agreement or any part hereof would result in
damages difficult to ascertain, upon any allegation of material breach
of this Agreement, either party hereto shall be entitled:
(a) PROCEEDINGS. To institute proceedings in a court located in
the State of Minnesota to enjoin the breach, termination, or
threatened termination of this Agreement. Such injunctive
remedy shall be in addition to and not in lieu of any right to
recover money damages for any such breach.
(b) COSTS AND EXPENSES. The successful party in any action brought
concerning the breach or termination of this Agreement shall
be entitled to recover all costs and expenses, including
attorney's fees incurred or associated with the enforcement of
any covenant of this Agreement.
(c) ADDITIONAL COSTS. Additionally, if there shall be any breach
of this Agreement by the Company, and Executive shall
institute any action (or counterclaim) in connection
therewith, Executive shall be entitled, if successful in such
action or if the Company sues and if Executive is successful
in that action, to recover as damages the discounted value (at
a rate of 6%) of all amounts unpaid under this Agreement, or
Executive may, at his election, recover as damages each
monthly payment of Base Salary and additional compensation at
such time as it becomes payable or would have become payable
under the terms of this Agreement, and the Company agrees not
only to pay such sums, but, in addition thereto, interest
thereon at the prime rate then in effect, until such payment
is made. In any such action, the fact that Executive did or
did not seek or engage in any other employment or in other
activities shall not affect, reduce or mitigate the amount of
recovery allowable to Executive. Executive's rights hereunder,
upon his death, accrue to his legal representatives or to his
designated beneficiary.
9. MISCELLANEOUS.
(a) SUCCESSORS AND ASSIGNS. This Agreement is binding on and
inures to the benefit of the Company's successors and assigns,
provided, however, that this Agreement may not be assigned by
any of the parties hereto without the prior written consent
<PAGE>
of each of the parties hereto. This Agreement shall be binding
upon and inure to the benefit of any successor of the Company,
and any such successor shall absolutely and unconditionally
assume all of the Company's obligations hereunder. Upon the
written request of Executive, the Company shall seek to have
any successor, by agreement in form and substance satisfactory
to Executive, assent to the fulfillment by the Company of its
obligations under this Agreement. Failure to attain such
assent at least thirty (30) business days prior to the time a
person or entity becomes a successor in interest to the
Company shall be considered Executive Cause for termination of
this Agreement in accordance with Section 5(d) hereof.
(b) OFFSETS. In no event shall any amount payable to Executive
pursuant to this Agreement be reduced for purposes of
offsetting, either directly or indirectly, any indebtedness or
liability of Executive to Company.
(c) COUNTERPARTS. This Agreement may be executed in one or more
counterparts, each of which shall be deemed to be an original
but all of which together shall constitute one and the same
instrument.
(d) CONSTRUCTION. Wherever possible, each provision of this
Agreement will be interpreted so that it is valid under the
applicable law. If any provision of this Agreement is to any
extent invalid under the applicable law, that provision will
still be effective to the extent it remains valid. The
remainder of this Agreement also will continue to be valid,
and the entire Agreement will continue to be valid in other
jurisdictions.
(e) WAIVERS. No failure or delay by either the Company or
Executive in exercising any right or remedy under this
Agreement will waive any provision of this Agreement, nor will
any single or partial exercise by either the Company or
Executive of any right or remedy under this Agreement preclude
either of them from otherwise or further exercising these
rights or remedies, or any other rights or remedies granted by
any law or any related document.
(f) CAPTIONS. The headings in this Agreement are for convenience
of reference only and do not affect the interpretation of this
Agreement.
(g) MODIFICATION/ENTIRE AGREEMENT. This Agreement may not be
altered, modified or amended except by an instrument in
writing signed by all of the parties hereto. No person,
whether or not an officer, agent, employee or representative
of any party, has made or has any authority to make for or on
behalf of that party any agreement, representation, warranty,
statement, promise, arrangement or understanding not expressly
set forth in this Agreement or in any other document executed
by the parties concurrently herewith ("Parol Agreements").
This Agreement and all other documents executed by the parties
concurrently herewith constitute the entire agreement between
the parties and supersede all express or implied, prior or
concurrent, Parol Agreements and prior written agreements with
respect to the subject matter hereof including, but not
limited to, that certain
<PAGE>
Employment Agreement, dated September 1, 1993, and Amendment
to Employment Agreement, dated December 1, 1993. The parties
acknowledge that in entering into this Agreement, they have
not relied and will not in any way rely upon any Parol
Agreements.
(h) GOVERNING LAW. The laws of the State of Minnesota shall govern
the validity, construction and performance of this Agreement.
Any legal proceeding related to this Agreement shall be
brought in an appropriate Minnesota court, and each of the
parties hereto hereby consents to the exclusive jurisdiction
of the courts of the State of Minnesota for this purpose.
(i) NOTICES. All notices and other communications required or
permitted under this Agreement shall be in writing and sent by
registered first class mail, postage prepaid, and shall be
deemed received five (5) days after mailing to the addresses
stated below:
If to the Company:
Navarre Corporation
7400 49th Avenue North
New Hope, Minnesota 55428
Attention: Chairman of the Board of Directors
With a copy to:
Scott J. Dongoske, Esq.
Winthrop & Weinstine, P.A.
3000 Dain Bosworth Plaza
60 South Sixth Street
Minneapolis, Minnesota 55402
If to Executive:
Eric H. Paulson
2605 Maple Ridge Lane
Excelsior, Minnesota 55331
(j) SURVIVAL. Notwithstanding the termination of this Agreement or
Executive's employment with the Company, the terms of this
Agreement concerning rights and remedies of the parties shall
survive such termination and shall govern in perpetuity all
rights, disputes, claims or causes of action arising out of or
in any way related to this Agreement.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the
day and year first above written.
NAVARRE CORPORATION
By: /s/ Charles E. Cheney
----------------------------------
Its Executive Vice President
------------------------------
/s/ Eric H. Paulson
--------------------------------------
ERIC H. PAULSON
(Signature to Employment Agreement)
EMPLOYMENT AGREEMENT
THIS AGREEMENT is made and entered into as of the 1st day of October, 1996, by
and between NAVARRE CORPORATION, a Minnesota corporation (the "Company"), and
CHARLES E. CHENEY, a resident of the State of Minnesota ("Executive").
W I T N E S S E T H:
WHEREAS, Executive has a unique knowledge of the Company's business, and has
special expertise in the management and future planning of its affairs, and has
been a key Executive of the Company, helping to develop the image of the
business; and
WHEREAS, the Company believes that Executive's continued involvement in the
management and affairs of the business are essential to its management and
planning in the future; and
WHEREAS, a previous employment agreement expired as of September 30, 1996 and it
is the desire of the parties to extend the terms thereof.
NOW, THEREFORE, in consideration of the foregoing premises, the mutual covenants
and obligations of this Agreement and other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the parties hereto
agree as follows:
1. EMPLOYMENT. Subject to all of the terms and conditions of this
Agreement, the Company hereby employs Executive, and Executive hereby
accepts employment with the Company, as its Executive Vice President,
Chief Financial Officer and Treasurer.
2. DUTIES.
(a) EXECUTIVE VICE PRESIDENT, CHIEF FINANCIAL OFFICER AND
TREASURER. The services of Executive are exclusive to the
Company. Executive will devote substantially all of his
business hours to, and make the best use of his energy,
knowledge and training in, performing his duties as Executive
Vice President, Chief Financial Officer and Treasurer of the
Company within the general guidelines established by the Board
of Directors of the Company as the same may, from time to
time, be modified by the Company's Board of Directors.
Executive will report to the Board of Directors of the Company
and have all the duties normally subscribed to the Chief
Financial Officer. Notwithstanding anything in this Agreement
to the contrary, the duties of Executive under this Agreement
do not (i) require Executive to relocate his principal office
or residence from the Minneapolis/St. Paul, Minnesota
metropolitan area without the prior written consent of
Executive, or (ii) prevent Executive from owning, directly or
indirectly, securities of, or otherwise participating in the
ownership of, any publicly-owned business, trade, industry or
venture. Executive will perform
<PAGE>
his duties in a competent and professional manner, consistent
with that expected of a chief financial officer of the
Company.
(b) DIRECTOR. During the term of this Agreement, Executive shall
also serve as a director of the Company.
(c) CONSULTANT. If Executive should make an election as described
in Section 5(d) hereof, the Company agrees to retain Executive
and Executive agrees to serve in a position of consultant and
advisor to the Company (with or without retention of his
position as Executive Vice President, Chief Financial Officer
and Treasurer or as a director, at the election of the
Company), for a period commencing upon such election and
ending on October 31, 2001. During the period of consulting
and advising, Executive shall render consulting and advisory
services in connection with business activities similar to
those carried on by the Company during the period of his
employment by the Company. Executive shall perform such
consulting and advisory services and attend meetings, as and
when reasonably requested by the Company in advance, provided
that Executive shall not be required to devote thereto in the
aggregate more than thirty (30) days per year. Executive shall
have discretion in choosing the times and places of
performance of his services to the Company compatible with his
other activities. Compensation to Executive under this Section
2 (c) shall continue to be due from the Company as if
Executive continued to be employed by the Company pursuant to
Section 2 (a) and (b) hereof.
3. TERM. Subject only to earlier termination in accordance with Section 5
of this Agreement, Executive's term of employment shall commence on the
date hereof and continue for a period of five (5) years (the "Initial
Term"). Upon the expiration of the Initial Term, this Agreement shall
be automatically renewed for successive additional one (1)-year terms
unless this Agreement is terminated in writing by either party hereto
at least ninety (90) days prior to the expiration of the Initial Term
or any subsequent renewal term. The Initial Term and any subsequent
renewal terms shall be referred to collectively herein as the
"Employment Period."
4. COMPENSATION. As compensation for all of Executive's services under
this Agreement, the Company agrees to pay Executive during the
Employment Period and on retirement, and Executive agrees to accept the
following:
(a) BASE SALARY. A base salary of $200,000 per annum (the "Base
Salary"), payable in accordance with the Company's standard
payroll practices. On each anniversary of this Agreement, the
Base Salary shall be adjusted by the Chief Executive Officer
and the Company's Board of Directors based upon the level of
performance by Executive, provided that in no event shall the
Base Salary for any fiscal year hereunder be less than the sum
provided above for the first full fiscal year. If conditions
require and Executive agrees, temporary cuts in pay can be
effected.
<PAGE>
(b) PERFORMANCE BONUS. As additional compensation for Executive,
Executive shall be eligible to receive a bonus determined by
the Board of Directors with a maximum bonus (the "Bonus")
equal to 60% of the Base Salary of Executive. If no Bonus is
otherwise declared by the Board of Directors, Executive will
be entitled to receive a bonus equal to 60% of Executive's
Base Salary. Executive's Bonus shall be paid semi-annually not
later than 45 days after March 31st and September 30th of each
year.
(c) BENEFITS.
(i) EXPENSES. The Company shall reimburse Executive for
any and all ordinary, necessary and reasonable
business expenses that Executive incurs in connection
with the performance of his duties under this
Agreement, including entertainment, telephone, travel
and miscellaneous expenses, provided that Executive
provides the Company with documentation for such
expenses in a form sufficient to sustain the
Company's deduction for such expenses under Section
162 of the Internal Revenue Code of 1986, as amended.
These expenses include all dues and assessments to
Executive's social, athletic, golf or country club.
(ii) MEDICAL AND DISABILITY INSURANCE. Subject to
Executive taking and passing the physical examination
required by the Company's insurance carrier, the
Company shall provide Executive with full medical and
disability insurance coverage provided to other
officers of the Company.
(iii) LIFE INSURANCE. Subject to the same physical
examination and cost provisions, the Company shall
provide Executive with a $250,000 term life insurance
policy insuring Executive's life during the term of
Executive's employment with the Company and shall pay
all premiums thereon. Such policy shall be owned by
the Executive and shall be payable to such
beneficiary or beneficiaries as Executive directs by
written instrument delivered to the Company or the
insurer under the life insurance policy.
(iv) VACATION. Executive shall be entitled to a paid
vacation period of four (4) weeks each year, which
may be taken at any time subject to the Company's
business needs.
(v) AUTOMOBILE EXPENSES. The Company agrees to lease an
automobile selected by Executive for use by the
Executive (the "Automobile"), the monthly lease cost
of which shall not exceed $750 (the "Lease Amount").
Alternatively, at Executive's request, the Company
will pay $750 to Executive during the Employment
Period for an automobile allowance. In addition, the
Company will make pay or reimburse the Executive for
all reasonable costs of licensing, sales taxes,
property taxes, maintenance, repair, oil, gasoline
and insurance for such Automobile. Executive agrees
that he shall operate the Automobile provided by the
Company with
<PAGE>
"reasonable care". In addition, Executive agrees that
his use of the Automobile provided hereunder is
subject to the Company's business use policy, as such
policy may from time to time be determined by the
Board of Directors of the Company, and that Executive
shall be responsible for any taxes with respect to
his personal use of the Automobile provided
hereunder. The Company agrees that it shall provide
Executive with a comparable replacement vehicle every
three (3) years after the date hereof. The Executive
shall have the right at any time to purchase the
Automobile (or any substitute vehicle) by tendering
to the Company a cash payment in an amount equal to
the greater of (a) the undepreciated book value of
such Automobile as contained in the books and records
of the Company for federal income tax purposes and
(b) One and 00/100 Dollars ($1.00).
(vi) BENEFIT CHANGES. No reference in this Agreement to
any policy or any employee benefit plan established
or maintained by the Company shall preclude the
Company from changing any such policies or amending
or terminating any such benefit plans if a
substantially similar benefit is provided to
Executive by the Company.
(vii) OTHER PLANS. Nothing contained herein is intended to
or shall be deemed to be granted to Executive in lieu
of any rights or privileges which Executive may be
entitled to as an employee of the Company under any
other policies or benefit plans that are currently in
effect or that may hereafter be adopted. Executive
shall be entitled to participate in any other
employee benefit plans of the Company generally
applicable to officers of the Company, its divisions
or subsidiaries, occupying similar positions as
Executive, including, but not limited to, any profit
sharing, pension, stock option, stock appreciation
rights, stock ownership, health, medical, dental,
vacation, insurance or other employee benefit plans.
5. TERMINATION. This Agreement may not be terminated prior to the end of
the Employment Period except as follows:
(a) BY THE COMPANY FOR COMPANY CAUSE. The Company may terminate
this Agreement for Company Cause upon the Executive's material
breach of this Agreement. Except as to subparagraph (iii)
below, the Company shall give the Executive thirty (30) days'
advance written notice of such termination, which notice shall
be via registered mail, return receipt requested, and which
shall describe in detail the acts or omissions which the
Company believes constitute such breach. Notwithstanding the
foregoing, Executive shall not be deemed to have been
terminated for Company Cause unless and until there shall have
been delivered to Executive a copy of a resolution duly
adopted by the affirmative vote of not less than seventy-five
(75%) of the entire membership of the Board of Directors
(certified by the Secretary of the Board of Directors) at a
meeting of the Board of Directors called and held for the
purpose (after reasonable notice to Executive and an
opportunity for Executive, together with Executive's counsel,
<PAGE>
to appear before the Board), finding that in the good faith
opinion of the Board of Directors, Executive was guilty of
conduct described in this Section 5(a), and specifying the
particulars thereof in detail. The Company shall not be
allowed to terminate this Agreement pursuant to this Section
5(a) if Executive is able to cure such breach within thirty
(30) days following delivery of such notice. However, in no
event shall a breach of the provisions of Sections 5(a)(iii)
or 7 be subject to cure. Acts or omissions which constitute a
material breach of this Agreement constituting "Company Cause"
shall be limited strictly to the following:
(i) Any material breach by the Executive of his
obligations under this Agreement;
(ii) Gross misconduct of the Executive which is manifestly
injurious to Company, or habitual failure or
inability of the Executive to perform his duties
under this Agreement; and
(iii) Any fraud, theft or embezzlement by the Executive of
the Company's assets, or any other unlawful or
criminal act which is punishable as a felony.
(b) DEATH. Subject to the provisions of Section 6, this Agreement
shall terminate upon Executive's death.
(c) DISABILITY. Subject to the provisions of Section 6, this
Agreement shall terminate upon Executive's Disability. As used
herein, the term "Disability" shall have such meaning as set
forth in the Company's disability policy in effect at the date
hereof and shall include both permanent and temporary
disability, short term and long term disability, and total and
partial disability. If there is no policy in effect at the
date of Executive's potential disability, Disability shall
mean Executive becoming substantially incapable of performing
his duties hereunder for a period of six (6) months or more.
(d) BY EXECUTIVE FOR EXECUTIVE CAUSE. Executive shall have the
right, at his election, to terminate this Agreement or to
change his position to that of consultant and advisor as
described in Section 2(c) herein, upon thirty (30) days'
written notice to the Company upon the occurrence, without
Executive's express written consent, of any one or more of the
following events, provided that Executive shall not have the
right to terminate this Agreement if the Company is able to
cure such event within thirty (30) days following delivery of
such notice:
(i) The Company is in material breach of this Agreement;
(ii) Executive is required to report to or accept
assignments from persons other than the Chief
Executive Officer and/or the Board of Directors of
the Company or he is removed without his written
consent as the
<PAGE>
Executive Vice President, Chief Financial Officer and
Treasurer of the Company and such removal is not
pursuant to Section 5(a) hereof;
(iii) The Chief Executive Officer appoints Executive as
Executive Vice President, Chief Financial Officer and
Treasurer, or if Executive should have a policy
dispute with the Chief Executive Officer;
(iv) The Shareholders should fail to elect Executive as a
director;
(v) An adverse change in Executive's status or position
as an executive officer of the Company, including,
without limitation, any adverse change in Executive's
status or position as a result of a material
diminution in Executive's duties, responsibilities or
authority as of the date of this Agreement (or any
status or position to which Executive may be promoted
after the date hereof) or the assignment to Executive
of any duties or responsibilities which, in
Executive's reasonable judgment, are inconsistent
with Executive's status or position, or any removal
of Executive from or any failure to reappoint or
reelect Executive to such positions (except in
connection with the termination of Executive's
employment in accordance with Section 5(a) hereof);
(vi) A reduction by the Company of Executive's Base Salary
as the same may be increased time to time, or a
change in the eligibility requirements or performance
criteria for any benefit other than salary, which
adversely effects Executive;
(vii) Without replacement by a plan providing benefits to
Executive equal to or greater than those
discontinued, the failure by the Company to continue
in effect, within its maximum stated term, any
employee benefit plan in which Executive is
participating immediately prior to the date of this
Agreement or the taking of any action by the Company
that would adversely effect Executive's participation
or materially reduce Executive's benefits under any
such plan;
(viii) The taking of any action by the Company that would
materially adversely effect the physical conditions
existing immediately prior to this Agreement in or
under which Executive performs his employment duties;
(ix) The Company's requiring Executive to be based
anywhere other than the Minneapolis/St. Paul,
Minnesota metropolitan statistical area, except for
required travel on the Company's business to an
extent substantially consistent with the business
travel obligations which Executive has typically
undertaken on behalf of the Company prior to the date
of this Agreement; or
(x) Any purported termination by the Company of this
Agreement or the employment of Executive by Company
which is not expressly authorized
<PAGE>
by this Agreement or any breach of this Agreement by
the Company which is not remedied by the Company
within thirty (30) days after the Company's receipt
of notice thereof from Executive.
(e) RETIREMENT. At such time as Executive reaches the age of 60
and remains as an employee of the Company, Executive may
retire and, subject to the provisions of Section 6 below, this
Agreement shall terminate.
6. PAYMENTS UPON TERMINATION.
(a) DEATH. Upon Executive's death during the Employment Period,
the heirs or legal representatives of Executive shall be
entitled to receive as a lump sum payment payable within sixty
(60) calendar days of his death, 2.99 times the average of the
aggregate base and incentive compensation paid to Executive
over the preceding five years, provided, however, that in no
event shall the amount due and payable hereunder constitute a
"Parachute Payment" within the meaning of Section 280G(b)(2)
of the Internal Revenue Code of 1986, as amended.
(b) DISABILITY. In the event that this Agreement is terminated due
to Executive's Disability, Executive shall be paid (i) his
Base Salary for a period of one year following the date of
such Disability or until Executive begins receiving benefits
under the Company's disability benefits plan, whichever occurs
first, (ii) all bonuses to which Executive would have been
entitled for the fiscal year in which such Disability
occurred, prorated to the date of Disability, (iii) his
accrued but unpaid vacation pay for the year in which such
Disability occurred, pro rated to the date of such Disability,
and (iv) any unpaid expense reimbursement.
(c) TERMINATION BY COMPANY FOR COMPANY CAUSE OR BY EXECUTIVE
WITHOUT EXECUTIVE CAUSE. If Executive is terminated pursuant
to Section 5(a) hereof, or Executive terminates this Agreement
other than in accordance with Section 5(d) hereof, the Company
shall pay to Executive (i) his Base Salary through the date
written notice is properly mailed to Executive pursuant to
Section 5(a) hereof, and (ii) all Bonus payments owing to
Executive for the fiscal year prior to the year such written
notice is received by Executive (to the extent that any such
payments were unpaid on the date of termination), and for the
current year.
(d) TERMINATION WITHOUT COMPANY CAUSE OR BY EXECUTIVE FOR
EXECUTIVE CAUSE. In addition to any other rights granted
Executive hereunder, if the Company should terminate this
Agreement other than in accordance with Section 5(a) hereof,
or if Executive should terminate this Agreement pursuant to
Section 5(d) hereof, the Company shall pay to Executive (i)
his Base Salary through the end of the term of this Agreement
or two years, whichever is more, in exchange for a properly
executed non-compete agreement between Executive and the
Company, (ii) any payments owing to Executive pursuant to
Section 4(b) hereof for the fiscal year prior to the year of
termination (to the extent any such payments were unpaid on
the date of termination, as well as for the current year),
(iii) a sum equivalent to any accrued but unpaid vacation for
the year in which he is
<PAGE>
terminated, and (iv) any unpaid expense reimbursement.
Furthermore, for the remainder of the term of this Agreement,
or one year whichever is more, the Company shall maintain in
full force and effect for the continued benefit of Executive
and his dependents all (i) pension plans, (ii) medical and
disability policies, (iii) stock option plans, and (iv) life
insurance plans in which Executive participated immediately
prior to his termination (or if such participation is barred,
shall arrange for individual policies of insurance providing
benefits substantially similar, on an after-tax basis, to
those which Executive otherwise would have been entitled
hereunder) for the remainder of the term of this Agreement.
(e) CHANGE OF CONTROL AND OWNERSHIP. In the event that (i)
Executive's employment with the Company is terminated by the
Company other than in accordance with Sections 5(a), (b), or
(c) hereof during the Employment Period and (ii) such
termination occurs after a Change in Control (as defined
hereinbelow), Company shall pay Executive a cash bonus
("Severance Payment") in an amount equal to Executive's
Average Annual Compensation (as defined hereinbelow),
multiplied by a factor of 2.99, provided, however, that in no
event shall the amount due and payable hereunder constitute a
"Parachute Payment" within the meaning of Section 280G(b)(2)
of the Internal Revenue Code of 1986, as amended. In the event
that any portion of the Severance Payment would be deemed a
Parachute Payment, the amount of the Severance Payment shall
be reduced only to the extent necessary to eliminate any such
treatment or characterization.
For purposes of this Agreement, "Change in Control" shall mean
(i) the sale of all or substantially all of the assets of the
Company, (ii) the acquisition by any means of more than fifty
percent (50%) of the issued and outstanding voting stock of
the Company by any entity, person or group of persons acting
in concert, (iii) the merger of the Company with, or the
consolidation of the Company into, another corporation or
entity, or (iv) the election to the Board of Directors of the
Company without the recommendation or approval of the
incumbent Board of Directors of the Company the lesser of (i)
three directors or (ii) directors constituting a majority of
the number of directors of the Company then in office.
For purposes of this Agreement, "Average Annual Compensation"
shall mean the average of all taxable compensation and fringe
benefits paid to or on behalf of Executive by Company, based
on the five (5) most recent calendar years. Amounts payable
pursuant to this Section 6(e) shall be in addition to, and not
in lieu of, all other compensation, rights and benefits
accruing or afforded to Executive pursuant to this Agreement.
(f) RETIREMENT. Upon Executive's retirement pursuant to Section
5(e) above, Executive and his heirs or legal representatives
shall be entitled to receive the following: (i) average annual
compensation for a period of two (2) years in exchange for a
properly executed non-compete agreement between Executive and
the Company, (ii) any payments owing to Executive pursuant to
Section 4(b)
<PAGE>
hereof through the date of retirement (to the extent any such
payments were unpaid on the date of retirement, as well as for
the current year), (iii) a sum equivalent to any accrued but
unpaid vacation for the year in which he retires, and (iv) any
unpaid expense reimbursement. Furthermore, for a period of
five (5) years after retirement, the Company shall maintain in
full force and effect for the continued benefit of Executive
and his dependents all (i) pension plans, (ii) medical and
disability policies, (iii) stock option plans and (iv) life
insurance plans in which Executive participated immediately
prior to his termination (or if such participation is barred,
shall arrange for individual policies of insurance providing
benefits substantially similar, on an after-tax basis, to
those which Executive otherwise would have been entitled
hereunder) for the remainder of the term of this Agreement.
7. OWNERSHIP OF PROPERTIES; CONFIDENTIALITY; EXCLUSIVITY; INVESTMENTS.
(a) OWNERSHIP OF PROPERTIES. The Company, as employer, shall own,
and Executive hereby transfers and assigns to the Company, all
rights in and to any material and/or ideas written, suggested
or submitted by Executive during the Employment Period and all
other results and proceeds of his services under this
Agreement (the "Properties"). Without limiting the generality
of the foregoing, these rights shall include all motion
picture, television, radio, dramatic, musical, publication and
other rights in and to the Properties, including the sole and
exclusive right to photograph and record the same with or
without dialogue, music and other sounds synchronously
recorded, and to perform, exhibit, distribute, reproduce,
transmit, broadcast or otherwise communicate the same and/or
motion picture, dramatic or other versions or adaptations
thereof, theatrically, non-theatrically and/or by means of
television, radio, the legitimate stage and/or any other means
now known or hereafter devised and to manufacture, publish, or
vend printed and/or recorded versions or adaptations thereof,
either publicly or privately and for profit or otherwise. The
Company and its licensees and assigns shall have the right to
adapt, change, revise, delete from, add to and/or rearrange
the Properties or any part thereof written or submitted by
Executive and to combine the same with other works to any
extent, and to change or substitute the title thereof and in
this connection Executive hereby waives any so-called "moral
rights" of authors. Executive agrees to execute and deliver to
the Company such releases, assignments or other instruments as
the Company may require from time to time to evidence its
ownership of the results and proceeds of Executive's services
hereunder' provided, however, that nothing in this Section
7(a) shall be deemed in any manner to restrict or qualify
Executive's ownership or right to exploit Executive's personal
memoirs.
The requirements of this Section 7(a) do not apply to
Properties for which no equipment, facility or confidential
information of the Company was used and which were developed
entirely on Executive's own time, and which (i) do not relate
directly to the Company's business or to the Company's actual
research or development, or (ii) do not result from any work
Executive performed for the Company. Except as previously
disclosed to the Company in writing, Executive
<PAGE>
does not have and will not assert any claims to or rights
under any Properties as having been made, conceived, authored
or acquired by Executive prior to his employment by the
Company.
(b) CONFIDENTIALITY. Executive acknowledges that his services
will, throughout the Employment Period, bring Executive in
close contact with many confidential affairs of the Company
and its affiliates, including information about costs,
profits, financial data, markets, trade secrets, sales,
products, computer programs, key personnel, pricing policies,
customer lists, development projects, operational methods,
technical processes, plans for future development, business
affairs and methods and other information not readily
available to the public. Executive further acknowledges that
the businesses of the Company and its affiliates are
international in scope, that their products are marketed
throughout the world, that the Company and its affiliates
compete in nearly all of their business activities with other
organizations which are or could be located in nearly any part
of the world and that the nature of Executive's services,
position and expertise are such that he is capable of
competing with the Company and its affiliates from nearly any
location in the world. In recognition of the foregoing
Executive covenants and agrees:
(i) that Executive will keep secret all material
confidential matters of the Company and its
affiliates which are not otherwise in the public
domain and will not disclose them to anyone outside
of the Company or its affiliates, either during or
after the Employment Period, except with the
Company's written consent and except for such
disclosure as is necessary in the performance of
Executive's duties during the Employment Period; and
(ii) that Executive will deliver promptly to the Company
on termination of his employment with the Company or
at any other time the Company may so request, at the
Company's expense, all confidential memoranda, notes,
records, reports and other documents (and all copies
thereof) relating to the Company's and its
affiliates' business, which Executive obtained while
employed by, or otherwise serving or acting on behalf
of, the Company or which the Executive may then
possess or have under his control.
(c) EXCLUSIVITY. Executive agrees that during his employment with
the Company, he will not alone, or in any capacity with
another entity or person, (i) engage in any commercial
activity that competes with the Company's business, as it is
conducted during the Employment Period, within any state of
the United States, (ii) in any way interfere or attempt to
interfere with the Company's relationships with any of its
current or potential customers, or (iii) attempt to employ any
of the Company's then employees on behalf of any other
entities competing with the Company. Executive further
acknowledges that all services of Executive shall be exclusive
to the Company, and that Executive's performances and services
hereunder are of a special, unique, unusual, extraordinary and
intellectual character which gives them peculiar value, the
loss of which cannot be reasonably
<PAGE>
or adequately compensated in an action at law for damages and
that a breach by Executive of the terms hereof (including
without limitation this Section 7) will cause the Company
irreparable injury. Executive agrees that the Company is
entitled to injunctive and other equitable relief to prevent a
breach or threatened breach of this Agreement, which shall be
in addition to any other rights or remedies to which the
Company may be entitled. For purposes of this Section 7(c),
the term "Company" shall include the Company, its successors,
assigns and affiliates.
(d) INVESTMENTS. Notwithstanding anything contained herein to the
contrary, during the Employment Period Executive may acquire
and/or retain, solely as an investment, and take customary
actions to maintain and preserve Executive's ownership of:
(i) securities of any corporation which are registered
under Sections 12(b) or 12(g) of the Securities
Exchange Act of 1934 and which are publicly traded,
so long as Executive is not part of any control group
of such corporation; and
(ii) any securities of a partnership, trust, corporation,
limited liability company or other entity so long as
(i) Executive remains a passive investor in that
entity and does not become part of any control group
thereof (except in a passive capacity) and (ii) such
entity is not, directly or indirectly, in competition
with the Company or its affiliates, regardless of
whether Executive is a passive investor or part of
any control group thereof.
8. REMEDIES. The parties hereto recognize and agree that, because the
material breach of this Agreement or any part hereof would result in
damages difficult to ascertain, upon any allegation of material breach
of this Agreement, either party hereto shall be entitled:
(a) PROCEEDINGS. To institute proceedings in a court located in
the State of Minnesota to enjoin the breach, termination, or
threatened termination of this Agreement. Such injunctive
remedy shall be in addition to and not in lieu of any right to
recover money damages for any such breach.
(b) COSTS AND EXPENSES. The successful party in any action brought
concerning the breach or termination of this Agreement shall
be entitled to recover all costs and expenses, including
attorney's fees incurred or associated with the enforcement of
any covenant of this Agreement.
(c) ADDITIONAL COSTS. Additionally, if there shall be any breach
of this Agreement by the Company, and Executive shall
institute any action (or counterclaim) in connection
therewith, Executive shall be entitled, if successful in such
action or if the Company sues and if Executive is successful
in that action, to recover as damages the discounted value (at
a rate of 6%) of all amounts unpaid under this Agreement, or
Executive may, at his election, recover as damages each
monthly
<PAGE>
payment of Base Salary and additional compensation at such
time as it becomes payable or would have become payable under
the terms of this Agreement, and the Company agrees not only
to pay such sums, but, in addition thereto, interest thereon
at the prime rate then in effect, until such payment is made.
In any such action, the fact that Executive did or did not
seek or engage in any other employment or in other activities
shall not affect, reduce or mitigate the amount of recovery
allowable to Executive. Executive's rights hereunder, upon his
death, accrue to his legal representatives or to his
designated beneficiary.
9. MISCELLANEOUS.
(a) SUCCESSORS AND ASSIGNS. This Agreement is binding on and
inures to the benefit of the Company's successors and assigns,
provided, however, that this Agreement may not be assigned by
any of the parties hereto without the prior written consent of
each of the parties hereto. This Agreement shall be binding
upon and inure to the benefit of any successor of the Company,
and any such successor shall absolutely and unconditionally
assume all of the Company's obligations hereunder. Upon the
written request of Executive, the Company shall seek to have
any successor, by agreement in form and substance satisfactory
to Executive, assent to the fulfillment by the Company of its
obligations under this Agreement. Failure to attain such
assent at least thirty (30) business days prior to the time a
person or entity becomes a successor in interest to the
Company shall be considered Executive Cause for termination of
this Agreement in accordance with Section 5(d) hereof.
(b) OFFSETS. In no event shall any amount payable to Executive
pursuant to this Agreement be reduced for purposes of
offsetting, either directly or indirectly, any indebtedness or
liability of Executive to Company.
(c) COUNTERPARTS. This Agreement may be executed in one or more
counterparts, each of which shall be deemed to be an original
but all of which together shall constitute one and the same
instrument.
(d) CONSTRUCTION. Wherever possible, each provision of this
Agreement will be interpreted so that it is valid under the
applicable law. If any provision of this Agreement is to any
extent invalid under the applicable law, that provision will
still be effective to the extent it remains valid. The
remainder of this Agreement also will continue to be valid,
and the entire Agreement will continue to be valid in other
jurisdictions.
(e) WAIVERS. No failure or delay by either the Company or
Executive in exercising any right or remedy under this
Agreement will waive any provision of this Agreement, nor will
any single or partial exercise by either the Company or
Executive of any right or remedy under this Agreement preclude
either of them from otherwise or further exercising these
rights or remedies, or any other rights or remedies granted by
any law or any related document.
<PAGE>
(f) CAPTIONS. The headings in this Agreement are for convenience
of reference only and do not affect the interpretation of this
Agreement.
(g) MODIFICATION/ENTIRE AGREEMENT. This Agreement may not be
altered, modified or amended except by an instrument in
writing signed by all of the parties hereto. No person,
whether or not an officer, agent, employee or representative
of any party, has made or has any authority to make for or on
behalf of that party any agreement, representation, warranty,
statement, promise, arrangement or understanding not expressly
set forth in this Agreement or in any other document executed
by the parties concurrently herewith ("Parol Agreements").
This Agreement and all other documents executed by the parties
concurrently herewith constitute the entire agreement between
the parties and supersede all express or implied, prior or
concurrent, Parol Agreements and prior written agreements with
respect to the subject matter hereof including, but not
limited to, that certain Employment Agreement, dated September
1, 1993, and Amendment to Employment Agreement, dated December
1, 1993. The parties acknowledge that in entering into this
Agreement, they have not relied and will not in any way rely
upon any Parol Agreements.
(h) GOVERNING LAW. The laws of the State of Minnesota shall govern
the validity, construction and performance of this Agreement.
Any legal proceeding related to this Agreement shall be
brought in an appropriate Minnesota court, and each of the
parties hereto hereby consents to the exclusive jurisdiction
of the courts of the State of Minnesota for this purpose.
(i) NOTICES. All notices and other communications required or
permitted under this Agreement shall be in writing and sent by
registered first class mail, postage prepaid, and shall be
deemed received five (5) days after mailing to the addresses
stated below:
If to the Company:
Navarre Corporation
7400 49th Avenue North
New Hope, Minnesota 55428
Attention: Chairman of the Board of Directors
With a copy to:
Scott J. Dongoske, Esq.
Winthrop & Weinstine, P.A.
3000 Dain Bosworth Plaza
60 South Sixth Street
Minneapolis, Minnesota 55402
<PAGE>
If to Executive:
Charles E. Cheney
4316 Lake Point Court
Shoreview, Minnesota 55126
(j) SURVIVAL. Notwithstanding the termination of this Agreement or
Executive's employment with the Company, the terms of this
Agreement concerning rights and remedies of the parties shall
survive such termination and shall govern in perpetuity all
rights, disputes, claims or causes of action arising out of or
in any way related to this Agreement.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the
day and year first above written.
NAVARRE CORPORATION
By: /s/ Eric H. Paulson
-----------------------------------
Its: President
------------------------------
/s/
---------------------------------------
CHARLES E. CHENEY
(Signature to Employment Agreement)
EMPLOYMENT AGREEMENT
THIS AGREEMENT is made and entered into as of this 21st day of November, 1996,
by and between NAVARRE CORPORATION, a Minnesota corporation (the "Company"), and
GUY M. MARSALA, a resident of the State of Minnesota ("Executive").
W I T N E S S E T H:
WHEREAS, it is the desire of the parties to enter into this employment agreement
on the terms and conditions contained herein.
NOW, THEREFORE, in consideration of the foregoing premises, the mutual covenants
and obligations of this Agreement and other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the parties hereto
agree as follows:
1. EMPLOYMENT. Subject to all of the terms and conditions of this
Agreement, the Company hereby employs Executive, and Executive hereby
accepts employment with the Company, as its Chief Operating Officer.
2. DUTIES AS CHIEF OPERATING OFFICER. The services of Executive are
exclusive to the Company. Executive will devote substantially all of
his business hours to, and make the best use of his energy, knowledge
and training in, performing his duties as Chief Operating Officer of
the Company within the general guidelines established by the Chief
Executive Officer of the Company as the same may, from time to time, be
modified by the Company's Board of Directors. Executive will always
report to the Chief Executive Officer of the Company and have all the
duties normally subscribed to the Chief Operating Officer.
Notwithstanding anything in this Agreement to the contrary, the duties
of Executive under this Agreement do not (i) require Executive to
relocate his principal office or residence from the Minneapolis/St.
Paul, Minnesota metropolitan area without the prior written consent of
Executive, or (ii) prevent Executive from owning, directly or
indirectly, securities of, or otherwise participating in the ownership
of, any publicly-owned business, trade, industry or venture. Executive
will perform his duties in a competent and professional manner,
consistent with that expected of a chief operations officer of the
Company.
3. TERM. Subject only to earlier termination in accordance with Section 5
of this Agreement, Executive's term of employment shall commence on the
date hereof and continue for a period of one (1) year (the "Initial
Term"). Upon the expiration of the Initial Term, this Agreement shall
be automatically renewed for successive additional one (1)-year terms
unless this Agreement is terminated in writing by either party hereto
at least sixty (60) days prior to the expiration of the Initial Term or
any subsequent renewal term. The Initial Term and any subsequent
renewal terms shall be referred to collectively herein as the
"Employment Period."
<PAGE>
4. COMPENSATION. As compensation for all of Executive's services under
this Agreement, the Company agrees to pay Executive during the
Employment Period and on retirement, and Executive agrees to accept the
following:
(a) BASE SALARY. A base salary of $195,000 per annum (the "Base
Salary"), payable in accordance with the Company's standard
payroll practices. On each anniversary of this Agreement, the
Base Salary shall be adjusted by the Chief Executive Officer
based upon the level of performance by Executive.
(b) PERFORMANCE BONUS. As additional compensation for Executive,
Executive shall be eligible to receive a bonus determined by
the Chief Executive Officer based on a mutually agreed upon
MBO program, with a maximum bonus (the "Bonus") equal to 60%
of the Base Salary of Executive. Executive's Bonus shall be
paid semi-annually not later than 45 days after March 31 and
September 30 of each year.
(c) STOCK OPTIONS. As outlined in Addendum 1.
(d) BENEFITS.
(i) EXPENSES. The Company shall reimburse Executive for
any and all ordinary, necessary and reasonable
business expenses that Executive incurs in connection
with the performance of his duties under this
Agreement, including entertainment, telephone, travel
and miscellaneous expenses, provided that Executive
provides the Company with documentation for such
expenses in a form sufficient to sustain the
Company's deduction for such expenses under Section
162 of the Internal Revenue Code of 1986, as amended.
(ii) MEDICAL AND DISABILITY INSURANCE. The Company shall
provide Executive with the same medical, dental and
disability insurance coverage provided to other
officers of the Company.
(iii) LIFE INSURANCE. Subject to passing the physical
examination required by the Company's insurance
carrier, the Company shall provide Executive with a
$250,000 term life insurance policy insuring
Executive's life during the term of Executive's
employment with the Company and the Company shall pay
all premiums thereon. Such policy shall be owned by
the Executive and shall be payable to such
beneficiary or beneficiaries as Executive directs by
written instrument delivered to the Company or the
insurer under the life insurance policy.
(iv) VACATION; SICK LEAVE. Executive shall be entitled to
a paid vacation period of four (4) weeks each year,
which may be taken at any time subject to the
Company's business needs, plus nine paid holidays per
year. Executive shall have sick leave of six days per
year accruing at the rate of one-half day per month.
<PAGE>
(v) AUTOMOBILE EXPENSES. The Company agrees to provide
Executive an automobile allowance of $750 per month
to be applied towards Executive's purchase or lease
of a car. In addition, the Company will pay or
reimburse the Executive for all reasonable costs of
licensing, sales taxes, property taxes, maintenance,
repair, oil, gasoline and insurance for such
automobile. Executive agrees that he shall operate
any automobile provided by the Company with
"reasonable care". In addition, Executive agrees that
his use of any automobile provided hereunder is
subject to the Company's business use policy, as such
policy may from time to time be determined by the
Board of Directors of the Company, and that Executive
shall be responsible for gas, oil and any taxes with
respect to his personal use of any automobile
provided hereunder.
(vi) BENEFIT CHANGES. No reference in this Agreement to
any policy or any employee benefit plan established
or maintained by the Company shall preclude the
Company from changing any such policies or amending
or terminating any such benefit plans if a
substantially similar benefit is provided to
Executive by the Company.
(vii) OTHER PLANS. Nothing contained herein is intended to
or shall be deemed to be granted to Executive in lieu
of any rights or privileges which Executive may be
entitled to as an employee of the Company under any
other policies or benefit plans that are currently in
effect or that may hereafter be adopted. Executive
shall be entitled to participate in any other
employee benefit plans of the Company generally
applicable to officers of the Company, its divisions
or subsidiaries, occupying similar positions as
Executive, including, but not limited to, any profit
sharing, 401(k), pension, stock option, stock
appreciation rights, stock ownership, health,
medical, dental, vacation, insurance or other
employee benefit plans.
5. TERMINATION. This Agreement may not be terminated prior to the end of
the Employment Period except as follows:
(a) BY THE COMPANY FOR COMPANY CAUSE. The Company may terminate
this Agreement for Company Cause upon Executive's material
breach of this Agreement. Except as to subparagraph (iii)
below, the Company shall give Executive thirty (30) days'
advance written notice of such termination, which notice shall
be via registered mail, return receipt requested, and which
shall describe in detail the acts or omissions which the
Company believes constitute such breach. The Company shall not
be allowed to terminate this Agreement pursuant to this
Section 5(a) if Executive is able to cure such breach within
thirty (30) days following delivery of such notice. However,
in no event shall a breach of the provisions of Sections
5(a)(iii) or 7 be subject to cure. Acts or omissions which
constitute a material breach of this Agreement constituting
"Company Cause" shall be limited strictly to the following:
<PAGE>
(i) Any material breach by Executive of his obligations
under this Agreement;
(ii) Gross misconduct of Executive which is manifestly
injurious to Company; and
(iii) Any fraud, theft or embezzlement by Executive of the
Company's assets, or any other unlawful or criminal
act which is punishable as a felony.
(b) DEATH. Subject to the provisions of Section 6, this Agreement
shall terminate upon Executive's death.
(c) DISABILITY. This Agreement shall terminate upon Executive's
total and/or permanent Disability which renders him incapable
of performing his duties hereunder for a period of six (6)
months or more.
(d) BY EXECUTIVE FOR EXECUTIVE CAUSE. Executive shall have the
right to terminate this Agreement upon thirty (30) days'
written notice to the Company upon the occurrence, without
Executive's express written consent, of any one or more of the
following events, provided that Executive shall not have the
right to terminate this Agreement if the Company is able to
cure such event within thirty (30) days following delivery of
such notice:
(i) The Company is in material breach of this Agreement;
(ii) Executive is removed without his written consent as
the Chief Operating Officer of the Company and such
removal is not pursuant to Section 5(a) hereof;
(iii) The Company's requiring Executive to be based
anywhere other than the Minneapolis/St. Paul,
Minnesota metropolitan statistical area, except for
required travel on the Company's business to an
extent substantially consistent with the business
travel obligations which Executive has typically
undertaken on behalf of the Company prior to the date
of this Agreement; or
(iv) Any purported termination by the Company of this
Agreement or the employment of Executive by Company
which is not expressly authorized by this Agreement
or any breach of this Agreement by the Company which
is not remedied by the Company within thirty (30)
days after the Company's receipt of notice thereof
from Executive.
6. PAYMENTS UPON TERMINATION.
(a) DEATH. In the event that this Agreement is terminated due to
Executive's death, Executive's estate shall be paid (i) his
Base Salary and prorated Bonus through the end of the month in
which his death occurred, (ii) his accrued but unpaid
<PAGE>
vacation pay for the year in which his death occurred, pro
rated to the date of his death, and (iii) any unpaid expense
reimbursement.
(b) DISABILITY. In the event that this Agreement is terminated due
to Executive's Disability, Executive shall be paid (i) his
Base Salary and prorated Bonus through the end of the 6th
month which defines the disability period (ii) his accrued but
unpaid vacation pay for the year in which such Disability
occurred, pro rated to the date of such Disability, and (iii)
any unpaid expense reimbursement.
(c) TERMINATION FOR CAUSE. If Executive is terminated pursuant to
Section 5(a) hereof or he terminates his own employment to
accept another position, the Company shall pay to Executive
(i) his Base Salary through the termination date after
receiving the written notice as required herein and (ii) any
unpaid expense reimbursement.
(d) TERMINATION WITHOUT COMPANY CAUSE. In addition to any other
rights granted Executive hereunder, if the Company should
terminate this Agreement other than in accordance with Section
5(a), 5(b) or 5(c) hereof, the Company shall pay to Executive
an additional amount equal to his Base Salary and prorated
Bonus for twelve (12) months, according to the current
standard payroll practice.
(e) CHANGE OF CONTROL AND OWNERSHIP. In the event that (i)
Executive's employment with the Company is terminated by the
Company other than in accordance with Sections 5(a), (b), or
(c) hereof during the Employment Period and (ii) such
termination occurs after a Change in Control (as defined
hereinbelow), Company shall pay Executive a cash bonus
("Severance Payment") in an amount equal to Executive's
Average Annual Compensation (as defined hereinbelow).
For purposes of this Agreement, "Change in Control" shall mean
(i) the sale of all or substantially all of the assets of the
Company, (ii) the acquisition by any means of more than fifty
percent (50%) of the issued and outstanding voting stock of
the Company by any entity, person or group of persons acting
in concert, or (iii) the merger of the Company with, or the
consolidation of the Company into, another corporation or
entity.
For purposes of this Agreement, "Average Annual Compensation"
shall mean the average of all taxable compensation and fringe
benefits paid to or on behalf of Executive by Company, based
on the five (5) most recent calendar years (or the entire
length of Executive's employment if less than five (5) years).
Amounts payable pursuant to this Section 6(e) shall be in
addition to, and not in lieu of, all other compensation,
rights and benefits accruing or afforded to Executive pursuant
to this Agreement.
<PAGE>
7. OWNERSHIP OF PROPERTIES; CONFIDENTIALITY; EXCLUSIVITY; INVESTMENTS.
(a) OWNERSHIP OF PROPERTIES. The Company, as employer, shall own,
and Executive hereby transfers and assigns to the Company, all
rights in and to any material and/or ideas written, suggested
or submitted by Executive during the Employment Period and all
other results and proceeds of his services under this
Agreement (the "Properties"). Without limiting the generality
of the foregoing, these rights shall include all motion
picture, television, radio, dramatic, musical, publication and
other rights in and to the Properties, including the sole and
exclusive right to photograph and record the same with or
without dialogue, music and other sounds synchronously
recorded, and to perform, exhibit, distribute, reproduce,
transmit, broadcast or otherwise communicate the same and/or
motion picture, dramatic or other versions or adaptations
thereof, theatrically, non-theatrically and/or by means of
television, radio, the legitimate stage and/or any other means
now known or hereafter devised and to manufacture, publish, or
vend printed and/or recorded versions or adaptations thereof,
either publicly or privately and for profit or otherwise. The
Company and its licensees and assigns shall have the right to
adapt, change, revise, delete from, add to and/or rearrange
the Properties or any part thereof written or submitted by
Executive and to combine the same with other works to any
extent, and to change or substitute the title thereof and in
this connection Executive hereby waives any so-called "moral
rights" of authors. Executive agrees to execute and deliver to
the Company such releases, assignments or other instruments as
the Company may require from time to time to evidence its
ownership of the results and proceeds of Executive's services
hereunder' provided, however, that nothing in this Section
7(a) shall be deemed in any manner to restrict or qualify
Executive's ownership or right to exploit Executive's personal
memoirs.
The requirements of this Section 7(a) do not apply to
Properties for which no equipment, facility or confidential
information of the Company was used and which were developed
entirely on Executive's own time, and which (i) do not relate
directly to the Company's business or to the Company's actual
research or development, or (ii) do not result from any work
Executive performed for the Company. Except as previously
disclosed to the Company in writing, Executive does not have
and will not assert any claims to or rights under any
Properties as having been made, conceived, authored or
acquired by Executive prior to his employment by the Company.
(b) CONFIDENTIALITY. Executive acknowledges that his services
will, throughout the Employment Period, bring Executive in
close contact with many confidential affairs of the Company
and its affiliates, including information about costs,
profits, financial data, markets, trade secrets, sales,
products, computer programs, key personnel, pricing policies,
customer lists, development projects, operational methods,
technical processes, plans for future development, business
affairs and methods and other information not readily
available to the public. Executive further acknowledges that
the businesses of the Company and its affiliates are
international in scope, that their products are marketed
throughout
<PAGE>
the world, that the Company and its affiliates compete in
nearly all of their business activities with other
organizations which are or could be located in nearly any part
of the world and that the nature of Executive's services,
position and expertise are such that he is capable of
competing with the Company and its affiliates from nearly any
location in the world. In recognition of the foregoing
Executive covenants and agrees:
(i) that Executive will keep secret all material
confidential matters of the Company and its
affiliates which are not otherwise in the public
domain and will not disclose them to anyone outside
of the Company or its affiliates, either during or
after the Employment Period, except with the
Company's written consent and except for such
disclosure as is necessary in the performance of
Executive's duties during the Employment Period; and
(ii) that Executive will deliver promptly to the Company
on termination of his employment with the Company or
at any other time the Company may so request, at the
Company's expense, all confidential memoranda, notes,
records, reports and other documents (and all copies
thereof) relating to the Company's and its
affiliates' business, which Executive obtained while
employed by, or otherwise serving or acting on behalf
of, the Company or which the Executive may then
possess or have under his control.
(c) EXCLUSIVITY. Executive agrees that during his employment with
the Company, he will not alone, or in any capacity with
another entity or person, (i) engage in any commercial
activity that competes with the Company's business, as it is
conducted during the Employment Period, within any state of
the United States, (ii) in any way interfere or attempt to
interfere with the Company's relationships with any of its
current or potential customers, or (iii) attempt to employ any
of the Company's then employees on behalf of any other
entities competing with the Company. Executive further
acknowledges that all services of Executive shall be exclusive
to the Company, and that Executive's performances and services
hereunder are of a special, unique, unusual, extraordinary and
intellectual character which gives them peculiar value.
Executive understands that the Company may be entitled to
injunctive and other equitable relief to prevent a breach or
threatened breach of this Agreement, which shall be in
addition to any other rights or remedies to which the Company
may be entitled. For purposes of this Section 7(c), the term
"Company" shall include the Company, its successors, assigns
and affiliates.
(d) INVESTMENTS. Notwithstanding anything contained herein to the
contrary, during the Employment Period Executive may acquire
and/or retain, solely as an investment, and take customary
actions to maintain and preserve Executive's ownership of:
(i) securities of any corporation which are registered
under Sections 12(b) or 12(g) of the Securities
Exchange Act of 1934 and which are publicly
<PAGE>
traded, so long as Executive is not part of any
control group of such corporation; and
(ii) any securities of a partnership, trust, corporation,
limited liability company or other entity so long as
(i) Executive remains a passive investor in that
entity and does not become part of any control group
thereof (except in a passive capacity) and (ii) such
entity is not, directly or indirectly, in competition
with the Company or its affiliates, regardless of
whether Executive is a passive investor or part of
any control group thereof.
8. REMEDIES. The parties hereto recognize and agree that, because the
material breach of this Agreement or any part hereof would result in
damages difficult to ascertain, upon any allegation of material breach
of this Agreement, either party hereto shall be entitled:
(a) PROCEEDINGS. To institute proceedings in a court located in
the State of Minnesota to enjoin the breach, termination, or
threatened termination of this Agreement. Such injunctive
remedy shall be in addition to and not in lieu of any right to
recover money damages for any such breach.
(b) COSTS AND EXPENSES. The parties in any action brought
concerning the breach or termination of this Agreement shall
be solely responsible for their own costs and expenses,
including attorney's fees incurred or associated with the
enforcement of any covenant of this Agreement.
9. MISCELLANEOUS.
(a) SUCCESSORS AND ASSIGNS. This Agreement is binding on and
inures to the benefit of the Company's successors and assigns,
provided, however, that this Agreement may not be assigned by
any of the parties hereto without the prior written consent of
each of the parties hereto. This Agreement shall be binding
upon and inure to the benefit of any successor of the Company,
and any such successor shall absolutely and unconditionally
assume all of the Company's obligations hereunder.
(b) OFFSETS. Amounts payable to Executive pursuant to this
Agreement may reduced for purposes of offsetting, either
directly or indirectly, any indebtedness or liability of
Executive to Company.
(c) COUNTERPARTS. This Agreement may be executed in one or more
counterparts, each of which shall be deemed to be an original
but all of which together shall constitute one and the same
instrument.
(d) CONSTRUCTION. Wherever possible, each provision of this
Agreement will be interpreted so that it is valid under the
applicable law. If any provision of this Agreement is to any
extent invalid under the applicable law, that provision will
still be effective to the extent it remains valid. The
remainder of this Agreement
<PAGE>
also will continue to be valid, and the entire Agreement will
continue to be valid in other jurisdictions.
(e) WAIVERS. No failure or delay by either the Company or
Executive in exercising any right or remedy under this
Agreement will waive any provision of this Agreement, nor will
any single or partial exercise by either the Company or
Executive of any right or remedy under this Agreement preclude
either of them from otherwise or further exercising these
rights or remedies, or any other rights or remedies granted by
any law or any related document.
(f) CAPTIONS. The headings in this Agreement are for convenience
of reference only and do not affect the interpretation of this
Agreement.
(g) MODIFICATION/ENTIRE AGREEMENT. This Agreement may not be
altered, modified or amended except by an instrument in
writing signed by all of the parties hereto. No person,
whether or not an officer, agent, employee or representative
of any party, has made or has any authority to make for or on
behalf of that party any agreement, representation, warranty,
statement, promise, arrangement or understanding not expressly
set forth in this Agreement or in any other document executed
by the parties concurrently herewith. This Agreement and all
other documents executed by the parties concurrently herewith
constitute the entire agreement between the parties and
supersede all express or implied, prior or concurrent, with
respect to the subject matter hereof.
(h) GOVERNING LAW. The laws of the State of Minnesota shall govern
the validity, construction and performance of this Agreement.
Any legal proceeding related to this Agreement shall be
brought in an appropriate Minnesota court, and each of the
parties hereto hereby consents to the exclusive jurisdiction
of the courts of the State of Minnesota for this purpose.
(i) NOTICES. All notices and other communications required or
permitted under this Agreement shall be in writing and sent by
registered first class mail, postage prepaid, and shall be
deemed received five (5) days after mailing to the addresses
stated below:
If to the Company:
Navarre Corporation
7400 49th Avenue North
New Hope, Minnesota 55428
Attention: Chief Executive Officer
<PAGE>
With a copy to:
Scott J. Dongoske, Esq.
Winthrop & Weinstine, P.A.
3000 Dain Bosworth Plaza
60 South Sixth Street
Minneapolis, Minnesota 55402
If to Executive:
Guy M. Marsala
28060 Boulder Bridge Drive
Shorewood, MN 55331
(j) SURVIVAL. Notwithstanding the termination of this Agreement or
Executive's employment with the Company, the terms of this
Agreement concerning rights and remedies of the parties shall
survive such termination and shall govern in perpetuity all
rights, disputes, claims or causes of action arising out of or
in any way related to this Agreement.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the
day and year first above written.
NAVARRE CORPORATION
By: /s/ Eric H. Paulson /s/ Guy M. Marsala
----------------------------------- -----------------------------------
Its President GUY M. MARSALA
-------------------------------
<PAGE>
ADDENDUM 1 TO MARSALA EMPLOYMENT AGREEMENT
Guy Marsala will receive a 1-year stock option for 100,000 shares of Navarre
Common Stock. The option price will be based on the closing price of Navarre's
stock on the NASDAQ exchange on the day Guy Marsala received the offer from
Navarre Corporation, November 11, 1996.
After the completion of a successful fiscal year, Guy Marsala will receive an
additional 5-year stock option for no less than 100,000 shares of Navarre Common
Stock. Such options shall be issued pursuant to the Company's standard stock
option plan, with pricing and other terms of the options determined in
accordance with such plan.
<PAGE>
ADDENDUM 2 TO MARSALA EMPLOYMENT AGREEMENT
6.(d) Termination Without Company Cause. For the duration of the severance
period or until suitable new employment is obtained, Executive will continue to
be eligible for all current benefits as well as executive outplacement
assistance at the local company of his choice.
GMM (illegible)
11/21/96 11/24/96
$5,000,000.00 May 8, 1997
New York, New York
DEMAND PROMISSORY NOTE
FOR VALUE RECEIVED, NAVARRE CORPORATION ("Maker"), with an address at
7400 49th Avenue North, New Hope, Minnesota 55428, hereby promises to pay ON
DEMAND to the order of VELVEL RECORDS LLC ("Payee"), with an address at 740
Broadway, New York, New York, 10003, in lawful money of the United States, the
principal sum of Five Million Dollars ($5,000,000.00), together with interest
(computed on the basis of a 360-day year), running on the unpaid balance only
after demand, at the prime rate of interest announced from time to time in New
York City by Citibank, N.A. All payments of principal and interest shall be made
without setoff, deduction, or counterclaim. Unless otherwise indicated, terms
not defined herein shall have the meanings assigned by the Unit Purchase
Agreement and Operating Agreement of VelVel Records LLC, dated August 28, 1996
(the "Agreement") as amended, supplemented or otherwise modified from time to
time. In the event of default in the payment of this Promissory Note, for any
action commenced to collect this Promissory Note, the Payee shall be entitled to
collect interest, costs, disbursements and reasonable legal fees.
All payments of principal and interest due under this Promissory Note
shall be made in legal tender in the United States of America for the payment of
private and public debts and delivered to the Payee at its address above set
forth or, at the option of the Payee, in such manner and at such other place as
the Payee shall have designated to the Maker in writing.
The entire unpaid principal amount of this Promissory Note shall mature
and become immediately due and payable without demand or notice if the Maker is
bankrupt or insolvent or petitions for re-organization under any law affecting
creditors, or the Maker files a petition in bankruptcy or insolvency, or if a
petition in bankruptcy or insolvency is filed against the Maker, or the Maker
makes an assignment for the benefit of creditors or makes an arrangement
pursuant to any bankruptcy, insolvency or re-organization law, or if the Maker
discontinues its business, or if a receiver is appointed for the Maker or the
Maker's business.
The Maker agrees to provide the Payee with prompt written notice of the
occurrence of, or any event which is reasonably likely to result in the
occurrence of, any default enumerated above.
This note is expressly subject to the provision of paragraph 3(g) of
the Agreement.
The Maker and all other parties liable for this Promissory Note,
whether principal, endorser, or otherwise, hereby jointly and severally (I)
waive presentment, demand for payment, notice of dishonor, notice of protest and
protest and all other notices or demands in
<PAGE>
connection with the delivery, acceptance, performance, default, endorsement or
guaranty of this Promissory Note, (ii) waive recourse to suretyship defenses
generally, including extensions of time, releases of security and other
indulgences which may be granted from time to time by the holder of this
Promissory Note to the Maker or any party liable for this Promissory Note and
(iii) agree to pay all costs and expenses, including reasonable attorneys' fees
and expenses, in connection with the enforcement or collection of this
Promissory Note.
This Promissory Note is secured by the Collateral Assignment and Pledge
Agreement dated August 28, 1996 that is attached to the Agreement as Schedule
"C" thereof.
This Promissory Note is made and given within the State of New York and
shall be construed, interpreted and governed by the laws of the State of New
York, without giving effect to the conflicts of laws principals thereof. Any
action arising under this Promissory Note may only be brought in any Federal or
State court sitting in New York County, New York. The Maker and all other
parties liable for this Promissory Note, whether principal, endorser, or
otherwise, hereby jointly and severally consent to the exercise of jurisdiction
by such court with respect to such action.
NAVARRE CORPORATION
By: /S/
----------------------------------
Eric H. Paulson
Loan and Security Agreement
by and between
CONGRESS FINANCIAL CORPORATION (CENTRAL)
as Lender
and
NAVARRE CORPORATION
as Borrower
Dated: June 12, 1997
<PAGE>
<TABLE>
<CAPTION>
TABLE OF CONTENTS
Page
<S> <C> <C>
SECTION 1.DEFINITIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
SECTION 2. CREDIT FACILITIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
2.1 Revolving Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
2.2 Letter of Credit Accommodations . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
2.3 Availability Reserves . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
SECTION 3. INTEREST AND FEES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
3.1 Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
3.2 Closing Fee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
3.3 Servicing Fee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
3.4 Unused Line Fee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
3.5 Changes in Laws and Increased Costs of Loans . . . . . . . . . . . . . . . . . . . . . 14
SECTION 4. CONDITIONS PRECEDENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
4.1 Conditions Precedent to Initial Loans and Letter of Credit Accommodations . . . . . . 15
4.2 Conditions Precedent to All Loans and Letter of Credit Accommodations . . . . . . . . 16
SECTION 5. GRANT OF SECURITY INTEREST . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
SECTION 6. COLLECTION AND ADMINISTRATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
6.1 Borrower's Loan Account . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
6.2 Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
6.3 Collection of Accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
6.4 Payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
6.5 Authorization to Make Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
6.6 Use of Proceeds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
SECTION 7. COLLATERAL REPORTING AND COVENANTS . . . . . . . . . . . . . . . . . . . . . . . . . . 20
7.1 Collateral Reporting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
7.2 Accounts Covenants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
7.3 Inventory Covenants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
7.4 Equipment Covenants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
7.5 Power of Attorney . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
7.6 Right to Cure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
7.7 Access to Premises . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
SECTION 8. REPRESENTATIONS AND WARRANTIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
8.1 Corporate Existence, Power and Authority; Subsidiaries . . . . . . . . . . . . . . . . 24
8.2 Financial Statements; No Material Adverse Change . . . . . . . . . . . . . . . . . . . 24
8.3 Chief Executive Office; Collateral Locations . . . . . . . . . . . . . . . . . . . . . 25
8.4 Priority of Liens; Title to Properties . . . . . . . . . . . . . . . . . . . . . . . . 25
8.5 Tax Returns . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
8.6 Litigation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
8.7 Compliance with Other Agreements and Applicable Laws . . . . . . . . . . . . . . . . . 25
8.8 Bank Accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
8.9 Accuracy and Completeness of Information . . . . . . . . . . . . . . . . . . . . . . . 26
8.10 Survival of Warranties; Cumulative . . . . . . . . . . . . . . . . . . . . . . . . . . 26
<PAGE>
SECTION 9. AFFIRMATIVE AND NEGATIVE COVENANTS . . . . . . . . . . . . . . . . . . . . . . . . . . 26
9.1 Maintenance of Existence . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
9.2 New Collateral Locations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
9.3 Compliance with Laws, Regulations, Etc. . . . . . . . . . . . . . . . . . . . . . . . 26
9.4 Payment of Taxes and Claims . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
9.5 Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
9.6 Financial Statements and Other Information . . . . . . . . . . . . . . . . . . . . . . 27
9.7 Sale of Assets, Consolidation, Merger, Dissolution, Etc. . . . . . . . . . . . . . . . 28
9.8 Encumbrances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
9.9 Indebtedness . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
9.10 Loans, Investments, Guarantees, Etc. . . . . . . . . . . . . . . . . . . . . . . . . . 29
9.11 Dividends and Redemptions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
9.12 Transactions with Affiliates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
9.13 Additional Bank Accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
9.14 Adjusted Net Worth . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
9.15 Costs and Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
9.16 Further Assurances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
SECTION 10. EVENTS OF DEFAULT AND REMEDIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
10.1 Events of Default . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
10.2 Remedies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
SECTION 11. JURY TRIAL WAIVER; OTHER WAIVERS
AND CONSENTS; GOVERNING LAW . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
11.1 Governing Law; Choice of Forum; Service of Process; Jury Trial Waiver . . . . . . . . 35
11.2 Waiver of Notices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
11.3 Amendments and Waivers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
11.4 Waiver of Counterclaims . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
11.5 Indemnification . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
SECTION 12. TERM OF AGREEMENT; MISCELLANEOUS . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
12.1 Term . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
12.2 Notices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
12.3 Partial Invalidity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
12.4 Successors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
12.5 Entire Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
</TABLE>
<PAGE>
INDEX TO
EXHIBITS AND SCHEDULES
Exhibit A Information Certificate
Schedule 8.4 Existing Liens
Schedule 8.8 Bank Accounts
Schedule 9.9 Existing Indebtedness
Schedule 9.10 Existing Loans, Advances and Guarantees
<PAGE>
LOAN AND SECURITY AGREEMENT
This Loan and Security Agreement dated June 12, 1997 is entered into by
and between CONGRESS FINANCIAL CORPORATION (CENTRAL), an Illinois corporation
("LENDER") and NAVARRE CORPORATION, a Minnesota corporation ("BORROWER").
W I T N E S S E T H:
WHEREAS, Borrower has requested that Lender enter into certain
financing arrangements with Borrower pursuant to which Lender may make loans and
provide other financial accommodations to Borrower; and
WHEREAS, Lender is willing to make such loans and provide such
financial accommodations on the terms and conditions set forth herein;
NOW, THEREFORE, in consideration of the mutual conditions and
agreements set forth herein, and for other good and valuable consideration, the
receipt and sufficiency of which is hereby acknowledged, the parties hereto
agree as follows:
SECTION 1. DEFINITIONS
All terms used herein which are defined in Article 1 or Article 9 of
the Uniform Commercial Code shall have the meanings given therein unless
otherwise defined in this Agreement. All references to the plural herein shall
also mean the singular and to the singular shall also mean the plural unless the
context otherwise requires. All references to Borrower and Lender pursuant to
the definitions set forth in the recitals hereto, or to any other person herein,
shall include their respective successors and assigns. The words "hereof",
"herein", "hereunder", "this Agreement" and words of similar import when used in
this Agreement shall refer to this Agreement as a whole and not any particular
provision of this Agreement and as this Agreement now exists or may hereafter be
amended, modified, supplemented, extended, renewed, restated or replaced. The
word "including" when used in this Agreement shall mean "including, without
limitation". An Event of Default shall exist or continue or be continuing until
such Event of Default is waived in accordance with Section 11.3 or is cured in a
manner satisfactory to Lender, if such Event of Default is capable of being
cured as determined by Lender. Any accounting term used herein unless otherwise
defined in this Agreement shall have the meanings customarily given to such term
in accordance with GAAP. For purposes of this Agreement, the following terms
shall have the respective meanings given to them below:
1.1 "ACCOUNTS" shall mean all present and future rights of Borrower to
payment for goods sold or leased or for services rendered, which are not
evidenced by instruments or chattel paper, and whether or not earned by
performance.
1.2 "ADJUSTED EURODOLLAR RATE" shall mean, with respect to each
Interest Period for any Eurodollar Rate Loan, the rate per annum (rounded
upwards, if necessary, to the next one-sixteenth (1/16) of one (1%) percent)
determined by dividing (a) the Eurodollar Rate for such Interest Period
<PAGE>
by (b) a percentage equal to: (i) one (1) minus (ii) the Reserve Percentage. For
purposes hereof, "Reserve Percentage" shall mean the reserve percentage,
expressed as a decimal, prescribed by any United States or foreign banking
authority for determining the reserve requirement which is or would be
applicable to deposits of United States dollars in a non-United States or an
international banking office of Reference Bank used to fund a Eurodollar Rate
Loan or any Eurodollar Rate Loan made with the proceeds of such deposit, whether
or not the Reference Bank actually holds or has made any such deposits or loans.
The Adjusted Eurodollar Rate shall be adjusted on and as of the effective day of
any change in the Reserve Percentage.
1.3 "ADJUSTED NET WORTH" shall mean as to any Person, at any time, in
accordance with GAAP (except as otherwise specifically set forth below), on a
consolidated basis for such Person and its subsidiaries (if any), the amount
equal to: (a) the difference between: (i) the aggregate net book value of all
assets of such Person and its subsidiaries, calculating the book value of
inventory for this purpose on a first-in-first-out basis, after deducting from
such book values all appropriate reserves in accordance with GAAP (including all
reserves for doubtful receivables, obsolescence, depreciation and amortization)
and (ii) the aggregate amount of the indebtedness and other liabilities of such
Person and its subsidiaries (including tax and other proper accruals).
1.4 "AVAILABILITY RESERVES" shall mean, as of any date of
determination, such amounts as Lender may from time to time establish and revise
in good faith reducing the amount of Revolving Loans and Letter of Credit
Accommodations which would otherwise be available to Borrower under the lending
formula(s) provided for herein: (a) to reflect events, conditions, contingencies
or risks which, as determined by Lender in good faith, do or may affect either
(i) the Collateral or any other property which is security for the Obligations
or its value, (ii) the assets, business or prospects of Borrower or any Obligor
or (iii) the security interests and other rights of Lender in the Collateral
(including the enforceability, perfection and priority thereof), (b) to reflect
Lender's good faith belief that any collateral report or financial information
furnished by or on behalf of Borrower or any Obligor to Lender is or may have
been incomplete, inaccurate or misleading in any material respect, (c) to
reflect outstanding Letter of Credit Accommodations as provided in Section 2.2
hereof, (d) in respect of any state of facts which Lender determines in good
faith constitutes an Event of Default or may, with notice or passage of time or
both, constitute an Event of Default, or (e) for each week during the calendar
months of October, November and December, respectively, of each year of this
Agreement, an amount equal to four (4%) percent of the gross sales for each such
week (the "Seasonal Reserve"); except that, provided that Lender determines, in
good faith, that the Seasonal Reserve should not otherwise remain as an
Availability Reserve in respect of events, conditions, contingencies or risks as
provided for in Section 1.4(a), (b), (c) or (d) above, and provided further that
no Event of Default exists and is continuing, Lender agrees to release (i) fifty
(50%) percent of the Seasonal Reserve on the last Business Day of January of the
immediately succeeding year, provided that Lender has received from Borrower a
schedule of all credits issued for the month of January and (ii) fifty (50%)
percent of the Seasonal Reserve on the last Business Day of February of the
immediately succeeding year provided that Lender has received from Borrower a
schedule of all credits issued for the month of February.
1.5 "BLOCKED ACCOUNTS" shall have the meaning set forth in Section 6.3
hereof.
<PAGE>
1.6 "BUSINESS DAY" shall mean any day other than a Saturday, Sunday, or
other day on which commercial banks are authorized or required to close under
the laws of the State of Illinois or the Commonwealth of Pennsylvania, and a day
on which the Reference Bank and Lender are open for the transaction of business,
except that if a determination of a Business Day shall relate to any Eurodollar
Rate Loans, the term Business Day shall also exclude any day on which banks are
closed for dealings in dollar deposits in the London interbank market or other
applicable Eurodollar Rate market.
1.7 "COLLATERAL" shall have the meaning set forth in Section 5 hereof.
1.8 "ELIGIBLE ACCOUNTS" shall mean Accounts created by Borrower which
are and continue to be acceptable to Lender based on the criteria set forth
below. In general, Accounts shall be Eligible Accounts if:
(a) such Accounts arise from the actual and bona fide sale and
delivery of goods by Borrower or rendition of services by Borrower in the
ordinary course of its business which transactions are completed in accordance
with the terms and provisions contained in any documents related thereto;
(b) such Accounts are not unpaid more than sixty (60) days past the
original due date thereof, but less than one hundred twenty (120) days after the
date of the original invoice for them; except that, Eligible Accounts shall
include Accounts which are more than one hundred twenty (120) days from the
original invoice date for those Accounts arising from the sale and shipment of
goods during the calendar months of September and October of each year to those
account debtors designated by Borrower as "MUSIC ACCOUNT DEBTORS" as set forth
in a written schedule submitted to Lender by Borrower from time to time
("SEASONAL MUSIC ACCOUNTS"), provided, however, (i) that the maximum amount of
Seasonal Music Accounts which may be considered Eligible Accounts at any time
shall not exceed $8,000,000, and (ii) all Seasonal Music Accounts which remain
unpaid as of February 15th of the immediately succeeding year shall not be
Eligible Accounts;
(c) such Accounts comply with the terms and conditions contained in
Section 7.2(c) of this Agreement;
(d) such Accounts do not arise from (i) sales on consignment, (ii)
guaranteed sales or (iii) except in the ordinary course of Borrower's business
in accordance with practices and policies previously disclosed in writing to
Lender, sales on any terms under which payment by the account debtor may be
conditional or contingent;
(e) the chief executive office of the account debtor with respect
to such Accounts is located in the United States of America, or, at Lender's
option, if either: (i) the account debtor has delivered to Borrower an
irrevocable letter of credit issued or confirmed by a bank satisfactory to
Lender and payable only in the United States of America or Canada and in U.S.
dollars, sufficient to cover such Account, in form and substance satisfactory to
Lender and, if required by Lender, the original of such letter of credit has
been delivered to Lender or Lender's agent and the issuer thereof notified of
the assignment of the proceeds of such letter of credit to Lender, or (ii) such
Account is subject to credit insurance payable to Lender issued by an insurer
and on terms and in an amount
<PAGE>
acceptable to Lender, or (iii) such Account is otherwise acceptable in all
respects to Lender (subject to such lending formula with respect thereto as
Lender may determine);
(f) such Accounts do not consist of progress billings, bill and
hold invoices or retainage invoices, except as to bill and hold invoices, if
Lender shall have received an agreement in writing from the account debtor, in
form and substance satisfactory to Lender, confirming the unconditional
obligation of the account debtor to take the goods related thereto and pay such
invoice;
(g) there are no facts, events or occurrences which would impair
the validity, enforceability or collectability of such Accounts or reduce the
amount payable or delay payment thereunder;
(h) such Accounts are subject to the first priority, valid and
perfected security interest of Lender and any goods giving rise thereto are not,
and were not at the time of the sale thereof, subject to any liens except those
permitted in this Agreement;
(i) neither the account debtor nor any officer or employee of the
account debtor with respect to such Accounts is an officer, employee or agent of
or affiliated with Borrower directly or indirectly by virtue of family
membership, ownership, control, management or otherwise;
(j) the account debtors with respect to such Accounts are not any
foreign government, the United States of America, any State, political
subdivision, department, agency or instrumentality thereof, unless, if the
account debtor is the United States of America, any State, political
subdivision, department, agency or instrumentality thereof, upon Lender's
request, the Federal Assignment of Claims Act of 1940, as amended or any similar
State or local law, if applicable, has been complied with in a manner
satisfactory to Lender;
(k) there are no proceedings or actions which are threatened or
pending against the account debtors with respect to such Accounts which might
result in any material adverse change in any such account debtor's financial
condition;
(l) such Accounts of a single account debtor or its affiliates do
not constitute more than twenty (20%) percent of all otherwise Eligible Accounts
(but the portion of the Accounts not in excess of such percentage may be deemed
Eligible Accounts);
(m) such Accounts are not owed by an account debtor who has
Accounts unpaid more than sixty (60) days past the original due date thereof,
but less than one hundred twenty (120) days after the date of the original
invoice for them and which Accounts constitute more than fifty (50%) percent of
the total Accounts of such account debtor;
(n) such Accounts are owed by account debtors whose total
indebtedness to Borrower does not exceed the credit limit with respect to such
account debtors as determined by Lender from time to time (but the portion of
the Accounts not in excess of such credit limit may be deemed Eligible
Accounts); and
<PAGE>
(o) such Accounts are owed by account debtors deemed creditworthy
at all times by Lender, as determined by Lender.
General criteria for Eligible Accounts may be established and revised from time
to time by Lender in good faith. Any Accounts which are not Eligible Accounts
shall nevertheless be part of the Collateral.
1.9 "ELIGIBLE INVENTORY" shall mean Inventory consisting of finished
goods (including Return to Vendor Inventory) held for resale in the ordinary
course of the business of Borrower which are acceptable to Lender based on the
criteria set forth below. In general, Eligible Inventory shall not include (a)
packaging and shipping materials; (b) supplies used or consumed in Borrower's
business; (c) Inventory at premises other than those owned and controlled by
Borrower, except if (i) Lender shall have received an agreement in writing from
the person in possession of such Inventory and/or the owner or operator of such
premises in form and substance satisfactory to Lender acknowledging Lender's
first priority security interest in the Inventory, waiving security interests
and claims by such person against the Inventory and permitting Lender access to,
and the right to remain on, the premises so as to exercise Lender's rights and
remedies and otherwise deal with the Collateral, or (ii) Lender has established
Availability Reserves in such amounts as Lender deems appropriate and necessary,
in its sole discretion, to permit Lender access to the premises so as to
exercise Lender's rights and remedies and otherwise deal with the Collateral;
(d) Inventory subject to a security interest or lien in favor of any person
other than Lender except those permitted in this Agreement; (e) bill and hold
goods; (f) Inventory which is not subject to the first priority, valid and
perfected security interest of Lender; (g) damaged and/or defective Inventory;
and (h) Inventory purchased or sold on consignment. General criteria for
Eligible Inventory may be established and revised from time to time by Lender in
good faith. Any Inventory which is not Eligible Inventory shall nevertheless be
part of the Collateral.
1.10 "EQUIPMENT" shall mean all of Borrower's now owned and hereafter
acquired equipment, machinery, computers and computer hardware and software
(whether owned or licensed), vehicles, tools, furniture, fixtures, all
attachments, accessions and property now or hereafter affixed thereto or used in
connection therewith, and substitutions and replacements thereof, wherever
located.
1.11 "EURODOLLAR RATE" shall mean with respect to the Interest Period
for a Eurodollar Rate Loan, the interest rate per annum equal to the arithmetic
average of the rates of interest per annum (rounded upwards, if necessary, to
the next one-sixteenth (1/16) of one (1%) percent) at which Reference Bank is
offered deposits of United States dollars in the London interbank market (or
other Eurodollar Rate market selected by Borrower and approved by Lender) on or
about 9:00 a.m. (Chicago, Illinois time) two (2) Business Days prior to the
commencement of such Interest Period in amounts substantially equal to the
principal amount of the Eurodollar Rate Loans requested by and available to
Borrower in accordance with this Agreement, with a maturity of comparable
duration to the Interest Period selected by Borrower.
1.12 "EURODOLLAR RATE LOANS" shall mean any Loans or portion thereof on
which interest is payable based on the Adjusted Eurodollar Rate in accordance
with the terms hereof.
<PAGE>
1.13 "EVENT OF DEFAULT" shall mean the occurrence or existence of any
event or condition described in Section 10.1 hereof.
1.14 "EXCESS AVAILABILITY" shall mean the amount, as determined by
Lender, calculated at any time from and after the date of this Agreement, equal
to: (a) the lesser of (i) the amount of the Revolving Loans available to
Borrower as of such time based on the applicable lending formulas multiplied by
the Net Amount of Eligible Accounts and the Value of Eligible Inventory, as
determined by Lender, and subject to the sublimits and Availability Reserves
from time to time established by Lender hereunder and (ii) the Maximum Credit,
minus (b) the sum of: (i) the amount of all then outstanding and unpaid
Obligations, plus (ii) the aggregate amount of all trade payables of Borrower
which are more than sixty (60) days past due as of such time, plus (iii) the
amount of checks issued by Borrower to pay trade payables, but not yet sent and
the book overdraft of Borrower.
1.15 "EXCESS CLOSING AVAILABILITY" shall mean the amount, as determined
by Lender, calculated as of the date of this Agreement, equal to: (a) the lesser
of (i) the amount of the Revolving Loans available to Borrower as of such time
based on the applicable lending formulas multiplied by the Net Amount of
Eligible Accounts and the Value of Eligible Inventory, as determined by Lender,
and subject to the sublimits and Availability Reserves from time to time
established by Lender hereunder and (ii) the Maximum Credit, minus (b) the sum
of: (i) the amount of all then outstanding and unpaid Obligations, plus (ii)
$5,000,000.
1.16 "FINANCING AGREEMENTS" shall mean, collectively, this Agreement
and all notes, guarantees, security agreements and other agreements, documents
and instruments now or at any time hereafter executed and/or delivered by
Borrower or any Obligor in connection with this Agreement, as the same now exist
or may hereafter be amended, modified, supplemented, extended, renewed, restated
or replaced.
1.17 "GAAP" shall mean generally accepted accounting principles in the
United States of America as in effect from time to time as set forth in the
opinions and pronouncements of the Accounting Principles Board and the American
Institute of Certified Public Accountants and the statements and pronouncements
of the Financial Accounting Standards Board which are applicable to the
circumstances as of the date of determination consistently applied, except that,
for purposes of Section 9.14 hereof, GAAP shall be determined on the basis of
such principles in effect on the date hereof and consistent with those used in
the preparation of the audited financial statements delivered to Lender prior to
the date hereof.
1.18 "INFORMATION CERTIFICATE" shall mean the Information Certificate
of Borrower constituting Exhibit A hereto containing material information with
respect to Borrower, its business and assets provided by or on behalf of
Borrower to Lender in connection with the preparation of this Agreement and the
other Financing Agreements and the financing arrangements provided for herein.
1.19 "INTEREST PERIOD" shall mean for any Eurodollar Rate Loan, a
period of approximately one (1), two (2), or three (3) months duration as
Borrower may elect, the exact duration to be determined in accordance with the
customary practice in the applicable Eurodollar Rate market;
<PAGE>
provided, that, Borrower may not elect an Interest Period which will end after
the last day of the then-current term of this Agreement.
1.20 "INTEREST RATE" shall mean, as to Prime Rate Loans, a rate of
one-half (1/2%) percent per annum in excess of the Prime Rate and, as to
Eurodollar Rate Loans, a rate of two and three-quarters (2 3/4%) percent per
annum in excess of the Adjusted Eurodollar Rate (based on the Eurodollar Rate
applicable for the Interest Period selected by Borrower as in effect three (3)
Business Days after the date of receipt by Lender of the request of Borrower for
such Eurodollar Rate Loans in accordance with the terms hereof, whether such
rate is higher or lower than any rate previously quoted to Borrower); provided,
that, the Interest Rate shall mean the rate of two and one-half (2 1/2%) percent
per annum in excess of the Prime Rate as to Prime Rate Loans and the rate of
four and three-quarters (4 3/4%) percent per annum in excess of the Adjusted
Eurodollar Rate as to Eurodollar Rate Loans, at Lender's option, without notice,
(a) for the period (i) from and after the date of termination or non-renewal
hereof until Lender has received full and final payment of all obligations
(notwithstanding entry of a judgment against Borrower) and (ii) from and after
the date of the occurrence of an Event of Default for so long as such Event of
Default is continuing as determined by Lender, and (b) on the Revolving Loans at
any time outstanding in excess of the amounts available to Borrower under
Section 2 (whether or not such excess(es), arise or are made with or without
Lender's knowledge or consent and whether made before or after an Event of
Default).
1.21 "INVENTORY" shall mean all of Borrower's now owned and hereafter
existing or acquired raw materials, work in process, finished goods and all
other inventory of whatsoever kind or nature, wherever located.
1.22 "LETTER OF CREDIT ACCOMMODATIONS" shall mean the letters of
credit, merchandise purchase or other guaranties which are from time to time
either (a) issued or opened by Lender for the account of Borrower or any Obligor
or (b) with respect to which Lender has agreed to indemnify the issuer or
guaranteed to the issuer the performance by Borrower of its obligations to such
issuer.
1.23 "LOANS" shall mean the Revolving Loans.
1.24 "MAXIMUM CREDIT" shall mean the amount of $45,000,000.
1.25 "NET AMOUNT OF ELIGIBLE ACCOUNTS" shall mean the gross amount of
Eligible Accounts less (a) sales, excise or similar taxes included in the amount
thereof and (b) returns, discounts, claims, credits, chargebacks and allowances
of any nature at any time issued, owing, granted, outstanding, available or
claimed with respect thereto.
1.26 "NET ORDERLY LIQUIDATION VALUE" shall mean, at any time,
determined in accordance with the most recent Inventory Appraisal received by
Lender in accordance with Section 7.3, the orderly liquidation value of the
Borrower's finished goods, net of all operating and liquidation expenses
necessary to conduct a liquidation of such goods.
1.27 "OBLIGATIONS" shall mean any and all Revolving Loans, Letter of
Credit Accommodations and all other obligations, liabilities and indebtedness of
every kind, nature and
<PAGE>
description owing by Borrower to Lender and/or its affiliates, including
principal, interest, charges, fees, costs and expenses, however evidenced,
whether as principal, surety, endorser, guarantor or otherwise, whether arising
under this Agreement or otherwise, whether now existing or hereafter arising,
whether arising before, during or after the initial or any renewal term of this
Agreement or after the commencement of any case with respect to Borrower under
the United States Bankruptcy Code or any similar statute (including the payment
of interest and other amounts which would accrue and become due but for the
commencement of such case, whether or not such amounts are allowed or allowable
in whole or in part in such case), whether direct or indirect, absolute or
contingent, joint or several, due or not due, primary or secondary, liquidated
or unliquidated, secured or unsecured, and however acquired by Lender.
1.28 "OBLIGOR" shall mean any guarantor, endorser, acceptor, surety or
other person liable on or with respect to the Obligations or who is the owner of
any property which is security for the Obligations, other than Borrower.
1.29 "PAYMENT ACCOUNT" shall have the meaning set forth in Section 6.3
hereof.
1.30 "PERSON" or "PERSON" shall mean any individual, sole
proprietorship, partnership, corporation (including any corporation which elects
subchapter S status under the Internal Revenue Code of 1986, as amended),
limited liability company, limited liability partnership, business trust,
unincorporated association, joint stock corporation, trust, joint venture or
other entity or any government or any agency or instrumentality or political
subdivision thereof.
1.31 "PLEDGED PROPERTY" shall mean all of the Borrower's now owned or
hereafter acquired equity interests in Net Radio Corporation, Digital
Entertainment, Inc. and Velvel, together with any other investments by Borrower
in Net Radio Corporation, Digital Entertainment, Inc. and/or Velvel of whatever
kind or nature.
1.32 "PRIME RATE" shall mean the rate from time to time publicly
announced by CoreStates Bank, N.A., or its successors, at its office in
Philadelphia, Pennsylvania, as its prime rate, whether or not such announced
rate is the best rate available at such bank.
1.33 "PRIME RATE LOANS" shall mean any Loans or portion thereof on
which interest is payable based on the Prime Rate in accordance with the terms
thereof.
1.34 "RECORDS" shall mean all of Borrower's present and future books of
account of every kind or nature, purchase and sale agreements, invoices, ledger
cards, bills of lading and other shipping evidence, statements, correspondence,
memoranda, credit files and other data relating to the Collateral or any account
debtor, together with the tapes, disks, diskettes and other data and software
storage media and devices, file cabinets or containers in or on which the
foregoing are stored (including any rights of Borrower with respect to the
foregoing maintained with or by any other person).
1.35 "REFERENCE BANK" shall mean CoreStates Bank, N.A., or such other
bank as Lender may from time to time designate.
<PAGE>
1.36 "RETURN TO VENDOR INVENTORY" shall mean all Inventory consisting
of finished goods purchased in the ordinary course of Borrower's business as
presently conducted on a return basis from vendors and designated on Borrower's
perpetual inventory system as return to vendor inventory.
1.37 "VALUE" shall mean, as determined by Lender in good faith, with
respect to Inventory, the lower of (a) cost computed on a first-in-first-out
basis in accordance with GAAP or (b) market value.
1.38 "VELVEL" shall mean Velvel Records, LLC and its successors.
SECTION 2. CREDIT FACILITIES
2.1 Revolving Loans.
(a) Subject to and upon the terms and conditions contained herein,
Lender agrees to make Revolving Loans to Borrower from time to time in amounts
requested by Borrower up to the amount equal to the sum of:
(i) seventy (70%) percent of the Net Amount of Eligible
Accounts, plus
(ii) subject to the provisions of Section 2.1(e) below, the
lesser of: (A) fifty-five (55%) percent of the Value of
Eligible Inventory consisting of finished goods
(including Return to Vendor Inventory), or (B)
eighty-two (82%) of the Net Orderly Liquidation Value
of Borrower's finished goods, less
(iii) any Availability Reserves.
(b) Lender may, in its discretion, from time to time, upon not less
than five (5) days prior notice to Borrower, (i) reduce the lending formula with
respect to Eligible Accounts to the extent that Lender determines in good faith
that: (A) the dilution with respect to the Accounts for any period (based on the
ratio of (1) the aggregate amount of reductions in Accounts other than as a
result of payments in cash to (2) the aggregate amount of total sales) has
increased in any material respect or may be reasonably anticipated to increase
in any material respect above historical levels, or (B) the general
creditworthiness of account debtors has declined or (ii) reduce the lending
formula(s) with respect to Eligible Inventory to the extent that Lender
determines that: (A) the number of days of the turnover of the Inventory for any
period has changed in any material respect or (B) the liquidation value of the
Eligible Inventory, or any category thereof, has decreased, or (C) the nature
and quality of the Inventory has deteriorated. In determining whether to reduce
the lending formula(s), Lender may consider events, conditions, contingencies or
risks which are also considered in determining Eligible Accounts, Eligible
Inventory or in establishing Availability Reserves.
(c) Except in Lender's discretion, the aggregate amount of the
Loans and the Letter of Credit Accommodations outstanding at any time shall not
exceed the Maximum Credit. In
<PAGE>
the event that the outstanding amount of any component of the Loans, or the
aggregate amount of the outstanding Loans and Letter of Credit Accommodations,
exceed the amounts available under the lending formulas, the sublimits for
Letter of Credit Accommodations set forth in Section 2.2(d) or the Maximum
Credit, as applicable, such event shall not limit, waive or otherwise affect any
rights of Lender in that circumstance or on any future occasions and Borrower
shall, upon demand by Lender, which may be made at any time or from time to
time, immediately repay to Lender the entire amount of any such excess(es) for
which payment is demanded.
(d) For purposes only of applying the sublimit on Revolving Loans
based on Eligible Inventory pursuant to Section 2.1(a)(ii)(B), Lender may treat
the then undrawn amounts of outstanding Letter of Credit Accommodations for the
purpose of purchasing Eligible Inventory as Revolving Loans to the extent Lender
is in effect basing the issuance of the Letter of Credit Accommodations on the
Value of the Eligible Inventory being purchased with such Letter of Credit
Accommodations. In determining the actual amounts of such Letter of Credit
Accommodations to be so treated for purposes of the sublimit, the outstanding
Revolving Loans and Availability Reserves shall be attributed first to any
components of the lending formulas in Section 2.1(a) that are not subject to
such sublimit, before being attributed to the components of the lending formulas
subject to such sublimit.
(e) Notwithstanding anything to the contrary contained in Section
2.1(a)(ii) above, the maximum aggregate amount of Revolving Loans outstanding at
any time (i) made in respect of the Value of Eligible Inventory, including
without limitation, the value of Eligible Inventory consisting of Return to
Vendor Inventory, shall not at any time exceed $15,000,000, and (ii) made in
respect of the Value of Eligible Inventory consisting of Return to Vendor
Inventory shall not exceed (x) for the calendar months of November through and
including February, $6,000,000, and (y) for the calendar months of March through
and including October, $5,000,000.
2.2 Letter of Credit Accommodations.
(a) Subject to and upon the terms and conditions contained herein,
at the request of Borrower, Lender agrees to provide or arrange for Letter of
Credit Accommodations for the account of Borrower containing terms and
conditions acceptable to Lender and the issuer thereof. Any payments made by
Lender to any issuer thereof and/or related parties in connection with the
Letter of Credit Accommodations shall constitute additional Revolving Loans to
Borrower pursuant to this Section 2.
(b) In addition to any charges, fees or expenses charged by any
bank or issuer in connection with the Letter of Credit Accommodations, Borrower
shall pay to Lender a letter of credit fee at a rate equal to one and one-half
(1 1/2%) percent per annum on the daily outstanding balance of the Letter of
Credit Accommodations for the immediately preceding month (or part thereof),
payable in arrears as of the first day of each succeeding month, except that
Borrower shall pay to Lender such letter of credit fee, at Lender's option,
without notice, at a rate equal to three and one-half (3 1/2%) percent per annum
on such daily outstanding balance for: (i) the period from and after the date of
termination or non-renewal hereof until Lender has received full and final
payment of all Obligations (notwithstanding entry of a judgment against
Borrower) and (ii) the period from and after the date of the occurrence of an
Event of Default for so long as such Event of Default is continuing
<PAGE>
as determined by Lender. Such letter of credit fee shall be calculated on the
basis of a three hundred sixty (360) day year and actual days elapsed and the
obligation of Borrower to pay such fee shall survive the termination or
non-renewal of this Agreement.
(c) No Letter of Credit Accommodations shall be available unless on
the date of the proposed issuance of any Letter of Credit Accommodations, the
Revolving Loans available to Borrower (subject to the Maximum Credit and any
Availability Reserves) are equal to or greater than: (i) if the proposed Letter
of Credit Accommodation is for the purpose of purchasing Eligible Inventory, the
sum of (A) the percentage equal to one hundred (100%) percent minus the then
applicable percentage set forth in Section 2.1(a)(ii)(A) above of the Value of
such Eligible Inventory, plus (B) freight, taxes, duty and other amounts which
Lender estimates must be paid in connection with such Inventory upon arrival and
for delivery to one of Borrower's locations for Eligible Inventory within the
United States of America and (ii) if the proposed Letter of Credit Accommodation
is for any other purpose, an amount equal to one hundred (100%) percent of the
face amount thereof and all other commitments and obligations made or incurred
by Lender with respect thereto. Effective on the issuance of each Letter of
Credit Accommodation, an Availability Reserve shall be established in the
applicable amount set forth in Section 2.2(c)(i) or Section 2.2(c)(ii).
(d) Except in Lender's discretion, the amount of all outstanding
Letter of Credit Accommodations and all other commitments and obligations made
or incurred by Lender in connection therewith shall not at any time exceed
$10,000,000. At any time an Event of Default exists or has occurred and is
continuing, upon Lender's request, Borrower will either furnish cash collateral
to secure the reimbursement obligations to the issuer in connection with any
Letter of Credit Accommodations or furnish cash collateral to Lender for the
Letter of Credit Accommodations, and in either case, the Revolving Loans
otherwise available to Borrower shall not be reduced as provided in Section
2.2(c) to the extent of such cash collateral.
(e) Borrower shall indemnify and hold Lender harmless from and
against any and all losses, claims, damages, liabilities, costs and expenses
which Lender may suffer or incur in connection with any Letter of Credit
Accommodations and any documents, drafts or acceptances relating thereto,
including any losses, claims, damages, liabilities, costs and expenses due to
any action taken by any issuer or correspondent with respect to any Letter of
Credit Accommodation. Borrower assumes all risks with respect to the acts or
omissions of the drawer under or beneficiary of any Letter of Credit
Accommodation and for such purposes the drawer or beneficiary shall be deemed
Borrower's agent. Borrower assumes all risks for, and agrees to pay, all
foreign, Federal, State and local taxes, duties and levies relating to any goods
subject to any Letter of Credit Accommodations or any documents, drafts or
acceptances thereunder. Borrower hereby releases and holds Lender harmless from
and against any acts, waivers, errors, delays or omissions, whether caused by
Borrower, by any issuer or correspondent or otherwise with respect to or
relating to any Letter of Credit Accommodation. The provisions of this Section
2.2(e) shall survive the payment of Obligations and the termination or
non-renewal of this Agreement.
(f) Nothing contained herein shall be deemed or construed to grant
Borrower any right or authority to pledge the credit of Lender in any manner.
Lender shall have no liability of any kind with respect to any Letter of Credit
Accommodation provided by an issuer other than Lender unless Lender has duly
executed and delivered to such issuer the application or a guarantee or
<PAGE>
indemnification in writing with respect to such Letter of Credit Accommodation.
Borrower shall be bound by any interpretation made in good faith by Lender, or
any other issuer or correspondent under or in connection with any Letter of
Credit Accommodation or any documents, drafts or acceptances thereunder,
notwithstanding that such interpretation may be inconsistent with any
instructions of Borrower. Lender shall have the sole and exclusive right and
authority to, and Borrower shall not: (i) at any time an Event of Default exists
or has occurred and is continuing, (A) approve or resolve any questions of
non-compliance of documents, (B) give any instructions as to acceptance or
rejection of any documents or goods or (C) execute any and all applications for
steamship or airway guaranties, indemnities or delivery orders, and (ii) at all
times, (A) grant any extensions of the maturity of, time of payment for, or time
of presentation of, any drafts, acceptances, or documents, and (B) agree to any
amendments, renewals, extensions, modifications, changes or cancellations of any
of the terms or conditions of any of the applications, Letter of Credit
Accommodations, or documents, drafts or acceptances thereunder or any letters of
credit included in the Collateral. Lender may take such actions either in its
own name or in Borrower's name.
(g) Any rights, remedies, duties or obligations granted or
undertaken by Borrower to any issuer or correspondent in any application for any
Letter of Credit Accommodation, or any other agreement in favor of any issuer or
correspondent relating to any Letter of Credit Accommodation, shall be deemed to
have been granted or undertaken by Borrower to Lender. Any duties or obligations
undertaken by Lender to any issuer or correspondent in any application for any
Letter of Credit Accommodation, or any other agreement by Lender in favor of any
issuer or correspondent relating to any Letter of Credit Accommodation, shall be
deemed to have been undertaken by Borrower to Lender and to apply in all
respects to Borrower.
2.3 Availability Reserves. All Revolving Loans otherwise available to
Borrower pursuant to the lending formulas and subject to the Maximum Credit and
other applicable limits hereunder shall be subject to Lender's continuing right
to establish and revise Availability Reserves.
SECTION 3. INTEREST AND FEES
3.1 Interest.
(a) Borrower shall pay to Lender interest on the outstanding
principal amount of the non-contingent Obligations at the Interest Rate. All
interest accruing hereunder on and after the date of any Event of Default or
termination or non-renewal hereof shall be payable on demand.
(b) Borrower may from time to time request that Prime Rate Loans be
converted to Eurodollar Rate Loans or that any existing Eurodollar Rate Loans
continue for an additional Interest Period. Such request from Borrower shall
specify the amount of the Prime Rate Loans which will constitute Eurodollar Rate
Loans (subject to the limits set forth below) and the Interest Period to be
applicable to such Eurodollar Rate Loans. Subject to the terms and conditions
contained herein, three (3) Business Days after receipt by Lender of such a
request from Borrower, such Prime Rate Loans shall be converted to Eurodollar
Rate Loans or such Eurodollar Rate Loans shall continue, as the case may be,
provided, that, (i) no Event of Default, or event which with notice or passage
of time or both would constitute an Event of Default exists or has occurred and
is continuing, (ii) no party hereto shall have sent any notice of termination or
non-renewal of this Agreement, (iii)
<PAGE>
Borrower shall have complied with such customary procedures as are established
by Lender and specified by Lender to Borrower from time to time for requests by
Borrower for Eurodollar Rate Loans, (iv) no more than four (4) Interest Periods
may be in effect at any one time, (v) the aggregate amount of the Eurodollar
Rate Loans must be in an amount not less than $5,000,000 or an integral multiple
of $1,000,000 in excess thereof, (vi) the maximum amount of the Eurodollar Rate
Loans at any time requested by Borrower shall not exceed the amount equal to
eighty (80%) percent of the lowest principal amount of the Revolving Loans which
it is anticipated will be outstanding during the applicable Interest Period as
determined by Lender (but with no obligation of Lender to make such Revolving
Loans), and (vii) Lender shall have determined that the Interest Period or
Adjusted Eurodollar Rate is available to Lender through the Reference Bank and
can be readily determined as of the date of the request for such Eurodollar Rate
Loan by Borrower. Any request by Borrower to convert Prime Rate Loans to
Eurodollar Rate Loans or to continue any existing Eurodollar Rate Loans shall be
irrevocable. Notwithstanding anything to the contrary contained herein, Lender
and Reference Bank shall not be required to purchase United States Dollar
deposits in the London interbank market or other applicable Eurodollar Rate
market to fund any Eurodollar Rate Loans, but the provisions hereof shall be
deemed to apply as if Lender and Reference Bank had purchased such deposits to
fund the Eurodollar Rate Loans.
(c) Any Eurodollar Rate Loans shall automatically convert to Prime
Rate Loans upon the last day of the applicable Interest Period, unless Lender
has received and approved a request to continue such Eurodollar Rate Loan at
least three (3) Business Days prior to such last day in accordance with the
terms hereof. Any Eurodollar Rate Loans shall, at Lender's option, upon notice
by Lender to Borrower, convert to Prime Rate Loans in the event that (i) an
Event of Default or event which, with the notice or passage of time, or both,
would constitute an Event of Default, shall exist, (ii) this Agreement shall
terminate or not be renewed, or (iii) the aggregate principal amount of the
Prime Rate Loans which have previously been converted to Eurodollar Rate Loans
or existing Eurodollar Rate Loans continued, as the case may be, at the
beginning of an Interest Period shall at any time during such Interest Period
exceed either (A) the aggregate principal amount of the Loans then outstanding,
or (B) the Revolving Loans then available to Borrower under Section 2 hereof.
Borrower shall pay to Lender, upon demand by Lender (or Lender may, at its
option, charge any loan account of Borrower) any amounts required to compensate
Lender, the Reference Bank or any participant with Lender for any loss
(including loss of anticipated profits), cost or expense incurred by such
person, as a result of the conversion of Eurodollar Rate Loans to Prime Rate
Loans pursuant to any of the foregoing.
(d) Interest shall be payable by Borrower to Lender monthly in
arrears not later than the first day of each calendar month and shall be
calculated on the basis of a three hundred sixty (360) day year and actual days
elapsed. The interest rate on non-contingent Obligations (other than Eurodollar
Rate Loans) shall increase or decrease by an amount equal to each increase or
decrease in the Prime Rate effective on the first day of the month after any
change in such Prime Rate is announced based on the Prime Rate in effect on the
last day of the month in which any such change occurs. In no event shall charges
constituting interest payable by Borrower to Lender exceed the maximum amount or
the rate permitted under any applicable law or regulation, and if any such part
or provision of this Agreement is in contravention of any such law or
regulation, such part or provision shall be deemed amended to conform thereto.
<PAGE>
3.2 Closing Fee. Borrower shall pay to Lender as a closing fee the
amount of $337,500, which shall be fully earned as of and payable on the date
hereof.
3.3 Servicing Fee. Borrower shall pay to Lender monthly a servicing fee
in an amount equal to $2,000 in respect of Lender's services for each month (or
part thereof) while this Agreement remains in effect and for so long thereafter
as any of the Obligations are outstanding, which fee shall be fully earned as of
and payable in advance on the date hereof and on the first day of each month
hereafter.
3.4 Unused Line Fee. Borrower shall pay to Lender monthly an unused
line fee at a rate equal to three-eighths (3/8%) percent per annum calculated
upon the amount by which $35,000,000 exceeds the average daily principal balance
of the outstanding Revolving Loans and Letter of Credit Accommodations during
the immediately preceding month (or part thereof) while this Agreement is in
effect and for so long thereafter as any of the Obligations are outstanding,
which fee shall be payable on the first day of each month in arrears.
3.5 Changes in Laws and Increased Costs of Loans.
(a) Notwithstanding anything to the contrary contained herein, all
Eurodollar Rate Loans shall, upon notice by Lender to Borrower, convert to Prime
Rate Loans in the event that (i) any change in applicable law or regulation (or
the interpretation or administration thereof) shall either (A) make it unlawful
for Lender, Reference Bank or any participant to make or maintain Eurodollar
Rate Loans or to comply with the terms hereof in connection with the Eurodollar
Rate Loans, or (B) shall result in the increase in the costs to Lender,
Reference Bank or any participant of making or maintaining any Eurodollar Rate
Loans by an amount deemed by Lender to be material, or (C) reduce the amounts
received or receivable by Lender in respect thereof, by an amount deemed by
Lender to be material or (ii) the cost to Lender, Reference Bank or any
participant of making or maintaining any Eurodollar Rate Loans shall otherwise
increase by an amount deemed by Lender to be material. Borrower shall pay to
Lender, upon demand by Lender (or Lender may, at its option, charge any loan
account of Borrower) any amounts required to compensate Lender, the Reference
Bank or any participant with Lender for any loss (including loss of anticipated
profits), cost or expense incurred by such person as a result of the foregoing,
including, without limitation, any such loss, cost or expense incurred by reason
of the liquidation or reemployment of deposits or other funds acquired by such
person to make or maintain the Eurodollar Rate Loans or any portion thereof. A
certificate of Lender setting forth the basis for the determination of such
amount necessary to compensate Lender as aforesaid shall be delivered to
Borrower and shall be conclusive, absent manifest error.
(b) If any payments or prepayments in respect of the Eurodollar
Rate Loans are received by Lender other than on the last day of the applicable
Interest Period (whether pursuant to acceleration, upon maturity or otherwise),
including any payments pursuant to the application of collections under Section
6.3 or any other payments made with the proceeds of Collateral, Borrower shall
pay to Lender upon demand by Lender (or Lender may, at its option, charge any
loan account of Borrower) any amounts required to compensate Lender, the
Reference Bank or any participant with Lender for any additional loss (including
loss of anticipated profits), cost or expense incurred by such person as a
result of such prepayment or payment, including, without limitation, any loss,
cost or
<PAGE>
expense incurred by reason of the liquidation or reemployment of deposits or
other funds acquired by such person to make or maintain such Eurodollar Rate
Loans or any portion thereof.
SECTION 4. CONDITIONS PRECEDENT
4.1 Conditions Precedent to Initial Loans and Letter of Credit
Accommodations. Each of the following is a condition precedent to Lender making
the initial Loans and providing the initial Letter of Credit Accommodations
hereunder:
(a) Lender shall have received evidence, in form and substance
satisfactory to Lender, that Lender has valid perfected and first priority
security interests in and liens upon the Collateral and any other property which
is intended to be security for the Obligations or the liability of any Obligor
in respect thereof, subject only to the security interests and liens permitted
herein or in the other Financing Agreements;
(b) all requisite corporate action and proceedings in connection
with this Agreement and the other Financing Agreements shall be satisfactory in
form and substance to Lender, and Lender shall have received all information and
copies of all documents, including records of requisite corporate action and
proceedings which Lender may have requested in connection therewith, such
documents where requested by Lender or its counsel to be certified by
appropriate corporate officers or governmental authorities;
(c) no material adverse change shall have occurred in the assets,
business or prospects of Borrower since the date of Lender's latest field
examination and no change or event shall have occurred which would impair the
ability of Borrower or any Obligor to perform its obligations hereunder or under
any of the other Financing Agreements to which it is a party or of Lender to
enforce the Obligations or realize upon the Collateral;
(d) Lender shall have completed a field review of the Records and
such other information with respect to the Collateral as Lender may require to
determine the amount of Revolving Loans available to Borrower, the results of
which shall be satisfactory to Lender, not more than three (3) business days
prior to the date hereof;
(e) Lender shall have received, in form and substance satisfactory
to Lender, all consents, waivers, acknowledgments and other agreements from
third persons which Lender may deem necessary or desirable in order to permit,
protect and perfect its security interests in and liens upon the Collateral or
to effectuate the provisions or purposes of this Agreement and the other
Financing Agreements, including acknowledgements by lessors, mortgagees and
warehousemen of Lender's security interests in the Collateral, waivers by such
persons of any security interests, liens or other claims by such persons to the
Collateral, subordination agreements in form and substance satisfactory to
Lender from all of Borrower's vendors claiming any security interest in or lien
upon any of the Collateral, and agreements permitting Lender access to, and the
right to remain on, the premises to exercise its rights and remedies and
otherwise deal with the Collateral;
(f) Lender shall have received Subordination Agreements in form and
substance acceptable to Lender (each a "SUBORDINATION AGREEMENT") from each
officer, director and/or
<PAGE>
shareholder with respect to any indebtedness owing to such officer, director
and/or shareholder as of the date of this Agreement.
(g) Lender shall have received evidence of insurance and loss payee
endorsements required hereunder and under the other Financing Agreements, in
form and substance satisfactory to Lender, and certificates of insurance
policies and/or endorsements naming Lender as loss payee;
(h) Lender shall have received, in form and substance satisfactory
to Lender, such opinion letters of counsel to Borrower with respect to the
Financing Agreements and such other matters as Lender may request;
(i) Lender shall have received, in form and substance satisfactory
to Lender, all releases, terminations and such other documents as Lender may
request to evidence and effectuate the termination by the existing lender or
lenders to Borrower of their respective financing arrangements with Borrower and
the termination and release by it or them, as the case may be, of any interest
in and to any assets and properties of Borrower and each Obligor, duly
authorized, executed and delivered by it or each of them, including, but not
limited to, (i) UCC termination statements for all UCC financing statements
previously filed by it or any of them or their predecessors, as secured party
and Borrower or any Obligor, as debtor and (ii) satisfactions and discharges of
any mortgages, deeds of trust or deeds to secure debt by Borrower or any Obligor
in favor of such existing lender or lenders, in form acceptable for recording in
the appropriate government office;
(j) the Excess Closing Availability as determined by Lender, as of
the date hereof, shall be not less than $5,000,000 after giving effect to the
initial Loans made or to be made and Letter of Credit Accommodations issued or
to be issued in connection with the initial transactions hereunder; and
(k) the other Financing Agreements and all instruments and
documents hereunder and thereunder shall have been duly executed and delivered
to Lender, in form and substance satisfactory to Lender.
4.2 Conditions Precedent to All Loans and Letter of Credit
Accommodations. Each of the following is an additional condition precedent to
Lender making Loans and/or providing Letter of Credit Accommodations to
Borrower, including the initial Loans and Letter of Credit Accommodations and
any future Loans and Letter of Credit Accommodations:
(a) all representations and warranties contained herein and in the
other Financing Agreements shall be true and correct in all material respects
with the same effect as though such representations and warranties had been made
on and as of the date of the making of each such Loan or providing each such
Letter of Credit Accommodation and after giving effect thereto; and
(b) no Event of Default and no event or condition which, with
notice or passage of time or both, would constitute an Event of Default, shall
exist or have occurred and be continuing on and as of the date of the making of
such Loan or providing each such Letter of Credit Accommodation and after giving
effect thereto.
<PAGE>
SECTION 5. GRANT OF SECURITY INTEREST
To secure payment and performance of all Obligations, Borrower hereby
grants to Lender a continuing security interest in, a lien upon, and a right of
set off against, and hereby assigns to Lender as security, the following
property and interests in property of Borrower, whether now owned or hereafter
acquired or existing, and wherever located (collectively, the "COLLATERAL"):
5.1 Accounts;
5.2 all present and future contract rights, general intangibles
(including tax and duty refunds, registered and unregistered patents,
trademarks, service marks, copyrights, trade names, applications for the
foregoing, trade secrets, goodwill, processes, drawings, blueprints, customer
lists, licenses, whether as licensor or licensee, choses in action and other
claims and existing and future leasehold interests in equipment, real estate and
fixtures), chattel paper, documents, instruments, securities and other
investment property (including, without limitation, the Pledged Property),
letters of credit, bankers' acceptances and guaranties;
5.3 all present and future monies, securities, credit balances,
deposits, deposit accounts and other property of Borrower now or hereafter held
or received by or in transit to Lender or its affiliates or at any other
depository or other institution from or for the account of Borrower, whether for
safekeeping, pledge, custody, transmission, collection or otherwise, and all
present and future liens, security interests, rights, remedies, title and
interest in, to and in respect of Accounts and other Collateral, including (a)
rights and remedies under or relating to guaranties, contracts of suretyship,
letters of credit and credit and other insurance related to the Collateral, (b)
rights of stoppage in transit, replevin, repossession, reclamation and other
rights and remedies of an unpaid vendor, lienor or secured party, (c) goods
described in invoices, documents, contracts or instruments with respect to, or
otherwise representing or evidencing, Accounts or other Collateral, including
returned, repossessed and reclaimed goods, and (d) deposits by and property of
account debtors or other persons securing the obligations of account debtors;
5.4 Inventory;
5.5 Equipment;
5.6 Records; and
5.7 all products and proceeds of the foregoing, in any form, including
insurance proceeds and all claims against third parties for loss or damage to or
destruction of any or all of the foregoing.
SECTION 6. COLLECTION AND ADMINISTRATION
6.1 Borrower's Loan Account. Lender shall maintain one or more loan
account(s) on its books in which shall be recorded (a) all Loans, Letter of
Credit Accommodations and other Obligations and the Collateral, (b) all payments
made by or on behalf of Borrower and (c) all other appropriate debits and
credits as provided in this Agreement, including fees, charges, costs, expenses
<PAGE>
and interest. All entries in the loan account(s) shall be made in accordance
with Lender's customary practices as in effect from time to time.
6.2 Statements. Lender shall render to Borrower each month a statement
setting forth the balance in the Borrower's loan account(s) maintained by Lender
for Borrower pursuant to the provisions of this Agreement, including principal,
interest, fees, costs and expenses. Each such statement shall be subject to
subsequent adjustment by Lender but shall, absent manifest errors or omissions,
be considered correct and deemed accepted by Borrower and conclusively binding
upon Borrower as an account stated except to the extent that Lender receives a
written notice from Borrower of any specific exceptions of Borrower thereto
within thirty (30) days after the date such statement has been mailed by Lender.
Until such time as Lender shall have rendered to Borrower a written statement as
provided above, the balance in Borrower's loan account(s) shall be presumptive
evidence of the amounts due and owing to Lender by Borrower.
6.3 Collection of Accounts.
(a) Borrower shall establish and maintain, at its expense, blocked
accounts or lockboxes and related blocked accounts (in either case, "BLOCKED
ACCOUNTS"), as Lender may specify, with such banks as are acceptable to Lender
into which Borrower shall promptly deposit and direct its account debtors to
directly remit all payments on Accounts and all payments constituting proceeds
of Inventory or other Collateral in the identical form in which such payments
are made, whether by cash, check or other manner. The banks at which the Blocked
Accounts are established shall enter into an agreement, in form and substance
satisfactory to Lender, providing that all items received or deposited in the
Blocked Accounts are the property of Lender, that the depository bank has no
lien upon, or right to setoff against, the Blocked Accounts, the items received
for deposit therein, or the funds from time to time on deposit therein and that
the depository bank will wire, or otherwise transfer, in immediately available
funds, on a daily basis, all funds received or deposited into the Blocked
Accounts to such bank account of Lender as Lender may from time to time
designate for such purpose ("PAYMENT ACCOUNT"). Borrower agrees that all
payments made to such Blocked Accounts or other funds received and collected by
Lender, whether on the Accounts or as proceeds of Inventory or other Collateral
or otherwise shall be the property of Lender.
(b) For purposes of calculating the amount of the Loans available
to Borrower, such payments will be applied (conditional upon final collection)
to the Obligations on the business day of receipt by Lender of immediately
available funds in the Payment Account provided such payments and notice thereof
are received in accordance with Lender's usual and customary practices as in
effect from time to time and within sufficient time to credit Borrower's loan
account on such day, and if not, then on the next business day. For the purposes
of calculating interest on the Obligations, such payments or other funds
received will be applied (conditional upon final collection) to the Obligations
one (1) business day following the date of receipt of immediately available
funds by Lender in the Payment Account provided such payments or other funds and
notice thereof are received in accordance with Lender's usual and customary
practices as in effect from time to time and within sufficient time to credit
Borrower's loan account on such day, and if not, then on the next business day.
<PAGE>
(c) Borrower and all of its affiliates, subsidiaries, shareholders,
directors, employees or agents shall, acting as trustee for Lender, receive, as
the property of Lender, any monies, checks, notes, drafts or any other payment
relating to and/or proceeds of Accounts or other Collateral which come into
their possession or under their control and immediately upon receipt thereof,
shall deposit or cause the same to be deposited in the Blocked Accounts, or
remit the same or cause the same to be remitted, in kind, to Lender. In no event
shall the same be commingled with Borrower's own funds. Borrower agrees to
reimburse Lender on demand for any amounts owed or paid to any bank at which a
Blocked Account is established or any other bank or person involved in the
transfer of funds to or from the Blocked Accounts arising out of Lender's
payments to or indemnification of such bank or person. The obligation of
Borrower to reimburse Lender for such amounts pursuant to this Section 6.3 shall
survive the termination or non-renewal of this Agreement.
6.4 Payments. All Obligations shall be payable to the Payment Account
as provided in Section 6.3 or such other place as Lender may designate from time
to time. Lender may apply payments received or collected from Borrower or for
the account of Borrower (including the monetary proceeds of collections or of
realization upon any Collateral) to such of the Obligations, whether or not then
due, in such order and manner as Lender determines. At Lender's option, all
principal, interest, fees, costs, expenses and other charges provided for in
this Agreement or the other Financing Agreements may be charged directly to the
loan account(s) of Borrower. Borrower shall make all payments to Lender on the
Obligations free and clear of, and without deduction or withholding for or on
account of, any setoff, counterclaim, defense, duties, taxes, levies, imposts,
fees, deductions, withholding, restrictions or conditions of any kind. If after
receipt of any payment of, or proceeds of Collateral applied to the payment of,
any of the Obligations, Lender is required to surrender or return such payment
or proceeds to any Person for any reason, then the Obligations intended to be
satisfied by such payment or proceeds shall be reinstated and continue and this
Agreement shall continue in full force and effect as if such payment or proceeds
had not been received by Lender. Borrower shall be liable to pay to Lender, and
does hereby indemnify and hold Lender harmless for the amount of any payments or
proceeds surrendered or returned. This Section 6.4 shall remain effective
notwithstanding any contrary action which may be taken by Lender in reliance
upon such payment or proceeds. This Section 6.4 shall survive the payment of the
Obligations and the termination or non-renewal of this Agreement.
6.5 Authorization to Make Loans. Lender is authorized to make the Loans
and provide the Letter of Credit Accommodations based upon telephonic or other
instructions received from anyone purporting to be an officer of Borrower or
other authorized person or, at the discretion of Lender, if such Loans are
necessary to satisfy any Obligations. All requests for Loans or Letter of Credit
Accommodations hereunder shall specify the date on which the requested advance
is to be made or Letter of Credit Accommodations established (which day shall be
a business day) and the amount of the requested Loan. Requests received after
11:00 a.m. Chicago, Illinois time on any day shall be deemed to have been made
as of the opening of business on the immediately following business day. All
Loans and Letter of Credit Accommodations under this Agreement shall be
conclusively presumed to have been made to, and at the request of and for the
benefit of, Borrower when deposited to the credit of Borrower or otherwise
disbursed or established in accordance with the instructions of Borrower or in
accordance with the terms and conditions of this Agreement.
<PAGE>
6.6 Use of Proceeds. Borrower shall use the initial proceeds of the
Loans provided by Lender to Borrower hereunder only for: (a) payments to each of
the persons listed in the disbursement direction letter furnished by Borrower to
Lender on or about the date hereof and (b) costs, expenses and fees in
connection with the preparation, negotiation, execution and delivery of this
Agreement and the other Financing Agreements. All other Loans made or Letter of
Credit Accommodations provided by Lender to Borrower pursuant to the provisions
hereof shall be used by Borrower only for general operating, working capital and
other proper corporate purposes of Borrower not otherwise prohibited by the
terms hereof. None of the proceeds will be used, directly or indirectly, for the
purpose of purchasing or carrying any margin security or for the purposes of
reducing or retiring any indebtedness which was originally incurred to purchase
or carry any margin security or for any other purpose which might cause any of
the Loans to be considered a "purpose credit" within the meaning of Regulation G
of the Board of Governors of the Federal Reserve System, as amended.
SECTION 7. COLLATERAL REPORTING AND COVENANTS
7.1 Collateral Reporting. Borrower shall provide Lender with the
following documents in a form satisfactory to Lender: (a) on a daily basis as
required by Lender, a schedule of Accounts, sales made, credits issued and cash
received; (b) on a weekly basis, perpetual inventory reports and inventory
reports by category, including, without limitation, Return to Vendor Inventory;
(c) on a monthly basis or more frequently as Lender may request, agings of
accounts payable, (d) upon Lender's request, (i) copies of customer statements
and credit memos, remittance advices and reports, and copies of deposit slips
and bank statements, (ii) copies of shipping and delivery documents, and (iii)
copies of purchase orders, invoices and delivery documents for Inventory and
Equipment acquired by Borrower; (e) on a weekly basis or more frequently as
Lender may request, agings of accounts receivable, together with a detailed
schedule of all returns, discounts, claims, credits, chargebacks and allowances
of any nature issued, owing, granted, outstanding, available or claimed with
respect to such accounts receivable; (f) on a quarterly basis or more frequently
as Lender may request, an Inventory Appraisal (as defined in Section 7.3) and
(g) such other reports as to the Collateral as Lender shall request from time to
time. If any of Borrower's records or reports of the Collateral are prepared or
maintained by an accounting service, contractor, shipper or other agent,
Borrower hereby irrevocably authorizes such service, contractor, shipper or
agent to deliver such records, reports, and related documents to Lender and to
follow Lender's instructions with respect to further services at any time that
an Event of Default exists or has occurred and is continuing.
7.2 Accounts Covenants.
(a) Borrower shall notify Lender promptly of: (i) any material
delay in Borrower's performance of any of its obligations to any account debtor
or the assertion of any claims, offsets, defenses or counterclaims by any
account debtor, or any disputes with account debtors, or any settlement,
adjustment or compromise thereof which is not in the ordinary course of
Borrower's business in accordance with practices and policies previously
disclosed in writing to Lender; (ii) all material adverse information relating
to the financial condition of any account debtor; and (iii) any event or
circumstance which, to Borrower's knowledge would cause Lender to consider any
then existing Accounts as no longer constituting Eligible Accounts. No credit,
discount, allowance or extension or agreement for any of the foregoing shall be
granted to any account debtor without
<PAGE>
Lender's consent, except in the ordinary course of Borrower's business in
accordance with practices and policies previously disclosed in writing to
Lender. So long as no Event of Default exists or has occurred and is continuing,
Borrower shall settle, adjust or compromise any claim, offset, counterclaim or
dispute with any account debtor. At any time that an Event of Default exists or
has occurred and is continuing, Lender shall, at its option, have the exclusive
right to settle, adjust or compromise any claim, offset, counterclaim or dispute
with account debtors or grant any credits, discounts or allowances.
(b) At any time that Inventory is returned, reclaimed or
repossessed, the Account (or portion thereof) which arose from the sale of such
returned, reclaimed or repossessed Inventory shall not be deemed an Eligible
Account. In the event any account debtor returns Inventory when an Event of
Default exists or has occurred and is continuing, Borrower shall, upon Lender's
request, (i) hold the returned Inventory in trust for Lender, (ii) segregate all
returned Inventory from all of its other property, (iii) dispose of the returned
Inventory solely according to Lender's instructions, and (iv) not issue any
credits, discounts or allowances with respect thereto without Lender's prior
written consent.
(c) With respect to each Account: (i) the amounts shown on any
invoice delivered to Lender or schedule thereof delivered to Lender shall be
true and complete, (ii) no payments shall be made thereon except payments
immediately delivered to Lender pursuant to the terms of this Agreement, (iii)
no credit, discount, allowance or extension or agreement for any of the
foregoing shall be granted to any account debtor except as reported to Lender in
accordance with this Agreement and except for credits, discounts, allowances or
extensions made or given in the ordinary course of Borrower's business in
accordance with practices and policies previously disclosed to Lender, (iv)
there shall be no setoffs, deductions, contras, defenses, counterclaims or
disputes existing or asserted with respect thereto except as reported to Lender
in accordance with the terms of this Agreement, (v) none of the transactions
giving rise thereto will violate any applicable State or Federal laws or
regulations, all documentation relating thereto will be legally sufficient under
such laws and regulations and all such documentation will be legally enforceable
in accordance with its terms, including, without limitation, all recording,
filing and other requirements of giving public notice under any applicable law
have been satisfied with respect to Accounts, including, without limitation, the
filing of any report in the states of New Jersey, Minnesota and Indiana with the
New Jersey Division of Taxation, the Minnesota Department of Revenue and the
Indiana Department of Revenue, respectively.
(d) Lender shall have the right at any time or times, in Lender's
name or in the name of a nominee of Lender, to verify the validity, amount or
any other matter relating to any Account or other Collateral, by mail,
telephone, facsimile transmission or otherwise.
(e) Borrower shall deliver or cause to be delivered to Lender, with
appropriate endorsement and assignment, with full recourse to Borrower, all
chattel paper and instruments which Borrower now owns or may at any time acquire
immediately upon Borrower's receipt thereof, except as Lender may otherwise
agree.
(f) Lender may, at any time or times that an Event of Default
exists or has occurred and is continuing, (i) notify any or all account debtors
that the Accounts have been assigned
<PAGE>
to Lender and that Lender has a security interest therein and Lender may direct
any or all accounts debtors to make payment of Accounts directly to Lender, (ii)
extend the time of payment of, compromise, settle or adjust for cash, credit,
return of merchandise or otherwise, and upon any terms or conditions, any and
all Accounts or other obligations included in the Collateral and thereby
discharge or release the account debtor or any other party or parties in any way
liable for payment thereof without affecting any of the Obligations, (iii)
demand, collect or enforce payment of any Accounts or such other obligations,
but without any duty to do so, and Lender shall not be liable for its failure to
collect or enforce the payment thereof nor for the negligence of its agents or
attorneys with respect thereto and (iv) take whatever other action Lender may
deem necessary or desirable for the protection of its interests. At any time
that an Event of Default exists or has occurred and is continuing, at Lender's
request, all invoices and statements sent to any account debtor shall state that
the Accounts and such other obligations have been assigned to Lender and are
payable directly and only to Lender and Borrower shall deliver to Lender such
originals of documents evidencing the sale and delivery of goods or the
performance of services giving rise to any Accounts as Lender may require.
7.3 Inventory Covenants. With respect to the Inventory: (a) Borrower
shall at all times maintain inventory records reasonably satisfactory to Lender,
keeping correct and accurate records itemizing and describing the kind, type,
quality and quantity of Inventory, Borrower's cost therefor and daily
withdrawals therefrom and additions thereto; (b) Borrower shall conduct a
physical count of the Inventory at least once each year, but at any time or
times as Lender may request on or after an Event of Default, and promptly
following such physical inventory shall supply Lender with a report in the form
and with such specificity as may be reasonably satisfactory to Lender concerning
such physical count; (c) Borrower shall not remove any Inventory from the
locations set forth or permitted herein, without the prior written consent of
Lender, except for sales of Inventory in the ordinary course of Borrower's
business and except to move Inventory directly from one location set forth or
permitted herein to another such location; (d) Borrower shall, at its expense,
on a quarterly basis or more frequently as Lender may request, deliver or cause
to be delivered to Lender written reports or appraisals as to the Inventory in
form, scope and methodology acceptable to Lender and by Buxbaum-Ginsberg &
Associates, Inc. or another appraiser acceptable to Lender, addressed to Lender
or upon which Lender is expressly permitted to rely (the "Inventory Appraisal");
(e) Borrower shall produce, use, store and maintain the Inventory with all
reasonable care and caution and in accordance with applicable standards of any
insurance and in conformity with applicable laws (including the requirements of
the Federal Fair Labor Standards Act of 1938, as amended and all rules,
regulations and orders related thereto); (f) Borrower assumes all responsibility
and liability arising from or relating to the production, use, sale or other
disposition of the Inventory; (g) except in the ordinary course of Borrower's
business in accordance with practices and policies previously disclosed in
writing to Lender, Borrower shall not sell Inventory to any customer on
approval, or any other basis which may obligate Borrower to repurchase such
Inventory; (h) Borrower shall keep the Inventory in good and marketable
condition; (i) Borrower shall not, without prior notice to Lender, acquire or
accept any Inventory on consignment or approval; and (j) Borrower shall not
return Inventory to any vendor in the ordinary course of Borrower's business or
otherwise if an Event of Default exists or has occurred and is continuing or if
the Borrower has Excess Availability of less than $1,000,000.
<PAGE>
7.4 Equipment Covenants. With respect to the Equipment: (a) upon
Lender's request, Borrower shall, at its expense, at any time or times as Lender
may request on or after an Event of Default, deliver or cause to be delivered to
Lender written reports or appraisals as to the Equipment in form, scope and
methodology acceptable to Lender and by an appraiser acceptable to Lender; (b)
Borrower shall keep the Equipment in good order, repair, running and marketable
condition (ordinary wear and tear excepted); (c) Borrower shall use the
Equipment with all reasonable care and caution and in accordance with applicable
standards of any insurance and in conformity with all applicable laws; (d) the
Equipment is and shall be used in Borrower's business and not for personal,
family, household or farming use; (e) Borrower shall not remove any Equipment
from the locations set forth or permitted herein, except to the extent necessary
to have any Equipment repaired or maintained in the ordinary course of the
business of Borrower or to move Equipment directly from one location set forth
or permitted herein to another such location and except for the movement of
motor vehicles used by or for the benefit of Borrower in the ordinary course of
business; (f) the Equipment is now and shall remain personal property and
Borrower shall not permit any of the Equipment to be or become a part of or
affixed to real property; and (g) Borrower assumes all responsibility and
liability arising from the use of the Equipment.
7.5 Power of Attorney. Borrower hereby irrevocably designates and
appoints Lender (and all persons designated by Lender) as Borrower's true and
lawful attorney-in-fact, and authorizes Lender, in Borrower's or Lender's name,
to: (a) at any time an Event of Default exists or has occurred and is continuing
(i) demand payment on Accounts or other proceeds of Inventory or other
Collateral, (ii) enforce payment of Accounts by legal proceedings or otherwise,
(iii) exercise all of Borrower's rights and remedies to collect any Account or
other Collateral, (iv) sell or assign any Account upon such terms, for such
amount and at such time or times as the Lender deems advisable, (v) settle,
adjust, compromise, extend or renew an Account, (vi) discharge and release any
Account, (vii) prepare, file and sign Borrower's name on any proof of claim in
bankruptcy or other similar document against an account debtor, (viii) notify
the post office authorities to change the address for delivery of Borrower's
mail to an address designated by Lender, and open and dispose of all mail
addressed to Borrower, and (ix) do all acts and things which are necessary, in
Lender's determination, to fulfill Borrower's obligations under this Agreement
and the other Financing Agreements and (b) at any time to (i) take control in
any manner of any item of payment or proceeds thereof, (ii) have access to any
lockbox or postal box into which Borrower's mail is deposited, (iii) endorse
Borrower's name upon any items of payment or proceeds thereof and deposit the
same in the Lender's account for application to the Obligations, (iv) endorse
Borrower's name upon any chattel paper, document, instrument, invoice, or
similar document or agreement relating to any Account or any goods pertaining
thereto or any other Collateral, (v) sign Borrower's name on any verification of
Accounts and notices thereof to account debtors and (vi) execute in Borrower's
name and file any UCC financing statements or amendments thereto. Borrower
hereby releases Lender and its officers, employees and designees from any
liabilities arising from any act or acts under this power of attorney and in
furtherance thereof, whether of omission or commission, except as a result of
Lender's own gross negligence or wilful misconduct as determined pursuant to a
final non-appealable order of a court of competent jurisdiction.
7.6 Right to Cure. Lender may, at its option, (a) cure any default by
Borrower under any agreement with a third party or pay or bond on appeal any
judgment entered against Borrower, (b) discharge taxes, liens, security
interests or other encumbrances at any time levied on or existing with
<PAGE>
respect to the Collateral and (c) pay any amount, incur any expense or perform
any act which, in Lender's judgment, is necessary or appropriate to preserve,
protect, insure or maintain the Collateral and the rights of Lender with respect
thereto. Lender may add any amounts so expended to the Obligations and charge
Borrower's account therefor, such amounts to be repayable by Borrower on demand.
Lender shall be under no obligation to effect such cure, payment or bonding and
shall not, by doing so, be deemed to have assumed any obligation or liability of
Borrower. Any payment made or other action taken by Lender under this Section
shall be without prejudice to any right to assert an Event of Default hereunder
and to proceed accordingly.
7.7 Access to Premises. From time to time as requested by Lender, at
the cost and expense of Borrower, (a) Lender or its designee shall have complete
access to all of Borrower's premises during normal business hours and after
notice to Borrower, or at any time and without notice to Borrower if an Event of
Default exists or has occurred and is continuing, for the purposes of
inspecting, verifying and auditing the Collateral and all of Borrower's books
and records, including the Records, and (b) Borrower shall promptly furnish to
Lender such copies of such books and records or extracts therefrom as Lender may
request, and (c) use during normal business hours such of Borrower's personnel,
equipment, supplies and premises as may be reasonably necessary for the
foregoing and if an Event of Default exists or has occurred and is continuing
for the collection of Accounts and realization of other Collateral.
SECTION 8. REPRESENTATIONS AND WARRANTIES
Borrower hereby represents and warrants to Lender the following (which
shall survive the execution and delivery of this Agreement), the truth and
accuracy of which are a continuing condition of the making of Loans and
providing Letter of Credit Accommodations by Lender to Borrower:
8.1 Corporate Existence, Power and Authority; Subsidiaries. Borrower is
a corporation duly organized and in good standing under the laws of its state of
incorporation and is duly qualified as a foreign corporation and in good
standing in all states or other jurisdictions where the nature and extent of the
business transacted by it or the ownership of assets makes such qualification
necessary, except for those jurisdictions in which the failure to so qualify
would not have a material adverse effect on Borrower's financial condition,
results of operation or business or the rights of Lender in or to any of the
Collateral. The execution, delivery and performance of this Agreement, the other
Financing Agreements and the transactions contemplated hereunder and thereunder
are all within Borrower's corporate powers, have been duly authorized and are
not in contravention of law or the terms of Borrower's certificate of
incorporation, by-laws, or other organizational documentation, or any indenture,
agreement or undertaking to which Borrower is a party or by which Borrower or
its property are bound. This Agreement and the other Financing Agreements
constitute legal, valid and binding obligations of Borrower enforceable in
accordance with their respective terms. Borrower does not have any subsidiaries
except as set forth on the Information Certificate.
8.2 Financial Statements; No Material Adverse Change. All financial
statements relating to Borrower which have been or may hereafter be delivered by
Borrower to Lender have been prepared in accordance with GAAP and fairly present
the financial condition and the results of operation of Borrower as at the dates
and for the periods set forth therein. Except as disclosed in any interim
financial statements furnished by Borrower to Lender prior to the date of this
Agreement,
<PAGE>
there has been no material adverse change in the assets, liabilities, properties
and condition, financial or otherwise, of Borrower, since the date of the most
recent audited financial statements furnished by Borrower to Lender prior to the
date of this Agreement.
8.3 Chief Executive Office; Collateral Locations. The chief executive
office of Borrower and Borrower's Records concerning Accounts are located only
at the address set forth below and its only other places of business and the
only other locations of Collateral, if any, are the addresses set forth in the
Information Certificate, subject to the right of Borrower to establish new
locations in accordance with Section 9.2 below. The Information Certificate
correctly identifies any of such locations which are not owned by Borrower and
sets forth the owners and/or operators thereof and to the best of Borrower's
knowledge, the holders of any mortgages on such locations.
8.4 Priority of Liens; Title to Properties. The security interests and
liens granted to Lender under this Agreement and the other Financing Agreements
constitute valid and perfected first priority liens and security interests in
and upon the Collateral subject only to the liens indicated on Schedule 8.4
hereto and the other liens permitted under Section 9.8 hereof. Borrower has good
and marketable title to all of its properties and assets subject to no liens,
mortgages, pledges, security interests, encumbrances or charges of any kind,
except those granted to Lender and such others as are specifically listed on
Schedule 8.4 hereto or permitted under Section 9.8 hereof.
8.5 Tax Returns. Borrower has filed, or caused to be filed, in a timely
manner all tax returns, reports and declarations which are required to be filed
by it (without requests for extension except as previously disclosed in writing
to Lender). All information in such tax returns, reports and declarations is
complete and accurate in all material respects. Borrower has paid or caused to
be paid all taxes due and payable or claimed due and payable in any assessment
received by it, except taxes the validity of which are being contested in good
faith by appropriate proceedings diligently pursued and available to Borrower
and with respect to which adequate reserves have been set aside on its books.
Adequate provision has been made for the payment of all accrued and unpaid
Federal, State, county, local, foreign and other taxes whether or not yet due
and payable and whether or not disputed.
8.6 Litigation. Except as set forth on the Information Certificate,
there is no present investigation by any governmental agency pending, or to the
best of Borrower's knowledge threatened, against or affecting Borrower, its
assets or business and there is no action, suit, proceeding or claim by any
Person pending, or to the best of Borrower's knowledge threatened, against
Borrower or its assets or goodwill, or against or affecting any transactions
contemplated by this Agreement, which if adversely determined against Borrower
would result in any material adverse change in the assets, business or prospects
of Borrower or would impair the ability of Borrower to perform its obligations
hereunder or under any of the other Financing Agreements to which it is a party
or of Lender to enforce any Obligations or realize upon any Collateral.
8.7 Compliance with Other Agreements and Applicable Laws. Borrower is
not in default in any material respect under, or in violation in any material
respect of any of the terms of, any agreement, contract, instrument, lease or
other commitment to which it is a party or by which it or any of its assets are
bound and Borrower is in compliance in all material respects with all applicable
provisions of laws, rules, regulations, licenses, permits, approvals and orders
of any foreign, Federal, State or local governmental authority.
<PAGE>
8.8 Bank Accounts. All of the deposit accounts, investment accounts or
other accounts in the name of or used by Borrower maintained at any bank or
other financial institution are set forth on Schedule 8.8 hereto, subject to the
right of Borrower to establish new accounts in accordance with Section 9.13
below.
8.9 Accuracy and Completeness of Information. All information furnished
by or on behalf of Borrower in writing to Lender in connection with this
Agreement or any of the other Financing Agreements or any transaction
contemplated hereby or thereby, including all information on the Information
Certificate is true and correct in all material respects on the date as of which
such information is dated or certified and does not omit any material fact
necessary in order to make such information not misleading. No event or
circumstance has occurred which has had or could reasonably be expected to have
a material adverse affect on the business, assets or prospects of Borrower,
which has not been fully and accurately disclosed to Lender in writing.
8.10 Survival of Warranties; Cumulative. All representations and
warranties contained in this Agreement or any of the other Financing Agreements
shall survive the execution and delivery of this Agreement and shall be deemed
to have been made again to Lender on the date of each additional borrowing or
other credit accommodation hereunder and shall be conclusively presumed to have
been relied on by Lender regardless of any investigation made or information
possessed by Lender. The representations and warranties set forth herein shall
be cumulative and in addition to any other representations or warranties which
Borrower shall now or hereafter give, or cause to be given, to Lender.
SECTION 9. AFFIRMATIVE AND NEGATIVE COVENANTS
9.1 Maintenance of Existence. Borrower shall at all times preserve,
renew and keep in full, force and effect its corporate existence and rights and
franchises with respect thereto and maintain in full force and effect all
permits, licenses, trademarks, tradenames, approvals, authorizations, leases and
contracts necessary to carry on the business as presently or proposed to be
conducted. Borrower shall give Lender thirty (30) days prior written notice of
any proposed change in its corporate name, which notice shall set forth the new
name and Borrower shall deliver to Lender a copy of the amendment to the
Certificate of Incorporation of Borrower providing for the name change certified
by the Secretary of State of the jurisdiction of incorporation of Borrower as
soon as it is available.
9.2 New Collateral Locations. Borrower may open any new location within
the continental United States provided Borrower (a) gives Lender thirty (30)
days prior written notice of the intended opening of any such new location and
(b) executes and delivers, or causes to be executed and delivered, to Lender
such agreements, documents, and instruments as Lender may deem reasonably
necessary or desirable to protect its interests in the Collateral at such
location, including UCC financing statements.
9.3 Compliance with Laws, Regulations, Etc. Borrower shall, at all
times, comply in all material respects with all laws, rules, regulations,
licenses, permits, approvals and orders of any Federal, State or local
governmental authority applicable to it.
<PAGE>
9.4 Payment of Taxes and Claims. Borrower shall duly pay and discharge
all taxes, assessments, contributions and governmental charges upon or against
it or its properties or assets, except for taxes the validity of which are being
contested in good faith by appropriate proceedings diligently pursued and
available to Borrower and with respect to which adequate reserves have been set
aside on its books. Borrower shall be liable for any tax or penalties imposed on
Lender as a result of the financing arrangements provided for herein and
Borrower agrees to indemnify and hold Lender harmless with respect to the
foregoing, and to repay to Lender on demand the amount thereof, and until paid
by Borrower such amount shall be added and deemed part of the Loans, provided,
that, nothing contained herein shall be construed to require Borrower to pay any
income or franchise taxes attributable to the income of Lender from any amounts
charged or paid hereunder to Lender. The foregoing indemnity shall survive the
payment of the Obligations and the termination or non-renewal of this Agreement.
9.5 Insurance. Borrower shall, at all times, maintain with financially
sound and reputable insurers insurance with respect to the Collateral against
loss or damage and all other insurance of the kinds and in the amounts
customarily insured against or carried by corporations of established reputation
engaged in the same or similar businesses and similarly situated. Said policies
of insurance shall be satisfactory to Lender as to form, amount and insurer.
Borrower shall furnish certificates, policies or endorsements to Lender as
Lender shall require as proof of such insurance, and, if Borrower fails to do
so, Lender is authorized, but not required, to obtain such insurance at the
expense of Borrower. All policies shall provide for at least thirty (30) days
prior written notice to Lender of any cancellation or reduction of coverage and
that Lender may act as attorney for Borrower in obtaining, and at any time an
Event of Default exists or has occurred and is continuing, adjusting, settling,
amending and canceling such insurance. Borrower shall cause Lender to be named
as a loss payee and an additional insured (but without any liability for any
premiums) under such insurance policies and Borrower shall obtain
non-contributory lender's loss payable endorsements to all insurance policies in
form and substance satisfactory to Lender. Such lender's loss payable
endorsements shall specify that the proceeds of such insurance shall be payable
to Lender as its interests may appear and further specify that Lender shall be
paid regardless of any act or omission by Borrower or any of its affiliates. At
its option, Lender may apply any insurance proceeds received by Lender at any
time to the cost of repairs or replacement of Collateral and/or to payment of
the Obligations, whether or not then due, in any order and in such manner as
Lender may determine or hold such proceeds as cash collateral for the
Obligations.
9.6 Financial Statements and Other Information.
(a) Borrower shall keep proper books and records in which true and
complete entries shall be made of all dealings or transactions of or in relation
to the Collateral and the business of Borrower and its subsidiaries (if any) in
accordance with GAAP and Borrower shall furnish or cause to be furnished to
Lender: (i) within fifteen (15) business days after the end of each fiscal
month, monthly unaudited consolidated financial statements, and, if Borrower has
any subsidiaries, unaudited consolidating financial statements (including in
each case balance sheets, statements of income and loss, statements of cash
flow, and statements of shareholders' equity), all in reasonable detail, fairly
presenting the financial position and the results of the operations of Borrower
and its subsidiaries as of the end of and through such fiscal month and (ii)
within ninety (90) days after the end of each fiscal year, audited consolidated
financial statements and, if Borrower has any
<PAGE>
subsidiaries, audited consolidating financial statements of Borrower and its
subsidiaries (including in each case balance sheets, statements of income and
loss, statements of cash flow and statements of shareholders' equity), and the
accompanying notes thereto, all in reasonable detail, fairly presenting the
financial position and the results of the operations of Borrower and its
subsidiaries as of the end of and for such fiscal year, together with the
unqualified opinion of independent certified public accountants, which
accountants shall be an independent accounting firm selected by Borrower and
reasonably acceptable to Lender, that such financial statements have been
prepared in accordance with GAAP, and present fairly the results of operations
and financial condition of Borrower and its subsidiaries as of the end of and
for the fiscal year then ended.
(b) Borrower shall promptly notify Lender in writing of the details
of (i) any loss, damage, investigation, action, suit, proceeding or claim
relating to the Collateral or any other property which is security for the
Obligations or which would result in any material adverse change in Borrower's
business, properties, assets, goodwill or condition, financial or otherwise and
(ii) the occurrence of any Event of Default or event which, with the passage of
time or giving of notice or both, would constitute an Event of Default.
(c) Borrower shall promptly after the sending or filing thereof
furnish or cause to be furnished to Lender copies of all reports which Borrower
sends to its stockholders generally and copies of all reports and registration
statements which Borrower files with the Securities and Exchange Commission, any
national securities exchange or the National Association of Securities Dealers,
Inc.
(d) Borrower shall furnish or cause to be furnished to Lender such
budgets, forecasts, projections and other information respecting the Collateral
and the business of Borrower, as Lender may, from time to time, reasonably
request. Lender is hereby authorized to deliver a copy of any financial
statement or any other information relating to the business of Borrower to any
court or other government agency or to any participant or assignee or
prospective participant or assignee. Borrower hereby irrevocably authorizes and
directs all accountants or auditors to deliver to Lender, at Borrower's expense,
copies of the financial statements of Borrower and any reports or management
letters prepared by such accountants or auditors on behalf of Borrower and to
disclose to Lender such information as they may have regarding the business of
Borrower. Any documents, schedules, invoices or other papers delivered to Lender
may be destroyed or otherwise disposed of by Lender one (1) year after the same
are delivered to Lender, except as otherwise designated by Borrower to Lender in
writing.
9.7 Sale of Assets, Consolidation, Merger, Dissolution, Etc. Borrower
shall not, directly or indirectly, (a) merge into or with or consolidate with
any other Person or permit any other Person to merge into or with or consolidate
with it, or (b) sell, assign, lease, transfer, abandon or otherwise dispose of
any stock or indebtedness to any other Person or any of its assets to any other
Person (except for (i) sales of Inventory in the ordinary course of business and
(ii) the disposition of worn- out or obsolete Equipment or Equipment no longer
used in the business of Borrower so long as (A) if an Event of Default exists or
has occurred and is continuing, any proceeds are paid to Lender and (B) such
sales do not involve Equipment having an aggregate fair market value in excess
of $50,000 for all such Equipment disposed of in any fiscal year of Borrower),
or (c) form or acquire any subsidiaries, or (d) wind up, liquidate or dissolve
or (e) agree to do any of the foregoing.
<PAGE>
9.8 Encumbrances. Borrower shall not create, incur, assume or suffer to
exist any security interest, mortgage, pledge, lien, charge or other encumbrance
of any nature whatsoever on any of its assets or properties, including the
Collateral, except: (a) liens and security interests of Lender; (b) liens
securing the payment of taxes, either not yet overdue or the validity of which
are being contested in good faith by appropriate proceedings diligently pursued
and available to Borrower and with respect to which adequate reserves have been
set aside on its books; (c) non-consensual statutory liens (other than liens
securing the payment of taxes) arising in the ordinary course of Borrower's
business to the extent: (i) such liens secure indebtedness which is not overdue
or (ii) such liens secure indebtedness relating to claims or liabilities which
are fully insured and being defended at the sole cost and expense and at the
sole risk of the insurer or being contested in good faith by appropriate
proceedings diligently pursued and available to Borrower, in each case prior to
the commencement of foreclosure or other similar proceedings and with respect to
which adequate reserves have been set aside on its books; (d) zoning
restrictions, easements, licenses, covenants and other restrictions affecting
the use of real property which do not interfere in any material respect with the
use of such real property or ordinary conduct of the business of Borrower as
presently conducted thereon or materially impair the value of the real property
which may be subject thereto; (e) purchase money security interests in Equipment
(including capital leases) and purchase money mortgages on real estate not to
exceed $50,000 in the aggregate at any time outstanding so long as such security
interests and mortgages do not apply to any property of Borrower other than the
Equipment or real estate so acquired, and the indebtedness secured thereby does
not exceed the cost of the Equipment or real estate so acquired, as the case may
be; and (f) the security interests and liens set forth on Schedule 8.4 hereto.
9.9 Indebtedness. Borrower shall not incur, create, assume, become or
be liable in any manner with respect to, or permit to exist, any obligations or
indebtedness, except: (a) the Obligations; (b) trade obligations and normal
accruals in the ordinary course of business not yet due and payable, or with
respect to which the Borrower is contesting in good faith the amount or validity
thereof by appropriate proceedings diligently pursued and available to Borrower,
and with respect to which adequate reserves have been set aside on its books;
(c) purchase money indebtedness (including capital leases) to the extent not
incurred or secured by liens (including capital leases) in violation of any
other provision of this Agreement; and (d) the indebtedness set forth on
Schedule 9.9 hereto; provided, that, (i) Borrower may only make regularly
scheduled payments of principal and interest in respect of such indebtedness in
accordance with the terms of the agreement or instrument evidencing or giving
rise to such indebtedness as in effect on the date hereof so long as no Event of
Default exists and is continuing; except that, with respect to such indebtedness
owing by Borrower to Velvel, Borrower shall only be permitted to repay such
indebtedness in accordance with, and subject to, the terms and provisions of
Section 9.10(b) below; (ii) Borrower shall not, directly or indirectly, (A)
amend, modify, alter or change the terms of such indebtedness or any agreement,
document or instrument related thereto as in effect on the date hereof, or (B)
redeem, retire, defease, purchase or otherwise acquire such indebtedness, or set
aside or otherwise deposit or invest any sums for such purpose, and (iii)
Borrower shall furnish to Lender all notices or demands in connection with such
indebtedness either received by Borrower or on its behalf, promptly after the
receipt thereof, or sent by Borrower or on its behalf, concurrently with the
sending thereof, as the case may be.
9.10 Loans, Investments, Guarantees, Etc. (a) Borrower shall not,
directly or indirectly, make any loans or advance money or property to any
person, or invest in (by capital contribution,
<PAGE>
dividend or otherwise) or purchase or repurchase the stock or indebtedness or
all or a substantial part of the assets or property of any person, or guarantee,
assume, endorse, or otherwise become responsible for (directly or indirectly)
the indebtedness, performance, obligations or dividends of any Person or agree
to do any of the foregoing, except: (i) the endorsement of instruments for
collection or deposit in the ordinary course of business; and (ii) the loans,
advances and guarantees set forth on Schedule 9.10 hereto; provided, that, as to
such loans, advances and guarantees, (A) Borrower shall not, directly or
indirectly, (1) amend, modify, alter or change the terms of such loans, advances
or guarantees or any agreement, document or instrument related thereto, or (2)
as to such guarantees, redeem, retire, defease, purchase or otherwise acquire
the obligations arising pursuant to such guarantees, or set aside or otherwise
deposit or invest any sums for such purpose; and (B) Borrower shall furnish to
Lender all notices or demands in connection with such loans, advances or
guarantees or other indebtedness subject to such guarantees either received by
Borrower or on its behalf, promptly after the receipt thereof, or sent by
Borrower or on its behalf, concurrently with the sending thereof, as the case
may be.
(b) Notwithstanding anything to the contrary contained in Section
9.9 or this Section 9.10, provided no Event of Default exists and is continuing:
(i) in addition to the investments in Velvel which exist as of the date hereof
as more particularly described in Schedule 9.10 hereto ("Existing Velvel
Investments"), Borrower shall be permitted to make additional payments to Velvel
to repay any existing indebtedness owing by Borrower to Velvel permitted by
Section 9.9 hereof with respect to the existing Velvel Investments (the
"Additional Velvel Payments"), provided that, (A) Borrower provides Lender with
five (5) Business Days prior written notice of each contemplated Additional
Velvel Payment setting forth the nature and amount thereof and such investment
is pledged and/or assigned by Borrower to Lender; (B) after giving effect to the
proposed Additional Velvel Payment, Borrower has Excess Availability of not less
than $5,000,000 for each of the immediately preceding thirty (30) Business Days
prior to, and on the date of, such payment; and (C) at no time shall the
Additional Velvel Payments exceed the aggregate amount of $5,000,000; and (ii)
Borrower shall be permitted to make, in the ordinary course of Borrower's
business in accordance with practices and policies previously disclosed in
writing to Lender, loans and advances to any person who supplies goods to
Borrower (individually, a "Vendor"; and collectively, "Vendors"), provided that,
(A) Borrower provides Lender with five (5) Business Days prior written notice of
each contemplated loan or advance to a Vendor setting forth the amount thereof;
(B) none of the indebtedness arising pursuant to such loans shall be evidenced
by a promissory note or other instrument, unless the original of such note or
other instrument is promptly delivered to Lender upon the issuance thereof, duly
indorsed and assigned by Borrower to Lender; (C) after giving effect to the
proposed loan or advance, Borrower has Excess Availability of not less than
$5,000,000 for each of the immediately preceding thirty (30) Business Days prior
to, and on the date of, such loan or advance; and (D) the maximum aggregate
amount of all loans and advances to any Vendor shall not exceed the aggregate
amount of $250,000 outstanding at any time and the maximum aggregate amount of
all loans and advances to all Vendors shall not exceed the aggregate amount of
$1,500,000 outstanding at any time.
9.11 Dividends and Redemptions. Borrower shall not, directly or
indirectly, declare or pay any dividends on account of any shares of class of
capital stock of Borrower now or hereafter outstanding, or set aside or
otherwise deposit or invest any sums for such purpose, or redeem, retire,
defease, purchase or otherwise acquire any shares of any class of capital stock
(or set aside or otherwise deposit or invest any sums for such purpose) for any
consideration other than common
<PAGE>
stock or apply or set apart any sum, or make any other distribution (by
reduction of capital or otherwise) in respect of any such shares or agree to do
any of the foregoing.
9.12 Transactions with Affiliates. Borrower shall not, directly or
indirectly, (a) purchase, acquire or lease any property from, or sell, transfer
or lease any property to, any officer, director, agent or other person
affiliated with Borrower, except in the ordinary course of and pursuant to the
reasonable requirements of Borrower's business and upon fair and reasonable
terms no less favorable to the Borrower than Borrower would obtain in a
comparable arm's length transaction with an unaffiliated person, or (b) make any
payments of management, consulting or other fees for management or similar
services, or of any indebtedness owing to any officer, employee, shareholder,
director or other person affiliated with Borrower except reasonable compensation
to officers, employees and directors for services rendered to Borrower in the
ordinary course of business, or (c) the investments by Borrower in Velvel
permitted in Section 9.10 hereof.
9.13 Additional Bank Accounts. Borrower shall not, directly or
indirectly, open, establish or maintain any deposit account, investment account
or any other account with any bank or other financial institution, other than
the Blocked Accounts and the accounts set forth in Schedule 8.8 hereto, except:
(a) as to any new or additional Blocked Accounts and other such new or
additional accounts which contain any Collateral or proceeds thereof, with the
prior written consent of Lender and subject to such conditions thereto as Lender
may establish and (b) as to any accounts used by Borrower to make payments of
payroll, taxes or other obligations to third parties, after prior written notice
to Lender.
9.14 Adjusted Net Worth. Borrower shall, at all times, maintain
Adjusted Net Worth of not less than $4,000,000.
9.15 Costs and Expenses. Borrower shall pay to Lender on demand all
costs, expenses, filing fees and taxes paid or payable in connection with the
preparation, negotiation, execution, delivery, recording, administration,
collection, liquidation, enforcement and defense of the Obligations, Lender's
rights in the Collateral, this Agreement, the other Financing Agreements and all
other documents related hereto or thereto, including any amendments, supplements
or consents which may hereafter be contemplated (whether or not executed) or
entered into in respect hereof and thereof, including: (a) all costs and
expenses of filing or recording (including Uniform Commercial Code financing
statement filing taxes and fees, documentary taxes, intangibles taxes and
mortgage recording taxes and fees, if applicable); (b) all insurance premiums,
appraisal fees and search fees; (c) costs and expenses of remitting loan
proceeds, collecting checks and other items of payment, and establishing and
maintaining the Blocked Accounts, together with Lender's customary charges and
fees with respect thereto; (d) charges, fees or expenses charged by any bank or
issuer in connection with the Letter of Credit Accommodations; (e) costs and
expenses of preserving and protecting the Collateral; (f) costs and expenses
paid or incurred in connection with obtaining payment of the Obligations,
enforcing the security interests and liens of Lender, selling or otherwise
realizing upon the Collateral, and otherwise enforcing the provisions of this
Agreement and the other Financing Agreements or defending any claims made or
threatened against Lender arising out of the transactions contemplated hereby
and thereby (including preparations for and consultations concerning any such
matters); (g) all out-of-pocket expenses and costs heretofore and from time to
time hereafter incurred by Lender during the course of periodic field
examinations of the Collateral and Borrower's operations, plus a
<PAGE>
per diem charge at the rate of $600 per person per day for Lender's examiners in
the field and office; and (h) the fees and disbursements of counsel (including
legal assistants) to Lender in connection with any of the foregoing.
9.16 Further Assurances. At the request of Lender at any time and from
time to time, Borrower shall, at its expense, duly execute and deliver, or cause
to be duly executed and delivered, such further agreements, documents and
instruments, and do or cause to be done such further acts as may be necessary or
proper to evidence, perfect, maintain and enforce the security interests and the
priority thereof in the Collateral and to otherwise effectuate the provisions or
purposes of this Agreement or any of the other Financing Agreements. Lender may
at any time and from time to time request a certificate from an officer of
Borrower representing that all conditions precedent to the making of Loans and
providing Letter of Credit Accommodations contained herein are satisfied. In the
event of such request by Lender, Lender may, at its option, cease to make any
further Loans or provide any further Letter of Credit Accommodations until
Lender has received such certificate and, in addition, Lender has determined
that such conditions are satisfied. Where permitted by law, Borrower hereby
authorizes Lender to execute and file one or more UCC financing statements
signed only by Lender in order for Lender to evidence, maintain, enforce and
perfect the security interest in the Collateral and the priority thereof.
SECTION 10. EVENTS OF DEFAULT AND REMEDIES
10.1 Events of Default. The occurrence or existence of any one or more
of the following events are referred to herein individually as an "Event of
Default", and collectively as "Events of Default":
(a) (i) Borrower fails to pay when due any of the Obligations or
(ii) Borrower or any Obligor fails to perform any of the covenants contained in
Sections 9.3, 9.4(a), and 9.6(a)(i) to the extent such failure consists solely
of a failure to deliver timely the financial statements required therein of this
Agreement and such failure shall continue for ten (10) days; provided, that,
such ten (10) day period shall not apply in the case of: (A) any failure to
observe any such covenant which is not capable of being cured at all or within
such ten (10) day period or which has been the subject of a prior failure within
a six (6) month period or (B) an intentional breach of Borrower or any Obligor
of any such covenant or (iii) Borrower fails to perform any of the terms,
covenants, conditions or provisions contained in this Agreement or any of the
other Financing Agreements other than those described in Sections 10.1(a)(i) and
10.1(a)(ii) above;
(b) any representation, warranty or statement of fact made by
Borrower to Lender in this Agreement, the other Financing Agreements or any
other agreement, schedule, confirmatory assignment or otherwise shall when made
or deemed made be false or misleading in any material respect;
(c) any Obligor revokes, terminates or fails to perform any of the
terms, covenants, conditions or provisions of any guarantee, endorsement or
other agreement of such party in favor of Lender;
<PAGE>
(d) any judgment for the payment of money is rendered against
Borrower or any Obligor in excess of $50,000 in any one case or in excess of
$100,000 in the aggregate and shall remain undischarged or unvacated for a
period in excess of thirty (30) days or execution shall at any time not be
effectively stayed, or any judgment other than for the payment of money, or
injunction, attachment, garnishment or execution is rendered against Borrower or
any Obligor or any of their assets;
(e) any Obligor (being a natural person or a general partner of an
Obligor which is a partnership) dies or Borrower or any Obligor, which is a
partnership, limited liability company, limited liability partnership or a
corporation, dissolves or suspends or discontinues doing business;
(f) Borrower or any Obligor becomes insolvent (however defined or
evidenced), makes an assignment for the benefit of creditors, makes or sends
notice of a bulk transfer or calls a meeting of its creditors or principal
creditors;
(g) a case or proceeding under the bankruptcy laws of the United
States of America now or hereafter in effect or under any insolvency,
reorganization, receivership, readjustment of debt, dissolution or liquidation
law or statute of any jurisdiction now or hereafter in effect (whether at law or
in equity) is filed against Borrower or any Obligor or all or any part of its
properties and such petition or application is not dismissed within thirty (30)
days after the date of its filing or Borrower or any Obligor shall file any
answer admitting or not contesting such petition or application or indicates its
consent to, acquiescence in or approval of, any such action or proceeding or the
relief requested is granted sooner;
(h) a case or proceeding under the bankruptcy laws of the United
States of America now or hereafter in effect or under any insolvency,
reorganization, receivership, readjustment of debt, dissolution or liquidation
law or statute of any jurisdiction now or hereafter in effect (whether at a law
or equity) is filed by Borrower or any Obligor or for all or any part of its
property; or
(i) any default by Borrower or any Obligor under any agreement,
document or instrument relating to any indebtedness for borrowed money owing to
any person other than Lender, or any capitalized lease obligations, contingent
indebtedness in connection with any guarantee, letter of credit, indemnity or
similar type of instrument in favor of any person other than Lender, in any case
in an amount in excess of $25,000, which default continues for more than the
applicable cure period, if any, with respect thereto, or any default by Borrower
or any Obligor under any material contract, lease, license or other obligation
to any person other than Lender, which default continues for more than the
applicable cure period, if any, with respect thereto;
(j) any change in the chief executive officer, chief financial
officer and/or controlling ownership of Borrower;
(k) the indictment or threatened indictment of Borrower or any
Obligor under any criminal statute, or commencement or threatened commencement
of criminal or civil proceedings against Borrower or any Obligor, pursuant to
which statute or proceedings the penalties or remedies sought or available
include forfeiture of any of the property of Borrower or such Obligor;
<PAGE>
(l) there shall be a material adverse change in the business,
assets or prospects of Borrower or any Obligor after the date hereof; or
(m) there shall be an event of default under any of the other
Financing Agreements.
10.2 Remedies.
(a) At any time an Event of Default exists or has occurred and is
continuing, Lender shall have all rights and remedies provided in this
Agreement, the other Financing Agreements, the Uniform Commercial Code and other
applicable law, all of which rights and remedies may be exercised without notice
to or consent by Borrower or any Obligor, except as such notice or consent is
expressly provided for hereunder or required by applicable law. All rights,
remedies and powers granted to Lender hereunder, under any of the other
Financing Agreements, the Uniform Commercial Code or other applicable law, are
cumulative, not exclusive and enforceable, in Lender's discretion,
alternatively, successively, or concurrently on any one or more occasions, and
shall include, without limitation, the right to apply to a court of equity for
an injunction to restrain a breach or threatened breach by Borrower of this
Agreement or any of the other Financing Agreements. Lender may, at any time or
times, proceed directly against Borrower or any Obligor to collect the
Obligations without prior recourse to the Collateral.
(b) Without limiting the foregoing, at any time an Event of Default
exists or has occurred and is continuing, Lender may, in its discretion and
without limitation, (i) accelerate the payment of all Obligations and demand
immediate payment thereof to Lender (provided, that, upon the occurrence of any
Event of Default described in Sections 10.1(g) and 10.1(h), all Obligations
shall automatically become immediately due and payable), (ii) with or without
judicial process or the aid or assistance of others, enter upon any premises on
or in which any of the Collateral may be located and take possession of the
Collateral or complete processing, manufacturing and repair of all or any
portion of the Collateral, (iii) require Borrower, at Borrower's expense, to
assemble and make available to Lender any part or all of the Collateral at any
place and time designated by Lender, (iv) collect, foreclose, receive,
appropriate, setoff and realize upon any and all Collateral, (v) remove any or
all of the Collateral from any premises on or in which the same may be located
for the purpose of effecting the sale, foreclosure or other disposition thereof
or for any other purpose, (vi) sell, lease, transfer, assign, deliver or
otherwise dispose of any and all Collateral (including entering into contracts
with respect thereto, public or private sales at any exchange, broker's board,
at any office of Lender or elsewhere) at such prices or terms as Lender may deem
reasonable, for cash, upon credit or for future delivery, with the Lender having
the right to purchase the whole or any part of the Collateral at any such public
sale, all of the foregoing being free from any right or equity of redemption of
Borrower, which right or equity of redemption is hereby expressly waived and
released by Borrower and/or (vii) terminate this Agreement. If any of the
Collateral is sold or leased by Lender upon credit terms or for future delivery,
the Obligations shall not be reduced as a result thereof until payment therefor
is finally collected by Lender. If notice of disposition of Collateral is
required by law, ten (10) days prior notice by Lender to Borrower designating
the time and place of any public sale or the time after which any private sale
or other intended disposition of Collateral is to be made, shall be deemed to be
reasonable notice thereof and Borrower waives any other notice. In the event
Lender institutes an action to recover any Collateral or seeks recovery of any
Collateral
<PAGE>
by way of prejudgment remedy, Borrower waives the posting of any bond which
might otherwise be required.
(c) Lender may apply the cash proceeds of Collateral actually
received by Lender from any sale, lease, foreclosure or other disposition of the
Collateral to payment of the Obligations, in whole or in part and in such order
as Lender may elect, whether or not then due. Borrower shall remain liable to
Lender for the payment of any deficiency with interest at the highest rate
provided for herein and all costs and expenses of collection or enforcement,
including attorneys' fees and legal expenses.
(d) Without limiting the foregoing, upon the occurrence of an Event
of Default or an event which with notice or passage of time or both would
constitute an Event of Default, Lender may, at its option, without notice, (i)
cease making Loans or arranging for Letter of Credit Accommodations or reduce
the lending formulas or amounts of Revolving Loans and Letter of Credit
Accommodations available to Borrower and/or (ii) terminate any provision of this
Agreement providing for any future Loans or Letter of Credit Accommodations to
be made by Lender to Borrower.
SECTION 11. JURY TRIAL WAIVER; OTHER WAIVERS
AND CONSENTS; GOVERNING LAW
11.1 Governing Law; Choice of Forum; Service of Process; Jury Trial
Waiver.
(a) The validity, interpretation and enforcement of this Agreement
and the other Financing Agreements and any dispute arising out of the
relationship between the parties hereto, whether in contract, tort, equity or
otherwise, shall be governed by the internal laws of the State of Illinois
(without giving effect to principles of conflicts of law).
(b) Borrower and Lender irrevocably consent and submit to the
non-exclusive jurisdiction of the Circuit Court, Cook County, Illinois and the
United States District Court for the Northern District of Illinois and waive any
objection based on venue or forum non conveniens with respect to any action
instituted therein arising under this Agreement or any of the other Financing
Agreements or in any way connected with or related or incidental to the dealings
of the parties hereto in respect of this Agreement or any of the other Financing
Agreements or the transactions related hereto or thereto, in each case whether
now existing or hereafter arising, and whether in contract, tort, equity or
otherwise, and agree that any dispute with respect to any such matters shall be
heard only in the courts described above (except that Lender shall have the
right to bring any action or proceeding against Borrower or its property in the
courts of any other jurisdiction which Lender deems necessary or appropriate in
order to realize on the Collateral or to otherwise enforce its rights against
Borrower or its property).
(c) Borrower hereby waives personal service of any and all process
upon it and consents that all such service of process may be made by certified
mail (return receipt requested) directed to its address set forth on the
signature pages hereof and service so made shall be deemed to be completed five
(5) days after the same shall have been so deposited in the U.S. mails, or, at
Lender's option, by service upon Borrower in any other manner provided under the
rules of any such
<PAGE>
courts. Within thirty (30) days after such service, Borrower shall appear in
answer to such process, failing which Borrower shall be deemed in default and
judgment may be entered by Lender against Borrower for the amount of the claim
and other relief requested.
(d) BORROWER AND LENDER EACH HEREBY WAIVES ANY RIGHT TO TRIAL BY
JURY OF ANY CLAIM, DEMAND, ACTION OR CAUSE OF ACTION (i) ARISING UNDER THIS
AGREEMENT OR ANY OF THE OTHER FINANCING AGREEMENTS OR (ii) IN ANY WAY CONNECTED
WITH OR RELATED OR INCIDENTAL TO THE DEALINGS OF THE PARTIES HERETO IN RESPECT
OF THIS AGREEMENT OR ANY OF THE OTHER FINANCING AGREEMENTS OR THE TRANSACTIONS
RELATED HERETO OR THERETO IN EACH CASE WHETHER NOW EXISTING OR HEREAFTER
ARISING, AND WHETHER IN CONTRACT, TORT, EQUITY OR OTHERWISE. BORROWER AND LENDER
EACH HEREBY AGREES AND CONSENTS THAT ANY SUCH CLAIM, DEMAND, ACTION OR CAUSE OF
ACTION SHALL BE DECIDED BY COURT TRIAL WITHOUT A JURY AND THAT BORROWER OR
LENDER MAY FILE AN ORIGINAL COUNTERPART OF A COPY OF THIS AGREEMENT WITH ANY
COURT AS WRITTEN EVIDENCE OF THE CONSENT OF THE PARTIES HERETO TO THE WAIVER OF
THEIR RIGHT TO TRIAL BY JURY.
(e) Lender shall not have any liability to Borrower (whether in
tort, contract, equity or otherwise) for losses suffered by Borrower in
connection with, arising out of, or in any way related to the transactions or
relationships contemplated by this Agreement, or any act, omission or event
occurring in connection herewith, unless it is determined by a final and
non-appealable judgment or court order binding on Lender, that the losses were
the result of acts or omissions constituting gross negligence or willful
misconduct. In any such litigation, Lender shall be entitled to the benefit of
the rebuttable presumption that it acted in good faith and with the exercise of
ordinary care in the performance by it of the terms of this Agreement.
11.2 Waiver of Notices. Borrower hereby expressly waives demand,
presentment, protest and notice of protest and notice of dishonor with respect
to any and all instruments and commercial paper, included in or evidencing any
of the Obligations or the Collateral, and any and all other demands and notices
of any kind or nature whatsoever with respect to the Obligations, the Collateral
and this Agreement, except such as are expressly provided for herein. No notice
to or demand on Borrower which Lender may elect to give shall entitle Borrower
to any other or further notice or demand in the same, similar or other
circumstances.
11.3 Amendments and Waivers. Neither this Agreement nor any provision
hereof shall be amended, modified, waived or discharged orally or by course of
conduct, but only by a written agreement signed by an authorized officer of
Lender, and as to amendments, as also signed by an authorized officer of
Borrower. Lender shall not, by any act, delay, omission or otherwise be deemed
to have expressly or impliedly waived any of its rights, powers and/or remedies
unless such waiver shall be in writing and signed by an authorized officer of
Lender. Any such waiver shall be enforceable only to the extent specifically set
forth therein. A waiver by Lender of any right, power and/or remedy on any one
occasion shall not be construed as a bar to or waiver of any such right, power
and/or remedy which Lender would otherwise have on any future occasion, whether
similar in kind or otherwise.
<PAGE>
11.4 Waiver of Counterclaims. Borrower waives all rights to interpose
any claims, deductions, setoffs or counterclaims of any nature (other then
compulsory counterclaims) in any action or proceeding with respect to this
Agreement, the Obligations, the Collateral or any matter arising therefrom or
relating hereto or thereto.
11.5 Indemnification. Borrower shall indemnify and hold Lender, and its
directors, agents, employees and counsel, harmless from and against any and all
losses, claims, damages, liabilities, costs or expenses imposed on, incurred by
or asserted against any of them in connection with any litigation,
investigation, claim or proceeding commenced or threatened related to the
negotiation, preparation, execution, delivery, enforcement, performance or
administration of this Agreement, any other Financing Agreements, or any
undertaking or proceeding related to any of the transactions contemplated hereby
or any act, omission, event or transaction related or attendant thereto,
including amounts paid in settlement, court costs, and the fees and expenses of
counsel, except as to any act, omission or event resulting from Lender's own
gross negligence or wilful misconduct as determined pursuant to a final
non-appealable order of a court of competent jurisdiction. To the extent that
the undertaking to indemnify, pay and hold harmless set forth in this Section
may be unenforceable because it violates any law or public policy, Borrower
shall pay the maximum portion which it is permitted to pay under applicable law
to Lender in satisfaction of indemnified matters under this Section. The
foregoing indemnity shall survive the payment of the Obligations and the
termination or non-renewal of this Agreement.
SECTION 12. TERM OF AGREEMENT; MISCELLANEOUS
12.1 Term.
(a) This Agreement and the other Financing Agreements shall become
effective as of the date set forth on the first page hereof and shall continue
in full force and effect for a term ending on the date three (3) years from the
date hereof (the "Renewal Date"), and from year to year thereafter, unless
sooner terminated pursuant to the terms hereof. Lender or Borrower (subject to
Lender's right to extend the Renewal Date as provided above) may terminate this
Agreement and the other Financing Agreements effective on the Renewal Date or on
the anniversary of the Renewal Date in any year by giving to the other party at
least sixty (60) days prior written notice; provided, that, this Agreement and
all other Financing Agreements must be terminated simultaneously. Upon the
effective date of termination or non-renewal of the Financing Agreements,
Borrower shall pay to Lender, in full, all outstanding and unpaid Obligations
and shall furnish cash collateral to Lender in such amounts as Lender determines
are reasonably necessary to secure Lender from loss, cost, damage or expense,
including attorneys' fees and legal expenses, in connection with any contingent
Obligations, including issued and outstanding Letter of Credit Accommodations
and checks or other payments provisionally credited to the Obligations and/or as
to which Lender has not yet received final and indefeasible payment. Such
payments in respect of the Obligations and cash collateral shall be remitted by
wire transfer in Federal funds to such bank account of Lender, as Lender may, in
its discretion, designate in writing to Borrower for such purpose. Interest
shall be due until and including the next business day, if the amounts so paid
by Borrower to the bank account designated by Lender are received in such bank
account later than 12:00 noon, Chicago, Illinois time.
<PAGE>
(b) No termination of this Agreement or the other Financing
Agreements shall relieve or discharge Borrower of its respective duties,
obligations and covenants under this Agreement or the other Financing Agreements
until all Obligations have been fully and finally discharged and paid, and
Lender's continuing security interest in the Collateral and the rights and
remedies of Lender hereunder, under the other Financing Agreements and
applicable law, shall remain in effect until all such Obligations have been
fully and finally discharged and paid.
(c) (i) If for any reason this Agreement is terminated prior to the
end of the then current term or renewal term of this Agreement, in view of the
impracticality and extreme difficulty of ascertaining actual damages and by
mutual agreement of the parties as to a reasonable calculation of Lender's lost
profits as a result thereof, Borrower agrees to pay to Lender, upon the
effective date of such termination, an early termination fee in the amount set
forth below if such termination is effective in the period indicated:
Amount Period
------ ------
(A) 3% of Maximum Credit From the date hereof to and
including June 12, 1998
(B) 2% of Maximum Credit From June 12, 1998 to and
including June 12, 1999
(C) 1/2% of Maximum Credit From June 12, 1999 to and
including June 12, 2000.
(ii) Notwithstanding anything to the contrary contained above,
if Lender exercises its right to terminate this Agreement upon the occurrence of
any Event of Default (other than an Event of Default as set forth in Section
10.1(g) and 10.1(h) hereof), then the early termination fee shall be $100,000.
Borrower expressly acknowledges, confirms and agrees that if Lender exercises
its right to terminate this Agreement upon the occurrence of any Event of
Default described in Section 10.1(g) and 10.1(h) hereof, Borrower shall pay
Lender the applicable early termination fee as set forth in Section
12.1(c)(i)(A), (B) or (C), as the case may be.
(iii) The early termination fee provided for in this Section
12.1 shall be presumed to be the amount of damages sustained by Lender as a
result of such early termination and Borrower agrees that it is reasonable under
the circumstances currently existing. In addition, Lender shall be entitled to
such early termination fee upon the occurrence of any Event of Default described
in Sections 10.1(g) and 10.1(h) hereof, even if Lender does not exercise its
right to terminate this Agreement, but elects, at its option, to provide
financing to Borrower or permit the use of cash collateral under the United
States Bankruptcy Code. The early termination fee provided for in this Section
12.1 shall be deemed included in the Obligations.
12.2 Notices. All notices, requests and demands hereunder shall be in
writing and (a) made to Lender at its address set forth below and to Borrower at
its chief executive office set forth below, or to such other address as either
party may designate by written notice to the other in accordance with this
provision, and (b) deemed to have been given or made: if delivered in person,
immediately
<PAGE>
upon delivery; if by telex, telegram or facsimile transmission, immediately upon
sending and upon confirmation of receipt; if by nationally recognized overnight
courier service with instructions to deliver the next business day, one (1)
business day after sending; and if by certified mail, return receipt requested,
five (5) days after mailing.
12.3 Partial Invalidity. If any provision of this Agreement is held to
be invalid or unenforceable, such invalidity or unenforceability shall not
invalidate this Agreement as a whole, but this Agreement shall be construed as
though it did not contain the particular provision held to be invalid or
unenforceable and the rights and obligations of the parties shall be construed
and enforced only to such extent as shall be permitted by applicable law.
12.4 Successors. This Agreement, the other Financing Agreements and any
other document referred to herein or therein shall be binding upon and inure to
the benefit of and be enforceable by Lender, Borrower and their respective
successors and assigns, except that Borrower may not assign its rights under
this Agreement, the other Financing Agreements and any other document referred
to herein or therein without the prior written consent of Lender. Lender may,
after notice to Borrower, assign its rights and delegate its obligations under
this Agreement and the other Financing Agreements and further may assign, or
sell participations in, all or any part of the Loans, the Letter of Credit
Accommodations or any other interest herein to another financial institution or
other person, in which event, the assignee or participant shall have, to the
extent of such assignment or participation, the same rights and benefits as it
would have if it were the Lender hereunder, except as otherwise provided by the
terms of such assignment or participation.
12.5 Entire Agreement. This Agreement, the other Financing Agreements,
any supplements hereto or thereto, and any instruments or documents delivered or
to be delivered in connection herewith or therewith represents the entire
agreement and understanding concerning the subject matter hereof and thereof
between the parties hereto, and supersede all other prior agreements,
understandings, negotiations and discussions, representations, warranties,
commitments, proposals, offers and contracts concerning the subject matter
hereof, whether oral or written. In the event of any inconsistency between the
terms of this Agreement and any schedule or exhibit hereto, the terms of this
Agreement shall govern.
<PAGE>
IN WITNESS WHEREOF, Lender and Borrower have caused these presents to
be duly executed as of the day and year first above written.
LENDER BORROWER
CONGRESS FINANCIAL CORPORATION NAVARRE CORPORATION
(CENTRAL)
By: /s/ Ken Sands By: /s/ Charles Cheney
-------------------------------- ------------------------------
Title: Senior Vice President Title Executive Vice President
----------------------------- ---------------------------
Address: Chief Executive Office:
150 South Wacker Drive 7400 49th Avenue North
Chicago, Illinois 60606 New Hope, Minnesota 55428
AGREEMENT AND
PLAN OF REORGANIZATION
THIS AGREEMENT AND PLAN OF REORGANIZATION (this "Agreement") is made as of March
7, 1997, by and among NET RADIO CORPORATION, a Nevada corporation with its
principal place of business located at Riverplace Exposition Hall, Suite 149, 43
Main Street, Minneapolis, Minnesota 55414 (the "Company"), NAVARRE CORPORATION,
a Minnesota corporation with its principal place of business located at 7400
49th Avenue North, New Hope, Minnesota 55428 ("Navarre") and NET RADIO
CORPORATION, a Minnesota corporation with its principal place of business
located at 7400 49th Avenue North, New Hope, Minnesota 55428, A WHOLLY OWNED
SUBSIDIARY OF NAVARRE CORPORATION ("NRC").
RECITALS
A. The Board of Directors of Navarre and the Company have each determined
that it is in the best interests of their respective stockholders that Navarre
and the Company enter into a business combination under which the Company will
merge with and into NRC (the "Merger"), in order to achieve certain synergies
and efficiencies resulting from the combination of the respective businesses,
and, in connection therewith, to make certain representations, warranties and
agreements in connection with the Merger.
B. The Company is engaged in the business of offering an array of
services and products to internet users, including 24-hour live programming
related to music and the music industry and a product known as "Net Companion"
(collectively, the "Business").
C. Pursuant to the terms of that certain Stock Purchase Agreement dated
as of May 1, 1996, by and among the Company, the Company's shareholders
(hereinafter referred to as the "Shareholders", whose names are set forth on
SCHEDULE 1. attached hereto) and Navarre, Navarre purchased what was then a
fifty percent (50%) interest in the Company through the purchase of fifty
percent (50%) of the issued and outstanding shares of capital stock of the
Company as of that date.
D. As of May 1, 1996, the Shareholders were the legal and beneficial
owners of all right, title and interest in and to the remaining fifty percent
(50%) of all of the issued and outstanding capital stock of the Company.
E. The parties to this Agreement intend that, subject to the terms and
conditions of this Agreement, the Company will merge with and into NRC, with NRC
to be the surviving corporation of the Merger, all pursuant to the terms and
conditions of this Agreement and an Agreement of Merger substantially in the
form of EXHIBIT A attached hereto (the "Agreement of Merger") and the applicable
provisions of the Nevada General Corporation Law ("Nevada Law") and the
Minnesota Business Corporation Act ("Minnesota Law"). Upon the effectiveness of
the Merger, all the outstanding capital stock of the Company shall be converted,
as provided in this Agreement and the Agreement of Merger, and the Shareholders
shall receive Navarre
<PAGE>
common stock in exchange for their Company owned stock and the Company stock
owned by Navarre will be cancelled.
F. The Merger is intended to be treated as a reorganization pursuant to
the provisions of Section 368 (a) of the Internal Revenue Code of 1986, as
amended (the "Code").
G. For accounting purposes, it is intended that the Merger shall be
accounted for as a purchase of assets under United States generally accepted
accounting principles ("GAAP").
NOW, THEREFORE, in consideration of the premises, the mutual covenants
and agreements contained in this Agreement and other valuable consideration, the
receipt and adequacy of which is hereby acknowledged, the Company, NRC and
Navarre, each intending to be legally bound, do hereby covenant and agree as
follows:
SECTION I.
THE MERGER
1.1 The Merger. Upon the terms and subject to the conditions set forth in
Sections VI and VII, and in accordance with Nevada Law and Minnesota Law, on the
Effective Date (as defined in Section 1.13) the Company shall be merged with and
into NRC. As a result of the Merger, the separate corporate existence of the
Company shall cease and NRC shall continue as the surviving corporation of the
Merger which shall continued to be a wholly owned subsidiary of Navarre (the
"Surviving Corporation").
1.2 Effective Date. Upon the terms and subject to the conditions of this
Agreement, as soon as practicable on the Effective Date the parties hereto shall
cause a certificate of merger (the "Certificate of Merger") to be filed with
both the Secretary of State of the State of Minnesota and the Secretary of State
of the State of Nevada, in such form as is required by, and executed in
accordance with the applicable provisions of, Minnesota Law and Nevada Law. The
Merger shall become effective upon the filing of the Certificate of Merger with
both the Secretary of State of the State of Minnesota and the Secretary of State
of the State of Nevada.
1.3. Effect of the Merger. On the Effective Date, the effect of the Merger shall
be as provided in the applicable provisions of Minnesota Law and Nevada Law.
Without limiting the generality of the foregoing, and subject thereto, on the
Effective Date all of the property, rights, privileges, powers and franchises of
the Company shall vest in the Surviving Corporation, and all debts, liabilities,
obligations, restrictions, disabilities and duties of the Company shall become
the debts, liabilities, obligations, restrictions, disabilities and duties of
the Surviving Corporation.
1.4. Articles of Incorporation and Bylaws. The Articles of Incorporation and the
Bylaws of NRC in effect immediately prior to the Effective Date, shall be the
Articles of Incorporation and Bylaws of the Surviving Corporation until
thereafter amended as provided by Minnesota Law and the Surviving Corporation's
Articles of Incorporation and its Bylaws.
<PAGE>
1.5. Directors and Officers. The directors of NRC immediately prior to the
Effective Date shall be the initial directors of the Surviving Corporation after
the Merger, each to hold office in accordance with the Articles of Incorporation
and Bylaws of the Surviving Corporation, and the officers of NRC immediately
prior to the Effective Date shall be the initial officers of the Surviving
Corporation after the Merger, in each case until their respective successors are
duly elected or appointed and qualified.
1.6. Subsequent Actions. If, at any time after the Effective Date, the Surviving
Corporation shall consider or be advised that any deeds, bills of sale,
assignments, assurances or any other actions or things are necessary or
desirable to continue in, vest, perfect or confirm of record or otherwise in the
Surviving Corporation its right, title or interest in, to or under any of the
rights, properties, privileges, franchises or assets, acquired or to be acquired
by the Surviving Corporation as a result of, or in connection with, the Merger
or otherwise to carry out this Agreement, the officers and directors of the
Surviving Corporation shall be directed and authorized to execute and deliver,
in the name of and on behalf of the Company, all such deeds, bills of sale,
assignments and assurances and to take and do, in the name of and on behalf of
the Company, all such other actions and things as may be necessary or desirable
to vest, perfect or confirm any and all right, title and interest in, to or
under such rights, properties, privileges, franchises or assets in the Surviving
Corporation or otherwise to carry out this Agreement.
1.7. Effect on Capital Stock of the Company. As of the Effective Date, by virtue
of the Merger and without any action on the part of the holders thereof, the
shares of stock of the Company owned by Navarre and the Shareholders, and the
NRC shares of common stock shall be as set forth in Sections 1.8., 1.9., 1.10.,
1.11. and 1.12. All outstanding options to purchase the Company's common stock
shall be exercised prior to the Effective Date. Any options or warrants not
exercised prior to the Effective Date shall automatically and immediately be
extinguished and of no further force or effect, without any further action by
NRC, the Company or any other party.
1.8. Delivery of the Company Share Certificates and Cancellation of Treasury
Shares.
(a) CANCELLATION OF TREASURY SHARES. On the Effective Date, each share of
the Company common stock held in the treasury of the Company or owned by
Navarre immediately prior to the Effective Date shall be cancelled and
retired and no shares of common stock or other securities of Navarre or
the Surviving Corporation shall be issuable, and no payment or other
consideration shall be made, with respect thereto.
(b) EXCHANGE OF SHARES OTHER THAN TREASURY SHARES. Subject to the terms
and conditions of this Agreement, at or prior to the Effective Date, the
Company shall deposit, or cause to be deposited with Norwest Bank
Minnesota, National Association (hereinafter referred to as the "Escrow
Agent") certificates representing all of the Company common stock that is
issued and outstanding to persons other than Navarre for conversion into
Navarre Shares as set forth in Sections 1.11. and 1.12. The certificates
deposited with the Escrow Agent shall be free and clear of all pledges,
liens, encumbrances, equities, claims and obligations to other persons of
every kind and character (the "Encumbrances"), and all right, title and
interest therein and thereto (the
<PAGE>
Merger described in this Agreement and the agreements contained in the
Exhibits attached hereto are collectively referred to herein as the
"Transaction").
1.9. Capital Stock of NRC. As of the Effective Date, each issued and outstanding
share of common stock, no par value per share, of NRC shall continue to be
issued and outstanding as shares of the Surviving Corporation common stock, and
the holder thereof shall retain its rights therein.
1.10. Certain Adjustments.
(a) If between the date hereof and the Effective Date, the outstanding
shares of Navarre common stock or of the Company common stock shall be
changed into a different number of shares by reason of any
reclassification, recapitalization, split-up, combination or exchange of
shares, or any dividend payable in stock or other security shall be
declared thereon with the record date within such period, the Conversion
Ratio set forth in the Agreement of Merger shall be adjusted accordingly
to provide to the holders of the Company common stock the same economic
effect as contemplated by this Agreement prior to such reclassification,
recapitalization, split-up, combination, exchange or dividend.
(b) No fractional share certificate of Navarre common stock will be
issued upon the surrender for exchange of certificates evidencing the
Company's stock, and an outstanding fractional share interest will not
entitle the holder thereof to vote, receive dividends or to any rights of
a stockholder of Navarre or of the Surviving Corporation with respect to
such fractional share interest. For purposes of valuating the amount of
cash, if any, to be paid to the holders of the Company stock with respect
to any fractional share interests, the Navarre shares shall be valued at
$3.00 per share, and at such time that the Shareholders have a right to
distribution under the terms of this Agreement, if a fractional share
results in the distribution, the Shareholder shall be paid in cash for
the fractional amount based on a $3.00 per share figure and the number of
Escrow Shares to be issued pursuant to Section 1.11.(a) shall be reduced
accordingly.
1.11. Conversion of Company Shares. The conversion of the Company Shares into
shares of common stock of Navarre to be issued to the Shareholders in
accordance with this Agreement and the Agreement of Merger shall be as
follows:
(a) 105,000 shares of common stock of Navarre (the "Escrow Shares") shall
be deposited with the Escrow Agent;
(b) up to an additional 1,175,000 shares of common stock of Navarre (the
"1997 Shares"); and
(c) up to an additional 1.6 million shares (but not more than 800,000
shares if all of the 1997 Shares have been issued/earned) of common stock
of Navarre (the "1998 Shares") (the Escrow Shares, 1997 Shares and 1998
Shares are collectively referred to hereinafter as the "Navarre Shares").
<PAGE>
Navarre shall reserve and cause to be set aside for future distribution to
record holders of the Company stock such shares as are necessary to meet its
obligations pursuant to Sections 1.11.(b), 1.11.(c), 1.12.(b) and 1.12.(c)
hereof.
1.12. Conversion Rights of the Shareholders of the Company Shares into Navarre
Stock. The conversion ratio of the Company stock owned by the Shareholders into
Navarre common stock shall be as set forth in the Agreement of Merger, and the
rights of such Shareholder to his or her pro rata share of the Navarre Shares
shall be based on the percentage interest of the Company stock owned by such
Shareholder set forth on SCHEDULE 1. attached hereto. The rights of the
Shareholders to receive equity securities of Navarre pursuant to the Merger
shall be conditioned on the following:
(a) The Escrow Shares shall be placed in escrow on the Effective Date to
indemnify Navarre, in part, against those liabilities of the Company
described on SCHEDULE 1.12.(a) hereto. The Escrow Shares shall be
released within 30 days of execution of a certificate signed by the
Surviving Corporation and Navarre confirming full payment or final
settlement of those liabilities described on SCHEDULE 1.12.(a) hereto.
For those Shareholders that have nonrecourse notes outstanding with the
Company for the purchase of Company Shares, the Escrow Shares will not be
issued to such Shareholders until the notes have been paid in full. The
Escrow Shares shall be ultimately released to the Shareholders after
first releasing to Navarre such number of Escrow Shares having a Fair
Market Value (as defined in Section 1.12.(e) below) equal to the cost of
any post closing costs paid by the Surviving Corporation or Navarre in
connection with resolution of those liabilities of the Company described
on SCHEDULE 1.12.(a). and hereto, or such earlier date as may be
determined by Navarre in its sole discretion.
Any dividends or distributions payable with respect to the Escrow Shares
shall be paid to the Shareholders upon final release of the Escrow
Shares, to the extent not previously used to satisfy the obligations set
forth above. If the liabilities described on SCHEDULE 1.12.(a) are
resolved in a non-monetary settlement (without the use of cash proceeds,
using assets or potential assets of the Company) (e.g., forfeiture of the
Company's licensing or distribution rights to a specific country, whether
by licensing or franchising such rights to a third party or otherwise)
then the calculation of the liabilities incurred by Navarre for purposes
of determining the number of Escrow Shares to be released to the
Shareholders shall be calculated as follows: (i) if a country with a
census population of 50,000,000 or greater is the subject of the
settlement involving the granting of licensing, distribution or franchise
rights for such country then $100,000 worth of the Escrow Shares for each
such country shall first be released to Navarre before the remaining
Escrow Shares are distributed to the Shareholders; and/or (ii) if a
country with a census population of less than 50,000,000 is the subject
of the settlement involving the granting of distribution or franchise
rights for such country then $50,000 worth of the Escrow Shares for each
such country shall first be released to Navarre before the remaining
Escrow Shares are distributed to the Shareholders.
(b) If applicable, any 1997 Shares earned by the Shareholders shall be
issued to the Shareholders within 90 days after the end of the applicable
earn out period. The actual number of 1997 Shares issued shall be
determined as follows:
<PAGE>
(i) Up to 600,000 Shares (the "1997 Pre-tax Shares") shall be
issued on the basis of the Surviving Corporation's actual net
profit before extraordinary items and income taxes ("Pre-tax
Income") for the twelve months ending twelve months from the
Effective Date (hereinafter such date is referred to as "Target
Date No. 1") in accordance with the following formula:
(1) If Pre-tax Income is a loss, then none of the 1997
Pre-tax Shares will be issued; or
(2) If Pre-tax Income is between $0 and $200,000, then
100,000 shares of the 1997 Pre-tax Shares will be issued;
or
(3) If Pre-tax Income is $200,000 or more, then the
remaining portion of the 500,000 unissued 1997 Pre-tax
Shares (rounded to the nearest whole number of shares)
available to be issued shall be the product of (i) 500,000
Shares and (ii) the quotient of Pre-tax Income (minus
$200,000) and $800,000.
(ii) Up to 200,000 1997 Shares (the "1997 Revenue Shares") shall
be issued on the basis of the Surviving Corporation's actual
revenue (excluding barter revenue and other similar
accommodations) for Target Date No. 1 in accordance with the
following formula:
One 1997 Revenue Share for each $5.00 of revenue earned by
the Surviving Corporation in excess of $4,000,000 for
Target Date No. 1; provided, however, no 1997 Revenue
Shares shall be issued if Pre-tax Income is less than $0.
(iii) To the extent the Surviving Corporation achieves "Net Sales"
of at least $1,750,000 for the 12 month period ending 12 months
from the Effective Date, up to 375,000 of the 1997 Shares (the
"1997 Net Sales Shares") eligible for distribution to the
Shareholders shall be distributed on a proportionate basis in an
amount equal to 1 share of common stock for each $3.33333 that Net
Sales exceed $1,750,000 for such 12 month period. For purposes of
this Agreement, "Net Sales" shall be calculated in accordance with
GAAP, with the exception that any Net Sales not collected within
60 days after any applicable earn out period shall not be included
in any earn out calculations for such period, and "barter income"
and any revenue which is all or in part offset by payments to an
entity from which revenue has been derived shall also be excluded
from such earn out calculations. The maximum number of 1997 Shares
subject to distribution under this Section shall be 375,000.
Example: If the Surviving Corporation's Net Sales are
$2,500,000 for such period, the 1997 Net Sales Shares
distributed would be 225,000.
(iv) Notwithstanding anything to the contrary contained herein,
the 1997 Shares (i.e. the sum of 1997 Revenue Shares, the 1997
Pre-tax Shares and the
<PAGE>
1997 Net Sales Shares) to be issued shall in no event exceed
1,175,000 shares in the aggregate; and provided further, that if
the Fair Market Value price for Navarre's common stock at Target
Date No. 1 is greater than 125% of the Fair Market Value of
Navarre's stock on the Effective Date (the "Base Price"), then the
1997 Pre-Tax Shares and the 1997 Revenue Shares (but not including
the 1997 Net Sales Shares) to be issued shall be equal to the
quotient of: (a) the product of 125% of the Base Price and the
number of shares as otherwise calculated above and (b) the Fair
Market Value of Navarre's common stock at Target Date No. 1;
further, provided, that only 800,000 of 1997 Shares shall be
subject to the Fair Market Value of the Navarre common stock and
the remaining 375,000 1997 Shares shall not be subject to the Fair
Market Value of Navarre common stock.
(c) Subject to the provisions set forth herein, any 1998 Shares earned by
the Shareholders shall be issued to the Shareholders within 90 days after
the end of the applicable earn out period. The actual number of 1998
Shares issued shall be determined as follows:
(i) Up to 1.6 million Shares (but reduced by the aggregate number
of 1997 Pre- tax Shares, 1997 Revenue Shares and 1997 Net Sales
Shares earned by the Shareholders) based upon the Surviving
Corporation's actual, cumulative Pre- tax Income for the Target
Date No. 2 ("Cumulative Pre-tax Income") in accordance with the
following formula:
(1) If Cumulative Pre-tax Income is $1,000,000 or less
(including an operating loss), then no 1998 Shares will be
issued (other than 1997 Shares previously earned); or
(2) If Cumulative Pre-tax Income is greater than
$1,000,000, then the 1998 Shares to be issued (rounded up
to the nearest whole number of shares) shall be the
difference between (i) the product of (a) 1.6 million
shares and (b) the quotient of Pre-tax Income (minus
$1,000,000) and $5,000,000; and (ii) the 1997 Shares
actually issued/earned pursuant to Section 1.12.(b);
provided, however, the combined number of 1997 Shares and
1998 Shares to be issued shall in no event exceed 1.6
million shares, and provided further, that if the Fair
Market Value of Navarre's common stock at Target Date No. 2
is greater than 150% of the Base Price, then the 1998
Shares to be issued shall be equal to the quotient of:
(a) the product of 150% of the Base Price and the number of
shares as otherwise calculated above and (b) the Fair
Market Value of Navarre's common stock at Target Date
No. 2.
(d) For purposes of this Section 1.12., the Company's litigation costs
with respect to litigation pending on the date of this Agreement and
described on SCHEDULE 2.8. hereto and for which provision is made in
Section 1.12.(a) shall not be taken into account in computing the
"Pre-tax Income" calculations described herein. "Pre-tax Income" shall
otherwise be defined as follows:
<PAGE>
Exclusions: "barter income," or any revenue which is all or in
part offset by payments to an entity from which
revenue has been derived; accounts receivable not
collected within 60 days after the end of any
applicable earn out period.
Allocated
Expenses: accounting expense allocation of $5,000 per month
for the first year and $10,000 per month during the
second year shall be charged against income.
(e) For purposes of this Agreement, "Fair Market Value" of a share of
Navarre's common stock as of a particular date (the "Determination Date")
shall mean: (i) if Navarre's common stock is traded on an exchange or the
NASDAQ national market or SmallCap Market, then the average last reported
sale prices, reported for the twenty (20) business days immediately
preceding the Determination Date, (ii) if Navarre's common stock is not
traded on an exchange or on NASDAQ but is traded on the over-the-counter
market, then the average closing bid and asked prices reported for the
twenty (20) business days immediately preceding the Determination Date,
and (iii) if Navarre's common stock is not actively traded, then the fair
market value of a share of common stock shall be the fair market value as
determined by Navarre's Board of Directors in good faith.
1.13. Closing. Subject to satisfaction or waiver of all conditions of closing
(the "Closing"), this Agreement shall be executed at the offices of Winthrop &
Weinstine, P.A., 3000 Dain Bosworth Plaza, 60 South Sixth Street, Minneapolis,
Minnesota at 10:00 a.m. central time on March 7, 1997 (the "Closing Date"). As
soon as practicable thereafter, and in no event later than March 21, 1997, the
parties will obtain all necessary shareholder approvals and third party
consents, exchange shares and other consideration and otherwise complete the
Transaction (the date all such activities are completed is hereinafter referred
to as the "Effective Date").
1.14. Certain Payments and Distributions. SCHEDULE 1.14.(a) attached hereto
lists and describes all loans, receivables or other amounts due from the
Shareholders to the Company or from the Company to the Shareholders existing on
the Closing Date. The Company further acknowledges and agrees that, except as
set forth on SCHEDULE 1.14(b), on or before the Effective Date (i) all loans and
advances from the Company to the Shareholders, whether or not disclosed in any
Schedule hereto, shall be repaid to the Company in full and the Company shall
have delivered to Navarre appropriate instruments or writings to evidence the
receipt of such repayments; (ii) all guarantees by the Company of loans obtained
by any shareholder, officer or director of the Company from third parties shall
have been released; and (iii) other than this Agreement, the Employment
Agreements, the Non-Compete Agreements, and agreements described on SCHEDULE
1.14.(b) hereto, all contracts, leases and agreements between the Company and
the Shareholders shall be terminated without penalty to Navarre or to the
Surviving Corporation.
1.15. Deliveries by the Company. Within ten (10) days after the Closing but in
no event later than the Effective Date, the Company shall have received for
delivery to Navarre on the Effective Date the following:
<PAGE>
(a) Certificates evidencing all of the issued and outstanding Company
shares issued to the Shareholders that are to be deposited with the
Escrow Agent;
(b) A certificate evidencing 1,042,907 shares of the Company, which
represents the shares purchased by Navarre as of May 1, 1996, which have
been held in escrow, which shall be deposited with the Escrow Agent to
effect the conversion.
(c) Executed counterparts of non-compete agreements executed by certain
Shareholders who are key employees of the Company (to be determined by
Navarre) in substantially the form set forth in EXHIBIT 1.15.(c) attached
hereto (the "Non-Compete Agreements");
(d) An executed counterpart of employment/confidentiality agreement for
Mark Hempel and Robert Griggs (collectively referred to hereinafter as
the "Employment Agreements") in substantially the form set forth on
EXHIBIT 1.15.(d) attached hereto;
(e) An executed counterpart of a voting agreement wherein all of the
Shareholders will appoint Eric H. Paulson and Charles E. Cheney as the
persons authorized to vote all shares of Navarre stock held by or to be
issued to the Shareholders in substantially the form set forth on EXHIBIT
1.15.(e) attached hereto (the "Voting Agreement");
(f) An executed counterpart of a shareholder rights agreement with
respect to the terms of the lock-up, registration rights and first
refusal rights of the Shareholders in substantially the form set forth on
EXHIBIT 1.15.(f) attached hereto (the "Shareholder Rights Agreement");
(g) Executed counterparts of release agreements signed by all current
employees of the Company evidencing that such employees are "at-will"
employees and that any and all employment agreements now in effect are
null and void as of the Effective Date and that any consulting, bonus,
severance or other provisions relating to compensation described in said
employment agreements are terminated and no longer of any force and
effect, at no cost to the Company, the Surviving Corporation or Navarre,
in substantially the form set forth in EXHIBIT 1.15.(g) attached hereto
(the "Agreement of Employees");
(h) An executed counterpart of a credit facility agreement in
substantially the form set forth on EXHIBIT 1.15.(h) attached hereto (the
"Credit Facility Agreement") which evidences Navarre's obligation to make
working capital loans to the Surviving Corporation based on specific
performance criteria;
(i) A fully executed agreement signed by the Shareholders and all of the
parties described on EXHIBIT 1.15.(i) hereto evidencing to Navarre's
satisfaction that all option holders, warrant holders and other persons
or entities with claims or rights to the Company's stock shall have
released and terminated all of such claims and rights (the "Option
Termination Agreement");
(j) An executed counterpart of a termination agreement in substantially
the form set forth on EXHIBIT 1.15.(j) attached hereto (the "Termination
Agreement") that will
<PAGE>
evidence the termination of the following agreements each dated as of May
1, 1996: (1) the Option Agreement, (2) Shareholder Voting Control
Agreement, and (3) Preemptive Rights Agreement;
(k) Such resignations of officers and directors of the Company effective
as of the Effective Date as are requested by Navarre not less than ten
(10) days after the Closing Date;
(l) Executed counterparts of disclosure statements in substantially the
form set forth in EXHIBIT 1.15.(l) attached hereto ("Disclosure
Statement") signed by every Shareholder;
(m) An executed counterpart of the severance agreement for Terrence K.
Mahoney ("Severance Agreement") in substantially the form set forth in
EXHIBIT 1.15.(m) attached hereto;
(n) Certificate of the Secretary of the Company certifying copies of the
Bylaws, stock ledger and minute book of the Company, evidencing no
changes since the Closing Date;
(o) Articles of Incorporation of the Company certified as of recent date
by the Secretary of State of the State of Nevada, evidencing no changes
since the Closing Date;
(p) Certificate of Good Standing of the Company certified as of recent
date by the Secretary of State of the State of Nevada and each state in
which the Company is qualified to do business;
(q) A copy, certified by an officer of the Company, of the duly adopted
Resolutions of the Company's Board of Directors and its Shareholders
approving this Agreement and the Transaction, the Agreement of Merger and
authorizing the execution of all of the documents contemplated in this
Agreement;
(r) An executed counterpart of the Agreement of Merger and Articles of
Merger which will be filed at the Office of the Secretary of State of the
State of Minnesota and office of the Secretary of State of the State of
Nevada;
(s) A bring-down certificate, which certificate shall (i) certify to both
Navarre and NRC, that the unaudited balance sheet of the Company as of
February 28, 1997, (a copy of which shall be attached to the bring-down
certificate) is complete, true and accurate in all respects, (ii) shall
identify any changes from the Company's January 31, 1997, financial
statements, (iii) shall identify any material changes outside of the
ordinary course of business from the date of this Agreement through the
Effective Date, and (iv) specifically identifying all revisions to any of
the Schedules attached to the Agreement from the date of this Agreement
through the Effective Date; and
(t) Such other documents as Navarre and NRC may require to evidence that
the conditions to the Effective Date set forth in Section VI and
elsewhere herein have been satisfied.
<PAGE>
1.16. Satisfaction of Note. Immediately, the Company shall mark "paid in full"
and return that certain $500,000 promissory note dated as of May 1, 1996,
executed by Navarre in favor of the Company (the "Note") which has been paid in
full by Navarre as of the date of this Agreement.
1.17. Deliveries by Navarre. On the Effective Date, Navarre shall deliver, or
cause to be delivered, to the Company the following:
(a) The Escrow Shares which shall be held with the Escrow Agent pursuant
to the terms of an escrow agreement to be substantially in the form of
EXHIBIT 1.17.(a) attached hereto (the "Escrow Agreement");
(b) Executed counterparts of the Non-Compete Agreements;
(c) An executed counterpart of the Voting Agreement;
(d) An executed counterpart of the Shareholder Rights Agreement;
(e) An executed counterpart of the Termination Agreement;
(f) An executed counterpart of the Credit Facility Agreement;
(g) A copy, certified by an officer of Navarre, of the duly adopted
resolutions of Navarre's Board of Directors approving this Agreement, the
Agreement of Merger and the Transaction, and authorizing the execution of
this Agreement and the other documents contemplated in this Agreement;
and
(h) Stock certificates evidencing the 5,000 shares of common stock of
Navarre issued to Patrick Mahoney, and 15,000 shares of common stock of
Navarre issued to Robert Griggs as consideration for the release of their
respective security interests in the Company's assets, as further
described in Section 5.6. of this Agreement.
1.18. Deliveries by NRC. On the Effective Date, NRC shall deliver, or cause
to be delivered, to the Shareholders the following:
(a) Executed counterparts of the Non-Compete Agreements;
(b) An executed counterpart of the Credit Facility Agreement;
(c) A copy, certified by an officer of NRC, of the duly adopted
resolutions of NRC's Board of Directors approving this Agreement, the
Agreement of Merger and the Transaction, and authorizing the execution of
this Agreement and the other documents contemplated in this Agreement;
and
(d) An executed counterpart of the Agreement of Merger and Articles of
Merger which will be filed at the Office of the Secretary of State of the
State of Minnesota and Office of the Secretary of State of the State of
Nevada.
<PAGE>
1.19. Inspection and Information by Navarre. Through the Effective Date, Navarre
may, through its representatives, accountants and attorneys, make such
investigation of the Company and of its financial and legal condition as it may
deem necessary or advisable, and the Company agrees to make available to such
persons, with the right, at Navarre's expense, to make copies thereof, all of
the Company's books, tax returns, records and other data of or relating to the
Company; provided, however, that such investigation shall be made only at
reasonable hours and so as not to interfere unreasonably with the Company's
operations through the Effective Date. Through the Effective Date, the Company
further agrees to furnish Navarre with such financial and operating data and
other information with respect to the Company as Navarre or its representatives,
accountants or attorneys shall from time to time reasonably request.
1.20. Inspection and Information by the Company. Through the Effective Date, the
Company may, through its representatives, accountants and attorneys, make such
investigation of Navarre and of its financial and legal condition as it may deem
necessary or advisable, and Navarre agrees to make available to such persons,
with the right, at the Company's expense, to make copies thereof, all of
Navarre's books, tax returns, records and other data of or relating to Navarre;
provided, however, that such investigation shall be made only at reasonable
hours and so as not to interfere unreasonably with Navarre's operations through
the Effective Date. Through the Effective Date, Navarre further agrees to
furnish the Company with such financial and operating data and other information
with respect to Navarre as the Company or its representatives, accountants or
attorneys shall from time to time reasonably request.
1.21. Further Assurances and Cooperation. Each party hereto agrees that he, she
or it will, at any time and from time to time after the Effective Date, upon
request of any other party hereto, take or cause to be taken such further action
and execute and deliver, or cause to be executed and delivered, all such further
documents as such party may reasonably require to effect the Merger and issuing
and delivering the Navarre Shares to the Shareholders.
1.22. Public Announcements. No party hereto shall issue any press release or
otherwise make any public announcements, statements or disclosures with respect
to the Transaction contemplated by this Agreement without the prior written
consent of Navarre and Navarre's counsel except as may be required by law or as
may be required under the circumstances to fully explain the Transaction
contemplated by this Agreement to those who have a need to understand such
Transaction and the Company's relationship with Navarre and NRC.
1.23. Expenses. Each party hereto shall pay its or his own expenses incident to
the negotiation, preparation and carrying out of this Agreement, including all
fees and expenses of its counsel and accountants for all activities of such
counsel and accountants undertaken pursuant to this Agreement, whether or not
the Transaction contemplated hereby are consummated. Navarre acknowledges that
the Company may incur legal and accounting costs to facilitate and assist the
Company in completing the Transaction that will be paid by Navarre.
<PAGE>
SECTION II.
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
The Company represents, warrants and covenants to NRC and Navarre and agrees
that:
2.1. Organization and Capitalization.
(a) The Company is a corporation duly organized, validly existing and in
good standing under the laws of the State of Nevada. The Company has full
power and authority (corporate and other), to own, lease or operate its
properties in the places where such business is now conducted and where
such properties are now owned, leased or operated, to carry on its
business as now being conducted, and to execute and deliver and carry out
the Transaction contemplated by this Agreement and the Agreement of
Merger, subject only to obtaining the approvals and consents identified
in SCHEDULE 2.17. The Company is duly qualified to do business in, and is
in good standing, and has all required and appropriate licenses under the
laws of the states or jurisdictions specified in SCHEDULE 2.1.(a) being
all the states and jurisdictions in which the failure to be so qualified
or in good standing would materially adversely affect the operations of
the Business of the Company. The Company is currently operating and
structured in accordance with its Articles of Incorporation and Bylaws.
The Company has delivered to Navarre complete and correct copies of its
Articles of Incorporation and Bylaws, as amended to the date of this
Agreement.
(b) On the Closing Date and on the Effective Date the authorized capital
stock of the Company consists of 10,000,000 shares of common capital
stock, $.01 par value per share. Except as set forth in SCHEDULE 2.1.(b),
there are no options, warrants, or other rights presently outstanding for
the purchase, acquisition or sale of any common stock or any other
securities of the Company, or any securities convertible into common
stock or other securities of the Company. As of the Effective Date, all
options, warrants, or other rights as set forth on SCHEDULE 2.1.(b) shall
have been terminated and of no further force and effect. All of the
Company shares, other than the shares owned by Navarre, (i) are owned
beneficially and held of record by the Shareholders, (ii) have been duly
authorized, and were duly and validly issued, are fully paid and
non-assessable, are not subject to preemptive rights, and were issued in
full compliance with all federal, state and local laws, rules and
regulations. There are no shareholder or other restrictive agreements
with respect to the ownership, transfer or repurchase of the capital
stock or the management of the Company or any voting trusts or other
agreements or understandings to which the Shareholders and/or the Company
is a party with respect to the voting of the capital stock of the
Company. There is no liability or indebtedness with respect to dividends
or other distributions declared or accumulated but unpaid with respect to
any equity securities of the Company.
(c) The Company has no subsidiaries and is not a party to any joint
venture nor a partner of any partnership. Except for as set forth in
SCHEDULE 2.1.(c), the Company does not own any capital stock or other
securities of, or any other direct or indirect interest in, any other
business entity.
<PAGE>
2.2. Due Authorization; Effect of Transaction. No provisions of the Company's
Articles of Incorporation or Bylaws, or of any agreement, instrument or
understanding, or any judgment, decree, law, rule or regulation, to which
Company is a party or by which it is bound, has been or will be violated by the
execution and delivery by the Company of this Agreement, or the performance or
satisfaction of any agreement or condition therein or herein contained upon the
Company's part to be performed or satisfied, and all requisite corporate and
other authorizations for such execution, delivery, performance and satisfaction
have been duly obtained, other than the approvals referred to on SCHEDULE 2.17.
This Agreement will, upon execution and delivery, be a legal, valid and binding
obligation of the Company, enforceable against it in accordance with its terms,
except as may be limited by applicable securities laws, bankruptcy, insolvency
or other laws affecting creditors' rights generally and as may be limited by
equitable principles. No authorization or approval of, or filing with, any
governmental agency, authority or other body or any other third persons will be
required in connection with the execution and delivery of this Agreement or the
consummation of the Transaction contemplated hereby, except as described on
SCHEDULE 2.17.
2.3. Financial Statements, Etc. of the Company.
(a) The Company has delivered to Navarre (i) audited balance sheets of
the Company as of the close of its fiscal year for the year ending
December 31, 1995, together with the related statements of income for
fiscal year ending December 31, 1995 (collectively, the "1995 Year End
Financial Statements"), and (ii) an unaudited balance sheet of the
Company as of April 30, 1996, (the "April Financial Statements"), and
(iii) an unaudited balance sheet of the Company as of January 31, 1997
(the "January Statements"). The 1995 Year End Financial Statements, the
April Financial Statements and the January Statements, including in each
case the notes to the financial statements, if any, are hereinafter
sometimes collectively referred to as the "Financial Statements." All of
such Financial Statements shall include all pertinent back-up
information, invoices, asset lists, detailed descriptions of liabilities,
payables and obligations and other supporting reconciliation
documentation relating to the Financial Statements (including, in the
case of accruals and estimates, the basis for such information).
(b) Except as set forth in SCHEDULE 2.3.(b), all of the Financial
Statements are (i) in accordance with the books and records of the
Company, (ii) true, correct and complete in all material respects and
fairly present the financial condition and results of operation of the
Company as of the dates thereof and throughout the periods covered
thereby in accordance with GAAP. In the case of the January Statements,
they include normal accruals and reflect reserves believed by the
officers and directors of the Company to be adequate for all material
liabilities. The Company does not have as of the date hereof and will not
have as of the Closing Date or the Effective Date (i) any Undisclosed
Liabilities or (ii) any Loss Contingencies, as such term is used in the
Statement of Financial Accounting Standards No. 5 issued by the Financial
Accounting Standards Board in March 1975, which are not adequately
disclosed in the Unaudited Financial Statements, as required by said
Statement No. 5. For purposes of this Section 2.3., "Undisclosed
Liabilities" shall mean any material liability or obligation of the
Company, whether matured or unmatured, fixed, liquidated or contingent,
known or unknown, that is not fully reflected or reserved against in the
Unaudited Financial Statements or fully
<PAGE>
covered by insurance or fully disclosed in any Schedule to this
Agreement, other than obligations and liabilities incurred in the
ordinary course of the Company's business. There has not been any change
between the date of the most recent Unaudited Financial Statements and
the date of this Agreement (whether in the ordinary course of business,
through a so-called Act of God or as a result of government activity or
otherwise, and whether or not covered by insurance) which has affected
materially and adversely the business or properties or condition,
financial or otherwise, or results of operation of the Company and, to
the best knowledge, information and belief of the management level
personnel of the Company, no fact or condition exists or is contemplated
or threatened, which might cause any such change.
(c) As of the date of the most recent Financial Statements, except as
otherwise disclosed in this Agreement and Schedules attached hereto, the
Company did not have any obligations or liabilities, past, present or
deferred, accrued or unaccrued, fixed, absolute, contingent or other,
except as disclosed in the Financial Statements, or the notes thereto,
and since such date the Company has not incurred any such obligations or
liabilities, other than obligations and liabilities incurred in the
ordinary course of the business. The Company has not guaranteed and is
not otherwise primarily or secondarily liable in respect of any
obligation or liability of any other person or entity with respect to the
Company, except for endorsements of negotiable instruments for deposit in
the ordinary coarse of business or as disclosed in the Financial
Statements, or the notes thereto, or in SCHEDULE 2.3.(c).
(d) The books and records of the Company have been maintained in all
material respects in accordance with generally accepted accounting
principles.
2.4. Material Contracts. SCHEDULE 2.4. contains a true, correct and complete
list of all the Company's Material Contracts, true, complete and correct copies
of which have been delivered to Navarre. "Material Contracts" for purposes of
this Agreement as it applies to the Company shall mean contracts of $1,000 or
greater. Each such contract is or will be, as the case may be, valid, binding
and enforceable in accordance with its terms and the Company has or will have,
as the case may be, performed in all material respects its obligations required
to be performed under any such contract and is not or will not be, as the case
may be, in breach or default or in arrears in any material respect or in any
other respect which would permit the other party to cancel such contract under
the terms thereof. Except as set forth on SCHEDULE 2.4., no claim, suit or
proceeding is pending or, to the best knowledge, information and belief of the
officers, directors and management level personnel of the Company, threatened
against the Company in connection with any such contract. No party is in default
or breach of any such contract, nor are payments pursuant thereto overdue,
except as described on SCHEDULE 2.4.
2.5. Employment Arrangements.
(a) The Company does not have any obligation, contingent or otherwise,
under any employment agreement, collective bargaining or other labor
agreement, any agreement containing severance or termination pay
arrangements, deferred compensation agreement, retainer or consulting
arrangements, pension or retirement plan, bonus or profit-sharing plan,
warrants, stock option or purchase plan or other employee contract or
<PAGE>
non-terminable (whether with or without penalty) arrangement, group life,
health, medical or hospitalization insurance, plan or program or other
employee or fringe benefit plan, including vacation plans or programs and
sick leave plans or programs, including those relating to any employee of
the Company, other than those listed or described on SCHEDULE 2.5.(a),
true, correct and complete copies of which have been made available to
Navarre for review. The Company has performed in all material respects
all obligations required to be performed under all such agreements, plans
and arrangements and is not in any material respect in breach of or in
default or arrears under the terms thereof.
(b) For the past two years, the Company's employees have not been subject
to or involved in or, to the best knowledge, information and belief of
the officers, directors and management level personnel of the Company,
threatened with any union elections, petitions therefor or other
organizational activities, except as described on SCHEDULE 2.5.(b).
Employees of the Company are not parties to any collective bargaining
agreement, and there are no grievances, disputes or controversies with
any union or any other organization of such employees, or threats of
strikes, work stoppages or any pending demands for collective bargaining
by any union or organization, or, to the best knowledge, information and
belief of the officers, directors and management level personnel of the
Company, any active organizing or recruiting of such employees with
respect to becoming members of any union or other employee organization.
(c) SCHEDULE 2.5.(c) sets forth a true, correct and complete list of
(i) all employees of the Company as of January 31, 1997, together with
their respective salaries, and (ii) all independent contractors having
contracts with the Company as of January 31, 1997.
2.6. Compliance with ERISA. Each employee benefit plan subject to the Employee
Retirement Income Security Act of 1974, as amended ("ERISA"), which the Company
has established or maintained or to which the Company or any ERISA Affiliate (as
defined below) is or has been obligated to contribute, or in which employees
participate (a "Plan") is listed on SCHEDULE 2.6. and is in material compliance
with the applicable provisions of ERISA and the Code. Except as set forth in
SCHEDULE 2.6., the Company has not made or been obligated to make any
contributions to, nor has it participated in any, employee benefit plan which is
a multi-employer plan. For purposes of this Section 2.6., the terms "employee
benefit plan" and "multi-employer plan" shall have the respective meanings
assigned to such terms in Section 3 of ERISA and the term "ERISA Affiliate"
shall mean every corporation or trade or business, whether or not incorporated,
which is from time to time a member of a controlled group or a group under
common control with the Company within the meaning of Sections 414(b) and 414(c)
of the Code and 4001(b)(1) of ERISA.
2.7. Ordinary Course of Business, Amendment of Certain Agreements; Certain
Changes. The Company, from December 31, 1995, to the date hereof, and until
the Effective Date, except as set forth on SCHEDULE 2.7. or as required by the
terms of this Agreement, in all material respects:
<PAGE>
(a) has operated, and will continue to operate, in the normal, usual and
customary manner in the ordinary and regular course of business;
(b) has not sold or otherwise disposed of, and will not sell or otherwise
dispose of or contract to sell or otherwise dispose of, any of its
business, properties or assets, including Intangible Property, other than
in the ordinary course of business;
(c) except in each case in the ordinary course of business, has not
discharged or satisfied and will not discharge or satisfy, and has not
incurred and will not incur, any obligations or liabilities (fixed,
contingent or other), other than the repayment of regularly scheduled
indebtedness;
(d) has not sold, assigned or transferred, and will not sell, assign or
transfer, any Intangible Property (as hereinafter defined);
(e) has not materially increased and will not increase the compensation
payable or to become payable to any of its officers, employees or other
agents, or increase the benefits under any employee benefit plan or
change any insurer providing any such benefit;
(f) has not changed and will not change any of the Material Contracts
listed on SCHEDULE 2.4. hereto;
(g) has not suffered, and will not suffer, any material damage or
destruction (whether or not covered by insurance), in any one instance
amounting to more than $10,000.00, that adversely affected, affects or
will affect the properties, assets, Business or operations of the
Company;
(h) has not entered into, and will not enter into, any other transactions
which individually or in the aggregate are material to the Company other
than in the ordinary course of business;
(i) will not make and has not made any change in its Articles of
Incorporation or Bylaws;
(j) will not make and has not made any change in its authorized capital
stock;
(k) except as otherwise provided herein, will not declare or make and has
not declared or made any dividend or other distribution or payment on or
in respect of its capital stock and will not directly or indirectly
redeem, purchase, or otherwise acquire any shares of its capital stock;
(l) has maintained and will maintain its properties and facilities in as
good working order and condition as at present, ordinary wear and tear
excepted;
(m) has used and will use its reasonable efforts to maintain and preserve
its business organization intact, retain its present employees and
maintain its relationships with independent contractors and others having
business relations with it;
<PAGE>
(n) has not created, assumed or otherwise permitted and will not create,
assume or otherwise permit the imposition of any Encumbrance upon any
assets or properties (including the Intangible Property) whether now
owned or hereafter acquired; and
(o) has not amended or terminated and will not amend or terminate any
material agreement or license or other right of the Company.
2.8. Litigation. SCHEDULE 2.8. contains a summary description of all
litigation or legal or other actions, suits, proceedings or investigations
pending, or, to the best knowledge, information and belief of the officers,
directors and management level personnel of the Company, threatened against
the Company or relating to its operations.
2.9. Compliance With Laws. To the best knowledge, information and belief of the
officers, directors and management level personnel of the Company, and so far as
the officers, directors and management level personnel of the Company should
have known through the exercise of reasonable diligence (including seeking the
advice of legal counsel), at all times since the date of incorporation the
Company has maintained and operated and, through the Effective Date, the Company
will maintain and operate, its business, properties and assets in all material
respects in accordance with all applicable federal, state, municipal and other
laws and administrative rules and regulations, including, without limitation,
the rules and regulations of the Interstate Commerce Commission, the Federal
Communications Commission and a similar state authority or agency (collectively,
a "Licensing Agency") and in compliance with all requirements of insurance
carriers. The Company has maintained and operated in all material respects its
business, properties and assets in accordance with, has obtained all approvals,
licenses, certificates, permits, exceptions, franchises, variances, waivers,
consents and other authorizations materially required for the conduct of its
Business (collectively, the "Licenses"). The Company holds all Licenses required
from any Licensing Agency. A list of all the Licenses is set forth on SCHEDULE
2.9. attached hereto. The Company is not in default with respect to any
judgment, order, writ, injunction, decree, demand or assessment issued by any
court or any federal, state, municipal or other governmental agency, board,
commission, bureau, instrumentality or department, relating to its Business,
properties and assets. The Company is not charged and, to the best knowledge,
information and belief of the officers, directors and management level personnel
of the Company, is not under investigation with respect to, any violation of any
federal, state, municipal or other law or administrative rule or regulation.
2.10. Adverse Restrictions. The execution and delivery of this Agreement and the
consummation of the Transaction contemplated hereunder and thereunder are not
events which of themselves or with the giving of notice or the passage of time
or both, could constitute, on the Company a violation of or conflict with or
result in any breach of, or default under the terms, conditions or provisions
of, any judgment, law or regulation, or the Company's Articles of Incorporation
or Bylaws, or result in the creation of any Encumbrance of any nature whatsoever
on the properties, facilities and assets of the Company.
2.11. Broker or Finder. No person or entity assisted in or brought about the
negotiation of this Agreement in the capacity of broker or agent or finder on
behalf of the Company. The Company does not have any liability to any broker,
finder or agent or has agreed to pay any brokerage fees, commissions or finders
fees with respect to this Agreement or the Transaction.
<PAGE>
2.12. Title and Condition of Assets.
(a) The assets and properties utilized in and material to conduct of the
Business, whether owned or leased, are in the aggregate in good operating
condition and repair (reasonable wear and tear excepted) and are suitable
for the purposes for which they are presently being used. The Company has
valid title to all of the assets reflected on its audited balance sheet
dated December 31, 1995, and its interim financial statement dated
January 31, 1997, free and clear of all Encumbrances of any kind or
nature other than Encumbrances disclosed on SCHEDULE 2.12.(a) hereto,
except for:
(i) Assets that were disposed in the ordinary course of business
(consistent with past practices); provided, that any sale or
disposal of assets shall not have materially changed the total net
asset value on said December 31, 1995 balance sheet;
(ii) Assets being leased under capitalized leases; and
(iii) Minor imperfections not materially distracting from the
value or not materially restricting the use of the property in
question.
(b) SCHEDULE 2.12.(b) contains a list of all leases for machinery,
equipment or other items of personal property (except miscellaneous
leases of office machinery having an aggregate value if capitalized of
less than $500.00) used or employed by the Company, and, with respect to
any personal property subject to a security interest or similar
agreement, details thereof, together with copies of such instruments have
been made available to Navarre. Each of the leases disclosed in SCHEDULE
2.12.(b) is in full force and effect and there are not existing defaults
or events of default, real or claimed, or events which with notice or
lapse of time or both would constitute defaults, the consequence of
which, severally or in the aggregate, would have a material adverse
effect on the business or financial condition of the Company. The
continuation, validity and effectiveness of those leases will in no way
be affected by the Transaction contemplated by this Agreement.
(c) The Company does not own any real estate. SCHEDULE 2.12.(c) sets
forth an identification of all real estate leased or subleased by the
Company and a list of all agreements, leases, subleases, options and
commitments with respect to the real estate to which the Company is a
party or by which the Company or any property of the Company is bound,
including the legal description of each parcel leased by the Company and
the lease term and rent obligations of the Company under such lease.
Except as otherwise disclosed on SCHEDULE 2.12.(c), other than the lease
listed and described on SCHEDULE 2.12.(c), there are no leases of real
property under which the Company is bound. Such lease is in full force
and effect and there are no existing defaults or events of default,
actual or asserted, or events which with the giving of notice or the
lapse of time or both would constitute a default or event of default, the
consequence of which, severally or in the aggregate, would have a
material adverse effect on the business or financial condition of the
Company.
<PAGE>
2.13. Intangible Property.
(a) All registered and unregistered trademarks and service marks, trade
names, fictional business names, patents, copyrights, registrations or
applications with respect thereto (state and federal), or licenses or
rights under the same owned, used or useful, or intended to be acquired
or used, in connection with the Business, including, without limitation,
the names "Net Radio Corporation," "Net Companion," "Net Radio," "Net
Radio Network," "Net.Radio" and related logos and the other are described
on SCHEDULE 2.13.(a), together with all other Intangible Property (as
that term is hereinafter defined). Except as set forth in SCHEDULE
2.13.(b), the Company is the sole and exclusive owner of all right, title
and interest in and to the Intangible Property. The Intangible Property
represents all of the intangible assets or rights to the same used by the
Company in the Business as conducted on the Closing Date and the
Effective Date. The Intangible Property is all the intangible assets that
are necessary for the operation of the Business as its it is currently
conducted. For purposes of this Agreement, "Intangible Property" shall
mean all patents, patent applications, inventions and discoveries that
may be patentable, registered and unregistered trademarks, registered and
unregistered service marks, the corporate name "Net Radio Corporation,"
trade names,fictitious business names, logos, symbols, copyrights in both
published and unpublished works,rights in mask works and licenses,
registrations and applications with respect thereto, and customer lists,
manifests, service schedules and all customer records, inventions,
processes, technical information and data, plans, drawings, blueprints,
know-how, trade secrets, proprietary information, confidential
information, software, all of the good will of the Company, and any other
intangible asset associated with, owned or used in connection with the
Business.
(b) Except as set forth in SCHEDULE 2.13.(b), (i) the Intangible Property
is free and clear of all Encumbrances to other persons or entities of
whatever kind and character; (ii) there are no claims or demands of any
other person, firm or corporation pertaining to the Intangible Property;
(iii) no proceedings have been instituted, are pending, or threatened
which challenge the Company's rights in respect thereto; (iv) the
Intangible Property does not infringe upon or otherwise violate the
rights of others nor is it being infringed on by others; (v) no
Intangible Property has been challenged or threatened in any way;
(vi) the Intangible Property is not subject to any outstanding order,
decree, judgment or stipulation; (vii) all products, materials and images
containing a trademark or service mark bear the proper trademark notice
where permitted by law; (viii) all works in which copyright protection is
claimed have been registered and are currently in compliance with formal
legal requirements, are valid and enforceable, and have been marked with
the proper copyright notice and (viii) no licenses, sublicenses or
agreements pertaining to the Intangible Property are in effect. There are
no outstanding and, to the best of the Company's knowledge and to the
best knowledge of its officers and directors, no threatened disputes or
disagreements respect to any license, sublicense or agreement pertaining
to the Intangible Property. With respect to trademark and/or service mark
applications which are pending as of the date of this Agreement, to the
best of the Company's knowledge, there are no potentially interfering
trademarks or service marks or applications therefor. The Intangible
Property represents all of the intangible assets or rights to the same
used by the Company in the Business as conducted on the Closing
<PAGE>
Date and as conducted on the Effective Date. The Company has taken
reasonable and practicable steps to maintain the secrecy and
confidentiality of, and its proprietary rights in, the customer list of
the Company.
(c) Except as set forth in SCHEDULE 2.13.(c), all current officers of the
Company have executed written contracts with the Company that assign to
the Company all rights to any inventions, improvements, discoveries, or
information relating to the Business of the Company; prior to the
Effective Date the Company shall obtain written contracts from those
officers listed on SCHEDULE 2.13.(c) assigning such rights and interests.
No employee of the Company has entered into any contract that restricts
or limits in any way the scope or type of work in which the employee may
be engaged or requires the employee to transfer, assign or disclose
information concerning his work to anyone other than the Company.
(d) The Company has taken all reasonable precautions to protect the
secrecy, confidentiality, and value of its trade secrets and has good
title and an absolute right to use the trade secrets. The trade secrets
are not part of the public knowledge or literature, and, to the best of
the Company's knowledge, have not been used, divulged, or appropriated
either for the benefit of any person or to the detriment of the Company.
No trade secret is subject to any adverse claim or has been challenged or
threatened in any way.
2.14. Rights to Use Works. Except as set forth in SCHEDULE 2.14., the Company
has received authorizations, licenses, and permissions which are required by law
or industry practice, to use, perform or otherwise transmit in the course of its
business all works, compositions or other information which it does not own or
otherwise have the right to use. All such authorizations, licenses and
permissions allow Company to use, perform or otherwise transmit such works,
compositions and information in all countries and principalities in which the
Company's Website may be accessed.
2.15. Competition. To the best of the Company's knowledge, there is currently
no business or operation existing in the United States which directly competes
with the business.
2.16. Accounts Receivable. The accounts receivable shown on the Company's
Financial Statements or arising after the date thereof and prior to the Closing
Date or after the Closing Date and arising prior to the Effective Date have been
created only in the ordinary course of business and, in all material respects,
represent bona fide transactions completed in accordance with the terms and
provisions contained in any documents related thereto. There are no set-offs,
pending returns, counterclaims or disputes asserted or conditions precedent to
payment therefor with respect to any such accounts receivable and no discount,
credit against or allowance from any such accounts receivable has been made or
agreed to (except for set-offs, counterclaims, disputes, conditions, discounts
or allowances that singly or in the aggregate would not reduce the value of the
Company's accounts receivable by more than $10,000.00).
2.17. Consents. Except as set forth on SCHEDULE 2.17., no consents from any
third parties, including any governmental or other regulatory agencies or
customers, are required to carry out the Transaction contemplated by this
Agreement. The Company shall obtain, prior to the
<PAGE>
Effective Date, all consents of third parties, including, but not limited to,
governmental or other regulatory agencies, which are required to prevent a
violation or default under any authorization, agreement, instrument or
understanding of the Company, as a result of the execution, delivery or
performance of this Agreement. A list of all consents of third parties required
to carry out such Transaction is set forth on SCHEDULE 2.17.
2.18. Tax Matters.
(a) SCHEDULE 2.18.(a) lists the fiscal year(s) and period(s) through
which the Company has filed Tax returns, stating whether or not they have
been examined by the Internal Revenue Service or any state agency with
respect to any such period, giving, in each instance, any deficiencies
proposed as a result of all such examinations, stating whether such
deficiencies have been paid or settled, and listing any powers of
attorney given by the Company empowering the person, firm or corporation
named therein to act on behalf of the Company in connection with Tax or
other matters. Since January 31, 1996, no material Tax liability has been
assessed, or proposed to be assessed, incurred or accrued other than in
the ordinary course of business. No Tax returns of the Company have been
examined by the Internal Revenue Service or the appropriate state
agencies for any fiscal year or period ended prior to the Closing Date,
and the Company is not presently under, not has it received notice of,
any contemplated investigation or audit by the Internal Revenue Service
or any state agency concerning any fiscal year or period ended prior to
the Closing Date or the Effective Date.
(b) The Company has provided to Navarre a true and complete copy of the
Company's state and federal income tax returns for the year 1995.
(c) Except as set forth in SCHEDULE 2.18.(e), As of the Closing Date and
as of the Effective Date, the Company has timely filed all Tax returns
required to be filed on or prior to the Closing Date and Effective Date,
taking into account any extensions of the filing deadlines which have
been validly granted to the Company. All such Tax returns are and will be
true and correct in all material respects. No material issues have been
raised (and are currently pending) by the Internal Revenue Service or any
other taxing authority in connection with any of the Tax returns referred
to in the preceding sentence, and no waivers of statutes of limitations
have been given or requested by or of the Company. Any deficiencies
asserted or assessments (including interest and penalties) made as a
result of any examination by the Internal Revenue Service or by
appropriate state or departmental authorities of the Tax returns of or
with respect to the Company have been fully paid or are adequately
provided for in the Unaudited Financial Statements and no material
proposed (but unassessed) additional Taxes have been asserted or assessed
and no Tax liens have been filed.
(d) The Company has paid, collected or withheld all federal, foreign,
state, county and local income, franchise, property, sales, use, payroll
(including, without limitation, social security) and all other Taxes
(including penalties and interest in respect thereof, if any) that have
become or are due or collectible with respect to any period or
transaction ended on or prior to the Closing Date and the Effective Date
whether shown
<PAGE>
on the Company's Tax returns or not and whether or not assessed prior to
the Closing Date or the Effective Date.
(e) Except as set forth on SCHEDULE 2.18.(e), the Company has accrued on
its Financial Statements all unpaid Taxes which are required under
generally accepted accounting principles to be so accrued on its
Financial Statements and which are due or may become due with respect to
any periods ended on or prior to the Closing Date, and prior to the
Effective Date whether or not such unpaid Taxes are shown on a return for
such period and whether or not a return has been filed for such period.
(f) Neither the Company, nor any predecessor thereto has at any time
consented under Section 341(f)(1) of the Code to have the provisions of
Section 341(f)(2) of the Code apply to any sale of its stock or is a
"personal holding company" within the meaning of Section 542 of the Code.
(g) Except as set forth on SCHEDULE 2.18.(g), all Taxes required to be
withheld on or prior to the Closing Date or the Effective Date from all
Company employees, owner/operators and other personnel engaged by the
Company in whatever capacity (including, without limitation, persons
designated as independent contractors) for income taxes, unemployment
taxes, social security and other taxes, contributions and assessments,
have been properly withheld and, if required on or prior to the Closing
Date or the Effective Date, have been deposited with, or as directed by,
the appropriate governmental agency.
2.19. Environmental Protection.
(a) Except as provided in SCHEDULE 2.19.(a), the Company has obtained all
authorizations required by law or contract (including, without
limitation, all environmental permits) and made all required governmental
filings relating to the ownership of its property, facilities and assets
and the operation thereof under all requirements of law relating to
pollution or protection of the environment where the failure to so obtain
such authorizations or make such required governmental filings would have
a material adverse effect on the Company. The Company is and at all times
since its organization has been in material compliance with the terms and
conditions of all such authorizations and environmental requirements.
SCHEDULE 2.19.(a) contains a complete and correct list of all waste
products generated by the Company in connection with its business which
would be considered to be hazardous wastes or substances under applicable
law and all persons or entities to whom such waste products are
transferred. To the best knowledge, information and belief of the
officers, directors and management level personnel of the Company, the
Company is not a "potentially responsible party" under the Comprehensive
Environmental Response, Compensation and Liability Act of 1980, as
amended, or any similar state law.
(b) In all matters relating to the Company's properties, facilities and
assets, there has not been, and on or prior to the Effective Date, there
shall not be, any past or present activities, practices, incidents,
actions or plans of the Company or any of its predecessors, which
individually or in the aggregate (i) constitute a material breach of
<PAGE>
any environmental laws, (ii) may materially interfere with or prevent
continued compliance with all environmental laws, or (iii) may give rise
to any material common law, statutory or other legal liability, or
otherwise form the basis of any material claim, clean-up cost, fine,
penalty or assessment based on or related to the transportation,
transmission, gathering, processing, distribution, use, treatment,
storage, disposal or handling, or the emission, discharge, release or
threatened release into the environment, of any pollutant, contaminant.
hazardous or toxic material, substance or waste.
(c) The Company has not entered into or received any consent decree,
compliance order, or administrative order relating to environmental
protection.
(d) The Company has neither entered into or received nor is the Company
in default under any judgment, order, writ, injunction or decree of any
federal, state, or municipal court or other governmental authority
relating to environmental protection.
(e) The Company has all permits, licenses, approvals, consents and
authorizations relating to environmental protection which are required
under federal, state or local laws, rules and regulations which, if not
obtained by the Company, would have a material adverse effect on the
Company, all of which are set forth on SCHEDULE 2.19.(a), and is in
material compliance with all such permits, licenses, approvals, consents
and authorizations, including, without limitation, any information
provided in the applications therefor.
(f) There are no material actions, suits, claims, arbitration
proceedings, or complaints pending or, to the best knowledge, information
and belief of the officers, directors and management level personnel of
the Company, threatened or under consideration by any governmental
authority, municipality, community, citizen or other entity against the
Company relating to environmental protection, nor does the Company have
reason to believe that any such actions, suits, claims or complaints will
be brought against it with respect to any past or present activities,
practices, incidents, actions or plans of the Company.
(g) No lien has arisen on the Company's properties or facilities under
federal, state or local laws, rules or regulations as they relate to
environmental protection.
(h) The Company has no above-ground or underground storage and fuel tanks
on the property leased, operated or occupied by the Company.
2.20. Insurance. The insurance policies listed and described briefly on SCHEDULE
2.20. constitute all of the policies in force and effect and owned or held by
the Company. Except as set forth in SCHEDULE 2.20., the Company is not in
default under any such policy. SCHEDULE 2.20. lists all claims made under such
policies since their existence and states the carriers, and expiration dates
(and with respect to those policies owned or held by the Company) the policy
numbers, premiums and coverage. The list of all claims made under the policies
set forth above has been procured from the Company's insurance carriers and is
true and accurate to the best knowledge, information and belief of the officers,
directors and management level personnel of the Company. All policies listed on
SCHEDULE 2.20. are outstanding and fully in
<PAGE>
force, and all liability under the claims listed on SCHEDULE 2.20. is fully
covered and insured against under such policies subject to applicable
deductibles. There are no outstanding claims under any such policy as to which
the insurer has disclaimed liability. The Company has not been refused insurance
by any insurance carrier to which it has applied for insurance.
2.21. Banks. SCHEDULE 2.21. lists all banks or other financial institutions
with which the Company has an account, line of credit or safe deposit box and
the account numbers thereof and names of persons authorized to act in
connection therewith.
2.22. Undisclosed Material Liabilities. Except as disclosed in SCHEDULE
2.22., the Company does not have any liabilities of any kind that would be
material to the financial condition of the Company, taken as a whole, other
than:
(a) Liabilities disclosed or provided for in the audited balance sheet of
the Company dated as of December 31, 1995;
(b) Liabilities incurred since December 31, 1995, in the ordinary course
of business consistent with past practice that in the aggregate are not
material to the Company, taken as a whole; and
(c) Liabilities not required under generally accepted accounting
principles to be shown on the balance sheet of the Company for reasons
other than the contingent nature thereof or the difficulty of determining
the amount thereof.
2.23. Disclosure. Neither the Financial Statements, nor this Agreement
(including the Schedules and Exhibits attached hereto as they relate to the
Company or its Shareholders) nor any certificate or other information or
document furnished or to be furnished by the Shareholders or the Company to NRC
and Navarre contains or will contain any untrue statement of a material fact or
omits or will omit to state a material fact required to be stated herein or
therein or necessary to make the statements herein or therein not misleading. To
the best knowledge, information and belief of the officers, directors and
management level personnel of the Company, there is no event, fact or condition
that materially and adversely affects, or that reasonably could be expected to
materially and adversely affect, the Company that has not been set forth in this
Agreement or in the Schedules to this Agreement. True copies of all indentures,
notes, leases, agreements, plans, contracts and other instruments listed on or
referred to, or otherwise related to any item referred to, in the Schedules
delivered or furnished to NRC and Navarre pursuant to this Agreement have been
delivered to or have been made available for inspection by NRC and Navarre and
NRC and Navarre's attorneys and accountants.
2.24. Continuing Representations. THE REPRESENTATIONS AND WARRANTIES OF THE
COMPANY CONTAINED IN SECTION II. OF THIS AGREEMENT SHALL BE REPEATED AND
REAFFIRMED AS TRUE AND CORRECT ON AND AS OF THE EFFECTIVE DATE WITH THE SAME
FORCE AND EFFECT AS IF MADE ON AND AS OF THAT DATE.
<PAGE>
SECTION III.
REPRESENTATIONS AND WARRANTIES OF NAVARRE
Navarre represents, warrants, covenants and agrees to and with the Company that:
3.1. Organization and Corporate Power. Navarre is a corporation duly organized
and validly existing and in good standing under the laws of the State of
Minnesota and has full power and authority (corporate and other), to own, lease
or operate its properties in places where such business is now operated, to
carry on its business as now being conducted, and to execute and deliver this
Agreement to carry out the Transaction contemplated by this Agreement, and to
execute the documents referenced herein.
3.2. Due Authorization; Effect of Transaction. Except as otherwise provided in
SCHEDULE 3.2., no provision of Navarre's Articles of Incorporation or Bylaws, or
of any agreement, instrument or understanding, or any judgment, decree, law,
rule or regulation, to which Navarre is a party or by which it is bound, has
been or will be violated by the execution by Navarre of this Agreement or the
performance or satisfaction of any agreement or condition therein or herein
contained upon its part to be performed or satisfied, and all requisite
corporate and other authorizations for such execution, delivery, performance and
satisfaction have been duly obtained. This Agreement will, upon execution and
delivery, be a legal, valid and binding obligation of Navarre, enforceable in
accordance with its terms, except as may be limited by bankruptcy, insolvency,
or other laws affecting creditors' rights generally.
3.3. Articles of Incorporation and Bylaws. Navarre has heretofore furnished, or
otherwise made available, to the Company a complete and correct copy of its
Articles of Incorporation and the Bylaws, each as amended to the date hereof.
Such Articles of Incorporation and Bylaws are in full force and effect. Navarre
is not in violation of any of the provisions of its Articles of Incorporation
or, in any material respect, its Bylaws.
3.4. Capitalization.
(a) The authorized capital stock of Navarre consists of 25,000,000 shares
of no par value capital stock, of which 5,000,000 are shares of preferred
stock, none of which are outstanding and none of which are reserved for
issuance, and 20,000,000 of which are designated shares of common stock,
of which, as of March 3, 1997, 6,777,248 shares were issued and
outstanding, and 1,260,220 shares were issuable upon the exercise of
options outstanding under the Navarre option plans listed on SCHEDULE
3.4. hereto. Except as set forth on SCHEDULE 3.4., (i) since March 3,
1997, no shares of Navarre Common Stock have been issued, except upon the
exercise of options described in the immediately preceding sentence, and
(ii) there are no outstanding "Navarre Equity Rights." For purposes of
this Agreement, "Navarre Equity Rights" shall mean subscriptions,
options, warrants, calls, commitments, agreements, conversion rights or
other rights of any character (contingent or otherwise) to purchase or
otherwise acquire from Navarre at any time, or upon the happening of any
stated event, any shares of the capital stock of Navarre. SCHEDULE 3.4.
hereto sets forth a complete and accurate list of certain information
with respect to all outstanding Navarre Equity Rights as of
<PAGE>
March 3, 1997. Since March 3, 1997, no Navarre Equity Rights have been
issued except as set forth on SCHEDULE 3.4.
(b) Except as set forth on SCHEDULE 3.4., there are no outstanding
obligations of Navarre to repurchase, redeem or otherwise acquire any
shares of capital stock of Navarre.
(c) All of the issued and outstanding shares of Navarre Common Stock are
validly issued, fully paid and nonassessable.
3.5. Required Filings and Consents. Except as listed on SCHEDULE 3.5. and except
for applicable requirements, if any, of foreign regulatory laws and commissions,
filing and recordation of appropriate merger or other documents as required by
Minnesota and Nevada Law, Navarre is not required to submit any notice, report
or other filing with any governmental authority, domestic or foreign, in
connection with the execution, delivery or performance of this Agreement. Except
as set forth in the immediately preceding sentence, no waiver, consent, approval
or authorization of any governmental or regulatory authority, domestic or
foreign, is required to be obtained by Navarre in connection with its execution,
delivery or performance of this Agreement or the Transaction contemplated
hereby.
3.6. SEC Filings; Financial Statements.
(a) Navarre has filed all forms, reports and documents required to be
filed with the Securities and Exchange Commission ("SEC") since January
1, 1994, and has heretofore delivered or made available to the Company,
in the form filed with the SEC, together with any amendments thereto, its
(i) Annual Reports on Form 10-K for the fiscal year ended March 31, 1996,
(ii) the Company's proxy statement relating to Navarre's annual meetings
of shareholders held on September 5, 1996, (iii) Quarterly Reports on
Form 10-Q for the fiscal quarters ended June 30, 1996, September 30,
1996, and December 31, 1996, and (iv) all other reports or registration
statements filed by Navarre with the SEC since March 31, 1996
(collectively, the "Navarre SEC Reports"). The Navarre SEC Reports
(i) were prepared substantially in accordance with the requirements of
the Securities Exchange Act of 1934, as the same may be amended from time
to time ("Exchange Act"), as the case may be, and the rules and
regulations promulgated under each of such respective acts, and (ii) did
not at the time they were filed contain any untrue statement of a
material fact or omit to state a material fact required to be stated
therein or necessary in order to make the statements therein, in the
light of the circumstances under which they were made, not misleading.
(b) The financial statements, including all related notes and schedules,
contained in the Navarre SEC Reports (or incorporated by reference
therein) fairly present the consolidated financial position of Navarre
and its subsidiaries as at the date thereof and the consolidated results
of operations and cash flows of Navarre and its subsidiary for the
periods indicated in accordance with GAAP applied on a consistent basis
throughout the periods involved (except for changes in accounting
principles disclosed in the notes thereto) and subject in the case of
interim financial statements to normal year-end adjustments.
<PAGE>
3.7. Absence of Certain Changes or Events. Except as disclosed in the Navarre
SEC Reports filed prior to the date hereof or disclosed in Navarre's Prospectus
dated December 10, 1996 and/or on SCHEDULE 3.7., since March 31, 1996, Navarre
has not incurred any material liability, except in the ordinary course of its
business consistent with its past practices, and there has not been any change,
or any event involving a prospective change, in the business, financial
condition or results of operations of Navarre which has had, or is reasonably
likely to have, a Material Adverse Effect on Navarre, and Navarre has conducted
its business in the ordinary course consistent with its past practices.
"Material Adverse Effect," as it applies to Navarre, for purposes of this
Agreement shall mean $1,000,000 or greater.
3.8. Litigation. Except as disclosed on SCHEDULE 3.8. hereto, (a) there are no
claims, actions, suits, proceedings or investigations pending or, to Navarre's
knowledge, threatened against Navarre or any properties or rights of Navarre
before any court, administrative, governmental, arbitral, mediation or
regulatory authority or body, domestic or foreign, as to which there is more
than a remote possibility of an adverse judgment or determination against
Navarre or any properties or rights of Navarre in excess of $200,000 (net of
insurance and net of accruals reflected in the financial statements incorporated
by reference in Navarre SEC Reports), and (b) cases in which Navarre is not a
named defendant, but as to which Navarre may be liable for an allocable share of
any judgment rendered. With respect to tax matters, litigation shall not be
deemed threatened unless a tax authority has delivered a written notice of
deficiency to Navarre.
3.9. No Violation of Law. The business of Navarre is not being conducted in
violation of any statute, law, ordinance, regulation, judgment, order or decree
of any domestic or foreign governmental or judicial entity (including any stock
exchange or other self-regulatory body) ("Legal Requirements"), or in violation
of any permits, franchises, licenses, authorizations or consents that are
granted by any domestic or foreign government or judicial entity (including any
stock exchange or other self-regulatory body) ("Permits"), except for possible
violations none of which, individually or in the aggregate, may reasonably be
expected to have a Material Adverse Effect on Navarre. Except as disclosed in
Navarre SEC Reports and as set forth on SCHEDULE 3.9. hereto, to the best of
Navarre's knowledge, no investigation or review by any domestic or foreign
governmental or regulatory entity (including any stock exchange or other
self-regulatory body) with respect to Navarre in relation to any alleged
violation of law or regulation is pending or, to Navarre's knowledge,
threatened, nor has any governmental or regulatory entity (including any stock
exchange or other self-regulatory body) indicated an intention to conduct the
same, except for such investigations which, if they resulted in adverse
findings, would not reasonably be expected to have, individually or in the
aggregate, a Material Adverse Effect on Navarre. Except as set forth on SCHEDULE
3.9. hereto, Navarre is not subject to any cease and desist or other order,
judgment, injunction or decree issued by, or is a party to any written
agreement, consent agreement or memorandum of understanding with, or is a party
to any commitment letter or similar undertaking to, or is subject to any order
or directive by, or has adopted any board resolutions at the request of, any
court, governmental entity or regulatory agency that materially restricts the
conduct of its business or which may reasonably be expected to have a Material
Adverse Effect on Navarre, nor has Navarre been advised that any court,
governmental entity or regulatory agency is considering issuing or requesting
any of the foregoing. None of the representations and warranties made in this
Section 3.9. are being made with respect to Environmental Laws.
<PAGE>
3.10. Navarre Proxy Statement. None of the information supplied or to be
supplied by or on behalf of Navarre for inclusion or incorporation by reference
in its proxy statement, in definitive form, relating to the meeting of Navarre
shareholders to be held in connection with the Merger, if required, or in the
related proxy and notice of meeting, or soliciting material used in connection
therewith (referred to herein collectively as the "Proxy Statement") will, at
the dates mailed to shareholders of Navarre and at the times of the Navarre
shareholders' meeting, contain any untrue statement of a material fact or omit
to state any material fact required to be stated therein or necessary in order
to make the statements therein, in light of the circumstances under which they
are made, not misleading. The Proxy Statement (except for information relating
solely to Company) will comply as to form in all material respects with the
applicable provisions of the 1933 Act and the Exchange Act and the rules and
regulations promulgated thereunder.
3.11. Employee Matters; ERISA. Except as previously disclosed in writing by
Navarre's outside counsel to the Company's outside counsel with specific
reference to this Section 3.11.:
(a) Set forth on SCHEDULE 3.11. hereto is a true and complete list of all
employee benefit plans covering present and former employees or directors
of Navarre or its beneficiaries, or providing benefits to such persons in
respect of services provided to any such entity, including, but not
limited to, any employee benefit plans within the meaning of Section 3(3)
of the Employee Retirement Income Security Act of 1974, as amended
("ERISA"), any deferred compensation bonuses, stock options, restricted
stock plans, incentive compensation, severance or change in control
agreements and any other material benefit arrangements or payroll
practices (collectively, the "Navarre Benefit Plans").
(b) All contributions and other payments required to be made by Navarre
to or under any Navarre Benefit Plan (or to any person pursuant to the
terms thereof) have been made or the amount of such payment or
contribution obligation has been reflected in the Navarre Financial
Statements.
(c) Each of the Navarre Benefit Plans intended to be "qualified" within
the meaning of Section 401(a) of the Code has been determined by the
Internal Revenue Service (the "IRS") to be so qualified, and, to
Navarre's knowledge, no circumstances exist that could reasonably be
expected by Navarre to result in the revocation of any such
determination. Navarre is in compliance in all material respects with,
and each of the Navarre Benefit Plans is and has been operated in all
material respects in compliance with, all applicable Legal Requirements
governing such plan, including, without limitation, ERISA and the Code.
Each Navarre Benefit Plan intended to provide for the deferral of income
or the reduction of salary or other compensation, or to afford other
income tax benefits, complies in all material respects with the
requirements of the applicable provisions of the Code and other Legal
Requirements to the extent required to provide such income tax benefits.
(d) With respect to the Navarre Benefit Plans, individually and in the
aggregate, no event has occurred and, to Navarre's knowledge, there does
not now exist any condition or set of circumstances, that could subject
Navarre to any material liability arising under the Code, ERISA or any
other applicable Legal Requirements (including, without
<PAGE>
limitation, any liability to any such plan or the Pension Benefit
Guaranty Corporation (the "PBGC")), or under any indemnity agreement to
which Navarre is a party, excluding liability for benefit claims and
funding obligations payable in the ordinary course.
(e) Except as set forth on SCHEDULE 3.11. hereto, none of the Navarre
Benefit Plans that are "welfare plans" within the meaning of Section 3(1)
of ERISA provides for any retiree benefits other than continuation
coverage required to be provided under Section 4980B of the Code or Part
6 of Title I of ERISA.
(f) Navarre has made available to Company a true and correct copy of each
current or last, in the case where there is no current, expired
collective bargaining agreement to which Navarre is a party or under
which Navarre has obligations and, with respect to each Navarre Benefit
Plan, where applicable, (i) such plan (but only to the extent such plan
is intended to be covered by Section 401 of the Code) and summary plan
description, (ii) the most recent annual report filed with the IRS,
(iii) each related trust agreement (including all material amendments to
each such trust agreement), (iv) the most recent determination of the IRS
with respect to the qualified status of such Navarre Benefit Plan, and
(v) the most recent actuarial report or valuation.
(g) Except as set forth on SCHEDULe 3.11. hereto, (i) the consummation or
announcement of the Transaction contemplated by this Agreement will not
(either alone or upon the occurrence of any additional or further acts or
events) result in any (A) payment (whether of severance pay or otherwise)
becoming due from Navarre to any officer, employee, former employee or
director thereof or to the trustee under any "rabbi trust" or similar
arrangement, or (B) benefit under any Navarre Benefit Plan being
established or becoming accelerated, vested or payable and (ii) Navarre
is not a party to (A) any management, employment, deferred compensation,
severance (including any payment, right or benefit resulting from a
change in control), bonus or other contract for personal services with
any current or former officer, director or employee (whether or not
characterized as a plan for purposes of ERISA), (B) any consulting
contract with any person who prior to entering into such contract was a
director or officer of Navarre, or (C) any plan, agreement, arrangement
or understanding similar to any of the items described in clause (ii)(A)
or (B) of this sentence.
(h) The consummation or announcement of the Transaction contemplated by
this Agreement will not (either alone or upon the occurrence of any
additional or further acts or events) result in the disqualification of
any of the Navarre Benefit Plans intended to be qualified under, result
in a prohibited transaction or breach of fiduciary duty under, or
otherwise violate, ERISA or the Code.
(i) Neither Navarre nor any of their directors, officers, employees or
agents, nor any "party in interest" or "disqualified person", as such
terms are defined in Section 3 of ERISA and Section 4975 of the Code has,
with respect to any Navarre Benefit Plan, engaged in or been a party to
any "prohibited transaction", as such term is defined in Section 4975 of
the Code or Section 406 of ERISA which is not otherwise exempt, which
could result in the imposition of either a penalty assessed pursuant to
Section 502(i) of ERISA or a tax imposed by Section 4975 of the Code or
which could constitute a breach
<PAGE>
of fiduciary duty, in each case applicable to Navarre or any Navarre
Benefit Plan and which would result in a Material Adverse Effect on
Navarre.
3.12. Approval.
(a) The Board of Directors of Navarre has unanimously determined that
the Transaction contemplated by this Agreement is in the best
interests of Navarre and its stockholders and has resolved to
recommend to such stockholders that they vote in favor thereof.
(b) Navarre has no rights agreements which would affect any of the
above described transactions and no vote or approval under any
such agreement is required thereunder, and no holder of rights
issued thereunder shall be entitled to exercise such rights under,
or be entitled to any rights or benefits pursuant to, solely by
reason of the approval, execution and delivery of this Agreement
or the consummation of the Transaction contemplated hereby.
3.13. Opinion of Financial Advisor. Navarre has determined that it does not need
the benefit of any opinion from an independent financial advisor to engage in
the Transaction contemplated hereby and has determined that the conversion ratio
set forth in the Agreement of Merger is fair from a financial point of view to
the holders of Navarre common stock.
3.14. Tax Matters. Except as set forth on SCHEDULE 3.14. hereto, all material
federal, state, local and foreign tax returns and tax reports required to be
filed by Navarre on or prior to the Effective Date or with respect to taxable
periods ending on or prior to the Effective Date have been or will be filed with
the appropriate governmental authorities on or prior to the Effective Date or by
the due date thereof including extensions.
3.15. Intellectual Property. To the best of Navarre's knowledge, Navarre does
not utilize or has utilized any patent, trademark, trade name, service mark,
copyright, software, trade secret or how, except for those which are owned,
possessed or lawfully used by Navarre in its operations, and, to the knowledge
of Navarre, Navarre does not infringe upon or unlawfully or wrongfully uses any
patent, trademark, trade name, service mark, copyright or trade secret owned or
validly claimed by another.
3.16. Insurance. Except as set forth on SCHEDULE 3.16. hereto, Navarre is, and
has been continuously since January 1, 1992, insured with financially
responsible insurers in such amounts and against such risks and losses as are
customary for companies conducting the business as conducted by Navarre during
such time period. Except as set forth on such SCHEDULE 3.16., since January 1,
1996, Navarre has not received notice of cancellation or termination with
respect to any material insurance policy of Navarre. The insurance policies of
Navarre are valid and enforceable policies.
3.17. Certain Contracts. All contracts described in Item 601(b)(10) of
Regulation S-K to which Navarre is a party or may be bound ("Navarre Contracts")
have been filed as exhibits to, or incorporated by reference in, Navarre's
Annual Report on Form 10-K for the year ended March 31, 1996. All Navarre
Contracts are valid and in full force and effect on the date hereof
<PAGE>
except to the extent they have previously expired in accordance with their
terms, and Navarre has not violated any provision of, or committed or failed to
perform any act which with or without notice, lapse of time or both would
constitute a default under the provisions of, any Navarre Contract, except for
defaults which, individually and in the aggregate, would not reasonably be
expected to result in a Material Adverse Effect on Navarre. True and complete
copies of all Navarre Contracts have been made available to the Company for
inspection.
3.18. Broker or Finder. No person or persons assisted in or brought about the
negotiation of this Agreement in the capacity of broker or agent or finder on
behalf of Navarre. Navarre has no liability to any broker, finder or agent and
has not agreed to pay any brokerage fees, commissions or finders fees with
respect to this Agreement or the Transaction.
3.19. Escrow Shares; 1997 Shares and 1998 Shares. Upon issuance to the
Shareholders pursuant to Section 1.11 and 1.12 of this Agreement, the Escrow
Shares, 1997 Shares and 1998 Shares shall have been duly authorized, duly and
validly issued and fully paid and nonassessable, and will not be subject to
preemptive rights of any shareholder of Navarre. The Escrow Shares, 1997 Shares
and 1998 Shares to be issued pursuant to this Agreement will not be registered
under the Securities Act of 1933 or any state securities law and may not be
resold without (i) registration under the Securities Act of 1933; or (ii) an
opinion of counsel acceptable to counsel for Navarre that such registration is
not necessary. The Navarre Shares may be sold by the Shareholders only in
compliance with Rule 144 or pursuant to registration under the Securities Act of
1933 and applicable state securities law.
3.20. Credit Facility Agreement. For the period ending September 30, 1998,
Navarre will, subject to achievement of satisfactory performance milestones by
the Surviving Corporation as identified in the Credit Facility Agreement, and
subject to all of the conditions set forth in the Credit Facility Agreement,
make available to the Surviving Corporation working capital in the amounts set
forth in the Credit Facility Agreement.
3.21. Continuing Representations. THE REPRESENTATIONS AND WARRANTIES OF
NAVARRE CONTAINED IN SECTION III. OF THIS AGREEMENT SHALL BE REPEATED AND
REAFFIRMED AS TRUE AND CORRECT ON AND AS OF THE EFFECTIVE DATE WITH THE SAME
FORCE AND EFFECT AS IF MADE ON AND AS OF THAT DATE.
SECTION IV.
REPRESENTATIONS AND WARRANTIES OF NRC
NRC represents, warrants, covenants and agrees to and with the Company that:
4.1. Organization and Corporate Power. NRC is a corporation duly organized and
validly existing and in good standing under the laws of the State of Minnesota
and has full power and authority (corporate and other), to own, lease or operate
its properties in places where such business is now operated, to carry on its
business as now being conducted, and to execute and deliver this Agreement to
carry out the Transaction contemplated by this Agreement, and to execute the
documents referenced herein.
<PAGE>
4.2. Due Authorization; Effect of Transaction. No provision of NRC's Articles of
Incorporation or Bylaws, or of any agreement, instrument or understanding, or
any judgment, decree, law, rule or regulation, to which NRC is a party or by
which it is bound, has been or will be violated by the execution by NRC of this
Agreement or the performance or satisfaction of any agreement or condition
therein or herein contained upon its part to be performed or satisfied, and all
requisite corporate and other authorizations for such execution, delivery,
performance and satisfaction have been duly obtained. This Agreement will, upon
execution and delivery, be a legal, valid and binding obligation of NRC,
enforceable in accordance with its terms, except as may be limited by
bankruptcy, insolvency, or other laws affecting creditors' rights generally.
4.3. Broker or Finder. No person or persons assisted in or brought about the
negotiation of this Agreement in the capacity of broker or agent or finder on
behalf of NRC. NRC has no liability to any broker, finder or agent and has not
agreed to pay any brokerage fees, commissions or finders fees with respect to
this Agreement or the Transaction.
SECTION V.
ADDITIONAL AGREEMENTS
5.1. Transition Planning. Eric Paulson and Robert Griggs, as Presidents of
Navarre and the Company, respectively, jointly shall be responsible for
coordinating all aspects of transition planning and implementation relating to
the Transaction contemplated hereby. If either such person ceases to be
President of his respective company for any reason, such person's successor as
President shall assume his predecessor's responsibilities under this Section
5.1. During the period between the date hereof and the Effective Date, Messrs.
Paulson and Griggs jointly shall (i) examine various alternatives regarding the
manner in which to best organize and manage the businesses of the Surviving
Corporation after the Effective Date, and (ii) coordinate policies and
strategies with respect to regulatory authorities and bodies, in all cases
subject to applicable law.
5.2. Control of Operations. Nothing contained in this Agreement shall give the
Company, directly or indirectly, the right to control or direct Navarre's or
NRC's operations prior to the Effective Date. Nothing contained in this
Agreement shall give Navarre, directly or indirectly, the right to control or
direct the Company's operations prior to the Effective Date. Prior to the
Effective Date, each of the Company, NRC and Navarre shall exercise, consistent
with the terms and conditions of this Agreement, complete control and
supervision over its respective operations.
5.3. Management Agreement. Navarre shall determine the members of the Board of
Directors of the Surviving Corporation after the Closing. Such directors will,
in turn, be responsible for recruiting, selecting and training the officers of
the Surviving Corporation. Further, the Company has informed its Shareholders
that Navarre intends to interview and select a new Chief Operating Officer and a
Chief Financial Officer for the Surviving Corporation.
5.4. Shareholder Approval. The Company and Navarre each acknowledge that Rule
4460(i) of the NASDAQ and Stock Market Manual requires shareholder approval
where the potential issuance of shares in a transaction will result in the
issuance of shares in excess of twenty
<PAGE>
percent (20%) of the issuer's outstanding securities prior to the transaction.
As a result of the fact that the Transaction contemplated herein will
potentially result in an issuance of common stock of Navarre in the amount of
more than twenty percent (20%), consummation of the Transaction contemplated
herein would ordinarily be subject to approval of the shareholders of Navarre,
and Navarre shall be required to call a special meeting with respect to the
proposed Transaction prior to the Effective Date. The Company has received
correspondence from NASDAQ under which NASDAQ has granted the Company an
exemption from Rule 4460(i), provided that the Shareholders of Navarre do not
challenge the transaction prior to the Effective Date.
5.5. Releases. Within ten (10) days of the Closing Date, the Company shall take
all necessary action to (i) terminate all outstanding warrants and options that
are in favor of the Shareholders and any third parties; (ii) release any
Encumbrances on the assets of the Company, including the Intangible Property,
that are in favor of any of Shareholders; and (iii) obtain the Agreement of
Employees from all its employees.
5.6. Repayment of Loan Obligations. Within 48 hours of Effective Date, Navarre
shall cause to be paid to the parties set forth and listed below twenty-five
percent (25%) of the outstanding balance of the Loans with the remainder of the
Loans to each be paid in eighteen (18) equal monthly installments of principal
plus interest at the rate provided therein. As additional consideration for the
release of the security interests securing the Loans, Navarre shall issue 5,000
shares of its common stock to Patrick Mahoney and 15,000 shares of its common
stock to Robert Griggs, which shares shall be issued as of the Effective Date.
In exchange, all security interests in the Company's assets provided to said
parties to secure the Loans shall be terminated contemporaneously with the
initial 25% payment. The Loans are as follows:
(a) that certain Promissory Note dated December 4, 1995, executed by
the Company in favor of Patrick Mahoney in the original principal
amount of $22,500, together with interest accruing at 10% per
annum;
(b) that certain Promissory Note dated December 29, 1995, executed by
the Company in favor of Robert Griggs in the original principal
amount of $22,500, together with interest accruing at 10% per
annum; and
(c) that certain Promissory Note dated November 13, 1995, executed by
the Company in favor of Robert Griggs in the original principal
amount of $45,000, together with interest accruing at 10% per
annum (the loans set forth in (a), (b) and (c) of this Section
5.6. are collectively referenced as the "Loans").
5.7. Agreements Null and Void. Except as described on SCHEDULE 5.7. hereto, the
Company and Navarre each agree that the Option Agreement, Shareholder Voting
Control Agreement and Preemptive Agreement, each dated as of May 1, 1996, shall
be null and void and of no further force or effect as of the Effective Date,
which shall be evidenced by the Termination Agreement. Further, the Stock
Purchase Agreement dated as of May 1, 1996 shall be null and void and of no
further force and effect, except as described on SCHEDULE 5.7., and except with
respect to Section VIII., Survival Of Representations and Warranties, which
shall continue to survive the termination of the Stock Purchase Agreement for
the period set forth therein.
<PAGE>
5.8. Consummation of the Merger.
(a) At the earliest reasonably practicable time following the execution
and delivery of this Agreement, each of Navarre and the Company, if
required, shall promptly take all action necessary in accordance with
Minnesota and Nevada Law and their Articles of Incorporation and Bylaws
to obtain the necessary approval of the Transaction, including the
issuance of Navarre common stock pursuant to the Merger Agreement, which
proposal shall be approved if it receives the affirmative vote of a
majority of the votes entitled to be cast by all holders of Navarre
Common Stock, or if the NASDAQ exemption as described in Section 5.4. of
this Agreement is not withdrawn. The Company, however, shall have
received the vote or consent of all of its shareholders to the Merger
Agreement; provided, however, Navarre, at its sole discretion, may waive
the requirement of a unanimous vote to provide for a less than unanimous
vote so long as it complies with Nevada Law. Each of Navarre and the
Company shall use all commercially reasonable efforts to solicit from its
respective stockholders proxies to be voted at their Stockholders Meeting
in favor of this Agreement, if applicable, pursuant to the Proxy
Statement and disclosure documents and, subject to the fiduciary duties
of its Board of Directors, each of Navarre and the Company shall include
in the Proxy Statement and disclosure and request for proxies the
recommendation of its Board of Directors in favor of this Agreement and
the Merger. Each of the parties shall take all other action necessary or,
in the opinion of the other parties, advisable to promptly and
expeditiously secure any vote or consent of stockholders required by
Minnesota and Nevada Law, the applicable requirements of any securities
exchange, and such party's Articles of Incorporation and Bylaws to effect
the Merger.
(b) Upon the terms and subject to the conditions hereof and as soon as
practicable after the conditions set forth in Articles VI and VII hereof
have been fulfilled or waived, each of the parties shall execute in the
manner required by Minnesota and Nevada Law and deliver to and file with
the Secretaries of State of the States of Minnesota and Nevada such
instruments and agreements as may be required by Minnesota and Nevada Law
and the parties shall take all such other and further actions as may be
required by law to make the Merger effective.
5.9. Additional Agreements. Each of the parties will comply in all material
respects with all applicable laws and with all applicable rules and regulations
of any governmental authority in connection with its execution, delivery and
performance of this Agreement and the Transaction contemplated hereby. Navarre,
NRC and the Company each agree to use all commercially reasonable efforts to
obtain in a timely manner all necessary waivers, consents and approvals and to
effect all necessary registrations and filings, and to use all commercially
reasonable efforts to take, or cause to be taken, all other actions and to do,
or cause to be done, all other things necessary, proper or advisable to
consummate and make effective as promptly as practicable the Transaction
contemplated by this Agreement.
5.10. Notification of Certain Matters. Each of Navarre and Company shall give
prompt notice to the other of the following:
<PAGE>
(a) the occurrence or nonoccurrence of any event whose occurrence or
nonoccurrence would be likely to cause either (i) any representation or
warranty contained in this Agreement to be untrue or inaccurate in any
material respect at any time from the date hereof to the Effective Date,
or (ii) directly or indirectly, any Material Adverse Effect on such
party;
(b) any material failure of such party, or any officer, director,
employee or agent of any thereof, to comply with or satisfy any covenant,
condition or agreement to be complied with or satisfied by it hereunder;
and
(c) any facts relating to such party which would make it necessary or
advisable to amend the Proxy Statement or the disclosure documents in
order to make the statements therein not misleading or to comply with
applicable law; provided, however, that the delivery of any notice
pursuant to this Section 5.10. shall not limit or otherwise affect the
remedies available hereunder to the party receiving such notice.
5.11. Purchase of Assets. Navarre and the Company will each use its best efforts
to cause the Transaction contemplated by this Agreement to be accounted for as a
pooling of interests in accordance with GAAP, and such accounting treatment to
be accepted by Company's independent certified public accountants, by the SEC,
respectively, and each of the parties agrees that it will take no action that
would cause such accounting treatment not to be obtained. However, the parties
recognize and agree that the Transaction set forth in this Agreement under the
facts and circumstances which now exist make it highly unlikely that the
Transaction will be treated as a pooling of interests and will be treated for
accounting purposes as a purchase of assets.
5.12. Tax-Free Reorganization. Each of the parties will use its best efforts
to cause the Merger to qualify as a tax-free reorganization under Section 368
of the Code.
SECTION VI.
CONDITIONS PRECEDENT TO NAVARRE'S AND TO NRC'S OBLIGATIONS
Navarre's and NRC's obligations to the Company to complete the Transaction
contemplated by this Agreement and the Agreement of Merger is subject to
compliance by the Company and its Shareholders with their agreements herein
contained and to the satisfaction on the Effective Date of the following further
conditions, any of which may be waived by Navarre and NRC:
6.1. Opinion of the Shareholders's Counsel. The Company shall have furnished
Navarre, NRC, and Navarre's lender with a favorable opinion, dated the Effective
Date, of Mahoney, Hagberg & Rice, A Professional Association, counsel for the
Company, in form and substance satisfactory to Winthrop & Weinstine, P.A.,
counsel for Navarre and NRC.
6.2. Deliveries of the Company. The Company shall have complied in all
respects with its obligations under Section 1.15. hereof.
<PAGE>
6.3. Representations and Covenants, Etc. The representations, warranties,
covenants and agreements of the Company contained in this Agreement or otherwise
made in writing pursuant hereto, shall be true and correct in all material
respects at and as of the Effective Date with the same force and effect as
though made on and as of such date; each and all of the agreements and
conditions to be performed or satisfied by the Company hereunder at or prior to
the Effective Date shall have been duly performed or satisfied in all material
respects; and the Company shall have furnished Navarre and NRC with such
certificates and other documents evidencing the accuracy of such representations
and warranties and the performance of such agreements or conditions as Navarre
shall have reasonably requested. Navarre shall, on the basis of its
investigation and inspection and that of its representatives, accountants and
attorneys, have been satisfied in all reasonable respects as to the accuracy in
all material respects of such representations and warranties and the performance
and satisfaction of such agreements and conditions.
6.4. Absence of Litigation. No action or proceeding shall have been instituted
or threatened prior to or at the Effective Date before any court or governmental
body or authority pertaining to the Transaction contemplated hereby, the results
of which could prevent or make illegal the consummation of such Transaction or
which, in the judgment of Navarre, could be materially adverse to the Company,
its properties, facilities or assets.
6.5. Satisfaction of Counsel. The validity of the Transaction herein mentioned,
as well as the form and substance of all opinions, certificates and other
documents hereunder, shall be satisfactory in all reasonable respects to
Winthrop & Weinstine, P.A., counsel for Navarre and NRC.
6.6. Uniform Commercial Code Searches. Navarre shall have received Uniform
Commercial Code, tax and judgment lien records searches (conducted through a
date reasonably proximate in time to the Closing Date and the Effective Date) of
filings in such records in all jurisdictions where the Company has any material
personal property or fixtures, which shall be in form, scope and substance
satisfactory to Buyer and its counsel and which shall not disclose any
Encumbrances not disclosed in a Schedule.
6.7. Third Party Consents. Navarre and NRC shall have received all required
consents and approvals from their lenders and any other third party or other
governmental authorities required to consent to or approve the Transaction
described in this Agreement.
6.8. Navarre Shareholder Approval. Navarre shall have received Shareholder
approval for the Transaction as required by applicable laws, rules and
regulations.
6.9. NRC Shareholder Approval. NRC shall have received Shareholder approval
for the Transaction as required by applicable laws, rules and regulations.
SECTION VII.
CONDITIONS PRECEDENT TO THE COMPANY'S OBLIGATIONS
The obligation of the Company to consummate the Transaction contemplated
hereunder is subject to compliance by Navarre and NRC with their agreements
herein contained, and to the
<PAGE>
satisfaction on the Effective Date of the following further conditions, any of
which may be waived by the Shareholders and the Company:
7.1. Opinion of Navarre's and NRC's Counsel. Navarre and NRC shall have
furnished the Company with a favorable opinion, dated the Closing Date, of
Winthrop & Weinstine, P.A., counsel for Navarre and NRC, in form and substance
satisfactory to Mahoney, Hagberg & Rice, A Professional Association, counsel to
the Company. Navarre and NRC shall have furnished the Shareholders with a
favorable opinion dated the Effective Date on such matters satisfactory to the
Shareholders.
7.2. Deliveries by Navarre. Navarre shall have complied in all respects with
its obligations under Section 1.17. hereof.
7.3. Deliveries by NRC. NRC shall have complied in all respects with its
obligations under Section 1.18. hereof.
7.4. Representations and Covenants, Etc. The representations, warranties,
covenants and agreements of Navarre and NRC contained in this Agreement or
otherwise made in writing by their or on their behalf pursuant hereto or
otherwise made in connection with the Transaction contemplated hereby shall be
true and correct in all material respects at and as of the Effective Date with
the same force and effect as though made on and as of such date; each and all
the agreements and conditions to be performed or satisfied by Navarre and NRC
hereunder at or prior to the Effective Date shall have been duly performed or
satisfied in all material respects; and Navarre and NRC shall have furnished the
Company with such certificates or other documents evidencing the accuracy of
such representations and warranties and the performance of such agreements or
conditions as the Company shall have requested. The Company shall, on the basis
of its investigation and inspection, and that of its representatives,
accountants and attorneys, have been satisfied in all reasonable respects as to
the accuracy in all material respects of such representations and warranties and
the performance and satisfaction of such agreements and conditions.
7.5. Absence of Litigation. No action or proceeding shall have been instituted
or threatened prior to or at the Effective Date before any court or governmental
body or authority pertaining to the Transaction contemplated hereby, the results
of which could prevent or make illegal the consummation of such Transaction or
which, in the judgment of the Company, could be materially adverse to Navarre,
its properties, facilities or assets.
7.6. Satisfaction of Counsel. The validity of the Transaction herein mentioned,
as well as the form and substance of all opinions, certificates and other
documents hereunder, shall be satisfactory in all reasonable respects to
Mahoney, Hagberg & Rice, A Professional Association, counsel to the Company.
<PAGE>
SECTION VIII.
ENTIRE AGREEMENT; SURVIVAL OF REPRESENTATIONS AND WARRANTIES
The Company, Navarre and NRC agree that, except as set forth in Section 5.7.,
this Agreement, including the Schedules and Exhibits hereto, and the Agreement
of Merger constitutes the entire agreement among the parties with respect to the
subject matter hereof and supersedes all prior understandings and agreements
with respect thereto. The representations, warranties, covenants and agreements
provided for in this Agreement shall survive the Effective Date for a period of
twenty-seven (27) months after which time they shall lapse and be of no further
force and effect, except for the representations and warranties set forth in
Sections 2.18. and 3.1., each of which shall survive for the applicable
limitations periods, and they shall be unaffected by any investigation made by
or on behalf of any party hereto.
SECTION IX.
INDEMNIFICATION AND OTHER REMEDIES
9.1. Specific Performance; Other Remedies. The parties recognize that various of
the rights of the parties under this Agreement are unique and, accordingly, the
parties shall, in addition to such other remedies as may be available to any of
them at law or in equity, have the right to enforce their rights hereunder by
actions for injunctive relief and specific performance to the extent permitted
by law. In addition, Navarre and the Surviving Corporation shall have the right
to set off their damages, costs and expenses against the Escrow Shares or any
payment or payments coming due in the form of the 1997 Shares and 1998 Shares
pursuant to this Agreement. The parties hereto agree that in any legal action
commenced to enforce the terms of this Agreement, the prevailing party shall be
entitled to recover from the other party all reasonable fees and expenses
(including reasonable legal fees) and including, but not limited to, all
reasonable fees and expenses incident to any action or participation in, or in
connection with, any case or proceeding commenced under federal or state
bankruptcy or insolvency laws or any regulatory proceeding.
9.2. Confidentiality.
(a) Whether or not the Transaction contemplated hereby are consummated,
each of the parties hereto agrees to keep confidential and cause their
attorneys and accountants to keep confidential any and all information
and data with respect to the other party which it has received as a
result of any investigation made in connection with this Agreement and
which is not otherwise available to the parties; provided, however, that
notwithstanding the foregoing, each of the parties hereto shall be free
to disclose any such information or data (a) to the extent required by
applicable law and (b) during the course of or in connection with any
litigation, arbitration or other proceeding based upon or in connection
with the subject matter of this Agreement, and the Agreement of Merger
including, without limitation, the failure of the Transaction
contemplated hereby to be consummated. In the event that the Transaction
contemplated hereby are not consummated, Navarre and NRC each agree that
it shall keep confidential any and all information and data with respect
to the Company or the Shareholders which is not
<PAGE>
otherwise available to the public and shall not directly or indirectly
use any such secret or confidential information for its benefit and shall
return to the Company all of the above-referenced information and data
with respect to the Company and the Shareholders, including all books,
records, Tax returns and other data relating to the Shareholders, the
Company and the ownership and operation of the Company. The duty of
confidentiality set forth herein shall not apply to information that:
(i) is, at the time of disclosure, in the public domain;
(ii) after disclosure, enters the public domain, except where such
entry is a direct result of a breach of this Agreement;
(iii) subsequent to disclosure, is obtained from a third party in
possession of such information and not under a contractual or
fiduciary obligation to the party originally disclosing such
information to keep such information in confidence or did not,
directly or indirectly, obtain such information from a party under
a contractual or fiduciary obligation to the party originally
disclosing such information to keep such information in
confidence;
(iv) is filed with any governmental or any regulatory authority
and available to the public; or
(v) is disclosed pursuant to any judicial or governmental
requirement or order.
(b) Without intending to limit the remedies available to a party due to
any breach or threatened breach of Section 9.2.(a), each of the other
parties agrees that damages at law would be an insufficient remedy in the
event of any breach or threatened breach by the other parties of Section
9.2.(a) and that such party shall be entitled to injunctive relief or
other equitable remedies in the event of any such breach or threatened
breach.
SECTION X.
GENERAL PROVISIONS
10.1. Effect of Waiver. Any waiver of any term or condition of this Agreement,
or of the breach of any covenant, representation or warranty contained herein,
in any one instance, shall not operate as or be deemed to be or construed as a
further or continuing waiver of any other breach of such term, condition,
covenant, representation or warranty or any other term, condition, covenant,
representation or warranty, nor shall any failure at any time or times to
enforce or require performance of any provision hereof operate as a waiver of or
affect in any manner such party's right at a later time to enforce or require
performance of such provision or of any other provision hereof.
10.2. Modification of Agreement. This Agreement may not be amended, nor shall
any waiver, change, modification, consent or discharge be effected, except by an
instrument in writing executed by or on behalf of the party against whom
enforcement of any amendment, waiver, change, modification, consent or discharge
is sought.
<PAGE>
10.3. Assignment; Parties in Interest. This Agreement shall not be assignable by
any party without the prior written consent of the other; provided, however,
that in the event that after the Effective Date Navarre or the Surviving
Corporation shall be merged with, or consolidated into, any other corporation,
or in the event that after the Effective Date Navarre or the Surviving
Corporation shall sell and transfer substantially all of its assets to another
corporation, the terms of this Agreement, shall inure to the benefit of the
corporation resulting from such merger or consolidation, or to which Navarre's
or the Surviving Corporation's assets shall be sold and transferred. This
Agreement shall be binding upon and shall inure to the benefit of the parties
hereto and their respective successors and permitted assigns. This Agreement is
not intended and shall not be construed to create any rights in or to be
enforceable in any part by persons other than the parties hereto (or a successor
to Navarre or the Surviving Corporation or assignees of the Shareholders as
provided in this Section).
10.4. Severability. If any provision of this Agreement shall be held or deemed
to be, or shall in fact be, invalid, inoperative or unenforceable as applied to
any particular case in any jurisdiction or jurisdictions, or in all
jurisdictions or in all cases, because of the conflict of any provision with any
constitution or statute or rule of public policy or for any other reason, such
circumstance shall not have the effect of rendering the provision or provisions
in question invalid, inoperative or unenforceable in any other jurisdiction or
in any other case or circumstance or of rendering any other provision or
provisions herein contained invalid, inoperative or unenforceable to the extent
that such other provisions are not themselves actually in conflict with such
constitution, statute or rule of public policy, but this Agreement shall be
returned and construed in any such jurisdiction or case as if such invalid,
inoperative or unenforceable provision had never been contained herein and such
provision reformed so that it would be valid, operative and enforceable to the
maximum extent permitted in such jurisdiction or in such case.
10.5. Construction. This Agreement has been negotiated by Navarre, NRC and the
Company and their respective legal counsel, and legal or equitable principles
that may require the construction of this Agreement or any provision hereof
against the party drafting this Agreement shall not apply in any construction or
interpretation of this Agreement.
10.6. Counterparts. This Agreement may be executed in two or more counterparts,
each of which shall be deemed an original, but all of which together shall
constitute one and the same instrument, and in pleading or proving any provision
of this Agreement it shall not be necessary to produce more than one such
counterpart.
10.7. Notices. All notices, requests, demands and other communications hereunder
shall be in writing and shall be deemed to have been duly given if delivered or
mailed, postage prepaid, certified or registered mail, return receipt requested:
<PAGE>
(a) If to Navarre or to NRC to: with a copy to:
Navarre Corporation Winthrop & Weinstine, P.A.
7400 49th Avenue North 3000 Dain Bosworth Plaza
New Hope, MN 55428 60 South Sixth Street
Attention: President Minneapolis, MN 55402
Attention: Scott J. Dongoske
(b) If to the Company to: with a copy to:
Net Radio Corporation Mahoney, Hagberg & Rice,
Riverplace Exposition Hall A Professional Association
Suite 149 333 South Seventh Street
43 Main Street S.E. Suite 1500
Minneapolis, MN 55414 Minneapolis, MN 55402
Attn: President Attn: Michael C. Mahoney
or to such other person(s) and address(es) as either party shall have
specified in writing to the other.
10.8. Governing Law. This Agreement shall be governed by and construed and
enforced in accordance with the law (other than the law governing conflict of
law questions) of the State of Minnesota.
10.9. Captions and Headings. Captions and section headings used herein are for
convenience only and are not a part of this Agreement and shall not be used in
construing it.
10.10. Legal Representation. EACH OF THE PARTIES TO THIS AGREEMENT REPRESENTS
AND WARRANTS THAT IT HAS READ AND UNDERSTOOD ALL THE TERMS OF THE AGREEMENT;
THAT IT HAS HAD AN OPPORTUNITY TO OR HAS CONSULTED WITH COUNSEL OF ITS CHOICE
PRIOR TO ITS EXECUTION; THAT IT POSSESSES FULL LEGAL AUTHORITY AND CAPACITY TO
EXECUTE THIS AGREEMENT; AND THAT IT HAS FREELY EXECUTED THIS AGREEMENT WITHOUT
COERCION, DURESS, OR RELIANCE UPON ANY PROMISE NOT EXPRESSLY STATED IN THIS
AGREEMENT.
IN WITNESS WHEREOF, the Shareholders, the Company, Navarre and NRC have caused
this Agreement to be executed as of the date first above written.
NET RADIO CORPORATION, NAVARRE CORPORATION,
a Nevada corporation a Minnesota corporation
By: /s/ Robert Griggs By: /s/ Charles E. Cheney
--------------------------------- --------------------------------
Robert Griggs Charles E. Cheney
Its Chief Executive Officer Its Executive Vice President
and Chief Financial Officer
<PAGE>
NET RADIO CORPORATION,
a Minnesota corporation
By: /s/ Charles E. Cheney
---------------------------------
Charles E. Cheney
Its Chief Financial Officer
ESCROW AGREEMENT
THIS ESCROW AGREEMENT (this "Agreement") is made effective as of March 20, 1997,
by and among the named persons set forth on Schedule 1 attached hereto (the
"Shareholders"), NET RADIO CORPORATION, a Minnesota corporation and wholly owned
subsidiary of Navarre Corporation ("NRC"), NAVARRE CORPORATION, a Minnesota
corporation ("Navarre") and NORWEST BANK MINNESOTA, NATIONAL ASSOCIATION, a
national banking association (the "Escrow Agent").
RECITALS:
A. Navarre, NRC, the Shareholders and Net Radio Corporation, a Nevada
corporation ("Net Radio") entered into that certain Agreement and Plan of
Reorganization, dated as of March 7, 1997, (the "Merger Agreement"), which
provides for the merger of Net Radio and NRC with NRC being the surviving
entity.
B. Pursuant to the Merger Agreement, Navarre has deposited 105,000 shares of
Navarre's stock, registered in the Escrow Agent's nominee name "EMSEG & CO"
representing the consideration given to the Shareholders under the terms of the
Merger Agreement with the Escrow Agent ("Escrow Account"), who has agreed to act
as escrow agent with respect to the Escrow Account pursuant to the terms of this
Agreement.
C. The parties desire to appoint the Escrow Agent (the "Escrow Agent") to act on
their behalf with respect to the matters contained in this Agreement.
AGREEMENTS:
IN CONSIDERATION for the mutual covenants set forth herein and for other good
and valuable consideration, the receipt and sufficiency of which is hereby
acknowledged, the parties agree as follows:
1. ESCROW ACCOUNT.
a. Appointment and Acceptance of the Escrow Agent. The Escrow Agent is
hereby appointed by the parties as escrow agent to act in accordance with
the instructions set forth herein. The Escrow Agent hereby accepts such
appointment.
b. Effective Date. This Agreement shall be effective as of March 20,
1997.
c. Term of Escrow. This Agreement shall terminate upon the earlier of
(i) the date all of the assets in the Escrow Account have been disbursed
as provided herein, (ii) the date on which Robert Griggs, the appointed
representative of the Shareholders (the "Representative"), Navarre and
NRC agree to terminate this Agreement, or (iii) May 31, 1999 (unless
extended by mutual agreement of the Shareholders, Navarre and NRC).
<PAGE>
d. Duty to Hold Escrow Account. Escrow Agent shall hold the Escrow
Account and any proceeds thereof and shall disburse all or part of such
funds only as instructed in accordance with Section 3.
2. NOTICE OF CLAIMS. Navarre and/or NRC (referred to hereinafter collectively or
individually, as applicable, as the "Indemnified Party") shall promptly deliver
written notice to the Escrow Agent of any claims by the Indemnified Party for
indemnification from the Company and the Shareholders under the terms of the
Merger Agreement. The Escrow Agent shall in turn notify the Representative of
any claims made or notices delivered by the Indemnified Party pursuant to this
Agreement and, if the Shareholders desire to contest any claim by the
Indemnified Party for indemnification hereunder, the Representative must notify
the Indemnified Party and Escrow Agent within 15 days of receipt of notice from
the Escrow Agent.
3. DISPOSITION OF ESCROW ACCOUNT. The Escrow Account, and any proceeds
thereof earned thereon, shall be dispersed in one or more installments as
follows:
a. Undisputed Claims. If the Shareholders do not contest the Indemnified
Party's claim(s) for indemnification, the Shareholders shall have 30 days
to pay the Indemnified Party the amount of the claim in cash. If full
payment is not made within such 30 day period, the Escrow Agent shall
immediately sell a sufficient amount of the stock contained in the Escrow
Account to pay such claim and shall disperse to the Indemnified Party the
lesser of (i) the balance of the Escrow Account and any proceeds thereof,
or (ii) the amount of such claim;
b. Disputed Claims. If the Shareholders contest any request by the
Indemnified Party for indemnification, upon a final award or judgment in
favor of the Indemnified Party issued by an arbitrator or by a court
holding the Shareholders liable to the Indemnified Party under the terms
and conditions of the Merger Agreement, the Escrow Agent shall
immediately sell a sufficient amount of the stock deposited in the Escrow
Account to pay such claim and shall disperse to the Indemnified Party an
amount equal to the lesser of (i) the balance of the Escrow Account and
any proceeds thereof, or (ii) the amount of such judgment plus
(a) interest thereon accrued at a rate of 18% per annum from the date of
the Indemnified Party's initial claim plus (b) the Indemnified Party's
costs and expenses in connection with such claim, including reasonable
attorneys' fees;
c. Written Agreement. As instructed in a writing signed by Navarre and
the Shareholders;
d. Expiration of Indemnification Period. At any time after the period
ending twenty-six (26) months after the date of this Agreement (the
"Indemnification Period"), the remaining balance of the Escrow Account,
and any interest earned thereon, shall be disbursed to the Shareholders
on a pro rata basis in accordance with the percentages set forth on
Schedule 1 attached hereto provided that if there are claims, (i) notice
of which was received by the Escrow Agent in accordance with Section 2
prior to the end of such period, and (ii) which have not been resolved as
described in Sections 3(a), 3(b), or 3(c), Escrow Agent shall retain
stock equal to 150% of the remaining disputed claims and shall
<PAGE>
disburse the balance of the stock, if any, to the Shareholders. The
remaining stock shall be held by Escrow Agent until such times as the
remaining disputed claims are resolved by settlement or court order and
shall disburse said stock in accordance with any such settlement or court
order. If distribution of the shares to the Shareholders in accordance
with Schedule 1 would otherwise result in distribution of a fractional
share, the Escrow Agent shall round the fractional share to the nearest
whole share.
4. ESCROW FUND CLAIM AND DISBURSEMENT PROCEDURES.
a. Initiation of Indemnification Claim Procedure. In the event the
Indemnified Party proposes to make any claim, it shall deliver a
certificate signed by an officer of the Indemnified Party ("Officer's
Certificate") to the Escrow Agent within forty-five (45) days after the
Indemnified Party first becomes aware of any claim. The Officer's
Certificate shall specify in reasonable detail each individual item
included in the amount of such claim, the date such item was incurred,
paid or properly accrued and the nature of the misrepresentation, breach
of warranty, agreement or third-party claim to which each such item is
related.
b. Shareholder's Objection. The Shareholders, through their
Representative, shall have forty-five (45) days after receipt of any
Officer's Certificate in which to object in writing to the claim or
claims made by the Indemnified Party in the Officer's Certificate, which
written objection (the "Objection Notice") shall state, in reasonable
detail, the basis for the Shareholders' objection. In the event the
Escrow Agent does not receive the Objection Notice within such forty-five
(45) day period, the Escrow Agent shall make distributions to the
Indemnified Party in accordance with Section 3 of this Agreement.
However, no such distribution shall be made with respect to those matters
specified in the Objection Notice delivered within such forty-five (45)
day period. A duplicate copy of the Objection Notice shall be delivered
to the Indemnified Party at the same time it is delivered to the Escrow
Agent.
c. Negotiated Settlement of Claims. In the event that the Shareholders do
deliver an Objection Notice with respect to any claim or claims made in
any Officer's Certificate, the Shareholders, through their Representative
and the Indemnified Party shall, within the forty-five (45) day period
beginning as of the date of the receipt by the Indemnified Party of the
Objection Notice, attempt in good faith to agree upon the proper
resolutions of each of such claims. If the parties should so agree, a
memorandum setting forth such agreement (the "Memorandum of Agreement")
shall be prepared and signed by both the Indemnified Party and the
Representative and shall be furnished to the Escrow Agent. The Escrow
Agent shall be entitled to rely on any such Memorandum of Agreement to
make distributions from the Escrow Fund in accordance with the terms of
such Memorandum of Agreement and Section 3 of this Agreement.
d. Arbitration. If no agreement can be reached after good faith
negotiation within the forty-five (45) day period specified above or such
extended period as the Indemnified Party and the Shareholders, through
their Representative, shall mutually agree upon in writing, the matter
shall be submitted to binding arbitration at the request of any party in
accordance with the rules and procedures of the American Arbitration
Association
<PAGE>
("AAA"). Unless otherwise agreed to by the Indemnified Party and the
Representative, any such arbitration shall be held in Minneapolis,
Minnesota before a single arbitrator mutually acceptable to both the
Indemnified Party and the Representative. In the event that the
Indemnified Party and the Representative are unable to agree on a single
arbitrator within thirty (30) days after initiation of the arbitration, a
panel of three (3) arbitrators shall be selected in accordance with the
procedures of the AAA. The decision of the arbitrator as to the validity
and amount of any claim shall be conclusive and binding upon the
Indemnified Party and the Shareholders. The Escrow Agent shall be
entitled to act in accordance with such decision and make distributions
out of the Escrow Fund in accordance therewith and with Section 3. Any
arbitrator's decision may be used as a basis for entry of judgment in any
jurisdiction. Each party shall pay its own costs and expenses incurred in
connection with such arbitration proceedings and each party shall pay
fifty percent (50%) of the fees of the arbitrator and the American
Arbitration Association; provided, however, that if either party is
successful in such arbitration proceeding in any amount equal to eighty
percent (80%) or more of the amount in dispute (i.e., the Indemnified
Party is successful if awarded eighty percent (80%) or more of its
claims, and the Shareholders are successful if the Indemnified Party is
awarded less than twenty percent (20%) of its claims), the other party
shall be responsible for paying all of the costs of the proceeding,
including the costs and expenses (including reasonable attorneys' fees
and travel expenses) of the prevailing party.
5. LIMITATIONS ON LIABILITY OF ESCROW AGENT.
a. The duties and obligations of Escrow Agent shall be determined solely
by the provisions of this Agreement and no implied duties or obligations
shall be read into this Agreement against Escrow Agent. Escrow Agent
shall be under no obligation to refer to the Merger Agreement or any
other documents between or among the parties related in any way to this
Agreement, except as specifically provided herein.
b. Escrow Agent shall not be liable to anyone for any damages, losses or
expenses for any act done or step taken or omitted by Escrow Agent in
good faith, provided, however, that Escrow Agent shall be liable for
damages, losses and expenses arising out of its willful default, gross
negligence or bad faith under this Agreement.
c. Escrow Agent shall be entitled to rely upon, and shall be protected in
acting in reasonable reliance upon, any writing furnished to Escrow Agent
by any party in accordance with the terms hereof, which the Escrow Agent
believes in good faith to be genuine and valid and to have been signed by
the proper party or parties.
d. Escrow Agent may obtain advice of its counsel with respect to any
questions relating to its duties or responsibilities hereunder and shall
not be liable for any action taken or omitted in good faith on such
advice of such counsel.
e. In the event a dispute arises between the parties to this Agreement
regarding the interpretation, operation or enforcement of the terms and
conditions of this Agreement, the Escrow Agent shall refuse to comply
with the claims or demands of any party until such disagreement is
finally resolved by mutual agreement of the parties or by a court
<PAGE>
of competent jurisdiction (including expiration of all available appeal
remedies), and, in so doing, Escrow Agent shall not be or become liable
to any party. In addition, Escrow Agent may, but shall not be required,
to file an action of interpleader to resolve such disagreement. Navarre,
NRC and the Shareholders jointly and severally agree to indemnify Escrow
Agent against all legal fees, costs and other expenses incurred by Escrow
Agent in connection with or as a result of any dispute among or between
the parties hereto or the performance by Escrow Agent of its duties
hereunder. Navarre and the Shareholders shall each pay one-half of any
expenses incurred by Escrow Agent pursuant to this Section 5(e).
f. Any action claimed to be required to be taken by Escrow Agent
hereunder and not otherwise specifically set forth herein shall require
the agreement of Navarre, NRC, the Representative and Escrow Agent.
g. The Escrow Agent shall be entitled to a fee described on Schedule A
hereto, which amount, plus all reasonable expenses of the Escrow Agent,
shall be invoiced to and payable one-half by Navarre and one-half by the
Shareholders.
6. RESIGNATION OF ESCROW AGENT. If Escrow Agent desires to resign as Escrow
Agent, it shall provide thirty (30) days written notice (a "Resignation Notice")
of its intention to so resign to Navarre and to the Representative.
Notwithstanding the foregoing, if following the resignation of Escrow Agent
there would be no replacement escrow agent hereunder, Navarre shall appoint a
successor mutually acceptable to Navarre and the Representative or shall turn
over the Escrow Account to a court of competent jurisdiction in the State of
Minnesota.
7. AMENDMENTS. No modification or amendment to this Agreement, or waiver of
compliance with any provision or condition hereof shall be valid unless
reduced to writing and signed by all of the parties hereto.
8. EFFECT OF THIS ESCROW AGREEMENT. This Agreement sets forth the entire
understanding of the parties with respect to the subject matter hereof and
supersedes any and all prior agreements, arrangements and understandings
relating to the subject matter hereof. This Agreement shall be binding upon and
inure to the benefit of the parties and their respective successors and legal
representatives. The paragraph headings of this Agreement are for convenience of
reference only and do not form a part hereof and do not in any way modify,
interpret or construe the intentions of the parties. This Agreement shall be
governed by and construed in accordance with the laws of the State of Minnesota
without regard to is conflicts of laws principles, and the state and federal
courts of Minnesota shall have exclusive jurisdiction over any controversy or
claim arising out of or relating to this Agreement.
9. APPOINTMENT OF SHAREHOLDER REPRESENTATIVE. The Shareholders hereby
acknowledge and agree that Robert Griggs has been named as the duly appointed
representative of the Shareholders; any action taken by the Representative in
accordance with the terms of this Agreement shall be taken on behalf of each
Shareholder as if such Shareholder were acting for his or her own benefit.
<PAGE>
10. NOTICES. Any notice, report, demand, waiver, or protest required, permitted
or contemplated hereunder shall be in writing and shall be personally delivered
or mailed, postage prepaid, certified or registered mail, or delivered by a
nationally recognized express courier service, charges prepaid, to the following
addresses (or such other addresses as the parties may specify from time to
time):
To the Shareholders to their appointed Representative:
Robert Griggs
1617 High Point Curve
Burnsville, MN 55337
To Navarre and/or NRC:
Navarre Corporation
7400 49th Avenue North
New Hope, MN 55428
Attention: President
with a copy to:
Winthrop & Weinstine, P.A.
3000 Dain Bosworth Plaza
60 South Sixth Street
Minneapolis, MN 55402
Attention: Scott J. Dongoske, Esq.
To NRC:
Net Radio Corporation
Riverplace Exposition Hall
Suite 149
43 Main Street S.E.
Minneapolis, MN 55414
Attention: President
with a copy to:
Winthrop & Weinstine, P.A.
3000 Dain Bosworth Plaza
60 South Sixth Street
Minneapolis, MN 55402
Attention: Scott J. Dongoske, Esq.
<PAGE>
To Escrow Agent:
Norwest Bank Minnesota, National Association
Sixth and Marquette
Minneapolis, Minnesota 55479-0069
Attention: Jane Schweiger
Facsimile: (612) 667-9825
and shall be deemed to have been duly delivered and received (i) on the date of
personal delivery, or (ii) on the date of receipt if mailed by registered or
certified mail, postage prepaid and return receipt requested, or (iii) on the
date of a signed receipt, if sent by an overnight delivery service, but only if
sent in the same manner to all persons entitled to receive notice or a copy.
11. COUNTERPARTS. This Agreement may be executed in one or more counterparts,
and by the different parties hereto on separate counterparts, each of which
shall be deemed an original but all of which shall constitute one and the same
Agreement.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the date
first above written.
NAVARRE:
NAVARRE CORPORATION
By: /s/ (illegible)
----------------------------
Its: President
------------------------
NRC:
NET RADIO CORPORATION, a Minnesota
corporation
By: /s/ (illegible)
----------------------------
Its: President
------------------------
ESCROW AGENT:
NORWEST BANK MINNESOTA, NATIONAL ASSOCIATION
By: /s/ Jane Schweiger
----------------------------
Its: Corporate Trust Officer
------------------------
By:
----------------------------
Its:
------------------------
<PAGE>
SHAREHOLDERS:
/s/ Terrence K. Mahoney /s/ Robert Griggs
- -------------------------------- -------------------------------
Terrence K. Mahoney Robert Griggs
- -------------------------------- -------------------------------
Scott Bourne Scot Combs
- -------------------------------- -------------------------------
Douglas Lennick Pablo Nyarady
- -------------------------------- -------------------------------
Patrick Mahoney Deborah Hopp
- -------------------------------- -------------------------------
Carl Halverson Thomas Mandt
/s/ Mark Hempel
- -------------------------------- -------------------------------
Mark Hempel Ron Buck
/s/ Justine Hannine /s/ George F. Burr
- -------------------------------- -------------------------------
Justine Hannine George Burr
/s/ David Witzig
- -------------------------------- -------------------------------
David Witzig Toni Dillon
/s/ Karen Hickey
- -------------------------------- -------------------------------
Karen Hickey Eleanor Downey
/s/ Paul Eifert
- -------------------------------- -------------------------------
John Daly Paul Eifert
- -------------------------------- -------------------------------
Nathan Wright Tony Verkinnes
<PAGE>
/s/ Alan Searle
- -------------------------------- -------------------------------
Tom Harold Alan Searle
/s/ Mark Bauer
- -------------------------------- -------------------------------
Steve Peterson Mark Bauer
/s/ Jon Clark
- -------------------------------- -------------------------------
John Michaels Jon Clark
/s/ Jan Andersen
- -------------------------------- -------------------------------
Ameet Medi-Ratta Jan Andersen
/s/ Bart Davis
- -------------------------------- -------------------------------
Bart Davis Connie Martin
/s/ Steve Lorbach /s/ Bill Creswall
- -------------------------------- -------------------------------
Steve Lorbach Bill Creswall
/s/ Johanna Hope /s/ Margaret Hart
- -------------------------------- -------------------------------
Johanna Hope Margaret Hart
/s/ Lee Jackson
- -------------------------------- -------------------------------
Lee Jackson Paul Downey
Internet Marketing Group, Ltd.
By:
----------------------------
Its
-------------------------
NAVARRE CORPORATION
SHAREHOLDER RIGHTS AGREEMENT
<PAGE>
<TABLE>
<CAPTION>
TABLE OF CONTENTS
Page
<S> <C> <C>
SECTION 1 RESTRICTIONS ON TRANSFERABILITY OF SECURITIES; REGISTRATION RIGHTS . . . . 2
1.1 Certain Definitions . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
1.2 Requested Registration . . . . . . . . . . . . . . . . . . . . . . . . . . 4
1.3 Company Registration . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
1.4 Expenses of Registration . . . . . . . . . . . . . . . . . . . . . . . . . 7
1.5 Registration Procedures . . . . . . . . . . . . . . . . . . . . . . . . . 8
1.6 Indemnification . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
1.7 Information by Holder . . . . . . . . . . . . . . . . . . . . . . . . . . 11
1.8 Rule 144 Reporting . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
1.9 Limitation on Resales . . . . . . . . . . . . . . . . . . . . . . . . . . 11
1.10 Non-Transfer or Assignment of Registration Rights . . . . . . . . . . . . 12
1.11 "Market Stand-Off" Agreement . . . . . . . . . . . . . . . . . . . . . . . 12
1.12 Allocation of Registration Opportunities . . . . . . . . . . . . . . . . . 12
1.13 Delay of Registration . . . . . . . . . . . . . . . . . . . . . . . . . . 13
1.14 Termination of Registration Rights . . . . . . . . . . . . . . . . . . . . 13
1.15 Registration of Previously Issued Shares . . . . . . . . . . . . . . . . . 13
SECTION 2 FURTHER AGREEMENTS OF THE CERTAIN SHAREHOLDERS . . . . . . . . . . . . . . 13
2.1 Limitations on Transfer . . . . . . . . . . . . . . . . . . . . . . . . . 13
2.2 Right of First Refusal . . . . . . . . . . . . . . . . . . . . . . . . . . 13
SECTION 3 MISCELLANEOUS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
3.1 Governing Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
3.2 Successors and Assigns . . . . . . . . . . . . . . . . . . . . . . . . . . 14
3.3 Entire Agreement; Amendment; Waiver . . . . . . . . . . . . . . . . . . . 14
3.4 Notices, etc . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
3.5 Delays or Omissions . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
3.6 Rights; Separability . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
3.7 Titles and Subtitles . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
3.8 Counterparts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
</TABLE>
<PAGE>
NAVARRE CORPORATION
SHAREHOLDER RIGHTS AGREEMENT
This Shareholder Rights Agreement (the "Agreement") is made and entered
into as of the ____ day of ______________, 199___, by and among Navarre
Corporation, a Minnesota corporation (the "Company"), and the persons identified
on Exhibit A attached hereto (the "Shareholders").
RECITALS
WHEREAS, each of the Shareholders were shareholders of Net Radio
Corporation, a Nevada corporation ("Net Radio"); and
WHEREAS, Net Radio, the Company and Net Radio Corporation, a Minnesota
corporation and wholly-owned subsidiary of the Company ("NRC") have entered into
an Agreement and Plan of Reorganization under which Net Radio will merge with
and into NRC ("Agreement"); and
WHEREAS, the Agreement and transactions contemplated by the Agreement
have been structured to comply with Section 368(a) of the Internal Revenue Code
(the "Code"); and
WHEREAS, in connection with the execution of the Agreement, the
Shareholders and the Company wish to establish certain rights and obligations
with respect to resale of the shares to be issued by the Company in connection
with the Agreement.
NOW, THEREFORE, in consideration of the mutual promises and covenants
set forth herein, the Company and the Shareholders hereby agree as follows:
SECTION 1
RESTRICTIONS ON TRANSFERABILITY OF SECURITIES;
REGISTRATION RIGHTS
1.1 CERTAIN DEFINITIONS. As used in this Agreement, the following terms
shall have the meanings set forth below:
(a) "Closing" shall mean the date of the closing of the
transactions under the Agreement.
<PAGE>
(b) "Commission" shall mean the Securities and Exchange Commission
or any other federal agency at the time administering the Securities Act.
(c) "Exchange Act" shall mean the Securities Exchange Act of 1934,
as amended, or any similar successor federal statute and the rules and
regulations thereunder, all as the same shall be in effect from time to time.
(d) "Holder" shall mean any shareholder who holds Registrable
Securities. A Holder of Shares shall be deemed a Holder of the Registrable
Securities.
(e) "Investors" shall mean persons who are acquiring Shares
pursuant to the Agreement.
(f) "Other Shareholders" shall mean persons other than Holders who,
by virtue of agreements with the Company, are entitled to include their
securities in certain registrations hereunder.
(g) "Registrable Securities" shall mean (i) the Shares and (ii) any
Common Stock issued as a dividend or other distribution with respect to or in
exchange for or in replacement of the shares referenced in (i) above, provided,
however, that Registrable Securities shall not include any shares of Common
Stock which have previously been registered.
(h) The terms "register," "registered" and "registration" shall
refer to a registration effected by preparing and filing a registration
statement in compliance with the Securities Act and applicable rules and
regulations thereunder, and the declaration or ordering of the effectiveness of
such registration statement.
(i) "Registration Expenses" shall mean all expenses incurred in
effecting any registration pursuant to this Agreement, including, without
limitation, all registration, qualification, and filing fees, printing expenses,
escrow fees, fees and disbursements of counsel and accountants for the Company,
blue sky fees and expenses and related Company legal fees and disbursements, and
expenses of any regular or special audits incident to or required by any such
registration, but shall not include Selling Expenses (but excluding the
compensation of regular employees of the Company, which shall be paid in any
event by the Company).
(j) "Restricted Securities" shall mean restricted securities as
defined in Rule 144.
(k) "Rule 144" shall mean Rule 144 as promulgated by the Commission
under the Securities Act, as such Rule may be amended from time to time, or any
similar successor rule that may be promulgated by the Commission.
<PAGE>
(l) "Rule 145" shall mean Rule 145 as promulgated by the Commission
under the Securities Act, as such Rule may be amended from time to time, or any
similar successor rule that may be promulgated by the Commission.
(m) "Securities Act" shall mean the Securities Act of 1933, as
amended, or any similar successor federal statute and the rules and regulations
thereunder, all as the same shall be in effect from time to time.
(n) "Selling Expenses" shall mean all underwriting discounts and
selling commissions applicable to the sale of Registrable Securities.
(o) "Shares" shall mean the Company's Common Stock issuable to the
Shareholders pursuant to the Agreement.
1.2 REQUESTED REGISTRATION.
(a) REQUEST FOR REGISTRATION. If the Company shall receive any time
after January 1, 2001 from Holders holding Registrable Securities who hold in
the aggregate 1,100,000 shares of the Company's Common Stock (the "Initiating
Holders"), a written request that the Company effect any registration of
Registrable Securities, the Company will:
(i) promptly give written notice of the proposed registration
to all Holders of Registrable Securities; and
(ii) as soon as practicable, use its best efforts to effect
such registration (including, without limitation, filing post-effective
amendments, appropriate qualifications under applicable blue sky or
other state securities laws, and appropriate compliance with the
Securities Act) and as would permit or facilitate the sale and
distribution of all or such portion of such Registrable Securities as
are specified in such request, together with all or such portion of the
Registrable Securities of any Holder or Holders joining in such request
as are specified in a written request received by the Company within
twenty (20) days after such written notice from the Company is
effective.
The Company shall not be obligated to effect, or to take any action
to effect, any such registration pursuant to this Section 1.2:
(A) In any particular jurisdiction in which the Company would
be required to execute a general consent to service of process in
effecting such registration, qualification or compliance, unless the
Company is already subject to service in such jurisdiction and except
as may be required by the Securities Act;
(B) After the Company has initiated one such registration
pursuant to this Section 1.2(a) (counting for these purposes only
registrations which have been
<PAGE>
declared or ordered effective and pursuant to which securities have
been sold and registrations which have been withdrawn by the Holders as
to which the Holders have not elected to bear the Registration Expenses
pursuant to Section 1.4 hereof;
(C) During the period starting with the date sixty (60) days
prior to the Company's good faith estimate of the date of filing of,
and ending on a date one hundred eighty (180) days after the effective
date of, a Company-initiated registration; provided that the Company is
actively employing in good faith all reasonable efforts to cause such
registration statement to become effective; or
(b) Subject to the foregoing clauses (A) through (C), the Company
shall file a registration statement covering the Registrable Securities so
requested to be registered as soon as practicable after receipt of the request
or requests of the Initiating Holders; provided, however, that if (i) in the
good faith judgment of the Board of Directors of the Company, such registration
would be seriously detrimental to the Company and the Board of Directors of the
Company concludes, as a result, that it is essential to defer the filing of such
registration statement at such time, and (ii) the Company shall furnish to such
Holders a certificate signed by the President of the Company stating that in the
good faith judgment of the Board of Directors of the Company, it would be
seriously detrimental to the Company for such registration statement to be filed
in the near future and that it is, therefore, essential to defer the filing of
such registration statement, then the Company shall have the right to defer such
filing for the period during which such disclosure would be seriously
detrimental, provided that (except as provided in clause (C) above) that the
Company may not defer the filing for a period of more than one hundred eighty
(180) days after receipt of the request of the Initiating Holders, and, provided
further, that the Company shall not defer its obligation in this manner more
than once.
The registration statement filed pursuant to the request of the
Initiating Holders may include other securities of the Company with respect to
which registration rights have been granted and securities of the Company being
sold for the account of the Company only with the consent of the majority of the
Holders.
(c) UNDERWRITING. The right of any Holder to registration pursuant
to Section 1.2 shall be conditioned upon such Holder's participation in the
underwriting, if any, arranged by the Initiating Holders. A Holder may elect to
include in such underwriting all or a part of the Registrable Securities he
holds.
(d) PROCEDURES. If the Company shall request inclusion in any
registration pursuant to Section 1.2 of securities being sold for its own
account, or if other persons shall request inclusion in any registration
pursuant to Section 1.2, the Initiating Holders shall, on behalf of all Holders,
offer to include such securities in the underwriting, if any, and may condition
such offer on their acceptance of the further applicable provisions of this
Section 1 (including Section 1.11). The Company shall (together with all Holders
and other persons proposing to distribute their securities through such
underwriting) enter into an underwriting agreement in customary
<PAGE>
form with the representative of the underwriter or underwriters selected for
such underwriting by the Company, which underwriters are reasonably acceptable
to the majority in interest of the Initiating Holders. Notwithstanding any other
provision of this Section 1.2, if the representative of the underwriters advises
the Holders in writing that marketing factors require a limitation on the number
of shares to be underwritten, the number of shares to be included in the
underwriting or registration shall be allocated as set forth in Section 1.12
hereof. If a person who has requested inclusion in such registration as provided
above does not agree to the terms of any such underwriting, such person shall be
excluded therefrom by written notice from the Company, the underwriter or the
Initiating Holders. The securities so excluded shall also be withdrawn from
registration. If shares are so withdrawn from the registration and if the number
of shares to be included in such registration was previously reduced as a result
of marketing factors pursuant to this Section 1.2(d), then the Company shall
offer to all holders who have retained rights to include securities in the
registration the right to include additional securities in the registration in
an aggregate amount equal to the number of shares so withdrawn, with such shares
to be allocated among such Holders requesting additional inclusion in accordance
with Section 1.12.
(e) LIMITATION. The Company shall not be obligated to include in
any registration statement pursuant to this Section 1.2 shares in an amount
greater than five percent of the Company's outstanding Common Stock prior to the
filing of the Registration Statement. To the extent that the number of shares
with respect to which inclusion is requested exceeds five percent of the Common
Stock of Navarre outstanding, the Company may require Holders to withdraw shares
from the registration statement on a pro rata basis based on the ratio set forth
in Section 1.12.
1.3 COMPANY REGISTRATION.
(a) If the Company at any time after two (2) years from the date of
Closing and prior to seven (7) years from the date of Closing, shall determine
to register any of its securities either for its own account or the account of a
security holder or holders exercising their respective demand registration
rights (other than pursuant to Section 1.2), and other than a registration
relating solely to employee benefit plans, or a registration relating solely to
a Rule 145 transaction, or a registration on any registration form that does not
permit secondary sales, the Company will:
(i) promptly give to each Holder written notice thereof; and
(ii) use its best efforts to include in such registration (and
any related qualification under blue sky laws or other compliance),
except as set forth in Section 1.3(b) below, and in any underwriting
involved therein, all the Registrable Securities specified in a written
request or requests, made by any Holder within twenty (20) days after
the written notice from the Company described in clause (i) above is
given. Such written request may specify all or a part of a Holder's
Registrable Securities.
<PAGE>
(b) UNDERWRITING. If the registration of which the Company gives
notice is for a registered public offering involving an underwriting, the
Company shall so advise the Holders as a part of the written notice given
pursuant to Section 1.3(a)(i). In such event, the right of any Holder to
registration pursuant to this Section 1.3 shall be conditioned upon such
Holder's participation in such underwriting and the inclusion of such Holder's
Registrable Securities in the underwriting to the extent provided herein. All
Holders proposing to distribute their securities through such underwriting shall
(together with the Company and the other holders of securities of the Company
with registration rights to participate therein distributing their securities
through such underwriting) enter into an underwriting agreement in customary
form with the representative of the underwriter or underwriters selected by the
Company.
Notwithstanding any other provision of this Section 1.3, if the
representative of the underwriters advises the Company in writing that marketing
factors require a limitation on the number of shares to be underwritten, the
Company may limit, to the extent so advised by the underwriters, the amount of
securities (including Registrable Securities) to be included in the registration
by the Company's shareholders (including the Holders), or may exclude, to the
extent so advised by the underwriters, such securities entirely from such
registration. The Company shall so advise all holders of securities requesting
registration, and the number of shares of securities that are entitled to be
included in the registration and underwriting shall be allocated first to the
Company for securities being sold for its own account and thereafter as set
forth in Section 1.12. If any person does not agree to the terms of any such
underwriting, he shall be excluded therefrom by written notice from the Company
or the underwriter. Any Registrable Securities or other securities excluded or
withdrawn from such underwriting shall be withdrawn from such registration.
If shares are so withdrawn from the registration or if the number
of shares of Registrable Securities to be included in such registration was
previously reduced as a result of marketing factors, the Company shall then
offer to all persons who have retained the right to include securities in the
registration the right to include additional securities in the registration in
an aggregate amount equal to the number of shares so withdrawn, with such shares
to be allocated among the persons requesting additional inclusion in accordance
with Section 1.12 hereof.
(c) After the Company has given three (3) notices pursuant to this
Section 1.3, no Holder shall have any right to have shares included in any
registration statement filed by the Company, except to the extent that such
Holder's shares have been excluded from registration in an amount more than
twenty-five percent (25%) of the aggregate shares requested to be included by
such Holder.
1.4 EXPENSES OF REGISTRATION. All Registration Expenses incurred in
connection with any registration, qualification or compliance pursuant to the
registrations pursuant to Section 1.2 hereof or, any registration, qualification
or compliance, arising out of a registration pursuant to Section 1.3, shall be
borne by the Company and the Selling Shareholders on a pro rata basis. If the
Holders bear the Registration Expenses for any registration proceeding begun
pursuant to
<PAGE>
Section 1.2 and subsequently withdrawn by the Holders registering shares
therein, such registration proceeding shall not be counted as a requested
registration pursuant to Section 1.2. If such withdrawal is based upon material
adverse information relating to the Company that is different from the
information actually known to the Holders requesting registration at the time of
their request for registration under Section 1.2, such registration shall not be
treated as a requested registration for purposes of Section 1.2, even though the
Holders do not bear the Registration Expenses for such registration. All Selling
Expenses relating to securities so registered shall be borne by the holders of
such securities pro rata on the basis of the number of shares of securities so
registered on their behalf.
1.5 REGISTRATION PROCEDURES. In the case of each registration effected
by the Company pursuant to Section 1, the Company will keep each Holder advised
in writing as to the initiation of each registration and as to the completion
thereof. As set forth in Section 1.4, the Company will use its best efforts to:
(a) Keep such registration effective for a period of one hundred
twenty (120) days or until the Holder or Holders have completed the distribution
described in the registration statement relating thereto, whichever first
occurs; provided, however, that (i) such 120-day period shall be extended for a
period of time equal to the period the Holder refrains from selling any
securities included in such registration at the request of an underwriter of
Common Stock (or other securities) of the Company.
(b) Prepare and file with the Commission such amendments and
supplements to such registration statement and the prospectus used in connection
with such registration statement as may be necessary to comply with the
provisions of the Securities Act with respect to the disposition of all
securities covered by such registration statement;
(c) Furnish such number of prospectuses and other documents
incident thereto, including any amendment of or supplement to the prospectus, as
a Holder from time to time may reasonably request;
(d) Notify each seller of Registrable Securities covered by such
registration statement at any time when a prospectus relating thereto is
required to be delivered under the Securities Act of the happening of any event
as a result of which the prospectus included in such registration statement, as
then in effect, includes an untrue statement of a material fact or omits to
state a material fact required to be stated therein or necessary to make the
statements therein not misleading or incomplete in the light of the
circumstances then existing, and at the request of any such seller, prepare and
furnish to such seller a reasonable number of copies of a supplement to or an
amendment of such prospectus as may be necessary so that, as thereafter
delivered to the purchasers of such shares, such prospectus shall not include an
untrue statement of a material fact or omit to state a material fact required to
be stated therein or necessary to make the statements therein not misleading or
incomplete in the light of the circumstances then existing;
<PAGE>
(e) Cause all such Registrable Securities registered pursuant
hereunder to be listed on each securities exchange or trading system on which
similar securities issued by the Company are then listed.
1.6 INDEMNIFICATION.
(a) The Company will indemnify each Holder, each of its officers,
directors and partners and each person controlling such Holder within the
meaning of Section 15 of the Securities Act, with respect to which registration,
qualification, or compliance has been effected pursuant to this Section 1, and
each underwriter, if any, and each person who controls within the meaning of
Section 15 of the Securities Act any underwriter, against all expenses, claims,
losses, damages, and liabilities (or actions, proceedings, or settlements in
respect thereof) arising out of or based on any untrue statement (or alleged
untrue statement) of a material fact contained in any prospectus, offering
circular, or other document (including any related registration statement,
notification, or the like) incident to any such registration, qualification, or
compliance, or based on any omission (or alleged omission) to state therein a
material fact required to be stated therein or necessary to make the statements
therein not misleading, or any violation by the Company of the Securities Act or
any rule or regulation thereunder applicable to the Company and relating to
action or inaction required of the Company in connection with any such
registration, qualification, or compliance, and will reimburse each such Holder,
each of its officers, directors, partners and each person controlling such
Holder, each such underwriter, and each person who controls any such
underwriter, for any legal and any other expenses reasonably incurred in
connection with investigating and defending or settling any such claim, loss,
damage, liability, or action, provided that the Company will not be liable in
any such case to the extent that any such claim, loss, damage, liability, or
expense arises out of or is based on any untrue statement or omission based upon
written information furnished to the Company by such Holder or underwriter and
stated to be specifically for use therein. It is agreed that the indemnity
agreement contained in this Section 1.6(a) shall not apply to amounts paid in
settlement of any such loss, claim, damage, liability, or action if such
settlement is effected without the consent of the Company (which consent has not
been unreasonably withheld).
(b) Each Holder severally, but not jointly, will, if Registrable
Securities held by him are included in the securities as to which such
registration, qualification, or compliance is being effected, indemnify the
Company, each of its directors, officers, partners and each underwriter, if any,
of the Company's securities covered by such a registration statement, each
person who controls the Company or such underwriter within the meaning of
Section 15 of the Securities Act, each other such Holder and Other Shareholder,
and each of their officers, directors, and partners, and each person controlling
such other Holder or Other Shareholder, against all claims, losses, damages and
liabilities (or actions in respect thereof) arising out of or based on any
untrue statement (or alleged untrue statement) of a material fact contained in
any such registration statement, prospectus, offering circular, or other
document, or any omission (or alleged omission) to state therein a material fact
required to be stated therein or necessary to make the statements therein not
misleading, and will reimburse the Company and such other Holders,
<PAGE>
Other Shareholders, directors, officers, partners, persons, underwriters, or
control persons for any legal or any other expenses reasonably incurred in
connection with investigating or defending any such claim, loss, damage,
liability, or action, in each case to the extent, but only to the extent, such
untrue statement (or alleged untrue statement) or omission (or alleged omission)
is made in such registration statement, prospectus, offering circular, or other
document in reliance upon and in conformity with written information furnished
to the Company by such Holder and stated to be specifically for use therein;
provided, however, that the obligations of such Holder hereunder shall not apply
to amounts paid in settlement of any such claims, losses, damages, or
liabilities (or actions in respect thereof) if such settlement is effected
without the consent of such Holder (which consent shall not be unreasonably
withheld); and provided further that in no event shall any indemnity under this
Section 1.6(b) exceed the lesser of (A) the net proceeds from the offering
received by such Holder and (B) that proportion of aggregate losses, claims,
damages, liabilities or expenses indemnified against by such Holder as
determined by the proportion of the shares sold by such Holder compared to the
total number of Shares sold.
(c) Each party entitled to indemnification under this Section 1.6
(the "Indemnified Party") shall give notice to the party required to provide
indemnification (the "Indemnifying Party") promptly after such Indemnified Party
has actual knowledge of any claim as to which indemnity may be sought, and shall
permit the Indemnifying Party to assume the defense of any such claim or any
litigation resulting therefrom, provided that counsel for the Indemnifying Party
who shall conduct the defense of such claim or any litigation resulting
therefrom, shall be approved by the Indemnified Party (whose approval shall not
unreasonably be withheld), and the Indemnified Party may participate in such
defense at such party's expense; provided, however, that an Indemnified Party
(together with all other indemnified parties which may be represented without
conflict by one counsel) shall have the right to retain one separate counsel
with the fees and expenses to be paid by the Indemnifying Party, if
representation of such Indemnified Party would be inappropriate due to actual or
potential differing interests between such Indemnified Party and any other party
represented by such counsel in such proceeding; and provided further that the
failure of any Indemnified Party to give notice as provided herein shall not
relieve the Indemnifying Party of its obligations under this Section 1, to the
extent such failure is not prejudicial. No Indemnifying Party, in the defense of
any such claim or litigation, shall, except with the consent of each Indemnified
Party, consent to entry of any judgment or enter into any settlement that does
not include as an unconditional term thereof the giving by the claimant or
plaintiff to such Indemnified Party of a release from all liability in respect
to such claim or litigation. Each Indemnified Party shall furnish such
information regarding itself or the claim in question as an Indemnifying Party
may reasonably request in writing and as shall be reasonably required in
connection with defense of such claim and litigation resulting therefrom.
(d) If the indemnification provided for in this Section 1.6 is held
by a court of competent jurisdiction to be unavailable to an Indemnified Party
with respect to any loss, liability, claim, damage, or expense referred to
therein, then the Indemnifying Party, in lieu of indemnifying such Indemnified
Party hereunder, shall contribute to the amount paid or payable by such
Indemnified Party as a result of such loss, liability, claim, damage, or expense
in such
<PAGE>
proportion as is appropriate to reflect the relative fault of the Indemnifying
Party on the one hand and of the Indemnified Party on the other in connection
with the statements or omissions that resulted in such loss, liability, claim,
damage, or expense as well as any other relevant equitable considerations. The
relative fault of the Indemnifying Party and of the Indemnified Party shall be
determined by reference to, among other things, whether the untrue or alleged
untrue statement of a material fact or the omission to state a material fact
relates to information supplied by the Indemnifying Party or by the Indemnified
Party and the parties' relative intent, knowledge, access to information, and
opportunity to correct or prevent such statement or omission.
(e) Notwithstanding the foregoing, to the extent that the
provisions on indemnification and contribution contained in the underwriting
agreement entered into in connection with the underwritten public offering are
in conflict with the foregoing provisions, the provisions in the underwriting
agreement shall control.
1.7 INFORMATION BY HOLDER. Each Holder of Registrable Securities shall
furnish to the Company such information regarding such Holder and the
distribution proposed by such Holder as the Company may reasonably request in
writing and as shall be reasonably required in connection with any registration,
qualification, or compliance referred to in this Section 1.
1.8 RULE 144 REPORTING. With a view to making available the benefits of
certain rules and regulations of the Commission that may permit the sale of the
Restricted Securities to the public without registration, the Company agrees to
use its best efforts to:
(a) Make and keep public information regarding the Company
available as those terms are understood and defined in Rule 144 under the
Securities Act;
(b) File with the Commission in a timely manner all reports and
other documents required of the Company under the Securities Act and the
Exchange Act;
(c) So long as a Holder owns any Restricted Securities, furnish to
the Holder forthwith upon written request a written statement by the Company as
to its compliance with the reporting requirements of Rule 144, and of the
Securities Act and the Exchange Act, a copy of the most recent annual or
quarterly report of the Company, and such other reports and documents so filed
as a Holder may reasonably request in availing itself of any rule or regulation
of the Commission allowing a Holder to sell any such securities without
registration.
1.9 LIMITATION ON RESALES. As consideration for the Company's agreement
to grant the Holders the registration rights set forth in this Agreement and its
agreement to use its best efforts to enable Holders to sell under Rule 144, the
Holders agree that they will see all their shares only in compliance with Rule
144 (or any successor Rule that may be adopted by the Commission) or pursuant to
registration under the Securities Act as provided in this Agreement. Each Holder
further agrees and acknowledges that the Agreement and transactions contemplated
by the Agreement are designed to ensure that the transaction qualifies as a
tax-free transaction
<PAGE>
under Section 368(a) of the Code. Therefore, notwithstanding any other rights in
this agreement, each Holder agrees that it will not directly or indirectly sell,
offer, pledge, contract or enter into any option to dispose of any of the Shares
for a period of two years from the date of Closing, without the consent of the
Company or an opinion of legal counsel or tax counsel to the Company that such
sale, pledge, contract or option will not destroy the tax-free nature of the
transaction for shareholders of Net Radio.
1.10 NON-TRANSFER OR ASSIGNMENT OF REGISTRATION RIGHTS. The rights to
cause the Company to register securities granted to a Holder by the Company
under this Section 1 may not be transferred or assigned to a transferee or
assignee of any Shares.
1.11 "MARKET STAND-OFF" AGREEMENT. If requested by the Company and an
underwriter of Common Stock (or other securities) of the Company, a Shareholder
shall not sell or otherwise transfer or dispose of any Common Stock (or other
securities) of the Company held by such Stockholder (other than those included
in the registration) during the one hundred eighty (180) day period following
the effective date of a registration statement of the Company filed under the
Securities Act. The obligations described in this Section 1.11 shall not apply
to a registration relating solely to employee benefit plans on Form S-8 or a
similar form that may be promulgated in the future, or a registration relating
solely to a Commission Rule 145 transaction on Form S-4 or similar forms that
may be promulgated in the future. The Company may impose stop-transfer
instructions with respect to the Shares subject to the foregoing restriction
until the end of said one hundred eighty (180) day period.
1.12 ALLOCATION OF REGISTRATION OPPORTUNITIES.
(a) ALLOCATION. In any circumstance in which all of the Registrable
Securities and other shares of Common Stock of the Company with registration
rights (the "Other Shares") requested to be included in a registration on behalf
of the Holders or other selling shareholders cannot be so included as a result
of limitations of the aggregate number of shares of Registrable Securities and
Other Shares that may be so included, the number of shares of Registrable
Securities and Other Shares that may be so included shall be allocated among the
Holders and other selling shareholders requesting inclusion of shares on the
basis of the ratio set forth in this Section 1.12. If any Holder or other
selling Shareholder does not request inclusion of the maximum number of shares
of Registrable Securities and Other Shares allocated to him pursuant to the
above-described procedure, the remaining portion of his allocation shall be
reallocated among those requesting Holders and other selling shareholders whose
allocations did not satisfy their requests pro rata on the basis of the number
of shares of Registrable Securities and Other Shares which would be held by such
Holders and other selling shareholders, and this procedure shall be repeated
until all of the shares of Registrable Securities and Other Shares which may be
included in the registration on behalf of the Holders and other selling
shareholders have been so allocated. The Company shall not limit the number of
Registrable Securities to be included in a registration pursuant to this
Agreement in order to include shares held by shareholders with no
<PAGE>
registration rights or any other shares of stock issued to employees, officers,
directors, or consultants pursuant to any equity compensatory plan.
(b) RATIO. In the event that there is any allocation of shares as
specified in this Agreement, each Holder of Registrable Securities who has
requested registration will be able to include at its option in such
registration up to the percentage of such Holder's amount of Registrable
Securities compared with the total Registrable Securities owned by all Holders.
1.13 DELAY OF REGISTRATION. No Holder shall have any right to take any
action to restrain, enjoin, or otherwise delay any registration as the result of
any controversy that might arise with respect to the interpretation or
implementation of this Section 1.
1.14 TERMINATION OF REGISTRATION RIGHTS. The right of any Holder to
inclusion in any registration pursuant to this Section shall terminate on the
date all shares of Registrable Securities held by such Holder may immediately be
sold by such Holder under Rule 144 during any 90-day period.
1.15 REGISTRATION OF PREVIOUSLY ISSUED SHARES. The Company and the
Shareholders agreed that the 170,000 shares previously issued to the
Shareholders of Net Radio are not covered by this Agreement.
SECTION 2
FURTHER AGREEMENTS OF THE CERTAIN SHAREHOLDERS
In addition, each Shareholder that directly or indirectly through one
or more of such Shareholder's affiliates owns more than 100,000 Shares or is
entitled to receive more than 100,000 shares pursuant to the Agreement, hereby
agrees as follows:
2.1 LIMITATIONS ON TRANSFER. Such Shareholder will not sell, transfer
or dispose of any Shares except for transfers without consideration to
affiliates of such Shareholder until after January 1, 2001. This restriction
does not apply to any Shares in excess of 210,000 Shares issued to any
Shareholder pursuant to the Agreement.
2.2 RIGHT OF FIRST REFUSAL. In the event such Shareholder wishes to
sell, in any 90-day period, a number of shares equal to the lesser of (i) five
percent of such shareholder's total ownership of the Company's Common Stock or
(ii) 25,000 shares of the Company's Common Stock, the Shareholder shall, prior
to such sale, provide the Company with written notice of such intent to sell.
Upon delivery of such notice, the Company shall have the right to buy all or any
portion of the Shares with respect to which notice was given at a price equal to
the closing bid price of the Company's common stock on the day prior to the day
on which notice is received by the Company, or at such lower price as the
Company and the Shareholder might agree. The Company shall have a period of 30
days from its receipt of the notice to exercise its right to purchase the
shares. If the Company elects not to exercise its right to purchase the shares,
then
<PAGE>
the Shareholder will be free to sell such shares for a ninety (90) day period,
such ninety (90) day period to begin on the earlier of (i) the date the Company
provides the shareholder with notice that it does not intend to exercise its
right or (ii) thirty (30) days after the Company's receipt of notice of the
Shareholder's intent to sell. Any Shares not sold in the 90-day period shall
become subject to this right of first refusal.
SECTION 3
MISCELLANEOUS
3.1 GOVERNING LAW. This Agreement shall be governed in all respects by
the laws of the State of Minnesota, as if entered into by and between Minnesota
residents exclusively for performance entirely within Minnesota.
3.2 SUCCESSORS AND ASSIGNS. Except as otherwise expressly provided
herein, the provisions hereof shall inure to the benefit of, and be binding
upon, the successors, assigns, heirs, executors and administrators of the
parties hereto, whether expressed or not, and, in particular, shall inure to the
benefit of and be enforceable by the holder or holders at the time of Common
Stock issuable upon conversion thereof.
3.3 ENTIRE AGREEMENT; AMENDMENT; WAIVER. The Agreement (including the
Exhibits hereto) constitutes the full and entire understanding and agreement
between the parties with regard to the subjects hereof and thereof. Neither this
Agreement nor any term hereof may be amended, waived, discharged or terminated,
except (i) by a written instrument signed by the Company and the holders of at
least fifty percent (50%) of the Registrable Securities and any such amendment,
waiver, discharge or termination shall be binding on all the Holders.
3.4 NOTICES, ETC. All notices and other communications required or
permitted hereunder shall be in writing and shall be mailed by United States
first-class mail, postage prepaid, or delivered personally addressed by hand or
special courier (a) if to a Holder, as indicated on the list of Holders attached
hereto as Exhibit A, or at such other address as such Holder or permitted
assignee shall have furnished to the Company in writing, or (b) if to the
Company, at 7400 49th Avenue North, Minneapolis, MN 55428, or at such other
address as the Company shall have furnished to each holder in writing. All such
notices and other written communications shall be effective (i) if mailed, two
(2) business days after mailing and (ii) if delivered, upon delivery.
3.5 DELAYS OR OMISSIONS. No delay or omission to exercise any rights,
power or remedy accruing to any Holder, upon any breach or default of the
Company under this Agreement shall impair any such right, power or remedy of
such Holder nor shall it be construed to be a waiver of any such breach or
default, or an acquiescence therein, or of or in any similar breach or default
there occurring; nor shall any waiver of any single breach or default be deemed
a
<PAGE>
waiver of any other breach or default theretofore or thereafter occurring. Any
waiver, permit, consent or approval of any kind or character on the part of any
Holder of any breach or default under the Agreement or any waiver on the part of
any Holder of any provisions or conditions of this Agreement must be made in
writing and shall be effective only to the extent specifically set forth in such
writing. All remedies, either under this Agreement or by law or otherwise
afforded to any Holder, shall be cumulative and not alternative.
3.6 RIGHTS, SEPARABILITY. Unless otherwise expressly provided herein, a
Holder's rights hereunder are several rights, not rights jointly held with any
of the other Holders. In case any provision of the Agreement shall be invalid,
illegal or unenforceable, the validity, legality and enforceability of the
remaining provisions shall not in any way be affected or impaired thereby.
3.7 TITLES AND SUBTITLES. The titles of the paragraphs and
subparagraphs of this Agreement are for convenience of reference only and are
not to be considered in construing this Agreement.
3.8 COUNTERPARTS. This Agreement may be executed in any number of
counterparts, each of which shall be an original, but all of which together
shall constitute one instrument.
IN WITNESS WHEREOF, the parties hereto have executed this Shareholder
Rights Agreement effective as of the day and year first above written.
"COMPANY"
Navarre Corporation
a Minnesota corporation
-------------------------------
By: Eric H. Paulson
Its: President and Chief Executive Officer
<PAGE>
SHAREHOLDERS
- --------------------------------- ---------------------------------
Terrence K. Mahoney Robert Griggs
- --------------------------------- ---------------------------------
Scott Bourne Scot Combs
- --------------------------------- ---------------------------------
Douglas Lennick Pablo Nyarady
- --------------------------------- ---------------------------------
Patrick Mahoney Deborah Hopp
- --------------------------------- ---------------------------------
Thomas Mandt Carl Halverson
- --------------------------------- ---------------------------------
Ron Buck Mark Hempel
<PAGE>
EXHIBIT A
List of Holders, Names and Addresses
Terrence K. Mahoney Robert Griggs
2642 Irvine Avenue South 1617 Highpoint Curve
Minneapolis, MN 55408 Burnsville, MN 55337
Scott Bourne Scot Combs
1507 Derby Circle 1857 120th Lane Northeast
Rosemount, MN 55068 Blaine, MN 55449
Douglas Lennick Pablo Nyarady
6309 Timber Trail 30 Greenhills Drive
Edina, MN 55439 Bolton, CT 06043
Patrick Mahoney Deborah Hopp
79 Hill Street, #B 4301 Fremont Avenue
San Francisco, CA 94110 Minneapolis, MN 55409
Thomas Mandt Carl Halverson
17665 Italy Path 715 Laura Court
Lakeville, MN 55044 Chaska, MN 55318
Ron Buck Mark Hempel
7608 South Bay Circle 6605 Cahill Road
Bloomington, MN 55438 Edina, MN 55318
<PAGE>
EXHIBIT B
Maximum Number of Shares
That May be Received by Shareholder
Name Maximum Number of Shares
- ---- ------------------------
Terrence K. Mahoney
Robert Griggs
Scott Bourne
Scot Combs
Douglas Lennick
Pablo Nyarady
Patrick Mahoney
Deborah Hopp
Thomas Mandt
Carl Halverson
Ron Buck
Mark Hempel
VOTING AGREEMENT
THIS AGREEMENT, made and entered into this 11th day of March, 1997, by and among
[SHAREHOLDER NAME] ("JAN K. ANDERSEN"), ERIC H. PAULSON ("Paulson") and CHARLES
E. CHENEY ("Cheney").
R E C I T A L S:
A. Pursuant to that certain Agreement and Plan of Reorganization made as of
March 7, 1997 (the "Merger Agreement"), by and among Net Radio Corporation, a
Nevada corporation ("Net Radio") Net Radio Corporation, a Minnesota corporation
and wholly owned subsidiary of Navarre Corporation ("NRC"), [______] and Navarre
Corporation, a Minnesota corporation (the "Company"), the Company agreed to
issue JAN K. ANDERSEN SIXTY FIVE THOUSAND (65,000) shares of newly issued,
nonregistered, no par value common stock of the Company (the "ANDERSEN Shares").
B. Paulson and Cheney are collectively the owners of approximately __________
percent (46.8%) of the issued and outstanding capital stock of the Company.
C. To induce NRC to merge with Net Radio, which merger is beneficial to
ANDERSEN, ANDERSEN agrees to be bound by the terms and conditions of this
Agreement.
D. The parties hereto intend this Agreement to comply with and be enforceable as
a shareholder voting agreement under and pursuant to Minnesota Statutes, Section
302A.455.
In consideration of the mutual covenants contained herein, the sufficiency of
which is hereby acknowledged, the parties agree to the following terms and
conditions:
1. Shares Subject to Agreement. The provisions of this Agreement shall
apply to all issued and outstanding capital stock of the Company now
owned or hereinafter acquired by ANDERSEN, all portions thereof and
substitutions therefor (collectively, the "Subject Shares"). The
provisions of this Agreement shall apply to the Subject Shares in the
hands of any third party, irrespective of the manner in which ANDERSEN or
the third parties acquired such Subject Shares, including, but not
limited to, purchase, gift, reclassification, recapitalization, stock
dividend or stock split.
<PAGE>
2. ANDERSEN hereby appoints Cheney and Paulson, with full power of
substitution, to represent and vote all the Subject Shares, held of
record by ANDERSEN, and, during the term of this Agreement, to execute
any further documents necessary to evidence the appointment of proxy
described herein.
3. Termination. This Agreement shall terminate and all rights and
obligations hereunder shall cease upon the happening of any of the
following events:
a. Cessation of the corporate business of the Company;
b. Voluntary or involuntary dissolution of the Company;
c. March 20, 2006, the tenth anniversary of the Closing of the
Merger Agreement;
d. Any Shares sold by ANDERSEN in conjunction with a registered
public offering by the Company or, commencing January 1, 2001,
held by ANDERSEN who owns or controls (including through
affiliates of ANDERSEN less than 200,000 of the Subject Shares
shall no longer be subject to this Agreement; or
e. Termination is mutually agreed upon by the parties hereto.
4. Enforcement.
(a) Injunctions. In the event Paulson and/or Cheney establish a
breach by ANDERSEN of any of the provisions of this Agreement,
Paulson and/or Cheney, in addition to all other rights and
remedies that Paulson and/or Cheney may otherwise have, shall be
entitled to preliminary and permanent injunctions restraining
ANDERSEN from doing or continuing such breach in violation of this
Agreement without showing or proving any actual damage sustained
by Paulson and/or Cheney, it being acknowledged and agreed by the
parties that the terms contained in this Agreement, are critical
elements of the Merger Agreement.
(b) Damages. In the event Cheney and/or Paulson establishes a
breach by ANDERSEN of any of the provisions of this Agreement, in
addition to all other rights and remedies they may otherwise have,
Cheney and/or Paulson shall nevertheless be entitled to recover
actual damages sustained as a result of each breach, including,
but not limited to, attorney's fees, for the period between the
commencement of the breach by ANDERSEN and the earlier of (i) the
entry of a final order granting permanent injunction and (ii) the
termination of this Agreement pursuant to Paragraph 3.
<PAGE>
5. General Provisions.
a. Waiver, Modification or Amendment. No waiver, modification or
amendment of any term, condition or provision of this Agreement
shall be valid or of any effect unless made in writing, signed by
the parties to be bound or their duly authorized representatives
and specifying with particularity the nature and extent of such
waiver, modification or amendment. Any waiver by any party of any
default of the other shall not affect, or impair any right arising
from, any subsequent default. Nothing herein shall limit the
rights and remedies of the parties hereto under and pursuant to
this Agreement, except as herein before set forth.
b. Benefit. Except as herein otherwise provided, this Agreement
shall inure to the benefit and shall be binding upon the parties
and their personal representatives, heirs, successors and assigns;
provided, however, that none of the parties shall assign any right
or obligation hereunder in whole or in part without the prior
written consent of each of the other parties hereto and any
attempt to do so shall be void.
c. Section Headings. Section headings as to the content of
particular sections are for convenience only and are in no way to
be construed as part of this Agreement or as a limitation of the
scope of the particular sections to which they refer.
d. Counterparts. This Agreement may be executed in two or more
counterparts, all of which shall be considered one in the same
agreement and shall become effective when one or more counterparts
have been signed by each of the parties and delivered to the other
parties.
e. Interpretation and Severance. The provisions of this Agreement
shall be applied and interpreted in a manner consistent with each
other so as to carry out the purposes and intent of the parties
hereto, but if for any reason any provision hereof is determined
to be unenforceable or invalid, such provision or such part
thereof as may be unenforceable or invalid shall be deemed severed
from this Agreement and the remaining provisions shall be carried
out with the same force and effect as if the severed provision or
part thereof had not been a part of this Agreement.
f. Minnesota Law to Govern. This Agreement shall be construed and
enforced in accordance with the laws of the State of Minnesota.
<PAGE>
g. Entire Agreement. With the exception of the certain other
written agreements specifically referenced herein, this Agreement
contains the entire understanding of the parties hereto in respect
of the transactions contemplated hereby and supersedes all prior
agreements and understandings between the parties with respect to
such subject matter.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the
day and year first written above.
/s/ Jan K. Andersen
----------------------------------
Jan K. Andersen
/s/ Eric H. Paulson
----------------------------------
Eric H. Paulson
/s/ Charles E. Cheney
----------------------------------
Charles E. Cheney
STOCK PURCHASE AGREEMENT
This STOCK PURCHASE AGREEMENT (this "Agreement"), dated as of March 7,
1997, by and among ValueVision International, Inc., a Minnesota corporation (the
"Purchaser"), Net Radio Corporation, a Minnesota corporation (the "Company"),
Navarre, Corporation, a Minnesota corporation and sole shareholder of the
Company ("Navarre"), and Net Radio Corporation, a Nevada corporation ("NRC").
WHEREAS, concurrent herewith, the Company, Navarre and NRC are entering
into that certain Agreement and Plan of Reorganization (the "Merger Agreement"),
whereby NRC will merge (the "Merger"), with and into the Company, with the
Company to be the surviving corporation of the Merger;
WHEREAS, following completion of the Merger, Navarre and the Company
desire to sell shares of the Company's Common Stock, no par value (the "Common
Stock"), to the Purchaser and the Purchaser desires to purchase shares of the
Common Stock from the Company;
NOW, THEREFORE, in consideration of the premises and the mutual
covenants and agreements hereinafter set forth, the parties hereto agree as
follows:
1. Sale and Purchase of Common Stock. Subject to the terms and
conditions hereof, the Company agrees to sell to the Purchaser, and the
Purchaser agrees to purchase from the Company, 1,765 shares (the "Shares") of
the Common Stock for an aggregate purchase price (the "Purchase Price") of Three
Million and 00/100 dollars ($3,000,000.00).
2. Purchase Price. The Purchase Price shall be paid by the Purchaser to
the Company in the form of One Million and 00/100 dollars ($1,000,000.00) in
cash (the "Cash Consideration") at the Closing (as hereinafter defined) and Two
Million and 00/100 dollars ($2,000,000.00) in advertising time as set forth in
Section 4 hereof (the "Advertising Consideration").
3. Closing. The closing of the sale to, and purchase by, the Purchaser
of the Shares (the "Closing") shall occur following completion of the Merger, at
the offices of Winthrop & Weinstine, a Professional Association, Minneapolis,
Minnesota, which the parties hereto currently anticipate will be March 18, 1997
or on such other day or at such other time or place as the Purchaser, the
Company and Navarre shall agree upon, provided, however, that such date shall
not be later than March 31, 1997 (the "Closing Date"). At the Closing, the
Company will deliver to the Purchaser certificates representing the Shares being
purchased by the Purchaser, registered in its name, against delivery to the
Company of the Purchaser's check in the amount of the Cash Consideration.
<PAGE>
4. Cable Television Advertising Time. Following the Closing, the
Purchaser shall provide the Company with cable television advertising time (the
"Advertising Time") having an aggregate value of Two Million and 00/100 dollars
($2,000,000.00), which the Purchaser is currently purchasing pursuant to various
of its cable agreements. The value of the Advertising Time will be equal to the
amount paid by the Purchaser pursuant to its cable agreements for such time. The
allocation of the Advertising Time shall be done in mutually agreed upon
markets, subject to availability from the Purchaser's cable affiliates, at the
then current market rate for such market, over a period to be determined by the
Purchaser, subject to availability from the Purchaser's cable affiliates, but in
no event more than sixty (60) months.
5. Additional Shares. If the Purchaser has not excercised any of the
Conversion Rights (as defined in the Conversion Agreement (as defined herein))
pursuant to the Conversion Agreement, but in no event after the fifth
anniversary of the Closing date, once the Company achieves net revenues
(excluding revenues from product sales) equal to or greater than $3,000,000 in
any rolling, consecutive four quarter period, (i) the Company shall have a one
time option for one hundred eighty (180) days from the last day of such four
quarter period (the "Option Period"), to require the Purchaser to make an
additional investment of $500,000 in cash (the "Option Consideration"), to
purchase the number of shares of the Common Stock (the "Additional Shares"),
such that the Additional Shares shall equal 4.95% of the Common Stock issued and
outstanding after issuance of the Additional Shares, and (ii) the Purchaser
shall have a one time option during the Option Period to purchase the Additional
Shares for the Option Consideration. In the event that either the Company or the
Purchaser exercises its option pursuant to this Section 5, the other parties
option hereunder shall terminate.
6. Representations and Warranties by the Company, Navarre and NRC. The
Company, Navarre and NRC, jointly and severally, represent and warrant to the
Purchaser that:
6.1 Organization, Standing, etc. Each of the Company and Navarre is
a corporation duly organized, validly existing and in good standing under the
laws of the State of Minnesota, NRC is a corporation duly organized, validly
existing and in good standing under the laws of the State of Nevada, and each of
the Company, Navarre and NRC has the requisite corporate power and authority to
own its properties and to carry on its business in all material respects as it
is now being conducted. The Company has the requisite corporate power and
authority to issue the Shares and the Additional Shares, and to otherwise
perform its obligations under this Agreement, the Merger Agreement and all other
agreements and documents related thereto. Navarre has the requisite corporate
power and authority to issue the Navarre Common Stock (as hereinafter defined),
and to otherwise perform its obligations under this Agreement, the Merger
Agreement and all other agreements and documents related thereto. NRC has the
corporate power and authority to perform its obligations under this Agreement
and the Merger Agreement. The copies of the Articles of Incorporation and Bylaws
of the Company attached hereto as SCHEDULE 6.1 are true and correct copies of
the duly and legally adopted Articles of Incorporation and Bylaws of the Company
in effect as of the date of this Agreement. Except as set forth on SCHEDULE
6.1.1, neither NRC nor the
<PAGE>
Company have any direct or indirect equity interest in any other firm,
corporation, partnership, joint venture association or other business
organization.
6.2 Qualification. Except as set forth on SCHEDULE 6.2, each of the
Company, Navarre and NRC is duly qualified or licensed as a foreign corporation
in good standing in each jurisdiction wherein the nature of its activities or of
its properties owned or leased makes such qualification or licensing necessary
and failure to be so qualified or licensed would have a material adverse impact
on its business.
6.3 Financial Statements. Attached to this Agreement as SCHEDULE
6.3 are (a) a balance sheet at December 31, 1995, together with the related
statements of operations, stockholders' equity and accumulated deficit, and cash
flow for the fiscal year then ended, and the report thereon of Larson, Allen,
Weishair & Co., LLP, independent public accountants, and (b) an unaudited
balance sheet at January 31, 1997, and unaudited profit and loss statements for
each of the thirteen (13) months commencing December 31, 1995 and ending in
January 1997, prepared by NRC. Such financial statements (i) are in accordance
with the books and records of NRC, (ii) present fairly the financial condition
of NRC at the balance sheet dates and the results of its operations for the
periods therein specified, and (iii) except as set forth on SCHEDULE 6.3, have
been prepared in accordance with generally accepted accounting principles
applied on a basis consistent with prior accounting periods. Specifically, but
not by way of limitation, the balance sheets or notes thereto, and except as set
forth on SCHEDULE 6.3, disclose all of the debts, liabilities and obligations of
any nature (whether absolute, accrued or contingent and whether due or to become
due) of the NRC at December 31, 1995 and January 31, 1997, which, individually
or in the aggregate, are material and which in accordance with generally
accepted accounting principles would be required to be disclosed in such balance
sheets, and the omission of which would, in the aggregate, have a material
adverse impact on NRC. For purposes of this Agreement, material shall mean
$1,000 for any individual item and $5,000 in the aggregate for all such items.
The balance sheets include appropriate reserves for all taxes and other
liabilities accrued at such date but not yet payable. Prior to the Merger, the
Company has had no operations and incurred no liabilities except pursuant to
this Agreement and the Merger Agreement.
6.4 Tax Returns and Audits. All required federal, state and local
tax returns or appropriate extension requests of NRC have been filed, and all
federal, state and local taxes required to be paid with respect to such returns
have been paid or due provision for the payment thereof has been made. NRC is
not delinquent in the payment of any such tax or in the payment of any
assessment or governmental charge. NRC has not received notice of any tax
deficiency proposed or assessed against it, and has not executed any waiver of
any statute of limitations on the assessment or collection of any tax. None of
NRC's tax returns has been audited by governmental authorities in a manner to
bring such audits to NRC's attention. NRC and the Company do not have any tax
liabilities except those reflected in SCHEDULE 6.3 and those incurred in the
ordinary course of business since January 31, 1997.
6.5 Changes, Dividends, etc. Except as set forth on SCHEDULE 6.5
and except for the transactions contemplated by this Agreement and the Merger
Agreement, since January 31, 1997,
<PAGE>
neither NRC or the Company has: (a) incurred any debts, obligations or
liabilities, absolute, accrued or contingent and whether due or to become due,
except current liabilities incurred in the ordinary course of business, which
(individually or in the aggregate) will not materially and adversely affect the
business, properties or prospects of NRC or the Company; (b) paid any obligation
or liability other than, or discharged or satisfied any liens or encumbrances
other than those securing, current liabilities, in each case in the ordinary
course of business; (c) declared or made any payment or distribution to its
stockholders as such, or purchased or redeemed any of its shares of capital
stock or other securities, or obligated itself to do so; (d) mortgaged, pledged
or subjected to lien, charge, security interest or other encumbrance any of its
assets, tangible or intangible, except in the ordinary course of business; (e)
sold, transferred or leased any of its assets except in the ordinary course of
business; (f) cancelled or compromised any debt or claim, or waived or released
any right of material value; (g) suffered any physical damage, destruction or
loss (whether or not covered by insurance) materially and adversely affecting
the properties, business or prospects of NRC or the Company; (h) entered into
any transaction other than in the ordinary course of business; (i) encountered
any labor difficulties or labor union organizing activities; (j) issued or sold
any shares of capital stock or other securities or granted any options, warrants
or other purchase rights with respect thereto other than as contemplated by this
Agreement or the Merger Agreement; (k) made any acquisition or disposition of
any material assets or become involved in any other material transaction, other
than for fair value in the ordinary course of business; (l) increased the
compensation payable, or to become payable, to any of its officers, directors or
employees, or made any bonus payment or similar arrangement with any officers,
directors or employees or increased the scope or nature of any fringe benefits
provided for its officers, directors or employees; or (m) agreed to do any of
the foregoing other than pursuant hereto. There has been no material adverse
change in the financial condition, operations, results of operations or business
of NRC or the Company since January 31, 1997.
6.6 Title to Properties and Encumbrances. NRC and the Company each
has good and marketable title to all its owned properties and assets, including
without limitation the properties and assets reflected in SCHEDULE 6.3 and the
properties and assets used in the conduct of its business, except for property
disposed of in the ordinary course of business since January 31, 1997, which
properties and assets are not subject to any mortgage, pledge, lease, lien,
charge, security interest, encumbrance or restriction, except (a) those which
are shown and described in SCHEDULE 6.3 or the notes thereto or which are set
forth on SCHEDULE 6.6, and (b) Permitted Liens (as hereinafter defined). The
plant, offices and equipment owned and leased by NRC and the Company have been
kept in good condition and repair in the ordinary course of business, and,
except as disclosed on SCHEDULE 6.3, NRC and the Company has not been threatened
with any action or proceeding under any building or zoning ordinance, law or
regulation.
6.7 Litigation; Governmental Proceedings. Except as set forth on
SCHEDULE 6.7, there are no legal actions, suits, arbitrations or other legal,
administrative or governmental proceedings or investigations pending or, to the
knowledge of NRC, the Company or Navarre, threatened against NRC or the Company,
its properties, assets or business, and neither NRC, the Company nor Navarre is
aware of any facts which are likely to result in or form the basis for any such
action, suit or other proceeding. Neither NRC or the Company is in default with
respect to any
<PAGE>
judgment, order or decree of any court or any governmental agency or
instrumentality. Neither NRC or the Company has been threatened with any action
or proceeding under any business or zoning ordinance, law or regulation.
6.8 Compliance with Applicable Laws and Other Instruments. Except
as disclosed on SCHEDULE 6.8, the business and operations of NRC and the Company
have been and are being conducted in accordance with all applicable laws, rules
and regulations of all govern mental authorities. Neither the execution nor
delivery of, nor the performance of or compliance with this Agreement or the
Merger Agreement nor the consummation of the transactions contemplated hereby or
thereby will conflict with, or, with or without the giving of notice or passage
of time, result in any breach of, or constitute a default under, or result in
the imposition of any lien or encumbrance upon any asset or property of NRC or
the Company pursuant to any applicable law, administrative regulation or
judgment, order or decree of any court or governmental body, any agreement or
other instrument to which NRC or the Company is a party or by which it or any of
its properties, assets or rights is bound or affected, and will not violate the
Articles of Incorporation or Bylaws of NRC or the Company. Neither NRC nor the
Company is in violation of its Articles of Incorporation or its Bylaws nor in
violation of, or, except as set forth on SCHEDULE 6.14, in default under, any
lien, indenture, mortgage, lease, agreement, instrument, commitment or
arrangement in any material respect.
6.9 The Shares and the Additional Shares. The Shares, when issued
and paid for pursuant to the terms of this Agreement, will be duly authorized,
validly issued and outstanding, fully paid, nonassessable and free and clear of
all pledges, liens, encumbrances and restrictions, and the Additional Shares
have been reserved for issuance based upon the number of shares of the Common
Stock currently issued and outstanding (including the Shares), and when issued
pursuant to Section 5 hereof will be duly authorized, validly issued and
outstanding, fully paid, nonassessable and free and clear of all pledges, liens,
encumbrances and restrictions. The certificates representing the Shares to be
delivered by the Company hereunder, and the certificates representing the
Additional Shares to be delivered pursuant to Section 5 hereof, will be genuine,
and neither the Company nor Navarre has any knowledge of any fact which would
impair the validity thereof.
6.10 Securities Laws. Based in part upon the representations and
warranties contained in Section 7 of this Agreement, no consent, authorization,
approval, permit or order of or filing with any governmental or regulatory
authority is required under current laws and regulations in connection with the
execution and delivery of this Agreement or the Merger Agreement, or the offer,
issuance, sale or delivery of the Shares, the offer, issuance, sale or delivery
of the Additional Shares or the offer, issuance, sale or delivery of the Navarre
Common Stock, other than the qualification thereof, if required, under
applicable state securities laws, which qualification has been or will be
effected as a condition of these sales. The Company has not, directly or through
an agent, offered the Shares or the Additional Shares or any similar securities
for sale to, or solicited any offers to acquire such securities from, persons
other than the Purchaser. Under the circumstances contemplated hereby, the
offer, issuance, sale and delivery of the Shares, the offer, issuance, sale and
delivery of the Additional Shares and the offer, issuance, sale and delivery of
the Navarre Common
<PAGE>
Stock will not under current laws and regulations require compliance with the
prospectus delivery or registration requirements of the Securities Act.
6.11 Patents and Other Intangible Rights. Except as set forth on
SCHEDULE 6.11, each of NRC and the Company (a) owns or has the exclusive right
to use, free and clear of all material liens, claims and restrictions, all
patents, trademarks, service marks, trade names, copyrights, licenses and rights
with respect to the foregoing, used in the conduct of its business as now
conducted, (b) is not obligated or under any liability whatsoever to make any
payments of a material nature by way of royalties, fees or otherwise to any
owner of, licensor of, or other claimant to, any patent, trademark, trade name,
copyright or other intangible asset, with respect to the use thereof or in
connection with the conduct of its business or otherwise, (c) owns or has the
unrestricted right to use all trade secrets, including know-how, inventions,
designs, processes, computer programs and technical data necessary to the
development, operation and sale of all products and services sold or proposed to
be sold by it, free and clear of any rights, liens or claims of others, and (d)
is not using any confidential information or trade secrets of others. Neither
NRC nor the Company is, nor has either received notice with respect to,
infringing upon or otherwise acting adversely to any known right or claimed
right of any person under or with respect to any patents, trademarks, service
marks, trade names, copyrights, licenses or rights with respect to the
foregoing.
6.12 Capital Stock. The authorized capital stock of the Company
consists of 1,000,000 shares of the Common Stock, of which 10,000 shares are
issued and outstanding. All of the outstanding shares of capital stock of the
Company were duly authorized and validly issued and are fully paid and
nonassessable. Following completion of the Merger and of the sale and issuance
of the Shares, the Purchaser will own fifteen percent (15%) of the issued and
outstanding shares of the Common Stock. There are not now and following
completion of the Merger there will not be any outstanding subscriptions,
options, warrants, calls, contracts, demands, commitments, Convertible
Securities (as hereinafter defined) or other agreements or arrangements of any
character or nature whatever, except as contemplated by this Agreement, under
which the Company is or may be obligated to issue capital stock or other
securities of any kind representing an ownership interest or contingent
ownership interest in the Company. Neither the offer nor the issuance or sale of
the Shares or the Additional Shares constitutes an event, under any
anti-dilution provisions of any securities issued or issuable by the Company or
any agreements with respect to the issuance of securities by the Company, which
will either increase the number of shares issuable pursuant to such provisions
or decrease the consideration per share to be received by the Company pursuant
to such provisions. Except as contemplated by this Agreement, no holder of any
security of the Company is entitled to any preemptive or similar rights to
purchase securities from the Company, provided, however, that nothing in this
Section 6.12 shall affect, alter or diminish any right granted to the Purchaser
in this Agreement. All outstanding securities of the Company have been issued in
full compliance with an exemption or exemptions from the registration and
prospectus delivery requirements of the Securities Act and from the registration
and qualification requirements of all applicable state securities laws.
<PAGE>
6.13 Outstanding Debt. Neither NRC nor the Company has any
Indebtedness for Borrowed Money (as hereinafter defined) except as otherwise set
forth in SCHEDULE 6.3 or the notes thereto. Neither NRC nor the Company is in
default in the payment of the principal of or interest or premium on any such
Indebtedness for Borrowed Money, and no event has occurred or is continuing
under the provisions of any instrument, document or agreement evidencing or
relating to any such Indebtedness for Borrowed Money which with the lapse of
time or the giving of notice, or both, would constitute an event of default
thereunder.
6.14 Schedule of Assets and Contracts. Attached hereto as SCHEDULE
6.14 is a schedule of material contracts containing:
(a) a listing of all real properties owned by NRC or the Company;
(b) a listing of each indenture, lease, sublease, license or other
instrument under which either NRC or the Company claims or holds a leasehold
interest in real property;
(c) a listing of all written and oral contracts, agreements,
subcontracts, purchase orders, commitments and arrangements involving payments
remaining to or from NRC or the Company in excess of $5,000 and other agreements
material to NRC's or the Company's business to which either NRC or the Company
is a party or by which it is bound, under which full performance (including
payment) has not been rendered by any party thereto;
(d) a listing of all collective bargaining agreements, employment
agreements, consulting agreements, noncompetition agreements, nondisclosure
agreements, executive compensation plans, profit sharing plans, bonus plans,
deferred compensation agreements, employee pension retirement plans and employee
benefit stock option or stock purchase plans and other employee benefit plans,
entered into or adopted by either NRC or the Company;
(e) a listing of all deeds of trust, mortgages, security agreements,
pledge agreements and other agreements or arrangements whereby any of the assets
or properties of NRC or the Company are subject to any lien, encumbrance,
security interest or charge;
(f) a listing of all leases of personal property involving payment
remaining to or from NRC or the Company in excess of $5,000;
(g) Annex J: a listing of all insurance policies in force and referred to
in Section 6.20 hereof;
(h) Annex K: a listing of all patents (including applications therefor),
royalty and license agreements, trademarks, trade names, service marks and
copyrights relating to Company products.
Prior to the Closing Date, NRC and the Company shall provide the
Purchaser with a true and complete copy of each document referred to above the
Purchaser or its counsel requests to examine.
<PAGE>
Except as set forth on SCHEDULE 6.14, each of NRC and the Company has
substantially performed all obligations required to be performed by it to date
and is not in default in any material respect under any of the contracts,
agreements, leases, documents, commitments or other arrangements to which it is
a party or by which it is otherwise bound. All instruments referred to above are
in effect and enforceable according to their respective terms, and there is not
under any of such instruments any existing material default or event of default
or event which, with notice or lapse of time or both, would constitute an event
of default thereunder. All parties having material contractual arrangements with
NRC or the Company are in substantial compliance therewith and none are in
material default in any respect thereunder. All plans or arrangements listed
pursuant to clause (d) above are fully funded to the extent that such funding is
required by generally accepted accounting principles.
6.15 Employees and Independent Contractors. SCHEDULE 6.15 sets
forth the name and annual compensation of each employee of NRC or the Company
and the name of each independent contract for NRC or the Company.
6.16 Stockholders of NRC. The name of each stockholder of NRC and
the number of shares owned by such stockholder of NRC Common Stock are set forth
on SCHEDULE 6.16.
6.17 Corporate Acts and Proceedings. This Agreement and the Merger
Agreement have been duly authorized by all necessary corporate action (including
board of director and shareholder approval as required by applicable law) on
behalf of the Company, Navarre and NRC, and have been duly executed and
delivered by authorized officers of the Company, Navarre and NRC, and each is a
valid and binding agreement upon the part of the Company, Navarre and NRC that
is enforceable against the Company, Navarre and NRC in accordance with its
terms, except as the enforceability thereof may be limited by bankruptcy,
insolvency, moratorium, reorganization or other similar laws affecting the
enforcement of creditors' rights generally and to judicial limitations on the
enforcement of the remedy of specific performance and other equitable remedies.
All corporate action necessary to the authorization, creation, issuance and
delivery of the Shares and the Additional Shares has been taken on the part of
the Company, or will be taken by the Company on or prior to the Closing Date.
6.18 Accounts Receivable. To the extent that they exceed the
reserves for doubtful accounts set forth in SCHEDULE 6.3, the accounts
receivable of the Company which are reflected in SCHEDULE 6.3 and all of its
accounts receivable which have arisen since January 31, 1997 (except such
accounts receivable as have been collected since January 31, 1997) are valid and
enforceable claims, and the goods and services sold and delivered which gave
rise to such accounts were sold and delivered in conformity with the applicable
purchase orders, agreements and specifications. Such accounts receivable are
subject to no valid defense or offsets except routine customer complaints or
warranty demands of an immaterial nature. The reserve for doubtful accounts that
is included in SCHEDULE 6.3 is adequate.
<PAGE>
6.19 Inventories. The inventories of the Company which are
reflected in SCHEDULE 6.3 and all inventory items which have been acquired since
January 31, 1997, consist of raw materials, supplies, work-in-process and
finished goods of such quality and in such quantities as are currently useable
or saleable in the ordinary course of its business.
6.20 Purchase Commitments and Outstanding Bids. No purchase
commitment of the Company is in excess of normal, ordinary and usual
requirements of its business, or was made at any price in excess of the then
current market price, or contains terms and conditions more onerous than those
usual and customary in the industry. There is no outstanding material bid, sales
proposal, contract or unfilled order of the Company which (a) will, or could if
accepted, require the Company to supply goods or services at a cost to the
Company in excess of the revenues to be received therefrom, or (b) quotes prices
which do not include a mark-up over reasonably estimated costs consistent with
past mark-ups on similar business or market conditions current at the time.
6.21 Insurance Coverage. There are in full force policies of
insurance issued by insurers of recognized responsibility insuring NRC and the
Company, their properties and business against such losses and risks, and in
such amounts, as in NRC's and the Company's best judgment, after advice from its
insurance broker, are acceptable for the nature and extent of their business and
their resources.
6.22 No Brokers or Finders. No person, firm or corporation has or
will have, as a result of any act or omission of NRC or the Company, any right,
interest or valid claim against or upon NRC, the Company or the Purchaser for
any commission, fee or other compensation as a finder or broker, or in any
similar capacity, in connection with the transactions contemplated by this
Agreement. NRC, the Company and Navarre will indemnify and hold the Purchaser
harmless against any and all liability with respect to any such commission, fee
or other compensation which may be payable or determined to be payable in
connection with the transactions contemplated by this Agreement.
6.23 Conflicts of Interest. Except as disclosed on SCHEDULE 6.23,
no officer, director or stockholder of NRC, the Company, Navarre or any
affiliate (as such term is defined in Rule 405 under the Securities Act of 1933,
as amended (the "Securities Act)) of any such person has any direct or indirect
interest (a) in any entity which does business with NRC or the Company, or (b)
in any property, asset or right which is used by NRC or the Company in the
conduct of its business, or (c) in any contractual relationship with NRC or the
Company other than as an employee. For the purpose of this Section 6.23, there
shall be disregarded any interest which arises solely from the ownership of less
than a 1% equity interest in a corporation whose stock is regularly traded on
any national securities exchange or in the over-the-counter market.
6.24 Licenses. Each of NRC and the Company possesses from the
appropriate agency, commission, board and government body and authority, whether
state, local or federal, all licenses, permits, authorizations, approvals,
franchises and rights which (a) are necessary for it to engage in the business
currently conducted by it, and (b) if not possessed by NRC or the Company
<PAGE>
would have an adverse impact on the business or NRC or the Company. Neither NRC,
the Company nor Navarre has any knowledge that would lead it to believe that NRC
or the Company will not be able to obtain all licenses, permits, authorizations,
approvals, franchises and rights that may be required for any business NRC or
the Company proposes to conduct.
6.25 Registration Rights. Other than under this Agreement, neither
NRC nor the Company has agreed to register any of its authorized or outstanding
securities under the Securities Act.
6.26 Retirement Plans. Neither NRC nor the Company have any
retirement plans in which any employees of the Company participates that is
subject to any provisions of the Employee Retirement Income Security Act of 1974
and of the regulations adopted pursuant thereto ("ERISA").
6.27 Environmental and Safety Laws. Neither NRC nor the Company is
in violation of any applicable statute, law or regulation relating to the
environment or occupational health and safety, and no material expenditures are
or will be required in order to comply with any such existing statute, law or
regulation.
The operations of the Company do not involve any asbestos,
ureaformaldehyde foamed-in-place insulation, polyclorinated biphenyls ("PCBs")
or any other hazardous substances or materials including, but not limited to,
hazardous substances or materials under the Comprehensive Environmental
Response, Compensation and Liability Act, as amended by the Superfund Amendments
and Reauthorization Act, the Resource Conservation and Recovery Act, the
Minnesota Environmental Response and Liability Act, or any other federal, state
or local statute, regulation, code or ordinance.
6.28 Employees. To the best knowledge of NRC, the Company and
Navarre, no officer of NRC or the Company or employee of NRC or the Company
whose annual compensation is in excess of $30,000 has any plans to terminate his
or her employment with NRC or the Company. Except as set forth on SCHEDULE 2.28,
each of NRC and the Company has complied in all material respects with all laws
relating to the employment of labor, including provisions relating to wages,
hours, equal opportunity, collective bargaining and payment of Social Security
and other taxes, and neither NRC or the Company has encountered any material
labor difficulties. Neither NRC nor the Company have any worker's compensation
liabilities, except those reflected on SCHEDULE 6.3 and SCHEDULE 2.28.
6.29 Absence of Restrictive Agreements. To the best knowledge of
NRC, the Company and Navarre, no employee of NRC or the Company is subject to
any secrecy or non-competition agreement or any agreement or restriction of any
kind that would impede in any way the ability of such employee to carry out
fully all activities of such employee in furtherance of the business of NRC or
the Company. To the best knowledge or NRC, the Company and Navarre, no employer
or former employer of any employee of NRC or the Company has any claim of any
kind whatsoever in respect of any of the rights described in Section 6.11 of
this Agreement.
<PAGE>
6.30 Disclosure. None of NRC, the Company nor Navarre has knowingly
withheld from the Purchaser any material facts relating to the assets, business,
operations, financial condition or prospects of NRC or the Company. No
representation or warranty in this Agreement or in any certificate, schedule,
statement or other document furnished or to be furnished to the Purchaser
pursuant hereto or in connection with the transactions contemplated hereby
contains or will contain any untrue statement of a material fact or omits or
will omit to state any material fact required to be stated herein or therein or
necessary to make the statements herein or therein not misleading.
7. Representations and Warranties of the Purchaser. The Purchaser hereby
represents and warrants that:
7.1 Investment Intent. The Shares being acquired by the Purchaser
hereunder are being purchased, and the Additional Shares to be acquired by the
Purchaser pursuant to Section 5 hereof and the Navarre Common Stock to be
acquired by the Purchaser pursuant to Section 11 hereof, will be acquired, for
the Purchaser's own account and not with the view to, or for resale in
connection with, any distribution or public offering thereof within the meaning
of the Securities Act. The Purchaser understands that the Shares, the Additional
Shares and the Navarre Common Stock have not been registered under the
Securities Act or any applicable state laws by reason of their issuance or
contemplated issuance in a transaction exempt from the registration and
prospectus delivery requirements of the Securities Act and such laws, and that
the reliance of the Company and others upon this exemption is predicated in part
upon this representation and warranty. The Purchaser further understands that
the Shares, the Additional Shares and the Navarre Common Stock may not be
transferred or resold without (a) registration under the Securities Act and any
applicable state securities laws, or (b) an exemption from the requirements of
the Securities Act and applicable state securities laws.
7.2 Location of Principal Office and Qualification as an Accredited
Investor. The state in which the Purchaser's principal office is located is
Minnesota. The Purchaser qualifies as an accredited investor within the meaning
of Rule 501 under the Securities Act. The Purchaser has such knowledge and
experience in financial and business matters that the Purchaser is capable of
evaluating the merits and risks of the investment to be made hereunder by the
Purchaser. To the best of its knowledge, the Purchaser has had access to all of
the Company's material books and records and access to the Company's executive
officers has been provided to the Purchaser or to the Purchaser's qualified
agents.
7.3 Acts and Proceedings. This Agreement has been duly authorized
by all necessary action on the part of the Purchaser, has been duly executed and
delivered by the Purchaser, and is a valid and binding agreement upon the part
of the Purchaser.
7.4 No Brokers or Finders. No person, firm or corporation has or
will have, as a result of any act or omission by the Purchaser, any right,
interest or valid claim against the Company for any commission, fee or other
compensation as a finder or broker, or in any similar capacity, in connection
with the transactions contemplated by this Agreement. The Purchaser will
indemnify
<PAGE>
and hold the Company and Navarre harmless against any and all liability with
respect to any such commission, fee or other compensation which may be payable
or determined to be payable as a result of the actions of the Purchaser in
connection with the transactions contemplated by this Agreement.
8. Conditions of the Purchaser's Obligation. The obligation to purchase
and pay for the Shares which the Purchaser has agreed to purchase on the Closing
Date is subject to the fulfillment prior to or on the Closing Date of the
following conditions. In the event that any such condition is not satisfied to
the satisfaction of the Purchaser, then the Purchaser shall not be obligated to
proceed with the purchase of the Shares or the Additional Shares. The Purchaser,
in its sole discretion, may waive any of the conditions to this Agreement.
8.1 No Errors, etc. The representations and warranties of NRC, the
Company and Navarre under this Agreement shall be true in all material respects
as of the Closing Date with the same effect as though made on and as of the
Closing Date.
8.2 Compliance with Agreement. The Company and Navarre shall have
performed and complied with all agreements or conditions required by this
Agreement and the Merger Agreement to be performed and complied with by it prior
to or as of the Closing Date.
8.3 Consummation of the Merger. The Merger shall have closed and
the Articles of Merger shall have been filed with and accepted by the Minnesota
Secretary of State and the Nevada Secretary of State.
8.4 Certificate of Officers. NRC, the Company and Navarre shall
each have delivered to the Purchaser a certificate, dated the Closing Date,
executed by the President and the senior financial officer of NRC, the Company
and Navarre, respectively, and certifying to the satisfaction of the conditions
specified in Sections 8.1, 8.2, 8.3 and 8.7 hereof.
8.5 Opinion of Counsel to the Company and Navarre. The Company and
Navarre shall have delivered to the Purchaser an opinion of Winthrop and
Weinstine, a Professional Association and/or Lindquist and Vennum, counsel for
the Company and Navarre, dated the Closing Date, to the effect that:
(a) Each of the Company and Navarre is a duly and validly
organized and existing corporation in good standing under the laws of the
State of Minnesota; has the corporate power and authority to enter into
this Agreement and the Merger Agreement, to issue and sell the Shares,
the Additional Shares and the Navarre Common Stock as contemplated by
this Agreement, and to carry out the provisions of this Agreement and the
Merger Agreement; has the corporate power and authority to own and hold
its properties owned and leased and to carry on the business in which it
is engaged; and has not failed to qualify to do business as a foreign
corporation in good standing in any state or jurisdiction wherein the
nature of its activities or of its properties owned or leased makes such
qualification necessary and failure to be so qualified would have a
material adverse effect upon the Company and or Navarre.
<PAGE>
(b) Each of this Agreement and the Merger Agreement has been duly
authorized, executed and delivered by the Company and Navarre, and is a
legal, valid and binding agreement of the Company and Navarre enforceable
in accordance with its terms, except as the enforceability thereof may be
limited by bankruptcy, insolvency, moratorium, reorganization or similar
laws affecting the enforcement of creditors' rights generally, and except
for judicial limitations on the enforcement of the remedy of specific
performance and other equitable remedies.
(c) The Shares have been duly authorized, issued and delivered by
the Company and are fully paid and nonassessable, and the certificates
therefor are in valid and sufficient form, and the Shares are entitled to
the benefits of this Agreement applicable thereto.
(d) The Additional Shares have been duly authorized and reserved
for issuance pursuant to Section 5 hereof, based upon the number of
shares of the Common Stock currently issued and outstanding (including
the Shares), and when issued pursuant to Section 5 hereof, the Additional
Shares will be duly authorized and issued and will be fully paid and
nonassessable.
(e) Shares of the Navarre Common Stock have been duly authorized
and reserved for issuance pursuant to Section 11 hereof, based upon the
current market price of the Navarre Common Stock, and when issued
pursuant to Section 11 hereof, the Navarre Common Stock will be duly
authorized and issued and will be fully paid and nonassessable.
(f) All corporate proceedings required by law or by the provisions
of this Agreement and the Merger Agreement to be taken by the Board of
Directors and the shareholders of the Company and Navarre (as applicable)
on or prior to the Closing Date in connection with the execution and
delivery of this Agreement, the Merger Agreement, the offer, issuance and
sale of the Shares, the Additional Shares and the Navarre Common Stock,
and in connection with the consummation of the transactions contemplated
by this Agreement and the Merger Agreement, have been duly and validly
taken. Articles of Merger regarding the Merger have been filed with and
accepted by the Minnesota Secretary of State and the Nevada Secretary of
State.
(g) The Company is authorized by its Articles of Incorporation to
issue 1,000,000 shares of the Common Stock. Prior to issuance of the
Shares, there are 10,000 shares of the Common Stock duly issued and
outstanding, all of which are fully paid and nonassessable. The issuance
and sale of such outstanding common shares were exempt from registration
under the Securities Act and such shares were issued in conformity with
the permit or qualification requirements of all applicable state
securities laws. Except for such shares of the Common Stock, the Company
has no other authorized or outstanding series or class of capital stock,
and, to the knowledge of such counsel, there are no outstanding
securities convertible into the Common Stock or outstanding options,
warrants or other rights to acquire securities of the Company, other than
options and warrants disclosed in Schedule 6.12 to this
<PAGE>
Agreement. To the knowledge of such counsel, there are no agreements or
understandings on the part of the Company with respect to the
registration of any securities of the Company under the Securities Act,
other than those granted under this Agreement, and there are no
obligations on the part of the Company to purchase or redeem any
outstanding shares of capital stock of the Company.
(h) Except as otherwise provided in this Agreement, no security
holder of the Company is entitled to preemptive or similar rights to
subscribe for or to purchase any shares of capital stock of the Company,
nor will any security holder of the Company be entitled to any such
rights as a result of the execution or delivery of this Agreement or the
issuance of the Shares or the Additional Shares.
(i) Assuming the accuracy of the representations of the Purchaser
set forth in Section 7 hereof, each of the Company and Navarre has
obtained the approval or consent of all governmental agencies or bodies
required to be obtained by it for the legal and valid execution and
delivery of this Agreement and the Merger Agreement, and the legal and
valid offer, issuance and sale of the Shares, the Additional Shares and
the Navarre Common Stock to the Purchaser, and for the performance of the
obligations of the Company and Navarre under any provisions of this
Agreement and the Merger Agreement. Neither the Company nor Navarre is in
violation of any term, provision or condition of its Articles of
Incorporation or Bylaws, or, to the best of such counsel's knowledge, and
except as disclosed in Schedule 6.14 to this Agreement, in violation of
any agreement or other instrument known to such counsel to which the
Company or Navarre is a party or by which either is bound or to which any
of their properties, assets or business is subject or any judgment,
decree or order known to such counsel or to the best of such counsel's
knowledge any statute, rule or regulation; and the execution, delivery
and performance of this Agreement, the Merger Agreement, the offer,
issuance and sale of the Shares, the Additional Shares and the Navarre
Common Stock and the consummation of the transactions contemplated by
this Agreement and the Merger Agreement, will not result in any breach or
violation of the terms or provisions of, or constitute a default under,
the Articles of Incorporation or the Bylaws of the Company or Navarre or,
to the best of such counsel's knowledge, in violation of any agreement or
other instrument to which the Company or Navarre is a party or by which
it is bound or to which any of its properties, assets or business is
subject or any judgment, decree, order, statute, rule or regulation known
to such counsel to apply to the Company or Navarre.
(j) Assuming the accuracy of the representations of the Purchaser
set forth in Section 7 hereof, the offer, sale, issuance and delivery of
the Shares, the Additional Shares and the Navarre Common Stock to the
Purchaser, under the circumstances contemplated by this Agreement are
exempt from the registration and prospectus delivery requirements of the
Securities Act, and all registrations, qualifications, permits and
approvals required under applicable state securities laws for the lawful
offer, sale, issuance and delivery of the Shares, the Additional Shares
and the Navarre Common Stock have been obtained.
<PAGE>
(k) Except as disclosed on Schedule 6.7 to this Agreement, such
counsel has no knowledge of any litigation, proceeding or governmental
investigation pending or threatened against the Company or Navarre, their
key management employees, properties or business which, if determined
adversely to the Company or Navarre, would have a material adverse effect
upon the financial condition, operations, results of operations or
business of the Company or Navarre.
8.6 Opinion of Counsel to NRC. NRC shall have delivered to the
Purchaser an opinion of Mahoney, Hagberg & Rice, counsel for NRC, dated the
Closing Date, to the effect that:
(a) NRC is a duly and validly organized and existing corporation
in good standing under the laws of the State of Nevada; has the corporate
power and authority to enter into this Agreement and the Merger
Agreement, and to carry out the provisions of this Agreement and the
Merger Agreement; has the corporate power and authority to own and hold
its properties owned and leased and to carry on the business in which it
is engaged; and, except as set forth on Schedule 6.2 to this Agreement,
has not failed to qualify to do business as a foreign corporation in good
standing in any state or jurisdiction wherein the nature of its
activities or of its properties owned or leased makes such qualification
necessary and failure to be so qualified would have a material adverse
effect upon NRC.
(b) Each of this Agreement and the Merger Agreement has been duly
authorized, executed and delivered by NRC, and is a legal, valid and
binding agreement of NRC, enforceable in accordance with its terms,
except as the enforceability thereof may be limited by bankruptcy,
insolvency, moratorium, reorganization or similar laws affecting the
enforcement of creditors' rights generally, and except for judicial
limitations on the enforcement of the remedy of specific performance and
other equitable remedies.
(c) All corporate proceedings required by law or by the provisions
of this Agreement and the Merger Agreement to be taken by the Board of
Directors and the shareholders of NRC on or prior to the Closing Date in
connection with the execution and delivery of this Agreement and the
Merger Agreement, and in connection with the consummation of the
transactions contemplated by this Agreement and the Merger Agreement,
have been duly and validly taken. Articles of Merger regarding the Merger
have been filed with and accepted by the Minnesota Secretary of State and
the Nevada Secretary of State.
(d) NRC is authorized by its Articles of Incorporation to issue
10,000,000 shares of common stock, $.01 par value per share (the "NRC
Common Stock"). Immediately prior to the Merger, there were 5,275,834
shares of the NRC Common Stock duly issued and outstanding (including
2,085,815 shares owned by Navarre), and except for 1,136,381 shares
issued by NRC effective in December 1996 pursuant to non-recourse notes
(the "December Shares") as to which such counsel need not express an
opinion, all of which were fully paid and nonassessable. Except for the
December Shares, as to which such counsel need not
<PAGE>
express an opinion, the issuance and sale of such outstanding NRC Common
Stock were exempt from registration under the Securities Act and such
shares were issued in conformity with the permit or qualification
requirements of all applicable state securities laws. Except for such
shares of the NRC Common Stock, NRC has no other authorized or
outstanding series or class of capital stock, and, to the knowledge of
such counsel, there are no outstanding securities convertible into the
NRC Common Stock or outstanding options, warrants or other rights to
acquire securities of NRC, other than options and warrants disclosed in
Schedule 6.14 to this Agreement. To the knowledge of such counsel, there
are no agreements or understandings on the part of NRC with respect to
the registration of any securities of NRC under the Securities Act, and
there are no obligations on the part of the Company to purchase or redeem
any outstanding shares of capital stock of the Company, other than as set
forth in the Amendment.
(e) No security holder of NRC is entitled to preemptive or similar
rights to subscribe for or to purchase any shares of capital stock of
NRC, nor will any security holder of NRC be entitled to any such rights
as a result of the execution or delivery of this Agreement or the Merger
Agreement.
(f) NRC has obtained the approval or consent of all governmental
agencies or bodies required to be obtained by it for the legal and valid
execution and delivery of this Agreement and the Merger, and for the
performance of the obligations of NRC under any provisions of this
Agreement and the Merger Agreement. NRC is not in violation of any term,
provision or condition of its Articles of Incorporation or Bylaws, or, to
the best of such counsel's knowledge, and except as disclosed in the
Schedule 6.14 to this Agreement, in violation of any agreement or other
instrument known to such counsel to which NRC is a party or by which it
is bound or to which any of its properties, assets or business is subject
or any judgment, decree or order known to such counsel or to the best of
such counsel's knowledge, except for the offer and sale of the December
Shares and unpaid employee withholding and social security payments as to
which such counsel need not express an opinion, any statute, rule or
regulation; and the execution, delivery and performance of this
Agreement, the Merger Agreement, and the consummation of the transactions
contemplated by this Agreement and the Merger Agreement, will not result
in any breach or violation of the terms or provisions of, or constitute a
default under, the Articles of Incorporation or the Bylaws of NRC, to the
best of such counsel's knowledge, in violation of any agreement or other
instrument to which NRC is a party or by which it is bound or to which
any of its properties, assets or business is subject or any judgment,
decree, order, statute, rule or regulation known to such counsel to apply
to NRC.
(g) Except as set forth in Schedule 6.7 to this Agreement, such
counsel has no knowledge of any litigation, proceeding or governmental
investigation pending or threatened against NRC, its key management
employees, properties or business which, if determined adversely to NRC,
would have a material adverse effect upon the financial condition,
operations, results of operations or business of NRC.
<PAGE>
8.7 No Event of Default. There shall exist at the time of Closing
no condition or event which would constitute an Event of Default (as hereinafter
defined) or which, after notice or lapse of time or both, would constitute an
Event of Default.
8.8 Qualification Under State Securities Laws All registrations,
qualifications, permits and approvals required under applicable state securities
laws for the lawful execution and delivery of this Agreement and the offer,
sale, issuance and delivery of the Shares, the Additional Shares and the Navarre
Common Stock shall have been obtained.
8.9 Employee Agreements. Each employee of the Company who has
managerial duties or whose duties involve research and development shall have
executed and delivered to the Company an agreement, in form and substance
satisfactory to the Purchaser and complying with applicable law, assigning
irrevocably to the Company any present or future invention, discovery,
improvement, formula, proprietary right or data, trade secret, shop right, idea
or know-how, whether patented or not, discovered, developed or otherwise
acquired by such employee during the term of such employee's employment with the
Company, and agreeing not to divulge to others information that is proprietary
to the Company.
8.10 Terrence Mahoney Agreement. The Company, NRC and Terrence
Mahoney shall have entered into a Severance and Release Agreement in form and
substance satisfactory to the Purchaser.
8.11 Mahoney, Hagberg & Rice Agreement. The law firm of Mahoney,
Hagberg & Rice shall have entered into a Settlement Agreement in form and
substance satisfactory to the Purchaser.
8.12 Conversion Agreement. Navarre and the Purchaser shall have
entered into a Conversion Agreement substantially in the form of Exhibit A (the
"Conversion Agreement").
8.13 Bring-Down Certificate. NRC shall deliver to the Purchaser an
unaudited balance sheet of NRC as of February 28, 1997, which shall be certified
by an officer of NRC and identify any material changes outside of the ordinary
course of business since the date of this Agreement through the Closing Date and
any revisions to the schedules attached hereto.
8.14 Proceedings and Documents. All corporate and other proceedings
and actions taken in connection with the transactions contemplated by this
Agreement and the Merger Agreement and all certificates, opinions, agreements,
instruments and documents mentioned herein or therein or incident to any such
transaction shall be satisfactory in form and substance to the Purchaser and its
counsel.
9. Affirmative Covenants of the Company and Navarre. The Company and
Navarre covenant and agree that:
<PAGE>
9.1 Corporate Existence. The Company and Navarre will maintain and
cause each Subsidiary (which, for purposes of the following covenants, shall
mean any corporation, association or other business entity more than a majority
(by number of votes) of the voting stock of which is at the time owned or
controlled, directly or indirectly, by the Company, Navarre or by one or more of
their Subsidiaries or both) to maintain its corporate existence in good standing
and comply with all applicable laws and regulations of the United States or of
any state or states thereof or of any political subdivision thereof and of any
governmental authority where failure to so comply would have a material adverse
impact on the Company, Navarre or their business or operations.
9.2 Books of Account and Reserves. The Company will, and will cause
each of its Subsidiaries to, keep books of record and account in which full,
true and correct entries are made of all of its and their respective dealings,
business and affairs, in accordance with generally accepted accounting
principles. The Company will employ independent public accountants selected by
the Board of Directors of the Company who are "independent" within the meaning
of the accounting regulations of the Commission and have annual audits made by
such independent public accountants in the course of which such accountants
shall make such examinations, in accordance with generally accepted auditing
standards, as will enable them to give such reports or opinions with respect to
the financial statements of the Company and its Subsidiaries as will satisfy the
requirements of the Commission in effect at such time with respect to
certificates and opinions of accountants.
9.3 Furnishing of Financial Statements and Information. The Company
will deliver to the Purchaser:
(a) as soon as practicable, but in any event within 30 days after
the close of each month, unaudited consolidated balance sheets of the
Company and its Subsidiaries as of the end of such month, together with
the related consolidated statements of opera tions and cash flow for such
month, setting forth the budgeted figures for such month prepared and
submitted in connection with the Company's annual plan as required under
Section 9.5 hereof and in comparative form figures for the corresponding
month of the previous fiscal year, all in reasonable detail and certified
by an authorized accounting officer of the Company, subject to year-end
adjustments;
(b) as soon as practicable, but in any event within 90 days after
the end of each fiscal year, a consolidated balance sheet of the Company
and its Subsidiaries, as of the end of such fiscal year, together with
the related consolidated statements of opera tions, stockholders' equity
and cash flow for such fiscal year, setting forth in comparative form
figures for the previous fiscal year, all in reasonable detail and duly
certified by the Company's independent public accountants, which
accountants shall have given the Company an opinion, unqualified as to
the scope of the audit, regarding such statements;
(c) within 90 days after the end of each fiscal year, written
notice of the current number of Additional Shares issuable pursuant to
Section 5 hereof, including a brief statement indicating any adjustments
reasonably anticipated;
<PAGE>
(d) concurrently with the delivery in each year of the financial
statements referred to in paragraph (b) of this Section 9.3, a statement
and report signed by the independent public accountants who certified
such financial statements to the effect that they have read this
Agreement and that in the course of the audit upon which their
certificate was based they became aware of no condition or event which
constituted an Event of Default or which, after notice or lapse of time
or both, would constitute an Event of Default or if such accountants did
become aware of. any such condition or event, specifying the nature and
period of existence thereof;
(e) promptly after the submission thereof to the Company, copies
of all reports and recommendations submitted by independent public
accountants in connection with any annual or interim audit of the
accounts of the Company or any of its Subsidiaries made by such
accountants;
(f) promptly upon transmission thereof, copies of all reports,
proxy statements, registration statements and notifications filed by it
with the Commission pursuant to any act administered by the Commission or
furnished to shareholders of the Company or to any national securities
exchange;
(g) with reasonable promptness, such other financial data relating
to the business, affairs and financial condition of the Company and any
Subsidiaries as is available to the Company and as from time to time the
Purchaser may reasonably request;
(h) promptly following the issuance of any additional shares of
the Common Stock or any options, warrants or other rights to purchase
securities of the Company, the Company shall give written notice of the
amount of securities so issued and the total consideration received
therefor;
(i) at least 20 days prior to the earlier of (i) the execution of
any agreement relating to any merger or consolidation of the Company or
any of its Subsidiaries with another corporation, or a plan of exchange
involving the outstanding capital stock of the Company or any of its
Subsidiaries, or the sale, transfer or other disposition of all or
substantially all of the property, assets or business of the Company or
any of its Subsidiaries to another corporation, or (ii) the holding of
any meeting of the shareholders of the Company for the purpose of
approving such action, written notice of the terms and conditions of such
proposed merger, consolidation, plan of exchange, sale, transfer or other
disposition; and
(j) within 15 days after the Company learns in writing of the
commencement or threatened commencement of any material suit, legal or
equitable, or of any material administrative, arbitration or other
proceeding against the Company, any of its Subsidiaries or their
respective businesses, assets or properties, written notice of the nature
and extent of such suit or proceeding.
<PAGE>
9.4 Inspection. The Company will permit the Purchaser and any of
its officers or employees, or any outside representatives designated by the
Purchaser and reasonably satisfactory to the Company, to visit and inspect at
the Purchaser's expense any of the properties of the Company or its
Subsidiaries, including their books and records (and to make photocopies thereof
or make extracts therefrom), and to discuss their affairs, finances, and
accounts with their officers, lawyers and accountants, except with respect to
trade secrets and similar confidential information, all to such reasonable
extent and at such reasonable times and intervals as the Purchaser may
reasonably request. Except as otherwise required by laws or regulations
applicable to the Purchaser, the Purchaser shall maintain, and shall require
their representatives to maintain, all information obtained pursuant to Section
9.3. this Section 9.4 and Section 9.5 on a confidential basis.
9.5 Preparation and Approval of Budgets. At least one month prior
to the beginning of each fiscal year of the Company, the Company shall prepare
and submit to its Board of Directors, for its review and approval, an annual
plan for such year, which shall include monthly capital and operating expense
budgets, cash flow statements and profit and loss projections itemized in such
detail as the Board of Directors may reasonably request. Each annual plan shall
be modified as often as is necessary in the judgment of the Board of Directors
to reflect changes required as a result of operating results and other events
that occur, or may be reasonably expected to occur, during the year covered by
the annual plan, and copies of each such modification shall be submitted to the
Board of Directors. The Company will, simultaneously with the submission thereof
to the Board of Directors, deliver a copy of each such annual plan and
modification thereof to the Purchaser.
9.6 Payment of Taxes and Maintenance of Properties. The Company
will, and will cause each Subsidiary to:
(a) pay and discharge promptly, or cause to be paid and discharged
promptly when due and payable, all taxes, assessments and governmental
charges or levies imposed upon it or upon its income or upon any of its
properties, as well as all material claims of any kind (including claims
for labor, material and supplies) which, if unpaid, might by law become a
lien or charge upon its property; provided, however, that neither the
Company nor any Subsidiary shall be required to pay any such tax,
assessment, charge, levy or claim if the amount, applicability or
validity thereof shall currently be contested in good faith by
appropriate proceedings and if the Company or such Subsidiary as the case
may be shall have set aside on its books reserves (segregated to the
extent required by generally accepted accounting principles) deemed
adequate by it with respect thereto; and
(b) maintain and keep, or cause to be maintained and kept, its
properties in good repair, working order and condition, and from time to
time make, or cause to be made, all repairs and renewals and replacements
which in the opinion of the Company are necessary and proper so that the
business carried on in connection therewith may be properly and
advantageously conducted at all times; the Company will maintain or cause
to be maintained back-up copies of all valuable papers and software.
<PAGE>
9.7 Insurance. The Company will, and will cause each Subsidiary to,
obtain and maintain in force such property damage, public liability, business
interruption, worker's compensation, indemnity bonds and other types of
insurance as the Company's executive officers, after consultation with an
accredited insurance broker, shall determine to be necessary or appropriate to
protect the Company from the insurable hazards or risks associated with the
conduct of the Company's business. The Company's executive officers shall
periodically report to the Board of Directors on the status of such insurance
coverage.
All insurance shall be maintained in at least such amounts and to
such extent as shall be determined to be reasonable by the Board of Directors;
and all such insurance shall be effected and maintained in force under a policy
or policies issued by insurers of recognized responsibility, except that the
Company or any Subsidiary may effect worker's compensation or similar insurance
in respect of operations in any state or other jurisdiction either through an
insurance fund operated by such state or other jurisdiction or by causing to be
maintained a system or systems of self-insurance which is in accord with
applicable laws.
9.8 Payment of Indebtedness and Discharge of Obligations. The
Company will, and will cause each Subsidiary to, pay or cause to be paid the
principal of and interest and premium, if any, on all Indebtedness for Borrowed
Money heretofore or hereafter incurred or assumed by it when and as the same
shall become due and payable, unless such Indebtedness for Borrowed Money is
renewed or extended. The Company will, and will cause each Subsidiary to,
faithfully observe, perform and discharge all of the material covenants,
conditions and obligations which are imposed on it by any and all indentures and
other agreements securing or evidencing such Indebtedness for Borrowed Money or
pursuant to which such Indebtedness for Borrowed Money is issued, and will not
permit the continuance of any act or omission which is or under the provisions
thereof may be declared to be a material default thereunder, unless such default
is waived pursuant to the provisions thereof. Neither the Company nor any
Subsidiary shall be required to make any payment or to take any other action by
reason of this Section 9.8 at any time while it shall be currently contesting in
good faith by appropriate proceedings its obligations to make such payment or to
take such action provided that the Company or such Subsidiary, as the case may
be, shall have set aside on its books reserves (segregated to the extent
required by generally accepted accounting principles) deemed adequate by it with
respect thereto.
9.9 Directors' and Stockholders' Meetings. The Purchaser, so long
as it holds any shares of the Common Stock, shall have the right to elect the
number of directors of the Company equal to the total number of directors of the
Company multiplied by the percentage of the Purchaser's ownership of the issued
and outstanding shares of the Common Stock, rounded up to the nearest whole
number, and in no event less than one director.
The Company shall reimburse the Purchaser for the reasonable
out-of-pocket expenses incurred by it or the directors elected by it in
connection with the attending of meetings by its director designees or carrying
out any other duties by such director designees that may be specified by the
Board of Directors; shall pay such director designees the same directors' fees
paid to the other non-
<PAGE>
employee directors of the Company; and shall maintain as part of its Articles of
Incorporation or Bylaws a provision for the indemnification of its directors to
the full extent permitted by law.
The Company agrees, as a general practice, to hold a meeting of its
Board of Directors at least once every two months, and during each year to hold
its annual meeting of shareholders on or approximately on the date provided in
its Bylaws.
9.10 Replacement of Certificates Representing the Shares or the
Additional Shares. Upon receipt of evidence reasonably satisfactory to the
Company of the loss, theft, destruction or mutilation of any certificates
representing the Shares or the Additional Shares and, in the case of any such
loss, theft or destruction, upon delivery of a bond of indemnity satisfactory to
the Company, or, in the case of any such mutilation, upon surrender and
cancellation of the certificates representing the Shares or the Additional
Shares, as the case may be, the Company will issue new certificates representing
the Shares or the Additional Shares, as the case may be, of like tenor, in lieu
of such lost, stolen, destroyed or mutilated certificates representing the
Shares or the Additional Shares, as the case may be.
9.11 Application of Proceeds. Unless otherwise approved by the
Purchaser, the net proceeds received by the Company from the sale of the Shares
shall be used substantially for working capital purposes. Pending use of the
proceeds in the business, up to $1,000,000 may be loaned to Navarre on a secured
demand note basis, subordinate only to Navarre's senior lender. Navarre agrees
to pay such note on an as-needed basis, as determined solely by the board of
directors of the Company.
9.12 Retirement Plans. The Company will cause each retirement plan
of the Company or any of its Subsidiaries in which any employees of the Company
or of any of its Subsidiaries participate that is subject to the provisions of
ERISA and the documents and instruments governing each such plan to be conformed
to when necessary, and to be administered in a manner consistent with, those
provisions of ERISA which may, from time to time, become effective and operative
with respect to such plans; if requested by the Purchasers in writing from time
to time, furnish to the Purchasers a copy of any annual report with respect to
each such plan that the Company files with the Secretary of Labor pursuant to
ERISA; and at such time as such insurance shall be available at rates deemed
commercially reasonable by the Company, maintain insurance against the
contingent liability against the net worth of the Company imposed in respect of
each such plan by the provisions of ERISA.
9.13 Filing of Reports. The Company will, from and after such time
as it has securities registered pursuant to Section 12 of the Securities
Exchange Act of 1934, as amended, or has securities registered pursuant to the
Securities Act, make timely filing of such reports as are required to be filed
by it with the Commission so that Rule 144 under the Securities Act or any
successor provision thereto will be available to the security holders of the
Company who are otherwise able to take advantage of the provisions of such Rule.
<PAGE>
9.14 Patents and Other Intangible Rights. The Company will apply
for, or obtain assignments of, or licenses to use, all patents, trademarks,
trademark rights, trade names, trade name rights and copyrights which in the
opinion of a prudent and experienced businessperson operating in the industry in
which the Company is operating are desirable or necessary for the conduct and
protection of the business of the Company.
9.15 Rights to Purchase Additional Securities. If the Company
should decide to issue and sell additional shares of any capital stock of the
Company or any warrants, securities convertible into capital stock of the
Company or other rights to subscribe for or to purchase any capital stock of the
Company, other than (a) shares of the Common Stock awarded or issued upon the
exercise of options granted pursuant to employee benefit plans adopted by the
Company, provided that the aggregate number of shares thus awarded and issued
and issuable pursuant to the exercise of all such options shall not be in excess
of five percent (5%) of the issued and outstanding shares of the Common Stock
(appropriately adjusted to reflect stock splits, stock dividends,
reorganizations, consolidations and similar changes effected after the Closing
Date), and (b) the Additional Shares, (all such capital stock, warrants,
securities convertible into capital stock and other rights, other than
securities referred to in (a) and (b) above, being hereinafter sometimes
collectively referred to as "Additional Securities"), the Company shall first
offer to sell to the Purchaser, upon the same terms and conditions as the
Company is proposing to issue and sell such Additional Securities to others, the
Purchaser's pro rata share (as defined below) of such Additional Securities.
Such offer shall be made by written notice given to the Purchaser and specifying
therein the amount of the Additional Securities being offered, the purchase
price and other terms of such offer. The Purchaser shall have a period of 30
days from and after the date of receipt by it of such notice within which to
accept such offer. If the Purchaser elects to accept such offer in whole or in
part, the Purchaser shall so accept by written notice to the Company given
within such 30-day period. If a Purchaser fails to accept such offer in whole or
in part within such 30-day period, any of such Additional Securities not
purchased by the Purchaser pursuant to such offer may be offered for sale to
others by the Company for a period of 60 days from the last day of such 30-day
period, but only on the same terms and conditions as set forth in the initial
offer to the Purchaser, free and clear of the restrictions imposed by this
Section 9.15.
For purposes of the previous paragraph, the Purchaser's "pro rata
share" is the number of shares of Additional Securities (rounded to the nearest
whole share) as is equal to the product of (a)(i) the number of shares of Common
Stock issued, or issuable upon the exercise or conversion of rights, options or
Convertible Securities (as hereinafter defined) without the payment of any
additional cash consideration or with the payment of a nominal cash
consideration, as the case may be (collectively, "Fully Paid securities"), to
the Purchaser immediately prior to the issuance of the Additional Securities
being offered divided by (ii) the total number of Fully Paid Securities issued
or issuable by the Company immediately prior to the issuance of the Additional
Securities, multiplied by (b)(i) the entire offering of Additional Securities.
9.16 Exclusive Placement. (i) As soon as practicable, but in no
event later than 60 days after the Closing or after the date a programing medium
is available, and for so long as the Purchaser is a shareholder of the Company
the Company shall provide the Purchaser, at the Company's actual
<PAGE>
direct cost without any profit or allocation of overhead, with at least one
placement on the most favorable level of service (e.g., the opportunity to
maintain a position to receive the most number of "hits" or "views") offered by
the Company on any of its programing mediums, including "Net TV" which is
currently being developed, and (ii) for so long as the Purchaser is a
shareholder of the Company, the Company shall not provide program distribution
for the sale or distribution of merchandise on behalf of any electronically
distributed shopping service other than the Purchaser, including but not limited
to, QVC, Home Shopping Network, Shop-At-Home and CUC Shoppers Advantage.
9.17 Right of First Refusal. The Purchaser shall have a right, but
not an obligation, to sell and distribute any merchandise (other than music
items of the nature sold by the Company or Navarre as of the date hereof) to be
offered by the Company on any of its programing mediums, so long as the
Purchaser can offer the Company similar terms as any other vendor.
9.18 Public Announcements. Any and all public announcements of any
kind regarding the transactions contemplated by this Agreement or which
reference either the Purchaser or Navarre, whether made before or after the
Closing, shall require the prior written approval of the Purchaser and Navarre,
which approval shall not be unreasonably withheld, and each of the parties
hereto hereby acknowledge that the Purchaser and Navarre are public companies
that must comply with the requirements of the Securities Act, the Securities
Exchange Act of 1934, as amended, and the rules and regulations of the Nasdaq
National Market.
10. Negative Covenants. The Company will be limited and restricted as
follows:
10.1 Consolidation. Merger. Acquisition. etc. Without the prior
approval of the Purchaser, (a) the Company will not, nor will it permit any
Subsidiary to, sell, lease, license or otherwise dispose of all or substantially
all of its assets or any asset or assets which have a mate rial effect upon the
business or financial condition of the Company, and (b) the Company will not,
nor will it permit any Subsidiary to, consolidate with or merge into any other
corporation or entity, or permit any other corporation or entity to consolidate
or merge into the Company or any Subsidiary, or enter into a plan of exchange
with any other corporation or entity, or otherwise acquire any other corporation
or entity; provided that the foregoing shall not apply to any transaction
between the Company and a wholly-owned Subsidiary.
10.2 Future Registration Rights. Except for any registration
expressly permitted by Section 12 of this Agreement, the Company will not,
without the prior approval of the Purchaser, agree with the holders of any
securities issued or to be issued by the Company to register such securities
under the Securities Act nor will it grant any incidental registration rights.
10.3 Other Restrictions. The Company will not without the prior
written consent of the Purchaser:
<PAGE>
(a) guarantee, endorse or otherwise be or become contingently
liable, or permit any Subsidiary to guarantee, endorse or otherwise
become contingently liable, in connection with the obligations,
securities or dividends of any person, firm, association or corporation,
other than the Company or any of its Subsidiaries, except that the
Company and any Subsidiary may endorse negotiable instruments for
collection in the ordinary course of business;
(b) make or permit any Subsidiary to make loans or advances to any
person (including without limitation to any officer, director or
stockholder of the Company or any Subsidiary), firm, association or
corporation, except loans and advances to the Company and its
wholly-owned Subsidiaries, advances to suppliers and employees made in
the ordinary course of business, and except as provided in Section 9.12
hereof;
(c) purchase or invest, or permit any Subsidiary to purchase or
invest, in the stock or obligations of any other person, firm or
corporation, other than a wholly-owned Subsidiary;
(d) pay, or permit any Subsidiary to pay, compensation, whether by
way of salaries, bonuses, participations in pension or profit sharing
plans, fees under management contracts or for professional services or
fringe benefits to any officer in excess of amounts fixed by the Board of
Directors of the Company prior to any payment to such officer; or
(e) make any material change in the nature of its business as
carried on at the date of this Agreement.
11. Conversion Rights. The Purchaser shall have those rights to exchange
all or any portion of the shares of the Common Stock that it then holds (the
"Conversion Shares"), into shares of the Common Stock, $.01 par value, of
Navarre (the "Navarre Common Stock") or cash as set forth in the Conversion
Agreement.
12. Registration of Stock.
12.1 Required Registration. In the event that the Company has not
commenced an initial public offering of the Common Stock pursuant to a
Registration Statement filed under the Securities Act of 1933, as amended (the
"Securities Act"), having an aggregate value of at least $10 million (a
"Registration") by the third anniversary of the Closing Date hereof, the
Purchaser and Navarre shall each have the right to demand that the Company offer
for sale pursuant to a Registration, shares of the Common Stock, provided that
the aggregate market value of the outstanding Common Stock following such
offering (excluding the value of the shares sold by the Company in such
offering) shall be at least $40 million. The Company shall include in such
Registration up to 20% of the shares of the Common Stock then owned by each of
the Purchaser and
<PAGE>
Navarre, unless, in the good faith judgment of the managing underwriter of such
Registration, the inclusion of such securities would interfere with the
successful marketing of the offering.
12.2 Registration Procedures. If and whenever the Company is
required by the provisions of Sections 12.1 to effect the registration of
securities under the Securities Act, the Company will:
(a) prepare and file with the Commission a registration statement
with respect to such securities, and use its best efforts to cause such
registration statement to become and remain effective for such period as
may be reasonably necessary to effect the sale of such securities;
(b) prepare and file with the Commission such amendments to such
registration statement and supplements to the prospectus contained
therein as may be necessary to keep such registration statement effective
for such period as may be reasonably necessary to effect the sale of such
securities;
(c) furnish to the Purchaser and to the underwriters of the
securities being registered such reasonable number of copies of the
registration statement, preliminary prospectus, final prospectus and such
other documents as the Purchaser and such underwriters may reasonably
request in order to facilitate the public offering of such securities;
(d) use its best efforts to register or qualify the securities
covered by such registration statement under such state securities or
blue sky laws of such jurisdictions as the Purchaser may reasonably
request in writing within 20 days following the original filing of such
registration statement, except that the Company shall not for any purpose
be required to execute a general consent to service of process or to
qualify to do business as a foreign corporation in any jurisdiction
wherein it is not so qualified;
(e) notify the Purchaser promptly after it shall receive notice
thereof, of the time when such registration statement has become
effective or a supplement to any prospectus forming a part of such
registration statement has been filed;
(f) notify the Purchaser promptly of any request by the Commission
for the amending or supplementing of such registration statement or
prospectus or for additional information;
(g) prepare and file with the Commission, promptly upon the
request of the Purchaser, any amendments or supplements to such
registration statement or prospectus which, in the opinion of counsel for
the Purchaser (and concurred in by counsel for the Company), is required
under the Securities Act or the rules and regulations thereunder in
connection with the distribution of the securities so registered;
<PAGE>
(h) prepare and promptly file with the Commission and promptly
notify the Purchaser of the filing of such amendment or supplement to
such registration statement or prospectus as may be necessary to correct
any statements or omissions if, at the time when a prospectus relating to
such securities is required to be delivered under the Securities Act, any
event shall have occurred as the result of which any such prospectus or
any other prospectus as then in effect would include an untrue statement
of a material fact or omit to state any material fact necessary to make
the statements therein, in the light of the circumstances in which they
were made, not misleading;
(i) advise the Purchaser, promptly after it shall receive notice
or obtain knowledge thereof, of the issuance of any stop order by the
Commission suspending the effectiveness of such registration statement or
the initiation or threatening of any proceeding for that purpose and
promptly use its best efforts to prevent the issuance of any stop order
or to obtain its withdrawal if such stop order should be issued;
(j) not file any amendment or supplement to such registration
statement or prospectus to which the Purchaser shall have reasonably
objected on the grounds that such amendment or supplement does not comply
in all material respects with the requirements of the Securities Act or
the rules and regulations thereunder, after having been furnished with a
copy thereof at least five business days prior to the filing thereof,
unless in the opinion of counsel for the Company the filing of such
amendment or supplement is reasonably necessary to protect the Company
from any liabilities under any applicable federal or state law and such
filing will not violate applicable law; and
(k) at the request of the Purchaser, furnish: (i) an opinion,
dated as of the closing date, of the counsel representing the Company for
the purposes of such registration, addressed to the underwriters, if any,
and to the Purchaser, covering such matters as such underwriters and the
Purchaser may reasonably request; and (ii) letters dated as of the
effective date of the registration statement and as of the closing date,
from the independent public accountants of the Company, addressed to the
underwriters, if any, and to the Purchaser, covering such matters as such
underwriters and the Purchaser may reasonably request.
12.3 Expenses. With respect to each registration requested pursuant
to Section 12.1 hereof, the Company shall bear all of the fees, costs and
expenses of such registrations, including without limitation, filing and NASD
fees, printing expenses, fees and disbursements of counsel and accountants for
the Company, fees and disbursements of counsel for the underwriter or
underwriters of such securities (if the Company and/or selling security holders
are required to bear such fees and disbursements), all internal Company
expenses, all legal fees and disbursements and other expenses of complying with
state securities or blue sky laws of any jurisdictions in which the securities
to be offered are to be registered or qualified, and the premiums and other
costs of policies of insurance against liability (if any) arising out of such
public offering. Fees and disbursements of counsel and
<PAGE>
accountants for the Purchaser, underwriting discounts and commissions and
transfer taxes relating to the shares included in the offering by the Purchaser
shall be borne by the Purchaser.
12.4 Indemnification. In the event that any securities held by the
Purchaser are included in a registration statement under Section 12.1:
(a) The Company will indemnify and hold harmless the Purchaser
pursuant to the provisions of this Section 12, its directors and
officers, and any underwriter (as defined in the Securities Act) for the
Purchaser and each person, if any, who controls the Purchaser or such
underwriter within the meaning of the Securities Act, from and against,
and will reimburse the Purchaser and each such underwriter and
controlling person with respect to, any and all loss, damage, liability,
cost and expense to which the Purchaser or any such underwriter or
controlling person may become subject under the Securities Act or
otherwise, insofar as such losses, damages, liabilities, costs or
expenses are caused by any untrue statement or alleged untrue statement
of any material fact contained in such registration statement, any
prospectus contained therein or any amendment or supplement thereto, or
arise out of or are based upon the omission or alleged omission to state
therein a material fact required to be stated therein or necessary to
make the statements therein, in light of the circumstances in which they
were made, not misleading; provided, however, that the Company will not
be liable in any such case to the extent that any such loss, damage,
liability, cost or expense arises out of or is based upon an untrue
statement or alleged untrue statement or omission or alleged omission so
made in conformity with information furnished by the Purchaser, such
underwriter or such controlling person in writing specifically for use in
the preparation thereof.
(b) The Purchaser will indemnify and hold harmless the Company,
its directors and officers, any controlling person and any underwriter
from and against, and will reimburse the Company, its directors and
officers, any controlling person and any underwriter with respect to, any
and all loss, damage, liability, cost or expense to which the Company or
any controlling person and/or any underwriter may become subject under
the Securities Act or otherwise, insofar as such losses, damages,
liabilities, costs or expenses are caused by any untrue or alleged untrue
statement of any material fact contained in such registration statement,
any prospectus contained therein or any amendment or supplement thereto,
or arise out of or are based upon the omission or the alleged omission to
state therein a material fact required to be stated therein or necessary
to make the statements therein, in light of the circumstances in which
they were made, not misleading, in each case to the extent, but only to
the extent, that such untrue statement or alleged untrue statement or
omission or alleged omission was so made in reliance upon and in strict
conformity with written information furnished by the Purchaser
specifically for use in the preparation thereof.
(c) Promptly after receipt by an indemnified party pursuant to the
provisions of paragraph (a) or (b) of this Section 12.4 of notice of the
commencement of any action involving the subject matter of the foregoing
indemnity provisions such indemnified party will, if a claim thereof is
to be made against the indemnifying party pursuant to the provisions of
<PAGE>
said paragraph (a) or (b), promptly notify the indemnifying party of the
commencement thereof; but the omission to so notify the indemnifying
party will not relieve it from any liability which it may have to any
indemnified party otherwise than hereunder. In case such action is
brought against any indemnified party and it notifies the indemnifying
party of the commencement thereof, the indemnifying party shall have the
right to participate in, and, to the extent that it may wish, jointly
with any other indemnifying party similarly notified, to assume the
defense thereof, with counsel satisfactory to such indemnified party,
provided, however, if the defendants in any action include both the
indemnified party and the indemnifying party and the indemnified party
shall have reasonably concluded that there may be legal defenses
available to it and/or other indemnified parties which are different from
or additional to those available to the indemnifying party, or if there
is a conflict of interest which would prevent counsel for the
indemnifying party from also representing the indemnified party, the
indemnified party or parties shall have the right to select separate
counsel to participate in the defense of such action on behalf of such
indemnified party or parties. After notice from the indemnifying party to
such indemnified party of its election so to assume the defense thereof,
the indemnifying party will not be liable to such indemnified party
pursuant to the provisions of said paragraph (a) or (b) for any legal or
other expense subsequently incurred by such indemnified party in
connection with the defense thereof other than reasonable costs of
investigation, unless (i) the indemnified party shall have employed
counsel in accordance with the proviso of the preceding sentence, (ii)
the indemnifying party shall not have employed counsel satisfactory to
the indemnified party to represent the indemnified party within a
reasonable time after the notice of the commencement of the action, or
(iii) the indemnifying party has authorized the employment of counsel for
the indemnified party at the expense of the indemnifying party.
13. Default.
13.1 Events of Default. Each of the following events shall be an
event of default (an "Event of Default") for purposes of this Agreement:
(a) if the Company or any Subsidiary becomes insolvent, or admits
in writing its inability to pay its debts as they mature, and does not
obtain additional financing within 90 days thereof to no longer be
insolvent or to pay its debts as they mature; or
(b) if the Company or any Subsidiary makes an assignment for the
benefit of creditors, or ceases doing business as a going concern, or the
Company or any Subsidiary applies for or consents to the appointment of a
trustee or receiver for the Company or any Subsidiary, or for the major
part of the property of either; or
(c) if a trustee or receiver is appointed for the Company or any
Subsidiary or for the major part of the property of either and the order
of such appointment is not discharged, vacated or stayed within 90 days
after such appointment; or
<PAGE>
(d) if any judgment, writ or warrant of attachment or of any
similar process in an amount in excess of $25,000 shall be entered or
filed against the Company or any Subsidiary or against any of the
property or assets of either and remains unpaid, unvacated, unbonded or
unstayed for a period of 90 days, provided, however, that this section
13.1(c) shall not apply to the items disclosed on SCHEDULE 6.7 hereto; or
(e) if an order for relief shall be entered in any Federal
bankruptcy proceeding in which the Company or any Subsidiary is the
debtor; or if bankruptcy, reorganization, arrangement, insolvency, or
liquidation proceedings, or other proceedings for relief under any
bankruptcy or similar law or laws for the relief of debtors, are
instituted by or against the Company or any Subsidiary and, if instituted
against the Company or any Subsidiary, are consented to or, if contested
by the Company or the Subsidiary, are not dismissed by the adverse
parties or by an order, decree or judgment within 90 days after such
institution; or
(f) if the Company or any Subsidiary shall default in any material
respect in the due and punctual performance of any covenant or agreement
in any note, bond, indenture, loan agreement, note agreement, mortgage,
security agreement or other instrument evidencing or related to
Indebtedness for Borrowed Money, and such default shall continue for more
than the period of notice and/or grace, if any, therein specified and
shall not have been waived; or
(g) (i) if any representation or warranty made by or on behalf of
the Company, Navarre or NRC in this Agreement or in any certificate,
report or other instrument delivered under or pursuant to any term hereof
or thereof shall prove to have been untrue or incorrect as of the date of
this Agreement or as of the Closing Date, or (ii) if any report,
certificate, financial statement or financial schedule or other
instrument prepared or purported to be prepared by the Company, Navarre
or NRC or any officer of the Company, Navarre or NRC furnished or
delivered under or pursuant to this Agreement after the Closing Date
shall prove to be untrue or incorrect as of the date it was made,
furnished or delivered, and either (i) or (ii) has a material adverse
effect on the Company or Navarre; or
(h) if default shall be made in the due and punctual performance
or observation of any term condition or covenant contained in Sections
10.1, 10.2 and 10.3 of this Agreement; or
(i) if default shall be made in the due and punctual performance
or observance of any term, condition or covenant contained in this
Agreement other than those set forth in Section 12.4(h), and such default
shall have continued for a period of 90 days.
13.2 Remedy Upon Events of Default. Upon the occurrence of an Event
of Default as herein defined, unless such Event of Default shall have been
waived by the Purchaser in a writing signed by an executive officer of the
Purchaser, the Purchaser shall be entitled the Conversion Rights as set forth in
the Conversion Agreement.
<PAGE>
13.3 Notice of Defaults. When, to its knowledge, any Event of
Default has occurred or exists, the Company agrees to give written notice within
three business days of such Event of Default to the Purchaser.
13.4 Suits for Enforcement. In case any one or more Events of
Default shall have occurred and be continuing, unless such Events of Default
shall have been waived in the manner provided in Section 13.2 hereof, the
Purchaser may proceed to protect and enforce its rights under this Section 13 by
suit in equity or action at law. It is agreed that in the event of such action
the Purchaser shall be entitled to receive all reasonable fees, costs and
expenses incurred, including without limitation, such reasonable fees and
expenses of attorneys (whether or not litigation is commenced) and reasonable
fees, costs and expenses of appeals.
13.5 Remedies Cumulative. No right, power or remedy conferred upon
the Purchaser shall be exclusive, and each such right, power or remedy shall be
cumulative and in addition to every other right, power or remedy, whether
conferred hereby or by any such security or now or hereafter available at law or
in equity or by statute or otherwise.
13.6 Remedies not Waived. No course of dealing between the Company
and/or Navarre and the Purchaser, and no delay in exercising any right, power or
remedy conferred hereby or by any such security or now or hereafter existing at
law or in equity or by statute or otherwise, shall operate as a waiver of or
otherwise prejudice any such right, power or remedy; provided, however, that
this Section shall not be construed or applied so as to negate the provisions
and intent of any statute which is otherwise applicable.
14. Definitions. Unless the context otherwise requires, the terms defined
in this Section 14 shall have the meanings herein specified for all purposes of
this Agreement, applicable to both the singular and plural forms of any of the
terms herein defined. All accounting terms defined below shall, except as
otherwise expressly provided, be determined by reference to the Company's books
of account and in conformity with generally accepted accounting principles as
applied to such books of account in the opinion of the independent public
accountants selected by the Board of Directors of the Company as required under
the provisions of Section 9.3 hereof.
14.1 "Convertible Securities" shall mean evidences of indebtedness,
shares of stock or other securities which are at any time directly or indirectly
convertible into or exchangeable for shares of the Common Stock.
14.2 "Indebtedness for Borrowed Money" shall include only
indebtedness of the Company and its Subsidiaries incurred as the result of a
direct borrowing of money and shall not include any other indebtedness
including, but not limited to, indebtedness incurred with respect to trade
accounts.
14.3 "Permitted Liens" shall mean (a) liens for taxes and
assessments or governmental charges or levies not at the time due or in respect
of which the validity thereof shall
<PAGE>
currently be contested in good faith by appropriate proceedings; and (b) liens
in respect of pledges or deposits under worker's compensation laws or similar
legislation, carriers', warehousemen's, mechanics', laborers' and materialmen's,
landlord's and statutory and similar liens, if the obligations secured by such
liens are not then delinquent or are being contested in good faith, and liens
and encumbrances incidental to the conduct of the business of the Company or any
Subsidiary which were not incurred in connection with the borrowing of money or
the obtaining of advances or credits and which do not in the aggregate
materially detract from the value of its property or materially impair the use
thereof in the operation of its business.
15. TERMINATION OF AGREEMENT. This Agreement may be terminated at any
time prior to the Closing Date:
(a) Mutual Consent. By mutual consent of the parties hereto.
(b) Breach of Agreement. By any of the parties hereto giving
written notice to any of the other parties if any of the parties hereto are in
breach in any material respect of any representation, warranty or covenant
contained in this Agreement.
(c) Results of Due Diligence. By the Purchaser giving written
notice to any of the Selling Parties on or before the Closing Date, if the
Purchaser is not satisfied (in its sole discretion) with the results of its
continuing business, legal, and accounting due diligence regarding the Company
and NRC.
(d) Delayed Closing. By any party hereto giving written notice to
the other parties hereto, if the transactions contemplated by this Agreement
shall not have been consummated by March 31, 1997, unless such failure shall be
due to the failure of the party seeking to terminate this Agreement to perform
or observe the covenants, agreements and conditions hereof to be performed or
observed by such party at or before the Closing Date.
(e) Government Action. By any party hereto if any court of
competent jurisdiction in the United States or other United States governmental
body shall have issued an order, decree or ruling or taken any other action
restraining, enjoining or otherwise prohibiting the consummation of the
transactions contemplated by this Agreement and such order, decree, ruling or
other action shall have become final and non-appealable.
16. Consents, Waivers and Amendments. Neither this Agreement nor any
provision hereof may be amended, changed, waived, discharged or terminated
orally, but only by a statement in writing signed by the party against which
enforcement of the change, waiver, discharge or termination is sought.
17. Payment of Fees and Expenses of Purchasers. Each party hereto shall
pay all costs and expenses incurred by it in preparing this Agreement (and all
other agreements, certificates, instruments and documents executed in connection
herewith), in performing its obligations under this Agreement, and in otherwise
consummating the transactions contemplated by this Agreement, including without
limitation, its attorneys' fees and accountants' fees. The Company shall pay (a)
all fees and expenses incurred by the Purchaser with respect to any amendments
or waivers requested
<PAGE>
by the Company (whether or not the same become effective) under or in respect of
this Agreement or the agreements contemplated hereby, and (b) all fees and
expenses incurred by the Purchaser with respect to the enforcement of the rights
granted under this Agreement or the agreements contemplated hereby.
18. Notices. All notices, requests, consents and other communications
required or permitted hereunder shall be in writing and shall be delivered, or
mailed first-class postage prepaid, registered or certified mail, addressed as
follows (or to another address or person as a party may specify on notice to the
other parties):
(a) if to the Purchaser:
ValueVision International, Inc
6740 Shady Oak Road
Eden Prairie, Minnesota 55344
Attn: Chief Executive Officer
(b) if to the Company or Navarre:
Navarre Corporation
7400 49th Avenue North
New Hope, MN 55428
Attn: President
(d) if to NRC:
Net Radio Corporation
Riverplace Exposition Hall, Suite 149
43 Main Street S.E.
Minneapolis, MN 55414
Attn: President
and such notices and other communications shall for all purposes of this
Agreement be treated as being effective or having been given if delivered
personally, or, if sent by mail, when received.
19. Survival of Representations and Warranties, etc. All representations
and warranties contained herein shall survive the execution and delivery of this
Agreement, any investigation at any time made by the Purchaser or on its behalf,
and the sale and purchase of the Shares, the Additional Shares and the Navarre
Common Stock and payment therefor. All statements contained in any certificate,
instrument or other writing delivered by or on behalf of NRC, the Company and/or
Navarre pursuant hereto or in connection with or contemplation of the
transactions herein
<PAGE>
contemplated (other than legal opinions) shall constitute representations and
warranties by NRC, the Company and/or Navarre hereunder.
20. Parties in Interest. All the terms and provisions of this Agreement
shall be binding upon and inure to the benefit of and be enforceable by the
respective successors and assigns of the parties hereto, whether so expressed or
not.
21. Headings. The headings of the Sections and paragraphs of this
Agreement have been inserted for convenience of reference only and do not
constitute a part of this Agreement.
22. Choice of Law. It is the intention of the parties that the laws of
Minnesota, without regard to its conflict of laws provisions, shall govern the
validity of this Agreement, the construc tion of its terms and the
interpretation of the rights and duties of the parties.
23. Counterparts. This Agreement may be executed concurrently in two or
more counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed and delivered in Minneapolis, Minnesota on the date and year first
above written.
VALUEVISION INTERNATIONAL, INC.
a Minnesota corporation
By Nicholas Jaksich
--------------------------------
Its President & COO
----------------------------
NET RADIO CORPORATION,
a Minnesota corporation
By /s/ Charles Cheney
--------------------------------
Its Chief Financial Officer
----------------------------
NAVARRE CORPORATION,
a Minnesota corporation
By /s/ Charles Cheney
--------------------------------
Its Chief Financial Officer
----------------------------
NET RADIO CORPORATION,
a Nevada corporation
By /s/ Robert Griggs
--------------------------------
Its Chief Executive Officer
----------------------------
CONVERSION AGREEMENT
This Conversion Agreement dated this 20th day of March, 1997 is made by
and between ValueVision International, Inc., a Minnesota corporation (the
"Purchaser") and Navarre Corporation, a Minnesota corporation ("Navarre").
WHEREAS, Navarre has closed on the merger (the "Merger") pursuant to
that certain Agreement and Plan of Reorganization (the "Merger Agreement") by
and among Navarre, Net Radio Corporation, a Minnesota corporation and wholly
owned subsidiary of Navarre (the "Company"), and Net Radio Corporation, a Nevada
corporation ("NRC"), whereby NRC merged with and into the Company;
WHEREAS, Navarre, the Purchaser, the Company and NRC entered into that
certain Stock Purchase Agreement dated March 7, 1997 (the "Purchase Agreement")
pursuant to which the Purchaser agreed to purchase 1,765 shares (the "Shares")
of Common Stock, $.01 par value of the Company (the "Common Stock");
WHEREAS, to induce the Purchaser to enter into the Purchase Agreement
and purchase the Shares, Navarre has agreed to enter into this Agreement and
provide the Purchaser with certain rights to convert the Shares into either cash
or shares of Common Stock, $.01 par value of Navarre.
NOW, THEREFORE, in consideration of the premises and the mutual
covenants and agreements hereinafter set forth, the parties hereto agree as
follows:
1. Definitions. All capitalized terms not otherwise defined herein shall have
the meaning set forth in the Purchase Agreement.
2. Conversion Rights. Upon and at all times after the earlier occurrence of (i)
an Event of Default as set forth in Section 13.1 of the Purchase Agreement or
(ii) the fifth anniversary of the Closing Date hereof if the Company has not
then registered the Common Stock under the Securities Act, the Purchaser shall
have the right (all such rights collectively referred to as the "Conversion
Rights") at Purchaser's option to exchange the Common Stock that it acquired
pursuant to the Purchase Agreement for shares of the Common Stock, $.01 par
value of Navarre (the "Navarre Common Stock"), or at the option of Navarre, for
cash to be paid by Navarre to Purchaser equal in amount to the sum of $3,000,000
plus the amount of any Option Consideration previously paid by Purchaser
pursuant to the Purchase Agreement (together, the "Conversion Price"), provided,
however, that the Conversion Price and the pro rata number of shares of the
Common Stock convertible hereunder shall be reduced by the value of any
Advertising Consideration not then used by the Company. In the event that the
Navarre Common Stock is no longer a publicly traded security on the National
Marketing Exchange (namely the NASDAQ National Market, New York Stock Exchange
or American Stock Exchange), Navarre shall pay the Conversion Price to Purchaser
in
<PAGE>
cash. In the event that the Conversion Price is to be paid by Navarre to
Purchaser in the form of Navarre Common Stock, the number of shares of Navarre
Common Stock to be delivered to Purchaser by Navarre shall be equal to the
Conversion Price divided by 1.01 of the then current market value of the Navarre
Common Stock (the "Conversion Ratio") which market value shall be the average of
the last sales prices of the Navarre Common Stock for the ten (10) consecutive
trading days immediately preceding the conversion exercise date. In the event
that any Advertising Consideration is used by the Company after exercise of the
Conversion Rights, Navarre agrees to pay to the Purchaser the value of such
Advertising Consideration in cash or in the form of Navarre Common Stock at the
market value previously determined in accordance with this Agreement. The
Purchaser shall exercise its Conversion Rights under this Agreement by providing
written notice of its intention in any form to Navarre and the Company. The
Purchaser agrees that the first time it excercises any of its Conversion Rights
hereunder, the Purchaser shall be required to exercise such Conversion Rights as
it relates to at least fifty percent (50%) of the Common Stock that the
Purchaser then has a right to convert into Navarre Common Stock or cash
hereunder. Thereafter, when the Purchaser exercises its Conversion Rights
hereunder, it my convert any portion of the remaining Common Stock that it then
holds. Navarre agrees to deliver a certificate representing that Navarre Common
Stock required by this Agreement or, in the alternative, the cash payment
required hereby within ten (10) days of the receipt of a written notice from
Purchaser of its intention to exercise Conversion Rights. Navarre shall further
deliver any additional cash or Navarre Common Stock required in connection with
this subsequent use of Advertising Consideration within ten (10) days.
3. Stock Fully Paid; Reservation of Shares. Navarre covenants and agrees that
all the Navarre Common Stock that may be issued upon the exercise of the
Conversion Rights will, upon issuance in accordance with the terms of this
Agreement, be fully paid and nonassessable, and that the issuance thereof shall
not give rise to any preemptive rights on the part of any person. Navarre
further covenants and agrees that it will at all times have authorized and
reserved a sufficient number of shares of the Navarre Common Stock for the
purpose of issue upon the exercise of the Conversion Rights.
4. Adjustment of Number of Shares and Conversion Price. If at any time
commencing on the first day of the Measurement Period and prior to the closing
on the exercise of any or all of the Conversion Rights, Navarre shall (i)
declare a dividend or make a distribution of the Navarre Common Stock payable in
shares of Navarre's capital stock (whether shares of Navarre Common Stock or of
any other class of Navarre capital stock); (ii) subdivide, reclassify or
recapitalize outstanding Navarre Common Stock into a greater number of shares;
(iii) combine, reclassify or recapitalize the outstanding Navarre Common Stock
into a smaller number of shares; or (iv) issue any shares of its capital stock
by reclassification of the Navarre Common Stock (including any such
reclassification in connection with a consolidation or a merger in which Navarre
is the continuing corporation), excluding, however, any dividend, distribution,
reclassification or recapitalization that requires the payment of more than
nominal additional consideration by security holders, the Conversion Ratio in
effect at the time of the record date of such dividend, distribution,
subdivision, combination, reclassification or recapitalization shall be adjusted
so that upon exercise of the Conversion Rights, the Purchaser shall be entitled
to receive the aggregate number and kind of shares which, if the Conversion
Rights had been exercised in full immediately prior to such event, the Purchaser
would have owned upon such exercise and been entitled to receive by virtue of
such
<PAGE>
dividend, distribution, subdivision, combination, reclassification or
recapitalization, for the same aggregate consideration. Any adjustments made by
this Section 4 shall be made successively immediately after the record date, in
the case of a dividend or distribution, or the effective date, in the case of a
subdivision, combination, reclassification or recapitalization.
5. Registration of Stock.
5.1 Navarre Demand Registration. In the event that the Purchaser shall
have exercised its Conversion Rights pursuant to this Agreement and is a holder
of Navarre Common Stock, it shall have a one-time right to demand a registration
(a "Navarre Demand Registration"), of its shares of the Navarre Common Stock
pursuant to a registration statement filed with the Securities and Exchange
Commission (the "Commission"), pursuant to the Securities Act of 1933, as
amended (the "Securities Act"). Upon receipt by Navarre of a request by the
Purchaser for a Navarre Demand Registration, Navarre shall prepare and file a
registration statement under the Securities Act covering the Purchaser's shares
of the Navarre Common Stock which are the subject of such request and shall use
its best efforts to cause such registration statement to become effective. The
Purchaser agrees that it will not sell more than 20% of its initial holdings of
the Navarre Common Stock pursuant to such registration during any three month
period, provided, however, if the Purchaser is unable to sell all of its shares
of the Navarre Common Stock pursuant to such registration because the
registration statement is no longer effective, Navarre agrees that the Purchaser
shall continue to have a right to demand registration of the remaining shares of
Navarre Common Stock that it owns pursuant hereto until all such shares are
sold.
5.2 Navarre Piggy-Back Registration. In the event that the Purchaser
shall have exercised its Conversion Rights pursuant to this Agreement and is a
holder of Navarre Common Stock, it shall have a unlimited right to piggy-back
registrations (a "Navarre Piggy-Back Registration"), of its shares of the
Navarre Common Stock pursuant to a registration statement filed with the
Commission under to the Securities Act. Each time Navarre shall determine to
proceed with the actual preparation and filing of a registration statement under
the Securities Act in connection with the proposed offer and sale for cash of
any of its securities by it or any of its security holders (other than a
registration statement on a form that does not permit the inclusion of shares by
its security holders), Navarre will give written notice of its determination to
the Purchaser. Upon the written request of the Purchaser given within 20 days
after receipt of any such notice from Navarre, Navarre will, except as herein
provided, cause all such shares of the Navarre Common Stock held by the
Purchaser which have been so requested to be registered, to be included in such
registration statement, all to the extent requisite to permit the sale or other
disposition by the Purchaser to be so registered; provided, however, that
nothing herein shall prevent the Navarre from, at any time, abandoning or
delaying any such registration initiated by it; provided further, however, that
if Navarre determines not to proceed with a registration after the registration
statement has been filed with the Commission and Navarre's decision not to
proceed is primarily based upon the anticipated public offering price of the
securities to be sold by Navarre, Navarre shall promptly complete the
registration for the benefit of Purchaser if the Purchaser wishes to proceed
with a public offering of its securities if the Purchaser agrees to bear all
expenses incurred by Navarre as the result of such registration after Navarre
has decided not to proceed. If any registration pursuant to this Section 5.2
shall be underwritten in whole or in part, Navarre may require that the shares
of Navarre Common Stock
<PAGE>
requested for inclusion pursuant to this Section 5.2 be included in the
underwriting on the same terms and conditions as the securities otherwise being
sold through the underwriters. In the event that the Navarre Common Stock
requested for inclusion pursuant to this Section 5.2 would constitute more than
25% of the total number of shares to be included in a proposed underwritten
public offering, and if in the good faith judgment of the managing underwriter
of such public offering the inclusion of all of such shares originally covered
by a request for registration would reduce the number of shares to be offered by
Navarre or interfere with the successful marketing of the shares of stock
offered by Navarre, the number of shares of the Navarre Common Stock otherwise
to be included in the underwritten public offering may be reduced pro rata (by
number of shares) among the holders of all other securities of Navarre being
included in such registration, provided, however, that after any such required
reduction the number of shares of the Navarre Common Stock to be included in
such offering pursuant to this Section 5.2 shall constitute at least 25% of the
total number of shares to be included in such offering.
5.3 Registration Procedures. If and whenever Navarre is required by the
provisions of Sections 5.1 or 5.2 to effect the registration of securities under
the Securities Act, Navarre will:
(a) prepare and file with the Commission a registration statement with
respect to such securities, and use its best efforts to cause such
registration statement to become and remain effective for such period as
may be reasonably necessary to effect the sale of such securities;
(b) prepare and file with the Commission such amendments to such
registration statement and supplements to the prospectus contained therein
as may be necessary to keep such registration statement effective for such
period as may be reasonably necessary to effect the sale of such
securities;
(c) furnish to the Purchaser and to the underwriters of the securities
being registered such reasonable number of copies of the registration
statement, preliminary prospectus, final prospectus and such other
documents as the Purchaser and such underwriters may reasonably request in
order to facilitate the public offering of such securities;
(d) use its best efforts to register or qualify the securities covered
by such registration statement under such state securities or blue sky laws
of such jurisdictions as the Purchaser may reasonably request in writing
within 20 days following the original filing of such registration
statement, except that Navarre shall not for any purpose be required to
execute a general consent to service of process or to qualify to do
business as a foreign corporation in any jurisdiction wherein it is not so
qualified;
(e) notify the Purchaser promptly after it shall receive notice
thereof, of the time when such registration statement has become effective
or a supplement to any prospectus forming a part of such registration
statement has been filed;
(f) notify the Purchaser promptly of any request by the Commission for
the
<PAGE>
amending or supplementing of such registration statement or prospectus or
for additional information;
(g) prepare and file with the Commission, promptly upon the request of
the Purchaser, any amendments or supplements to such registration statement
or prospectus which, in the opinion of counsel for the Purchaser (and
concurred in by counsel for Navarre), is required under the Securities Act
or the rules and regulations thereunder in connection with the distribution
of the securities so registered;
(h) prepare and promptly file with the Commission and promptly notify
the Purchaser of the filing of such amendment or supplement to such
registration statement or prospectus as may be necessary to correct any
statements or omissions if, at the time when a prospectus relating to such
securities is required to be delivered under the Securities Act, any event
shall have occurred as the result of which any such prospectus or any other
prospectus as then in effect would include an untrue statement of a
material fact or omit to state any material fact necessary to make the
statements therein, in the light of the circumstances in which they were
made, not misleading;
(i) advise the Purchaser, promptly after it shall receive notice or
obtain knowledge thereof, of the issuance of any stop order by the
Commission suspending the effectiveness of such registration statement or
the initiation or threatening of any proceeding for that purpose and
promptly use its best efforts to prevent the issuance of any stop order or
to obtain its withdrawal if such stop order should be issued;
(j) not file any amendment or supplement to such registration
statement or prospectus to which the Purchaser shall have reasonably
objected on the grounds that such amendment or supplement does not comply
in all material respects with the requirements of the Securities Act or the
rules and regulations thereunder, after having been furnished with a copy
thereof at least five business days prior to the filing thereof, unless in
the opinion of counsel for Navarre the filing of such amendment or
supplement is reasonably necessary to protect Navarre from any liabilities
under any applicable federal or state law and such filing will not violate
applicable law; and
(k) at the request of the Purchaser, furnish: (i) an opinion, dated as
of the losing date, of the counsel representing Navarre for the purposes of
such registration, addressed to the underwriters, if any, and to the
Purchaser, covering such matters as such underwriters and the Purchaser may
reasonably request; and (ii) letters dated as of the effective date of the
registration statement and as of the closing date, from the independent
public accountants of Navarre, addressed to the underwriters, if any, and
to the Purchaser, covering such matters as such underwriters and the
Purchaser may reasonably request.
5.4 Expenses. With respect to each registration requested pursuant to
Section 5.1 or 5.2 hereof (except as otherwise provided in Section 5.2 with
respect to registrations initiated by Navarre but with respect to which Navarre
has determined not to proceed), Navarre shall bear all of the fees, costs and
expenses of such registrations, including without limitation, filing and NASD
fees,
<PAGE>
printing expenses, fees and disbursements of counsel and accountants for
Navarre, fees and disbursements of counsel for the underwriter or underwriters
of such securities (if Navarre and/or selling security holders are required to
bear such fees and disbursements), all internal Navarre expenses, all legal fees
and disbursements and other expenses of complying with state securities or blue
sky laws of any jurisdictions in which the securities to be offered are to be
registered or qualified, and the premiums and other costs of policies of
insurance against liability (if any) arising out of such public offering. Fees
and disbursements of counsel and accountants for the Purchaser, underwriting
discounts and commissions and transfer taxes relating to the shares included in
the offering by the Purchaser shall be borne by the Purchaser.
5.5 Indemnification. In the event that any securities held by the
Purchaser are included in a registration statement under Section 5.1 or 5.2:
(a) Navarre will indemnify and hold harmless the Purchaser pursuant to
the provisions of this Section 5, its directors and officers, and any
underwriter (as defined in the Securities Act) for the Purchaser and each
person, if any, who controls the Purchaser or such underwriter within the
meaning of the Securities Act, from and against, and will reimburse the
Purchaser and each such underwriter and controlling person with respect to,
any and all loss, damage, liability, cost and expense to which the
Purchaser or any such underwriter or controlling person may become subject
under the Securities Act or otherwise, insofar as such losses, damages,
liabilities, costs or expenses are caused by any untrue statement or
alleged untrue statement of any material fact contained in such
registration statement, any prospectus contained therein or any amendment
or supplement thereto, or arise out of or are based upon the omission or
alleged omission to state therein a material fact required to be stated
therein or necessary to make the statements therein, in light of the
circumstances in which they were made, not misleading; provided, however,
that Navarre will not be liable in any such case to the extent that any
such loss, damage, liability, cost or expense arises out of or is based
upon an untrue statement or alleged untrue statement or omission or alleged
omission so made in conformity with information furnished by the Purchaser,
such underwriter or such controlling person in writing specifically for use
in the preparation thereof.
(b) The Purchaser will indemnify and hold harmless Navarre, its direc
tors and officers, any controlling person and any underwriter from and
against, and will reimburse Navarre, its directors and officers, any
controlling person and any underwriter with respect to, any and all loss,
damage, liability, cost or expense to which Navarre or any controlling
person and/or any underwriter may become subject under the Securities Act
or otherwise, insofar as such losses, damages, liabilities, costs or
expenses are caused by any untrue or alleged untrue statement of any
material fact contained in such registration statement, any prospectus
contained therein or any amendment or supplement thereto, or arise out of
or are based upon the omission or the alleged omission to state therein a
material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances in which they were made,
not misleading, in each case to the extent, but only to the extent, that
such untrue statement or alleged untrue statement or omission or alleged
omission was so made in reliance upon and in strict conformity with written
information furnished by the Purchaser specifically for use in the
preparation thereof.
<PAGE>
(c) Promptly after receipt by an indemnified party pursuant to the
provisions of paragraph (a) or (b) of this Section 5.5 of notice of the
commencement of any action involving the subject matter of the foregoing
indemnity provisions such indemnified party will, if a claim thereof is to
be made against the indemnifying party pursuant to the provisions of said
paragraph (a) or (b), promptly notify the indemnifying party of the
commencement thereof; but the omission to so notify the indemnifying party
will not relieve it from any liability which it may have to any indemnified
party otherwise than hereunder. In case such action is brought against any
indemnified party and it notifies the indemnifying party of the
commencement thereof, the indemnifying party shall have the right to
participate in, and, to the extent that it may wish, jointly with any other
indemnifying party similarly notified, to assume the defense thereof, with
counsel satisfactory to such indemnified party, provided, however, if the
defendants in any action include both the indemnified party and the
indemnifying party and the indemnified party shall have reasonably
concluded that there may be legal defenses available to it and/or other
indemnified parties which are different from or additional to those
available to the indemnifying party, or if there is a conflict of interest
which would prevent counsel for the indemnifying party from also
representing the indemnified party, the indemnified party or parties shall
have the right to select separate counsel to participate in the defense of
such action on behalf of such indemnified party or parties. After notice
from the indemnifying party to such indemnified party of its election so to
assume the defense thereof, the indemnifying party will not be liable to
such indemnified party pursuant to the provisions of said paragraph (a) or
(b) for any legal or other expense subsequently incurred by such
indemnified party in connection with the defense thereof other than
reasonable costs of investigation, unless (i) the indemnified party shall
have employed counsel in accordance with the proviso of the preceding
sentence, (ii) the indemnifying party shall not have employed counsel
satisfactory to the indemnified party to represent the indemnified party
within a reasonable time after the notice of the commencement of the
action, or (iii) the indemnifying party has authorized the employment of
counsel for the indemnified party at the expense of the indemnifying party.
6. Limitations on the Conversion Rights. The Conversion Rights set forth in this
Agreement shall become immediately exercisable upon an Event of Default,
provided, however, that the Purchaser agrees not to exercise any Conversion
Rights based solely on an Event of Default as set forth in Section 13.1(a), (d),
(f), (g) or (i) of the Purchase Agreement until the first anniversary of the
Closing Date.
7. Obligations of Navarre. Navarre's obligations under this Agreement shall be
enforceable whether or not violation of the Purchase Agreement by any party have
occurred or the Purchase Agreement is unenforceable for any reason, including
without limitation, applicable bankruptcy laws. Navarre also agrees that the
Purchaser may do or refrain from doing any of the following without notice to,
or the consent of Navarre, without limiting or discharging Navarre's liability
under this Agreement: (i) renew, amend, modify, extend or release any existing
obligation of the Company and/or Navarre under the Purchase Agreement; and (ii)
amend, supplement and waive compliance by the Company and/or Navarre with any of
the provisions of the Purchase Agreement.
8. Consents, Waivers and Amendments. Neither this Agreement nor any provision
hereof may
<PAGE>
be amended, changed, waived, discharged or terminated orally, but only by a
statement in writing signed by the party against which enforcement of the
change, waiver, discharge or termination is sought. Delay in the exercise of the
Conversion Rights following an Event of Default shall not constitute a waiver of
the Conversion Rights. Failure of the Purchaser to pursue remedies under the
Purchase Agreement upon an Event of Default shall not constitute a waiver of any
rights hereunder.
9. Notices. All notices, requests, consents and other communications required or
permitted hereunder shall be in writing and shall be delivered, or mailed
first-class postage prepaid, registered or certified mail, addressed as follows
(or to another address or person as a party may specify on notice to the other
parties):
(a) if to the Purchaser:
ValueVision International, Inc
6740 Shady Oak Road
Eden Prairie, Minnesota 55344
Attn: Chief Executive Officer
(b) if to Navarre:
Navarre Corporation
7400 49th Avenue North
New Hope, MN 55428
Attn: President
and such notices and other communications shall for all purposes of this
Agreement be treated as being effective or having been given if delivered
personally, or, if sent by mail, when received.
10. Representations and Warranties, etc. All representations and warranties or
the Purchaser and Navarre contained in the Purchase Agreement are hereby
incorporated by reference and shall survive the execution and delivery of this
Agreement, any investigation at any time made by the Purchaser or on its behalf,
and the sale and purchase of the Shares, the Additional Shares and the Navarre
Common Stock and payment therefor. All statements contained in any certificate,
instrument or other writing delivered by or on behalf of NRC, the Company and/or
Navarre pursuant this Agreement or the Purchase Agreement or in connection with
or contemplation of the transactions contemplated herein or therein (other than
legal opinions) shall constitute representations and warranties by Navarre
hereunder.
11. Parties in Interest. All the terms and provisions of this Agreement shall be
binding upon and inure to the benefit of and be enforceable by the respective
successors and assigns of the parties hereto, whether so expressed or not.
12. Headings. The headings of the Sections and paragraphs of this Agreement have
been inserted for convenience of reference only and do not constitute a part of
this Agreement.
<PAGE>
13. Choice of Law. It is the intention of the parties that the laws of
Minnesota, without regard to its conflict of laws provisions, shall govern the
validity of this Agreement, the construction of its terms and the interpretation
of the rights and duties of the parties.
14. Counterparts. This Agreement may be executed concurrently in two or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
IN WITNESS WHEREOF, the undersigned have executed this Agreement effective
as of the date first above written.
NAVARRE CORPORATION
By /s/ Eric Paulson
---------------------------------
Its President
-------------------------------
VALUEVISION INTERNATIONAL, INC.
By /s/ David T. Quinby
---------------------------------
Its Vice President, General Counsel
-------------------------------
<TABLE>
<CAPTION>
NAVARRE CORPORATION
EXHIBIT 11 -- STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS
YEAR ENDED YEAR ENDED YEAR ENDED
MARCH 31, MARCH 31, MARCH 31,
1997 1996 1995
(Amounts in thousands, except per share data)
<S> <C> <C> <C>
Primary and fully diluted
Weighted-average shares outstanding 6,692 6,058 6,056
Net effect of dilutive stock options --
based on the treasury stock method
using the higher of the year end
or average market price -- 384 232
----- ----- -----
Total 6,692 6,442 6,288
===== ===== =====
Net income (loss) $(6,190) $1,319 $1,607
======== ====== ======
Net earnings (loss) per common share $( .92) $ .20 $ .26
======= ====== ======
</TABLE>
NAVARRE CORPORATION
EXHIBIT 21
SUBSIDIARIES OF NAVARRE CORPORATION
NAME OF SUBSIDIARY STATE OF INCORPORATION PERCENT OF OWNERSHIP
Digital Entertainment, Inc. Minnesota 100%
Net Radio Corporation Minnesota 85%
CONSENT OF ERNST & YOUNG LLP
Our audits included the financial statement schedule of Navarre Corporation
listed in Item 14(a). This schedule is the responsibility of the Company's
management. Our responsibility is to express an opinion based on our audits. In
our opinion, the financial statement schedule referred to above, when considered
in relation to the basic financial statements taken as a whole, presents fairly
in all material respects the information set forth therein.
We consent to the incorporation by reference in the Registration Statement (Form
S-8 No. 33-80218 and No. 33-86762 as amended) pertaining to the Navarre
Corporation 1992 Stock Option Plan and the Registration Statement (Form S-3 No.
333-09231) pertaining to the registration of 530,000 shares of Navarre
Corporation common stock of our report dated April 25, 1997, with respect to the
financial statements and schedule of Navarre Corporation included in its Annual
Report (Form 10-K) for the period ended March 31, 1997, filed with the
Securities and Exchange Commission.
/s/ Ernst & Young LLP
Minneapolis, Minnesota
June 27, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<CURRENCY> USD
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> MAR-31-1997
<PERIOD-START> APR-01-1996
<PERIOD-END> MAR-31-1997
<EXCHANGE-RATE> 1,000
<CASH> 655
<SECURITIES> 0
<RECEIVABLES> 47,377
<ALLOWANCES> 2,388
<INVENTORY> 16,854
<CURRENT-ASSETS> 67,948
<PP&E> 3,438
<DEPRECIATION> 2,571
<TOTAL-ASSETS> 78,397
<CURRENT-LIABILITIES> 72,983
<BONDS> 0
0
0
<COMMON> 8,005
<OTHER-SE> (2,906)
<TOTAL-LIABILITY-AND-EQUITY> 78,397
<SALES> 200,697
<TOTAL-REVENUES> 200,697
<CGS> 177,415
<TOTAL-COSTS> 26,985
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 2,338
<INTEREST-EXPENSE> 2,110
<INCOME-PRETAX> (5,997)
<INCOME-TAX> (527)
<INCOME-CONTINUING> (3,703)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (6,189)
<EPS-PRIMARY> (.92)
<EPS-DILUTED> (.92)
</TABLE>
