-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, UpRNmxGBaMPX2CkKlfZUjAXJj1SBO9kkngi0QNoRXvHuQrQ8Z0d1ONL22UtcrZL/ OnxRsVaSlCKrGhBl8bGabA== 0000950149-95-000921.txt : 19951222 0000950149-95-000921.hdr.sgml : 19951222 ACCESSION NUMBER: 0000950149-95-000921 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 17 CONFORMED PERIOD OF REPORT: 19950930 FILED AS OF DATE: 19951221 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: GOOD GUYS INC CENTRAL INDEX KEY: 0000785931 STANDARD INDUSTRIAL CLASSIFICATION: RETAIL-RADIO TV & CONSUMER ELECTRONICS STORES [5731] IRS NUMBER: 942366177 STATE OF INCORPORATION: DE FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: 1934 Act SEC FILE NUMBER: 000-14134 FILM NUMBER: 95603578 BUSINESS ADDRESS: STREET 1: 7000 MARINA BLVD CITY: BRISBANE STATE: CA ZIP: 94005 BUSINESS PHONE: 4156155000 MAIL ADDRESS: STREET 2: 7000 MARINA BLVD CITY: BRISBANE STATE: CA ZIP: 94005 10-K405 1 10-K405 1 FORM 10-K SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ---------------------------------- /X/ Annual Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the fiscal year ended September 30, 1995 / / Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 Commission File Number 0-14134 ----------------------------------- THE GOOD GUYS, INC. (Exact name of registrant as specified in its charter) Delaware 94-2366177 (State or other jurisdiction of (I.R.S. employer identification no.) incorporation or organization) 7000 Marina Boulevard, Brisbane, California 94005-1840 (Address of principal executive offices) Registrant's telephone number, including area code: (415) 615-5000 Securities registered pursuant to Section 12(g) of the Act: Common Stock, $.001 par value (Title of Class) 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. /X/ The aggregate market value of the voting stock held by nonaffiliates of the registrant was approximately $123,837,769 as of December 15, 1995. Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. On December 15, 1995, there were 13,581,416 shares of common stock outstanding. -1- 2 DOCUMENTS INCORPORATED BY REFERENCE (1) Portions of Annual Report to Shareholders for fiscal year ended September 30, 1995. (Part II of Form 10-K) (2) Portions of definitive proxy statement filed with Securities and Exchange Commission relating to the Company's 1996 Annual Meeting of Shareholders. (Part III of Form 10-K) -2- 3 PART I ITEM 1. BUSINESS General THE GOOD GUYS! is a leading specialty retailer of consumer electronics products. The Company currently operates 70 stores: In California, 18 stores are located in the San Francisco Bay area, 24 in the greater Los Angeles/Orange County metropolitan area, 3 in Sacramento, 7 in San Diego, and one each in Bakersfield, Fresno, Modesto and Stockton. In Washington, Oregon and Nevada, THE GOOD GUYS! operates 8 stores, 3 stores and 3 stores, respectively. The Good Guys, Inc. was incorporated in California in 1976. On March 4, 1992, the Company changed its state of incorporation from California to Delaware by merging into a wholly-owned Delaware subsidiary formed for that purpose. In September 1995, The Good Guys, Inc. transferred substantially all of its assets and liabilities to The Good Guys - California, Inc., its wholly-owned operating subsidiary. Unless the context otherwise requires, the terms "THE GOOD GUYS!" and "Company" refer to The Good Guys, Inc., together with its operating subsidiary. Business Strategy THE GOOD GUYS! goal is to be a leading consumer electronics retailer in each of its targeted markets. The cornerstones of its business strategy include: Customer Service. THE GOOD GUYS! believes that superior service is the single most important factor in overall customer satisfaction, and that the Company differentiates itself from other consumer electronics retailers by providing superior customer service. The Company believes that friendly and knowledgeable sales associates are critical to satisfying customers interested in middle to high-end electronics products. The Company's objective is to generate long-term repeat business from its customers. Merchandising. The Company's merchandising strategy is to provide customers with a broad and compelling selection of brand name consumer electronics with an emphasis on middle to high-end merchandise. Merchandise is offered at competitive prices, which are backed by a low price guarantee. Marketing. The Company aggressively uses newspaper, direct mail, radio and television advertising to build name recognition, to position THE GOOD GUYS! in its markets, and to increase store traffic. Stores are designed to be exciting and easy to shop and are located in high visibility and high traffic commercial areas. Expansion. The Company plans to continue to expand its store base. Successful expansion will depend, among other things, on the Company's ability to continue to locate suitable store sites and to hire and train skilled personnel. It will also depend on the Company's ability to open new stores quickly in new markets, to -3- 4 achieve economies of scale in advertising and distribution, and to continue to gain market share from established competitors. Customer Service The Company believes that knowledgeable and friendly sales associates are critical to providing superior customer service. As of September 30, 1995, the Company had over 2,100 highly trained part-time and full-time sales associates. Sales associates are paid under an incentive compensation program with a salary guarantee that is applied against incentives earned. Incentives are based on the gross profit realized, the amount of "repeat" business the sales associate generates, product returns, performance against sales goals and peer ranking. The Company believes this incentive structure creates long-term repeat customers for THE GOOD GUYS!. All sales associates attend a full-time, in-house initial training program. The Company's training program is continually updated and is designed to develop good sales practices and techniques and to help sales associates explain and demonstrate to customers the use and operation of store merchandise. This training enables sales associates to better understand customer needs and to help them select products with which they are satisfied. The Company generally holds meetings daily at each store to keep sales associates trained in Company procedures and policies and to update them on competitive information, current product introductions, product availability and pricing. Manufacturers also conduct in-store training sessions to familiarize sales associates with existing and new products. The Company hosts a product show annually. All sales associates attend the product show and are required to participate in training sessions focused on product knowledge and selling skills. Manufacturers are in attendance with product displays and are available to answer questions. Additionally, regional training workshops are conducted twice a year to enhance the sales associates' product knowledge. These sessions are conducted by a combination of manufacturers, corporate trainers and the corporate buyers. Customer service and sales techniques are also incorporated into these training workshops. In recent years, THE GOOD GUYS! has eliminated cashiers and customer pickup windows, enabling sales associates to assist customers throughout the entire sales transaction. This allows sales associates to spend more time assessing the customer's needs, and provides customers with a smoother, more efficient and more enjoyable shopping experience. The Company's satisfaction guaranteed policy provides that a product generally may be returned within 30 days of purchase for a full refund or in exchange for another product. When purchasing a product from the Company, customers may elect to purchase a Premier Performance Guarantee under which a third party provides extended service coverage beyond the period covered by the manufacturer's warranty. -4- 5 All merchandise purchased from THE GOOD GUYS! and in need of repair may be returned to any of the Company's stores for service. Such merchandise is sent to either a Company-operated or an independent factory authorized repair facility and is returned to the store after repair. The Company has its own regional service facilities, which service all of its stores. The Company also operates car audio and car cellular phone installation facilities at almost all of its locations. The majority of the Company's sales are made through credit cards. The Company currently honors MasterCard, VISA, American Express and various other credit cards, as well as THE GOOD GUYS! "Preferred Customer Card" issued by an independent third party. Because of the relatively high cost of many of the consumer electronics products sold by the Company, its business could be affected by consumer credit availability. The Company places emphasis on developing the skills of its employees in order to provide a source of quality management personnel for current and future stores. The Company has been able to fill many sales managerial positions by promoting sales associates and, similarly, to fill many store management positions by promoting sales managers. Merchandising The Company offers its customers a broad range of high quality consumer electronics products supplied primarily by manufacturers of nationally known brands. This selection comprises approximately 4,400 products from over 240 vendors and is intended to cover all of the popular price points within each product category. The Company does not carry private label products. In addition, the Company continually introduces and evaluates new and complementary product lines. For example, in 1994 the Company commenced selling personal computers and peripheral equipment in all of its stores. The following table shows the approximate percentage of sales for each major product category for the last three fiscal years. Historical percentages may not be indicative of percentages in future years.
Year Ended September 30, -------------------------------- Category 1995 1994 1993 - -------- ---- ---- ---- Video . . . . . . . . . . . . . . . . . . . . . . . . 36% 36% 36% Audio and cellular phones . . . . . . . . . . . . . . 30% 33% 35% Home office . . . . . . . . . . . . . . . . . . . . . 17% 12% 9% Other (accessories, installation, photo, premier performance guarantee, repair service, video games and other) . . . . . . . . . . . . . . 17% 19% 20% ---- ---- ---- 100% 100% 100% ==== ==== ====
For the year ended September 30, 1995, the Company's three leading suppliers for video products were, in alphabetical order, Mitsubishi, Panasonic and -5- 6 Sony and for audio and cellular products were, in alphabetical order, Motorola, Panasonic and Sony. The three leading suppliers of home office products were, in alphabetical order, Apple, Packard Bell and Panasonic. Marketing The Company believes that its advertising activities have resulted in significant name recognition in its markets and have increased the number of qualified potential customers visiting its stores. The Company's advertising vehicles include newspaper, direct mail, television and radio. All of the Company's print and direct mail advertisements, and most of its television ads, are created, produced and placed by the Company's advertising staff. The Company believes that the use of its own personnel maximizes its control over advertising effectiveness, increases its flexibility, allows quick response to changing market conditions, and enables it to purchase media on advantageous terms. The Company's advertisements promote the Company as an "audio-video specialist" and emphasize competitive prices, extensive selection, and superior customer service from knowledgeable sales associates. Expansion Since the end of fiscal 1985, the Company has grown from 7 to 70 stores. Over the past five years the Company has expanded its store base at a compound rate of approximately 20% per year. During fiscal 1995, THE GOOD GUYS! opened 14 new stores, continuing to penetrate its current markets by opening one store in the San Diego area and two stores in the Los Angeles/Orange County area, and entering two new states by opening seven stores in Washington and three stores in Oregon. The Company also opened WOW!, MULTIMEDIA SUPERSTORE, in Las Vegas, Nevada, a concept store jointly operated with Tower Records. The Company will continue to expand within its current four-state market during fiscal 1996, with plans to open 12-14 stores during the fiscal year. Store Operations With the exception of WOW!, MULTIMEDIA SUPERSTORE, the Company's stores range in size from approximately 9,000 to 27,000 square feet. Most of the newer stores reflect the ongoing evolution in the Company's store design and are approximately 18,000 to 20,000 square feet in size. All of the Company's stores are located in high visibility, high traffic commercial areas and are open seven days a week, including most holidays. THE GOOD GUYS! stores are designed to reinforce the Company's merchandising philosophy and its desire to provide a pleasant shopping experience. Merchandise is generally displayed by category to facilitate comparison of brands, models and prices. During fiscal 1995, the Company introduced a new store design, called "Generation 21". These stores are larger and brighter stores that feature interactive displays, easily accessible merchandise and vibrant graphics. -6- 7 In August 1995, the Company opened WOW!, MULTIMEDIA SUPERSTORE, in Las Vegas, Nevada. This concept store, which is jointly operated with Tower Records, provides the full range of consumer electronics offered at all THE GOOD GUYS! stores, as well as a full range of music, video, computer software and books and magazines offered by Tower Records. THE GOOD GUYS! occupies approximately half of the 62,000 square foot store. Each store generally has one store manager, one assistant manager, two sales managers, and an operations manager. Some store managers are responsible for two or more stores. The assistant store manager oversees the store's operations and the sales managers supervise the sales associates. Sales associates are specialized by product category. Sales associates handle all aspects of the customer interface: providing customers with the information necessary to determine the best product for their specific need, tendering the invoice and handling the payment, and bringing the goods from the stockroom to the customer. Store operations are overseen by a senior management team which holds frequent meetings with the store managers. Merchandising and store operation policies for all stores are established by senior management. Distribution The Company operates a 460,000 square foot operations center in Hayward, California, which has the capacity to handle deliveries to more than 100 stores in the Western United States. Deliveries are generally made to each store six or seven days a week, as ordered by the Company's automatic replenishment system. The Company believes that this frequency of delivery maximizes availability of merchandise at the stores while minimizing store level and overall inventories. Management Information Systems The Company's management information system is a distributed, on-line network of computers that links all stores, delivery locations, service centers, credit providers, the distribution facility and the corporate offices into a fully integrated system. Each store has its own system which allows store management to track sales and inventory at the product, customer or sales associate level. The Company's point of sale system allows the capture of sales data and customer information and allows the tracking of merchandising trends and inventory levels on a daily basis. Management believes that its current systems are adequate to support THE GOOD GUYS! anticipated growth. Competition The business of the Company is highly competitive. The Company competes primarily with other specialty stores, independent electronics and appliance stores, department stores, mass merchandisers, discount stores and catalog showrooms. To some extent, the Company also competes with drugstores, supermarkets and others that make incidental sales of electronics products. Competitors of the Company include Circuit City Stores, Best Buy, Sears, Incredible -7- 8 Universe, Montgomery Ward, Target, several smaller electronics chains and independent stores. The Company's strategy is to compete by being a value-added retailer, offering a broad selection of top national brand name merchandise sold at competitive prices by a friendly, knowledgeable and motivated team of associates. Seasonality As is the case with many other retailers, the Company's sales are higher during the Christmas season than during other periods of the year. Employees At September 30, 1995, the Company employed approximately 4,000 persons, of whom 450 were salaried, 1,450 were hourly non-selling associates and 2,100 were salespeople on commission against a minimum guarantee. At September 30, 1995, over 340 of its employees were employed in the Company's executive offices; the balance were employed in its stores, distribution center, home delivery center, and service centers. There are no collective bargaining agreements covering any of the Company's employees. The Company has never experienced a strike or work stoppage and management believes that relations with its employees are excellent. Trademarks and Service Marks The Company has registered the name "THE GOOD GUYS!" as a trademark with the United States Patent and Trademark Office and the State of California. Federal registration of the trademark extends through 2000 and is renewable indefinitely. The Company has registered "THE GOOD GUYS!" as a service mark through 1999, which is renewable indefinitely. The Company's name is an integral part of its advertising and is important to its business. ITEM 2. PROPERTIES Of the Company's stores in California, 18 are located in the San Francisco Bay area, 24 in the greater Los Angeles/Orange County metropolitan area, 3 in Sacramento, 7 in San Diego; and one each in Bakersfield, Fresno, Modesto and Stockton, California. In addition, THE GOOD GUYS! operates 8 stores in the State of Washington, 3 stores in Oregon and 3 stores in Nevada. All of the stores are leased under leases that have expiration dates (assuming that lease options are exercised) in years ranging from 1999 to 2038. The Company's operations center is located in a 460,000 square foot facility in Hayward, California under a lease, the term of which expires (assuming that lease options are exercised) in 2011. The Company also maintains executive offices in Brisbane, California at 7000 Marina Boulevard under a lease, the term of which expires (assuming that lease options are exercised) in 2004. -8- 9 ITEM 3. LEGAL PROCEEDINGS On March 31, 1992, Alan J. Story and his wife, Janice Story, filed a complaint against the Company and others in Solano County Superior Court, based on Mr. Story being held hostage and shot in the Company's Florin Mall store in Sacramento by individuals unrelated to the Company. Also named as defendants in the complaint are the individuals (or their legal representatives) who allegedly took the hostages and shot Mr. Story, the store (Big R Country West Stores, which is unrelated to the Company) where the individuals allegedly purchased the weapons used in the incident, the Sacramento County Sheriff's Department which responded to the incident, and the County of Sacramento. The causes of the action in the complaint are as follows: (1) "Assault and Battery," (2) "Premises Liability," (3) "Negligence--Law Enforcement Hostage Negotiations," (4) "Negligence--Sales of Firearms," (5) "Negligence--Parental Supervision," and (6) "Loss of Consortium." No specific amount of damages has been requested to date. The principal causes of action alleged against the Company are for premises liability and loss of consortium. Similar lawsuits have been filed on behalf of certain other plaintiffs who allege that they also were hostages and victims. The Company does not believe that it has any liability in connection with the litigation; however, should liability exist, the Company believes that it has adequate insurance to cover such liability. The Company's insurance carriers have accepted coverage of this litigation and have retained counsel for the Company. On August 11, 1993, an unincorporated association known as Cellular Agents Association and six small retail agents of LA Cellular in the Los Angeles and Orange County area filed an action against the Company and three of its store managers entitled Cellular Agents Association v. The Good Guys, Inc., et al, Los Angeles Superior Court No. YC017055. The Complaint alleges three principal claims: below-cost pricing of cellular telephones in violation of the California Unfair Practices Act; "bundling" of cellular telephones and service in violation of Public Utility Commission rules and the California Cartwright Act; and false advertising. Plaintiffs have dismissed this action, subject to an agreement that they may refile the action in Orange County Superior Court and seek to have it consolidated with the Cellular Activators case described below. Plaintiffs have refiled the action in Orange County, and the two cases have now been consolidated. The Company believes that it has meritorious defenses to the claims alleged in this lawsuit and intends to defend the action vigorously. On May 5, 1994, Cellular Activators, a general partnership consisting of Richard Hansen and Jacque Coon, and several other individuals and entities, filed a complaint against the Company and seven other named defendants entitled Cellular Activators, et al. v. Los Angeles Cellular Telephone Company, et al., Orange County Superior Court Case No. 729278. The named defendants are Los Angeles Cellular Telephone Company, Los Angeles SMSA Limited Partnership, PacTel Cellular, PacTel Corporation, AirTouch Communications, AirTouch Cellular, Circuit City Stores, and the Company. The complaint alleges a wide variety of antitrust and fraud-related claims against the carrier defendants, including alleged conspiracy to fix cellular telephone prices. Only two of the several plaintiffs allege claims against the Company (although, as noted above, the claims in the Cellular Agents case have now been consolidated with this case). Those claims are for below cost pricing in violation of the California Unfair Practices Act, bundling of cellular telephones and service, and -9- 10 conspiracy to engage in bundling and below-cost pricing. Plaintiffs have filed a Second Amended Complaint, and the case is now scheduled for trial on April 22, 1996. Discovery is ongoing, but it is too early to be able to express an opinion as to the likely outcome of this matter. The Company believes that it has meritorious defenses to the claims alleged in this lawsuit and intends to defend the action vigorously. On March 7, 1995, the Company filed a lawsuit for trademark infringement against Good Guys Stereo Warehouse, an Oregon corporation offering retail consumer electronics services out of two stores in the Corvallis, Oregon area. The Good Guys, Inc. v. Good Guys Stereo Warehouse, Inc., et al., No.95-283-HA (D. Ore.). On March 27, 1995, Defendant filed an Answer and Counterclaim for injunctive and declaratory relief for trademark infringement. The issues raised by Defendant's counterclaim are essentially coextensive with the issues raised by the Company's underlying lawsuit. On July 14, 1995, the court granted the Company's request for a preliminary injunction, thus provisionally validating the Company's position. The Company believes that it has no liability for trademark infringement and intends vigorously to defend against the counterclaim. The Company has been named as a defendant in two purported class actions, entitled Long v. Packard Bell Electronics, et al., Case. No. 7515706, filed in Orange County Superior Court on August 21, 1995, and Sutter v. Acer America Corporation, et al., Case No. 95A505027, filed in Sacramento County Superior Court on September 7, 1995. In both cases, plaintiffs have named a large number of computer manufacturers, wholesalers and retailers, alleging that since 1986 the defendants have misrepresented to the public the screen size of certain computer monitors. In addition to these two cases, there are numerous other cases pending around the State of California (and in other parts of the country) making essentially the same allegations against a variety of computer manufacturers, wholesalers and retailers. All of the California cases have now been coordinated in a single court in San Francisco. The cases are at an early stage, discovery has not yet commenced, and it is too early to be able to express any opinion as to the likely outcome of the matter. The Company believes it has meritorious defenses to the claims alleged in the lawsuit and intends to defend the action vigorously. The Company also believes it has meritorious claims for indemnification from certain computer manufacturers from which it has purchased computer equipment. The Company has recently been named as a defendant in an action known as Levy v. Circuit City Stores, Inc., et al., Case No. 971872, filed in San Francisco Superior Court on August 18, 1995. The plaintiff is an individual named Carol Levy, who claims to be suing on her own behalf and on behalf of the general public. The defendants, in addition to the Company, are Circuit City Stores, Inc., Wireless Depot, Inc., Tandy Corporation, Cellular Warehouse, Bay Area Cellular Telephone Company, and GTE Mobilnet of California. The First Amended Complaint alleges various violations of the California Unfair Practices Act and the Unfair Competition Statute, including failure to post certain signs in connection with the sale of cellular telephones, bundling of cellular telephone equipment and service, unlawful loss leader sales of cellular telephone equipment, and unfair and deceptive advertising of cellular telephone equipment and service. The plaintiff seeks injunctive relief and restitution. The case is at a very early stage, and it is too soon to be able to express an opinion as to the likely outcome of the matter. The Company believes it has -10- 11 meritorious defenses to the claims alleged in the lawsuit and intends to defend the case vigorously. The Company has been named as a defendant in another purported class action entitled Littau v. Circuit City Stores, Inc., et al., Case No. 973978, filed in San Francisco Superior Court on November 14, 1995. Plaintiffs are two individuals named James A. Littau and Frederick Goldberg, who claim to be suing in their own behalf and on behalf of all those similarly situated. The defendants, in addition to the Company, are Circuit City Stores West Coast, Inc., Sears Roebuck & Co., Tandy Corp. dba Radio Shack, Whole Earth Access Co., COMPUSA, Inc., Best Buy Co. and Fry's Electronics, Inc. The Complaint alleges violations of the California Unfair Practices, Unfair Competition and Consumer Legal Remedies Acts, and causes of action for fraud, negligent misrepresentation and breach of contract in connection with the sale of "bundled software packages" included with personal computer systems. Plaintiffs seek an injunction, restitution, damages and attorneys fees. The case is at a very early stage, and therefore we cannot express any opinion as to the probable outcome. The Company believes it has meritorious defenses to the claims alleged in the lawsuit and intends vigorously to defend the action. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS Not Applicable. ITEM 4A. EXECUTIVE OFFICERS OF THE COMPANY The executive officers of the Company and their respective ages and positions with the Company are as follows:
Name Age Position - ---- --- -------- Ronald A. Unkefer 51 Chairman Robert A. Gunst 47 President and Chief Executive Officer Robert E. Baird 47 Senior Vice President, Marketing and Merchandising Thomas A. Hannah 50 Senior Vice President, Operations Brad S. Bramy 43 Vice President, Advertising William C. Curley 52 Vice President, Management Information Services and Operations John G. Duken 35 Vice President, Store Operations William B. Perlstein 45 Vice President, Stores Gregory L. Steele 48 Vice President, Real Estate
-11- 12 Geradette M. Vaz 43 Vice President, Human Resources
All executive officers are elected by and serve at the discretion of the Board of Directors. Ronald A. Unkefer founded the Company's business in 1973, has been the Chairman of the Board of the Company since it was incorporated in 1976, and was its Chief Executive Officer until his resignation from that position in January 1993. Robert A. Gunst became the President and Chief Operating Officer of the Company in May 1990 and its Chief Executive Officer in January 1993. Robert E. Baird joined the Company as Vice President, Marketing in February 1994 and was named Senior Vice President, Marketing and Merchandising in May 1995. From August 1989 to February 1994 he was the General Manager of the Northern California Division of Circuit City Stores, Inc. Thomas A. Hannah joined the Company as Senior Vice President, Stores in June 1993 and was named Senior Vice President, Operations, in May 1995. From November 1982 to March 1993 he was Assistant Vice President, Circuit City Stores, Inc., and General Manager of three separate operating divisions located in Richmond, San Francisco and Dallas. Brad S. Bramy was named Vice President, Advertising in May 1995. Prior to holding this position, Mr. Bramy served in various positions in the advertising department since joining the Company in 1983. William C. Curley joined the Company as Vice President, Management Information Services and Distribution in October 1990 and became Vice President, Management Information Services and Operations in November 1991. John G. Duken joined the Company in September 1993 as General Manager of Store Operations and was named Vice President, Store Operations in June 1994. From June 1988 to August 1993 he held several positions with Circuit City Stores, Inc., including Divisional Operations Manager of the Northern California Division and General Operations Manager of the Midwest Division. William B. Perlstein joined the Company as Regional Sales Manager in March 1987, was named Vice President, Store Operations in January 1993, and was named Vice President, Stores in June 1993. Gregory L. Steele has served as Vice President, Real Estate since April 1986. Geradette M. Vaz joined the Company in July 1986 as Vice President, Human Resources, and has served in that position to the present. -12- 13 PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SECURITY HOLDER MATTERS Incorporated by reference from page 20 of the Company's 1995 Annual Report to Shareholders. ITEM 6. SELECTED FINANCIAL DATA Incorporated by reference from page 12 of the Company's 1995 Annual Report to Shareholders. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Incorporated by reference from pages 10 through 11 of the Company's 1995 Annual Report to Shareholders. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Incorporated by reference from pages 13 through 19 of the Company's 1995 Annual Report to Shareholders. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not Applicable. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information relating to directors of the Company required to be furnished pursuant to this item is incorporated by reference from portions of the Company's definitive Proxy Statement for its annual meeting of shareholders to be filed with the Securities and Exchange Commission pursuant to Regulation 14A within 120 days after September 30, 1995 (the "Proxy Statement") under the caption "Election of Directors." Certain information relating to executive officers of the Company is set forth in Item 4A of Part I of this Form 10-K under the caption "Executive Officers of Registrant." ITEM 11. EXECUTIVE COMPENSATION Incorporated by reference from portions of the Proxy Statement under the captions "Compensation of Directors and Executive Officers" and "Certain Relationships and Related Transactions." -13- 14 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Incorporated by reference from portions of the Proxy Statement under the captions "Certain Shareholders" and "Compensation of Directors and Executive Officers." ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Incorporated by reference from portions of the Proxy Statement under the caption "Compensation of Directors and Executive Officers" and "Certain Relationships and Related Transactions." PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (A)1. FINANCIAL STATEMENTS Included in Part II of this report by incorporation by reference from the 1995 Annual Report to Shareholders: Independent Auditors' Report (page 19 of the 1995 Annual Report to Shareholders) Consolidated statements of income for each of the three years in the period ended September 30, 1995 (page 14 of the 1995 Annual Report to Shareholders) Consolidated balance sheets as of September 30, 1995 and 1994 (page 13 of the 1995 Annual Report to Shareholders) Consolidated statements of shareholders' equity for each of the three years in the period ended September 30, 1995 (page 14 of the 1995 Annual Report to Shareholders) Consolidated statements of cash flows for each of the three years in the period ended September 30, 1995 (page 15 of the 1995 Annual Report to Shareholders) Notes to consolidated financial statements (pages 16 through 19 of the 1995 Annual Report to Shareholders) (A)2. FINANCIAL STATEMENT SCHEDULES All schedules are omitted because they are not required, or are not applicable, or the information is included in the financial statements. -14- 15 (A)3. EXHIBITS 3.1 Certificate of Incorporation. (Exhibit 3.1 to the Company's Form 8-K Report for March 4, 1992; incorporated herein by reference.) 3.2 Bylaws. (Exhibit 3.2 to the Company's Form 8-K Report for March 4, 1992; incorporated herein by reference.) 10.1 1985 Stock Option Plan, as amended.* (Exhibit 10.1 to the Company's Form 8-K Report for March 4, 1992; incorporated herein by reference.) 10.2 Form of Nonqualified Stock Option Agreements.* (Exhibit 4.3 to the Company's Registration Statement on Form S-8 as filed on January 28, 1991, registration number 33-38749; incorporated herein by reference.) 10.3 THE GOOD GUYS! Profit-Sharing Plan, as amended and restated as of December 20, 1990.* (Exhibit 10.4 to the Company's Form 10-K Annual Report for its fiscal year ended September 30, 1991; incorporated herein by reference.) 10.4 THE GOOD GUYS! Deferred Pay Plan.* (Exhibit 4.1 to the Company's Registration Statement on Form S-8 as filed on March 12, 1991, registration number 33-39421; incorporated herein by reference.) 10.5 THE GOOD GUYS! Deferred Pay Plan Amendment No. 1.* (Exhibit 4.6 to the Company's Registration Statement on Form S-8 as filed on March 12, 1991, registration number 33-39421; incorporated herein by reference.) 10.6 Letter Agreement with Robert A. Gunst, dated March 30, 1990.* (Exhibit 10.14 to the Company's Form 10-K Annual Report for its fiscal year ended September 30, 1990; incorporated herein by reference.) 10.7 Employee Stock Purchase Plan, as amended.* (Exhibit 10.7 to the Company's Form 10-K Annual Report for its fiscal year ended September 30, 1994; incorporated herein by reference.) 10.8 THE GOOD GUYS! Deferred Pay Plan Amendment No. 2.* (Exhibit 10.27 to the Company's Form 10-K Annual Report for its fiscal year ended September 30, 1992; incorporated herein by reference.) 10.9 Credit Agreement dated June 28, 1993 between Bank of America National Trust & Savings Association, the Bank of California, N.A. and The Good Guys, Inc. (Exhibit 10.9 to the Company's Form 10-K Annual Report for its fiscal year ended September 30, 1993, incorporated herein by reference.) - ---------------------- *Compensatory plan or arrangement. -15- 16 10.10 Letter Agreement with Thomas A. Hannah, dated June 1, 1993.* (Exhibit 10.10 to the Company's Form 10-K Annual Report for its fiscal year ended September 30, 1993, incorporated herein by reference.) 10.11 Incentive Plan for Chief Executive Officer for fiscal year ending September 30, 1996.* 10.12 Incentive Plan for Senior Vice Presidents for fiscal year ending September 30, 1996.* 10.13 Incentive Plan for Vice President, Store Operations for fiscal year ending September 30, 1996.* 10.14 Incentive Plan for Vice President, Sales for fiscal year ending September 30, 1996.* 10.15 Incentive Plan for Vice President, Real Estate for fiscal year ending September 30, 1996.* 10.16 Incentive Plan for other Vice Presidents for fiscal year ending September 30, 1996.* 10.17 1994 Stock Incentive Plan.* (Exhibit 10.6 to the Company's Form 10-K Annual Report for its fiscal year ended September 30, 1994; incorporated herein by reference.) 10.18 Assignment and Assumption Agreement, dated September 26, 1995, by and between The Good Guys, Inc. and The Good Guys - California, Inc. 10.19 Credit Agreement, dated as of September 26, 1995, by and among Bank of America National Trust & Savings Association, The Bank of California, N.A. and The Good Guys-California, Inc. 10.20 Operating Agreement, dated effective as of April 15, 1995, between MTS, Inc., a California corporation, dba Tower Records/Book/Video, and The Good Guys, Inc., a Delaware corporation. 10.21 Non-Committed Line of Credit Agreement, dated October 27, 1995, by and between The Bank of California, N.A. and The Good Guys-California, Inc. 10.22 Non-Committed Line of Credit Agreement, dated July 24, 1995, by and between The Dai-Ichi Kangyo Bank, Limited and The Good Guys, Inc. 11.1 Statement re Computation of Per Share Earnings. - ---------------------- *Compensatory plan or arrangement. -16- 17 13.1 Annual Report to Shareholders for fiscal year ended September 30, 1995 (pages incorporated by reference). 23.1 Independent Auditors' Consent. 24.1 Powers of Attorney. (b) Reports on Form 8-K. There were no reports on Form 8-K for the quarter ended September 30, 1995. -17- 18 SIGNATURES Pursuant to the requirements of 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. Dated: December 21, 1995 THE GOOD GUYS, INC. By /s/ ROBERT A. GUNST ---------------------------------- Robert A. Gunst 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. /s/ ROBERT A. GUNST Director, President and December 21, 1995 - ---------------------------- Chief Executive Officer (Robert A. Gunst) (Principal Executive Officer and Principal Financial Officer) /s/ LESLIE S. BENSON Controller (Principal December 21, 1995 - ---------------------------- Accounting Officer) (Leslie S. Benson) /s/ RONALD A. UNKEFER* Chairman of the Board December 21, 1995 - ---------------------------- (Ronald A. Unkefer) /s/ STANLEY R. BAKER* Director December 21, 1995 - ---------------------------- (Stanley R. Baker) /s/ RUSSELL M. SOLOMON* Director December 21, 1995 - ---------------------------- (Russell M. Solomon) /s/ JOHN E. MARTIN* Director December 21, 1995 - ---------------------------- (John E. Martin) /s/ W. HOWARD LESTER* Director December 21, 1995 - ---------------------------- (W. Howard Lester) *By /s/ ROBERT A. GUNST ------------------------ Attorney-in-Fact
-18- 19 EXHIBIT INDEX
Number Description ------ ----------- 10.11 Incentive Plan for Chief Executive Officer for fiscal year ending September 30, 1996. 10.12 Incentive Plan for Senior Vice Presidents for fiscal year ending September 30, 1996. 10.13 Incentive Plan for Vice President, Store Operations for fiscal year ending September 30, 1996. 10.14 Incentive Plan for Vice President, Sales for fiscal year ending September 30, 1996. 10.15 Incentive Plan for Vice President, Real Estate for fiscal year ending September 30, 1996. 10.16 Incentive Plan for other Vice Presidents for fiscal year ending September 30, 1996. 10.18 Assignment and Assumption Agreement, dated September 26, 1995, by and between The Good Guys, Inc. and The Good Guys - California, Inc. 10.19 Credit Agreement, dated as of September 26, 1995, by and among Bank of America National Trust & Savings Association, The Bank of California, N.A. and The Good Guys-California, Inc. 10.20 Operating Agreement, dated effective as of April 15, 1995, between MTS, Inc., a California corporation, dba Tower Records/Book/Video, and The Good Guys, Inc., a Delaware corporation. 10.21 Non-Committed Line of Credit Agreement, dated October 27, 1995, by and between The Bank of California, N.A. and The Good Guys-California, Inc. 10.22 Non-Committed Line of Credit Agreement, dated July 24, 1995, by and between The Dai-Ichi Kangyo Bank, Limited and The Good Guys, Inc. 11.1 Statement re Computation of Per Share Earnings. 13.1 Annual Report to Shareholders for fiscal year ended September 30, 1995 (pages incorporated by reference). 23.1 Independent Auditors' Consent. 24.1 Powers of Attorney.
EX-10.11 2 EXHIBIT 10.11 1 Exhibit 10.11
INCENTIVE PLAN FOR CHIEF EXECUTIVE OFFICER FOR FISCAL YEAR ENDING SEPTEMBER 30, 1996 --------------------------------------------------------------- EPS AS A % OF BUDGET* BONUS AS A % OF SALARY* --------------------- ----------------------- 75% and below 0.0% --------------------------------------------------------------- 80% 10.0% --------------------------------------------------------------- 85% 20.0% --------------------------------------------------------------- 90% 30.0% --------------------------------------------------------------- 95% 40.0% --------------------------------------------------------------- 100% 50.0% --------------------------------------------------------------- 105% 60.0% --------------------------------------------------------------- 112.5% and above 75.0% =============================================================== * Pro rata interpolation between points ===============================================================
EX-10.12 3 EXHIBIT 10.12 1 Exhibit 10.12 1996 KEY MANAGEMENT INCENTIVE PLAN: SENIOR VICE PRESIDENT ------------------------------------------------------------ PLAN OBJECTIVES This plan is designed to provide incentive, and to reward the participant based upon a combination of the Company's overall performance and individual performance. Effective Date: This plan is effective for the fiscal year starting October 1, 1995 and ending September 30, 1996. ------------------------------------------------------------ PARTICIPANT The Senior Vice President (or an equivalent position as ELIGIBILITY determined by the President) is eligible to participate in the plan. The criteria may be changed from year to year. All bonuses are at the discretion of the Board of Directors. ------------------------------------------------------------ PRELIMINARY The preliminary bonus amount, which is recommended to the BONUS Compensation Committee of the Board of Directors, is CALCULATION determined by the Company's performance against an Earnings Per Share (EPS) matrix. EPS as a percent of budget must exceed 75% before any bonus will be payable. Where EPS as a percentage of budgeted EPS falls between the percentages shown on the EPS matrix, the preliminary bonus percentage will be prorated accordingly. This plan is targeted to pay a bonus equal to 40% OF BASE SALARY, should the company achieve 100% of its EPS goal, and should the associate achieve 100% of his/her individual performance multiplier (see below). The salary used for calculation of the bonus is the participant's base annual compensation in effect as of September 30, 1996. -----------------------------------------------------
EPS PRELIMINARY BONUS AS A PERCENT AS A PERCENT OF BUDGET OF SALARY -------------------------------------------------- 75% and below 0.0% -------------------------------------------------- 100% 40.0 -------------------------------------------------- 125% and above 75.0 --------------------------------------------------
- ----------------------------------------------------------------------------- 2 ---------------------------------------------------------------- INDIVIDUAL The individual's overall performance, including but not limited PERFORMANCE to achievement of performance objectives, serves as a multiplier MULTIPLIER against Company performance. ------------------------------------------------------ INDIVIDUAL PERFORMANCE LEVEL PERFORMANCE MULTIPLIER ------------------------------------------------------ Outstanding 100% - 125% ------------------------------------------------------ Highly Effective 100% ------------------------------------------------------ Effective 50% - 100% ------------------------------------------------------ Does Not Meet Requirements 0% ------------------------------------------------------ The President will assign an "individual performance multiplier" based on individual performance as described above. The decision of the President on your performance level and "individual performance multiplier" will be final. It will be based on an overall assessment of performance, including but not limited to achievement of performance objectives during the fiscal year, and will take into account all factors that are deemed to be relevant. Performance evaluations will not automatically determine performance level for purposes of the bonus plan. For the performance multiplier to be in excess of 100%, individual performance must be truly exceptional. ---------------------------------------------------------------- PAYMENT OF Bonuses are paid annually based on achieving annual targets. All BONUSES bonuses will be paid as soon as possible after results have been audited for the bonus period. Participants must be actively employed by THE GOOD BUYS! in a bonus eligible position on the date the bonus is paid to be eligible to earn a bonus payment. An associate who terminates for any reason prior to the date the bonus is paid does not earn a bonus. As an additional condition to the receipt of a bonus, the Board of Directors must approve the funding of the bonus plan based on economic and business conditions. Unless and until the board approves the payment of a bonus, no bonus will be deemed earned under this plan. ---------------------------------------------------------------- 2 3 -------------------------------------------------------------- NEWLY HIRED OR Newly hired eligible associates must be in position for a PROMOTED minimum of six months, or by April 1st, to participate in the ELIGIBLE plan. If an eligible associate has six or more months in ASSOCIATES position, the bonus payable after the end of the fiscal year will be prorated based on the number of full months in the position. If an associate has been in position less than six months (i.e. in position after April 1st), no bonus is earned for that year. Newly promoted eligible associates must be in position for a minimum of three months, or by July 1st, to participate in the plan. If an eligible associate has three or more months in position, the bonus payable after the end of the fiscal year will be prorated based on the number of full months in the position. If an associate has been in position less than three months (i.e. in position after July 1st), no bonus is earned for that year. In no case shall a newly promoted associate be eligible to participate in the plan if he/she was not employed by THE GOOD GUYS! prior to April 1st of the plan year. A full month is defined as a calendar month, beginning on the first and ending on the last day of the calendar month. If an associate's change in position and responsibilities results in his/her participation in two different incentive plans during a plan year, the bonus payment will be prorated to reflect the number of months worked under each plan. -------------------------------------------------------------- PLAN This plan will be administered by the Vice President of Human ADMINISTRATION Resources, with direction provided by the President. The President will be responsible for making a recommendation on each participant's overall performance, contribution, attitude and accomplishment of objectives, and recommending the multiplier factor. -------------------------------------------------------------- EMPLOYMENT This plan does not create or evidence a contract between THE RIGHTS GOOD GUYS! and any participant and does not create or evidence any employment rights for the participant. Both THE GOOD GUYS! and participants reaffirm that participant employment is at will and may be terminated by either participant or THE GOOD GUYS! at any time for any reason. The plan does not restrict THE GOOD GUYS! from terminating the employment of any participant. -------------------------------------------------------------- 3 4 -------------------------------------------------------------- AMENDMENT This plan may be amended or terminated at any time, in whole AND or in part, by the President. The President retains the right TERMINATION to reduce or eliminate payment to a participant if the President, in his discretion, considers the participant's performance to be unsatisfactory. Associates who receive a "needs improvement" or "unsatisfactory" rating on their annual Performance Appraisal, or receive written progressive counseling during the plan year, may be disqualified from participating in this plan until such a time as their performance improves to an effective or better level. -------------------------------------------------------------- 4 10/19/95 EX-10.13 4 EXHIBIT 10.13 1 Exhibit 10.13 1996 KEY MANAGEMENT INCENTIVE PLAN: VICE PRESIDENT OF STORE OPERATIONS --------------------------------------------------------------- PLAN OBJECTIVES This plan is designed to provide incentive and to reward the participant based upon a combination of the Company's overall performance and the Stores Department's performance. Effective Date: This plan is effective for the fiscal year starting October 1, 1995 and ending September 30, 1996. --------------------------------------------------------------- PARTICIPANT The Vice President of Store Operations (or an equivalent ELIGIBILITY position as determined by the President) is eligible to participate in the plan. The criteria may be changed from year to year. All bonuses are at the discretion of the Board of Directors. --------------------------------------------------------------- BONUS PLAN The bonus plan has a combined target of 33% of salary, 50% OVERVIEW based on Company Earnings Per Share (EPS) performance, and 50% based on Sales Controllable Profit results. Each component has been given a weight of 50%. The combined target assumes that both the Stores Department, the Company and the individual meet their objectives. --------------------------------------------------------------- PART I: The Company believes the most important indicator for CORPORATE assessing the Company's performance is Earnings Per Share EARNINGS PER (EPS). The preliminary bonus amount is determined by the SHARE Company's performance against EPS matrix. EPS as a percent of budget must exceed 75% before any bonus will be payable. Where EPS as a percentage of budgeted EPS falls between the percentages shown on the EPS chart, the preliminary bonus percentage will be prorated accordingly. This component of the plan is targeted to pay a bonus equal to 16 1/2% OF BASE SALARY, should the company achieve 100% of its EPS goal. The salary used for calculation of the bonus is the participant's base annual compensation in effect as of September 30, 1996. --------------------------------------------------------------- Continued on next page 2 PART I: CORPORATE EARNINGS PER SHARE (continued) -------------------------------------------------------------- EPS AS A PERCENT OF BUDGET PRELIMINARY BONUS AS A PERCENT OF SALARY -------------------------------------------------------------- 75% and below 0.0% -------------------------------------------------------------- 100% 16.5 -------------------------------------------------------------- 125% and above 30.0 -------------------------------------------------------------- --------------------------------------------------------------- PART II: SALES Store Controllable Profit is defined as store sales less related CONTROLLABLE cost of sales and controllable expenses (as defined within the PROFIT Profit and Loss statement) for the year. This component of the plan is targeted to pay a bonus equal to 16 1/2% OF BASE SALARY. The preliminary bonus calculation according to the attached chart shall be paid out as a percent of the participant's base annual compensation as of September 30, 1996. ---------------------------------------------------------------- INDIVIDUAL The individual's overall performance, including but not limited PERFORMANCE to achievement of performance objectives, serves as a multiplier MULTIPLIER against both Part I and Part II of the incentive plan. The Senior Vice President of Operations will assign one of the following performance levels as the "individual performance multiplier": ---------------------------------------------------------------- INDIVIDUAL PERFORMANCE LEVEL PERFORMANCE MULTIPLIER -------------------------------------------------------------- Outstanding 100% - 125% -------------------------------------------------------------- Highly Effective 100% -------------------------------------------------------------- Effective 50% - 100% -------------------------------------------------------------- Does Not Meet Requirements 0% -------------------------------------------------------------- INDIVIDUAL The decision of the President on performance level and PERFORMANCE "individual performance multiplier" will be final. It will be MULTIPLIER, based on an overall assessment of performance, including but not CONTINUED limited to achievement of performance objectives during the fiscal year, and will take into account all factors that are deemed to be relevant. Performance evaluations will not automatically determine performance level for purposes of the bonus plan. For the performance multiplier to be in excess of 100%, individual performance must be truly exceptional. ---------------------------------------------------------------- 2 3 -------------------------------------------------------------- PAYMENT OF Bonuses are paid annually based on achieving annual targets. BONUS All bonuses will be paid as soon as possible after results have been audited for the bonus period. Participants must be actively employed by THE GOOD GUYS! in a bonus eligible position on the date the bonus is paid to be eligible to earn a bonus payment. An associate who terminates for any reason prior to the date the bonus is paid does not earn a bonus. As an additional condition to the receipt of a bonus, the Board of Directors must approve the funding of the bonus plan based on economic and business conditions. Unless and until the board approves the payment of a bonus, no bonus will be deemed earned under this plan. -------------------------------------------------------------- NEWLY HIRED OR Newly hired eligible associates must be in position for a PROMOTED minimum of six months, or by April 1st, to participate in the ELIGIBLE plan. If an eligible associate has six or more months in ASSOCIATES position, the bonus payable after the end of the fiscal year will be prorated based on the number of full months in the position. If an associate has been in position less than six months (i.e. in position after April 1st), no bonus is earned for that year. Newly promoted eligible associates must be in position for a minimum of three months, or by July 1st, to participate in the plan. If an eligible associate has three or more months in position, the bonus payable after the end of the fiscal year will be prorated based on the number of full months in the position. -------------------------------------------------------------- NEWLY HIRED OR If an associate has been in position less than three months PROMOTED (i.e. in position after July 1st), no bonus is earned for that ELIGIBLE year. In no case shall a newly promoted associate be eligible ASSOCIATES, to participate in the plan if he/she was not employed by THE CONTINUED GOOD GUYS! prior to April 1st of the plan year. A full month is defined as a calendar month, beginning on the first and ending on the last day of the calendar month. If an associate's change in position and responsibilities results in his/her participation in two different incentive plans during a plan year, the bonus payment will be prorated to reflect the number of months worked under each plan. -------------------------------------------------------------- 3 4 ---------------------------------------------------------------- PLAN This plan will be administered by the Vice President of Human ADMINISTRATION Resources, with direction provided by the President. The President will be responsible for making a recommendation on each participant's overall performance, contribution, attitude and accomplishment of objectives, and recommending the multiplier factor. ---------------------------------------------------------------- EMPLOYMENT This plan does not create or evidence a contract between THE RIGHTS GOOD GUYS! and any participant and does not create or evidence any employment rights for the participant. Both THE GOOD GUYS! and participants reaffirm that participant employment is at will and may be terminated by either participant or THE GOOD GUYS! at any time for any reason. The plan does not restrict THE GOOD GUYS! from terminating the employment of any participant. ---------------------------------------------------------------- AMENDMENT This plan may be amended or terminated at any time, in whole or AND in part, by the President. The President retains the right to TERMINATION reduce or eliminate payment to a participant if the President, in his discretion, considers the participant's performance to be unsatisfactory. Associates who receive a "needs improvement" or "unsatisfactory" rating on their annual Performance Appraisal, or receive written progressive counseling during the plan year, may be disqualified from participating in this plan until such a time as their performance improves to an effective or better level. ---------------------------------------------------------------- 10/19/95 4 5 VICE PRESIDENT OF STORE OPERATIONS SALES CONTROLLABLE PROFIT DOLLARS CONTROLLABLE PROFIT $ ANNUAL AS A % OF GOAL BONUS ------------------------------- 94% 0.0% 95% 2.8% 96% 5.5% 97% 8.3% 98% 11.0% 99% 13.8% 100% 16.5% 101% 18.8% 102% 21.0% 103% 23.3% 104% 25.5% 105% 27.8% 106% 30.0% EX-10.14 5 EXHIBIT 10.14 1 Exhibit 10.14 1996 KEY MANAGEMENT INCENTIVE PLAN: VICE PRESIDENT OF SALES ---------------------------------------------------------------- PLAN This plan is designed to provide incentive, and to reward the OBJECTIVES participant based upon a combination of the Company's overall performance and the Stores Department's performance. Effective Date: This plan is effective for the fiscal year starting October 1, 1995 and ending September 30, 1996. ---------------------------------------------------------------- PARTICIPANT The Vice President of Sales (or an equivalent position as ELIGIBILITY determined by the President) is eligible to participate in the plan. The criteria may be changed from year to year. All bonuses are at the discretion of the Board of Directors. ---------------------------------------------------------------- BONUS PLAN The bonus plan has a combined target of 33% of salary, 50% based OVERVIEW on Company Earnings Per Share (EPS) performance, and 50% based on Sales Controllable Profit results. Each component has been given a weight of 50%. The combined target assumes that both the Stores Department, the Company and the individual meet their objectives. ---------------------------------------------------------------- PART I: The company believes the most important indicator for assessing CORPORATE the Company's performance is Earnings Per Share (EPS). The EARNINGS PER preliminary bonus amount is determined by the Company's SHARE performance against EPS matrix. EPS as a percent of budget must exceed 75% before any bonus will be payable. Where EPS as a percentage of budgeted EPS falls between the percentages shown on the EPS chart, the preliminary bonus percentage will be prorated accordingly. This component of the plan is targeted to pay a bonus equal to 16 1/2% OF BASE SALARY, should the company achieve 100% of its EPS goal. The salary used for calculation of the bonus is the participant's base annual compensation in effect as of September 30, 1996. ---------------------------------------------------------------- Continued on next page 2 PART I: CORPORATE EARNINGS PER SHARE (continued)
---------------------------------------------------------------- EPS AS A PRELIMINARY BONUS PERCENT OF AS A PERCENT OF BUDGET SALARY ---------------------------------------------------------------- 75% and below 0.0% ---------------------------------------------------------------- 100 16.5 ---------------------------------------------------------------- 125% and above 30.0 ----------------------------------------------------------------
---------------------------------------------------------------- PART II: SALES Store Controllable Profit is defined as store sales less CONTROLLABLE related cost of sales and controllable expenses (as defined PROFIT within the Profit and Loss statement) for the year. This component of the plan is targeted to pay a bonus equal to 16 1/2% OF BASE SALARY. The preliminary bonus calculation according to the attached chart shall be paid out as a percent of the participant's base annual compensation as of September 30, 1996. ---------------------------------------------------------------- INDIVIDUAL The individual's overall performance, including but not limited PERFORMANCE to achievement of performance objectives, serves as a multiplier MULTIPLIER against both Part I and Part II of the incentive plan. The Senior Vice President of Operations will assign one of the following performance levels as the "individual performance multiplier": ----------------------------------------------------------------
INDIVIDUAL PERFORMANCE LEVEL PERFORMANCE MULTIPLIER ---------------------------------------------------------------- Outstanding 100% - 125% ---------------------------------------------------------------- Highly Effective 100% ---------------------------------------------------------------- Effective 50% - 100% ---------------------------------------------------------------- Does Not Meet Requirements 0% ----------------------------------------------------------------
---------------------------------------------------------------- Continued on next page 2 3 ---------------------------------------------------------------- INDIVIDUAL The decision of the President on performance level and PERFORMANCE "individual performance multiplier" will be final. It will be MULTIPLIER, based on an overall assessment of performance, including but CONTINUED not limited to achievement of performance objectives during the fiscal year, and will take into account all factors that are deemed to be relevant. Performance evaluations will not automatically determine performance level for purposes of the bonus plan. For the performance multiplier to be in excess of 100%, individual performance must be truly exceptional. ---------------------------------------------------------------- PAYMENT OF Bonuses are paid annually based on achieving annual targets. All BONUS bonuses will be paid as soon as possible after results have been audited for the bonus period. Participants must be actively employed by THE GOOD GUYS! in a bonus eligible position on the date the bonus is paid to be eligible to earn a bonus payment. An associate who terminates for any reason prior to the date the bonus is paid does not earn a bonus. As an additional condition to the receipt of a bonus, the Board of Directors must approve the funding of the bonus plan based on economic and business conditions. Unless and until the board approves the payment of a bonus, no bonus will be deemed earned under this plan. ---------------------------------------------------------------- NEWLY HIRED Newly hired eligible associates must be in position for a OR PROMOTED minimum of six months, or by April 1st, to participate in the ELIGIBLE plan. If an eligible associate has six or more months in ASSOCIATES position, the bonus payable after the end of the fiscal year will be prorated based on the number of full months in the position. If an associate has been in position less than six months (i.e. in position after April 1st), no bonus is earned for that year. Newly promoted eligible associates must be in position for a minimum of three months, or by July 1st, to participate in the plan. If an eligible associate has three or more months in position, the bonus payable after the end of the fiscal year will be prorated based on the number of full months in the position. ---------------------------------------------------------------- continued on next page 3 4 ---------------------------------------------------------------- NEWLY HIRED OR If an associate has been in position less than three months PROMOTED (i.e., in position after July 1st), no bonus is earned for ELIGIBLE that year. In no case shall a newly promoted associate be ASSOCIATES, eligible to participate in the plan if he/she was not employed CONTINUED by THE GOOD GUYS! prior to April 1st of the plan year. A full month is defined as a calendar month, beginning on the first and ending on the last day of the calendar month. If an associate's change in position and responsibilities results in his/her participation in two different incentive plans during a plan year, the bonus payment will be prorated to reflect the number of months worked under each plan. ---------------------------------------------------------------- PLAN This plan will be administered by the Vice President of Human ADMINISTRATION Resources, with direction provided by the President. The President will be responsible for making a recommendation on each participant's overall performance, contribution, attitude and accomplishment of objectives, and recommending the multiplier factor. ---------------------------------------------------------------- EMPLOYMENT This plan does not create or evidence a contract between THE RIGHTS GOOD GUYS! and any participant and does not create or evidence any employment rights for the participant. Both THE GOOD GUYS! and participants reaffirm that participant employment is at will and may be terminated by either participant or THE GOOD GUYS! at any time for any reason. The plan does not restrict THE GOOD GUYS! from terminating the employment of any participant. ---------------------------------------------------------------- AMENDMENT This plan may be amended or terminated at any time, in whole or AND in part, by the President. The President retains the right to TERMINATION reduce or eliminate payment to a participant if the President, in his discretion, considers the participant's performance to be unsatisfactory. Associates who receive a "needs improvement" or "unsatisfactory" rating on their annual Performance Appraisal, or receive written progressive counseling during the plan year, may be disqualified from participating in this plan until such a time as their performance improves to an effective or better level. ---------------------------------------------------------------- 10/19/95 4 5 VICE PRESIDENT OF SALES SALES CONTROLLABLE PROFIT DOLLARS CONTROLLABLE PROFIT $ ANNUAL AS A % OF GOAL BONUS ------------------------------- 94% 0.0% 95% 2.8% 96% 5.5% 97% 8.3% 98% 11.0% 99% 13.8% 100% 16.5% 101% 18.8% 102% 21.0% 103% 23.3% 104% 25.5% 105% 27.8% 106% 30.0% EX-10.15 6 EXHIBIT 10.15 1 Exhibit 10.15 1996 KEY MANAGEMENT INCENTIVE PLAN: VICE PRESIDENT REAL ESTATE ---------------------------------------------------------------- PLAN This plan is designed to provide incentive, and to reward Vice OBJECTIVES Presidents of THE GOOD GUYS! based upon a combination of the Company's overall performance and their individual performance. Effective Date: This plan is effective for the fiscal year starting October 1, 1995 and ending September 30, 1996. ---------------------------------------------------------------- PARTICIPANT A Vice President (or an equivalent position as determined by the ELIGIBILITY President) is eligible to participate in the plan. The criteria may be changed from year to year. All bonuses are at the discretion of the Board of Directors. ---------------------------------------------------------------- PRELIMINARY The preliminary bonus amount, which is recommended to the BONUS Compensation Committee of the Board of Directors, is determined CALCULATION by the Company's performance against an Earnings Per Share (EPS) matrix. EPS as a percent of budget must exceed 75% before any bonus will be payable. Where EPS as a percentage of budgeted EPS falls between the percentages shown on the EPS matrix, the preliminary bonus percentage will be prorated accordingly. This plan is targeted to pay a bonus equal to 33% OF BASE SALARY, should the company achieve 100% of its EPS goal, and should the associate achieve 100% of his/her individual performance multiplier (see below). The salary used for calculation of the bonus is the participant's base annual compensation in effect as of September 30, 1996.
-------------------------------------------------------------- EPS AS A PERCENT OF BUDGET PRELIMINARY BONUS AS A PERCENT OF SALARY -------------------------------------------------------------- 75% and below 0.0% -------------------------------------------------------------- 100% 33.0 -------------------------------------------------------------- 125% and above 60.0 -------------------------------------------------------------- ---------------------------------------------------------------
2 -------------------------------------------------------------- INDIVIDUAL The individual's overall performance, including but not limited PERFORMANCE to achievement of performance objectives, serves as a MULTIPLIER multiplier against Company performance. INDIVIDUAL PERFORMANCE LEVEL PERFORMANCE MULTIPLIER Outstanding 100% - 125% Highly Effective 100% Effective 50% - 100% Does Not Meet Requirements 0% The President will assign an "individual performance multiplier" based on individual performance as described above. The decision of the President on your performance level and "individual performance multiplier" will be final. It will be based on an overall assessment of performance, including but not limited to achievement of performance objectives during the fiscal year, and will take into account all factors that are deemed to be relevant. Performance evaluations will not automatically determine performance level for purposes of the bonus plan. For the performance multiplier to be in excess of 100%, individual performance must be truly exceptional. -------------------------------------------------------------- NEW STORE The participant will also be eligible for an additional OPENINGS separate bonus of $2,000 for each new store opened on schedule as defined in the fiscal year's MBOs. -------------------------------------------------------------- PAYMENT OF Bonuses are paid annually based on achieving annual targets. BONUSES All bonuses will be paid as soon as possible after results have been audited for the bonus period. Participants must be actively employed by THE GOOD GUYS! in a bonus eligible position on the date the bonus is paid to be eligible to earn a bonus payment. An associate who terminates for any reason prior to the date the bonus is paid does not earn a bonus. As an additional condition to the receipt of a bonus, the Board of Directors must approve the funding of the bonus plan based on economic and business conditions. Unless and until the board approves the payment of a bonus, no bonus will be deemed earned under this plan. -------------------------------------------------------------- NEWLY HIRED Newly hired eligible associates must be in position for a ELIGIBLE minimum of six months, or by April 1st, to participate in the ASSOCIATES plan. If an eligible associate has six or more months in position, the bonus payable after the end of the fiscal year will be prorated based on the number of full months in the position. If an associate has been in position less than six months (i.e. in position after April 1st), no bonus is earned for that year. -------------------------------------------------------------- 3 ---------------------------------------------------------------- NEWLY PROMOTED Newly promoted eligible associates must be in position for ELIGIBLE a minimum of three months, or by July 1st, to participate in ASSOCIATES the plan. If an eligible associate has three or more months in position, the bonus payable after the end of the fiscal year will be prorated based on the number of full months in the position. If an associate has been in position less than three months (i.e. in position after July 1st), no bonus is earned for that year. In no case shall a newly promoted associate be eligible to participate in the plan if he/she was not employed by THE GOOD GUYS! prior to April 1st of the plan year. A "full month" is defined as a calendar month, beginning on the first and ending on the last day of the calendar month. If an associate's change in position and responsibilities results in his/her participation in two different incentive plans during a plan year, the bonus payment will be prorated to reflect the number of months worked under each plan. ---------------------------------------------------------------- PLAN This plan will be administered by the Vice President of Human ADMINISTRATION Resources, with direction provided by the President. The President will be responsible for making a recommendation on each participant's overall performance, contribution, attitude and accomplishment of objectives, and recommending the multiplier factor. ---------------------------------------------------------------- EMPLOYMENT This plan does not create or evidence a contract between THE RIGHTS GOOD GUYS! and any participant and does not create or evidence any employment rights for the participant. Both THE GOOD GUYS! and participants reaffirm that participant employment is at will and may be terminated by either participant or THE GOOD GUYS! at any time for any reason. The plan does not restrict THE GOOD GUYS! from terminating the employment of any participant. ---------------------------------------------------------------- AMENDMENT AND This plan may be amended or terminated at any time, in whole TERMINATION or in part, by the President. The President retains the right to reduce or eliminate payment to a participant if the President, in his discretion, considers the participant's performance to be unsatisfactory. Associates who receive a "needs improvement" or "unsatisfactory" rating on their annual Performance Appraisal, or receive written progressive counseling during the plan year, may be disqualified from participating in this plan until such a time as their performance improves to an effective or better level. ---------------------------------------------------------------- 10/19/95 3 EX-10.16 7 EXHIBIT 10.16 1 Exhibit 10.16 1996 KEY MANAGEMENT INCENTIVE PLAN: VICE PRESIDENT ---------------------------------------------------------------- PLAN OBJECTIVES This plan is designed to provide incentive, and reward to Vice Presidents of THE GOOD GUYS! based upon a combination of the Company's overall performance and their individual performance. Effective Date: This plan is effective for the fiscal year starting October 1, 1995 and ending September 30, 1996. ---------------------------------------------------------------- PARTICIPANT A Vice President (or an equivalent position as determined by ELIGIBILITY the President) is eligible to participate in the plan. The criteria may be changed from year to year. All bonuses are at the discretion of the Board of Directors. ---------------------------------------------------------------- PRELIMINARY The preliminary bonus amount, which is recommended to BONUS the Compensation Committee of the Board of Directors, is CALCULATION determined by the Company's performance against an Earnings Per Share (EPS) matrix. EPS as a percent of budget must exceed 75% before any bonus will be payable. Where EPS as a percent of budgeted EPS falls between the percentages shown on the EPS matrix, the preliminary bonus percentage will be prorated accordingly. This plan is targeted to pay a bonus equal to 33% OF BASE SALARY, should the company achieve 100% of its EPS goal, and should the associate achieve 100% of his/her individual performance multiplier (see below). The salary used for calculation of the bonus is the participant's base annual compensation in effect as of September 30, 1996. ---------------------------------------------------------------------------- EPS AS A PERCENT OF BUDGET PRELIMINARY BONUS AT A PERCENT OF SALARY ---------------------------------------------------------------------------- 75% and below 0.0% ---------------------------------------------------------------------------- 100% 33.0 ---------------------------------------------------------------------------- 125% and above 60.0 ---------------------------------------------------------------------------- ------------------------------------------------------------------ 2 ---------------------------------------------------------------- INDIVIDUAL The individual's overall performance, including but not limited PERFORMANCE to achievement of performance objectives, serves as a multiplier MULTIPLIER against Company performance.
---------------------------------------------------------------- INDIVIDUAL PERFORMANCE LEVEL PERFORMANCE MULTIPLIER ---------------------------------------------------------------- Outstanding 100% - 125% ---------------------------------------------------------------- Highly Effective 100% ---------------------------------------------------------------- Effective 50% - 100% ---------------------------------------------------------------- Does Not Meet Requirements 0% ----------------------------------------------------------------
The President will assign an "individual performance multiplier" based on individual performance as described above. The decision of the President on your performance level and "individual performance multiplier" will be final. It will be based on an overall assessment of performance, including but not limited to achievement of performance objectives during the fiscal year, and will take into account all factors that are deemed to be relevant. Performance evaluations will not automatically determine performance level for purposes of the bonus plan. For the performance multiplier to be in excess of 100%, individual performance must be truly exceptional. ---------------------------------------------------------------- PAYMENT OF Bonuses are paid annually based on achieving annual targets. All BONUS bonuses will be paid as soon as possible after results have been audited for the bonus period. Participants must be actively employed by THE GOOD GUYS! in a bonus eligible position on the date the bonus is paid to be eligible to earn a bonus payment. An associate who terminates for any reason prior to the date the bonus is paid does not earn a bonus. As an additional condition to the receipt of a bonus, the Board of Directors must approve the funding of the bonus plan based on economic and business conditions. Unless and until the board approves the payment of a bonus, no bonus will be deemed earned under this plan. ---------------------------------------------------------------- NEWLY HIRED Newly hired eligible associates must be in position for a ELIGIBLE minimum of six months, or by April 1st, to participate in the ASSOCIATES plan. If an eligible associate has six or more months in position, the bonus payable after the end of the fiscal year will be prorated on the number of full months in the position. If an associate has been in position less than six months (i.e. in position after April 1st), no bonus is earned for that year. ---------------------------------------------------------------- 2 3 ---------------------------------------------------------------- NEWLY Newly promoted eligible associates must be in position for a PROMOTED minimum of three months, or by July 1st, to participate in the ELIGIBLE plan. If an eligible associate has three or more months in ASSOCIATES position, the bonus payable after the end of the fiscal year will be prorated based on the number of full months in the position. If an associate has been in position less than three months (i.e. in position after July 1st), no bonus is earned for that year. In no case shall a newly promoted associate be eligible to participate in the plan if he/she was not employed by THE GOOD GUYS! prior to April 1st of the plan year. A "full month" is defined as a calendar month, beginning on the first and ending on the last day of the calendar month. If an associate's change in position and responsibilities results in his/her participation in two different incentive plans during a plan year, the bonus payment will be prorated to reflect the number of months worked under each plan. ---------------------------------------------------------------- PLAN This plan will be administered by the Vice President of Human ADMINISTRATION Resources, with direction provided by the President. The President will be responsible for making a recommendation on each participant's overall performance, contribution, attitude and accomplishment of objectives, and recommending the multiplier factor. ---------------------------------------------------------------- EMPLOYMENT This plan does not create or evidence a contract between THE RIGHTS GOOD GUYS! and any participant and does not create or evidence any employment rights for the participant. Both THE GOOD GUYS! and participants reaffirm that participant employment is at will and may be terminated by either participant or THE GOOD GUYS! at any time for any reason. The plan does not restrict THE GOOD GUYS! from terminating the employment of any participant. ---------------------------------------------------------------- AMENDMENT This plan may be amended or terminated at any time, in whole or AND in part, by the President. TERMINATION The President retains the right to reduce or eliminate payment to a participant if the President, in his discretion, considers the participant's performance to be unsatisfactory. Associates who receive a "Needs Improvement" or "Unsatisfactory" rating on their annual Performance Appraisal, or receive written progressive counseling during the plan year, may be disqualified from participating in this plan until such a time as their performance improves to an effective or better level. ---------------------------------------------------------------- 3 EX-10.18 8 EXHIBIT 10.18 1 Exhibit 10.18 ASSIGNMENT AND ASSUMPTION AGREEMENT THIS ASSIGNMENT AND ASSUMPTION AGREEMENT (the "Agreement") is entered into effective as of September 26, 1995, by and between THE GOOD GUYS, INC., a Delaware corporation ("Assignor"), and THE GOOD GUYS - CALIFORNIA, INC., a California corporation ("Assignee"). RECITALS A. Assignor desires to assign substantially all of its assets, rights, properties, claims and contracts used in its business (the "Business") to Assignee, subject to the assumption by Assignee of all liabilities and obligations of Assignor relating to such assets, rights, properties, claims and contracts. B. Assignee desires to issue 1,000 shares of its common stock to Assignor, which will constitute all of the issued and outstanding shares of capital stock of Assignee, in exchange for the assets, rights, properties, claims and contracts assigned by Assignor hereunder. C. It is intended that the transaction contemplated by this Agreement will qualify for nonrecognition of gain or loss under Section 351 of the Internal Revenue Code of 1986. NOW, THEREFORE, Assignor and Assignee hereby agree as follows: 1. Assignment of Property and Assets by Assignor. a. Assignment. On the terms and subject to the conditions of this Agreement, Assignor hereby conveys, assigns, transfers and delivers to Assignee, in exchange for the issuance to Assignor of 1,000 shares of common stock of Assignee (the "Shares"), all of Assignor's assets, rights, accounts, properties, claims and contracts (the "Assigned Assets"), except for those leases set forth in ATTACHMENT I (the "Unassigned Leases") which will be the subject of a separate assignment and assumption agreement, and except that any contract between Assignor and any third party which contains a prohibition against, or limitation or condition on, transfer or assignment (the "Non-Assignable Contracts") is not assigned hereby. b. Instruments of Conveyance and Transfer. Assignor has delivered or will deliver to Assignee such deeds, endorsements, consents, assignments and other good and sufficient instruments of conveyance and assignment as will be effective to vest in Assignee all right, title and -1- 2 interest of Assignor in and to the Assigned Assets, and has transferred or will transfer to Assignee copies of all the contracts, agreements, commitments, books, records, files and other data relating to the Assigned Assets reasonably necessary for the continued operation of the Business by Assignee. c. Further Assurances. From time to time hereafter, Assignor will execute and deliver such other instruments of conveyance, assignment, transfer and delivery, and will take such other actions, as Assignee reasonably may request in order more effectively to transfer, convey, assign and deliver to Assignee, and to place Assignee in possession and control of, any of the Assigned Assets and the Unassigned Leases and Non-Assignable Contracts (at such time as they may be assigned by Assignor to Assignee). 2. Assumption of Liabilities. Effective as of the date hereof, Assignee hereby assumes and agrees to pay, perform and discharge when due the liabilities and obligations of Assignor, to the extent the same are unpaid, undelivered or unperformed as of the date hereof (the "Assumed Liabilities"). 3. Delivery of Shares. a. Subscription; Delivery of Certificates. Assignee will promptly deliver to Assignor a duly executed stock certificate or certificates, registered in Assignor's name and representing the Shares, against assignment of the Assigned Assets to Assignee pursuant to Section 1 hereof and the assumption of the Assumed Liabilities by Assignee pursuant to Section 2 hereof, representing payment in full for the Shares. b. Representation of Assignor. Assignor hereby represents and warrants that it is acquiring the Shares for its own account and not with an intent to sell or otherwise distribute such securities. 4. Covenants Subsequent to Assignment and Assumption. a. Assignor's Cooperation. Assignor will use its reasonable best efforts to provide any information contained in Assignor's books and records, and will use its reasonable best efforts otherwise to assist and cause its employees to assist Assignee, in connection with the investigation, litigation and final disposition of any claims relating to the Assigned Assets or the Assumed Liabilities. -2- 3 b. Insurance. With respect to any liability or obligation assumed hereunder by Assignee relating to the operation of the Business prior to the date hereof that is covered by Assignor's insurance policies, Assignor will make its insurance available to cover such claims, including worker's compensation claims with respect to occurrences prior to the date hereof; provided that Assignee will be responsible for any deductible amounts and amounts in excess of coverage with respect thereto. Assignor and Assignee each agree to cooperate fully and promptly in the preparation and presentation of defenses to any such liability claims, including, but not limited to, the prompt review and copying of records, the availability of employees for consultation and as witnesses, and the prompt response to all requests for supporting documents and materials. Assignee agrees to give Assignor prompt notice of any information it receives which pertains to a claim for which Assignor could be required to make insurance coverage available under this Section 4.b. c. Further Agreements. Assignor authorizes and empowers Assignee on and after the date hereof to receive and open all mail received by Assignee relating to the Business, the Assigned Assets, or the Assumed Liabilities, and to deal with the contents of such communications in any proper manner. Assignor will promptly deliver to Assignee any mail or other communication received by Assignor after the date hereof pertaining to the Assigned Assets or the Assumed Liabilities and any cash, checks or other instruments of payment to which Assignee is entitled. 5. Miscellaneous. a. Bulk Sales Law. Assignee and Assignor agree to waive compliance with the provisions of the California Bulk Sales Law. b. Further Action. Each of the parties hereto agrees to use reasonable efforts to take, or cause to be taken, all action and to do, or cause to be done, all things necessary, proper or advisable to consummate and make effective the transactions contemplated by this Agreement and to effect all registrations, filings and notices with or to third parties or governmental or regulatory authorities that are necessary or desirable. c. No Third Party Rights. Nothing in this Agreement, expressed or implied, is intended to confer on any person or entity other than Assignor and Assignee or their respective successors and assigns, any rights, remedies, obligations or liabilities under or by reason of this Agreement. -3- 4 d. Choice of Law. This Agreement will be interpreted and enforced in accordance with the laws of the State of California as applied to contracts executed and performed entirely therein. e. Counterparts. This Agreement may be executed in any number of counterparts, each of which will be an original, but all of which together will constitute one instrument. f. Captions. The captions appearing in this Agreement are inserted only as a matter of convenience and in no way define, limit, construe or describe the scope or interpretation of this Agreement. g. Amendment of Agreement; Termination. This Agreement may be amended by a written instrument signed by all of the parties hereto. This Agreement may be terminated and the transactions contemplated herein may be abandoned by mutual written consent of Assignor and Assignee. In the event of any such termination, this Agreement will forthwith become wholly void and of no further force and effect and there will be no liability on the part of Assignor, Assignee, or their respective officers or directors. h. Severability. The invalidity or unenforceability of any provision of this Agreement will not affect the validity or enforceability of any other provision. i. Assignability. This Agreement is not assignable by either party without the prior written consent of the other. -4- 5 IN WITNESS WHEREOF, the parties hereto have executed and delivered this Assignment and Assumption Agreement as of the date first written above. THE GOOD GUYS, INC., A DELAWARE CORPORATION By: /s/ Robert A. Gunst ------------------------------- Robert A. Gunst Title: President ---------------------------- THE GOOD GUYS - CALIFORNIA, INC., A CALIFORNIA CORPORATION By: /s/ Robert A. Gunst ------------------------------- Robert A. Gunst Title: President ---------------------------- -5- 6 ATTACHMENT I UNASSIGNED LEASES Stonestown Shopping Center Stonestown Installation Facility San Mateo Almaden Plaza (Blossom Hill) Beverly Connection Chula Vista Southland Mall (Hayward) Marina Del Rey Metro Center (MIS Facility) Burlingame Anaheim Service Center Temple of the Golden Rule (Berkeley) Geary Street, San Francisco Grossmont Center, San Diego -6- EX-10.19 9 EXHIBIT 10.19 1 EXHIBIT 10.19 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- CREDIT AGREEMENT ------------------ DATED AS OF SEPTEMBER 26, 1995 AMONG THE GOOD GUYS - CALIFORNIA, INC. BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION AND THE BANK OF CALIFORNIA N.A. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 2 TABLE OF CONTENTS
Section Page 1. Definitions and Financial Requirements...................................................................... 1 1.1 Definitions..................................................................................... 1 1.2 Financial Requirements.......................................................................... 5 2. The Credit Facilities....................................................................................... 5 2.1 The BofA Facility............................................................................... 5 2.2 The BankCal Facility............................................................................ 5 2.3 Pro Rata Borrowings............................................................................. 6 2.4 Advances Under this Agreement................................................................... 6 2.5 Optional Interest Rates......................................................................... 6 2.6 Standby Letters of Credit....................................................................... 8 2.7 Fee............................................................................................. 9 2.8 Commitment Fee.................................................................................. 9 2.9 Default Rate.................................................................................... 9 2.10 Termination of Prior Agreement.................................................................. 9 2.11 Termination of This Agreement................................................................... 10 2.12 Extension of Availability Period................................................................ 10 3. Extensions of Credit, Payments and Interest Calculations.................................................... 10 3.1 Requests for Credit............................................................................. 10 3.2 Oral Requests................................................................................... 10 3.3 Disbursements and Payments...................................................................... 11 3.4 Branch Accounts................................................................................. 11 3.5 Evidence of Indebtedness........................................................................ 11 3.6 Debits to Borrower's Accounts................................................................... 11 3.7 Interest Calculation............................................................................ 11 3.8 Late Payments; Compounding...................................................................... 11 3.9 Banking Day..................................................................................... 11 3.10 Taxes and Other Charges......................................................................... 12 3.11 Increased Costs................................................................................. 12 4. Conditions to Availability of Credit.................................................................... 13 4.1 Conditions to First Extension of Credit......................................................... 13 4.2 Conditions to Each Extension of Credit.......................................................... 13 5. Representations and Warranties.............................................................................. 14 5.1 Organization.................................................................................... 14 5.2 No Conflicts.................................................................................... 14 5.3 Enforceability.................................................................................. 14 5.4 Good Standing................................................................................... 14 5.5 Compliance with Laws............................................................................ 14 5.6 Litigation...................................................................................... 14 5.7 No Event of Default............................................................................. 14 5.8 Information Submitted........................................................................... 15 5.9 No Material Adverse Change...................................................................... 15 5.10 ERISA Plan Compliance........................................................................... 15 5.11 Transfer of Assets.............................................................................. 15 6. Covenants................................................................................................... 15
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Section Page 6.1 Notices of Certain Events....................................................................... 16 6.2 Financial and Other Information................................................................. 16 6.3 Books, Records, Audits and Inspections.......................................................... 17 6.4 Adjusted Tangible Net Worth..................................................................... 17 6.5 Total Liabilities to Adjusted Tangible Net Worth................................................ 18 6.6 Fixed Charge Coverage Ratio..................................................................... 18 6.7 Capital Expenditures............................................................................ 18 6.8 Out-Of-Debt Requirement......................................................................... 19 6.9 Other Indebtedness.............................................................................. 19 6.10 Liens........................................................................................... 20 6.11 Acquisitions and Investments.................................................................... 21 6.12 Dividends....................................................................................... 21 6.13 Loans to Officers............................................................................... 21 6.14 Capital Ownership............................................................................... 22 6.15 Sales and Leasebacks............................................................................ 22 6.16 Existence and Properties........................................................................ 22 6.17 Liquidations and Mergers........................................................................ 22 6.18 Sale of Assets.................................................................................. 22 6.19 Insurance....................................................................................... 23 6.20 Compliance with Laws............................................................................ 23 6.21 Accuracy of Financial Information............................................................... 23 6.22 Additional Acts................................................................................. 23 6.23 Business Activities............................................................................. 23 6.24 Change in Name, Structure or Location........................................................... 23 6.25 Subsidiaries.................................................................................... 23 6.26 Environmental Quality........................................................................... 23 6.27 Use of Proceeds................................................................................. 24 6.28 Taxes........................................................................................... 24 6.29 Current Ratio................................................................................... 24 7. Events of Default........................................................................................... 24 7.1 Failure to Pay.................................................................................. 24 7.2 Breach of Representation or Warranty............................................................ 24 7.3 Falsity of Information.......................................................................... 24 7.4 Suits........................................................................................... 24 7.5 Judgments....................................................................................... 24 7.6 Failure to Pay Debts; Voluntary Bankruptcy...................................................... 25 7.7 Involuntary Bankruptcy.......................................................................... 25 7.8 Governmental Action............................................................................. 25 7.9 Default of Other Financial Obligations.......................................................... 25 7.10 Default of Other Bank Obligations............................................................... 25 7.11 Material Adverse Change......................................................................... 25 7.12 ERISA Plan Termination.......................................................................... 25 7.13 Other Breach Under Agreement.................................................................... 26 8. Miscellaneous............................................................................................... 26 8.1 Successors and Assigns.......................................................................... 26 8.2 Consents and Waivers............................................................................ 26 8.3 Governing Law................................................................................... 26
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Section Page 8.4 Costs and Attorneys' Fees....................................................................... 26 8.5 Integration..................................................................................... 26 8.6 Participations.................................................................................. 27 8.7 Arbitration; Reference Proceeding............................................................... 27 8.8 Notices......................................................................................... 29 8.9 Headings........................................................................................ 29 8.10 Severability.................................................................................... 29 8.11 Counterparts.................................................................................... 29 8.12 Indemnification................................................................................. 29 8.13 Setoff.......................................................................................... 29 9. Relation of Banks........................................................................................... 29 9.1 Independent Facilities.......................................................................... 29 9.2 No Agency....................................................................................... 29 9.3 No Requirement to Share......................................................................... 30 9.4 Notices......................................................................................... 30 9.5 Independent Credit Investigations............................................................... 30 9.6 Other Relationships............................................................................. 30
-iii- 5 CREDIT AGREEMENT This Agreement is effective as of September 26, 1995 among Bank of America National Trust and Savings Association ("BofA"), The Bank of California N.A. ("BankCal") and The Good Guys - California, Inc., a California corporation ("Borrower"). BofA and BankCal are sometimes referred to as "Banks," and each is a "Bank." RECITALS A. The Banks and The Good Guys, Inc., a Delaware corporation ("Former Borrower") entered into a certain Credit Agreement dated as of June 28, 1995 (the "Previous Credit Agreement"). B. The Former Borrower and the Borrower are entering into an Assignment and Assumption Agreement dated September 26, 1995, under which the Former Borrower is assigning all of its assets to the Borrower, and the Borrower is assuming the liabilities and obligations of the Former Borrower. In exchange, the Former Borrower will own all of the 1,000 issued and outstanding shares of the Borrower. C. The Borrower and the Former Borrower have requested the Banks to permit the Borrower to assume all of the obligations under the Previous Credit Agreement, with the Former Borrower becoming a guarantor ("Guarantor") of the obligations of the Borrower under this Agreement. D. On the effective date of this Agreement, all indebtedness outstanding under the Previous Credit Agreement shall be assumed by the Borrower and shall be deemed outstanding under this Agreement, and the Previous Credit Agreement shall be deemed cancelled. AGREEMENT 1. Definitions and Financial Requirements. 1.1 Definitions. In addition to the terms defined elsewhere in this Agreement, the following terms have the meanings indicated for the purposes hereof: "Availability Period" means the period commencing on the Closing Date and ending on February 28, 1997, or such later date as determined under paragraph 2.12 below. "Banking Day" means, unless otherwise defined in this Agreement, a day other than a Saturday or a Sunday on which Banks are open for business in California. With respect to LIBOR Rate Portions, a Banking Day is a day other than a Saturday or a Sunday on which Banks are open for business in California, New York and London and are dealing in offshore dollars. "BankCal Facility" means the facility provided by BankCal under Paragraph 2.2 below. "BankCal Money Market Rate" means a rate per annum which BankCal quotes as the rate at which funds in the amount of the Portion and for a period of time comparable to the Interest Period are available for purchase from other banks in the ordinary course of BankCal's business on the first day of the applicable Interest Period, adjusted for the then maximum reserve, capital adequacy, deposit insurance, and similar requirements that under any circumstances could be applicable to BankCal pursuant to applicable law or regulation, and other amounts associated with BankCal's costs and desired return. The BankCal Money Market Rate may be accepted only at the time quoted by BankCal. Due to changes in legal, regulatory, economic, or market conditions, BankCal may at any time determine that the BankCal Money Market Rate is not available. "BankCal's Prime Rate" means a fluctuating rate that changes with the rate BankCal announces to be in effect from time to time as its prime rate. The Prime Rate is set by BankCal based on various factors, including general economic and market conditions, and is used as a reference point in pricing certain loans. BankCal may price its loans at, above or below the Prime Rate. -1- 6 "BofA Facility" means the facility provided by BofA under Paragraph 2.1 below. "BofA Fixed Rate" means the fixed interest rate per annum, determined solely by BofA on the first day of the applicable Interest Period for the Portion, as the rate at which BofA would be able to borrow funds in the Money Market in the amount of the Portion and with an interest and principal payment schedule equal to the Portion and for a term equal to the applicable Interest Period. The BofA Fixed Rate shall include adjustments for reserve requirements, federal deposit insurance, and any other similar adjustment which BofA deems appropriate. The BofA Fixed Rate is BofA's estimate only and BofA is under no obligation to actually purchase or match funds for any transaction. "Money Market" means one or more wholesale funding markets available to BofA, including domestic negotiable certificates of deposit, eurodollar deposits, bank deposit notes or other appropriate money market instruments selected by BofA. "BofA's Reference Rate" means the rate of interest publicly announced from time to time by BofA in San Francisco, California, as its reference rate. Any change in BofA's Reference Rate shall take effect on the day specified in the public announcement of such change. BofA's Reference Rate is set by BofA based on various factors, including BofA's costs and desired return, general economic conditions and other factors, and is used as a reference point for pricing some loans. BofA may price loans at, above or below BofA's Reference Rate. "Capital Expenditure" means an expenditure for the acquisition of fixed or capital assets or the leasing of fixed or capital assets, but excluding the leasing of premises for retail store locations and distribution facilities; excluding equipment rentals for less than one year; excluding landlord allowances for leasehold improvements; and excluding expenditures under operating leases. "Cayman Rate" means the interest rate determined by the following formula, rounded upward to the nearest 1/100 of one percent. (All amounts in the calculation will be determined by BofA as of the first day of the Interest Period.) Cayman Rate = Cayman Base Rate ------------------------------ (1.00 - Reserve Percentage) Where "Cayman Base Rate" means the interest rate (rounded upward to the nearest 1/16th of one percent) at which BofA's Grand Cayman Branch, Grand Cayman, British West Indies, would offer U.S. dollar deposits for the applicable Interest Period -2- 7 to other major banks in the offshore dollar inter-bank market. "Closing Date" means the date that the conditions precedent stated in Paragraph 4.1 below are all satisfied or waived as provided by the Banks in writing. "ERISA" means the Employee Retirement Income Act of 1974, as amended from time to time. "ERISA Plan" means any employee pension benefit plan maintained or contributed to by Borrower and insured by the Pension Benefit Guaranty Corporation under Title IV of ERISA. "Event of Default" means any event listed in Article 7 of this Agreement. "Fixed Charge Coverage Ratio" means the ratio of Income Available for Fixed Charges to the sum of interest expense, positive income taxes, rent expense and lease expense. "Income Available for Fixed Charges" means net income, plus positive income taxes, depreciation and amortization, interest expense, rent expense and lease expense. "Interest Period" means for each Portion the period during which such Portion shall bear interest at a specified Optional Rate, as agreed by the Banks and the Borrower at the time Borrower requests the Portion. "LIBOR Rate" means the interest rate determined by the following formula, rounded upward to the nearest 1/100 of one percent. (All amounts in the calculation will be determined by the respective Bank as of the first day of the Interest Period.) LIBOR Rate = London Rate ----------------------------- (1.00 - Reserve Percentage) Where "London Rate" means the interest rate (rounded upward to the nearest 1/16th of one percent) determined as follows: (a) for amounts outstanding from BofA, the rate at which BofA's London Branch, London, Great Britain, would offer U.S. dollar deposits for the applicable Interest Period to other major banks in the London inter-bank market at approximately 11:00 a.m. London time two (2) Banking Days before the commencement of the Interest Period. -3- 8 (b) for amounts outstanding from BankCal, the rate at which U.S. dollar deposits for the applicable Interest Period would be offered to BankCal in the Eurodollar market two (2) Banking Days before the commencement of the Interest Period. "Optional Rate" means one of the optional interest rates provided under this Agreement, other than BofA's Reference Rate and BankCal's Prime Rate. "Portion" means all or such part of the principal balance of credit provided under this Agreement for which interest is accruing at one of the Optional Rates. "Reserve Percentage" means the total of the maximum reserve percentages for determining the reserves to be maintained by member banks of the Federal Reserve System for Eurocurrency Liabilities, as defined in Federal Reserve Board Regulation D, rounded upward to the nearest 1/100 of one percent. The percentage will be expressed as a decimal, and will include, but not be limited to, marginal, emergency, supplemental, special, and other reserve percentages. "Spread" means seven-eighths (0.875) of one percentage point. "Tangible Net Worth" means the gross book value of the assets of Borrower (exclusive of goodwill, patents, trademarks, trade names, organization expense, treasury stock, unamortized debt discount and expense, deferred charges and other like intangibles) less (a) reserves applicable thereto, and (b) all liabilities (including accrued and deferred income taxes). 1.2 Financial Requirements. Unless otherwise specified in this Agreement, all accounting terms used in this Agreement shall be interpreted, all financial computations required under this Agreement shall be made, and all financial information required under this Agreement shall be prepared in accordance with generally accepted accounting principles consistently applied. 2. The Credit Facilities 2.1 The BofA Facility. Subject to the provisions of this Agreement, from time to time during the Availability Period, BofA, on a revolving basis, will make advances to Borrower and issue standby letters of credit for Borrower's account. The undrawn and the drawn and unreimbursed amount of all letters of credit outstanding under the BofA Facility may not exceed at any one time Five Million Dollars ($5,000,000). The total of all advances, plus the undrawn and the drawn and unreimbursed amount of all letters of credit, outstanding under the BofA Facility may -4- 9 not exceed at any one time the following amounts (the "BofA Credit Limit"): (a) From February 1 through October 31 of each year: Twenty Million Dollars ($20,000,000). (b) At all other times: Fifty Million Dollars ($50,000,000). 2.2 The BankCal Facility. Subject to the provisions of this Agreement, from time to time during the Availability Period, BankCal, on a revolving basis, will make advances to Borrower and issue standby letters of credit for Borrower's account. The undrawn and the drawn and unreimbursed amount of all letters of credit outstanding under the BankCal Facility may not exceed at any one time Three Million Dollars ($3,000,000). The total of all advances plus the undrawn and the drawn and unreimbursed amount of all letters of credit outstanding under the BankCal Facility may not exceed at any one time the following amounts (the "BankCal Credit Limit"): (a) From February 1 through October 31 of each year: Ten Million Dollars ($10,000,000). (b) At all other times: Twenty Five Million Dollars ($25,000,000). 2.3 Pro Rata Borrowings. Borrower agrees that, at all times, the total of all advances, plus the undrawn and the drawn and unreimbursed amount of all letters of credit, outstanding under the BofA Facility and the BankCal Facility, respectively, shall bear the same ratio as the ratio of the BofA Credit Limit to the BankCal Credit Limit. This requirement shall apply regardless of the amount of any credit outstanding from either Bank to Borrower outside the BofA Facility and the BankCal Facility (to the extent such credit is permitted under paragraph 6.9(h) below). Whenever the ratio of the BofA Credit Limit to the BankCal Credit Limit changes in accordance with the provisions of paragraphs 2.1 and 2.2 above, the Borrower shall adjust the credit outstandings from the two Banks to maintain the ratio required by the preceding sentence as soon as it is possible to do so without incurring any penalties for prepaying any Portion bearing interest at an Optional Rate. Whenever the Borrower requests a letter of credit, both Banks shall issue letters of credit to the same beneficiary and for the same term, in pro rata amounts in proportion to the ratio of the BofA Credit Limit to the BankCal Credit Limit at the time the letters of credit are designated. 2.4 Advances Under this Agreement. (a) Borrower shall repay the entire principal balance of all advances under this Agreement on the last day -5- 10 of the Availability Period, subject to the provisions of Paragraph 2.5(e) below. (b) Except as provided below, advances made by BofA under this Agreement shall bear interest at a rate per annum equal to BofA's Reference Rate, and advances made by BankCal under this Agreement shall bear interest at a rate per annum equal to BankCal's Prime Rate. Borrower shall pay interest monthly in arrears on the first day of each month until the last day of the Availability Period, on which date all accrued and unpaid interest shall be due and payable. 2.5 Optional Interest Rates. In lieu of the rates related to BofA's Reference Rate and BankCal's Prime Rate, Borrower may elect to have all or portions of advances under this Agreement bear interest at any of the following rates plus the Spread during an appropriate Interest Period: the LIBOR Rate; for amounts advanced by BofA, the BofA Fixed Rate or the Cayman Rate; and for amounts advanced by BankCal, the BankCal Money Market Rate. Each Optional Rate is subject to the following requirements: (a) Each Portion shall be for an amount not less than the following: (i) For the LIBOR Rate or the BankCal Money Market Rate, One Million Dollars ($1,000,000). (ii) For the BofA Fixed Rate or the Cayman Rate, an amount not less than Five Hundred Thousand Dollars ($500,000) for interest periods of 30 days or longer. For shorter maturities, each Portion will be for an amount which, when multiplied by the number of days in the applicable interest period, is not less than fifteen million (15,000,000) dollar-days. (b) Each Interest Period shall not end later than the last day of the Availability Period. For the LIBOR Rate, the Interest Period shall be one (1), two (2), three (3), six (6), or twelve (12) months. For the BankCal Money Market Rate, the Interest Period shall be from one to no longer than sixty days. For the Grand Cayman Rate and the BofA Fixed Rate, the Interest Period shall be from one day to no longer than one year. For the LIBOR Rate and the Cayman Rate, the last day of the Interest Period will be determined by each Bank using the practices of the offshore dollar inter-bank market. (c) Borrower shall pay interest on each Portion on the first day of each month following the first day of the Interest Period for such portion and on the last day of the Interest Period for such portion. -6- 11 (d) A Portion shall not be converted to a different interest rate during its Interest Period. Upon the expiration of an Interest Period, the Portion shall thereafter bear interest at the rate based on BofA's Reference Rate or BankCal's Prime Rate, as applicable, unless Borrower elects a new interest rate as provided hereunder. (e) Any payment of a Portion prior to the last day of the Interest Period for such Portion, whether voluntary, by reason of acceleration or otherwise, including any mandatory payments required under this Agreement and applied by either Bank to a Portion, shall be accompanied by the amount of accrued interest on the amount repaid and by the amount (if any) by which (i) the additional interest which would have been payable on the amount repaid had it not been paid until the last day of its Interest Period exceeds (ii) the interest which would have been recoverable by such Bank by placing the amount repaid on deposit in the Reinvestment Market specified below for a period starting on the date it was repaid and ending on the last day of the Interest Period for such portion. The Reinvestment Market for LIBOR Rate Portions, Cayman Rate Portions and BankCal Money Market Rate Portions shall be the offshore dollar inter-bank markets, and the Reinvestment Market for the BofA Fixed Rate shall be the certificate of deposit markets. (f) Banks shall have no obligation to accept an election for a Portion if any of the following described events has occurred and is continuing: (1) Dollar deposits in the principal amount, and for periods equal to the Interest Period, of a Portion are not available in the relevant market; or (2) The Optional Rate does not accurately reflect the cost of the Portion. 2.6 Standby Letters of Credit. (a) Each standby letter of credit shall be issued pursuant to the terms and conditions hereof and of each Bank's standard form agreement for standby letter of credit executed by Borrower. (b) Each standby letter of credit shall: (1) expire on or before one (1) year after the date such letter of credit is issued, but in no event later than four months after the last day of the Availability Period; (2) be otherwise in form and substance and in favor of beneficiaries satisfactory to Banks. -7- 12 (c) Borrower shall pay the Banks an issuance fee equal to seven-eighths of one percent (0.875%) per annum of the outstanding undrawn amount of each standby letter of credit, payable in advance at the time the letter of credit is issued and annually thereafter, calculated on the basis of the face amount outstanding on the day the fee is calculated. If there is a default under this Agreement, at each Bank's option, the amount of the fee shall be increased to 1-1/2% per annum, effective starting on the day the Bank provides notice of the increase to the Borrower. In addition, the Borrower shall pay such other fees at the times and in the amounts that each Bank advises Borrower from time to time as being applicable to Borrower's standby letters of credit. (d) Any sum owed to either Bank with respect to a standby letter of credit issued for Borrower's account which is not paid when due shall, at the option of that Bank in each instance, be added to advances outstanding under the that Bank's Facility and shall thereafter bear interest at the rate applicable to advances. (e) In addition to any other rights or remedies which Banks may have under this Agreement or otherwise, upon the occurrence of an Event of Default each Bank may require Borrower to prepay the amount of any standby letters of credit outstanding from that Bank under this Agreement. 2.7 Fee. Borrower shall pay the following fees on or before the date of execution of this Agreement: for BofA, a fee of Twenty Thousand Dollars ($20,000); and for BankCal, a fee of Ten Thousand Dollars ($10,000). 2.8 Commitment Fee. (a) Borrower shall pay each Bank a commitment fee at the rate of two tenths of one percent (0.20%) per annum on the average daily unused portion of the following: (i) for BofA, the BofA Credit Limit; and (ii) for BankCal, the BankCal Credit Limit. The commitment fee shall be computed on a calendar quarter basis in arrears. The commitment fee shall be payable on the first day of each calendar quarter, and on the last day of the Availability Period. (b) Upon at least thirty (30) days' advance written notice to Banks, Borrower may cancel the availability of credit under this Agreement and repay all of its obligations hereunder in full (subject to the provisions of Paragraphs 2.5(e) above), and Borrower shall not be obligated to pay a commitment fee for any quarterly fee after the quarterly period in which such cancellation and repayment occurred. 2.9 Default Rate. Upon the occurrence and during the continuation of any Event of Default under Paragraph 7.1 below, -8- 13 and without constituting a waiver of any such Event of Default, advances under this Agreement from either Bank shall at the option of such Bank bear interest at a rate per annum which is two percentage points (2.00%) higher than the rate of interest otherwise provided under this Agreement. Upon the expiration of any Interest Period, the relevant Portion shall thereafter bear interest at BofA's Reference Rate plus two percentage points (2.00%) or BankCal's Prime Rate plus two percentage points (2.00%). 2.10 Termination of Prior Agreement. On the Closing Date, the Credit Agreement between the Banks and Borrower dated June 28, 1995, shall be terminated, and any credit outstanding thereunder shall be deemed outstanding under this Agreement. 2.11 Termination of This Agreement. Borrower may, at any time, terminate this Agreement by written notice to Banks, provided that all amounts outstanding hereunder have been paid and all other obligations of Borrower have been fulfilled. 2.12 Extension of Availability Period. The Borrower may extend the Availability Period to expire on February 28, 1998, by providing a written notice of extension to both Banks. The notice must be given by the Borrower to the Banks during the period commencing on March 1, 1996 and ending on April 30, 1996; provided that, at the time the notice is given by the Borrower to the Banks, there is no Event of Default under this Agreement, and the Borrower has provided a certificate, signed by a responsible officer of Borrower, certifying compliance with all terms and conditions of this Agreement as of December 31, 1995. 3. Extensions of Credit, Payments and Interest Calculations 3.1 Requests for Credit. Each request for an extension of credit shall be made in writing on a form acceptable to the Bank extending the credit or in any other manner acceptable to that Bank. Requests for advances must be received no later than 2:00 p.m. on the date the advance will be made; provided that requests for advances or the designation of portions which will bear interest at the LIBOR Rate must be received no later than 9:00 a.m. three (3) Banking Days before the date the advance will be made or the designation will take effect; provided further that requests for advances or the designation of Portions which will bear interest at an Optional Rate other than the LIBOR Rate must be received no later than 11:00 a.m. on the date the advance will be made or the designation will take effect. 3.2 Oral Requests. At each Bank's sole discretion in each instance, such Bank may accept telephone requests to make or to repay extensions of credit. Extensions of credit requested by telephone shall be deposited or wired into Borrower's commercial account number 14995-05205 with BofA, or such other account(s) as -9- 14 may be specified in writing by Borrower. Telephone requests may be made by any individual identified in writing to such Bank on a form acceptable to such Bank as being authorized to make such requests. Each Bank shall be entitled to rely upon any written or telephone request from persons it reasonably believes to be authorized by Borrower to make such requests without making independent inquiry. Borrower hereby indemnifies each Bank for, and holds each Bank harmless from, any and all losses, damages, claims and expenses (including reasonable attorneys' fees and allocated costs of Banks' in-house counsel), however arising, which such Bank suffers or incurs based on or arising out of extensions of credit or payments made on any telephone request, except that Banks shall not be indemnified against their own gross negligence or wilful misconduct. The provisions of this Paragraph shall survive termination of this Agreement. 3.3 Disbursements and Payments. Each disbursement by Banks and each payment by Borrower under this Agreement shall be made in U.S. Dollars and in immediately available funds and at such branch of each Bank as that Bank may from time to time select. 3.4 Branch Accounts. Each extension of credit under this Agreement shall be made for the account of such branch of the Bank extending the credit as such Bank may from time to time select. 3.5 Evidence of Indebtedness. Principal, interest and all other sums due each Bank under this Agreement shall be evidenced by entries in records maintained by such Bank, and, if required by such Bank, by a promissory note or notes. Each payment on and any other credits with respect to principal, interest and all other sums due under this Agreement shall be evidenced by entries to records maintained by each Bank. 3.6 Debits to Borrower's Accounts. Borrower hereby authorizes BofA to debit Borrower's account number 14995-05205 in the amount of interest and fees due to BofA under this Agreement. BofA shall debit the account on the date such amounts become due, or, if such due date is not a Banking Day, on the next Banking Day after such due date. For amounts due to BankCal, upon the instructions of Borrower, BofA shall wire such amounts as designated by Borrower to The Bank of California N.A., ABA #1210-000-15, for credit to Bancontrol Account No. 001-060235 with reference to The Good Guys, Inc. If there are insufficient funds in the account to cover the amount debited to the account in accordance with this Paragraph, such debit will be reversed and such amount will remain unpaid. Borrower shall pay BofA's standard fees for each wire transfer. 3.7 Interest Calculation. Except as otherwise stated in this Agreement, all interest and fees, if any, payable under this Agreement shall be computed on the basis of a three hundred sixty -10- 15 (360) day year and actual days elapsed, which results in more interest or a larger fee than if a three hundred sixty-five (365) day year were used. 3.8 Late Payments; Compounding. At the option of each Bank, in each instance, any sum payable hereunder which is not paid when due (including unpaid interest) may be added to principal of this Agreement and shall thereafter bear interest at the rate applicable to principal. 3.9 Banking Day. Any sum payable by Borrower hereunder which becomes due on a day which is not a Banking Day shall be due on the next Banking Day after such due date (subject to the practices of the Eurodollar market, if applicable). Any payments received by either Bank on a day which is not a Banking Day or after 2:00 p.m. on a Banking Day shall be deemed to be received on the next Banking Day after such date of receipt. 3.10 Taxes and Other Charges. (a) Borrower agrees to make all payments or reimbursements under this Agreement free and clear of and without deduction for any present or future taxes, levies, imposts, fees or other charges of any kind which may be imposed by any governmental authority with respect to such payments or reimbursements ("Taxes"). If any Taxes are imposed by any governmental authority, Borrower agrees to pay such Taxes and to confirm payment by delivery of official tax receipts or notarized copies thereof to Banks within thirty (30) days after the due date for each tax payment. This Paragraph shall not apply with respect to any taxes which are imposed on or measured by either Bank's net income by any jurisdiction. (b) In the event the Borrower is prohibited by operation of law from making payments or reimbursements to the Banks without making such deductions or paying, or causing to be paid, any and all Taxes, the Borrower shall pay to the Banks upon demand such additional amounts as may be necessary in order to reimburse the Banks for Taxes paid by the Banks on the Borrower's behalf such that the aggregate net amounts received by the Banks shall equal the amounts which would have been received if such deduction or withholding had not been required. 3.11 Increased Costs. Borrower shall reimburse or compensate each Bank, upon demand by that Bank, for all costs incurred, losses suffered or payments made by that Bank which are applied or allocated by such Bank to this Agreement (all as reasonably determined by such Bank in its sole discretion) by reason of any change in any statute, regulation, or any request or requirement of any regulatory agency, whether or not having -11- 16 the force of law, which is applicable to all or a class of all national banks, including: (a) any and all present or future reserve, deposit or similar requirements applied against (or against any class of or change in or in the amount of) assets or liabilities of, or commitments or extensions of credit by, such Bank; and (b) any and all present or future capital or similar requirements against (or against any class of or change in or in the amount of) assets or liabilities of, or commitments or extensions of credit by, such Bank. 4. Conditions to Availability of Credit. Each Bank's obligation to extend credit under this Agreement is subject to the following conditions. In the case of documents or evidence to be received by Banks, each such item must be in form and substance satisfactory to both Banks: 4.1 Conditions to First Extension of Credit. Before the first extension of credit: (a) Receipt by Banks of evidence that the execution, delivery, and performance by Borrower and Guarantor of this Agreement and any instrument or agreement required under this Agreement, as appropriate, have been duly authorized. (b) Receipt by Banks of an executed copy of this Agreement; a promissory note as required by BankCal; and each Bank's standard wire transfer agreement. (c) Payment of any fees and costs due on the Closing Date. (d) Receipt by Banks of evidence of the insurance coverage required by Paragraph 6.19 below. (e) Receipt by Bank of copies of all executed documents and agreements effecting the transfer of the assets and liabilities of the Guarantor to the Borrower. (f) Continuing guaranties, on each Bank's standard form, executed by Guarantor, guarantying the obligations of Borrower to each Bank, in a principal amount acceptable to each Bank. (g) Payment by the Borrower of all costs, expense and attorneys' fees (including allocated costs for in-house legal services) incurred by the Banks in connection with this Agreement. 4.2 Conditions to Each Extension of Credit. As a condition to each extension of credit, (a) Borrower must be in compliance with Paragraph 2.3 above. (b) Each representation and warranty made by Borrower and Guarantor under this Agreement must be true and correct as of the date of the extension of credit. 5. Representations and Warranties Borrower represents and warrants (and each request for an extension of credit under this Agreement shall be deemed a -12- 17 representation and warranty made on the date of such request) that: 5.1 Organization. Borrower and Guarantor each is a corporation duly organized and existing under the laws of the state of its organization and the execution, delivery, and performance of this Agreement and of any instrument or agreement required by this Agreement are within Borrower's and Guarantor's powers, have been duly authorized, and are not in conflict with the terms of any charter, bylaw, or other organization papers of Borrower or Guarantor; 5.2 No Conflicts. The execution, delivery, and performance of this Agreement and of any instrument or agreement required by this Agreement are not in conflict with any law or any indenture, agreement, or undertaking to which Borrower or Guarantor is a party or by which Borrower or Guarantor is bound or affected; 5.3 Enforceability. This Agreement is a legal, valid and binding agreement of Borrower, enforceable against Borrower in accordance with its terms, and any instrument or agreement required under this Agreement, when executed and delivered, will be similarly legal, valid, binding and enforceable; 5.4 Good Standing. Borrower and Guarantor each is properly licensed and in good standing in each state in which it is doing business and Borrower and Guarantor each has qualified under, and complied with, where required, the fictitious name statute of each state in which it is doing business; 5.5 Compliance with Laws. Borrower and Guarantor each has complied with all federal, state, and local laws, rules, and regulations affecting the business of Borrower and Guarantor including, but not limited to, laws regulating Borrower's and Guarantor's sales or the furnishing of services to their customers and disclosures in connection therewith; 5.6 Litigation. There is no litigation, tax claim, proceeding or dispute pending, or, to the knowledge of Borrower, threatened, against or affecting Borrower or Guarantor or their property, the adverse determination of which would have a material adverse effect on Borrower's or Guarantor's financial condition or operations or impair Borrower's or Guarantor's ability to perform its obligations hereunder or under any instrument or agreement required hereunder; 5.7 No Event of Default. No event has occurred and is continuing or would result from the extension of credit under this Agreement which constitutes or would constitute an Event of Default or which, upon a lapse of time or notice or both, would become an Event of Default; 5.8 Information Submitted. All financial information submitted by Borrower or Guarantor to either Bank has been prepared in accordance with generally accepted accounting principles consistently applied, is fairly presented in all material -13- 18 respects and is complete insofar as may be necessary to give Banks a true and accurate knowledge of the subject matter thereof; 5.9 No Material Adverse Change. There has been no material adverse change in the consolidated financial condition of Borrower and Guarantor since the date of the most recent financial statements submitted to Banks; 5.10 ERISA Plan Compliance. (a) Borrower and Guarantor each has fulfilled its obligations, if any, under the minimum funding standards of ERISA and the Internal Revenue Code of 1986, as amended from time to time, (the "Code") with respect to each ERISA Plan and is in compliance in all material respects with the presently applicable provisions of ERISA and the Code, and has not incurred any liability with respect to any ERISA Plan under Title IV of ERISA; (b) No reportable event has occurred under Section 4043(b) of ERISA for which the Pension Benefit Guaranty Corporation requires 30 day notice; (c) No action by Borrower or Guarantor to terminate or withdraw from any ERISA Plan has been taken and no notice of intent to terminate an ERISA Plan has been filed under Section 4041 of ERISA; (d) No proceeding has been commenced with respect to an ERISA Plan under Section 4042 of ERISA, and no event has occurred or condition exists which might constitute grounds for the commencement of such a proceeding. 5.11 Transfer of Assets. All of the assets of the Guarantor have been transferred to the Borrower, and all of the liabilities and obligations of the Guarantor have been assumed by the Borrower, except for such assets, liabilities and obligations which have been disclosed to the Banks and are acceptable to the Banks. 6. Covenants So long as credit is available under this Agreement and until full and final payment of all of Borrower's obligations under this Agreement and any instrument or agreement required under this Agreement, Borrower and Guarantor shall, unless Banks waive compliance in writing: 6.1 Notices of Certain Events. Promptly give written notice to both Banks of: (a) all litigation affecting Borrower or Guarantor where the amount claimed is Two Million Dollars ($2,000,000) or more; (b) any substantial dispute which may exist between Borrower or Guarantor and any governmental regulatory body or law enforcement authority; -14- 19 (c) any Event of Default or any event which, upon a lapse of time or notice or both, would become an Event of Default; (d) the occurrence of any reportable event under Section 4043(b) of ERISA for which the Pension Benefit Guaranty Corporation requires thirty (30) day notice; any action by Borrower or Guarantor to terminate or withdraw from an ERISA Plan or the filing of any notice of intent to terminate under Section 4041 of ERISA; any notice of noncompliance made with respect to an ERISA Plan under Section 4041(b) of ERISA; or the commencement of any proceeding with respect to an ERISA Plan under Section 4042 of ERISA; (e) any other matter which has resulted or could reasonably be expected to result in an adverse change in Borrower's or Guarantor's financial condition or operations; 6.2 Financial and Other Information. Deliver to both Banks in form and detail satisfactory to Banks, and in such number of copies as Banks may request: (a) Within one hundred twenty (120) days after the end of each fiscal year Guarantor's consolidated financial statements for such year audited by a certified public accountant together with an unqualified opinion of such certified public accountant and including, at a minimum, Guarantor's consolidated balance sheet and statements of income, retained earnings and cash flow, and including a copy of the accountant's management letter, and consolidating worksheets prepared by Borrower; (b) Within one hundred twenty (120) days after the end of each fiscal year, a copy of Guarantor's Form 10-K Annual Report; within sixty (60) days after each quarterly accounting period, a copy of Guarantor's Form 10-Q Quarterly Report; and within ten (10) days after the date of filing with the Securities and Exchange Commission, a copy of each Form 8-K Current Report filed by Guarantor; (c) Within one hundred twenty (120) days after the end of each fiscal year Guarantor's projected consolidated balance sheet and statements of income, retained earnings and cash flow for the period through the last day of the Availability Period; or a written notice that the projections previously supplied to the Banks and covering such period are unchanged; (d) Within forty-five (45) days after each quarterly accounting period, a certificate, signed by a responsible officer of Borrower, certifying compliance with all terms and conditions of this Agreement; (e) Within forty-five (45) days after each quarterly accounting period, the Guarantor's consolidated and consolidating financial statements -15- 20 prepared by the Guarantor; (f) Promptly upon request of either Bank, such other statements, lists of property and accounts, budgets, forecasts or reports as to Borrower or Guarantor as Banks may reasonably request; 6.3 Books, Records, Audits and Inspections. Borrower and Guarantor must maintain adequate books, accounts and records and prepare all financial statements required hereunder in accordance with generally accepted accounting principles consistently applied, and in compliance with the regulations of any governmental regulatory body having jurisdiction over Borrower or Guarantor or their business and permit employees or agents of either Bank at any reasonable time to inspect Borrower's and Guarantor's properties and to examine or audit Borrower's and Guarantor's books, accounts, and records and make copies and memoranda thereof. 6.4 Adjusted Tangible Net Worth. Maintain on a consolidated basis Adjusted Tangible Net Worth of at least the amount indicated as of the end of each quarter set forth below. "Adjusted Tangible Net Worth" means Tangible Net Worth minus the proceeds of any public or private offering of stock of the Guarantor after the date of this Agreement, other than stock sold under the Employee Stock Purchase Plan and Stock Options:
Quarter Ending Amount -------------- ------ March 31, 1995 $124,000,000 June 30, 1995 $127,000,000 September 30, 1995 $131,000,000 December 31, 1995 $140,000,000 March 31, 1996 $144,000,000 June 30, 1996 $147,000,000 September 30, 1996 $151,000,000 December 31, 1996 $161,000,000 March 31, 1997 $166,000,000 June 30, 1997 $171,000,000 September 30, 1997 $177,000,000 December 31, 1997 $191,000,000
-16- 21 6.5 Total Liabilities to Adjusted Tangible Net Worth. Not permit the ratio of consolidated total liabilities (as shown on consolidated balance sheet, prepared in accordance with generally accepted accounting principles) to Adjusted Tangible Net Worth to exceed the figures indicated as of each date set forth below: (a) As of March 31, June 30, and September 30 of each year: 0.90:1.00. (b) As of December 31 of each year: 1.25:1.00. 6.6 Fixed Charge Coverage Ratio. As of the end of each quarterly accounting period set forth below, achieve a consolidated Fixed Charge Coverage Ratio at least equal to the ratio indicated: (a) As of March 31, June 30, and September 30 of each year: 1.25:1.00. (b) As of December 31 of each year: 1.50:1.00. 6.7 Capital Expenditures. Not, in any of the periods specified below, on a consolidated basis, expend or incur, or consent to expend or incur, Capital Expenditures of more than amounts indicated. These limitations are non-cumulative, i.e. amounts not used in any period may not be carried forward into the next period; provided, however, that an unused amount not exceeding Two Million Dollars ($2,000,000) may be carried forward into the next period:
Period Amount ------ ------ Fiscal year ending September 30, 1995 $23,500,000 Fiscal year ending September 30, 1996 $17,500,000 Five months ending February 28, 1997 $ 8,500,000 Fiscal year ending September 30, 1997 $23,000,000 Quarter ending December 31, 1997 $ 6,000,000
6.8 Out-Of-Debt Requirement. For each ninety (90) day period ending on March 31 of each year, Borrower and Guarantor must fulfill either the requirements of (a) or of (b) below: (a) Repay all outstanding advances, and not draw any new advances, for a period of at least thirty (30) consecutive calendar days during such ninety (90) day period. This requirement must be fulfilled for the BofA Facility, the -17- 22 BankCal Facility and any indebtedness permitted under paragraphs 6.9(g) and (h) at the same time; or (b) Reduce the amount of all advances (including the BofA Facility, the BankCal Facility and any indebtedness permitted under paragraphs 6.9(g) and (h)) to not more than Fifteen Million Dollars ($15,000,000) for a period of at least sixty (60) consecutive calendar days during such ninety (90) day period. 6.9 Other Indebtedness. Borrower and Guarantor each shall not create or incur any indebtedness for borrowed money or for the deferred purchase price of property under capital leases, or become liable as a surety, guarantor, accommodation endorser, or otherwise for or upon the obligation of any other person, firm or corporation; provided, however, that this Paragraph shall not be deemed to prohibit: (a) the acquisition of goods, supplies or merchandise on normal trade credit; including, but not limited to, indebtedness for the purchase of inventory under the existing agreements with I.T.T. Commercial Finance Corporation and Whirlpool Credit Corporation, in an amount not exceeding Forty Million Dollars ($40,000,000) at any one time; provided, however, that in each case the agreement between the Borrower and the lender (and any amendments thereto) must be in form and substance acceptable to the Banks; (b) the execution of bonds or undertakings in the ordinary course of its business as presently conducted; (c) the endorsement of negotiable instruments received in the ordinary course of its business as presently conducted; (d) indebtedness and lease obligations existing as of the date of this Agreement and which have been disclosed to Banks in writing; (e) leasing of premises for retail store locations, distribution facilities and corporate facilities; (f) equipment rentals for less than one year; (g) additional indebtedness under uncommitted facilities from lenders other than the Banks in an amount outstanding not to exceed the following at any one time: from February 1 through October 31 of any year, Twenty Million Dollars ($20,000,000); and at other times, Forty Million Dollars ($40,000,000); -18- 23 (h) additional indebtedness under uncommitted facilities from either Bank; provided, however, that the total outstanding indebtedness from both Banks (whether under this Agreement or otherwise) plus the total outstanding indebtedness from other lenders under subparagraph (g) above must not exceed the following at any on time: from February 1 through October 31 of any year, Fifty Million Dollars ($50,000,000); and at other times, Seventy Five Million Dollars ($75,000,000). 6.10 Liens. Borrower and Guarantor each shall not create, assume or suffer to exist any security interest, lien (including the lien of an attachment, judgment or execution) or encumbrance, securing a charge or obligation, on or of any of its property, real or personal, whether now owned or hereafter acquired, except: (a) liens, security interests and encumbrances in existence as of the date of this Agreement which have been disclosed to Banks in writing; (b) liens for current taxes, assessments or other governmental charges which are not delinquent or remain payable without any penalty; (c) purchase money security interests in property acquired after the date of this Agreement; provided, however, that no such liens shall cover Borrower's inventory; (d) statutory liens of landlords and liens of carriers, warehousemen, mechanics, materialmen and other liens, other than any lien imposed under ERISA, imposed by law and created in the ordinary course of business for amounts not yet due or which are being contested in good faith by appropriate proceedings and with respect to which adequate reserves or other appropriate provisions are being maintained in accordance with the provisions of GAAP;provided that all such items shall not, in the aggregate, exceed Two Million Dollars ($2,000,000) at any time (excluding any mechanics and materialmen liens which have not been recorded in the real property records and for which no other enforcement action has been taken); provided, however, that no such liens shall cover Borrower's inventory; 6.11 Acquisitions and Investments. Borrower and Guarantor each shall not acquire or purchase the assets or business of any other person, firm, or corporation; and not purchase any stock or make any other investment in any other company, except for: (a) joint ventures for real estate development with respect to the Borrower's retail store locations and distribution facilities, for an aggregate investment in any one fiscal year not exceeding Two Million Five Hundred -19- 24 Thousand Dollars ($2,500,000); such dollar limit to be non-cumulative from year to year; (b) cash and certificates of deposit; (c) U.S. treasury bills and other obligations of the federal government; (d) readily marketable commercial paper with a maturity not exceeding sixty (60) days; (e) bankers' acceptances; (f) repurchase agreements covering U.S. government securities; 6.12 Dividends. Borrower and Guarantor shall not (and shall not permit any of their subsidiaries to) declare or pay any dividends on any of their respective shares except dividends payable in capital stock, and not purchase, redeem or otherwise acquire for value any of their respective shares, or create any sinking fund in relation thereto; provided, however, that Borrower and Guarantor may purchase stock from their employees for a consideration not exceeding, in the aggregate, One Million Five Hundred Thousand Dollars ($1,500,000) in any one fiscal year; such dollar limit to be non-cumulative from year to year; 6.13 Loans to Officers. Borrower and Guarantor each shall not make any loans, advances or other extensions of credit to any of Borrower's or Guarantor's executives, officers, employees, directors or shareholders (or any relatives of any of the foregoing); provided, however, that Borrower and Guarantor may make such loans, advances and extensions of credit to executives, officers and employees in an amount not exceeding, in the aggregate, One Million Dollars ($1,000,000) in any one fiscal year; such dollar limit to be non-cumulative from year to year; 6.14 Capital Ownership. Borrower and Guarantor each shall not cause, permit, or suffer any one shareholder to control, directly, indirectly or through affiliates, more than fifty percent (50%) of Guarantor's capital ownership; and Guarantor's capital stock must continue to be entirely owned by Guarantor; 6.15 Sales and Leasebacks. Borrower and Guarantor each shall: (a) Not dispose of any of its assets except for full, fair and reasonable consideration; (b) Not enter into any sale and leaseback agreement covering any of its fixed or capital assets; provided, however, that Borrower may enter into sale/leaseback agreements covering rolling stock, equipment and fixtures as follows: (i) agreements covering assets first used by Borrower or Guarantor within the 90 days prior to the agreement; and (ii) additional agreements in an aggregate amount not exceeding -20- 25 Five Million Dollars ($5,000,000) in each fiscal year; such dollar limit to be non-cumulative from year to year; 6.16 Existence and Properties. Borrower and Guarantor each shall maintain and preserve Borrower's and Guarantor's existence and all rights, privileges and franchises now enjoyed, conduct Borrower's and Guarantor's business in an orderly, efficient and customary manner, keep all Borrower's and Guarantor's properties in good working order and condition, and from time to time make all needed repairs, renewals or replacements thereto and thereof so that the efficiency of such property shall be fully maintained and preserved; 6.17 Liquidations and Mergers. Borrower and Guarantor each shall not liquidate or dissolve or enter into any consolidation, merger, partnership, joint venture or other combination, except for (a) joint ventures permitted in Paragraph 6.11 above; and (b) any merger whose primary purpose is to reincorporate in another state; provided that any other secondary purpose is reasonably acceptable to both Banks in their reasonable discretion; and provided further that Borrower provides to Banks such documentation as reasonably required by either Bank; 6.18 Sale of Assets. Borrower and Guarantor each shall not sell, lease, or otherwise dispose of its business or assets as a whole or such as in the opinion of either Bank constitute a substantial portion of its business or assets except in the ordinary course of its business as heretofore conducted; 6.19 Insurance. Borrower and Guarantor each shall maintain and keep in force insurance of the type usual for the business it is in, and deliver to Banks upon either Bank's request a copy of each insurance policy or, if permitted by Banks, a certificate of insurance listing all insurance in force; 6.20 Compliance with Laws. Borrower and Guarantor each shall at all times comply with, or cause to be complied with, all laws, statutes (including but not limited to any fictitious name statute), rules, regulations, orders and directions of any governmental authority having jurisdiction over Borrower or Guarantor or Borrower's or Guarantor's business; 6.21 Accuracy of Financial Information. Borrower and Guarantor each shall cause all financial information upon submission by Borrower or Guarantor to Banks to be fairly presented in all material respects and complete to the extent necessary to give Banks a true and accurate knowledge of the subject matter thereof; 6.22 Additional Acts. Borrower and Guarantor each shall perform, on request of either Bank, such acts as may be reasonably necessary or advisable to carry out the intent of this Agreement; 6.23 Business Activities. Borrower and Guarantor each shall not engage in any business activities or operations substantially different from or unrelated to present business activities and operations; -21- 26 6.24 Change in Name, Structure or Location. Notify Banks in writing prior to any change in (a) Borrower's or Guarantor's name, (b) Borrower's or Guarantor's business or legal structure, or (c) Borrower's or Guarantor's place of business or chief executive office if Borrower or Guarantor has more than one place of business; 6.25 Subsidiaries. Borrower and Guarantor each shall not create or acquire any subsidiaries without the prior written consent of both Banks, which consent shall not unreasonably be withheld; 6.26 Environmental Quality. Borrower and Guarantor each shall comply with all applicable laws, rules, regulations, orders and directives relating to environmental quality, where a failure to so comply may result in a material adverse effect on the Borrower's or Guarantor's financial condition or ability to repay the credit outstanding under this Agreement; 6.27 Use of Proceeds. Borrower shall use the proceeds of the credit provided by this Agreement for general working capital purposes, and such other purposes as may be acceptable to Banks; 6.28 Taxes. Borrower and Guarantor each shall pay all taxes when due. 6.29 Current Ratio. Maintain on a consolidated basis a ratio of current assets to current liabilities, as of the end of each fiscal quarter, at least equal to 1.40:1.00. For the purposes of this computation, all amounts outstanding under lines of credit, including the BofA Facility and the BankCal Facility, shall be considered current liabilities. 7. Events of Default The occurrence of any of the following Events of Default shall terminate any obligation on the part of either Bank to extend credit under this Agreement and, at the option of each Bank, shall make all obligations of Borrower to such Bank under or in respect of this Agreement and any instrument or agreement required under this Agreement immediately due and payable, without notice of default, presentment or demand for payment, protest or notice of nonpayment or dishonor, or other notices or demands of any kind or character: 7.1 Failure to Pay. Borrower fails to pay when due, any instalment of interest or principal or any other sum due under this Agreement in accordance with the terms hereof; 7.2 Breach of Representation or Warranty. Any representation or warranty herein or in any agreement, instrument or certificate executed pursuant hereto or in connection with any transaction contemplated hereby proves to have been false or misleading in any material respect when made; -22- 27 7.3 Falsity of Information. Any financial or other information delivered by Borrower or Guarantor to Banks proves to be false or misleading in any material respect; 7.4 Suits. One or more suits are filed against Borrower or Guarantor by a trade creditor or trade creditors of Borrower or Guarantor in an aggregate amount of at least One Million Dollars ($1,000,000) provided that such suit may have a material adverse impact on Borrower or Guarantor; 7.5 Judgments. One or more judgments or arbitration awards are entered against Borrower or Guarantor, or Borrower or Guarantor enters into any settlement agreements with respect to any litigation or arbitration, in the aggregate amount of One Million Dollars ($1,000,000) or more on a claim or claims not covered by insurance; 7.6 Failure to Pay Debts; Voluntary Bankruptcy. Borrower or Guarantor fails to pay its debts generally as they come due, or files any petition, proceeding, case, or action for relief under any bankruptcy, reorganization, insolvency, or moratorium law, or any other law or laws for the relief of, or relating to, debtors; 7.7 Involuntary Bankruptcy. An involuntary petition is filed under any bankruptcy or similar statute against Borrower or Guarantor, or a receiver, trustee, liquidator, assignee, custodian, sequestrator, or other similar official is appointed to take possession of the properties of Borrower or Guarantor; provided, however, that such Event of Default shall be deemed cured if such petition or appointment is set aside or withdrawn or ceases to be in effect within sixty (60) days from the date of said filing or appointment; 7.8 Governmental Action. Any governmental regulatory authority takes or institutes action which, in the opinion of either Bank, will materially adversely affect Borrower's or Guarantor's condition, operations or ability to pay Borrower's obligations under this Agreement or any instrument or agreement required under this Agreement; 7.9 Default of Other Financial Obligations. Any default occurs under any other agreement involving the borrowing of money or the extension of credit to which Borrower or Guarantor may be a party as borrower, guarantor or instalment purchaser if such default consists of the failure to pay any obligation when due or if such default gives to the holder of the obligation concerned the right to accelerate the obligation; 7.10 Default of Other Bank Obligations. Any default occurs under any other obligation of Borrower or Guarantor to either Bank or to any subsidiary or affiliate of either Bank, which default has -23- 28 not been waived in writing by such Bank or cured by Borrower or Guarantor within any applicable grace period; 7.11 Material Adverse Change. Any material adverse change occurs in the financial condition or results of operations of Borrower or Guarantor or in Borrower's or Guarantor's ability to perform its obligations under this Agreement or under any instrument or agreement required by this Agreement; 7.12 ERISA Plan Termination. Any ERISA Plan termination or any full or partial withdrawal from an ERISA Plan occurs which could result in liability of Borrower or Guarantor to the Pension Benefit Guaranty Corporation or to the ERISA Plan in an aggregate amount which, in the reasonable opinion of either Bank, will have a material adverse effect on the financial condition of Borrower or Guarantor; 7.13 Other Breach Under Agreement. Borrower or Guarantor breaches, or defaults under, any term, condition, provision, representation or warranty contained in this Agreement not specifically referred to in this Article. 8. Miscellaneous 8.1 Successors and Assigns. This Agreement shall bind and inure to the benefit of the parties hereto and their respective successors and assigns; provided, however, that Borrower shall not assign this Agreement or any of the rights, duties or obligations of Borrower hereunder without the prior written consent of both Banks. 8.2 Consents and Waivers. No consent or waiver under this Agreement shall be effective unless in writing. No waiver of any breach or default shall be deemed a waiver of any breach or default thereafter occurring. 8.3 Governing Law. This Agreement shall be governed by and construed under the laws of the State of California. 8.4 Costs and Attorneys' Fees. Borrower agrees to pay to Banks, on demand, all costs, expenses and attorneys' fees (including allocated costs for in-house legal services) incurred by either Bank in connection with the preparation, administration and enforcement of this Agreement and any instrument or agreement required under this Agreement, including without limitation during any workout, attempted workout, and/or in connection with the rendering of legal advice as to the Banks' rights, remedies, and obligations under this Agreement. In the event a legal action or arbitration proceeding is commenced in connection with the enforcement of this Agreement or any instrument or agreement required under this Agreement, the prevailing party shall be entitled to reasonable attorneys' fees (including allocated costs for in-house legal services), costs and necessary disbursements incurred in connection with such action or proceeding (including -24- 29 any proceeding for declaratory relief, any counterclaim to any proceeding, or any appeal), as determined by the court or arbitrator. 8.5 Integration. This Agreement and any instrument, agreement or document attached hereto or referred to herein (a) integrate all the terms and conditions mentioned herein or incidental hereto, (b) supersede all oral negotiations and prior writings in respect to the subject matter hereof, and (c) are intended by the parties as the final expression of the agreement with respect to the terms and conditions set forth in this Agreement and any such instrument, agreement or document and as the complete and exclusive statement of the terms agreed to by the parties. In the event of any conflict between the terms, conditions and provisions of this Agreement and any such instrument, agreement, or document, the terms, conditions and provisions of this Agreement shall prevail. 8.6 Participations. (a) Any Bank (a "Transferor") may from time to time sell, assign, grant participations in, or otherwise transfer to any other person, firm or corporation (a "Participant") all or part of the obligations of Borrower and Guarantor to Transferor under this Agreement. (b) Borrower agrees that each transfer of its obligations under this Agreement will give rise to a direct obligation of Borrower to the Participant and that Participant shall have the same rights and benefits under this Agreement as it would have if it were a Bank party to this Agreement, including rights and benefits under Paragraphs 3.10 and 3.11 above. (c) Each transferor shall remain liable for the performance of all of its obligations under this Agreement notwithstanding any transfer by such Transferor of Borrower's obligations under this Agreement. (d) Each transfer of Borrower's obligations under this Agreement shall be on terms which provide that: (i) Participant shall not be entitled to take or refrain from taking, or to require Transferor to take or refrain from taking, any action under this Agreement or any instrument or agreement required hereunder other than through Transferor; and (ii) Except in case of insolvency, bankruptcy, receivership or equivalent proceedings: (A) Participant shall deal only with Transferor; and (B) Borrower shall not be required to deal with Participant. (e) Borrower authorizes each Bank and each Participant, upon the occurrence of an Event of Default, to proceed directly by right of setoff, banker's lien, or -25- 30 otherwise, against any assets of Borrower which may be in the hands of Bank or such Participant, respectively. Borrower authorizes each Bank to disclose to any prospective Participant and any Participant any and all information in such Bank's possession concerning Borrower, Guarantor and this Agreement. 8.7 Arbitration; Reference Proceeding. (a) Any controversy or claim between or among the parties, including but not limited to those arising out of or relating to this Agreement or any agreements or instruments relating hereto or delivered in connection herewith and any claim based on or arising from an alleged tort, shall at the request of any party be determined by arbitration. The arbitration shall be conducted in accordance with the United States Arbitration Act (Title 9, U.S. Code), notwithstanding any choice of law provision in this Agreement, and under the Commercial Rules of the American Arbitration Association ("AAA"). The arbitrator(s) shall give effect to statutes of limitation in determining any claim. Any controversy concerning whether an issue is arbitrable shall be determined by the arbitrator(s). Judgment upon the arbitration award may be entered in any court having jurisdiction. The institution and maintenance of an action for judicial relief or pursuit of a provisional or ancillary remedy shall not constitute a waiver of the right of any party, including the plaintiff, to submit the controversy or claim to arbitration if any other party contests such action for judicial relief. (b) Notwithstanding the provisions of subparagraph (a), no controversy or claim shall be submitted to arbitration without the consent of all parties if, at the time of the proposed submission, such controversy or claim arises from or relates to an obligation to either Bank which is secured by real property collateral located in California. If all parties do not consent to submission of such a controversy or claim to arbitration, the controversy or claim shall be determined as provided in subparagraph (c). (c) A controversy or claim which is not submitted to arbitration as provided and limited in subparagraphs (a) and (b) shall, at the request of any party, be determined by a reference in accordance with California Code of Civil Procedure Sections 638 et seq. If such an election is made, the parties shall designate to the court a referee or referees selected under the auspices of the AAA in the same manner as arbitrators are selected in AAA-sponsored proceedings. The presiding referee of the panel, or the referee if there is a single referee, shall be an active attorney or retired judge. Judgment upon the award rendered by such referee or referees shall be entered in the court in -26- 31 which such proceeding was commenced in accordance with California Code of Civil Procedure Sections 644 and 645. (d) No provision of this Paragraph shall limit the right of any party to this Agreement to exercise self-help remedies such as setoff, to foreclose against or sell any real or personal property collateral or security, or to obtain provisional or ancillary remedies from a court of competent jurisdiction before, after, or during the pendency of any arbitration or other proceeding. The exercise of a remedy does not waive the right of either party to resort to arbitration or reference. At each Bank's option, foreclosure under a deed of trust or mortgage may be accomplished either by exercise of power of sale under the deed of trust or mortgage or by judicial foreclosure. 8.8 Notices. All notices required hereunder shall be personally delivered or sent by first class mail, postage prepaid, to the addresses set forth on the signature page of this Agreement, or to such other addresses as the parties hereto may specify from time to time in writing. 8.9 Headings. Article and paragraph headings are for reference only and shall not affect the interpretation or meaning of any provisions of this Agreement. 8.10 Severability. The illegality or unenforceability of any provision of this Agreement or any instrument or agreement required hereunder shall not in any way affect or impair the legality or enforceability of the remaining provisions of this Agreement or any instrument or agreement required hereunder. 8.11 Counterparts. This Agreement may be executed in as many counterparts as may be deemed necessary or convenient, and by the different parties hereto on separate counterparts each of which, when so executed, shall be deemed an original but all such counterparts shall constitute but one and the same agreement. 8.12 Indemnification. The Borrower shall indemnify the Banks against, and hold the Banks harmless from, all claims, actions, losses, and expenses, including attorneys' fees and costs incurred by the Banks, arising from any contention that the Borrower has failed to comply with any law, rule, regulation, order or directive applicable to the Borrower's sales or leases to or performance of services for the Borrower's customers, including without limitation those sales, leases, and services requiring consumer or other disclosures. This indemnification shall survive the repayment of all principal, interest and fees payable under this Agreement. 8.13 Setoff. Each Bank agrees that it will not set off amounts due to such Bank against deposits made by Borrower or Guarantor at such Bank, unless there has been an Event of Default under -27- 32 Paragraph 7.6 or 7.7 above. Nothing in this Paragraph shall constitute a waiver of any rights the Banks may have to place an administrative hold on any deposits upon the occurrence of an Event of Default under Paragraph 7.6 or 7.7 above. 9. Relation of Banks. 9.1 Independent Facilities. The obligations of each Bank under this Agreement are several and not joint, and the credit facilities provided by each Bank under this Agreement are independent. 9.2 No Agency. Neither Bank is the agent of the other under this Agreement, and each Bank shall manage its own credit facilities and enforce its own rights and remedies under this Agreement; provided, however, that (a) any amendment of this Agreement requires the consent of both Banks, and (b) any waiver of any provision of this Agreement shall be binding only on such Bank or Banks as consent to the waiver. 9.3 No Requirement to Share. Neither Bank shall be obligated to share with the other Bank any payments or other amounts received from, or for the account of, the Borrower or the Guarantor; provided, however, that to the extent that either Bank exercises the right of setoff as permitted in Paragraph 8.13 above, then that Bank shall share the amount recovered by such setoff, with each Bank receiving from such setoff an amount proportional to the ratio of the total credit outstanding under this Agreement from each Bank at the time of the setoff. The amount shared with the other Bank shall constitute a purchase of a participation in the other Bank's credit outstanding to the Borrower. 9.4 Notices. Each Bank (the "Notifying Bank") shall promptly give notice to the other Bank (the "Receiving Bank") of any (a) declaration of Borrower's default made by the Notifying Bank; (b) termination of the availability of additional credit from the Notifying Bank; or (c) acceleration of the due date of any payment to be made to the Notifying Bank. Upon receipt of such notice, the Receiving Bank shall have the right to terminate the availability of any additional credit from the Receiving Bank. 9.5 Independent Credit Investigations. Each Bank represents that it has made and agrees that it shall continue to make its own independent investigation of the financial condition and affairs of Borrower and Guarantor and its own appraisal of the creditworthiness of Borrower and Guarantor. Neither Bank has any duty to provide the other Bank with any credit or other information with respect to Borrower, Guarantor or this Agreement; provided, however, that Borrower agrees that the Banks may share any such information as the Banks may choose. -28- 33 9.6 Other Relationships. Each Bank may accept deposits from, lend money to, act as agent or trustee for other lenders to, and generally engage in any kind of banking, trust or other business with Borrower or Guarantor as if it were not a party to this Agreement. In Witness Whereof, the parties hereto have executed this Agreement as of the day and year first above written. Bank of America National Trust and Savings Association The Good Guys - California, Inc. By: /s/ Hagop Bouloukian By: /s/ Robert A. Gunst --------------------------- ---------------------------- Title: Vice President Title: President and CEO ------------------------ ------------------------- By By --------------------------- ----------------------------- Title Title ------------------------ -------------------------- Address for notices: Address for notices: San Francisco Commercial 7000 Marina Boulevard Banking, Concourse Level Brisbane, CA 94005-1830 345 Montgomery Street San Francisco, CA 94104 The Bank of California N.A. By: /s/ Wanda Headrick --------------------------- Title: Vice President ------------------------ By --------------------------- Title ------------------------ Address for notices: San Francisco Corporate Banking 17th Floor 400 California Street San Francisco, CA 94104 (Attach Exhibit A - Form of Financial Statements) -29- 34 CONTINUING GUARANTY THIS CONTINUING GUARANTY (the "Guaranty") is made by the undersigned (the "Guarantor") in favor of THE BANK OF CALIFORNIA, N.A. (the "Bank"). 1. CONSIDERATION. Guarantor acknowledges that the giving of this Guaranty is a material condition precedent to Bank's extending or continuing any present or future financial accommodations of whatever nature to any one or more of THE GOOD GUYS -- CALIFORNIA, INC., a California corporation (the "Borrower") and that Guarantor has derived or expects to derive material financial advantages or other benefits commensurate in value to the obligations and liabilities being undertaken by Guarantor under the terms of this Guaranty. 2. INDEBTEDNESS GUARANTEED. In consideration of the foregoing, and for other valuable consideration, Guarantor unconditionally guarantees and promises to pay to Bank, on demand, in lawful money of the United States of America all Indebtedness of Borrower to Bank. "Indebtedness" is used herein in its most comprehensive sense and includes all debts, obligations and liabilities of Borrower or any one or more of them to Bank currently existing or now or hereafter made, incurred or created, whether voluntary or involuntary and however arising or evidenced, whether direct or acquired by assignment or succession, whether due or not due, absolute or contingent, liquidated or unliquidated, determined or undetermined, and whether Borrower may be liable individually or jointly with others, or whether recovery upon such debt may be or become barred by any statute of limitation or otherwise unenforceable. This is a continuing guaranty relating to any Indebtedness, including that arising under successive transactions which shall either continue the Indebtedness or from time to time renew it after it has been satisfied. This Guaranty may be revoked only by Bank's actual receipt of written notice from Guarantor. Where Bank has a contractual commitment to extend credit, such revocation shall not be effective with respect to Indebtedness created under such commitment. This Guaranty shall continue to be effective or be reinstated if at any time any payment of any Indebtedness is rescinded or must otherwise be returned by Bank upon the insolvency, bankruptcy or reorganization of Borrower, Guarantor or otherwise, all as though such payment had not been made. 3. GUARANTOR'S LIABILITY. The liability of Guarantor under this Guaranty shall not exceed at any time an amount equal to the sum of (a) THIRTY FIVE MILLION AND NO/100 DOLLARS ($35,000,000.00) (b) all interest, fees and charges constituting Indebtedness upon or with respect to such amount, (c) Guarantor's obligations to pay attorneys' fees and all other costs and expenses which may be incurred by Bank in the protection, preservation or enforcement of any rights of Bank under this Guaranty, and (d) Guarantor's obligations to reimburse and indemnify Bank hereunder. In any event, Bank may permit the Indebtedness to exceed Guarantor's liability under this Guaranty. Any payment by Guarantor to Bank hereunder shall not reduce its maximum obligations hereunder, unless Guarantor has given Bank actual written notice that such payment shall Page 1 35 have such effect at or prior to the time of such payment. The foregoing limitation of liability applies only to Guarantor's obligations under this Guaranty; unless otherwise specifically agreed in writing, every other guaranty heretofore, now, or hereafter given by Guarantor to Bank with respect to the Indebtedness shall be deemed independent of this Guaranty and every other such guaranty, so that as each such guaranty is enforced or collected upon in a manner that reduces the liability of Guarantor thereunder, the liability of all guarantors on all other guaranties shall remain intact. 4. NATURE OF GUARANTOR'S LIABILITY. Guarantor's obligations and liabilities under this Guaranty are independent of Borrower's obligations and liabilities under any documents evidencing Indebtedness ("Loan Documents"), and a separate action or actions may be brought and prosecuted against Guarantor whether action is brought against Borrower or any other guarantor or Person, whether or not any foreclosure has been or is going to be initiated with respect to any security for the Indebtedness, or whether Borrower or any other guarantor or Person are joined in any such action or actions. Recovery realized from any other guarantor of the Indebtedness, or recovery from any source other than a direct payment by Guarantor, shall be first credited upon that portion of the Indebtedness which exceeds the maximum liability of Guarantor hereunder. As used in this Guaranty, "Person" means any individual or entity, and may include Bank where the construction so allows. 5. GUARANTOR'S AUTHORIZATION. Guarantor authorizes Bank, without notice, demand or consent of any kind, and without affecting Guarantor's liability under this Guaranty, from time to time, to (a) renew, alter, compromise, extend, accelerate or otherwise change any of the terms of the Indebtedness or any part thereof, including changing the rate of interest thereon or the time for payment thereof, (b) accept partial payments on the Indebtedness, (c) extend credit to Borrower on an unsecured basis or take security or other support for the obligations evidenced by this Guaranty or the Indebtedness, and exchange and enforce, waive or release any such security or other support or any part thereof, (d) accept new or additional documents, instruments or agreements relative to the Indebtedness, (e) apply any security or other support and direct the order or manner of sale or other disposition of such property as Bank, in its sole discretion, may determine, and (f) release or substitute any Person liable on the Indebtedness, any other guarantor of the Indebtedness, or any other Person providing support for the Indebtedness to Bank, this Guaranty, or any other guaranty. Guarantor waives all rights and defenses based on Bank's taking or failing to take none, some, any or all of the actions referred to in this section. 6. WAIVERS. (a) Guarantor waives any and all rights or defenses arising by reason of: (i) the absence, impairment or loss of any right of reimbursement, contribution or subrogation, or any other right or remedy of Guarantor PAGE 2 36 against Borrower or any other guarantor or Person, or with respect to any security interest or other support for the Indebtedness, (ii) any disability or other defense of Borrower, or the partial or complete cessation from any cause of the liability of Borrower for the Indebtedness for any reason other than payment in full and final satisfaction, (iii) the application by Borrower of the proceeds of any Indebtedness for purposes other than the purposes represented by Borrower to Bank or Guarantor or intended or understood by Bank or Guarantor, (iv) any act or omission by Bank which directly or indirectly results in or aids the discharge of Borrower or any of the Indebtedness by operation of law or otherwise, (v) the statute of limitations in any action under this Guaranty or in any action for the collection of any Indebtedness, (vi) the omission of any demand, presentment, protest or notice of any kind, including without limitation notice of the existence, creation, incurring, modification, substitution or renewal of any new or additional Indebtedness or of any action or non-action on the part of Borrower, Bank or any other Person in connection with any Indebtedness, or (vii) any exchange, release, loss, damage, impairment or non-perfection of any security or support for the Indebtedness, or any release, amendment, waiver of or consent to depart from the terms of any security agreement, other support or any other guaranty, for all or any of the Indebtedness. (b) Guarantor waives all rights to require Bank to (i) seek payment of the Indebtedness from borrower, any other guarantor or Person, or from any collateral securing the Indebtedness, before enforcing Guarantor's obligations under this Guaranty, (ii) apply any payments from any source in any particular manner, including without limitation to apply any payments to any portion of the Indebtedness guaranteed by this Guaranty before applying them to anything else, (iii) give notice of the terms, time and place of any public or private sale of personal property security for the Indebtedness or comply with any other provisions of Section 9504 of the Uniform Commercial Code or its equivalent, from time to time in effect in the state governing such security interest, (iv) give notice of any judicial or nonjudicial sale or foreclosure of any real property securing any portion of the Indebtedness, or (v) enforce any remedy which Bank now has or hereafter may have against Borrower, any other guarantor or Person. Guarantor also waives any benefit of, and any right to participate in or direct the PAGE 3 37 application of, any now existing or hereafter acquired security or support for the Indebtedness. (c) Guarantor acknowledges that Guarantor is entitled under various legal doctrines to reimbursement from Borrower to the extent Guarantor pays the Indebtedness. Nonetheless, Guarantor hereby waives any and all rights of reimbursement under any legal doctrine including without limitation subrogation, indemnity, contribution, or any other claim arising from the existence or performance of this Guaranty which Guarantor now or hereafter may have against Borrower or any Person, or their respective properties, directly or contingently liable for the Indebtedness, or any direct or contingent security for the Indebtedness. The preceding sentence shall remain in effect only until all of the Indebtedness has been paid in full, including without limitation any portion thereof which exceeds the liability of Guarantor under this Guaranty. (d) Guarantor waives notice of acceptance of this Guaranty. Without limiting the generality of the waivers contained in this Guaranty, Guarantor waives all rights, defenses and other benefits under the following statutes, judicial decisions applying these statutes, and further waives all equivalent legal rules in any form in all applicable jurisdictions: California Civil Code sections 2787-2855. Guarantor acknowledges that Bank is relying on all of the waivers contained throughout this Guaranty in creating and continuing the Indebtedness, and that these waivers are a material part of the consideration to Bank for creating and continuing the Indebtedness. 7. DILIGENT INQUIRIES. Guarantor assumes the responsibility for being and keeping informed of the financial condition of Borrower and any other guarantor or Person liable on, or with respect to, any of the Indebtedness, and of all other circumstances bearing upon the risk of nonpayment of the Indebtedness, and confirms that Bank shall have no duty to advise Guarantor of any information regarding such condition or any such circumstances whether or not materially adverse. Guarantor waives all rights and defenses based on Bank's failure to perform any such duty. 8. AUTHORIZATION OF BORROWER. Where Borrower is a corporation, partnership or other business entity, Bank shall have no duty to inquire into the powers of Borrower or its officers, directors, partners, trustees or agents acting or purporting to act on Borrower's behalf (and Guarantor waives all rights and defenses based on Bank's failure to perform any such duty), and any Indebtedness made or created in reliance upon the exercise of such powers shall be covered by this Guaranty. Bank's books and records showing the account between Bank and Borrower shall be admissable in any proceeding or action to enforce this Guaranty and shall be conclusive and binding upon Guarantor absent obvious error. PAGE 4 38 9. GENERAL PROVISIONS. 9.1 NOTICES. Any notice given by any party under this Guaranty shall be in writing and personally delivered, sent by United States mail, postage prepaid, or sent by telex or other authenticated message, charges prepaid and addressed as follows: To Guarantor: To Bank: The Good Guys, Inc. The Bank of California, N.A. 7000 Marina Blvd. 400 California Street Brisbane, California 94005-1830 San Francisco, California 94104 Attn: Robert A. Gunst, President Attn: Wanda Headrick, Vice President FAX or Telex No. (415) 615-6287 FAX or Telex No. (415) 765-2634 Guarantor and Bank may change the place to which notices, requests, and other communications are to be sent by giving written notice of such change to the other. 9.2 BINDING EFFECT. This Guaranty shall be binding upon Guarantor, its permitted successors, representatives and assigns, and shall inure to the benefit of Bank and its successors and assigns; provided, however, that Guarantor may not assign or transfer its obligations under this Guaranty without the prior written consent of Bank. Bank reserves the right to sell, assign, or transfer its rights and powers under this Guaranty in whole or in part without notice to Guarantor. In that connection, Bank may disclose all documents and information which Bank now or hereafter may have relating to this Guaranty, Guarantor or Guarantor's operations or finances. Guarantor waives any duty of confidentiality Bank may have with respect to information concerning Guarantor and Guarantor's operations and finances, as well as all rights and defenses based on Bank's failure to comply with any such duty, in the circumstances covered by the preceding two sentences. 9.3 NO WAIVER. Any waiver, consent or approval of any kind by Bank must be in writing and shall be effective only to the extent set forth in such writing. No failure or delay on the part of Bank in exercising any power, right or privilege under this Guaranty shall operate as a waiver thereof, and no single or partial exercise of any such power, right or privilege shall preclude any further exercise thereof, or the exercise of any other power, right or privilege. 9.4 RIGHTS CUMULATIVE. All rights and remedies existing under this Guaranty are cumulative to, and not exclusive of, any other rights or remedies under contract or applicable law. 9.5 UNENFORCEABLE PROVISIONS. Any provision of this Guaranty which is prohibited or unenforceable in any jurisdiction shall be so only as to such Page 5 39 jurisdiction and only to the extent of such prohibition or unenforceability, but all the remaining provisions of this Guaranty shall remain valid and enforceable. 9.6 GOVERNING LAW. Except as may be otherwise provided herein, this Guaranty shall be governed by and construed in accordance with the laws of the State of California. 9.7 INDEMNIFICATION. Guarantor shall pay and protect, defend and indemnify Bank and Bank's employees, officers, directors, shareholders, affiliates, correspondents, agents and representatives (other than Bank, collectively "Agents") against, and hold Bank and each Agent harmless from, all claims, actions, proceedings, liabilities, damages, losses, expenses (including, without limitation, attorneys' fees and costs) and other amounts incurred by Bank and each Agent, arising from (i) the matters contemplated by this Guaranty or by any Loan Document or (ii) any contention that Guarantor has failed to comply with any law, rule, regulation, order or directive applicable to Guarantor's business; PROVIDED, HOWEVER, that this indemnification shall not apply to any of the foregoing incurred solely as the result of Bank's or any Agent's gross negligence or willful misconduct. This indemnification shall survive the payment and satisfaction of all of Borrower's obligations and liabilities to Bank. 9.8 REIMBURSEMENT. Guarantor shall reimburse Bank for all costs and expenses, including without limitation reasonable attorneys' fees and disbursements (and fees and disbursements of Bank's in-house counsel) expended or incurred by Bank in any arbitration, mediation, judicial reference, legal action or otherwise in connection with (a) the negotiation, preparation, amendment, interpretation and enforcement of this Guaranty including without limitation during any workout, attempted workout, and/or in connection with the rendering of legal advice as to Bank's rights,remedies and obligations under this Guaranty or any of the Loan Documents, (b) collecting any sum which becomes due Bank under this Guaranty or any Loan Document, (c) any proceeding for declaratory relief, any counterclaim to any proceeding, or any appeal, or (d) the protection, preservation or enforcement of any rights of Bank. For the purposes of this section, attorneys' fees shall include, without limitation, fees incurred in connection with the following: (1) contempt proceedings; (2) discovery; (3) any motion, proceeding or other activity of any kind in connection with a bankruptcy proceeding or case arising out of or relating to any petition under Title 11 of the United States Code,as the same shall be in effect from time to time, or any similar law; (4) garnishment, levy, and debtor and third party examinations; and (5) postjudgment motions and proceedings of any kind, including without limitation any activity taken to collect or enforce any judgment. PAGE 6 40 9.9 ENTIRE AGREEMENT. This Guaranty is intended by Guarantor and Bank as the final expression of Guarantor's obligations and liabilities to Bank described herein and supersedes all prior understandings or agreements concerning the subject matter hereof. This Guaranty may be amended only by a writing signed by Guarantor and Bank. This Continuing Guaranty is a replacement of that certain Continuing Guaranty dated as of September 26, 1995, executed by The Good Guys, Inc., a Delaware corporation in favor of The Bank of California, N.A. IN WITNESS WHEREOF, Guarantor has executed this Guaranty as of October 27, 1995. Acknowledgement: _____ YES _____ NO I/We hereby acknowledge receipt of a copy of this signed guaranty. (If "No", copy mailed to Guarantor on _____________) GUARANTOR THE GOOD GUYS, INC., a Delaware corporation By: /s/ Robert A. Gunst ------------------------------ Robert A. Gunst, President and Chief Executive Officer WITNESS - --------------------------------- - --------------------------------- If the Guarantor(s)' signature cannot be witnessed by the account officer, the Guarantor(s) must have his or her signature notarized or must obtain a signature guaranty of the document from his or her bank. PAGE 7 EX-10.20 10 EXHIBIT 10.20 1 Exhibit 10.20 OPERATING AGREEMENT This OPERATING AGREEMENT (the "Agreement") is made and entered into to be effective as of the 15th day of April 1995 (the "Effective Date"), between MTS, Inc., a California corporation, dba Tower Records/Book/Video ("Tower") and The Good Guys, Inc., a Delaware corporation ("TGGI"). Wilton Company Sahara, a Nevada Limited-Liability Company is hereinafter referred to as the "Developer". Tower and TGGI are sometimes hereinafter referred to collectively as the "Parties" or individually as a "Party." Except as otherwise provided herein, the terms utilized in this Agreement shall have the same meaning as set forth in the Leases (as defined below) between the Parties and Developer. R E C I T A L S A. Developer has executed a lease with TGGI with an Effective Date of February 23, 1995 (the "TGGI Lease") for certain premises (the "TGGI Premises") located in the building to be constructed by the Developer at the corner of Sahara and Decatur, Las Vegas, Nevada (the ""Building"). B. Developer has also executed a lease with Tower with an Effective Date of February 22, 1995 (the "Tower Lease") for certain premises (the "Tower Premises") located in the Building that are adjacent to the TGGI Premises. The TGGI Premises and the Tower Premises are sometimes hereinafter referred to collectively as the "Premises" and the TGGI Lease and the Tower Lease are sometimes hereinafter collectively referred to as the "Leases". C. TGGI and Tower desire to set forth their agreements regarding access to and the conduct of their businesses in their respective Premises and to obtain the consent and agreement of the Developer with respect to such operations. NOW, THEREFORE, the Parties hereto, and, where specified, the Developer, have agreed as follows. 1. Initial Construction. The Parties have approved the design of the shell of the Building which Developer has agreed to construct in a first class manner pursuant to the Leases and the plans, a list of which is attached hereto a Exhibit A (the "Building Shell Plans"). TGGI and Tower have approved the Plans for the layout and design of interior space within their respective Premises and a list of such plans is attached hereto as Exhibit B (the "Interior Space Plans"). Any changes to the Building Shell Plan shall be subject to the approval of TGGI and Tower. 1 2 Upon satisfaction of the conditions set forth in the Tower Lease and in the TGGI Lease, Developer will (1) construct the Building pursuant to the Building Shell Plans, (2) construct the Common Areas (as defined in the Leases), and (3) construct or cause to be constructed as soon as reasonably possible the balance of the improvements on Pads A and B (as defined in the Leases) provided that on an interim basis Parcel A and Parcel B shall be rough graded and treated by Developer to avoid blowing dust and sand, and utilities to the site shall be installed by Developer. TGGI and Tower will construct their respective Tenant Improvements pursuant to the terms of their respective Leases. The Parties will coordinate their construction efforts and cooperate with respect to the selection of contractors, appropriate course of construction insurance, the scheduling of construction and related matters in order to provide for a coordinated opening of the TGGI and Tower stores within their respective Premises. 2. Joint Opening. It is the intent of the Parties to conduct a joint opening of the stores within their respective Premises. Each Party shall use all reasonable efforts and due diligence to obtain such result. 3. Use of Space and Alterations. As shown in the Interior Space Plans, space within the Tower Premises will be dedicated to the sale of TGGI products and space within the TGGI Premises will be dedicated to the sale of Tower products. Additionally, portions of the Tower Premises and the TGGI Premises and a portion of the Common Area (as defined in the Tower Lease and the TGGI Lease) may be utilized for a cafe/coffee bar (the "Cafe") to be operated by an independent third party unless otherwise agreed by the parties; the space within the Building to be utilized for the Cafe is shown on the Interior Space Plans. The operator of the Cafe may also be permitted by Tower and TGGI to locate non-permanently attached kiosks or similar type of facilities containing not more than two hundred (200) square feet of area on the sidewalk portion of the Common Area adjacent to the Building. Tower and TGGI may also permit the operator of the Cafe to install a drive through facility adjacent to the Building as more particularly set forth in the Tower Lease and the TGGI Lease, provided the drive through facility shall be subject to the permitting requirements of the City of Las Vegas and shall not materially reduce the number of parking spaces available in the Common Area. All such installations shall be subject to approval of the Parties as to size, location(s), design, signage and other terms and conditions. Proceeds of all operations of the Cafe shall be divided equally between Tower and TGGI. Changes to the Interior Space Plans which materially affect the designated location of the Cafe or the location of each Party's display of products within the other Party's Premises will be subject to mutual review and approval, provided that if approval thereof is not obtained and the Party that requested the change is not willing to withdraw its request, then either (i) the Party in whose Premises such products are displayed may remove such products and deliver such products to the other Party following five (5) days notice of the requirement for such consent, or (ii) the Party whose products are so displayed may remove such product from the other Party's Premises upon five (5) days prior written notice that such consent will not be granted. 2 3 4. Common Name in Advertising. TGGI and Tower are considering the utilization of a mutually acceptable common name for purposes of publicity and advertising and with respect to signage in the area designated on the Building Shell Plans for such purposes; the name tentatively approved by both Tower and TGGI is "WOW". WOW or such other mutually acceptable common name is hereinafter referred to as the "Common Name". The text, format and cost pertaining to advertising and publicity materials utilizing the Common Name shall be subject to the prior written approval of Tower and TGGI. Neither Tower nor TGGI shall utilize the Common Name in any other locations or with any other co-tenants or co-occupants, except with the prior written consent of Tower in the event TGGI wishes to so utilize the Common Name or the prior written consent of TGGI in the event Tower wishes to so utilize the Common Name. Nothing contained herein shall preclude Tower or TGGI from utilizing names other than the Common Name, with other co-tenants or co-occupants in other locations. Either TGGI or Tower shall, at its sole election, have the option to cause the use of the Common Name to be discontinued by both TGGI and Tower in the conduct of their businesses in their respective Premises. In such event both Tower and TGGI shall, as soon as reasonably practical after receipt of written notice to such effect, cease and desist from the utilization of the Common Name in any manner. In such event the sign(s) containing the Common Name shall be removed from the Building and the Shopping Center; the cost of removal shall be a Shared Expense (as hereinafter defined). 5. Product Sales. TGGI and Tower will use their best efforts to mutually agree upon a point of sale system and a cash reconciliation system. Any changes to such approved systems shall be subject to the prior written consent of both Parties, provided that if the Parties cannot agree the systems shall be maintained separately. 6. Employees. TGGI acknowledges that Tower employees may be selling TGGI inventory which is located in the Tower Premises. Tower acknowledges that TGGI employees may be selling Tower inventory which is located in the TGGI Premises. In no event shall such activity constitute a violation of the exclusive provisions of the TGGI Lease or the Tower Lease. Neither Party nor their employees shall be entitled to compensation from the other Party with respect to such sales. The Parties agree to cooperate in connection with such sales in order to be assured that the employees of each Party are competent and able to conduct such sales in a reasonably knowledgeable and expeditious manner. 7. Operations. Each party shall designate a Store Manager for the store operated on its Premises. The duties of the TGGI Store Manager shall include the supervision of any matters pertaining to the physical condition of the Premises. The TGGI Store Manager shall consult with the Tower Store Manager on a regular basis so that matters requiring joint approval or involving considerations affecting both Premises are resolved to the satisfaction of both Parties. The specifications for any contracts to be let relative to the physical condition of the Building shall be developed jointly by Tower and TGGI; unless otherwise agreed contracts involving substantial financial commitments shall be subject to a mutually acceptable bid procedure and the selection of acceptable bids involving such substantial financial commitments shall be subject to the mutual approval of TGGI and Tower. In 3 4 the event the TGGI Store Manager in consultation with the Tower Store Manager and/or the Chief Financial Officer of Tower is unable to resolve any matters to the mutual satisfaction of both Parties, such matters shall be referred by written notice to the persons to whom notices are to be sent pursuant to Section 17.g below for further discussion and resolution. If a mutually satisfactory resolution is not obtained, the Parties shall take steps to employ an expedited private mediation service to negotiate a binding resolution of the matter. In no event shall either Party be responsible in monetary damages as the result of the failure to agree so long as such Party is acting in good faith. 8. Shared Expenses. Tower and TGGI will enter into contracts for the provision of certain common services at the Premises and to bear equally such expenses (the "Shared Expenses"). Such services include the following: (i) security for TGGI Premises and Tower Premises; (ii) use of outside contractors for interior janitorial and maintenance services; (iii) maintenance and repair of exterior signs; (iv) maintenance and repair of the heating, ventilating and air conditioning system, including replacement of units or portions thereof as required by the Leases; (v) repair and replacement of roof coverings if required pursuant to the terms of the Lease; (vi) utilities supplied to the Premises to the extent not separately metered to the TGGI Premises or the Tower Premises; (vii) insurance expense pursuant to Article 12 of this Agreement; (viii) Common Area Expenses if TGGI and Tower elect to take over the operation of the Common Areas as provided in the Leases; and (ix) such other services as the Parties may deem appropriate to designate as Shared Expenses. The terms of the aforesaid contracts shall be subject to the mutual approval of the Parties and shall be supervised on an on-going basis by the TGGI Store Manager in consultation with the Tower Store Manager or the person(s) to whom notices are to be sent pursuant to Section 17.g below. Notwithstanding the foregoing, each Party may elect to have separate janitorial and maintenance contracts for services to be rendered within their respective Premises. Copies of all such contracts involving Shared Expenses shall be provided to the respective Store Managers and the person(s) to whom notices are to be sent pursuant to Section 17.g below. Nothing contained herein shall require TGGI to continue to provide the services of its Store Manager for such purposes; in the event TGGI elects to cease providing such services, the Parties shall determine by mutual agreement the procedure for resolving all such issues. To the extent that services to be rendered jointly to the TGGI Premises and the Tower Premises benefit disproportionately one of the Parties, the share to be borne by each Party may be adjusted on an equitable basis. To the extent that insurance to be carried pursuant to Section 12 below contains different coverages applicable to either of the Premises, an equitable adjustment to the portion to be borne by the Party requiring the greater coverage shall be made. 9. Payments of Shared Expenses. Shared Expenses incurred pursuant to Sections 7 and 8 hereof shall be paid within fifteen (15) days of receipt of a statement therefore accompanied by copies of invoices pertaining thereto. Each Party reserves the right to audit the records of Shared 4 5 expenses not more often than once per annum with such audit to be conducted within the three (3) year period following payment of any such obligation. 10. Hours of Business. TGGI and Tower agree that the hours for the conduct of business within their respective Premises will be 9:00 a.m. to Midnight, seven (7) days per week. Those hours may be modified upon mutual agreement of the Parties. In the event one Party determines to open or close later than the other Party, reasonable provision for securing the unopened Premises shall be determined by mutual agreement. 11. In-Store Promotions. Nothing contained herein shall be deemed to preclude either Party from conducting in-store promotions including live appearance by persons whose products may be sold within the TGGI Premises or the Tower Premises, provided that in such event (i) the Party conducting the promotion shall provide at least five (5) days prior written notice or other notice as may be mutually agreed in writing by the Parties together with such reasonable additional security services as may be required in connection with such appearance at the sole cost and expense of the Party conducting the promotion, and (ii) such promotion shall be conducted in such a manner that it will not unreasonably interfere with the operations of the other Party. 12. Insurance. The Parties have agreed that the bodily injury and property damage insurance described in Section 12.1A of their respective Leases shall be carried pursuant to separate policies in which each Party names the other Party as an additional insured. In the event the Parties elect pursuant to Section 12.4 of their respective Leases to carry Landlord's Property Insurance and/or Landlord's earthquake and flood damage insurance (as those terms are defined and/or referenced in Section 12.2 of their respective Leases), the expense related thereto shall be treated as a Shared Expense, subject to a mutually acceptable written agreement as to the deductibles with respect to earthquake and flood damage insurance. All policies of insurance delivered to either Party to this Agreement pursuant to this provision must contain a provision that the company writing said policy will give to the other Party twenty (20) days notice in writing in advance of any cancellation or lapse or the effective date of any reduction in the amounts of insurance. 13. Separation. At any time during the Term of the TGGI Lease or the Tower Lease, as those Leases may be extended pursuant to their terms, either Party shall have the right upon sixty (60) days prior written notice to require the construction of a demising wall between the Premises. Upon election by a Party to cause the demising wall to be constructed, and upon such written notice thereof to the other Party, the Party so electing to construct the demising wall shall be entitled to proceed to construct such demising wall in a manner which will not unreasonably interfere with the operations of the other Party. All changes to the respective Premises of each Party, such as the relocation of entrances, modifications to signs, changes to utility systems or other components of the Building, necessitated by the separation of the Premises shall be made pursuant to plans and specifications prepared by the Party electing to construct the demising wall, such plans and specifications to be subject to the reasonable approval of Developer and the other Party. All construction shall be performed in 5 6 accordance with all applicable Laws (as that term is defined in the Tower Lease and in the TGGI Lease). The construction of the demising wall shall be the obligation of the remaining Party if one of the Parties ceases the conduct of business in its Premises or if the Lease of one Party is terminated for any reason. Notwithstanding the foregoing, each Party shall bear an equal share of the cost of such construction (excluding interior painting or other decorative covering of such wall), such sum to be paid within thirty (30) days of receipt of a bill therefore accompanied by reasonable supporting data. 14. Right of First Refusal. In the event any Party (the "Transferor") is in receipt of a valid, bona fide, acceptable written offer (the "Offer") to accept an assignment of its Lease or to sublease all or any portion of its Premises, other than an assignment or sublease pursuant to Section 16.2A of the Party's Lease, said offer shall be submitted in writing (the "Transfer Notice") simultaneously to the other Party (the "Optionee") and to Developer. The Optionee shall have the right to elect to (i) take the assignment of the Transferor's Lease or enter into the sublease as the case may be upon the terms and conditions set forth in the Offer, or (ii) take an assignment of the Transferor's Lease upon and subject to all of the terms and conditions set forth in the Lease if a change of use is included in the Offer; such rights shall be exercised (if at all) by delivery of a written notice of such exercise to Transferor within twenty (20) days of receipt of the Transfer Notice. If either right is exercised, the Transferor shall close its business in its Premises within ninety (90) days after execution by Tower, TGGI and Developer of the documents necessary to convey Transferor's interest in the subject Premises. Optionee's failure to so elect shall constitute a waiver of the right of first refusal with respect to the Offer so long as the transaction is consummated within ninety (90) days of the expiration of the twenty (20) day period. The failure to exercise the foregoing rights in any instance shall not relieve the Transferor or its successor from the obligations set forth herein with respect to any subsequent proposed assignment or sublease. 15. Default and Remedies. A. Default. The occurrence of any of the following events shall constitute a material default under this Agreement giving rise to the rights set forth in Section B below: (i) material breach of the TGGI Lease by TGGI that is not cured within any applicable cure period provided for in the Lease; (ii) material breach of the Tower Lease by Tower that is not cured within any applicable cure period provided for in the Lease; (iii) abandonment or vacation of the Premises by either Party for eighteen (18) days or more other than in connection with a remodeling of the Premises or restoration following a casualty as set forth in Article 13 of the Leases; (iv) the filing for protection under the federal or state bankruptcy protection law which has a material detrimental effect upon the conduct of the business of the bankrupt Party in the Premises; (v) assignment of the Party's Lease or sublease of all or any interest in the Party's Premises in violation of the provisions of Article 16 of the Party's Lease or Section 14 of this Agreement; or (vi) a material default in the terms of this Agreement which is not cured within ten (10) days after written notice thereof. 6 7 In the event of a material default pursuant to Section 15A(vi) hereof, it is agreed that if any monetary default is cured within said ten (10) day period or if the Defaulting Party in good faith within said ten (10) day period commences to cure any non-monetary default and diligently proceeds therewith, then such Party shall not be deemed to be in default hereunder. Developer agrees that all times set forth in the Leases for the cure of a default thereunder shall be deemed extended for an additional ten (10) days period from the date Developer gives the Non-Defaulting Party written notice that the Defaulting Party has not cured its breach of its Lease with Developer in order to enable the NonDefaulting Party (as hereinafter defined) to exercise its remedies as provided for herein. B. Remedies. In the event of any such material default or breach by either Party beyond the period of notice and cure provided in such Party's Lease (hereinafter the "Defaulting Party"), pursuant to Section 15A hereof and in addition to any other remedy available at law or in equity, the Party not then in default (the "NonDefaulting Party") may at any time after five (5) days written notice to the Defaulting Party thereafter: (i) cure the default of the Defaulting Party by payment of monetary sums due or otherwise by undertaking to perform any matter with respect to which breach has occurred; (ii) require an assignment of the Defaulting Party's Lease. In the event the Defaulting Party notifies the Non-Defaulting Party within said five (5) day period that the matter with respect to which a default is claimed is the subject of a litigation or dispute between the Defaulting Party and the Developer, then the Non-Defaulting Party shall not have the option to (a) cure the alleged default, unless the failure would jeopardize the Non-Defaulting Party's Lease and/or its occupancy thereunder, or (b) require an assignment of the Defaulting Party's Lease until the litigation pertaining thereto is concluded and the Defaulting Party is determined to be in default without a cure thereof. Neither Party shall permit the termination of its Lease based on an alleged default under its Lease. Notwithstanding the foregoing, in the event the NonDefaulting Party elects to cure any default by the Defaulting Party, all sums paid by the NonDefaulting Party shall be due from the Defaulting Party within ten (10) days of receipt of a bill therefore together with interest from the date advanced at the rate specified in Section 17(i) hereof. Upon the Defaulting Party's Premises becoming vacant or upon the cessation of the conduct of business in the Premises for a period of eighteen (18) days, the NonDefaulting Party shall have all the rights set forth in this Agreement in addition to all other remedies available at law or in equity. In the event the Lease is assigned in violation of the provisions of the Defaulting Party's Lease or in violation of this Agreement, the Parties agree that the NonDefaulting Party may seek and shall be entitled to obtain such legal and equitable relief as shall be available at law or in equity to prevent the transfer in violation of the terms set forth herein. 16. Indemnity and Waiver of Subrogation. Each Party shall indemnify, without regard to insurance proceeds receivable, defend and save the other Party and such Party's agents, contractors and employees harmless from all 7 8 costs, liabilities, obligations, damages, penalties, claims or actions (including without limitation, any and all sums paid for investigation costs, settlement of claims, consultant and expert fees, and reasonable attorneys' fees, and costs and expenses of litigation and appeal from the first notice of any claim or demand), payable in connection with or resulting from any of the following: a. a breach of any representation or warranty contained in such indemnifying Party's Lease; b. loss of life, personal injury or damage to property, occurring in, on or about the Premises as the result of a negligence, act or omission to act of the indemnifying Party, its agents, contractors or employees; c. any breach or other failure to perform any covenant or agreement under this Agreement; d. the presence of Hazardous Substances (as defined in the indemnifying Party's Lease) in, on or under the Premises, the Building or the Shopping Center at any time during the term of this Lease resulting from the negligence or act or omission of the indemnifying Party, its agents, contractors or employees; or e. violation of or noncompliance with any public law, statute, ordinance, governmental rule or regulation or requirement imposed by any city, county, state or federal authority having jurisdiction over the subject matter pertaining to the indemnifying Party's obligations with respect to its Premises, the Building or the Shopping Center. It shall be the obligation of the indemnifying Party to defend the other Party by counsel reasonably acceptable to the indemnified Party. Each Party hereby waives any rights it may have against the other Party in connection with any of the matters which are the subject of the insurance required to be carried pursuant to Section 12 of this Agreement or which may be carried by such Party in excess of the requirements set forth in Article 12 of the TGGI Lease or the Tower Lease. Each Party on behalf of their respective insurance companies insuring their respective interests against any such loss or risk, waive any right of subrogation it may have against the other Party and each Party will provide evidence to the other within fifteen (15) days of receipt of a written request therefore at any time during the term of this Lease that any policy maintained pursuant to this Agreement or otherwise at such Party's option, shall contain a provision affirming the aforesaid waiver. 17. Miscellaneous. a. Severability. If any term or provision of this Agreement shall, to any extent, be determined by a court of competent jurisdiction to be invalid or unenforceable, the remainder of this Agreement shall not be affected thereby, and each term and provision of this Agreement shall be valid and enforceable to the fullest extent permitted by law; it is the intention of the parties hereto that if any provision of this Agreement is 8 9 capable of two constructions, one of which would render the provision void and the other of which would render the provision valid, then the provision shall have the meaning that renders it valid. b. No Partnership. It is agreed that nothing contained in this Agreement or in any Party's Lease shall be deemed or construed as creating a partnership or joint venture between Tower and TGGI or between any Party and the Developer or cause any of them to be liable and responsible in any way for the obligations or debts of the other. c. Tower Sales. Notwithstanding the provisions of Section 16.e of this Agreement, Tower shall not be prevented from selling material and/or products permitted to be sold under the provisions of the Tower Lease and alleged to be pornographic or obscene unless said materials and/or products are determined to be in violation of applicable obscenity statutes and/or other statutes pursuant to a final non-appealable judgment of a court of competent jurisdiction. d. Time; Binding Effect; Choice of Law. Time is of the essence of this Agreement and each and every provision hereof. The Parties hereto agree that all the provisions of this Agreement are to be construed as both covenants and conditions as though the words imparting such covenants and conditions were used in each separate paragraph hereof. All of the provisions hereof shall bind and inure to the benefit hereto and their respective heirs, legal representatives, successors and assigns. This Agreement shall be covered by the laws of the State of Nevada. e. Waiver. No covenant, term, or condition or the breach thereof shall be deemed waived, except by written consent of the party against whom the waiver is claimed, and any waiver of the breach of any covenant, term or condition shall not be deemed to be a waiver of other covenant, term or condition. Acceptance by either party of any performance by the other after the time the same shall have become due shall not constitute a waiver by the other party of the breach or default of any covenant, term, or condition, unless otherwise expressly agreed in writing by the other party. f. Reasonable Consent. Except as limited elsewhere in this Agreement, wherever in this Agreement or in any matter pertaining to a Party's occupancy of the Premises, such Party shall be required to give its consent or approval to any action on the part of the other, such consent or approval shall not be unreasonably withheld or delayed. Except where other time periods to give or deny consent are otherwise provided in this Agreement, it is agreed that failure to respond in writing to a written request for consent stating the specific reasons for denying same within ten (10) business days from the date of such request shall be deemed to constitute a granting of such consent; if the written request for consent sets forth a shorter time period (but in no event less than five (5) business days) and references this Section of the Agreement, the consent shall be deemed granted at the end of the shorter period unless such consent is denied in writing stating the specific reasons therefor within such shorter time period. In the event of failure to give any such consent, the other party shall be entitled to specific performance at law and shall have such other remedies as are reserved to it under this Agreement, but in no event shall 9 10 either Party be responsible in monetary damages for failure to give consent unless said failure is withheld maliciously or in bad faith. g. Notices Whenever in this Agreement it shall be required or permitted that notice or demand be given or served by either party to this Agreement to or on the other, such notice or demand shall be given or served, and shall not be deemed to have been duly given or served unless in writing and served personally or forwarded by (i) certified or registered mail, return receipt requested, (ii) guaranteed overnight mail delivery service, or (iii) facsimile transmission with evidence of delivery; such notice shall be addressed to the addresses of the parties specified on the signature page hereto and, in the case of Tower, with copies to Walter S. Martin, Devaughn Searson and Russell Solomon at the same address. Date of service of a notice served by mail shall be the date of receipt or refusal of receipt. Either party may change such addresses or the persons to whom the notices are to be sent by written notice by certified or registered mail to the other Party. h. Cost of Suit. If either party or Developer shall bring any action for any relief against the other, declaratory or otherwise, arising out of this Agreement, the losing Party shall pay the successful Party a reasonable sum for attorney's fees and costs that shall be deemed to have accrued on the commencement of such action and shall be paid pursuant to an order of a court of competent jurisdiction. Attorney's fees incurred in enforcing any provision of this Agreement are recoverable as a separate item; this provision is intended to be severable from the provisions of the Lease or the other provisions of this Agreement and to survive any judgment that is not deemed merged into the judgment. i. Interest Charges. Wherever in this Agreement reference is made to the accrual of interest or to interest on sums due to either party, such sums shall bear interest from the date due at a rate equal to the greater of ten percent (10%) per annum or the Reference Rate announced by the Bank of America N.T. & S.A. plus one percent (1%) or the rate of interest to avoid imputed interest pursuant to the provisions of the Internal Revenue Code of 1986 as amended. Notwithstanding anything to the contrary contained herein, interest to be paid hereunder shall be limited to the maximum legal rate payable. Payment of such interest shall not excuse or cure any default under this Agreement unless expressly agreed to in writing. j. Assignment. This Agreement may not be assigned or transferred without (i) the prior written consent of both Parties which may be withheld in such Party's sole and absolute discretion, and (ii) the prior written consent of Developer which consent shall not be unreasonably withheld or delayed and which shall be subject to the provisions of Section 17.f hereof. Any transferee shall expressly assume and agree in writing to be bound by the terms of this Agreement. k. Termination. This Agreement shall terminate upon the occurrence of any of the following events: (i) Expiration or earlier termination of either of the Leases; 10 11 (ii) separation pursuant to Section 13 of this Agreement; (iii) transfer of all or any interest in the Lease pursuant to which the Party ceases conduct of business in the Premises pursuant to Article 5 of such Party's Lease. The provisions of Sections 13 and 16 of this Agreement shall be deemed to survive termination of this Agreement. 1. Entire Understanding. THIS AGREEMENT TOGETHER WITH THE EXHIBITS HERETO CONSTITUTES THE ENTIRE AGREEMENT BETWEEN TGGI AND TOWER RELATIVE TO THE SUBJECT MATTER HEREOF, AND THIS AGREEMENT AND THE EXHIBITS AND ATTACHMENTS MAY BE ALTERED, AMENDED OR REVOKED ONLY BY AN INSTRUMENT IN WRITING SIGNED BY BOTH TOWER AND TGGI. IN WITNESS WHEREOF, the Parties have hereto executed this Agreement to be effective as of the Effective Date. THE GOOD GUYS, INC. MTS, INC., a Delaware corporation a California corporation, dba Tower Records/Book/Video By: /s/ Gregg Steele By: /s/ Walter S. Martin --------------------------- -------------------------- Gregg Steele Vice President Real Estate 7000 Marina Blvd. 2500 Del Monte St., Bldg. C Brisbane, CA 94005-1840 Sacramento, CA 95691 ATTN: Vice President Real Estate ATTN: Michael Solomon Date of Execution: 4/20/95 Date of Execution: 4/20/95 ------------ ------------ 11 12 ACKNOWLEDGEMENT Developer has read and hereby approves the foregoing Agreement and each and every term hereof. Developer acknowledges and agrees that it shall be bound by the provisions of this Agreement pertaining to the transfer of any interest in the Tower Lease and/or the TGGI Lease and their respective Premises pursuant to Sections 14 and 15 hereof. Developer will provide to the other Party a copy of any notice of default given to any Party under the Lease, such notice to be given simultaneously with the notice to the Party against whom the default is alleged by Developer. DEVELOPER AND TOWER AGREE THAT NO CHANGES TO THE TOWER LEASE SHALL BE ENTERED INTO, WHICH WOULD HAVE THE EFFECT OF INCREASING THE BURDEN OF TGGI AS THE RESULT OF THE SHARED EXPENSES REFERRED TO IN SECTION 8 ABOVE OR THE OBLIGATIONS OF TGGI IF IT WERE TO ASSUME THE TOWER LEASE OR SUBLEASE THE TOWER PREMISES, WITHOUT OBTAINING THE PRIOR WRITTEN CONSENT OF TGGI. DEVELOPER AND TGGI AGREE THAT NO CHANGES TO THE TGGI LEASE SHALL BE ENTERED INTO, WHICH WOULD HAVE THE EFFECT OF INCREASING THE BURDEN OF TOWER AS THE RESULT OF THE SHARED EXPENSES REFERRED TO IN SECTION 8 ABOVE OR THE OBLIGATIONS OF TOWER IF IT WERE TO ASSUME THE TGGI LEASE OR SUBLEASE THE TGGI PREMISES, WITHOUT OBTAINING THE PRIOR WRITTEN CONSENT OF TOWER. WILTON COMPANY SAHARA, a Nevada Limited-Liability Company BY: /s/ Jay H. Wilton ------------------------------ Jay H. Wilton, Managing Member 3226 Thatcher Avenue Marina Del Rey, CA 90292 Date of Execution: 4/26/95 12 EX-10.21 11 EXHIBIT 10.21 1 EXHIBIT 10.21 [BANKCAL LOGO] THE BANK OF CALIFORNIA October 27, 1995 THE GOOD GUYS-CALIFORNIA, INC. 7000 Marina Blvd. Brisbane, California 94005 Attn: Robert Gunst, Chief Executive Officer Re: $10,000,000.00 Optional Advance Facility Dear Bob: The Bank of California, N.A. (the "Bank") is pleased to offer to The Good Guys-California, Inc., a California corporation ("Borrower") an optional advance facility (the "Facility") in the maximum principal amount of the lessor of (a) TEN MILLION AND NO/100 DOLLARS ($10,000,000.00); or (b) the difference between (i) the Maximum Available Amount (defined below) and (ii) the sum of (1) all principal outstanding under the Credit Agreement (defined below); and (2) all principal outstanding outside the Credit Agreement to Bank, B or A (defined below) or any other lender. The Maximum Available Amount is THIRTY MILLION AND NO/100 DOLLARS ($30,000,000.00) from February 1 through October 31 of any year, and SEVENTY FIVE MILLION AND NO/100 DOLLARS ($75,000,000.00) at all other times. The Facility, at Bank's sole option, may be available from time to time until February 28, 1997, to be governed by the terms of the enclosed Optional Advance Note ("Note"). As between Borrower and Bank, the Credit Agreement shall survive the termination thereof until the Facility terminates or is canceled; and no change thereto shall be effective with respect to Bank unless Bank so agrees in writing. Advances under the Facility may be requested in writing, by telephone or otherwise on behalf of Borrower. Borrower shall promptly provide Bank a written confirmation of all telephone bids accepted by Borrower in accordance with the Facility Letter and Note, which confirmation shall be executed by an officer duly authorized to conduct such transactions with Bank; provided that Bank retains the right to correct any errors contained therein. If the proceeds of any advances under the Note are, at Borrower's request, to be wire-transferred to Borrower or any other individual or entity, such transfer shall be subject to all applicable laws and regulations, and the policy of the Board of Governors of the Federal Reserve System on Reduction of Payments System Risk in effect from time to time. Borrower recognizes and agrees that Bank cannot effectively determine whether a specific request purportedly made by or on behalf of Borrower is actually authorized or authentic. Borrower assumes all risks regarding the validity, authenticity and due authorization of any request purporting to be made by or on behalf of Borrower and promises to repay any sums, with interest, that are advanced by Bank pursuant to any request which Bank in good faith believes to be authorized. PAGE 1 2 This Facility reflects the Bank's general willingness to extend credit to you, but does not involve any obligation on the part of the Bank to make funds available. Therefore, no commitment or facility fee will be charged. Enclosed is the original Note and the Facility Letter. For the purposes of the Loan Documents, the following terms shall have the following meanings: "ADVANCE" means an extension of credit under the Note. "COVERED AMOUNT" means all or a portion of the principal amount outstanding under the Note. "CREDIT AGREEMENT" means that certain Credit Agreement dated as of October 27, 1995 among Borrower and Bank of America National Trust and Savings Association ("B of A") and The Bank of California, N.A. "FACILITY LETTER" means this Optional Advance Facility Letter dated October 27, 1995 from Bank to and accepted by Borrower, as amended from time to time. "LOAN DOCUMENTS" means, individually and collectively, the Facility Letter, the Note, the Credit Agreement and all other contracts, instruments, addenda and documents executed in connection with the extensions of credit which are the subject of the Facility Letter and Note. "MATURITY DATE" means the earlier of (i) last day of each Period, or (ii) the date Bank may make all sums of principal and interest immediately due and payable pursuant to the rights of Bank under the Note or the Credit Agreement. "PERIOD" means each agreed upon period of 1 to 60 days. "PRIME RATE" means the rate Bank announces to be in effect from time to time as Bank's prime rate. Prime Rate is a rate set by Bank based upon various factors including general economic and market conditions, that is used as a reference point for pricing certain loans. Bank may price its loans at, above, or below the Prime Rate. "RATE OPTION" means a rate per annum Bank quotes as the rate at which the Covered Amount for the applicable Period are available for purchase from other banks in the ordinary course of Bank's business on the first day of the applicable Period, adjusted for the then maximum reserve, capital adequacy, deposit insurance and similar requirements applicable to Bank pursuant to applicable law or regulation, and other amounts associated with Bank's costs and desired return. "TERMINATION DATE" means the earlier of (i) February 28, 1997; or (ii) the date Bank may make all sums of principal and interest immediately due and payable pursuant to the rights of Bank under the Note or the Credit Agreement. Your signing and returning these documents constitutes your agreement to the terms and conditions of the Facility. This Facility Letter and Note supersede and replace in their entirety that certain Facility Letter and Note dated June 20, 1995 ("Previous Facility Letter and Note"). As of the effective date of this Facility Letter and Note, all unpaid principal, interest and other amounts accrued and outstanding under the Previous Facility Letter and Note shall for all purposes be and constitute unpaid amounts outstanding under, and evidenced by this Facility Letter and Note. PAGE 2 3 We look forward to serving you. Very truly yours, THE BANK OF CALIFORNIA, N.A. By: /s/ Wanda Headrick ---------------------------- Title: Vice President ------------------------- Accepted and Agreed: THE GOOD GUYS-CALIFORNIA, INC. a California corporation By: /s/ Robert A. Gunst ---------------------------- Title: President and CEO ------------------------- Date: October 27 , 1995 -------------------------- 4 OPTIONAL ADVANCE NOTE $10,000,000.00 October 27, 1995 This signer of this Note ("Borrower") promises to pay to the order of THE BANK OF CALIFORNIA, N.A. ("Bank") at its office at 400 California Street, San Francisco, California 94104, or at such other place as Bank may designate in writing, in lawful money of the United States of America, the principal sum of TEN MILLION AND NO/100 DOLLARS ($10,000,000.00), or such sums as Bank may advance from time to time in its sole discretion to Borrower, with interest on each advance under this Note form the date it is disbursed until maturity, whether scheduled or accelerated, at a fluctuating rate per annum at all times equal to the Prime Rate, unless another Rate Option is in effect as set forth herein, provided,however, that no Maturity Date shall be subsequent to the Termination Date. The Rate Option may apply to a Covered Amount for each Period, provided, however, that such Period shall not have a maturity date subsequent to the Termination Date. For a quote of Bank's Rate Option which would apply to a Covered Amount, Borrower may call Bank's San Francisco Office at (415) 765-3641 between 8:00 a.m. and 11:00 a.m., Pacific time, on any day on which Bank's San Francisco Office is open for business to the public. If Borrower accepts the Rate Option when offered, that rate will apply to such Covered Amount for the applicable Period as follows: For maturities of 1 day to and including 60 days, the minimum Covered Amount will be One Million and No/100 Dollars ($1,000,000.00). Regardless of maturity, Covered Amounts in excess of the minimum must be in increments of at least Two Hundred Fifty Thousand and No/100 Dollars ($250,000.00). Subject to the provisions of this Note, Borrower may repay and reborrow under this Note; provided, however, that each Advance (whether priced at the Prime Rate or the Rate Option) is payable in full on the Maturity Date, together with all accrued unpaid interest. Subject to all of the rights and remedies of the Bank hereunder, the entire outstanding principal balance and all accrued but unpaid interest shall be payable no later than the Termination Date. Interest on each Advance shall be payable on the applicable Maturity Date for each such Advance. Principal, interest, and all other sums owed Bank under this Note or any Loan Document shall be evidenced by entries in records maintained by Bank for such purpose. Each payment on and any other credits with respect to principal, interest and all other sums outstanding under this Note or any Loan Document shall be evidenced by entries in such records. Bank's records shall be conclusive evidence thereof. Any unpaid payments of principal or interest on this Note, shall bear interest from maturity, whether scheduled or accelerated, at a fluctuating rate per annum at all times equal to the Prime Rate plus 2.0%, until paid in full, whether before or after judgment. Bank establishes the Rate Option with the understanding it will apply to a Covered Amount for the entire scheduled Period. If for any reason Bank receives all or any portion of a Covered Amount prior to the scheduled Maturity Date of the applicable Period, then in consideration thereof, Borrower shall pay to bank on demand, liquidated damages to cover breakage costs and loss of contractual return. 5 Interest shall be calculated for actual days elapsed on the basis of a 360-day year. Each change in the rate of interest shall become effective on the date each Prime Rate change is announced in the Bank. In no event shall Borrower be obligated to pay interest at a rate in excess of the highest rate permitted by applicable law from time to time in effect. The following shall constitute Events of Default hereunder: (a) the failure of Borrower to perform its obligations to Bank under, or the occurrence of any other default under the terms of this Note or other Loan Document; provided, however, that in the event of a conflict in the definition of Default or Events of Default in the Loan Documents and the Credit Agreement, provisions of the Loan Documents shall control; and (b) the occurrence of an event described in Section 7 of the Credit Agreement. The occurrence of an Event of Default shall make all sums of interest, principal and any other amounts owing under any Loan Documents immediately due and payable at Bank's option without notice of default, presentment on demand for payment, protest or notice of nonpayment or dishonor or any other notices or demands; and give Bank the right to exercise any other right or remedy provided by contract or applicable law. Any failure or delay on the part of Bank in exercising any power, right or privilege under this Note or under any Loan Document shall not operate as a waiver thereof, nor shall any single or partial exercise of any such power, right or privilege preclude any further exercise thereof. Borrower shall reimburse and indemnify Bank, including without limitation for attorneys' fees, as set forth in Sections 8.4 and 8.12 of the Credit Agreement. For the purpose of this provision, the term "Banks" shall refer to Bank and the term "this Agreement" shall refer to the Loan Documents. This Note shall be governed by and construed in accordance with the law of the State of California. This Note is the Note defined in the Facility Letter of even date herewith and shall be governed by the terms thereof. THE GOOD GUYS-CALIFORNIA, INC., a California corporation By: /s/ Robert A. Gunst --------------------------- Title: President and CEO ------------------------ Page 2 EX-10.22 12 EXHIBIT 10.22 1 EXHIBIT 10.22 THE DAI-ICHI KANGYO BANK, LIMITED SAN FRANCISCO AGENCY 101 CALIFORNIA STREET, SUITE 4000 SAN FRANCISCO, CA 94111 The Good Guys, Inc. July 24, 1995 7000 Marina Boulevard Brisbane, California 94005 DEMAND LINE OF CREDIT FACILITY Ladies and Gentlemen: We are pleased to make available to you a demand line of credit facility for general corporate purposes on the terms set forth in this letter. 1. We agree to consider from time to time your requests that we make advances ("Advances") to you in an aggregate amount not to exceed $20,000,000 at any one time outstanding on the terms and conditions set forth below. This letter is not a commitment to lend but rather sets forth the procedures to be used in connection with your requests for our making of Advances to you from time to time on or prior to the termination hereof pursuant to paragraph (8) and, in the event that we make Advances to you hereunder, your obligations to us with respect thereto. However, our agreement to make any Advance shall not create any obligation to make any further Advances. The Advances shall be evidenced by the "grid" promissory note executed by you in substantially the form of Exhibit A hereto (the "Note"). 2. Each Advance shall be in an amount at least equal to $10,000 and shall be made upon (i) your request to us by telephone, facsimile or letter, given by any of the persons ("Designated Persons") empowered to borrow by your general borrowing resolution, as amended from time to time, and listed on Exhibit B hereto or otherwise designated by you in writing in accordance with paragraph (9) (the Bank being conclusively entitled at all times to rely on the most recent designation of Designated Persons on Exhibit B or any such written notice actually received by the Bank, as the case may be), that you wish to borrow money on a specified date in a specified amount; and (ii) our agreement with you, and your agreement with us, as to such date and amount, as to whether such Advance will bear interest at the Stated Rate (as defined in the Note) or at the Quoted Rate (as defined in the Note) and, if such Advance will bear interest at Quoted Rate, as to such Quoted Rate and the term of such Quoted Rate, in each case subject to and in accordance with the terms of the Note. On the date of such Advance as so agreed by you and us, we will make such Advance available to you in same day funds by transferring funds to such account as is designated in writing by a Designated Person. Promptly after the date of each Advance, we will send you a written confirmation of such Advance and the amount thereof and, if such Advance is at a Quoted Rate, the term of such Quoted Rate and the interest rate per annum applicable thereto. 3. Each request by you for an Advance shall constitute a representation and warranty by you that no payment default has occurred and is continuing under any agreement or instrument relating to any of your indebtedness or would result after giving effect to such Advance and to the application of the proceeds therefrom. 4. You shall repay, and shall pay interest on, each Advance in accordance with the terms hereof and of the Note. Unless we demand payment of an Advance bearing interest at a Quoted Rate, you shall have no right to prepay any unpaid principal amount of any Advance bearing interest at a Quoted Rate prior to the last day of the term of such Quoted Rate. To the extent that any unpaid principal amount of any Advance bears interest at the Stated Rate, you may pay all or any part thereof on not less than one Business Day notice to us, together with accrued interest to the date of such payment on the principal amount prepaid. 2 5. You shall make each payment hereunder and under the Note on or before 1:00 P.M. (San Francisco time) on the day for payment thereof (whether upon demand or otherwise) in lawful money of the United States of America to us at the office of our San Francisco Agency at 101 California Street, Suite 4000, San Francisco, California 94111, in same day funds. You hereby authorize us, if and to the extent that payment is not made when due hereunder, to charge from time to time against any or all of your accounts with us any amount so due. All computations of interest shall be made by us on the basis of a year of 360 days, for the actual number of days (including the first day but excluding the last day) elapsed. 6. Whenever any payment to be made hereunder shall be otherwise due on a Saturday, a Sunday or a public or bank holiday in San Francisco (any other day being a "Business Day"), such payment shall be made on the next succeeding Business Day, and such extension of time shall in such case be included in the computation of payment of interest. 7. We shall incur no liability to you in acting upon any telephone, facsimile or letter request or other communication which we believe in good faith to have been given by a Designated Person or in otherwise acting in good faith under this letter. Further, all documents required to be executed in conjunction with Advances under this letter may be signed by any Designated Person. 8. This letter shall remain in effect until terminated by either you or us by giving prior written notice of termination hereof to the other party hereto, but no such termination shall affect your obligations with respect to the Advances hereunder outstanding at the time of such termination. 9. All written communications hereunder shall be mailed, transmitted by facsimile or delivered to the address specified below for you and for us, or as to each party, to such other address as shall be designated by such party in a written notice to the other party. If to you: The Good Guys, Inc. 7000 Marina Boulevard Brisbane, California 94005 Attention: Brian Stiles Telephone: (415) 615-6112 Facsimile: (415) 615-6287 If to us: The Dai-Ichi Kangyo Bank, Limited San Francisco Agency 101 California Street, Suite 4000 San Francisco, CA 94111 Attention: Mark A. Dirsa Telephone: (415) 393-1813 Facsimile: (415) 788-7868 10. We may assign to one or more banks or other entities all or any part of, or may grant participations to one or more banks or other entities in or to all or any part of, any Advance or Advances hereunder and under the Note. You may not assign your rights hereunder or any interest herein without our prior written consent and any such assignment without our consent shall be null and void. 11. You agree to pay on demand all costs and expenses, if any, incurred by us in connection with the enforcement of this letter or the Note, and, in accordance with the terms of the Note, any losses, costs or expenses incurred by us in connection with any payment of any portion of the Advances bearing interest at a Quoted Rate on a date other than the last day of the term of such Quoted Rate. 3 12. This letter shall be governed by, and construed in accordance with, the laws of the State of California. If the terms of this letter are satisfactory to you, please indicate you agreement and acceptance thereof by signing a counterpart of this letter and returning it to us. Very truly yours, THE DAI-ICHI KANGYO BANK, LIMITED By /s/ Seigo Makino ------------------------------- Seigo Makino Title: Joint General Manager Agreed and Accepted: By /s/ Robert A. Gunst -------------------------- Name and Title: Robert A. Gunst, President and CEO 4 EXHIBIT A TO DEMAND LINE OF CREDIT FACILITY DEMAND PROMISSORY NOTE $20,000,000 Dated July 24, 1995 FOR VALUE RECEIVED, the undersigned (the "Borrower") HEREBY PROMISES TO PAY ON DEMAND to the order of THE DAI-ICHI KANGYO BANK, LIMITED (the "Bank"), the principal amount of each Advance (as defined below) made by the Bank to the Borrower; together with interest (computed on the basis of a year of 360 days for the actual number of days, including the first day but excluding the last day, elapsed) on the principal amount of each Advance outstanding from time to time from and including the date on which such Advance is made until the day when the principal amount of such Advance is paid in full, payable on the day when the principal amount of such Advance is paid in full, and unless such Advance bears interest at a Quoted Rate (as defined below) on the last day of each calendar month, at a fluctuating interest rate per annum (the "Stated Rate") in effect from time to time equal at all times to the rate of interest announced publicly by the Bank at its Branch in New York, New York, from time to time, as the Bank's Base Rate (the "Base Rate"), provided, however, that any overdue amount of principal, interest, fees or other amounts payable hereunder or under the Demand Line of Credit Facility referred to below shall bear interest, payable on demand, at the Stated Rate plus 1.0% per annum. Each change in the fluctuating interest rate hereunder shall take effect simultaneously with the corresponding change in the Base Rate. If from time to time the Borrower and the Bank mutually agree, all or any portion (in the amount of at least $10,000) of the aggregate principal amount of all or any of the Advances shall bear interest in lieu of the Stated Rate, but otherwise payable as provided herein, at a rate (being a "Quoted Rate" as to any such Advance or Advances) and for a term (such term being the "Quoted Rate Interest Period" in respect of such Quoted Rate) in each case quoted by the Bank and agreed to by the Borrower. Unless such payment shall earlier have been made upon demand by the Bank, on the last day of each Quoted Rate Interest Period the Borrower shall pay the full unpaid principal amount of the Advances bearing interest at the Quoted Rate pertaining to such Quoted Rate Interest Period. The duration of any Quoted Rate Interest Period shall in no way affect the Bank's right to demand payment hereunder at any time; provided, however, that unless the Bank shall have made a demand hereunder for payment, the Borrower shall have no right to prepay any unpaid principal amount of any Advance bearing interest at a Quoted Rate prior to the last day of the Quoted Rate interest Period therefor. To the extent that any unpaid principal amount of any Advance bears interest at the Stated Rate, the Borrower may pay all or any part thereof on not less than one Business Day notice to the Bank, together will accrued interest to the date of such payment on the principal amount prepaid. The Borrower shall make each payment of principal and interest hereunder prior to 12:00 Noon (San Francisco time) on the day for payment thereof (whether upon demand or otherwise) in lawful money of the United States of America to the Bank at the office of its San Francisco Agency at 101 California Street, Suite 4000, San Francisco, California 94111, in same day funds. Whenever any payment to be made hereunder shall be otherwise due on a Saturday, a Sunday or a public or bank holiday in San Francisco (any other day being a "Business Day"), such payment shall be made on the next succeeding Business Day, and such extension of time shall in such case be included in the computation of payment of interest. The Borrower hereby authorized the Bank to endorse on the grid attached hereto the date and amount of each Advance made by the Bank to the Borrower hereunder; in the case of Advances bearing interest at a Quoted Rate, the Quoted Rate Interest Period therefor and the interest rate applicable thereto; and all payments made on account of principal thereof, provided that the failure to do so shall not affect the obligations of the Borrower to the Bank. 5 The Borrower also agrees to pay to the Bank on demand all costs and expenses (including fees and expenses of counsel) incurred by the Bank in enforcing this Promissory Note. Without limiting the foregoing, the Borrower further agrees that if any payment of any portion of the principal an Advance bearing interest at the Quoted Rate shall be made for any reason (including, without limitation, demand therefor by the Bank) other than on the last day of the Quoted Rate Interest Period for such Quoted Rate, the Borrower shall pay to the Bank on demand any amounts required to compensate the Bank for any losses, costs or expenses which the Bank may incur as a result of such principal payment, including, without limitation, any loss (including loss of anticipated profits), cost or expense incurred by reason of the Bank's liquidation or reemployment of deposits or other funds acquired by the Bank to fund or maintain such portion of the principal of such Advance. This Promissory Note shall be governed by, and construed in accordance with, the laws of the State of California. This Promissory note is the Noted referred to in, and is entitled to the benefits of, the Demand Line of Credit Facility dated July 24, 1995 between the Borrower and the Bank, which Demand Line of Credit Facility, among other things, sets forth procedures to be used in connection with the Borrower's periodic requests that the Bank make advances (the "Advances") to it from time to time in an aggregate amount not to exceed at any time outstanding the amount first above mentioned. THE GOOD GUYS, INC. By /s/ Robert A. Gunst ------------------------- Robert A. Gunst Title: President and CEO 6 GRID
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7 EXHIBIT B TO DEMAND LINE OF CREDIT FACILITY INITIAL DESIGNATED PERSONS: Robert A. Gunst Judith P. Devolder Leslie Benson Kim Coleman Michelle Brooks Brian Stiles WIRE TRANSFER FORMAT FOR THE GOOD GUYS, INC. ------------------- ACCOUNT NAME: The Good Guys! ACCOUNT NUMBER: 1499-505205 BANK: Bank of America BRANCH: San Francisco Main Office ADDRESS: 345 Montgomery Street ABA NUMBER: 121000358 ATTENTION: Mimi Drew EX-11.1 13 EXHIBIT 11.1 1 EXHIBIT 11.1 THE GOOD GUYS, INC. STATEMENT SETTING FORTH COMPUTATION OF EARNINGS PER SHARE (AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA)
September 30, September 30, September 30, 1995 1994 1993 ------------------------------------------------------------- Net Income 1. As presented in the annual report $14,166 $13,893 $7,651 Shares used in per share computation 13,427 13,164 12,787 Net income per common share and common share equivalents $1.06 $1.06 $.60 ============================================================= 2. Computation of primary and fully dilutive earnings per share including common stock equivalents a) Primary earnings per common share Weighted average number of shares: Common stock (A) 13,427 13,164 12,787 Stock options (B) 176 270 241 ----------------------------------------------------------------- Total 13,603 13,434 13,028 ----------------------------------------------------------------- Primary earnings per share $1.04 $1.03 $.59 ================================================================= b) Fully diluted earnings per share Weighted average number of shares: Common stock (A) 13,427 13,164 12,787 Stock options (B) 177 271 261 ----------------------------------------------------------------- Total 13,604 13,435 13,048 ================================================================= Fully diluted earnings per share $1.04 $1.03 $.59 =================================================================
A) The weighted average number of common shares outstanding during the year has been computed by taking the number of days each share is outstanding and dividing by the number of days in the year. B) Stock options used in the primary earnings per share are calculated using the average market price. Stock options in fully diluted earnings per share are calculated using the higher of the ending market price or the average market price. EX-13.1 14 EXHIBIT 13.1 1 EXHIBIT 13.1 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following table sets forth, for the years indicated, the relative percentages that certain income and expense items bear to net sales, and the number of stores open at the end of each period:
Years Ended September 30, ------------------------------------- 1995 1994* 1993* - ------------------------------------------------------------------------ Gross profit 24.2% 26.1% 28.4% Selling, general & administrative expenses 21.5% 22.9% 26.2% Income before income tax 2.6% 3.2% 2.3% Net income 1.6% 1.9% 1.4% Number of stores open at end of period 66 52 45
*Certain reclassifications have been made to the 1994 and 1993 financial data in order to conform to the current year's presentation SALES Sales increased to $889.2 million in 1995 from $724.7 million in 1994 and $562.8 million in 1993. The 23% sales increase in 1995 is a result of a same store sales gain of 7%, the opening of 14 new stores (seven in Washington, three in California, three in Oregon, and one in Nevada) and a full year of operation for the seven stores opened in 1994. The 29% sales increase in fiscal 1994 was attributable to a same store sales gain of 19%, the opening of seven new stores, and a full year of operation of the four stores opened in 1993. Comparable store sales in the future may be affected by competition, the opening of additional stores in existing markets and general economic conditions. The following table sets forth sales by product category: SALES BY PRODUCT CATEGORY
Years ended September 30, ----------------------------------------- 1995 1994 1993 - ------------------------------------------------------------------------------- Video 36% 36% 36% Audio and Cellular Phones 30% 33% 35% Home Office 17% 12% 9% Other Accessories, installation, photo, premier performance guarantee, repair service, video games and other 17% 19% 20% ------------- ------------- ------------- Total 100% 100% 100% ============= ============= =============
Sales of Home Office products continued to increase as a percentage of sales during fiscal 1995 due to increased demand for computers. Video and Audio remain our largest sales categories, although, due to the increase in Home Office sales, Audio declined as a percentage of sales. Sales of Home Office products increased as a percentage of sales during fiscal 1994 as a result of the introduction of personal computers to all locations during the year. In fiscal 1994, the Video category was particularly strong, while Audio declined as a percentage of sales notwithstanding positive Audio category same store sales growth. GROSS PROFIT Gross profit as a percentage of sales was 24.2% in fiscal 1995, compared to 26.1% in fiscal 1994 and 28.4% in fiscal 1993. Gross profit as a percentage of sales decreased in 1995 primarily due to the increased proportion of Home Office sales, which typically carry lower gross margins, the cost impact from enhancements made to the Company's Premier Performance Guarantee program in November 1994 and promotional activity in the consumer electronics market. During fiscal 1994, margins decreased due to merchandising, marketing and promotional activities. A second factor which contributed to the decrease in gross margin percentage was the introduction of personal computers, which sell at lower gross profit margins than most other categories. The Company believes that gross profit as a percentage of sales may continue to fluctuate as a result of changes in sales product mix and competitive pricing. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES Selling, general and administrative expenses consist primarily of payroll, advertising and occupancy costs. Although most of these expenses vary proportionately with sales, there is a fixed component to them that allows the Company to leverage its costs with additional sales. This leveraging may not be fully realized during periods when a large number of stores are opened because new stores typically generate lower sales than the average mature location. Additionally, when we open in new market areas, as we did in 1995, the leverage will be impacted since the advertising costs of the entire market are initially absorbed by a smaller number of stores. This provides an opportunity to improve the percentage as we continue to open stores in both our established and our new market areas. Selling, general and administrative expenses as a percentage of sales were 21.5% in fiscal 1995, compared to 22.9% in fiscal 1994 and 26.2% in fiscal 1993. The decrease in 1995 was due to cost reductions related to restructuring store operations and additional support from vendors for advertising and promotional programs. We also continued to leverage costs in our mature stores and decreased general and administrative compensation as a percentage of sales. The decrease between 1994 and 1993 reflects the combined impacts of cost reduction programs and leverage from an increase in the average store sales volume. -10- 2 NET EARNINGS Income before income taxes as a percentage of sales for the fiscal years 1995, 1994 and 1993 was 2.6%, 3.2% and 2.3%, respectively. The effective income tax rates for fiscal years 1995, 1994 and 1993 were 39.9%, 41.0% and 40.4%, respectively. The 1995 effective tax rate was positively impacted by the utilization of job tax credits during the first half of the year. Net income as a percentage of sales for the fiscal years 1995, 1994 and 1993 was 1.6%, 1.9% and 1.4%, respectively. The decrease in 1995 was due to the decline in gross margins partially offset by the decrease in operating costs. The increase in net income in 1994 was attributable to increases in sales without proportionate increases in selling, general and administrative expenses, partially offset by a decrease in gross margin. LIQUIDITY AND CAPITAL RESOURCES The Company's store sales are primarily cash and credit card transactions, providing a source of liquidity for the Company. The Company also uses private label credit card programs administered and financed by financial services companies, which allow the Company to expand store sales without the burden of additional receivables. Working capital requirements are reduced by vendor credit terms that allow the Company to finance a portion of its inventory. The Company also uses lease financing to fund its capital requirements. As of the end of fiscal 1995, the Company had working capital of $74.0 million, compared to $66.9 million in fiscal 1994 and $59.3 million in fiscal 1993. In fiscal 1995, net cash provided by operating activities was $11.7 million, compared to $26.1 million and $13.8 million in fiscal 1994 and 1993, respectively. This decrease in net cash from operating activities was primarily attributable to an increase in merchandise inventories and accounts receivable that were partially offset by an increase in accounts payable and accrued expenses. The 1995 increases in merchandise inventories and accounts payable were due to preparing for and supporting a larger store base than in the prior year. The increase in accounts receivable resulted from an increase in receivables related to vendor programs and the proceeds due from store equipment leasing transactions which had not been received at year end. The Company added 14 stores in 1995, seven stores in 1994 and four stores in 1993. This expansion has been financed primarily through the use of cash provided from operations and lease financing. Cash utilized for capital expenditures was $17.8, $19.6, and $9.4 million for fiscal years 1995, 1994 and 1993, respectively. The Company plans to open approximately 12 to 14 new stores during the 1996 fiscal year. Management estimates that each new store requires approximately $1.5 to $2.0 million for leasehold improvements, fixtures and equipment and inventory not financed by the vendors. The Company expects to be able to fund its working capital requirements and expansion plans with a combination of anticipated cash flow from operations, normal trade credit, financing agreements, and continued use of lease financing. The Company has a committed unsecured $75 million revolving bank line of credit which fluctuates with seasonal working capital requirements. The credit agreement provides that funds borrowed will bear interest at the varying alternative rates based on the prime rate and various domestic and international money market rates. The credit facility expires in February 1997, with the option to extend for one additional year. This credit facility is used for working capital and store construction purposes. At both September 30, 1995 and 1994, there were no borrowings outstanding under the line. During 1995, the Company also entered into demand line of credit facilities with various banks totaling $30 million. These uncommitted facilities require bank approval for each advance and allows the Company to borrow at money market rates related to the banks financing costs. The Company may use these facilities to fund its working capital, construction costs and general corporate purposes. The maximum amount the Company can borrow under these uncommitted demand line of credit facilities is limited by its committed credit agreement. Maximum borrowings outstanding under credit facilities during fiscal 1995 were $20 million, compared to $10 million in fiscal 1994 and $4 million in fiscal 1993. The weighted average borrowings outstanding under credit facilities during fiscal years 1995, 1994 and 1993 were $5,500,000, $400,000 and $100,000, respectively. The weighted average interest rates for such borrowings were 8.3% during fiscal year 1995 and 6.0% during both fiscal 1994 and 1993. IMPACT OF INFLATION The Company believes that, because of competition among manufacturers and the technological changes in the consumer electronics industry, inflation has not had a significant effect on results of operations. -11- 3 SELECTED FINANCIAL DATA
Years Ended September 30, ------------------------------------ - ------------------------------------------------------------------------------------------------------- (Dollars and shares in thousands, except per 1995 1994 1993 1992 1991 share and other data) - ------------------------------------------------------------------------------------------------------- SUMMARY OF EARNINGS Net sales $889,206 $724,713 $562,827 $509,629 $424,276 Cost of sales 674,179 535,690 402,755 374,200 306,750 -------------------------------------------------------------- Gross profit 215,027 189,023 160,072 135,429 117,526 Selling, general, and administrative expenses 191,066 166,046 147,579 129,330 98,663 -------------------------------------------------------------- Income from operations 23,961 22,977 12,493 6,099 18,863 Interest income(expense) - net (399) 567 346 233 (523) -------------------------------------------------------------- Income before income taxes 23,562 23,544 12,839 6,332 18,340 Income taxes 9,396 9,651 5,188 2,539 7,355 -------------------------------------------------------------- Net income $ 14,166 $ 13,893 $ 7,651 $ 3,793 $ 10,985 -------------------------------------------------------------- Net income per share $ 1.06 $ 1.06 $ 0.60 $ 0.29 $ 0.93 Weighted average shares 13,427 13,164 12,787 12,908 11,823 FINANCIAL POSITION Working capital $74,042 $66,900 $59,320 $47,440 $50,769 Total assets $227,729 $188,712 $149,782 $128,121 $113,567 Shareholders' equity $136,022 $118,948 $102,518 $91,274 $84,801 OTHER DATA Number of stores at year end 66 52 45 41 33 Average sales per store $14,962 $14,912 $12,998 $13,700 $14,436 Sales per selling square foot $1,481 $1,519 $1,324 $1,426 $1,567 Sales per gross square foot $921 $925 $813 $897 $1,004 Same stores sales 7% 19% 0% 2% 11% Inventory turns * 6.4 6.4 6.0 6.5 6.9
Certain reclassifications have been made to this financial data in order to conform to the current year's presentation. * Based on average of beginning and ending inventories for each fiscal year. -12- 4 CONSOLIDATED BALANCE SHEETS
September 30, ----------------------- (Dollars in thousands) 1995 1994 - ---------------------------------------------------------------------------------------------------------- ASSETS CURRENT ASSETS: Cash and cash equivalents $18,434 $21,661 Accounts receivable, less allowance for doubtful accounts of $569 and $481 21,209 11,080 Merchandise inventories 115,806 94,928 Prepaid expenses 10,300 8,995 ----------------------- Total current assets 165,749 136,664 PROPERTY AND EQUIPMENT: Leasehold improvements 51,127 40,684 Furniture, fixtures, and equipment 37,791 30,284 Construction in progress 12,907 13,353 ----------------------- Total property and equipment 101,825 84,321 Less accumulated depreciation and amortization 42,584 33,490 ----------------------- Property and equipment - net 59,241 50,831 ----------------------- Other Assets 2,739 1,217 ----------------------- Total Assets $227,729 $188,712 ======================= LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable $53,504 $41,238 Accrued expenses and other liabilities: Payroll 12,435 11,822 Sales taxes 6,025 5,774 Other 19,743 10,930 ----------------------- Total current liabilities 91,707 69,764 SHAREHOLDERS' EQUITY: Preferred stock, no par value - Authorized, 2,000,000 shares - None issued Common stock, $.001 par value: Authorized, 40,000,000 shares; Issued and outstanding, 13,581,416 and 13,282,181 shares, respectively 14 13 Additional paid-in capital 61,833 58,926 Retained earnings 74,175 60,009 ----------------------- Total shareholders' equity 136,022 118,948 ----------------------- Total Liabilities and Shareholders' Equity $227,729 $188,712 =======================
See notes to financial statements. -13- 5 CONSOLIDATED STATEMENTS OF INCOME
Years Ended September 30, ---------------------------------------------------------------------------------- (Dollars and shares in thousands, except per 1995 1994 1993 share data) - ------------------------------------------------------------------------------------------------------------------------------------ Net sales $889,206 $724,713 $562,827 Cost of sales 674,179 535,690 402,755 ---------------------------------------------------------------------------------- Gross profit 215,027 189,023 160,072 Selling, general, and administrative expenses 191,066 166,046 147,579 ---------------------------------------------------------------------------------- Income from operations 23,961 22,977 12,493 Interest income (expense) - net (399) 567 346 ---------------------------------------------------------------------------------- Income before income taxes 23,562 23,544 12,839 Income taxes 9,396 9,651 5,188 ---------------------------------------------------------------------------------- Net income $14,166 $13,893 $7,651 ================================================================================== Net income per common share $1.06 $1.06 $.60 ================================================================================== Shares used in per share computation 13,427 13,164 12,787 ==================================================================================
See notes to financial statements. CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Common Stock Additional -------------------------- Paid-In Retained (Dollars in thousands) Shares Amount Capital Earnings Total - --------------------------------------------------------------------------------------------------------------------------- Balance at September 30, 1992 12,533,082 $13 $52,796 $38,465 $ 91,274 Issuance of common stock under Employee Stock Purchase Plan 248,371 2,140 2,140 Issuance pursuant to stock options and tax benefits from sale of optioned stock by employees 239,575 1,453 1,453 Net income 7,651 7,651 --------------------------------------------------------------------- Balance at September 30, 1993 13,021,028 13 56,389 46,116 102,518 Issuance of common stock under Employee Stock Purchase Plan 228,054 2,180 2,180 Issuance pursuant to stock options and tax benefits from sale of optioned stock by employees 33,099 357 357 Net income 13,893 13,893 --------------------------------------------------------------------- Balance at September 30, 1994 13,282,181 13 58,926 60,009 118,948 Issuance of common stock under Employee Stock Purchase Plan 264,335 1 2,575 2,576 Issuance pursuant to stock options and tax benefits from sale of optioned stock by employees 34,900 332 332 Net income 14,166 14,166 14,166 --------------------------------------------------------------------- Balance at September 30, 1995 13,581,416 $14 $61,833 $74,175 $136,022 =====================================================================
See notes to financial statements. -14- 6 CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended September 30, -------------------------------------------------- (Dollars in thousands) 1995 1994 1993 - ------------------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income $14,166 $13,893 $7,651 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation and amortization 9,387 8,485 7,450 Allowance for doubtful accounts 88 (219) 172 Shareholders' equity tax benefits from stock options 56 132 568 Change in assets, liabilities and equity: Accounts receivable (10,217) 2,134 (36) Merchandise inventories (20,878) (23,404) (10,284) Prepaid expenses and other assets (2,827) 2,571 (2,151) Accounts payable 12,266 15,510 7,004 Accrued expenses and other liabilities 9,677 6,990 3,413 -------------------------------------------------- Net cash provided by operating activities 11,718 26,092 13,787 CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of property and equipment - net (17,797) (19,577) (9,378) -------------------------------------------------- Net cash used in investing activities (17,797) (19,577) (9,378) CASH FLOWS FROM FINANCING ACTIVITIES: Issuance of common stock 2,852 2,405 3,025 -------------------------------------------------- Net cash provided by financing activities 2,852 2,405 3,025 Net increase (decrease) in cash and cash equivalents (3,227) 8,920 7,434 -------------------------------------------------- Cash and cash equivalents at beginning of year 21,661 12,741 5,307 -------------------------------------------------- Cash and cash equivalents at end of year $18,434 $21,661 $12,741 ==================================================
See notes to financial statements. -15- 7 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES BUSINESS: The Good Guys, Inc., through its wholly owned subsidiary (together, the Company), is a retailer of consumer electronic products in California, Nevada, Oregon and Washington. BASIS OF PRESENTATION: The consolidated financial statements include the accounts of the The Good Guys, Inc. and its wholly owned subsidiary. All significant intercompany transactions have been eliminated in consolidation. Certain reclassifications were made to prior year statements to conform to current year presentations. CASH EQUIVALENTS: Cash equivalents represent short-term, highly liquid investments with maturities of three months or less. MERCHANDISE INVENTORIES: Inventories are stated at the lower of cost (first-in, first-out method) or market. PROPERTY AND EQUIPMENT: Property and equipment are stated at cost. Depreciation and amortization are computed using the straight line method based on estimated useful lives of three to seven years for furniture, fixtures and equipment, and the lesser of the estimated useful lives of assets or the remaining lease terms for leasehold improvements. STORE PRE-OPENING COSTS: Store pre-opening costs are expensed as incurred. REVENUE RECOGNITION: The Company recognizes revenue at the point of sale. Merchandise returns are recorded at the time of return, as the effect of returns are not significant to the Company's operating results. PREMIER PERFORMANCE GUARANTEE CONTRACTS: The Company sells extended service contracts ("Premier Performance Guarantee contracts") on behalf of an unrelated company (the "Warrantor") that markets this product for merchandise sold by the Company. Commission revenue is recognized at the time of sale. The Company acts solely as an agent for the Warrantor and has no liability to the customer under the extended service contract nor any other material obligation to the customer or the Warrantor. Merchandise presented to the Company for servicing under extended service contracts is repaired by the Company on behalf of the Warrantor. The repairs are billed to the Warrantor at amounts customarily charged by the Company for these services. INCOME TAXES: The Company accounts for its income taxes in accordance with Statement of Financial Accounting Standard No. 109, "Accounting for Income Taxes." Under this standard, deferred income taxes reflect the tax effects, based on current tax law, of temporary differences resulting from differences between the amounts of assets and liabilities recognized for financial reporting and income tax purposes. FAIR VALUE OF FINANCIAL INSTRUMENTS: SFAS No. 107, "Disclosures about Fair Value of Financial Instruments", requires disclosure of the estimated fair value of financial instruments. The carrying value of cash and cash equivalents, accounts receivable and accounts payable approximate the estimated fair value. NET INCOME PER COMMON SHARE: Net income per share was computed based on the weighted average number of shares of common stock outstanding during the year. NOTE 2: BORROWING ARRANGEMENTS The Company currently maintains a committed unsecured revolving line of credit which expires on February 28, 1997, with the option to extend for one year. The line of credit allows borrowings of up to $75,000,000, which fluctuates with seasonal working capital requirements. The credit line also includes a standby letter of credit facility. The agreement provides the Company with several different borrowing alternatives with interest rates based on the prime rate and various domestic and international money market rates. The agreement requires maintenance of certain financial loan covenants, including minimum tangible net worth, debt to equity and fixed charge coverage ratios, restrictions on capital expenditures and prohibits payment of cash dividends. The Company was in compliance with these covenants at September 30, 1995. There were no borrowings under the line of credit at September 30, 1995 and 1994. Interest paid for the years ended September 30, 1995, 1994 and 1993 was $606,000, $169,000, and $131,000, respectively. At September 30, 1995 and 1994, no portion of the commitment was reserved under the letter of credit facility. During 1995, the Company also entered into demand line of credit facilities with various banks totaling $30 million. These uncommitted facilities require bank approval for each advance and allows the Company to borrow at money market rates related to the banks financing costs. The Company may use these facilities for working capital, construction costs and -16- 8 general corporate purposes. The maximum amount the Company can borrow under these uncommitted demand line of credit facilities is limited by its committed credit agreement. No amounts were borrowed under these agreements during 1995. The Company also purchases products from some vendors through finance companies under agreements which generally require payment in 30 days and provide for purchase discounts. NOTE 3: INCOME TAXES The provision for income taxes consists of the following:
Years ended September 30, -------------------------------------------------- (Dollars In Thousands) 1995 1994 1993 - ------------------------------------------------------------------------------ Currently payable: Federal $ 8,870 $7,650 $4,879 State 2,174 1,902 1,140 ------- ------ ------ Total currently payable 11,044 9,552 6,019 Deferred tax (1,648) 99 (831) ------- ------ ------ Total $ 9,396 $9,651 $5,188 ======= ====== ======
For the years ended September 30, 1995, 1994 and 1993, the Company paid income taxes totaling $9,485,000, $10,652,000 and $6,242,000, respectively. The provisions for income taxes as reported are different from the tax provisions computed by applying the statutory federal income tax rate. The differences are reconciled as follows:
Years ended September 30, ----------------------------------------------------- 1995 1994 1993 - --------------------------------------------------------------------------------- Federal Income Tax at the statutory rate 35.0% 35.0% 34.3% State franchise tax, less federal tax effect 5.6 6.0 6.0 Other - net (.7) .1 - --------------------------------------------------------------------------------- Total 39.9% 41.0% 40.4% - ---------------------------------------------------------------------------------
Deferred income taxes reflect the net effect of temporary differences between the carrying amounts of assets and liabilities for financial reporting and the amounts used for income tax purposes. Significant components of the Company's net deferred tax assets as of September 30, 1995 and 1994 were as follows:
September 30, -------------------------------------- (Dollars in thousands) 1995 1994 - --------------------------------------------------------------------- Current Vacation accruals $1,088 $1,022 Prepaid expenses (891) (977) Reserves 1,186 1,174 State taxes 733 733 Inventory capitalization 1,001 991 - --------------------------------------------------------------------- Current - net 3,117 2,943 Noncurrent Depreciation 2,127 1,256 Other - net (238) (841) - --------------------------------------------------------------------- Noncurrent - net 1,889 415 - --------------------------------------------------------------------- Total $5,006 $3,358 - ---------------------------------------------------------------------
NOTE 4: LEASES The Company's stores, distribution and administration facilities and certain equipment are leased under operating leases. The leases have remaining initial terms inclusive of renewal options, of one to forty-three years and generally provide for rent increases based on the consumer price index. Certain store leases require additional lease payments based on store sales. The Company subleases a portion of one of its stores to a company whose president is also a member of the Company's Board of Directors. The lease expires on July 31, 2003 and provides for additional rent increases based on the consumer price index. Under the terms of the sublease agreement, the income received for the years ended September 30, 1995, 1994 and 1993 was $318,938, $318,938 and $276,600, respectively. The future minimum annual payments for leases having noncancelable terms in excess of one year, net of sublease income, at September 30, 1995, are as follows:
REAL (Dollars in thousands) PROPERTY EQUIPMENT ------------------------------------ 1996 $26,409 $8,243 1997 25,891 6,095 1998 25,817 4,866 1999 25,271 3,733 2000 22,831 1,450 Later years through 2015 140,962 0 ------------------------------------ Total $267,181 $24,387 ------------------------------------
Lease expense for the years ended September 30, 1995, 1994 and 1993 was $35,958,000, $28,149,000 and $24,723,000, respectively. -17- 9 NOTE 5: PROFIT SHARING PLAN The Profit Sharing Plan (the "Plan") is a defined contribution plan covering substantially all of the Company's employees. Contributions are made to the Plan at the discretion of the Company's Board of Directors in cash or shares of the Company's common stock. The profit sharing contributions for the years ended September 30, 1995, 1994 and 1993 were $1,467,000, $602,000 and $562,000, respectively. NOTE 6: STOCK OPTIONS The Company's 1985 Stock Option Plan and 1994 Stock Incentive Plan authorize the issuance of incentive stock options and non-qualified stock options covering up to 2,715,000 shares of common stock. Although the 1985 Plan expired in 1995 and no further options maybe granted under it, options granted prior to its expiration remain outstanding. Options granted under both Plans are exercisable at prices equal to the fair market value of the stock on the date of grant. Options vest ratably over four years and no option may be granted for a term exceeding ten years. The following is a summary of stock option activity under the Plan for the years ended September 30, 1995, 1994, and 1993.
Number Price of shares Range - ------------------------------------------------------------------------------ Balance at September 30, 1992 803,480 $2.37 - $26.25 Granted 275,000 9.00 - 13.75 Exercised (142,775) 2.37 - 8.25 Canceled (111,950) 5.00 - 26.25 ----------------------------------- Balance at September 30, 1993 823,755 2.37 - 26.25 Granted 303,150 11.25 - 17.25 Exercised (33,099) 2.94 - 13.12 Canceled (43,851) 6.50 - 26.25 ----------------------------------- Balance at September 30, 1994 1,049,955 2.37 - 26.25 Granted 338,200 9.75 - 12.63 Exercised (34,900) 2.94 - 11.25 Canceled (143,275) 9.50 - 26.25 ----------------------------------- Balance at September 30, 1995 1,209,980 $2.37 - $26.25 ===================================
At September 30, 1995, options for 621,463 shares were exercisable at prices ranging from $2.37 to $26.25 per share and 903,450 shares were available for additional option grants. The following is a summary of non-qualified stock options not covered under the 1985 Stock Option Plan or the 1994 Stock Incentive Plan for the years ended September 30, 1995, 1994 and 1993.
Number Price of Shares Range - --------------------------------------------------------------------------------- Balance at September 30, 1992 136,800 $2.56 - $8.12 Exercised (96,800) 2.56 - 2.56 --------------------------------- Balance at September 30, 1993 40,000 6.50 - 8.12 Exercised 0 6.50 - 8.12 --------------------------------- Balance at September 30, 1994 40,000 6.50 - 8.12 Exercised 0 6.50 - 8.12 --------------------------------- Balance at September 30, 1995 40,000 $6.50 - $8.12 ---------------------------------
At September 30, 1995, the options for 40,000 shares in the above table were exercisable at prices ranging from $6.50 to $8.12. NOTE 7: EMPLOYEE STOCK PURCHASE PLAN The Company established an employee stock purchase plan in February of 1986, which permits eligible employees to purchase the Company's common stock under terms specified by this Plan. Since inception a total of 1,900,000 shares of the Company's common stock has been reserved for issuance under this Plan, and 1,445,054 shares have been issued as of September 30, 1995. NOTE 8: LEGAL PROCEEDINGS The Company is involved in a number of lawsuits, including lawsuits alleging unfair trade practices in connection with the sale of cellular telephones. Management believes that the ultimate outcome of the lawsuits, individually and in the aggregate, will not have a material impact on the financial position or results of operations of the Company. -18- 10 NOTE 9: QUARTERLY FINANCIAL DATA (UNAUDITED) Quarterly financial data for the years ended September 30, 1995 and 1994 are summarized in the following table:
December 31, March 31, June 30, September 30, (Dollars in thousands, except per share amounts) 1994 1995 1995 1995 - ------------------------------------------------------------------------------------------------------------------------------- Net sales $281,658 $195,745 $198,315 $213,488 Gross profit 67,956 47,327 49,259 50,485 Net income 8,601 2,300 2,222 1,043 Net income per share $ .65 $ .17 $ .17 $ .08 December 31, March 31, June 30, September 30, (Dollars in thousands, except per share amounts) 1993 1994 1994 1994 - ------------------------------------------------------------------------------------------------------------------------------- Net sales $217,204 $164,140 $164,431 $178,938 Gross profit 57,436 44,307 43,285 43,995 Net income 7,378 2,783 1,923 1,809 Net income per share $ .57 $ .21 $ .15 $ .14
INDEPENDENT AUDITORS' REPORT Board of Directors and Shareholders THE GOOD GUYS, INC. Brisbane, California We have audited the accompanying consolidated balance sheets of THE GOOD GUYS, INC. as of September 30, 1995 and 1994, and the related consolidated statements of income, shareholders' equity and cash flows for each of the three years in the period ended September 30, 1995. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the consolidated financial position of THE GOOD GUYS, INC. at September 30, 1995 and 1994, and the results of their operations and their cash flows for each of the three years in the period ended September 30, 1995 in conformity with generally accepted accounting principles. DELOITTE & TOUCHE LLP San Francisco, California November 1, 1995 -19- 11 CORPORATE INFORMATION OFFICERS Robert A. Gunst President and Chief Executive Officer Robert E. Baird Senior Vice President, Marketing and Merchandising Thomas A. Hannah Senior Vice President, Operations Brad S. Bramy Vice President, Advertising William C. Curley Vice President, MIS and Operations John G. Duken Vice President, Store Operations William B. Perlstein Vice President, Stores Gregory L. Steele Vice President, Real Estate Gera M. Vaz Vice President, Human Resources DIRECTORS Ronald A. Unkefer Chairman of the Board Stanley R. Baker Director Robert A. Gunst Director, President and Chief Executive Officer of the Company Howard Lester Director and Chairman and Chief Executive Officer of Williams-Sonoma, Inc. John E. Martin Director and Chairman and Chief Executive Officer of Taco Bell Corp. Russell M. Solomon Director and Founder and President of MTS, Inc. (Tower Records) ANNUAL MEETING January 24, 1996, 10:30 AM Bank of America Building A.P. Giannini Auditorium 555 California Street San Francisco, CA 94104 INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS Deloitte & Touche LLP 50 Fremont Street San Francisco, CA 94105 TRANSFER AGENT Chemical Mellon Shareholder Services 50 California Street, 10th Floor San Francisco, CA 94111 (800) 356-2017 FORM 10-K A copy of the Company's From 10-K Annual Report filed with the Securities and Exchange Commission may be obtained without charge by writing to Investor Relations at the address noted below: QUARTERLY REPORTS THE GOOD GUYS! will discontinue mailing quarterly reports to shareholders beginning in fiscal 1996. Shareholders can obtain a faxed copy of recent quarterly reports and press releases by calling Company News On Call, a division of PR Newswire, at 1-800-758-5804. THE GOOD GUYS! news # is 108403. Or write to: THE GOOD GUYS! Attn: Investor Relations 7000 Marina Blvd. Brisbane, CA 94005-1840 COMMON STOCK The Good Guys, Inc. common stock is traded on the Nasdaq National Market under the symbol GGUY. The following table sets for the quarterly high and low sales prices for the Company's common stock as quoted in the Nasdaq National Market for fiscal 1994 and 1995.
Fiscal Quarter Ended HIGH LOW - --------------------------------------------------------------- December 31, 1993 16 11 March 31, 1994 20 1/2 11 1/4 June 30, 1994 19 1/4 10 5/8 September 30, 1994 14 10 1/2 December 31, 1994 13 11 March 31, 1995 13 3/4 11 1/4 June 30, 1995 11 3/4 9 1/4 September 30, 1995 13 7/8 10 7/8
As of November 17, 1995 there were 1,849 shareholders of record, excluding shareholders whose stock is held in nominee or street name by brokers. The Company's present policy is to retain its earnings to finance future growth and, accordingly, it does not anticipate paying cash dividends in the foreseeable future. -20- EX-23.1 15 EXHIBIT 23.1 1 Exhibit 23.1 DELOITTE & TOUCHE LLP INDEPENDENT AUDITORS' CONSENT We consent to the incorporation by reference in Registration Statement Nos. 33-5935, 33-19342, 33-32986, 33-38749, 33-39421, 33-49960, 33-56524 and 33-60957 of The Good Guys, Inc. on Form S-8 of our reports dated November 1, 1995, appearing in and incorporated by reference in the Annual Report on Form 10-K of The Good Guys, Inc. for the year ended September 30, 1995. DELOITTE & TOUCHE LLP December 19, 1995 EX-24.1 16 EXHIBIT 24.1 1 Exhibit 24.1 POWER OF ATTORNEY KNOW ALL PERSONS BY THESE PRESENTS, that each of the persons whose signature appears below, being a member of the Board of Directors of The Good Guys, Inc. (the "Company"), hereby constitutes and appoints Robert A. Gunst as his true and lawful attorney-in-fact and agent, with full power of substitution and resubstitution, for and in his name, place and stead, in any and all capacities, to sign on his behalf the Company's ANNUAL REPORT ON FORM 10-K for its fiscal year ended September 30, 1995, and to execute any amendments thereto, and to file the same, with all exhibits thereto, and all other documents in connection therewith, with the Securities and Exchange Commission, with the full power and authority to do and perform each and every act and thing necessary or advisable to be done in connection therewith, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorney-in-fact and agent, or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof. This power of attorney may be executed in any number of counterparts. DATED: December 21, 1995 /s/ Ronald A. Unkefer ----------------------------- Ronald A. Unkefer /s/ Stanley R. Baker ----------------------------- Stanley R. Baker /s/ Russell M. Solomon ----------------------------- Russell M. Solomon /s/ W. Howard Lester ----------------------------- W. Howard Lester /s/ John E. Martin ----------------------------- John E. Martin -1- EX-27 17 FINANCIAL DATA SCHEDULE
5 1,000 12-MOS SEP-30-1995 SEP-30-1995 18,434 0 21,778 569 115,806 165,749 101,825 42,584 227,729 91,707 0 14 0 0 136,008 227,729 889,206 889,206 674,179 674,179 191,066 0 399 23,562 9,396 14,166 0 0 0 14,166 1.06 1.06
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