-----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, BY9CWRnPli8rWXiQYVTP9MqTjBSD05yWIWqkk2Dhiw/YLfrxbkaBMOJ+rFp6SfuX zYbmF3aUY8ZUphcU5nq5og== 0000950149-01-500811.txt : 20010528 0000950149-01-500811.hdr.sgml : 20010528 ACCESSION NUMBER: 0000950149-01-500811 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 20010228 FILED AS OF DATE: 20010525 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: 0228 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-14134 FILM NUMBER: 1648734 BUSINESS ADDRESS: STREET 1: 7000 MARINA BLVD CITY: BRISBANE STATE: CA ZIP: 94005 BUSINESS PHONE: 4156155000 MAIL ADDRESS: STREET 1: 7000 MARINA BLVD STREET 2: 7000 MARINA BLVD CITY: BRISBANE STATE: CA ZIP: 94005 10-K 1 f72537e10-k.txt THE GOOD GUYS, INC. FORM 10-K 1 FORM 10-K SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ---------------- [ ] Annual Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 [X] Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from October 1, 2000 to February 28, 2001 Commission File Number 0-14134 ---------------- 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) 1600 Harbor Bay Parkway, Alameda, California 94502-1840 ------------------------------------------------------- (Address of principal executive offices) Registrant's telephone number, including area code: (510) 747-6000 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. [ ] The aggregate market value of the voting stock held by nonaffiliates of the registrant was approximately $79,898,878 as of April 30, 2001. Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. On April 30, 2001, there were 23,215,320 shares of common stock outstanding. DOCUMENTS INCORPORATED BY REFERENCE (1) Portions of definitive proxy statement filed with Securities and Exchange Commission relating to the Company's 2001 Annual Meeting of Shareholders. (Part III of Form 10-K) 2 INTRODUCTORY NOTE Good Guys, Inc. changed its fiscal year end from September 30 to the last day of February. This Transition Report on Form 10-K includes information for the five-month period from October 1, 2000, through February 28, 2001. A separate Form 10-K was filed previously for the fiscal year ended September 30, 2000. PART I. ITEM 1. BUSINESS. General Good Guys was incorporated as The Good Guys, Inc. 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. On April 16, 2001, The Good Guys, Inc. changed its corporate name from The Good Guys, Inc. to Good Guys, Inc. and The Good Guys -- California, Inc. changed its name to Good Guys California, Inc. Unless the context otherwise requires, the terms "Company" or "Good Guys" refers to Good Guys, Inc., together with its operating subsidiary. Good Guys is a leading specialty retailer of consumer entertainment electronics, offering a distinctive selection of fully featured digital and high-tech products from more than 100 of the world's most respected manufacturers. Good Guys currently operates 79 stores in California, Nevada, Oregon and Washington. In California, 20 stores are located in the San Francisco Bay area, 27 in the greater Los Angeles/Orange County metropolitan area, three in Sacramento, seven in San Diego, and one each in Bakersfield, Fresno, Modesto and Stockton. In Washington, Oregon and Nevada, Good Guys operates nine stores, five stores and four stores, respectively. Change In Fiscal Year As previously reported, Good Guys has changed its fiscal year end from September 30 to the last day of February for fiscal years ending after September 30, 2000. The change was made to align Good Guys financial reporting with that of other consumer electronics retailers and to allow the investment and vendor communities to draw more realistic comparisons between the Company and its major competitors. This report is for the five-month transition period ended February 28, 2001. Information Regarding Forward-Looking Statements and Certain Factors The Private Securities Litigation Reform Act of 1995 provides companies with a "safe harbor" when making forward-looking statements. Statements of the Company that are not historical facts, including statements about management's expectations for future periods, are forward-looking statements and involve certain risks and uncertainties. Factors that could cause the Company's actual results to differ materially from management's projections, forecasts, estimates and expectations or affect the decision to invest in the Company's securities include, but are not limited to, the following: Recent Net Income (Losses) and Restructuring. For the five-month transition period ended February 28, 2001, Good Guys reported net income of $1.3 million compared to net income for the same year-ago period of $1.1 million. However, Good Guys experienced net losses for the fiscal years ended September 30, 2000, and September 30, 1999, of $17.3 million and $39.9 respectively. Although Good Guys believes it will be able to successfully implement its turnaround strategy and return to profitability, there can be no assurance that it will be able to do so. Failure to return to profitability could have a material adverse effect on the Company's relationships with its vendors and lenders. Dependence on Key Personnel. The Company's success depends upon the active involvement of senior management personnel, particularly Chairman and Chief Executive Officer Ronald A. Unkefer and President Kenneth R. Weller. The loss of the full-time services of Ronald A. Unkefer, Kenneth R. Weller or other members of senior management could have a material adverse effect on the Company's results of operations and financial condition. Risks Associated With Competition. The retail consumer electronics industry is highly competitive. Good Guys competes against a diverse group of retailers, including several national and regional large format merchandisers and superstores, such as Circuit City and Best Buy. Those competitors sell, among other products, similar audio and video consumer electronics products. Certain of these competitors have substantially greater financial resources than those of Good Guys. A number of different competitive factors could have a material adverse effect on the Company's results of operations and financial condition, including, but not limited to: 2 3 - Increased operational efficiencies of competitors; - Competitive pricing strategies; - Expansion by existing competitors; - Entry by new competitors into markets in which Good Guys is currently operating; or - Adoption by existing competitors of innovative store formats or retail sales methods. Seasonal and Quarterly Fluctuations in Sales. Like many retailers, seasonal shopping patterns affect the Company's business. Good Guys changed its fiscal year to end on the last day of February. The next complete fiscal year (fiscal 2002) began on March 1, 2001. In the new fiscal year, the fourth fiscal quarter will include the December holiday shopping period, which has historically contributed, and is expected to continue to contribute, a substantial portion of the Company's operating income for the entire fiscal year. As a result, any factors negatively affecting the Company during the fourth calendar quarter of any year could have a material adverse effect on results of operations for the entire year. More generally, the Company's quarterly results of operations also may fluctuate based upon such factors as: - Competition; - General regional and national economic conditions; - Consumer trends; - Changes in the Company's product mix; - Timing of promotional events; - New product introductions; and - The Company's ability to execute its business strategy effectively. Changes In Consumer Demand and Preferences. The Company's success depends on its ability to anticipate and respond in a timely manner to consumer demand and preferences regarding audio and video consumer electronic products and changes in such demand and preferences. Consumer spending patterns, particularly discretionary spending for products such as those Good Guys offers, are affected by, among other things, prevailing economic conditions. In addition, the periodic introduction and availability of new products and technologies at price levels that generate wide consumer interest stimulate the demand for audio and video consumer electronics products. It is possible that these products or other new products will never achieve widespread consumer acceptance. Furthermore, the introduction or expected introduction of new products or technologies may depress sales of existing products and technologies. Significant deviations from the projected demand for products Good Guys sells would have a materially adverse effect on its results of operations and financial condition, either from lost sales or from lower margins if Good Guys should need to mark down excess inventory to stimulate sales. Dependence on Suppliers. The success of the Company's business and growth strategy depends to a significant degree upon its maintaining good relationships with its suppliers, particularly brand-name suppliers of audio and video equipment such as JVC, Mitsubishi, Panasonic and Sony. The loss of any of these key vendors or the Company's failure to establish and maintain relationships with these or other vendors could have a material adverse effect on its results of operations and financial condition. Inventory Purchased from Foreign Vendors. Good Guys purchases a significant portion of its inventory from overseas vendors, particularly vendors headquartered in Japan. Although substantially all the Company's merchandise inventory purchases are domestically sourced and denominated in U.S. Dollars, changes in trade regulations, currency fluctuations or other factors may increase the cost of items purchased from foreign vendors or create shortages of such items, which could in turn have a material adverse effect on the Company's results of operations and financial condition. Conversely, significant reductions in the cost of such items in U.S. dollars may cause a significant reduction in retail price levels of those products and may limit or eliminate the ability to successfully differentiate Good Guys from other competitors, thereby resulting in an adverse effect on the Company's sales, margins or competitive position. Shares Eligible for Future Sale. As of February 28, 2001, the Company had outstanding stock options and warrants to purchase an aggregate of 6,701,301 shares of common stock at exercise prices ranging from $2.63 to $21.00, of which options and warrants to purchase 3,895,815 shares are exercisable now. As of February 28, 2001, the Company had 57,729 outstanding restricted shares. The sale of restricted shares and the sale of shares covered by such options or warrants by the holders thereof could have an adverse effect on the market price for the Company's common stock. 3 4 Business Strategy Good Guys goal is to be the leading specialty retailer of consumer entertainment electronics in each of its markets. The cornerstones of its business strategy include: Merchandising. The Company's merchandising strategy is to provide shoppers with a differentiated selection of fully featured consumer entertainment electronics, including name brand products at popular price points and higher-end brands and models not available at most major retailers. Merchandise is offered at competitive prices and backed by a low price guarantee. Marketing. Good Guys aggressively uses newspaper, direct mail and broadcast advertising to build name recognition, to position itself in its markets and to increase store traffic. Advertising is primarily directed toward the Company's target customer base of early adopters, tech savvy consumers and middle to upper-income households. Stores are designed to be exciting and easy to shop and are located in high visibility and high traffic commercial areas. Differentiated Customer Service. Good Guys believes that superior service is an important factor in overall customer satisfaction and that Good Guys differentiates itself from other consumer electronics retailers by providing superior service to its shoppers via a sales staff of highly trained, commissioned product specialists. Good Guys believes that friendly and knowledgeable product specialists are critical to satisfying customers interested in more fully featured, middle to high-end consumer electronics products. The Company's objective is to generate long-term repeat business from its customers. Expansion. Currently, the Company has a moratorium on opening new stores and relocating existing stores. However, when the Company does re-institute an expansion program, the Company's efforts will focus on, among other things, locating suitable store sites and hiring and training skilled personnel. Efforts will also be made to open new stores quickly, to achieve economies of scale in advertising and distribution and to gain market share from established competitors. Merchandising Good Guys offers its customers a broad range of high quality consumer electronics products supplied primarily by manufacturers of nationally known brands. The following table shows the approximate percentage of sales for each major product category for the five-month periods ended February 2001 and 2000, and for the last three fiscal years. Historical percentages may not be indicative of percentages in future years.
Five months ended Year ended September 30, ---------------------------- ------------------------------------ February 28, February 29, Category 2001 2000 2000 1999 1998 ------------ ------------ ---- ---- ---- Video 56% 53% 53% 45% 43% Audio 19% 19% 18% 16% 16% Computer & home office -- -- -- 14% 17% Mobile and wireless 10% 10% 11% 9% 10% Other Accessories, repair service and extended service plans 15% 18% 18% 16% 14% --- --- --- --- --- Total company 100% 100% 100% 100% 100% === === === === ===
For the five-month period ended February 2001, the Company's three leading suppliers for video products were, in alphabetical order, Mitsubishi, Panasonic and Sony, for audio products were, in alphabetical order, Denon, Sony and Yamaha, and for mobile and wireless products were, in alphabetical order, AT&T Wireless, Sony and Sprint PCS. During the five-month transition period ended February 2001, the Company's ten largest suppliers accounted for approximately 70% of the merchandise purchased by the Company. One of the Company's suppliers, Sony, accounted for more than 10% of its merchandise mix. As part of the Company's strategic initiatives, Good Guys is committed to partnering with its vendors to introduce new products and host world premieres for a wide range of digital and high-tech products. Good Guys believes that consumer electronics retailers who have trained product specialists are uniquely positioned to assist vendors introduce their increasingly complex technologies to consumers and speed acceptance of those products. 4 5 Marketing and Advertising Good Guys aggressively uses newspaper, direct mail and broadcast advertising to build name recognition, to position Good Guys in its markets and generate store traffic. The Company's advertisements promote Good Guys as an entertainment electronics specialist and emphasize competitive prices, extensive selection and superior customer service from knowledgeable product specialists. The Company's advertising efforts are targeted to early adopters, tech savvy consumers and middle to upper-income households. To support its marketing strategy, Good Guys promotes its merchandise through an advertising program that emphasizes the print media (consisting of newspaper advertising, catalogs and other customer mailings) and, to a lesser extent, television. The Company's primary advertising channel is weekly newspaper advertisements, which highlight specific products and their prices and specific financing plans, many times in connection with specific promotions. Good Guys targets the bulk of these advertisements to run on Fridays and Sundays in order to drive "impulse" weekend purchases. These advertisements include some low-priced products to draw attention, but also emphasize the Company's more fully featured models and higher-end entertainment electronics products. In addition, Good Guys has an active customer database, which is used for targeted mailings of catalogs and other promotional advertisements and materials. Good Guys believes that its direct mail activities leverage and complement its general media advertising campaign. The Company's television advertising focuses primarily on "image" ads which consist of name recognition advertising emphasizing the Good Guys name and the Company's distinctive, high-quality product selection, knowledgeable sales force, customer-oriented stores and competitive prices. Good Guys plans and directs all print, direct mail and television advertisements. The advertisements are produced by outside vendors in order to control costs and give maximum flexibility. Good Guys increased its advertising and marketing spending in fiscal 2000 by approximately 20% over the prior year in order to promote an integrated branding and marketing campaign, and it maintained the higher spending level for the five-month transition period ended February 2001. This campaign is designed to convey the Company's commitment to providing early adopters, tech-savvy consumers and middle and upper-income customers with a distinctive selection of consumer entertainment electronics. Good Guys intends to maintain current spending levels in fiscal 2002. Customer Service Good Guys believes that knowledgeable and friendly product specialists are critical to providing superior customer service. As of February 28, 2001, Good Guys employed 1,718 trained part-time and full-time product specialists. All product specialists participate in ongoing training programs designed to develop good sales practices and techniques and to provide product specialists with the knowledge base to explain and demonstrate to shoppers the use and operation of store merchandise. This training enables product specialists to better understand customer needs and to help them select products that meet those needs. The ongoing program is led by an internal training team and also includes vendor-led initiatives. The Company's satisfaction guarantee policy provides that a product generally may be returned within 30 days of purchase for a full refund or an exchange for another product. When purchasing a product from Good Guys, customers may elect to purchase an Extended Service Plan under which a third party provides extended service coverage beyond the period covered by the manufacturer's warranty. In addition, Good Guys offers a 60-day low price guarantee. If a customer finds a lower price on an item identical to the one purchased at Good Guys, the Company will refund the difference for up to 60 days after the purchase. All merchandise purchased from 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. Good Guys has its own regional service facilities, which service all of its stores. In-home service is also available. In addition, Good Guys operates mobile installation facilities at most store locations and offers custom home installation. The majority of the Company's sales are made through credit cards. Good Guys currently honors MasterCard, VISA, American Express and various other credit cards, as well as the Company's "Preferred Customer Card" issued by an independent third party. Because of the relatively high cost of many of the consumer electronics products sold by Good Guys, its business could be affected by consumer credit availability. Store Operations The Company's stores range in size from approximately 9,000 to 38,000 square feet. The Company's stores are predominantly located in high visibility, high-traffic commercial areas and are open seven days a week, including most holidays. Stores are designed to be exciting and easy to shop. 5 6 Good Guys has developed three store formats, which emphasize mid to high-end products. Each store has displays designed to showcase a full spectrum of the Company's product offerings. These displays allow customers to make extensive side-by-side product comparisons. The Company's new stores have substantially larger selling space, providing customers with an uncluttered presentation of the latest technology and featuring multiple demonstration rooms dedicated to demonstrating home theater and mobile electronics products. Good Guys operates: Original Concept stores, Generation 21 format stores and EXPO format stores. - Original Concept: The original concept stores sell the full range of Good Guys merchandise, such as televisions, DVD players, VCRs, audio components, mobile electronics, cameras, camcorders and related accessories. The original concept stores typically range from 15,000 to 20,000 square feet. Good Guys currently has 37 original concept stores. - Generation 21: Good Guys introduced its first Generation 21 stores in fiscal 1995. These stores are larger and brighter than the original concept stores and feature more interactive displays, easily accessible merchandise and vibrant graphics. The Generation 21 stores typically range in size from 20,000 to 25,000 square feet. Good Guys currently has 25 Generation 21 stores. - EXPO: In 1996, Good Guys introduced its EXPO store design. The EXPO format provides greater merchandise flexibility and connectivity between existing categories of product, featuring hands-on demonstrations of product interactivity throughout the store and a central area for customers to meet with product specialists to design system solutions for their homes. The EXPO stores typically range from 25,000 to 30,000 square feet. Good Guys currently has 17 EXPO stores. Good Guys jointly operates 5 locations with Tower Records which are promoted as WOW! stores. These include 2 Generation 21 style formats and 3 EXPO formats. These stores offer the same entertainment electronics assortments as other Good Guys locations as well as a full range of music, video and books offered by Tower Records. Good Guys occupies approximately 30,000 square feet in each of the WOW! stores. In addition, Good Guys has subleased 3,000 square feet in two Good Guys locations in Las Vegas to Tower Records to sell entertainment software. Each store generally has one store manager, one operations manager and two or three sales managers. The store manager oversees the store's operations and the sales managers supervise the product specialists. Product specialists are specialized by product category. Product specialists 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. Cashiers have been re-introduced to all locations to give customers a grab and go (grab-n-go) option on impulse purchases and also to assist the product specialists in transactions. Store operations are overseen by a senior management team, which holds frequent meetings with the store managers. Senior management establishes merchandising and store operation policies for all stores. Distribution Good Guys operates a 460,000 square foot operations center in Hayward, California. Deliveries are generally made to each store from three to seven days a week depending on the season, location of stores and store sales volumes. Quantities are determined by the Company's automated replenishment system. Good Guys believes that this frequency and method 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 product specialist 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. 6 7 Competition The business of the Company is highly competitive. Good Guys competes primarily with other specialty stores, independent electronics and appliance stores, department stores, mass merchandisers, discount stores and catalog showrooms. Competitors of Good Guys include Circuit City, Best Buy, Sears, Walmart, Target, Radio Shack and many regional and local electronics chains and independent stores. The Company's strategy is to compete by being a value-added retailer, offering a distinctive selection of fully featured, higher-end consumer entertainment electronics from leading manufacturers sold at competitive prices by a friendly, honest and knowledgeable team of product specialists. Seasonality Good Guys changed its fiscal year to end on the last day of February. In the future, the fourth fiscal quarter will include the December holiday shopping period, which has historically contributed, and is expected to continue to contribute, a substantial portion of the Company's operating income for the entire fiscal year. As is the case with many other retailers, the Company's sales are higher during the quarter that includes the December holiday season than during other periods of the year, and have previously been between 30% and 33% of the Company's annual sales. Employees As of February 28, 2001, Good Guys employed approximately 3,604 persons, of whom 537 were salaried, 1,349 were hourly non-selling associates and 1,718 were salespeople on commission against a minimum guarantee. As of February 28, 2001, approximately 173 of its employees were employed in the Company's executive offices; the remaining employees 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. Good Guys has never experienced a strike or work stoppage and management believes that relations with its employees are excellent. ITEM 2. PROPERTIES. Of the Company's stores in California, 20 are located in the San Francisco Bay area, 27 in the greater Los Angeles/Orange County metropolitan area, three in Sacramento, seven in San Diego; and one each in Bakersfield, Fresno, Modesto and Stockton, California. In addition, Good Guys operates nine stores in the State of Washington, five stores in Oregon and four stores in Nevada. All of the stores are leased under leases that have expiration dates in years ranging from 2002 to 2019. 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 in 2011. On March 2, 2001, the Company relocated its executive offices from approximately 35,000 square feet in Brisbane, California, at 7000 Marina Boulevard to more economical space occupying approximately 31,000 square feet in Alameda, California, at 1600 Harbor Bay Parkway. ITEM 3. LEGAL PROCEEDINGS. Good Guys is involved in various legal proceedings arising during the normal course of business. Management believes that the ultimate outcome of these proceedings, individually and in the aggregate, will not have a material impact on the financial position or results of operations of the Company. 7 8 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS. At the annual meeting of shareholders of Good Guys held on January 31, 2001, 19,011,518 shares were represented in person or by proxy. The matters voted upon and the results of the voting are as follows: 1. The election of directors
NOMINEE IN FAVOR WITHHELD ------- -------- -------- 2. The amendment to the Company's 1994 Stock Incentive Plan to increase the number of shares of Common Stock reserved for issuance under the plan by 700,000: 13,941,749 votes in favor, 4,221,061 votes against and 848,708 abstentions. 3. The amendment to the Company's Employee Stock Purchase Plan to increase the number of shares of Common Stock reserved for issuance under the plan by 400,000: 17,912,100 votes in favor, 256,584 votes against and 842,834 abstentions. 4. The ratification of selection of Deloitte & Touche LLP as the independent auditors of the Company: 18,946,563 votes in favor, 31,611 votes against and 33,344 abstentions. ITEM 4A. EXECUTIVE OFFICERS OF THE COMPANY. The executive officers of Good Guys and their respective ages and positions with the Company are as follows:
NAME AGE POSITION ---- --- -------- Ronald A. Unkefer .......... 56 Chairman and Chief Executive Officer Kenneth R. Weller .......... 52 President Cathy A. Stauffer .......... 41 Vice President, Merchandising George J. Hechtman ......... 50 Vice President, Administration Robert A. Stoffregen ....... 51 Vice President, Finance and Chief Financial Officer
All executive officers are elected by and serve at the discretion of the Board of Directors. Ronald A. Unkefer is the Founder, Chairman and Chief Executive Officer of Good Guys, Inc. Mr. Unkefer founded the Company on July 1, 1973, and served as Chairman and Chief Executive Officer until January 1993, when he retired from the position of Chief Executive Officer to pursue venture capital and broadcasting interests. He continued to serve as Chairman until January 1996. Mr. Unkefer returned to the Company as Chairman and Chief Executive Officer on July 1, 1999, to spearhead the Company's efforts to return to profitability. During his first tenure with Good Guys (1973-1993), Mr. Unkefer established a proven track record of achieving profitable results, completing a successful public offering in 1986 and establishing Good Guys as one of the nation's premier retailers of consumer electronics. Mr. Unkefer is also Chairman of goodguys.com, an online consumer electronics retailer formed by Good Guys and a group of private investors; Chairman of First Ventures, a venture capital fund investing in Internet and technology companies; and Chairman of First Broadcasting, an owner and developer of major market radio stations. 8 9 Kenneth R. Weller rejoined Good Guys in August 2000 as President. Mr. Weller began his career with Good Guys in 1982 as a sales associate, rising to the position of Vice President of Sales in 1986 after holding various store management positions. In 1993, Mr. Weller left Good Guys and joined Best Buy as Senior Vice President, Sales and served in that position until returning to Good Guys last year. Mr. Weller is largely credited with the substantial growth Good Guys experienced during his seven years at the helm of the sales organization. Cathy A. Stauffer was named Vice President, Merchandising in July 1999. Ms. Stauffer joined Good Guys in 1977 and held various positions in advertising and marketing before being named Vice President of Marketing in 1988 where she served until 1993. Ms. Stauffer returned to Good Guys in 1998 as a consultant and was named Vice President of Quality later that year. George J. Hechtman was appointed Vice President, Administration in April 2000. Mr. Hechtman was Senior Vice President of Store Operations for Office Max from 1994 to 1999 and Vice President of Merchandising and Franchise Operations for BizMart from 1991 to 1993. From July 1999 until joining the Company, he was Executive Vice President and Chief Operating Officer of Blue Dot Services, a heating and air conditioning contractor. Mr. Hechtman has held various positions in consumer electronic merchandising at Circuit City, Montgomery Ward and Pacific Stereo and has provided consulting services to retailers including McDonalds and Tandy Corporation. Robert A. Stoffregen, CPA, JD was appointed Vice President, Finance and Chief Financial Officer in October 2000. From 1991 to 1994, Mr. Stoffregen served as Senior Vice President/Chief Financial Officer for The Sharper Image and from 1994 to October 2000, served as Chief Financial Officer for companies that included the California Culinary Academy, Radical Entertainment and Zap Me! Corporation. He began his career with Deloitte & Touche in 1976 where he rose to the level of partner in the firm's retail specialty group. PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SECURITY HOLDER MATTERS. Good Guys, Inc. common stock is traded on the NASDAQ National Market under the symbol GGUY The following table sets forth the quarterly high and low sales prices for the Company's common stock as quoted for the period:
FISCAL PERIOD ENDED HIGH LOW ------------------- ------- ------- Quarter ended June 30, 1999 8 3/16 2 29/32 Quarter ended September 30, 1999 8 5/16 4 5/8 Quarter ended December 31, 1999 11 5 1/4 Quarter ended March 31, 2000 10 1/4 3 5/8 Quarter ended June 30, 2000 4 1/2 2 1/6 Quarter ended September 30, 2000 8 2 15/16 Quarter ended December 31, 2000 7 15/16 2 3/4 Two months ended February 28, 2001 6 1/4 2 15/16
As of April 30, 2001, there were 3,374 shareholders of record excluding shareholders whose stock is held in nominee or street name by brokers. 9 10 ITEM 6. SELECTED FINANCIAL DATA.
Five-months ended Fiscal years ended September 30, -------------------------- --------------------------------------------------------------- February 28, February 29, 2001 2000 2000 1999 1998 1997 1996 ------------ ------------ --------- --------- --------- --------- --------- (Amounts and shares in thousands, (unaudited) (1) except per share and other data) SUMMARY OF EARNINGS Net sales $ 414,978 $ 391,558 $ 850,512 $ 915,642 $ 928,382 $ 889,779 $ 925,714 Cost of sales (298,412) (274,356) (603,975) (692,745) (700,070) (666,815) (711,463) ------------------------ ---------------------------------------------------------------- Gross profit 116,566 117,202 246,537 222,897 228,312 222,964 214,251 Selling, general, and administrative expenses (112,849) (114,677) (258,637) (257,993) (241,007) (241,411) (220,032) Store closure expenses -- -- -- (54) (3,008) 314 (3,741) Gain from property transactions -- 1,025 10,775 -- -- -- -- ------------------------ ---------------------------------------------------------------- Income (loss) from operations 3,717 3,550 (1,325) (35,150) (15,703) (18,133) (9,522) Interest income 90 36 94 91 119 172 211 Interest expense (2,488) (2,440) (6,520) (4,828) (1,396) (930) (679) ------------------------ ---------------------------------------------------------------- Income (loss) before income taxes 1,319 1,146 (7,751) (39,887) (16,980) (18,891) (9,990) Income tax (expense) benefit -- -- (9,577) -- 5,167 7,237 3,771 ------------------------ ---------------------------------------------------------------- Net income (loss) $ 1,319 $ 1,146 $ (17,328) $ (39,887) $ (11,813) $ (11,654) $ (6,219) ======================= ================================================================ Net income (loss) per share Basic $ 0.06 $ 0.06 $ (0. 84) $ (2.58) $ (0.84) $ (0.86) $ (0.46) Diluted $ 0.06 $ 0.05 $ (0. 84) $ (2.58) $ (0.84) $ (0.86) $ (0.46) Weighted average shares outstanding: Basic 22,937 19,920 20,560 15,484 14,012 13,626 13,576 Diluted 23,763 21,345 20,560 15,484 14,012 13,626 13,576 FINANCIAL POSITION Working capital $ 80,935 $ 58,557 $ 59,621 $ 61,858 $ 30,018 $ 53,892 $ 65,606 Total assets $ 219,876 $ 226,860 $ 220,116 $ 226,163 $ 250,948 $ 236,152 $ 246,015 Revolving Credit Debt $ 50,161 $ 40,000 $ 34,358 $ 56,504 -- -- -- Shareholders' equity $ 92,780 $ 97,877 $ 90,519 $ 92,954 $ 109,655 $ 118,632 $ 129,268 OTHER DATA Number of stores at year end 79 79 79 79 77 76 75 Average sales per store (in thousands) $ 5,253 $ 4,956 $ 10,894 $ 11,637 $ 12,219 $ 11,811 $ 13,024 Sales per selling square foot $ 410 $ 387 $ 841 $ 931 $ 1,065 $ 1,057 $ 1,213 Sales per gross square foot $ 256 $ 242 $ 526 $ 577 $ 665 $ 660 $ 756 Comparable stores sales increase (decrease) 6% 1% 5% -4% 3% -8% -8% Annualized Inventory turns(2) 5.9 5.8 5.3 5.4 5.5 5.5 5.9 (1) As discussed in Note 1 of the Consolidated Financial Statements, previously issued amounts for sales and cost of sales have been reclassified to give effect to the change in accounting for sales incentives. (2) Based on average of beginning and ending inventories for each period.
10 11 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. Statements made below and elsewhere in this Transition Report on Form 10-K that are not historical facts, including any statements about expectations for the 12-month period ending February 28, 2002 and beyond, involve certain risks and uncertainties. Factors that could cause the estimates and expectations to differ materially from management's projections, estimates and expectations include, but are not limited to, the Company's ability to successfully implement its restructuring program, increases in promotional activities of the Company's competitors, changes in consumer buying attitudes, the presence or absence of new products or product features in the Company's merchandise categories, changes in vendor support for advertising and promotional programs, changes in the Company's merchandise sales mix, general economic conditions, and other factors referred to in this Transition Report on Form 10-K under "Information Regarding Forward Looking Statements and Certain Factors" and in the Company's Consolidated Financial Statements, including Notes thereto. The Consolidated Financial Statements and Notes to the Consolidated Financial Statements should be read in conjunction with this Management's Discussion and Analysis of the Financial Condition and Results of Operations. CHANGE IN FISCAL YEAR As reported in its Form 8-K filing with the Securities and Exchange Commission on November 15, 2000, Good Guys has changed its fiscal year end from September 30 to the last day of February for fiscal years ending after September 30, 2000. The change was made to align Good Guys financial reporting with that of other consumer electronics retailers and to allow the investment and vendor communities to draw more realistic comparisons between the company and its major competitors. GENERAL The following table sets forth, for the periods 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:
Five months ended Year ended September, 30 -------------------------- ---------------------------- February 28, February 29, 2001 2000 2000 1999 1998 ------------ ------------ ---- ---- ---- Gross profit 28.1% 29.9% 28.6% 24.3% 24.6% Selling, general & and administrative Expenses including depreciation and amortization 27.2% 29.3% 30.1% 28.2% 26.0% Store closure expenses -- -- -- -- -0.3% Gain from property transactions -- 0.3% 1.3% -- -- Income (loss) before income taxes 0.3% 0.3% (0.9%) (4.4%) (1.8%) Net income (loss) 0.3% 0.3% (2.0%) (4.4%) (1.3%) Number of stores open at end of period 79 79 79 79 77
SALES AND GROSS PROFIT The following table sets forth sales by product category:
Five months ended Year ended September, 30 ------------------------- ------------------------------ February 28, February 29, 2001 2000 2000 1999 1998 ------------ ------------ ---- ---- ---- Video 56% 53% 53% 45% 43% Audio 19% 19% 18% 16% 16% Computer & home office -- -- -- 14% 17% Mobile and wireless 10% 10% 11% 9% 10% Other Accessories, repair service and extended service plans 15% 18% 18% 16% 14% --- --- --- --- --- Total company 100% 100% 100% 100% 100% === === === === ===
11 12 Net Sales Net sales for the five-month period ended February 2001 were $415 million, an increase of $23.4 million or 6% from the $391.6 million for the year-ago period. The sales improvement was driven by strong demand for digital products, including high definition and HD-ready televisions, digital cameras and camcorders and digital satellite systems, as well as sizeable growth in wireless, mobile electronics and core audio/video product sales. Good Guys also benefited from the impact of company-wide changes made in late 1999 and early 2000 that shifted the company's focus to higher-end consumer entertainment electronics and increased the level of experience and training for the company's product specialists. In addition, the introduction of new accessory and furniture products has provided steady growth, while sales of mature technologies that have become low price, ubiquitous commodities have declined; for example, sales of video/VHS players and sales of stereo rack systems were down from the prior year by 16% and 14%, respectively. Commissions on Extended Service Plan ("ESP") sales were flat and declined as a percentage of product sales from the year-ago period. In fiscal 2000, net sales decreased 7% to $850.5 million from $915.6 million in fiscal 1999. The decrease resulted primarily from the discontinuation of computer and home office products and de-emphasis of loss leaders in the fourth quarter of fiscal 1999 and, as discussed in Note 1 of the Consolidated Financial Statements, the Company has reduced the previously issued amount for fiscal 2000 net sales by $10.0 million to give effect to a change in accounting for sales incentives. Excluding sales from these discontinued product lines and the change in accounting for sales incentives, sales of continuing product categories increased by 5% or $40.2 million. The largest sales increases occurred in product lines where consumers were responding to advances in product technology, such as digital television, digital versatile disc (DVD) players and digital cameras. Sales declined for VCRs and other mature technologies. In fiscal 1999, sales decreased 1% to $915.6 million from $928.4 million in fiscal 1998. The 1% sales decrease in fiscal 1999 resulted from a comparable store sales decrease of 4%, offset in part by the opening of two new stores in fiscal 1999. Comparable store sales in the future may be affected by competition, the opening of additional stores in existing markets, the absence or introduction of significant new products in the consumer electronics industry and general economic conditions. Gross Profit Margin Gross profit margin for the five-month period ended February 2001 was 28.1% of sales compared with 29.9% in the year-ago period. The decline was primarily due to a more competitive promotional environment, which included sales rebates and credit card financing discounts during the holiday selling season; stronger sales of video products, which carry slightly lower margins than audio products; and the Company's successful efforts to increase comparable store sales. There was also a decline in ESP sales commissions as a percentage of product sales and in increase in distribution costs. In fiscal 2000, gross profit margin increased to 28.6% of sales compared with 24.3% in fiscal 1999 and 24.6% in fiscal 1998. The lower gross profit margin for fiscal 1999 and fiscal 1998 reflects sales of computer and home office products, primarily computers, which carried lower gross margins than the Company's average, as well as a greater dependency on low margin, entry-level merchandise. During the fourth quarter of fiscal 1999, sales of computer and home office products were discontinued and the Company refocused on the market niche for fully featured, higher-end products at the front end of the technology curve where the profit margins are higher. The Company also increased its profit margin in fiscal 2000 by increasing sales of ESP contracts and by initiating cost control measures surrounding inventory. Selling, General and Administrative Expenses For the five-month period ended February 2001, selling, general and administrative expenses including depreciation and amortization, as a percentage of sales, were 27.2% compared to the year-ago period of 29.3%. Total spending for the five-month period ended February 2001 decreased by $1.8 million from the year-ago period. The decrease is primarily attributed to: (1) restructuring of sales incentive programs which lowered commission expense, (2) reductions in overhead costs for compensation, professional fees and corporate office rent and (3) the Company's ongoing efforts to reduce costs. For fiscal 2000, selling, general and administrative expenses as a percentage of sales were 30.1% compared to 28.2% in fiscal 1999 and 26.0% in fiscal 1998, reflecting the decline in net sales as a result of the elimination of computer and home office products. The total spending for selling, general and administrative expenses for fiscal 2000 increased by $644,000 or less than 1% from fiscal 1999. In addition, expenses for fiscal 2000 reflect an increase in net advertising expenses of $7.5 million, or 20 percent, in addition to costs for reorganizing store operations, increased commissions based upon improved gross margins and expenses related to Y2K. Expenses for fiscal 1999 reflect the pre-operating expense for the opening of two new stores, expenses related to Y2K and expenses of $9.3 million incurred during the fourth quarter in order to streamline the Company's cost structure. The fourth quarter charges in fiscal 1999 consisted primarily of severance payments, discontinued product line charges and one-time bank charges. The increase as a percentage of sales in fiscal 1999 from 1998 was partially the result of a decrease in sales and partially the result of the expenses in the fourth quarter of fiscal 1999 discussed above. 12 13 Store Closure Expenses No store closure expenses were reported for the five-month period ended February 28, 2001, or for fiscal 2000. Store closure expenses were $54,000 and $3.0 million in fiscal 1999 and fiscal 1998, respectively. During fiscal 1998, the Company entered into new lease agreements to relocate five stores and convert them to its new "EXPO" concept. The Company opened one of these stores in each quarter from the first quarter of fiscal 1999 through the first quarter of fiscal 2000. Store closure expense was recorded when the new lease was signed and reflects amounts reserved for future minimum lease payments and other cash obligations. Gain from Property Transactions. In the first quarter of fiscal 2000, the Company sold a parcel of land and recorded a gain of approximately $1.0 million. In the fourth quarter of fiscal 2000, the Company entered into a lease amendment and termination agreement for its corporate office space in exchange for $9.8 million cash from its landlord and relocated to more cost-effective space leased from a new landlord in March 2001. Interest Expense For the five-month period ended February 2001, interest expense was $2.5 million compared to $2.4 million for the year-ago period, and for fiscal years 2000, 1999, and 1998, interest expense was $6.5 million, $4.8 million, and $1.4 million, respectively. The Company uses a revolving loan to finance its inventory. Interest expense has increased in each fiscal year as the average loan balance has increased from $20.8 million in fiscal 1998 to $44.8 million in fiscal 1999 to $48.0 million in fiscal 2000. The weighted average interest rates for the five-month periods ended February 2001 and 2000 were 9.8% and 8.9%, and for fiscal years 2000, 1999 and 1998 were 9.2%, 8.0% and 8.4%, respectively. The Company entered into a borrowing agreement in September 1999, which increased its borrowing capacity up to $100 million. Net Income (Loss) As a result of the factors discussed above, net income before tax for the five-month period ended February 2001 was $1.3 million compared to $1.1 million for the year-ago period. The year-ago period included a gain of $1.0 million for the sale of land. Income before income taxes as a percentage of sales for both five-month periods was 0.3%. As a result of the factors discussed above, the loss before tax for fiscal 2000 was $7.8 million, which includes a one-time gain of $10.8 million associated with property transactions, compared to a loss before tax of $39.9 million and $17.0 million for fiscal 1999 and fiscal 1998, respectively. The loss before income taxes as a percentage of sales for fiscal years 2000, 1999 and 1998 was 0.9%, 4.4%, and 1.8%, respectively. Income tax expense of $9.6 million was recorded in the fourth quarter of fiscal 2000 and is comprised of $7.5 million in non-cash charges to adjust the fiscal 1999 deferred tax asset valuation allowance associated with the carry-forward of income tax benefits generated from fiscal 1999 and fiscal 1998 losses and $2.1 million related to a tax settlement with the IRS for years prior to fiscal 1998. The deferred tax valuation allowance will not inhibit the Company's ability to offset future taxable income by its federal and state operating loss carry-forwards of $72.2 million and $42.1 million, respectively. The Company's loss carry-forwards expire on various dates from 2003 to 2020. The effective income tax rates for the five-month periods ended February 2001 and 2000 were both 0%, and for fiscal years 1999 and 1998 were 0%, and 36.6%, respectively. The zero tax rate for the five-month period ended February 2001 and 2000, reflects the utilization of operating loss carry-forwards and for fiscal 1999 is due to the Company providing a valuation allowance on its deferred income tax benefit generated from fiscal 1999 and fiscal 1998 losses. 13 14 LIQUIDITY AND CAPITAL RESOURCES The Company's 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. The Company also uses lease financing to fund its capital requirements. At February 28, 2001, the Company had working capital of $80.9 million. As of the end of fiscal 2000, the Company had working capital of $59.6 million, compared to $61.9 million and $30.0 million at the end of fiscal 1999 and 1998, respectively. During the five-month period ended February 2001, net cash used by operating activities was $15.8 million compared to net cash provided by operating activities of $8.0 million for the year-ago period. The decrease in cash from operating activities compared to the year-ago period is primarily the result of a decline in accounts payable as the Company accelerated vendor payments to take advantage of improved vendor terms and, to a lesser extent, the Company's accelerated payments to major vendors in preparation for the move of its corporate headquarters during early March 2001 to avoid disruption in deliveries during the move. In addition, cash from operating activities decreased as receivables increased over the prior year end, offset by cash generated from operating actives for reductions in inventories and prepaid expenses. In fiscal 2000, net cash provided by operating activities was $11.2 million, compared to net cash used by operating activities of $58.3 million in 1999 and net cash provided by operating activities of $2.5 million in fiscal 1998. The fiscal 2000 increase in net cash provided by operating activities was primarily attributable to a decrease in the net loss (which included gains from property transactions) and an increase in accounts payable, partially offset by an increase in merchandise inventories. The fiscal 1999 decrease in net cash provided by operating activities was primarily attributable to an increase in net loss and a decrease in accounts payable, partially offset by a decrease in merchandise inventories and accounts receivable. During fiscal 1999, the Company opened one new EXPO store format. In fiscal 1998, the Company opened one new EXPO store and remodeled and relocated four existing stores to the EXPO format. Cash utilized for capital expenditures was $1.8 million, $21.1 million and $21.0 million, in fiscal 2000, 1999 and 1998, respectively. The Company does not plan to open or extensively remodel any stores in fiscal 2002. During the five-month period ended February 2001, cash provided from financing activities was $16.6 million compared to cash used by financing activities of $12.7 million in the year-ago period. Cash provided by (used in) financing activities in fiscal 2000, 1999 and 1998 was ($8.0) million, $78.9 million and $2.6 million, respectively. In fiscal 2000, the Company raised $14.2 million in cash through private placements, employee and non-employee stock issuance and used cash to repay $22.1 million on its revolving credit debt. In fiscal 1999, the Company raised $22.4 million in cash through private placements, employee and non-employee stock issuance and increased borrowings by $56.5 million under its revolving credit debt. In fiscal 1998 the Company raised $4.0 million in cash through private placements, employee and non-employee stock issuance and used $1.4 million in cash to repurchase common stock. Effective September 30, 1999, the Company entered into a three-year revolving credit agreement. This agreement allows for borrowings of up to $100 million based upon a formula related to the Company's inventory balances, and is secured by the Company's assets. At February 28, 2001, there was $50.2 million and at September 30, 2000 and 1999, there was $34.4 million and $56.5 million, respectively, outstanding under the line. At September 30, 1998, there were no borrowings outstanding under the prior credit facility. Based upon inventory levels at February 28, 2001, available borrowing under this facility was $13.1 million. The Company has classified borrowings under the agreement as long-term because it has the intent and ability to keep its borrowings outstanding greater than one year. Maximum borrowings outstanding under credit facilities during the five-month period ended February 2001 was $62.7 million compared to $64.7 million for fiscal 2000, compared to $64.3 million in fiscal 1999 and compared to $55.0 million in fiscal 1998. The weighted average borrowings outstanding under credit facilities during the five-month periods ended February 2001 was $40.3 million, and for fiscal years 2000, 1999 and 1998 weighted average borrowing was $48.0 million, $44.8 million and $20.8 million, respectively. The weighted average interest rates for the five-month period ended February 2001 was 9.8%, and for fiscal years 2000, 1999 and 1998 were 9.2%, 8.0% and 8.4%, respectively. 14 15 The Company continues to implement its strategy for returning to profitability that was first outlined on July 26, 1999. In the fourth quarter of 1999, the Company eliminated the computer and home office category from the Company's product mix, eliminated no-name, entry-level offerings and de-emphasized loss leaders. This improved the Company's gross profit margins and selling focus in fiscal 2000 and going forward. To increase foot traffic and brand awareness, the Company increased the marketing and advertising budget in fiscal 2000 by 20% over 1999 levels. Because the Company's market niche is the upscale electronics consumer, product lines have been expanded to showcase leading-edge consumer electronics. Additionally, the Company is committed to minimizing selling, general and administrative expenses and has placed a moratorium on opening new stores and relocations or extensive remodeling of existing stores until the company returns to sustainable profitability. However, the return to profitability is contingent on many factors, including, but not limited to, the successful implementation of the new business strategy, consumer acceptance of new technologies, continued vendor support and economic conditions in the regions where the Company's stores are located. The Company expects to be able to fund its working capital requirements with a combination of anticipated cash flow from operations, normal trade credit, existing financing agreements and other financing agreements. New Accounting Pronouncements In June 1998, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standard No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133"). SFAS 133, as amended by SFAS 138, establishes standards for derivative instruments, including certain derivative instruments embedded in other contracts (collectively referred to as derivatives) and for hedging activities. SFAS 133 requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. The Company adopted SFAS 133 on October 1, 2000. The Company does not currently engage in any hedging activity or hold any derivative instruments and has no immediate plans to do so in the future. The adoption of SFAS No. 133 did not have a significant impact on the Company's financial statements. The Emerging Issues Task Force issued Emerging Issues Task Force No. 00-14, "Accounting for Certain Sales Incentives" ("EITF 00-14") in July 2000. EITF 00-14 addresses the recognition, measurement, and income statement classification for sales incentives offered voluntarily by a vendor without charge to customers that can be used in, or that are exercisable by a customer as a result of, a single exchange transaction. The effective date for adoption of EITF 00-14 is June 30, 2001. The effect of the adoption of the consensuses should be reported as a cumulative effect of a change in accounting principle under APB Opinion No. 20, "Accounting Changes," or prospectively to new sales incentives offered on or after the effective date. In accordance with EITF 00-14, the Company has retroactively changed its reporting classification of sales incentives as a reduction of net sales. Sales incentives of $10 million for the fiscal year ended September 2000 have been reclassified from cost of sales to conform with the change in accounting classification. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company is exposed to market risks, which include changes in U.S. interest rates. The Company does not engage in financial transactions for trading or speculative purposes. The interest due on the Company's line of credit is based on variable interest rates and therefore affected by changes in market interest rates. If interest rates on existing variable rate debt rose 98 basis points (a 10% change from the bank's reference rate as of February 28, 2001), the Company's annual interest expense and payments would increase by approximately $451,000. Substantially all the Company's merchandise inventory purchases are domestically sourced and denominated in U.S. dollars. 15 16 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. CONSOLIDATED BALANCE SHEETS
February 28, September 30, ------------ ------------------------- (Dollars in thousands, except share data) 2001 2000 1999 - ---------------------------------------------------------- ------------ --------- --------- ASSETS CURRENT ASSETS: Cash and cash equivalents $ 5,329 $ 7,208 $ 2,556 Accounts receivable, less allowance for doubtful accounts of $1,206, $1,483 and $1,463, respectively 21,802 15,106 19,021 Merchandise inventories 120,928 121,458 110,276 Prepaid expenses 9,811 11,088 6,710 --------- --------- --------- Total current assets 157,870 154,860 138,563 PROPERTY AND EQUIPMENT: Land -- -- 2,306 Leasehold improvements 71,746 73,629 73,298 Furniture, fixtures, and equipment 76,596 76,058 72,686 Construction in progress 3,187 1,269 3,785 --------- --------- --------- Total property and equipment 151,529 150,956 152,075 Less accumulated depreciation and amortization 89,982 86,148 72,121 --------- --------- --------- Property and equipment -- net 61,547 64,808 79,954 --------- --------- --------- Other assets 459 448 7,646 --------- --------- --------- Total Assets $ 219,876 $ 220,116 $ 226,163 ========= ========= ========= LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable $ 36,379 $ 57,395 $ 36,571 Accrued expenses and other liabilities: Payroll 8,352 9,542 9,615 Sales taxes 4,465 5,751 4,936 Other 27,739 22,551 25,583 --------- --------- --------- Total current liabilities 76,935 95,239 76,705 Revolving credit debt 50,161 34,358 56,504 SHAREHOLDERS' EQUITY: Preferred stock, $.001 par value Authorized, 2,000,000 shares -- None issued Common stock, $.001 par value: Authorized, 40,000,000 shares Issued and outstanding 23,077,802, 22,763,194 and 19,636,022 shares respectively 23 23 20 Additional paid-in capital 104,164 103,222 88,332 Retained earnings (deficit) (11,407) (12,726) 4,602 --------- --------- --------- Total shareholders' equity 92,780 90,519 92,954 --------- --------- --------- Total Liabilities and Shareholders' Equity $ 219,876 $ 220,116 $ 226,163 ========= ========= ========= See notes to Consolidated Financial Statements.
16 17 CONSOLIDATED STATEMENTS OF OPERATIONS
Five Months ended Years ended September 30, ---------------------------- ----------------------------------------- February 28, February 29, 2001 2000 2000 1999 1998 ------------ ------------ --------- --------- --------- (Dollars and shares in thousands, (Unaudited) except per share data) Net sales (Note 1) $ 414,978 $ 391,558 $ 850,512 $ 915,642 $ 928,382 Cost of sales (Note 1) (298,412) (274,356) (603,975) (692,745) (700,070) --------- --------- --------- --------- --------- Gross profit 116,566 117,202 246,537 222,897 228,312 Selling, general and administrative (106,972) (107,500) (243,872) (243,870) (229,679) expenses Depreciation and amortization (5,877) (7,177) (14,765) (14,123) (11,328) Store closure expense -- -- -- (54) (3,008) Gain from property transactions (net) -- 1,025 10,775 -- -- --------- --------- --------- --------- --------- Income (loss) from operations 3,717 3,550 (1,325) (35,150) (15,703) Interest income 90 36 94 91 119 Interest expense (2,488) (2,440) (6,520) (4,828) (1,396) --------- --------- --------- --------- --------- Income (loss) before income taxes 1,319 1,146 (7,751) (39,887) (16,980) Income tax (expense) benefit -- -- (9,577) -- 5,167 --------- --------- --------- --------- --------- Net income (loss) $ 1,319 $ 1,146 $ (17,328) $ (39,887) $ (11,813) ========= ========= ========= ========= ========= Net income (loss) per share Basic $ 0.06 $ 0.06 $ (0.84) $ (2.58) $ (0.84) ========= ========= ========= ========= ========= Diluted $ 0.06 $ 0.05 $ (0.84) $ (2.58) $ (0.84) ========= ========= ========= ========= ========= Weighted average shares Basic 22,937 19,920 20,560 15,484 14,012 ========= ========= ========= ========= ========= Diluted 23,763 21,345 20,560 15,484 14,012 ========= ========= ========= ========= ========= See notes to Consolidated Financial Statements.
17 18 CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Common Stock Additional Retained -------------------------- Paid-In Earnings (Dollars in thousands, except share data) Shares Amount Capital (Deficit) Total - ----------------------------------------- ----------- ----------- ----------- ----------- ----------- Balance at September 30, 1997 13,810,310 $ 14 $ 62,316 $ 56,302 $ 118,632 Issuance of common stock under Employee Stock Purchase Plan 299,926 1,740 1,740 Profit Sharing Plan 196,300 1,447 1,447 Exercise of stock options 110,622 849 849 Issuance of restricted stock 29,360 181 181 Repurchase and retirement of common stock (196,300) (1,381) (1,381) Net loss (11,813) (11,813) ----------- ----------- ----------- ----------- ----------- Balance at September 30, 1998 14,250,218 14 65,152 44,489 109,655 Issuance of common stock under Employee Stock Purchase Plan 390,498 1 2,069 2,070 Non-employee common stock issued in exchange for services rendered 80,800 500 500 Exercise of stock options 53,912 275 275 Issuance of restricted stock 160,594 250 250 Proceeds from sale of common stock, net of offering expenses 4,700,000 5 20,086 20,091 Net loss (39,887) (39,887) ----------- ----------- ----------- ----------- ----------- Balance at September 30, 1999 19,636,022 20 88,332 4,602 92,954 Issuance of common stock under Employee Stock Purchase Plan 384,845 1,688 1,688 Exercise of stock options 623,485 1 3,186 3,187 Issuance of restricted stock 101,195 729 729 Proceeds from sale of common stock, net of offering expenses 2,017,647 2 9,287 9,289 Net loss (17,328) (17,328) ----------- ----------- ----------- ----------- ----------- Balance at September 30, 2000 22,763,194 23 103,222 (12,726) 90,519 Issuance of common stock under Employee Stock Purchase Plan 253,629 715 715 Exercise of stock options 7,250 37 37 Issuance of restricted stock 53,729 190 190 Net Income 1,319 1,319 ----------- ----------- ----------- ----------- ----------- Balance at February 28, 2001 23,077,802 $ 23 $ 104,164 $ (11,407) $ 92,780 =========== =========== =========== =========== =========== See notes to Consolidated Financial Statements.
18 19 CONSOLIDATED STATEMENTS OF CASH FLOWS
Five months ended Years ended September 30, --------------------------- -------------------------------------- (Dollars in thousands) February 28, February 29, 2001 2000 2000 1999 1998 - -------------------------------------------------- ------------ ------------ -------- -------- -------- (Unaudited) CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss) $ 1,319 $ 1,146 $(17,328) $(39,887) $(11,813) Adjustments to reconcile net loss to net cash provided by (used in) operating activities: Depreciation and amortization 5,877 7,177 14,765 14,123 11,328 Gain on sale of land -- (1,025) (1,025) -- -- Store closure expense -- -- -- 54 3,008 Allowance for doubtful accounts (277) (587) 20 314 (47) Deferred taxes -- -- 7,430 -- (4,568) Issuance of common stock in exchange for services rendered -- -- -- 500 -- Restricted stock issuance 190 51 729 250 212 Change in: Accounts receivable (6,419) 1,459 3,895 7,318 (4,895) Income taxes receivable -- -- -- -- 6,176 Merchandise inventories 530 (5,554) (11,182) 24,796 (17,304) Prepaid expenses and other assets 1,266 (6,849) (4,610) (490) (85) Accounts payable (21,016) 11,389 20,824 (59,946) 21,000 Accrued expenses and other liabilities 2,712 892 (2,290) (5,381) (528) -------- -------- -------- -------- -------- Net cash provided by (used in) operating activities (15,818) 8,099 11,228 (58,349) 2,484 CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of fixed assets (2,616) (1,082) (1,802) (21,086) (21,008) Sale of fixed assets -- 3,208 3,208 -- -- -------- -------- -------- -------- -------- Net cash provided by (used in) investing activities (2,616) 2,126 1,406 (21,086) (21,008) -------- -------- -------- -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: Issuance of revolving credit debt 15,803 -- -- 56,504 -- Repayment of revolving credit debt -- (16,504) (22,146) -- -- Issuance of common stock 752 3,723 14,164 22,436 4,005 Repurchase and retirement of common stock -- -- -- -- (1,381) -------- -------- -------- -------- -------- Net cash provided by (used in) financing activities 16,555 (12,781) (7,982) 78,940 2,624 Net increase (decrease) in cash (1,879) (2,556) 4,652 (495) (15,900) Cash at beginning of period 7,208 2,556 2,556 3,051 18,951 -------- -------- -------- -------- -------- Cash at end of period $ 5,329 $ -- $ 7,208 $ 2,556 $ 3,051 ======== ======== ======== ======== ======== See notes to Consolidated Financial Statements.
19 20 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES BUSINESS: Good Guys, Inc. (formerly, The Good Guys, Inc.), through its wholly owned subsidiary (together, the Company), is a retailer of consumer electronics in California, Nevada, Oregon and Washington. The Company's operations include 79 retail stores engaging only in activities related to the sale of consumer electronics products throughout the Western United States and comprise only one segment. BASIS OF PRESENTATION: The consolidated financial statements include the accounts of Good Guys, Inc. and its wholly owned subsidiary. All significant intercompany transactions have been eliminated in consolidation. The Company has changed its fiscal year end from September 30 to the last day of February for fiscal years ending after September 30, 2000. The consolidated statements of operations and cash flows for the five-month period ended February 29, 2000 have been prepared by the Company without audit and in the opinion of management include all adjustments (which include only normal recurring adjustments) necessary to present fairly the results of operations and cash flows for the five-month period ended February 29, 2000. The Company's business is seasonal and the results of operations for the five-month period ended February 28, 2001 may not be indicative of the results to be achieved for a full year. USE OF ESTIMATES: The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. CASH EQUIVALENTS: Cash equivalents represent short-term, highly liquid investments with original maturities of three months or less. Interest earned from these investments is included in interest income. MERCHANDISE INVENTORIES: Inventories are stated at the lower of cost (first-in, first-out method) or market. During the five-month transition period ended February 2001, the Company's ten largest suppliers accounted for approximately 70% of the merchandise purchased by the Company. One of the Company's suppliers, Sony, accounted for more than 10% of its merchandise mix. 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 five years for furniture, fixtures and equipment, and the lesser of the estimated useful lives of assets or the remaining lease terms for leasehold improvements. Whenever events or changes in circumstances have indicated that the carrying amount of its assets might not be recoverable, the Company, using its best estimates based on reasonable and supportable assumptions and projections, has reviewed the carrying value of long-lived assets for impairment. If the undiscounted future cash flows of long-lived assets are less than the carrying amount, the carrying value of the long-lived asset is reduced to fair value and an impairment loss is recognized. ADVERTISING: Advertising costs are charged to expense when incurred. Advertising costs for the five-month periods ended February 2001 and 2000 were $28.0 million and $29.1 million (unaudited), respectively; and for the fiscal years ended 2000, 1999, and 1998 were $54.1 million, $46.0 million, and $54.1 million, respectively. VENDOR REBATES AND PROMOTIONS: The Company receives rebates of certain promotional costs from its merchants and suppliers. Agreements are made with each individual supplier, and income is earned as cooperative advertising is placed and is recorded as a reduction of advertising expenses. The uncollected amount of vendor rebate and promotional income remaining in accounts receivable at February 28, 2001 was approximately $12.4 million; and at September 30, 2000 and 1999 was approximately $6.5 million and $12.0 million, respectively. STORE PRE-OPENING AND CLOSING COSTS: Store pre-opening costs are expensed as incurred. Store closing costs may include the cost of writing down store assets to their estimated fair value, less costs of disposal. Additionally, a liability is recorded for the net present value of any remaining operating lease obligations after the expected closing date, net of estimated sublease income, if any, at the time a commitment to close a store is made. EMPLOYEE STOCK OPTION PLANS: The Company accounts for its stock option grants using the intrinsic value method in accordance with APB No. 25, "Accounting for Stock Issued to Employees" and its related interpretations. Because the Company has granted its stock options to its employees at their fair market value at the date of grant, under APB No. 25, no compensation expense is required to be recognized in the financial statements. INSURANCE RISK RETENTION: The Company retains certain risks for workers' compensation, general liability and employee medical programs and accrues estimated liabilities on an undiscounted basis for known claims and claims incurred but not reported. REVENUE RECOGNITION: The Company recognizes revenue at the point of sale, net of estimated returns which are estimated based upon historical trends and customer habits. The effect of the returns is not significant to the Company's operating results. 20 21 EXTENDED SERVICE PLAN CONTRACTS: The Company sells extended service 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. INCOME TAXES: The Company accounts for income taxes in accordance with Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes." Under this standard, deferred income taxes reflect the tax effects, based on current tax law, of temporary differences between the amounts of assets and liabilities recognized for financial reporting and income tax purposes. A valuation allowance is recorded when it is deemed more likely than not that a deferred tax asset will not be realized. FAIR VALUE OF FINANCIAL INSTRUMENTS: The carrying value of cash and cash equivalents, accounts receivable, accounts payable, and revolving credit debt approximate their estimated fair values. NET INCOME (LOSS) PER SHARE: Net income per share has been computed in accordance with Statement of Financial Accounting Standards No. 128, "Earnings per Share" (SFAS 128). SFAS 128 requires a dual presentation of basic and diluted earnings per share (EPS). Basic EPS excludes dilution and is computed by dividing net income (loss) by the weighted average of shares outstanding for the period. Diluted EPS reflects the potential dilution that would occur if securities or other contracts to issue common stock had been converted into common stock. COMPREHENSIVE INCOME: Comprehensive income consists of net income or loss for the current period and other comprehensive income (income, expenses, gains and losses that currently bypass the income statement and are reported directly as a separate component of equity). The Company does not have any items of other comprehensive income for the five-month periods ended February 2001 and 2000, or the fiscal years ended September 2000, 1999, and 1998. Therefore, total comprehensive income (loss) is the same as net income (loss) for those periods. NEW ACCOUNTING PRONOUNCEMENTS: In June 1998, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standard No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133"). SFAS 133, as amended by SFAS 138, establishes standards for derivative instruments, including certain derivative instruments embedded in other contracts (collectively referred to as derivatives) and for hedging activities. SFAS 133 requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. The Company adopted SFAS 133 on October 1, 2000. The Company does not currently engage in any hedging activity or hold any derivative instruments and has no immediate plans to do so in the future. The adoption of SFAS No. 133 did not have a significant impact on the Company's financial statements. The Emerging Issues Task Force issued Emerging Issues Task Force No. 00-14, "Accounting for Certain Sales Incentives" ("EITF 00-14") in July 2000. EITF 00-14 addresses the recognition, measurement, and income statement classification for sales incentives offered voluntarily by a vendor without charge to customers that can be used in, or that are exercisable by a customer as a result of, a single exchange transaction. The effective date for adoption of EITF 00-14 is June 30, 2001. The effect of the adoption of the consensuses should be reported as a cumulative effect of a change in accounting principle under APB Opinion No. 20, "Accounting Changes," or prospectively to new sales incentives offered on or after the effective date. In accordance with EITF 00-14, the Company has changed its reporting classification of sales incentives as a reduction of net sales effective October 1, 2000. Sales incentives of $10 million for the fiscal year ended September 2000 have been reclassified from cost of sales to conform with the change in accounting classification. There were no sales incentive costs in fiscal years 1999 and 1998. 21 22 NOTE 2: BORROWING ARRANGEMENTS Effective September 30, 1999, the Company entered into a new revolving credit agreement with its lenders, which expires on September 30, 2002. The new agreement allows borrowings up to $100 million based upon a formula related to the Company's inventory balances, and is secured by substantially all of the Company's assets. The agreement requires maintenance of certain non-financial loan covenants. The interest rate varies based on the type of obligation incurred by the Company but approximates the prime rate plus 0.5 percent. The Company intends to keep its borrowings under the revolving credit agreement outstanding greater than one year. As a result, such amounts have been classified as long-term on the accompanying balance sheet. The outstanding balance at February 28, 2001 and September 30, 2000 was $50.2 and $34.4 million, respectively, at an interest rate of 9.0% and 9.75%, respectively. Based upon inventory levels at February 28, 2001, available borrowing under this facility was $11.3 million. Interest paid for the current and previous facilities was $1.7 million for both five-month periods ended February 2001 and 2000 (unaudited), respectively, and $5.7 million, $5.1 million and $1.7 million, for the fiscal years ended September 30, 2000, 1999 and 1998, respectively. NOTE 3: GAIN ON PROPERTY TRANSACTIONS In December 2000, the Company sold a parcel of land and recorded a gain of approximately $1.0 million. In August 2000, the Company entered into a lease amendment and termination agreement for its corporate office space in exchange for $9.8 million cash from its landlord and relocated to more cost-effective space leased from a new landlord in March 2001. NOTE 4: INCOME TAXES Income tax expense (benefit) consists of the following:
Five Months Ended Years ended September 30, --------------------------- -------------------------------------- (Dollars in thousands) February 28, February 29, 2001 2000 2000 1999 1998 ------------ ------------ ------- ------ ------- (Unaudited) Currently Payable (Receivable): Federal $ -- $ -- $ 2,147 $ -- $ (972) State -- -- -- -- (373) ------ ------ ------- ------ ------- Total currently payable -- -- 2,147 -- (599) Deferred Tax -- -- 7,430 -- (4,568) ------ ------ ------- ------ ------- Total $ -- $ -- $ 9,577 $ -- $(5,167) ====== ====== ======= ====== =======
For the five-month periods ended February 2001 and 2000, the Company paid income taxes of $252,000 and $0 (unaudited), respectively. For the years ended September 30, 2000, 1999 and 1998, the Company paid no income taxes. 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:
Five Months Ended Years ended September 30, --------------------------- ----------------------------------- February 28, February 29, 2001 2000 2000 1999 1998 ------------ ------------ ----- ----- ----- (Unaudited) Federal income tax At the statutory rate 35.0% (35.0%) (35.0%) (35.0%) (35.0%) State franchise tax, Less federal tax effect -- -- 20.2 -- (1.2) Other -- net 0.3 -- (0.2) 0.2 0.4 Change in valuation allowance (35.3) (35.0) 138.6 (34.8) 6.0 ----- ----- ----- ----- --- Total 0.0% 0.0% 123.6% 0.0% (29.8%) ===== ===== ===== ===== ===
22 23 Significant components of the Company's net deferred tax assets as of February 28, 2001 and September 30, 2000 and 1999 were as follows:
February 28, September 30, ------------ ----------------------- (Dollars in thousands) 2001 2000 1999 ------------ -------- -------- Current Vacation accruals $ 830 $ 749 $ 729 Prepaid expenses (1,995) (1,887) (1,157) Reserves 1,190 1,153 1,961 Inventory capitalization (688) (741) (1,505) Other 83 402 334 -------- -------- -------- Current assets -- net (580) (324) 362 Noncurrent Depreciation 392 392 123 Net operating loss 28,516 29,084 22,574 Other 481 426 634 Valuation allowance (28,809) (29,578) (16,263) -------- -------- -------- Noncurrent assets --- net 580 324 7,068 -------- -------- -------- Total $ -- $ -- $ 7,430 ======== ======== ========
As of February 28, 2001, the Company had net operating loss carry-forwards for federal income tax purposes of approximately $72.2 million and net operating loss carry-forwards for state tax purposes of approximately $42.0 million, which expire at various dates from 2003 to 2020. These loss carry-forwards translate into a combined tax benefit of $28.5 million that can be used to offset future taxes payable. Using its best estimates, the Company has established a valuation allowance of approximately $28.8 million at February 28, 2001, due to the uncertainty of realizing future tax benefits from its net operating loss carry-forwards. NOTE 5: 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 45 years and generally provide for rent increases based on the consumer price index. Certain store leases require additional lease payments based on the achievement of specified store sales. The Company subleases a portion of one of its stores to a company whose Chairman is also a member of Good Guys 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 five-month periods ended February 2001 and 2000 was $210,766 and $195,642 (unaudited), respectively, and for each of the years ended September 2000, 1999 and 1998 was $326,077, $318,938, and $318,938, respectively. 23 24 The future minimum annual payments for leases having noncancelable terms in excess of one year, net of sublease income, at February 28, 2001, are as follows:
(Dollars in thousands) REAL PROPERTY EQUIPMENT ------------- --------- 2002 $ 38,903 $11, 875 2003 37,432 6,799 2004 36,805 4,282 2005 35,980 1,981 2006 33,491 125 Later years through 2019 155,261 -- -------- -------- Total $337,872 $ 25,062 ======== ========
Lease expense for the five-month periods ended February 2001 and 2000 was $21.7 million and $22.4 million (unaudited), respectively; and for the years ended September 2000, 1999 and 1998 was $52.6 million, $51.5 million, and $47.1 million, respectively. NOTE: 6 STORE CLOSURE EXPENSES Store closure expenses were $54,000 and $3.0 million in fiscal 1999 and fiscal 1998, respectively. During fiscal 1998, the Company entered into new lease agreements to relocate five stores and convert them to its new EXPO concept. Store closure expense was recorded as of the date the new lease was signed and reflects amounts reserved for future minimum lease payment and other cash obligations. The following schedule summarizes information related to closed store reserves:
(dollars in thousands) Accrued Fiscal Lease Period Beginning Exit Cash Other Ending Ending Balance Charges Payments Adjustments Balance -------- ---------- ---------- ------------ ----------- ---------- 2001 (five months) $2,001 $ (413) $(258) $1,330 2000 $3,285 $(1,284) $2,001 1999 $4,657 $ 54 $(1,746) $ 320 $3,285 1998 $2,609 $3,008 $ (465) $ (95) $4,657
NOTE 7: DEFERRED PAY AND PROFIT SHARING PLAN The Company has a Deferred Pay Plan to which its employees may contribute a portion of their annual salaries and a Profit Sharing Plan that covers substantially all of the Company's employees. The Profit Sharing Plan was amended for fiscal years 1999 and 1998 such that the Company matched an employee's contributions to the Deferred Pay Plan that were invested in the Company's common stock. The Company matched such contributions up to 6% of the employee's annual salary. The Company's contributions for fiscal year 1999 and 1998 were $754,000 and $566,000, respectively. Effective October 1, 1999, contributions to the Profit Sharing Plan are at the discretion of the Board of Directors. There were no discretionary contributions to the Profit Sharing Plan for the five-month period ending February 2001 or for fiscal 2000. 24 25 NOTE 8: EMPLOYEE STOCK PLANS The Company's 1985 Stock Option Plan ("1985 Plan") and 1994 Stock Incentive Plan ("1994 Plan") authorize the issuance of incentive stock options and non-qualified stock options covering up to 4,215,000 shares of common stock. Although the 1985 Plan expired in 1995 and no further options may be 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 granted under the plans prior to August 1999 vest ratably over four years. Options granted under the 1994 Plan in August 1999 and thereafter, vest at the end of one year in the case of options granted to directors and ratably over three years for options granted to employees. All options under the Plans have a maximum term of ten years, except those issued to 10% shareholders, which have a term of five years. As of February 28, 2001, 757,862 shares remained available for the grant of options under the 1994 Plan. During fiscal 2000, non-qualified options covering 1,125,000 shares were granted outside the 1994 Plan at exercise prices equal to the fair market value of the stock on the date of grant, having terms ranging from three to ten years and vesting over three years (with the exception of an option for 25,000 shares that vests at the end of one year). During the five-month period ended February 2001, a non-qualified option covering 75,000 shares was granted outside the 1994 Plan at an exercise price equal to the fair market value of the stock on the date of grant, having a term of 10 years and vesting over three years. The following is a summary of stock option activity for the five-month period ended February 2001 and for the years ended September 30, 2000, 1999, and 1998.
Weighted Average Number Exercise of shares Price ----------------------- Balance at September 30, 1997 1,454,448 $ 9.48 Granted ( weighted average fair value of $2.58) 314,750 7.51 Exercised (110,622) 7.52 Canceled (160,374) 9.17 ----------------------- Balance at September 30, 1998 1,498,202 9.25 Granted (weighted average fair value of $3.02) 2,149,240 5.30 Exercised (53,912) 5.09 Canceled (1,823,823) 8.30 ----------------------- Balance at September 30, 1999 1,769,707 5.55 Granted (weighted average fair value of $2.64) 1,398,950 3.91 Exercised (623,485) 5.11 Canceled (300,309) 5.87 ----------------------- Balance at September 30, 2000 2,244,863 4.59 Granted (weighted average fair value of $3.56) 297,250 5.42 Exercised (7,250) 5.09 Canceled (93,285) 5.93 ----------------------- Balance at February 28, 2001 2,441,578 4.63 =======================
At February 28, 2001, options for 593,092 shares were exercisable at a weighted average exercise price of $5.80 and 757,862 shares were available for additional option grants. In November 1998, options to purchase 1,341,365 shares of common stock were re-priced from a weighted average exercise price of $9.22 to a weighted average exercise price of $5.09, which was equal to fair market value at the date of re-pricing. 25 26 The following table summarizes information about stock options at February 28, 2001.
Options Outstanding Options Exercisable --------------------------------- ------------------- Weighted Average Remaining Weighted Weighted Contractual Average Average Range of Number Life Exercise Number Exercise Exercise Prices Shares (Years) Price Shares Price --------------- --------------------------------- ------------------- $ 2.63 - $ 5.25 1,753,061 8.5 $3.94 296,740 $ 5.07 $ 5.26 - $ 7.88 648,683 8.1 $6.13 267,182 $ 5.92 $ 7.89 - $10.50 23,834 6.2 $8.20 13,170 $ 8.20 $10.51 - $13.13 4,000 3.9 $12.63 4,000 $12.63 $13.14 - $15.75 8,000 2.4 $14.13 8,000 $14.14 $15.76 - $21.00 4,000 1.0 $20.38 4,000 $20.38 ---------------------------------------------------------------------------- $ 2.63 - $21.00 2,441,578 8.3 $ 4.63 593,092 $ 5.80 ----------------------------------------------------------------------------
The Company established an Employee Stock Purchase Plan ("ESPP") in February 1986, which permits employees to purchase the Company's common stock under terms specified by this ESPP. The ESPP is a statutory Employee Stock Purchase Plan under Section 423 of the Internal Revenue Code. Common stock issued under the ESPP during the five-month period ended February 2001 and during fiscal 2000 and 1999 totaled 253,629, 384,845 and 390,498 shares, respectively, at a weighted average price of $2.82, $4.15 and $5.30, respectively. At February 28, 2001, 536,384 shares were reserved for future issuance under the ESPP. Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" (SFAS No. 123), requires the disclosure of pro forma net earnings and earnings per share as if the Company had adopted the fair value method prior to fiscal 1995. Under SFAS No. 123, the fair value of stock-based awards to employees is calculated through the use of options pricing models, even though such models were developed to estimate the fair value of freely tradable, fully transferable options without vesting restrictions, which significantly differ from the Company's stock option awards. These models also require subjective assumptions, including future stock price volatility and expected time to exercise, which greatly affect the calculated value. The Company's calculations are based on a single-option valuation approach and forfeitures are recognized as they occur. The impact of outstanding unvested stock options granted prior to 1996 has been excluded from the pro forma calculation and accordingly, the proforma adjustments presented are not indicative of future period pro forma adjustments. The Company's calculations were made using the Black-Scholes option pricing model, with the following weighted average assumptions: expected option life, 5 years; stock volatility of, 75% for the five-month period ended February 2001, 75% in fiscal 2000, and 60% in fiscal 1999 and 50% in fiscal 1998; risk-free interest rates of, 6% in fiscal 2001, 6% in fiscal 2000 and 5.75% in fiscal 1999 and 1998; and no dividends during the expected term. Had compensation cost been recognized in accordance with SFAS No. 123, the pro forma net income for the five-month period ended February 2001 would have been $659,000 or $0.03 per share, and in fiscal 2000 the pro forma net loss would have been $18.3 million or $0.89 per share, and in fiscal 1999 the pro forma net loss would have been $44.0 million or $2.84 per share and in fiscal 1998 the pro forma net loss would have been $12.8 million or $0.91 per share. NOTE 9: COMMON STOCK In August 2000, the Company issued, in a private placement, 2.0 million shares of common stock and received $9.3 million in net proceeds. Additionally, the Company issued warrants for the purchase of 1.0 million shares. The warrants were issued with an exercise price of $4.64, representing the fair market value of the common stock at the date of issuance. The warrants are exercisable over the period of three years from the date of issuance In August 1999, the Company issued 3.25 million shares of common stock in a private placement of its common stock in exchange for $15.4 million in net proceeds. As part of the private placement, the Company issued warrants totaling 1.785 million shares. The warrants were issued with an exercise price of $6.125, which was in excess of the fair market value of the common stock at the date of issuance and are exercisable during the three-year period following the date of issuance. 26 27 In June 1999, the Company issued 1.45 million shares of common stock to its current Chairman and Chief Executive Officer and received $4.7 million in cash. Additionally, the Company issued warrants to him for the purchase of 1.435 million shares. The warrants were issued with an exercise price of $3.396, representing 105 percent of the fair market value of the common stock at the date of issuance. The warrants become exercisable over a period of one to three years from the date of issuance and expire five years from the date they are first exercisable. Restricted stock issuance: The Company has issued restricted stock to directors, officers and certain key employees as part of the Company's compensation program. All shares awarded entitle the recipient to full rights of a shareholder, are restricted as to disposition and are subject to forfeiture under certain circumstances. The market value of these shares at the date of grant is amortized to expense ratable over the vesting period of one year. Shares issued during the five-month period ended February 2001, fiscal 2000, 1999, and 1998 were 57,729, 101,195, 160,594 and 29,360, respectively. During the five-month period ended February 2001, fiscal 2000, 1999 and 1998, compensation expense of $190,000, $729,000, $250,000 and $181,000, respectively, was recognized on the amortization of restricted stock, leaving unamortized compensation expense of $113,000, $66,000, $341,000 and $0, respectively, at the end of each period. Non-employee stock issuance: In fiscal 1999, the Company issued 80,800 shares of common stock and warrants for 40,400 common shares at an exercise price of $6.125 per share with a combined fair market value of $500,000 to a vendor in exchange for $500,000 of advertising services provided. These advertising expenses have been included in selling, general and administrative expenses for fiscal 1999 in the accompanying statements of operations. NOTE 10: REPURCHASE AND RETIREMENT OF STOCK In January 1996 and September 1997, the Company's Board of Directors authorized the purchase of up to 1,000,000 shares of the Company's common stock on the open market or in private transactions. For the year ended September 30, 1998, the Company had repurchased 196,300 shares for $1.4 million. The Company did not repurchase shares in the five-month period ended February 2001, fiscal 2000 or fiscal 1999. NOTE 11: LEGAL PROCEEDINGS The Company is involved in various legal proceedings arising during the normal course of business. Management believes that the ultimate outcome of these proceedings, individually and in the aggregate, will not have a material impact on the financial position or results of operations of the Company. NOTE 12: RELATED PARTY During fiscal 2000, Good Guys and a group of private equity investors, including the Chairman and certain Good Guys Directors, formed a company, goodguys.com, to sell consumer electronics through the Internet. In exchange for a trademark license, a product supply agreement and other non-cash considerations, the Company received common stock for approximately 20% of goodguys.com and a warrant for an additional 29.9% exercisable only upon a change in control or other liquidation event, as defined. In addition, the Company receives a percentage of sales to goodguys.com. The Company has not made any cash investments in goodguys.com. goodguys.com commenced Internet operations in October 2000. For the five-month period ended February 2001, the Company recorded revenues of $1.9 million from goodguys.com attributable to product sales, royalties, and reimbursable expenses. At February 28, 2001, the Company had $179,000 in trade receivables from goodguys.com. The Company accounts for its investment in goodguys.com under the equity method. 27 28 NOTE 13: NET INCOME (LOSS) PER SHARE Basic earnings per share are calculated based upon the weighted average number of common shares outstanding. Diluted earnings per share assume the exercise of all options, which are dilutive, whether exercisable or not. Net loss per share was computed based on the weighted average number of shares of common stock outstanding during the year. Since the Company has reported net losses for each of the three fiscal years ended September 30, 2000, the potentially dilutive effect of stock options and warrants of 1.4 million, 115,000, and 151,000 to purchase shares of the Company's common stock in the fiscal years ended September 30, 2000, 1999 and 1998, respectively, has been excluded from the calculation of net loss per share. The following is a reconciliation of the weighted average number of shares (in thousands) used in the Company's basic and diluted per share computations:
Five-months Ended -------------------------- February 28, February 29, 2001 2000 ------------ ------------ (Unaudited) Basic shares 22,937 19,920 Effect of dilutive stock warrants 574 1,060 Effect of dilutive stock options 252 365 ------ ------ Diluted shares 23,763 21,345 ====== ======
NOTE 14: QUARTERLY FINANCIAL DATA (UNAUDITED) Quarterly financial data are summarized in the following table. As discussed in Note 1 to these financial statements, previously issued financial statements have been reclassified to conform with the change in accounting classification for sales incentives.
Two Months Quarter Ended Ended ----------------------------------------- ------------ (Dollars in thousands, June 30, September 30, December 31, February 28, except per share amounts) 2000 2000 2000 2001 - ---------------------------------------------------------------------------------- Net sales $ 195,121 $ 208,175 $ 282,157 $ 132,821 Gross profit 57,116 56,941 78,781 37,785 Net income (loss) (2,972) (9,744) 5,802 (4,483) Net income (loss) per: basic share $ (0.14) $ (0.45) $ 0.25 $ (0.19) Diluted share $ (0.14) $ (0.45) $ 0.25 $ (0.19)
Quarter Ended ------------------------------------------------------- (Dollars in thousands, June 30, September 30, December 31, March 31, except per share amounts) 1999 1999 1999 2000 - ---------------------------------------------------------------------------------- Net sales $ 210,451 $191, 994 $ 260,940 $ 186,276 Gross profit 54,640 44,864 78,778 53,702 Net income (loss) (8,196) (25,542) 5,619 (10,231) Net income (loss) per: basic share $ (0.54) $ (1.42) $ 0.29 $ (0.50) Diluted share $ (0.54) $ (1.42) $ 0.27 $ (0.50)
28 29 INDEPENDENT AUDITORS' REPORT Board of Directors and Shareholders Good Guys, Inc. Alameda, California We have audited the accompanying consolidated balance sheets of Good Guys, Inc. (formerly The Good Guys, Inc.) and subsidiary as of February 28, 2001, and September 30, 2000 and 1999, and the related statements of operations, shareholders' equity, and cash flows for the five-month period ended February 28, 2001, and for each of the three years in the period ended September 30, 2000. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Good Guys, Inc. and subsidiary at February 28, 2001, and September 30, 2000 and 1999, and the results of their operations and their cash flows for the five-month period ended February 28, 2001, and for each of the three years in the period ended September 30, 2000, in conformity with accounting principles generally accepted in the United States of America. /s/ Deloitte & Touche LLP San Francisco, California April 13, 2001 29 30 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 following table and biographical summaries set forth the names and ages of the nominees, their principal occupations at present, the positions and offices held by each of them with the Company in addition to the position as director, and the period during which each of them has served as a director of the Company.
DIRECTOR CONTINUOUSLY DIRECTOR AGE SINCE -------- --- ------------ Ronald A. Unkefer 56 1999 Stanley R. Baker (1) 56 1976 Russell M. Solomon (2) 75 1986 John E. Martin (1) 55 1990 Gary M. Lawrence (2) 44 1999 Joseph P. Clayton (1) 51 1999 Joseph M. Schell (2) 54 1999 Kenneth R. Weller 52 2000
- ---------- (1) Member of Compensation Committee (2) Member of Audit Committee Ronald A. Unkefer is the Founder, Chairman and Chief Executive Officer of Good Guys, Inc. Mr. Unkefer founded the Company on July 1, 1973, and served as Chairman and Chief Executive Officer until January 1993, when he retired from the position of Chief Executive Officer to pursue venture capital and broadcasting interests. He continued to serve as Chairman until January 1996. Mr. Unkefer returned to the Company as Chairman and Chief Executive Officer on July 1, 1999, to spearhead the Company's efforts to return to profitability. During his first tenure with Good Guys (1973-1993), Mr. Unkefer established a proven track record of achieving profitable results, completing a successful public offering in 1986 and establishing Good Guys as one of the nation's premier retailers of consumer electronics. Mr. Unkefer is also Chairman of goodguys.com, an online consumer electronics retailer formed by Good Guys and a group of private investors; Chairman of First Ventures, a venture capital fund investing in Internet and technology companies; and Chairman of First Broadcasting, an owner and developer of major market radio stations. Stanley R. Baker, an original investor in the Company, is a founder of Good Guys and has been a member of the Board of Directors since the company's incorporation in 1976. From 1975 to 1991, he held a variety of senior executive positions in marketing and merchandising, retiring from active daily involvement in the business in 1991. From 1995 to 1999, Mr. Baker served as Chairman of the Board of Trustees for the Schools of the Sacred Heart, a K-12 private school in San Francisco. He continues to serve as a trustee. Russell M. Solomon, a member of the Board of Directors since 1986, is the Founder and Chairman of MTS Incorporated (d.b.a. Tower Records.) Over the past 40 years, Mr. Solomon has built Tower Records into an internationally recognized retailer with 243 record, video and book stores spanning 18 countries. Mr. Solomon is a former President of the National Association of Recording Merchandisers (NARM) and has served on the Board of Directors for both NARM and the Video Software Dealers Association (VSDA.) He is currently Chairman of the Dean's Advisory Council for the Graduate School of Management at the University of California, Davis and is also a member of the Board of Directors for the Crocker Art Museum Association in Sacramento. 30 31 John E. Martin, a member of the Board of Directors since 1990, is Chairman of Culinary Adventures, a privately held restaurant company with locations in California, Arizona and Oklahoma, and Chairman of RTHPORT, a retail organization that facilitates online auctions. Mr. Martin, who has more than 34 years of experience in retail and restaurant management, served as Chief Executive Officer of Taco Bell from 1983 until 1996 and also served as Chairman from 1994 until 1996. From October 1996 to June 1997, Mr. Martin served as Chairman and Chief Executive Officer of PepsiCo Casual Restaurants International. Mr. Martin is also the former President of Burger Chef, Hardees and La Petite Boulangerie. Most recently, he served as Chairman of Easyriders, Inc., an operator of restaurants and apparel stores, and Chairman of Diedrich Coffee, Inc., an operator of specialty coffee stores. Mr. Martin is also a director of Williams-Sonoma, Inc. Gary M. Lawrence, a member of the Board of Directors since 1999, is a managing partner in the Dallas office of international law firm Akin, Gump, Strauss, Hauer & Feld, L.L.P., where he chairs the technology practice group and is a member of the firm-wide strategic planning and management committees. His clients include Internet and other emerging technology companies, major U.S. and European Stock Exchange-listed corporations, venture capitalists and private equity investors. Mr. Lawrence has substantial experience in counseling individual and corporate clients across a broad spectrum of legal and business issues, with particular emphasis on financings, mergers, acquisitions, divestitures and joint ventures in the high-technology arena. Mr. Lawrence is also a director of goodguys.com. Joseph P. Clayton, a member of the Board of Directors since 1999, has more than 25 years of experience in the consumer electronics and telecommunications industries. Mr. Clayton currently is President and Chief Executive Officer - North America and member of the Board of Directors of Global Crossing, Ltd., a global provider of integrated telecommunications solutions. Prior to its merger with Global Crossing in 1999, he served as Chief Executive Officer of Frontier Corporation. From March 1992 to January 1997, Mr. Clayton was Executive Vice President of Marketing and Sales for Thomson Consumer Electronics for the Americas and Asia. From May 1988 to March 1992, Mr. Clayton served as Thomson's Senior Vice President of Television Operations for North and South America. Mr. Clayton also serves on the Boards of Directors for Asia Global Crossing and E.W. Scripps, both publicly held communications companies. Joseph M. Schell, a member of the Board of Directors since 1999, has more than 25 years of experience in investment banking and financial services. Mr. Schell currently is Chairman of Global Technology Investment Banking for Merrill Lynch & Co. From May 1985 until June 1999, Mr. Schell was Senior Managing Director, Director of Investment Banking and a member of the Executive Committee of NationsBank Montgomery Securities. Mr. Schell also serves on the Boards of Directors of Dycom Industries, a publicly held engineering, construction and maintenance services company, and Sanmina Corporation, a publicly held electronics contract manufacturing services company. Kenneth R. Weller rejoined Good Guys in August 2000 as President. Mr. Weller began his career with Good Guys in 1982 as a sales associate, rising to the position of Vice President of Sales in 1986 after holding various store management positions. In 1993, Mr. Weller left Good Guys and joined Best Buy as Senior Vice President of Sales and served in that position until returning to Good Guys last year. Mr. Weller is largely credited with the substantial growth Good Guys experienced during his seven years at the helm of the sales organization. Certain information relating to executive officers of the Company is set forth in Item 4A in Part 1 of this Transition Report on Form 10-K under the caption "Executive Officers of the Company". SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE Under the securities laws of the United States, the Company's directors and executive officers, and any persons holding more than ten percent of the Company's common stock, are required to report their initial ownership of the Company's common stock and any subsequent changes in that ownership to the Securities and Exchange Commission. Specific due dates for these reports have been established and the Company is required to disclose in this Transition Form 10-K statement any failure to file by such dates of which it becomes aware during the fiscal year. Subject to the foregoing, the Company believes that during the five-month transition period ended February 28, 2001 its directors and officers filed on a timely basis all such reports required to be filed, with the exception of Form 5's for the five-month transition period covering the annual grant of restricted shares on January 31, 2001 to the non-employee directors listed in Item 10 hereof, an option granted to Robert Stoffregen, Vice President, Finance and Chief Financial Officer of the Company, and an option granted to Cathy Stauffer, Vice President, Merchandising of the Company. 31 32 PERFORMANCE GRAPH The following graph shows a five-year comparison (for annual periods ending on the last day of February) of cumulative total returns for $100 invested in each of the Company's common stock, the NASDAQ Stock Market (US) Index and the NASDAQ Retail Trade Index, each of which assumes reinvestment of dividends: [GRAPH]
1996 1997 1998 1999 2000 2001 ---- ---- ---- ---- ---- ---- Good Guys Stock 100 86 91 44 70 64 NASDAQ Stock Market 100 119 163 212 434 198 NASDAQ Retail Trade 100 111 147 151 131 94
32 33 ITEM 11. EXECUTIVE COMPENSATION. Incorporated by reference from portions of the Proxy Statement for the Company's Annual Meeting of Shareholders held on January 31, 2001, (the "Proxy Statement") under the captions "Compensation of Directors and Executive Officers" and "Certain Relationships and Related Transactions," except for the information that follows in this Item 11. The following table shows specific compensation information for the 12 months ended February 28, 2001 (February 2001) and for each of the fiscal years ending September 30, 2000, 1999 and 1998 for the Chief Executive Officer, the three other executive officers who were serving as of February 28, 2001, and received over $100,000 dollars for the fiscal year then ended, and a former executive officer who would have been included among the most highly compensated officers had he remained in the employ of the Company through February 28, 2001. SUMMARY COMPENSATION TABLE
LONG-TERM COMPENSATION ANNUAL COMPENSATION AWARDS ------------------------ ------------ RESTRICTED SHARES FISCAL STOCK UNDERLYING YEAR OTHER ANNUAL AWARDS OPTIONS NAME AND PRINCIPAL POSITION ENDING SALARY BONUS COMPENSATION(1) ($) (NUMBER) - ---------------------------- ------------- -------- ------- --------------- ---------- ------------ Ronald A. Unkefer February 2001 $500,043 $0 $594 $0 0 Chief Executive Officer(2) September 2000 $500,043 $0 $0 $0 0 September 1999 $125,005 $0 $0 $0 0 September 1998 $0 $0 $0 $0 0 Cathy A. Stauffer February 2001 $221,675 $50,000 $6,330 $0 75,000 Vice President, September 2000 $199,591 $0 $6,754 $0 30,000 Merchandising September 1999 $185,994 $0 $19,619 $60,000 17,500 September 1998 $170,925 $0 $0 $0 0 George J. Hechtman February 2001 $220,841 $50,000 $76,052 $0 100,000 Vice President, September 2000 $106,254 $0 $6,477 $0 100,000 Administration(3) September 1999 $0 $0 $0 $0 0 September 1998 $0 $0 $0 $0 0 Richard C. Gazlay February 2001 $171,257 $7,500 $396 $0 0 Vice President, September 2000 $167,506 $15,000 $0 $0 0 Operations(4) September 1999 $53,343 $75,679 $0 $0 26,000 September 1998 $103,587 $94,203 $0 $0 1,000 Kenneth R. Weller, February 2001 $218,188 $66 $0 $0 1,000,000 President(5) September 2000 $51,515 $0 $0 $0 1,000,000 September 1999 $0 $0 $0 $0 0 September 1998 $0 $0 $0 $0 0 - --------- (1) Consists of perquisites and other personal benefits, including long term disability, life insurance premiums paid by the Company, accrued vacation for terminated employees, and the tax gross up for relocation expenses. (2) Mr. Unkefer was named Chief Executive Officer of the Company on July 1, 1999. (3) Mr. Hechtman was named Vice President, Administration in April 2000. (4) Mr. Gazlay served the Company in a variety of positions, including Vice President, Operations until November 2000 and then Director of Service until his resignation in March 2001. (5) Mr. Weller was named President of the Company on August 15, 2000.
33 34 STOCK OPTION TABLES The following table shows information concerning stock options granted to the individuals named in the Summary Compensation Table above during the 12-month period ended February 28, 2001 ("Transition Period"). OPTION GRANTS IN TRANSITION PERIOD
INDIVIDUAL GRANTS ------------------------- % OF TOTAL POTENTIAL REALIZABLE OPTIONS VALUE AT ASSUMED NUMBER OF GRANTED TO RATES OF STOCK PRICE SECURITIES EMPLOYEES APPRECIATION FOR UNDERLYING IN OPTION TERM(2) OPTIONS TRANSITION EXERCISE EXPIRATION -------------------------- NAME GRANTED(1) PERIOD PRICE DATE 5% 10% - ---- --------- ---------- -------- ---------- ---------- ---------- Ronald A. Unkefer 0 0 -- -- -- -- Cathy A. Stauffer 5,000 .29% $4.6250 3/17/10 $14,543 $36,855 70,000 4.08% $7.0625 11/08/10 $310,905 $787,906 George J. Hechtman 100,000 5.82% $2.8750 4/26/10 $180,807 $458,201 Richard C. Gazlay 0 0 -- -- -- -- Kenneth R. Weller 1,000,000 58.22% $ 3.75 8/15/10 $2,358,000 $5,976,000
- ---------- (1) All of the above options were granted under the 1994 Stock Incentive Plan with the exception that the options granted to George Hechtman and Kenneth Weller were granted outside that Plan. The options are non-qualified stock options that were granted at 100% of the fair market value of the common stock on the date of grant. The options expire ten years from the date of grant, unless otherwise earlier terminated upon the occurrence of certain events related to termination of employment. Options granted vest 33.3% per year on the first three anniversaries of the option grant date. Additional vesting of the right to exercise the options ceases when the optionee's employment terminates. (2) The 5% and the 10% assumed rates of appreciation applied to the option exercise price over the ten-year option term are prescribed by the rules of the Securities and Exchange Commission and do not represent the Company's estimate or projection of the future price of common stock. If the Company's common stock does not appreciate relative to the exercise price, the named executive officers will receive no benefit from the options. (4) (3) All information given in this table and the following table as to exercise prices and values is as of February 28, 2001. 34 35 The following table shows the number of shares covered by both exercisable and non-exercisable stock options held by the individuals named in the Summary Compensation Table above as of February 28, 2001, and the value of unexercised options as of that date.
VALUE(1) OF UNEXERCISED NUMBER OF UNEXERCISED IN-THE-MONEY OPTIONS AT SHARES OPTIONS AT 2/28/01 2/28/01 ACQUIRED VALUE ------------------------------- ------------------------------- NAME ON EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE - ---- ----------- -------- ----------- ------------- ----------- ------------- Ronald A. Unkefer........ -- -- 0 0 $0 $0 Cathy A. Stauffer........ -- -- 41,251 96,249 $47,799 $3,059 George J. Hechtman....... -- -- 33,334 66,666 $79,168 $158,332 Richard C. Gazlay........ -- -- 18,053 0 $3,286 $0 Kenneth R. Weller -- -- 0 1,000,000 $0 $1,500,000 - ----------
(1) The value of unexercised options is calculated by multiplying the number of options outstanding by the difference between the option exercise price and the February 28, 2001 closing price of $5.25 per share of the Company's common stock as reported on the NASDAQ National Market. Options with an exercise price in excess of the February 28, 2001 closing price were not included in this calculation. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The following table sets forth information as of May 11, 2001, unless otherwise noted, regarding securities ownership by (i) each person who is known by the Company to own beneficially more than five percent of the Company's common stock, (ii) each current executive officer named in the Summary Compensation Table, (iii) the directors and nominees individually, and (iv) all executive officers and directors as a group.
COMMON STOCK BENEFICIALLY OWNED(1) NAME NUMBER PERCENT ---- ---------- ---------- Lord, Abbett & Co.(2) ............................................... 1,736,258 6.8% 767 Fifth Avenue, 11th Floor New York, NY 10153 First Pacific Advisors(2) ........................................... 1,669,500 6.6% 11400 West Olympic Blvd., Suite 1200 Los Angeles, CA 90064 Dimensional Fund Advisors(2) ........................................ 1,525,100 6.0% 1299 Ocean Avenue, 11th Floor Santa Monica, CA 90401 Ronald A. Unkefer (3) ............................................... 2,914,329 11.5% Kenneth R. Weller (4) ............................................... 750,000 3.0% John E. Martin (5) .................................................. 729,836 2.9% Joseph M. Schell (6) ................................................ 450,644 1.8% Stanley R. Baker (7) ................................................ 433,278 1.7% Gary M. Lawrence (8) ................................................ 269,813 1.1% W. Howard Lester (9) ................................................ 248,219 1.0% Russell M. Solomon (10) ............................................. 72,764 * Joseph P. Clayton (11) .............................................. 60,011 * George J. Hechtman .................................................. 20,000 * Cathy A. Stauffer (12) .............................................. 48,384 * ---------- ---------- All executive officers and directors as a group (12 persons) (13) 6,005,669 23.6%
35 36 - ---------- * Represents less than 1% of the outstanding shares. (1) The stockholders named in the table have sole voting and investment power with respect to all shares of stock shown as beneficially owned by them, subject to community property laws where applicable and the information contained in the footnotes to this table. (2) As of March 31, 2001. (3) Includes 801,734 shares issuable upon the exercise of outstanding warrants that are exercisable within 60 days. Mr. Unkefer is a member of the administrative committees for The Good Guys! Profit Sharing Plan, the trustee of which currently holds 532,392 shares on behalf of plan participants, and The Good Guys! Deferred Pay Plan, the trustee of which currently holds 377,200 shares on behalf of plan participants. If a participant fails to vote his or her shares under either Plan, such shares will be voted in the manner determined by the administrative committees. (4) Includes 250,000 shares issuable upon the exercise of outstanding warrants that are exercisable within 60 days. (5) Includes 133,744 shares issuable upon the exercise of outstanding stock options and warrants that are exercisable within 60 days. (6) Includes 127,744 shares issuable upon the exercise of outstanding stock options and warrants that are exercisable within 60 days. (7) Includes 106,808 shares issuable upon the exercise of outstanding stock options and warrants that are exercisable within 60 days. (8) Includes 73,872 shares issuable upon the exercise of outstanding stock options and warrants that are exercisable within 60 days. (9) Includes 79,872 shares issuable upon the exercise of outstanding stock options and warrants that are exercisable within 60 days. (10) Includes 31,387 shares issuable upon the exercise of outstanding stock options and warrants that are exercisable within 60 days, and also includes shares held in trusts established by him as to which he disclaims beneficial interest. (11) Includes 30,000 shares issuable upon the exercise of outstanding stock options and warrants that are issuable within 60 days. (12) Includes 139 shares held by the trustee of The Good Guys! Profit-Sharing Plan and allocated to Ms. Stauffer, as to which Ms. Stauffer has voting power, 2,298 shares held by the trustee of The Good Guys! Deferred Pay Plan and allocated to Ms. Stauffer's individual account, as to which Ms. Stauffer has voting power, and 19,584 shares issuable upon exercise of outstanding stock options that are exercisable within 60 days. (13) Includes 139 shares held by the trustee of The Good Guys! Profit-Sharing Plan and allocated to the individual accounts of members of the group, as to which such individuals have voting power; 2,298 shares held by the trustee of The Good Guys! Deferred Pay Plan and allocated to the individual accounts of such members, as to which such individuals have voting power, and 1,680,631 shares issuable upon exercise of outstanding stock options and warrants that are exercisable within 60 days. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. Incorporated by reference from portions of the Proxy Statement under the captions "Compensation of Directors and Executive Officers" and "Certain Relationships and Related Transactions." See also Note 5 and Note 12 of the Consolidated Financial Statements - Item 8 of this Transition Report relating to transactions during the transition period. 36 37 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: Independent Auditors' Report Consolidated statements of operations for the five months ended February 28, 2001, February 29, 2000 (unaudited) and each of the three years in the period ended September 30, 2000 Consolidated balance sheets as of February 28, 2001 and September 30, 2000 and 1999 Consolidated statements of shareholders' equity for the five months ended February 28, 2001 and for each of the three years in the period ended September 30, 2000 Consolidated statements of cash flows for the five months ended February 28, 2001, February 29, 2000 (unaudited) and for each of the three years in the period ended September 30, 2000 Notes to consolidated financial statements (2) Financial Statement Schedules. Independent Auditor's Report on Financial Statement Schedule Schedule II Valuation and Qualifying Accounts All other schedules are omitted because they are not required or are not applicable, or the information is included in the financial statements. (b) REPORTS ON FORM 8-K. None 37 38
Exhibits. 3.1 Restated Certificate of Incorporation. 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 10-K Annual Report for the fiscal year ended September 30, 1998; 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 Employee Stock Purchase Plan, as amended.* (Exhibit 4.2 to the Company's Registration Statement of Form S-8 as filed on March 30, 2001, registration number 333-57964; incorporated herein by reference). 10.4 Amended and Restated 1994 Stock Incentive Plan.*(Exhibit 42.2 to the Company's Form 10-K Annual Report for the fiscal year ended September 30, 2000; incorporated herein by reference.) 10.5 Assignment and Assumption Agreement, dated September 26, 1995, by and between The Good Guys, Inc. and The Good Guys -- California, Inc. (Exhibit 10.18 to the Company's Form 10-K Annual Report for the fiscal year ended September 30, 1995; incorporated herein by reference.) 10.6 Form of Operating Agreement, for WOW! Stores between MTS, Inc., dba Tower Records/Book/Video, and The Good Guys, Inc., used in connection with all existing WOW! stores. (Exhibit 10.20 to the Company's Form 10-K Annual Report for the fiscal year ended September 30, 1995; incorporated herein by reference.) 10.7 Loan Agreement between The Good Guys-California, Inc. and Bank of America and GE Capital, dated as of September 30, 1999. (Exhibit 10.9 to the Company's Form 10-K for the fiscal year ended September 30, 1999; incorporated herein by reference.) 10.8 Stock Purchase Agreement, dated June 1, 1999, between Ronald A. Unkefer and the Company. (Exhibit 10.15 to the Company's Report on Form 10-Q for the quarter ended June 30, 1999; incorporated herein by reference.) 10.9 Employment Agreement dated June 2, 1999, between Ronald A. Unkefer and the Company. (Exhibit 10.16 to the Company's Report on Form 10-Q for the quarter ended June 30, 1999; incorporated herein by reference.)* 10.10 Form of severance agreement entered into with Cathy Stauffer in June 1999. (Exhibit 10.17 to the Company Form 10-Q for the quarter ended June 30, 1999, incorporated herein by reference.)* 10.11 Stock Purchase Agreement dated as of August 19, 1999, together with the forms of Warrant to Purchase Shares of Common Stock and Registration Rights Agreement executed in connection with private placement. (Exhibit 10.18 to the Company's Report on Form 8-K for August 20, 1999; incorporated herein by reference.) 10.12 Executive Employment Agreement with Kenneth R. Weller, dated August 15, 2000. (Exhibit 10.14 to the Company's Report on Form 8-K filed on August 29, 2000; incorporated herein by reference.) 10.13 Stock and Warrant Subscription Agreement, dated as of August 15, 2000, between The Good Guys, Inc. and Kenneth R. Weller. (Exhibit 10.15 to the Company's Report on Form 8-K filed on August 29, 2000; incorporated herein by reference.) 10.14 Stock Purchase Agreement, dated as of August 15, 2000, between The Good Guys, Inc. and the persons listed on Schedule A thereto. (Exhibit 10.16 to the Company's Report on Form 8-K filed on August 29, 2000; incorporated herein by reference.) 10.15 Registration Rights Agreement, dated as of August 16, 2000, between The Good Guys, Inc. and the persons listed on Schedule A thereto. (Exhibit 10.17 to the Company's Report on Form 8-K filed on August 29, 2000; incorporated herein by reference.) 10.16 Form of Warrant to Purchase Shares of Common Stock of The Good Guys to be issued pursuant to the Stock Purchase Agreement, dated as of August 16, 2000, between The Good Guys and the persons listed on Schedule A thereto. (Exhibit 10.18 to the Company's Report on Form 8-K filed on August 29, 2000; incorporated herein by reference.)
- ---------------------------------- *Compensatory plan or arrangement. 38 39 10.17 Letter agreement between George J. Hechtman and the Company, dated April 12, 2000.* (Exhibit 10.17 to the Company's Form 10-K filed for its fiscal year ended September 30, 2000; incorporated herein by reference.) 10.18 Letter agreement between Robert A. Stoffregen and the Company, dated September 29, 2000.* (Exhibit 10.18 to the Company's Form 10-K filed for its fiscal year ended September 30, 2000; incorporated herein by reference.) 10.19 Option Agreement between George Hechtman and the Company, dated April 26, 2000.* (Exhibit 10.19 to the Company's Form 10-K filed for its fiscal year ended September 30, 2000; incorporated herein by reference.) 10.20 Option Agreement between Robert A. Stoffregen and the Company, dated October 6, 2000.* (Exhibit 10.20 to the Company's Form 10-K filed for its fiscal year ended September 30, 2000; incorporated herein by reference.) 10.21 Option Agreement between the Company and Stanley R. Baker, dated July 27, 2000.* (Exhibit 10.21 to the Company's Form 10-K filed for its fiscal year ended September 30, 2000; incorporated herein by reference.) 10.22 Lease Agreement for Corporate Office, dated December 29, 2000, by and between Good Guys and LNR Harbor Bay, LLC. 10.23 Royalty and services, licensing, domain name, and stock subscription & warrant agreements, dated as of January 1, 2000, entered into between The Good Guys-California, Inc and goodguys.com, inc. 21.1 List of Subsidiaries. 23.1 Independent Auditors' Consent. 24.1 Power of Attorney. 99.1 Definitive Proxy Statement for Annual Meeting of Shareholders held on January 31, 2001.
- ---------------------------------- *Compensatory plan or arrangement. 39 40 INDEPENDENT AUDITORS' REPORT ON FINANCIAL STATEMENT SCHEDULE To the Board of Directors and Shareholders of Good Guys, Inc.: We have audited the consolidated financial statements of Good Guys, Inc. (formerly The Good Guys, Inc.) and subsidiary as of February 28, 2001, and September 30, 2000 and 1999, and for the five-month Year ended February 28, 2001, and for each of three fiscal years in the Year ended September 30, 2000, and have issued our report thereon dated April 13, 2001. Our audits also included the financial statement schedule of Good Guys, Inc. and subsidiaries listed in Item 14(a)(2). This financial statement schedule is the responsibility of the Company's management. Our responsibility is to express an opinion based on our audits. In our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly in all material respects the information set forth therein. /s/ Deloitte & Touche LLP San Francisco, California April 13, 2001 SCHEDULE II GOOD GUYS, INC. & SUBSIDIARY VALUATION AND QUALIFYING ACCOUNTS (Dollars in Thousands)
Column A Column B Column C Column D Column E ----------- --------- --------- --------- --------- Additions Balance at Charged to Balance at Beginning Costs and End of Description of Year Expenses Deductions Year ----------- --------- --------- --------- --------- Year Ended September 30, 1998: Allowance for Doubtful Accounts $ 1,196 - $ 47 $ 1,149 Year Ended September 30, 1999: Allowance for Doubtful Accounts $ 1,149 $ 400 $ 86 $ 1,463 Year Ended September 30, 2000: Allowance for Doubtful Accounts $ 1,463 $ 488 $ 468 $ 1,483 Year Ended February 28, 2001: Allowance for Doubtful Accounts $ 1,483 $ 53 $ 330 $ 1,206
40 41 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: May 25, 2001 GOOD GUYS, INC. By: /S/ RONALD A. UNKEFER ---------------------------------------- Ronald A. Unkefer Chairman 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/ RONALD A. UNKEFER Chairman and Chief Executive Officer May 25, 2001 - -------------------------------- (Principal Executive Officer) (Ronald A. Unkefer) /S/ ROBERT A. STOFFREGEN Chief Financial Officer May 25, 2001 - -------------------------------- (Principal Financial and Accounting Officer) (Robert A. Stoffregen) /s/ STANLEY R. BAKER* Director May 25, 2001 - ------------------------------- (Stanley R. Baker) /s/ RUSSELL M. SOLOMON* Director May 25, 2001 - ------------------------------- (Russell M. Solomon) /s/ JOHN E. MARTIN* Director May 25, 2001 - ------------------------------- (John E. Martin) /s/ GARY M. LAWRENCE* Director May 25, 2001 - ------------------------------- (Gary M. Lawrence) /s/ JOSEPH P. CLAYTON* Director May 25, 2001 - ------------------------------- (Joseph P. Clayton) /s/ JOSEPH M. SCHELL* Director May 25, 2001 - ------------------------------- (Joseph M. Schell) /s/ KENNETH R. WELLER* Director May 25, 2001 - ------------------------------- (Kenneth R. Weller) *By /S/ ROBERT A. STOFFREGEN - ------------------------------- Robert A. Stoffregen, Attorney-in-Fact
41 42 EXHIBIT INDEX 3.1 Restated Certificate of Incorporation. 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 10-K Annual Report for the fiscal year ended September 30, 1998; 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 Employee Stock Purchase Plan, as amended.* (Exhibit 4.2 to the Company's Registration Statement of Form S-8 as filed on March 30, 2001, registration number 333-57964; incorporated herein by reference). 10.4 Amended and Restated 1994 Stock Incentive Plan.*(Exhibit 42.2 to the Company's Form 10-K Annual Report for the fiscal year ended September 30, 2000; incorporated herein by reference.) 10.5 Assignment and Assumption Agreement, dated September 26, 1995, by and between The Good Guys, Inc. and The Good Guys - California, Inc. (Exhibit 10.18 to the Company's Form 10-K Annual Report for the fiscal year ended September 30, 1995; incorporated herein by reference.) 10.6 Form of Operating Agreement, for WOW! Stores between MTS, Inc., dba Tower Records/Book/Video, and The Good Guys, Inc., used in connection with all existing WOW! stores. (Exhibit 10.20 to the Company's Form 10-K Annual Report for the fiscal year ended September 30, 1995; incorporated herein by reference.) 10.7 Loan Agreement between The Good Guys-California, Inc. and Bank of America and GE Capital, dated as of September 30, 1999. (Exhibit 10.9 to the Company's Form 10-K for the fiscal year ended September 30, 1999; incorporated herein by reference.) 10.8 Stock Purchase Agreement, dated June 1, 1999, between Ronald A. Unkefer and the Company. (Exhibit 10.15 to the Company's Report on Form 10-Q for the quarter ended June 30, 1999; incorporated herein by reference.) 10.9 Employment Agreement dated June 2, 1999, between Ronald A. Unkefer and the Company. (Exhibit 10.16 to the Company's Report on Form 10-Q for the quarter ended June 30, 1999; incorporated herein by reference.)* 10.10 Form of severance agreement entered into with Cathy Stauffer in June 1999. (Exhibit 10.17 to the Company Form 10-Q for the quarter ended June 30, 1999, incorporated herein by reference.)* 10.11 Stock Purchase Agreement dated as of August 19, 1999, together with the forms of Warrant to Purchase Shares of Common Stock and Registration Rights Agreement executed in connection with private placement. (Exhibit 10.18 to the Company's Report on Form 8-K for August 20, 1999; incorporated herein by reference.) 10.12 Executive Employment Agreement with Kenneth R. Weller, dated August 15, 2000. (Exhibit 10.14 to the Company's Report on Form 8-K filed on August 29, 2000; incorporated herein by reference.) 10.13 Stock and Warrant Subscription Agreement, dated as of August 15, 2000, between The Good Guys, Inc. and Kenneth R. Weller. (Exhibit 10.15 to the Company's Report on Form 8-K filed on August 29, 2000; incorporated herein by reference.) 10.14 Stock Purchase Agreement, dated as of August 15, 2000, between The Good Guys, Inc. and the persons listed on Schedule A thereto. (Exhibit 10.16 to the Company's Report on Form 8-K filed on August 29, 2000; incorporated herein by reference.) 10.15 Registration Rights Agreement, dated as of August 16, 2000, between The Good Guys, Inc. and the persons listed on Schedule A thereto. (Exhibit 10.17 to the Company's Report on Form 8-K filed on August 29, 2000; incorporated herein by reference.) 10.16 Form of Warrant to Purchase Shares of Common Stock of The Good Guys to be issued pursuant to the Stock Purchase Agreement, dated as of August 16, 2000, between The Good Guys and the persons listed on Schedule A thereto. (Exhibit 10.18 to the Company's Report on Form 8-K filed on August 29, 2000; incorporated herein by reference.) 10.17 Letter agreement between George J. Hechtman and the Company, dated April 12, 2000.* (Exhibit 10.17 to the Company's Form 10-K filed for its fiscal year ended September 30, 2000; incorporated herein by reference.) - ---------------------------------- *Compensatory plan or arrangement. 42 43 10.18 Letter agreement between Robert A. Stoffregen and the Company, dated September 29, 2000.* (Exhibit 10.18 to the Company's Form 10-K filed for its fiscal year ended September 30, 2000; incorporated herein by reference.) 10.19 Option Agreement between George Hechtman and the Company, dated April 26, 2000.* (Exhibit 10.19 to the Company's Form 10-K filed for its fiscal year ended September 30, 2000; incorporated herein by reference.) 10.20 Option Agreement between Robert A. Stoffregen and the Company, dated October 6, 2000.* (Exhibit 10.20 to the Company's Form 10-K filed for its fiscal year ended September 30, 2000; incorporated herein by reference.) 10.21 Option Agreement between the Company and Stanley R. Baker, dated July 27, 2000.* (Exhibit 10.21 to the Company's Form 10-K filed for its fiscal year ended September 30, 2000; incorporated herein by reference.) 10.22 Lease Agreement for Corporate Office, dated December 29, 2000, by and between Good Guys and LNR Harbor Bay, LLC 10.23 Services, licensing, domain name, and stock subscription & warrant agreements, dated January 2000, entered into between The Good Guys-California, Inc and goodguys.com 21.1 List of Subsidiaries. 23.1 Independent Auditors' Consent. 24.1 Power of Attorney. 99.1 Definitive Proxy Statement for Annual Meeting of Shareholders held on January 31, 2001 *Compensatory plan or arrangement. *Compensatory plan or arrangement. - -------------------------------------------------------------------------------- 43 EX-3.1 2 f72537ex3-1.txt EXHIBIT 3.1 1 EXHIBIT 3.1 RESTATED CERTIFICATE OF INCORPORATION OF GOOD GUYS, INC. (PURSUANT TO SECTION 245) The undersigned, Robert A. Stoffregen, hereby certifies that: 1. He is the duly elected and acting Secretary of Good Guys, Inc., a Delaware corporation. 2. The Certificate of Incorporation of this corporation was originally filed with the Secretary of State of Delaware on January 14, 1992 under the name of The Good Guys, Inc. 3. The name of the corporation was changed to Good Guys, Inc., pursuant to a certificate of Ownership and Merger Merging The Good Guys, Inc. and GGuys, Inc., filed with the Secretary of State of Delaware on April 16, 2001. 4. This Restated Certificate of Incorporation merely restates and integrates but does not further amend the provisions of the corporation's Certificate of Incorporation, and as such there is no discrepancy between the provisions of the Certificate of Incorporation and the provisions of this Restated Certificate of Incorporation. 5. The corporation's Certificate of Incorporation shall be restated to read in full as follows: FIRST. The name of this corporation (hereinafter called the "Corporation") is GOOD GUYS, INC. SECOND. The address of the registered office of this Corporation in the State of Delaware is 2711 Centerville Road, Suite 400, Wilmington, County of New Castle, Delaware, and its registered agent at that address is Corporation Service Company. THIRD. The purpose of the Corporation is to engage in any lawful act or activity for which corporations may be organized under the General Corporation Law of the State of Delaware. FOURTH. (A) This Corporation is authorized to issue two classes of stock, preferred stock and common stock. The authorized number of shares of capital stock is Forty-Two Million (42,000,000) shares, of which the authorized number of shares of preferred stock 2 is Two Million (2,000,000) and the authorized number of shares of common stock is Forty Million (40,000,000). The stock, whether preferred stock or common stock, shall have a par value of one-tenth of one cent ($0.001) per share. (B) Shares of preferred stock may be issued from time to time in one or more series. The Board of Directors of this Corporation is hereby authorized to fix or alter the voting rights, powers, preferences and privileges, and the relative, participating, optional or other rights, if any, and the qualifications, limitations or restrictions thereof, or any wholly unissued series or preferred stock; and to fix the number of shares constituting any such series and the designation thereof; and to increase or decrease the number of shares of any series of preferred stock (but not below the number of shares thereof then outstanding). FIFTH. In furtherance and not in limitation of the powers conferred by statute, the Board of Directors is expressly authorized to adopt, amend or repeal from time to time any or all of the Bylaws of this Corporation. SIXTH. The number of directors which shall constitute the whole Board of Directors of this Corporation shall be as specified in the Bylaws of this Corporation. SEVENTH. Elections of directors need not be by written ballot except and to the extent provided in the Bylaws of this Corporation. EIGHTH. To the fullest extent permitted by the Delaware General Corporation Law as the same exists or as it may hereafter be amended, no director of this Corporation shall be personally liable to this Corporation or its stockholders for monetary damages for any breach of fiduciary duty as a director. Notwithstanding the foregoing sentence, a director shall be liable to the extent provided by applicable law (i) for any breach of the director's duty of loyalty to the Corporation or its stockholders, (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (iii) pursuant to Section 174 of the General Corporation Law of the State of Delaware, or (iv) for any transaction from which the director derived an improper personal benefit. No amendment to or repeal of this Article EIGHTH shall apply to or have any effect on the liability or alleged liability of any director of the Corporation for or with respect to any acts or omissions of such director occurring prior to such amendment or repeal. NINTH. No action shall be taken by the stockholders of this Corporation except at an annual or special meeting of the stockholders called in accordance with the Bylaws of this Corporation and no action shall be taken by the stockholders by written consent. TENTH. (A) This corporation reserves the right at any time and from time to time to amend, alter, change or repeal any provisions contained herein, and other provisions authorized by the laws of the State of Delaware at the time in force may be added or inserted, in the manner now or hereafter prescribed by law, and all rights, preferences and privileges of whatsoever nature conferred upon shareholders, directors or any other 2 3 person whomsoever by or pursuant to the Certificate of Incorporation in its present form or as hereafter amended are granted, subject to the rights reserved in this Article TENTH. 3 4 (B) In addition to any requirements of law and any other provisions hereof (and notwithstanding the fact that approval by a lesser vote may be permitted by law or any other provision hereof), the affirmative vote of the holders of 66-2/3% or more of the combined voting power of the then-outstanding shares of voting stock, voting together as a single class, shall be required to amend, alter or repeal, or adopt any provision inconsistent with, this Article TENTH or Article NINTH hereof. * * * * The foregoing Amended and Restated Certificate of Incorporation has been duly adopted by this Corporation's Board of Directors in accordance with the applicable provisions of Section 245 of the General Corporation Law of the State of Delaware. Dated: May 2, 2001. /s/ Robert A. Stoffregen ------------------------------------ Robert A. Stoffregen 4 EX-10.22 3 f72537ex10-22.txt EXHIBIT 10.22 1 EXHIBIT 10.22 OFFICE LEASE LANDLORD: LNR HARBOR BAY, LLC, a California Limited Liability Company TENANT: THE GOOD GUYS-CALIFORNIA, INC., a California Corporation 2 TABLE OF CONTENTS
Page ---- 1. Premises.....................................................................1 2. Term.........................................................................1 3. Rent. .......................................................................2 4. Common Areas; Operating Expenses; Real Property Taxes and Assessments; Insurance Costs and Utilities Costs .........................................2 5. Security Deposit ............................................................8 6. Use. ........................................................................9 7. Payments and Notices .......................................................11 8. Brokers.....................................................................11 9. Surrender; Holding Over ....................................................12 10. Taxes on Tenant's Property .................................................12 11. Condition of Premises; Repairs . ...........................................12 12. Alterations.................................................................13 13. Liens.......................................................................15 14. Assignment and Subletting . ................................................15 15. Entry by Landlord ..........................................................18 16. Utilities and Services . ...................................................18 17. Indemnification and Exculpation ............................................19 18. Damage or Destruction ......................................................20 19. Eminent Domain . ...........................................................21 20. Tenant's Insurance . .......................................................22 21. Landlord's Insurance . .....................................................23 22. Waiver of Claims; Waiver of Subrogation ....................................24 23. Tenant's Default and Landlord's Remedies ...................................24 24. Landlord's Default .........................................................26 25. Subordination ..............................................................27 26. Estoppel Certificate .......................................................27 27. Intentionally Omitted.......................................................28 28. Modification and Cure Rights of Landlord's Mortgagees and Lessors ..........28 29. Quiet Enjoyment . ..........................................................28 30. Transfer of Landlord's Interest ............................................28 31. Limitation on Landlord's Liability .........................................28 32. Miscellaneous . ............................................................29 33. Lease Execution . ..........................................................30 34. Waiver of Jury Trial .......................................................31
EXHIBITS EXHIBIT "A" Site Plan EXHIBIT "B" Floor Plan EXHIBIT "C" Work Letter Agreement EXHIBIT "D" Sample Form of Notice of Lease Term Dates EXHIBIT "E" Rules and Regulations EXHIBIT "F" Sample Form of Tenant Estoppel Certificate EXHIBIT "G" Janitorial Specifications RIDERS No. 1 Extension Option Rider No. 2 Fair Market Rental Rate Rider No. 3 Right of First Offer No. 4 Tenant's Generator and AST (ii) 3 INDEX
Page(s) ------- Actual Statement ............................................................5 ADA..........................................................................9 Amortization Rate ...........................................................3 Building Common Areas .......................................................2 Building Holidays ...........................................................2 business day ...............................................................11 capital expenditure(s) ......................................................4 capital expenditures ........................................................6 Common Areas ................................................................3 Cost Pools ..................................................................3 days .......................................................................29 Environmental Law ..........................................................10 Environmental Permits ......................................................10 Estimate Statement ..........................................................5 Force Majeure Delays .......................................................30 Hazardous Materials ........................................................10 HVAC ...................................................................13, 18 Indemnified Claims .........................................................20 Insurance Costs .............................................................5 Landlord ............................................................1, 28, 29 Landlord Indemnified Parties ...........................................10, 20 Lease .......................................................................1 Operating Expenses .................................................3. Summary PCBs .......................................................................10 Permitted Transfer .........................................................16 Pre-Approved Change ........................................................13 prime rate ..................................................................2 Project Common Areas ........................................................2 real property taxes .........................................................4 Real Property Taxes and Assessments ......................................4, 5 reference rate ..............................................................2 rent.........................................................................2 Service Provider............................................................19 Summary .....................................................................1 Tenant...................................................................1, 29 Tenant Changes .............................................................13 Tenant Indemnified Parties .................................................10 Tenant Parties .............................................................20 Tenant's Parties ...........................................................10 Tenant's Percentage .........................................................7 Term ........................................................................1 Transfer ...................................................................15 Transfer Notice ............................................................16 Transferee .................................................................16 Utilities Costs .............................................................5 worth at the time of award..................................................25
(iii) 4 SUMMARY OF BASIC LEASE INFORMATION AND DEFINITIONS This SUMMARY OF BASIC LEASE INFORMATION AND DEFINITIONS ("SUMMARY") is hereby incorporated into and made a part of the attached Office Lease which pertains to the Building described in Section 1.4 below. All references in the Lease to the "Lease" shall include this Summary. All references in the Lease to any term defined in this Summary shall have the meaning set forth in this Summary for such term. Any initially capitalized terms used in this Summary and any initially capitalized terms in the Lease which are not otherwise defined in this Summary shall have the meaning given to such terms in the Lease. If there is any inconsistency between the Summary and the Lease, the provisions of the Lease shall control. 1.1 LANDLORD'S ADDRESS: LNR Harbor Bay, LLC c/o Lennar Partners 18401 Von Karman Avenue, Suite 540 Irvine, CA 92612 Attn: David Team and Kevin Hanson Telephone: (949) 442-6100 Facsimile: (949) 442-6175 1.2 TENANT'S ADDRESS: Prior to Commencement Date: 7000 Marina Blvd. Brisbane, CA 94005-1830 Attn: George Hechtman, Vice President Administration Telephone: (650) 615-6154 Facsimile: (650) 615-6555 After Commencement Date: At the Premises With a copy to: Miller, Starr & Regalia 1331 North California Blvd. Suite 500 Walnut Creek, CA 94596 Attn: Phillip H. Stoermer, Esq. Telephone: (925) 941-3271 Facsimile: (925) 933-4126 1.3 SITE; PROJECT: The Site consists of the parcel(s) of real property located at 1600, 1650 and 1700 Harbor Bay Parkway, County of Alameda, State of California, as shown on the site plan attached hereto as Exhibit "A" as such area may be expanded or reduced from time to time. The Project includes the Site and all buildings, improvements and facilities, now or subsequently located on the Site from time to time, including, without limitation, the Building under construction at 1600 Harbor Bay Parkway, as depicted on the site plan attached hereto as Exhibit "A". The aggregate rentable square feet of the office buildings (including the Building) to be constructed within the Project contain approximately 180,754 rentable square feet. 1.4 BUILDING: A two (2) story office building located on the Site, containing approximately 61,681 rentable square feet, the address of which is 1600 Harbor Bay Parkway, Alameda, CA. 1.5 PREMISES: Those certain premises generally shown on the floor plan attached hereto as Exhibit "B", located on the second floor of the Building, and containing approximately 30,978 rentable square feet. 1.6 TERM: Ten (10) years. 1.7 ESTIMATED COMMENCEMENT DATE: February 28, 2001; Actual Commencement Date: To be determined as provided in Exhibit "C" attached hereto. 1.8 MONTHLY BASIC RENT: Upon the commencement of the Term of this Lease, and on the first day of each month thereafter during the Term of this Lease, Tenant shall pay to Landlord, in advance and without offset, deduction or demand except as otherwise set forth in this Lease as Monthly Basic Rent for the Premises the following monthly payments: -1- 5
Year Of Term Monthly Basic Rent ------------ ------------------ 1 $51,114.00 2 $52,647.00 3 $54,227.00 4 $55,853.00 5 $57,529.00 6 $59,255.00 7 $61,032.00 8 $62,863.00 9 $64,749.00 10 $66,691.00
1.9 TENANT'S PERCENTAGE OF THE BUILDING: 50,22%, which is the ratio that the rentable square footage of the Premises bears to the rentable square footage of the Building. Accordingly, as more particularly set forth in Section 4 hereof, Tenant shall pay to Landlord: (a) 50.22% of the "Operating Expenses" (as defined in Section 4.4)(b)50.22% of Real Property Taxes and Assessments (as defined in Section 4.5); (c) 50.22% of Insurance Costs (as defined in Section 4.6);" and (d) 50.22% of Utilities Costs (as defined in Section 4.7). Tenant's Percentage is subject to adjustment in accordance with Section 1.3 of the Lease. 1.10 BUILDING PERCENTAGE OF THE PROJECT: 34.12%, which is the ratio that the rentable square footage of the Building bears to the rentable square footage of all buildings within the Project. Accordingly, as more particularly provided in Section 4 hereof, Operating Expenses, Real Property Taxes and Assessments, Insurance Costs and Utilities Costs include the Building Percentage of all such items which are common to the entire Project. 1.11 SECURITY DEPOSIT: $505,000.00. 1.12 PERMITTED USE: General office and training center uses. 1.13 BROKERS: CB Richard Ellis representing Landlord. Triton Commercial representing Tenant. 1.14 INTEREST RATE: The lesser of: (a) the rate announced from time to time by Wells Fargo Bank or, if Wells Fargo Bank ceases to exist or ceases to publish such rate, then the rate announced from time to time by the largest (as measured by deposits) chartered bank operating in California, as its "prime rate" or "reference rate", plus three percent (3%); or (b) the maximum rate permitted by law. 1.15 TENANT IMPROVEMENTS: The tenant improvements installed or to be installed in the Premises as described in the Work Letter Agreement attached hereto as Exhibit "C". 1.16 PARKING: A total of one hundred five (105) parking spaces to be available to Tenant at all times during the Term as it may be extended without charge to Tenant, in accordance with the provisions of Section 6.2 of the Lease. 1.17 BUSINESS HOURS FOR THE BUILDING. 7:00 a.m. to 7:00 p.m., Mondays through Fridays (except Building Holidays) and 7:00 a.m. to Noon on Saturdays (except Building Holidays). "BUILDING HOLIDAYS" shall mean New Year's Day, Labor Day, Presidents' Day, Thanksgiving Day, Memorial Day, Independence Day and Christmas Day and such other national holidays as are adopted by Landlord as holidays for the Building. Notwithstanding the foregoing, subject to factors beyond Landlord's control and subject to the other provisions of this Lease, including, without limitation, Sections 4.2, 18, 19 and 27, Tenant shall have access to the Premises and entry access to the Building twenty-four (24) hours per day, seven (7) days per week year round. [ILLEGIBLE] [ILLEGIBLE] ------------------- ----------------- Landlord's Initials Tenant's Initials -2- 6 OFFICE LEASE This LEASE, which includes the preceding Summary of Basic Lease Information and Definitions ("SUMMARY") attached hereto and incorporated herein by this reference ("LEASE"), is made as of the 3rd day of January, 2001 by and between LNR HARBOR BAY, LLC, a California limited liability company ("LANDLORD"),and THE GOOD GUYS-CALIFORNIA, INC., a California corporation ("TENANT"). 1. PREMISES. 1.1 PREMISES. Landlord hereby leases to Tenant, and Tenant hereby leases from Landlord, the Premises described in Section 1.5 of the Summary above, improved or to be improved with the Tenant Improvements. Such lease is upon, and subject to, the terms, covenants and conditions herein set forth and each party covenants, as a material part of the consideration for this Lease, to keep and perform their respective obligations under this Lease. 1.2 LANDLORD'S RESERVATION OF RIGHTS. Provided Tenant's use of and access to the Premises is not interfered with in an unreasonable manner, and subject to the terms of this Lease, Landlord reserves for itself the right from time to time to install, use, maintain, repair, replace and relocate pipes, ducts, conduits, wires and appurtenant meters and equipment above the ceiling surfaces, below the floor surfaces and within the walls of the Building and the Premises. 1.3 MEASUREMENT OF PREMISES, BUILDING AND/OR THE PROJECT. Landlord and Tenant hereby acknowledge and agree that the square footage of the Project, Building and Premises is as set forth in Sections 1.3, 1.4 and 1.5 above, respectively, and that such square footage was determined in accordance with the Method for Measuring Floor Area in Office Buildings, ANSI Z65.1-1996, as promulgated by the Building Owners and Managers Association based upon the construction plans for the Building and Premises. Notwithstanding the foregoing, within thirty (30) days after completion of construction of the Building and issuance of a certificate of occupancy therefore, Landlord will, at Landlord's sole cost and expense, cause its architect to prepare or cause to be prepared a certificate verifying the rentable and usable square feet of the Premises and the Building. Landlord will provide a copy of the architect's certificate to Tenant upon receipt thereof from the architect. Except as otherwise set forth in this Section 1.3 of this Lease, wherever in this Lease calculations appear which are based on the rentable square footage determination, Landlord and Tenant will adjust those calculations on the basis of the actual final determination of rentable square footage as aforesaid. Such adjustments (if any) will be applicable to (i) the calculation of sums due Landlord or Tenant based on the rentable square footage of the Premises, such as, but not limited to, the Allowance (Section 5(a) of Exhibit "C") and Rent if the Premises contain other than the rentable square footage set forth in Section 1.5 of the Summary, and (ii) the determination of Tenant's Percentage of Operating Expenses (Section 4.4), Real Property Taxes and Assessments (Section 4.5), Insurance Costs (Section 4.6), and Utilities Costs (Section 4.7). Upon completion of each subsequent building in the Project, a similar certification will be provided by Landlord to Tenant as to the rentable and usable square footage in such building. Should Tenant dispute the determination of the square footage of the Premises or the Building as determined by Landlord's architect, Tenant shall provide Landlord with Tenant's architect's or space planner's determination of the square footage in question and Landlord and Tenant and the two architects/space planners shall meet and confer within ten (10) days of request by Tenant to attempt to resolve any square footage discrepancy. Should Landlord and Tenant be unable to resolve such square footage discrepancy within twenty (20) days after such meeting, Landlord's architect and Tenant's architect shall together select a third party architect not affiliated or employed by either party to determine the square footage measurement in dispute in accordance with the terms of this Lease. If the third party architect is not appointed within ten (10) days after the expiration of such twenty (20) day period, a third party architect who shall act as arbiter of the square footage dispute shall be appointed by the Superior Court of Alameda County, California. 2. TERM. 2.1 TERM; NOTICE OF LEASE DATES. "TERM" means (i) the Initial Term set forth in Section 1.6 of the Summary and the Option Term if exercised pursuant to Rider No. 1 to this Lease. The Term of this Lease shall be for the period designated in Section 1.6 of the Summary commencing on the Commencement Date (as determined pursuant to Exhibit "C"), and ending on the expiration of such period, unless the Term is sooner terminated as provided in this Lease. Notwithstanding the foregoing, if the Commencement Date falls on any day other than the first day of a calendar month then the term of this Lease will be measured from the first day of the month following the month in which the Commencement Date occurs. Within ten (10) days following Landlord's delivery of possession of the Premises to Tenant, Tenant shall execute a written confirmation of the Commencement Date and expiration date of the Term in the form of the Notice of Lease Term Dates attached hereto as Exhibit "D". Landlord shall deliver a written request to Tenant for execution of the Notice of Lease Term Dates which shall be binding upon Tenant should Tenant fail to execute and return the notice of Lease Term Dates to Landlord within ten (10) days following Landlord's written request. 2.2 ESTIMATED COMMENCEMENT DATE. It is estimated by the parties that the Term of this Lease will commence on the Estimated Commencement Date set forth in Section 1.7 of the Summary. Landlord agrees to use its best efforts to cause the Commencement Date to occur by the Estimated Commencement Date, however, the Estimated Commencement Date is merely an estimate of the 7 Commencement Date and, consequently, Tenant agrees that, except as set forth in this Lease, Landlord shall have no liability to Tenant for any loss or damage, nor shall Tenant be entitled to terminate or cancel this Lease if the Term of this Lease does not commence by the Estimated Commencement Date for any reason whatsoever, including any delays in substantial completion of the Tenant Improvements. Notwithstanding the foregoing, Landlord and Tenant agree as follows: Tenant will be entitled to one (1) day of free rent after the Commencement Date for every day beyond April 1, 2001 that the Commencement Date is delayed by causes other than Tenant Delays or Force Majeure Delays. 2.3 EARLY OCCUPANCY. If Tenant occupies the Premises prior to the Commencement Date, such early occupancy shall be subject to all of the terms and conditions of this Lease, including, without limitation, the provisions of Sections 17, 20 and 22, except that provided Tenant does not commence the operation of business from the Premises, Tenant will not be obligated to pay rent during the period of such early occupancy. Tenant agrees to provide Landlord with prior notice of any such intended early occupancy and to cooperate with Landlord during the period of any such early occupancy so as not to interfere with Landlord in the completion of any improvements to the Premises constructed pursuant to Exhibit "C". 2.4 POST COMMENCEMENT DATE TENANT IMPROVEMENT COMPLETION. Tenant acknowledges that as provided in Exhibit "C," certain designated portions of the Premises may not be completed as of the Commencement Date and shall not be required to establish "substantial completion" of the Premises, but Landlord agrees to use commercially reasonable and diligent efforts following the Commencement Date to pursue completion of such uncompleted portions and all punch-list items identified by Tenant and Landlord as provided in Exhibit "C". If Landlord does not diligently pursue completion of such items after notice to Landlord and a period of thirty (30) days to cure (subject to Force Majeure Delays as defined in Section 32.15 below), Tenant shall have the right to pursue completion of such items within the Premises at Landlord's expense and Landlord shall reimburse Tenant within thirty (30) days of demand for the reasonable, actual and documented expenses incurred by Tenant in so completing such items. 3. RENT. 3.1 BASIC RENT. Tenant agrees to pay Landlord, as basic rent for the Premises, the Monthly Basic Rent in the amounts designated in Section 1.8 of the Summary. The Monthly Basic Rent shall be paid by Tenant in monthly installments in the amounts designated in Section 1.8 of the Summary in advance on the first day of each and every calendar month during the Term, without demand, notice, deduction or offset, except as expressly provided in this Lease, except that the first full month's Monthly Basic Rent shall be paid by Tenant on or before February 15, 2001. Monthly Basic Rent for any partial month shall be prorated in the proportion that the number of days this Lease is in effect during such month bears to the actual number of days in such month. 3.2 ADDITIONAL RENT. All amounts and charges payable by Tenant under this Lease in addition to the Monthly Basic Rent described in Section 3.1 above (including, without limitation, payments for insurance, repairs and parking, and Tenant's Percentage of Operating Expenses, Real Property Taxes and Assessments, Insurance Costs, and Utilities Costs, respectively) shall be considered additional rent for the purposes of this Lease, and the word "rent" in this Lease shall include such additional rent unless the context specifically or clearly implies that only the Monthly Basic Rent is referenced. The Monthly Basic Rent and additional rent shall be paid to Landlord as provided in Section 7, without any prior demand therefor and without any deduction or offset whatever except as otherwise set forth in this Lease, in lawful money of the United States of America. 4. COMMON AREAS; OPERATING EXPENSES; REAL PROPERTY TAXES AND ASSESSMENTS; INSURANCE COSTS AND UTILITIES COSTS. 4.1 DEFINITIONS; TENANT'S RIGHTS. During the Term of this Lease, except as otherwise set forth in this Lease, Landlord grants to Tenant a non-exclusive easement and the right to use, in common with other tenants in the Project, and subject to the Rules and Regulations referred to in Section 6.1 below, those portions of the Project (the "PROJECT COMMON AREAS") not leased or designated for lease to tenants that are provided for use in common by Landlord, Tenant and any other tenants of the Project (or by the sublessees (agents, employees, customers invitees, guests or licensees of any such party), whether or not those areas are open to the general public. The Project Common Areas shall include, without limitation, any fixtures, systems, decor, facilities and landscaping contained, maintained or used in connection with those areas, and shall be deemed to include any city sidewalks adjacent to the Project, any offsite common areas which benefit the Project such as monument signage indemnifying the Project but not a specific tenant unless Tenant's name appears thereon, landscaping and lighting, any pedestrian walkway system, park or other facilities located on the Site and open to the general public. The common areas of the Building shall be referred to herein as the "BUILDING COMMON AREAS" and shall include, without limitation, the following areas: (a) the common entrances, lobbies, restrooms on multi-tenant floors, elevators, stairways and accessways, loading docks, ramps, drives and platforms and any passageways and serviceways thereto to the extent not exclusively serving another tenant or contained within another tenant's premises, and the common pipes, conduits, wires and appurtenant equipment serving the Premises; and -2- 8 (b) the parking areas (subject to Section 6.2 below), loading and unloading areas, trash areas, roadways, sidewalks, walkways, parkways, driveways and landscaped areas appurtenant to the Building. The Building Common Areas and the Project Common Areas shall be referred to herein collectively as the "COMMON AREAS." 4.2 LANDLORD'S RESERVED RIGHTS. Landlord reserves the right from time to time to use any of the Common Areas and to do any of the following, as long as such acts do not unreasonably interfere with Tenant's use of or access to the Premises: (a) expand the Building and construct or alter other buildings or improvements on the Site; (b) make any changes, additions, improvements, repairs or replacements in or to the Project, the Site, the Common Areas and/or the Building (including the Premises if required to do so by any law or regulation) and the fixtures and equipment thereof, including, without limitation: (i) maintenance, replacement and relocation of pipes, ducts, conduits, wires and meters; and (ii) changes in the location, size, shape and number of driveways, entrances, stairways, elevators, loading and unloading areas, ingress, egress, direction of traffic, landscaped areas and walkways, easements and, subject to Section 6.2, parking spaces and parking areas; (c) close temporarily any of the Common Areas while engaged in making repairs, improvements or alterations to the Project, Site and/or Building; and (d) perform such other acts and make such other changes with respect to the Project, Site, Common Areas and Building, as Landlord may, in the exercise of good faith business judgment, deem to be appropriate. Notwithstanding the foregoing, Landlord agrees that if Tenant's use of the Premises or the Project Common Areas or the Building Common Areas is unreasonably interfered with as a result of Landlord's activities in the Project or the Premises, Tenant will be entitled to an equitable abatement of rent to the extent of and for the period of such interference. Any dispute as to the amount or duration of such abatement will be resolved pursuant to the procedure set forth in Section 24 of this Lease. 4.3 COST POOLS. Landlord shall have the right, from time to time, to equitably allocate some or all of the Operating Expenses, Real Property Taxes and Assessments, Insurance Costs and Utilities Costs among different tenants and/or different buildings of the Project (the "COST POOLS") based upon the unique usage of benefits or services provided by Landlord to such buildings and/or tenants as compared to the other tenants and/or buildings in the Project. Such Cost Pools may include, without limitation, office space tenants and retail space tenants in the Project and may be modified to take into account the addition of any additional buildings within the Project. Accordingly, in the event of such allocation into Cost Pools, Tenant's Percentage and the Building's Share shall be appropriately adjusted to reflect such allocation. Any dispute will be resolved pursuant to the procedure set forth in Section 24 of this Lease. 4.4 DEFINITION OF OPERATING EXPENSES. As used in this Lease, the term "OPERATING EXPENSES" shall mean only sums reasonably expended or incurred for the following items: (i) expenses, costs and amounts incurred by Landlord in connection with the ownership, management, maintenance, repair, replacement, and operation of the Project to the extent consistent with prevailing prices incurred by comparable landlords for comparable office building projects in Alameda County; (ii) the cost of janitorial service to the Premises as set forth on Exhibit "G" and to the balance of the Project, alarm and security service, window cleaning, and trash removal, the cost of operating, maintaining, repairing, replacing, renovating and managing the utility systems, mechanical systems, sanitary and storm drainage systems, elevator systems and the cost of supplies, tools, and equipment and maintenance and service contracts in connection therewith; (iii) the cost of licenses (excluding Landlord's business license), certificates, permits (excluding any building or construction permits) and inspections and the reasonable cost of contesting the validity or applicability of any governmental enactments which may increase Operating Expenses, and the costs incurred in connection with the implementation and operation of a transportation system management program or similar program that is required by applicable law enacted after the Commencement Date; (iv) the cost of landscaping, relamping, supplies, tools, equipment (including costs under equipment rental agreements) and materials, and all fees, charges and other costs, including management fees (or amounts in lieu thereof), consulting fees legal fees and accounting be, incurred in connection with the management, operation, administration, maintenance and repair of the Project; (v) the cost of parking area repair, restoration and maintenance, including, but not limited to, resurfacing, repainting, restriping, and cleaning; (vi) wages, salaries and other compensation and benefits of all persons engaged in the operation, management, maintenance or security of the Project, and employer's Social Security taxes, unemployment taxes or insurance, and any other taxes which may be levied on such wages, salaries, compensation and benefits, excluding such items related to executive personnel of Landlord; (vii) payments under any easement, license, operating agreement, declaration, restrictive covenant, or instrument pertaining to the sharing of costs by the Project that has been disclosed to Tenant prior to the Effective Date; (viii) amortization (including interest on the unamortized cost at a rate equal to the floating commercial loan rate announced from time to time by Bank of America, a national banking association, or its successor, as its prime rate, plus 2% per annum (the "AMORTIZATION RATE")) of the cost of acquiring or the rental expense of personal property used in the maintenance, operation and repair of the Project; (ix) Harbor Bay Isle Association fees, Harbor Bay Business Park Association dues, -3- 9 Island City Landscaping and Lighting District fees and Harbor Bay Transportation Subsidy fees (collectively, "ASSOCIATION FEES"); and (x) the cost of any capital alterations, capital additions, or capital improvements (hereinafter the "CAPITAL EXPENDITURE(S)") made to the Project or any portion thereof (A) which relate to the operation, repair, maintenance and replacement of all systems, equipment or facilities which serve the Project in the whole or in part (including replacement of wall and floor coverings, ceiling tiles and fixtures in lobbies, corridors, restrooms and other common or public areas or facilities, maintenance and replacement of curbs, walkways and parking areas, and repairs to roofs to the extent not covered by warranty), (B) which are intended as a labor-saving device or to effect other economies in the operation or maintenance of the Project, or any portion thereof to the extent of savings realized as a result thereof, or (C) that are required under any governmental law or regulation that is then being enforced against the Project by a federal, state or local governmental agency as to such laws or regulations enacted after the Commencement Date; provided, however, that each such permitted capital expenditure shall be amortized (including interest on the unamortized cost at the Amortization Rate in effect at the time such capital expenditure is placed in service) over its useful life determined in accordance with IRS guidelines. If Landlord is not furnishing any particular work or service (the cost of which, if performed or provided by Landlord, would be included in Operating Expenses) to a tenant who has undertaken to perform such work or service in lieu of the performance thereof by Landlord, Operating Expenses shall be deemed to be increased by an amount equal to the additional Operating Expenses which would reasonably have been incurred during such period by Landlord if it had at its own expense furnished such work or service to such tenant. In no event will Tenant's cost of Operating Expenses increase as the result of Landlord's election to allow another tenant to provide such work or service at its own expense. Real Property Taxes and Assessments, Insurance Costs and Utilities Costs, as defined in Section 4.5, Section 4.6 and Section 4.7, respectively, shall be separately accounted for pursuant to Sections 4.8 and 4.9 below. In no event will controllable Operating Expenses (i.e., Operating Expenses excluding Insurance Costs, Utilities Costs, Association Fees and Real Property Taxes and Assessments) charged to Tenant increase by more than five percent (5%) annually. As used herein, "Operating Expenses" shall mean 100% of all Operating Expenses items which are attributable to the Building only and the Building Percentage of all Operating Expenses items which are attributable to the entire Project. 4.5 DEFINITION OF REAL PROPERTY TAXES AND ASSESSMENTS. All Real Property Taxes and Assessments shall be adjusted to reflect an assumption that the Building is fully assessed for real property tax purposes as a completed building(s) ready for occupancy. As used in this Lease, the term "REAL PROPERTY TAXES AND ASSESSMENTS" shall mean: any form of assessment, license fee, license tax, business license fee, commercial rental tax, levy, charge, improvement bond, tax, water and sewer rents and charges, utilities and communications taxes and charges or similar or dissimilar imposition imposed by any authority having the direct power to tax, including any city, county, state or federal government, or any school, agricultural, lighting, drainage or other improvement or special assessment district thereof, or any other governmental charge, general and special, ordinary and extraordinary, foreseen and unforeseen, which may be assessed against any legal or equitable interest of Landlord in the Premises and the Building, and the Building Percentage of the same in the Project Common Areas or Site, including the following by way of example: (a) any tax on Landlord's "right" to rent or "right" to other income from the Premises or as against Landlord's business of leasing the Premises, if imposed in lieu of ordinary ad valorem real property taxes; (b) any assessment, tax, fee, levy or charge in substitution, partially or totally, of any assessment, tax, fee, levy or charge previously included within the definition of real property tax including assessments, taxes, fees, levies and charges may be imposed by governmental agencies for such services as fire protection, street, sidewalk and road maintenance, refuse removal and for other governmental services formerly provided without charge to property owners or occupants. It is the intention of Tenant and Landlord that all such new and increased assessments, taxes, fees, levies and charges be included within the definition of "REAL PROPERTY TAXES" for the purposes of this Lease; (c) any assessment, tax, fee, levy or charge allocable to or measured by the area of the Premises or other premises in the Building or the rent payable by Tenant hereunder or other tenants of the Building, including, without limitation, any gross receipts tax or excise tax levied by state; city or federal government, or any political subdivision thereof, with respect to the receipt of such rent, or upon or with respect to the possession, leasing, operation, management, maintenance, alteration, repair, use or occupancy by any tenant of the Building, or any portion thereof but not on Landlord's other operations, if such taxes are imposed in lieu of ordinary ad valorem real property taxes; (d) any assessment, tax, fee, levy or charge by any governmental agency related to any transportation plan, fund or system (including assessment districts) instituted within the geographic area of which the Building is a part; (e) any tax assessment in lieu of (not in addition to) any ad valorem real property to the extent Tenant is relieved of the obligation therefore; and (f) assessments under local improvement district 92 -- 1 as shown on the tax bill for the Project. -4- 10 Notwithstanding the foregoing provisions of this Section 4.5 above to the contrary, "REAL PROPERTY TAXES AND ASSESSMENTS" shall not include Landlord's federal or state income, franchise, inheritance or estate taxes, transfer taxes or business license taxes. Landlord agrees to pay Real Property Taxes and Assessments in the maximum number of installments allowed without a penalty. 4.6 DEFINITION OF INSURANCE COSTS. As used in this Lease, "INSURANCE COSTS" shall mean the cost of insurance obtained by Landlord pursuant to Section 21 for the Building, the Premises and the Tenant Improvements and the Building Percentage of the costs of such insurance for the Project Common Areas (including commercially reasonable deductible amounts or amounts which would otherwise be attributable to a commercially reasonable deductible amount should Landlord elect to self-insure against property damage or loss as permitted under Section 21, provided Tenant's responsibility for any such deductible or self-insured deductible amounts shall be subject to the limitations set forth in Section 21 of this Lease). Notwithstanding the foregoing, any increase in the premium forth a property insurance attributable to the replacement cost of the Tenant Improvements in excess of Building standard shall not be included as Insurance Costs, but shall be paid by Tenant concurrently with Tenants monthly installment of its share of Insurance Costs. 4.7 DEFINITION OF UTILITIES COSTS. As used in this Lease, "UTILITIES COSTS" shall mean all actual charges for utilities for the Building and the Building Percentage of the same for the Project Common Areas, including but not limited to water, sewer and electricity, and the costs of heating, ventilating and air conditioning and other utilities (but excluding those charges for which tenants are individually responsible) as well as related fees, assessments and surcharges. 4.8 ESTIMATE STATEMENT. By the first day of April of each calendar year during the Term of this Lease (after the Base Year noted in Section 1.10 of the Summary), Landlord shall endeavor to deliver to Tenant a statement ("ESTIMATE STATEMENT") estimating the Operating Expenses, Real Property Taxes and Assessments, Insurance Costs, and Utilities Costs for the current calendar year payable by Tenant. Landlord shall have the right no more than two (2) times in any calendar year to deliver a revised Estimate Statement for such calendar year if Landlord reasonably determines that the Operating Expenses, Real Property Taxes and Assessments, Insurance Costs, and/or Utilities Costs are greater than those set forth in the original Estimate Statement (or previously delivered revised Estimate Statement) for such calendar year. The Operating Expenses, Real Property Taxes and Assessments, Insurance Costs, and/or Utilities Costs shown on the Estimate Statement (or revised Estimate Statement, as applicable) shall be divided into twelve (12) equal monthly installments, and Tenant shall pay to Landlord, concurrently with the regular monthly rent payment next due following the receipt of the Estimate Statement (or revised Estimate Statement, as applicable), an amount equal to one (1) monthly installment of such Operating Expenses, Real Property Taxes and Assessments, Insurance Costs, and Utilities Costs multiplied by the number of months from January in the calendar year in which such statement is submitted to the month of such payment, both months inclusive (less any amounts previously paid by Tenant with respect to any previously delivered Estimate Statement or revised Estimate Statement for such calendar year). Subsequent installments shall be paid concurrently with the regular monthly rent payments for the balance of the calendar year and shall continue until the next calendar year's Estimate Statement (or current calendar year's revised Estimate Statement) is received. Within fifteen (15) days of receipt of Tenant's written request therefore, Landlord will provide reasonable supporting data and a breakdown of any element of the Estimated Statement requested by Tenant as well as evidence of actual payment of Real Property Taxes and Assessments after payment by Landlord. 4.9 ACTUAL STATEMENT. By the first day of April of each succeeding calendar year during the Term of this Lease, Landlord shall endeavor to deliver to Tenant a statement ("Actual Statement") of the actual Operating Expenses, Real Property Taxes and Assessments, Insurance Costs, and Utilities Costs for the immediately preceding calendar year. If the Actual Statement reveals that Operating Expenses, Real Property Taxes and Assessments, Insurance Costs, and/or Utilities Costs were over-stated or understated in any Estimate Statement (or revised Estimate Statement) previously delivered by Landlord pursuant to Section 4.8 above, then within thirty (30) days after delivery of the Actual Statement, Tenant shall pay to Landlord the amount of any such under-payment, or, Landlord shall credit Tenant against the next monthly rent falling due, the amount of such over-payment, as the case may be. Such obligation will be a continuing one which will survive the expiration or earlier termination of this Lease. Prior to the expiration or sooner termination of the Lease Term and Landlord's acceptance of Tenant's surrender of the Premises, Landlord will have the right to estimate the actual Operating Expenses, Real Property Taxes and Assessments, Insurance Costs, and Utilities Costs for the then current Lease Year and to collect from Tenant prior to Tenant's surrender of the Premises, Tenant's Percentage of any excess of such actual Operating Expenses, Real Property Taxes and Assessments, Insurance Costs, and Utilities Costs over the estimated Operating Expenses, Real Property Taxes and Assessments, Insurance Costs, and Utilities Costs paid by Tenant in such Lease Year. 4.10 No Release. Any delay or failure by Landlord in delivering any Estimate or Actual Statement pursuant to this Section 4 shall not constitute a waiver of its right to receive Tenant's payment of Operating Expenses, Real Property Taxes and Assessments, Insurance Costs, and Utilities Costs, nor shall it relieve Tenant of its obligations to pay Operating Expenses, Real Property Taxes and Assessments, Insurance Costs, and Utilities Costs pursuant to this Section 4, except that Tenant shall not be obligated to make any payments based on such Estimate or Actual Statement until thirty (30) days after receipt of such statement and Tenant shall not be obligated to pay Tenant's Percentage of any amount which is not invoiced to Tenant within two (2) years of the date such amount is incurred by Landlord. -5- 11 4.11 EXCLUSIONS FROM OPERATING EXPENSES, REAL PROPERTY TAXES AND ASSESSMENTS, INSURANCE COSTS AND UTILITIES COSTS. Notwithstanding anything to the contrary contained elsewhere in this Section 4, the following items shall be excluded from Operating Expenses, Real Property Taxes and Assessments, Insurance Costs, and Utilities Costs, as applicable: (a) Costs of decorating, redecorating, or special cleaning or other services provided to certain tenants and not provided on a regular basis to all tenants of the Building; (b) Any charge for depreciation of the Building or equipment and any interest or other financing charge; (c) Any charge for Landlord's income taxes, excess profit taxes, franchise taxes, business license taxes, or similar taxes on Landlord's business; (d) All costs relating to activities forth a marketing, solicitation, negotiation and execution of leases of space in the Building, including without limitation, preparation of plans, costs of tenant improvements and brokerage fees; (e) All costs for which Tenant or any other tenant in the Building is being charged other than pursuant to the operating expense clauses of leases for the Building; (f) The cost of correcting defects in the construction of the Building or in the building equipment, except that conditions (not occasioned by construction defects) resulting from ordinary wear and tear will not be deemed defects for the purpose of this category; (g) The cost of repairs made by Landlord because of the total or partial destruction of the Building or the condemnation of a portion of the Building except to the extent of a commercially reasonable deductible amount for property insurance for comparable projects in Alameda County; (h) The cost of any items for which Landlord is reimbursed by insurance or otherwise compensated by parties other than tenants of the Building pursuant to clauses similar to this paragraph; (i) Any operating expense representing an amount paid to a related corporation, entity, or person which is in excess of the amount which would be paid in the absence of such relationship; (j) The cost of any work or service performed for or facilities furnished to any tenant of the Building to a greater extent or in a manner more favorable to such tenant than that performed for or furnished to Tenant; (k) The cost of alterations of space in the Building leased to other tenants; (l) Ground rent or similar payments to a ground lessor; (m) Legal fees and related expenses incurred by Landlord (together with any damages awarded against Landlord) due to the negligence or willful misconduct of Landlord; (n) Costs arising from the presence of any Hazardous Materials within, upon or beneath the Project unless resulting solely from the acts or neglect of Tenant, its agents, employees or contractors; (o) Costs for sculpture, paintings or other objects of art in the Building which exceed those typically incurred in other similar first class office buildings in Alameda County, California and specifically excluding any cost related to the initial acquisition or installation thereof; (p) Salaries of management personnel to the extent that such persons provide services to properties other than the Building; (q) The cost of any capital alterations, capital expenditures, capital additions or capital improvements (collectively "CAPITAL EXPENDITURES") made to the Project or the Building during the Initial Term of this Lease except as expressly allowed in Section 4.4 above; (r) Any cost incurred by Landlord pursuant to Section 11.2 of this Lease for replacement of the Building shell or other structural portions of the Building (including replacement of the structural elements of the roof or replacement of the foundations) during the Initial Term of this Lease; (s) Any cost of replacement of the utility systems including the HVAC (as defined in Section 11.2 of the Lease) during the Initial Term of the Lease; (t) The cost of any management fees in excess of a sum equal to ten percent (10%) of Operating Expenses, excluding therefrom any sum related to a capital expenditure in excess of Twenty-Five Thousand Dollars ($25,000.00); (u) Any cost related to the initial construction or decoration of the Building or the Project, such as, but not limited to, the initial installation of landscaping, utilities, or striping of the Common Areas, or painting of the buildings in the Project; -6- 12 (v) The cost of new buildings, additional land or any expansion of the Project; (w) Repairs or replacements or hook-up or tap-in charges related to any utility systems which are dedicated to the use of a single tenant; (x) Repairs or replacements necessitated by the negligence or the wrongful action of Landlord or Landlord's agents, contractors or employees, or any other tenant (to the extent the cost of such repairs or replacements are collected from such tenant which Landlord agrees to seek with due diligence); (y) All interest or penalties incurred as a result of Landlord's failing to pay bills as the same become due; (z) Any repairs to the Building or the Common Area necessitated by any construction in the Project; (aa) Any bad debt losses, rent losses or reserves for bad debt or rent losses; (bb) Costs of selling, syndicating, financing, mortgaging or hypothecating any of Landlord's interest in the Project; or (cc) Any cost related to compliance with the Americans with Disabilities Act (42 U.S.C. Section 12101 et seq.) or any similar statute, ordinance or regulation in effect as of the Commencement Date; (dd) Costs of a second or subsequent replacement of any capital item which is replaced more than one time during its reasonable useful life (but this exclusion shall not exclude costs of a second or subsequent replacement of a capital item after the expiration of its reasonable useful life which is otherwise permitted under this Article 4); and (ee) Reserves in excess of commercially reasonable reserve amounts maintained by landlords of comparable projects in Alameda County, provided in any event, Landlord shall reimburse Tenant at the expiration of the Lease Term for any unamortized reserves paid by Tenant during the Lease Term which have not been applied to the costs of replacements for which such reserves have been collected by Landlord. 4.12 TENANT'S PERCENTAGE. "TENANT'S PERCENTAGE" shall mean the percentage set forth in Section 1.9 of the Summary. Tenant's Percentage was calculated by multiplying the number of rentable square feet of the Premises by 100 and dividing the product by the total rentable square feet in the Building. Landlord shall have the right from time to time, in its discretion, to include or exclude existing or future buildings in the Project in the calculation of the total rentable square feet of the Project, for purposes of determining the Building's Share of Operating Expenses, Real Property Taxes and Assessments, Insurance Costs and Utilities Costs and/or the provision of various services and amenities thereto, including equitable allocation of the foregoing in Cost Pools (as described in Section 4.3 above); in such event, Tenant's Percentage shall include such allocation of the Building's Share of Operating Expenses, Real Property Taxes and Assessments, Insurance Costs, and Utilities Costs in the calculation of Tenant's Percentage. In addition, if either the rentable square feet of the Premises and/or the Building and other buildings in the Project changes, Tenant's Percentage and/or the Building's Share shall be appropriately adjusted, and, as to the calendar year in which such change occurs, Tenant's Percentage and/or the Building's Share for such year shall be determined on the basis of the number of days during such calendar year that each such Tenant's Percentage and/or the Building's Share was in effect. 4.13 TENANT'S AUDIT RIGHTS. If Tenant questions a component of an Actual Statement, Landlord will provide Tenant with a copy of the actual invoices or other documentation reasonably acceptable to Tenant substantiating the component within thirty (30) days of Tenant's request therefor. Landlord will maintain accurate, detailed records of all items included in the Actual Statements at Landlord's office at the address for notices set forth in Section 1.1 of the Summary for at least twenty-four (24) months after delivery of the Actual Statement to Tenant. Tenant may at its cost and expense inspect or cause an employee of Tenant or a certified public accountant hired on a non-contingent basis to audit the records during normal business hours at the offices of Landlord's property manager on up to one (1) occasion per annum provided Tenant delivers prior written notice ("Audit Notice") of its intent to perform such audit within twenty four (24) months following receipt of the Actual Statement which Tenant intends to audit. In no event will Landlord or its property manager be required to (i) photocopy any accounting records or other items or contracts, (ii) create any ledgers or schedules not already in existence, (iii) incur any costs or expenses relative to such inspection, or (iv) perform any other tasks other than making available such accounting records as are described in this paragraph. Tenant must pay its Percentage of Operating Expenses when due pursuant to the terms of the Lease and may not withhold payment of Operating Expenses or any other rent pending results of the audit or during a dispute regarding Operating Expenses. The audit must be completed within sixty (60) days of the date of Tenant's Audit Notice and the results of such audit shall be delivered to Landlord within seventy five (75) days of the date of Tenant's Audit Notice. If Tenant does not deliver its Audit Notice within such time period, then the Actual Statement will be conclusively binding on Tenant. If such audit or review correctly reveals that Landlord has overcharged Tenant and Landlord agrees with the results of such audit, then within thirty (30) days after the results of such audit are made available to Landlord, Landlord agrees to reimburse Tenant the amount of such overcharge. If the audit reveals that Tenant was undercharged, then within thirty (30) days after the results of the audit are made available to Tenant, Tenant agrees to reimburse Landlord the -7- 13 amount of such undercharge. If the audit shows that the Actual Statement contains an overstatement exceeding five percent (5%) of any category of the items set forth in Sections 4.4, 4.5, 4.6 or 4.7 for the covered period, then the reasonable audit fees and expenses incurred by Tenant will be paid by Landlord. To the extent Landlord must pay the cost of such audit, such cost shall not exceed a reasonable hourly charge for a reasonable amount of hours spent by such third-party in connection with the audit. Tenant agrees to keep the results of the audit confidential and will cause its agents, employees and contractors to keep such results confidential. If Landlord's accountant protests the conclusions of the audit, Landlord may contest Tenant's determination by giving Tenant written notice within thirty (30) days following Landlord's receipt of the audit report. If Landlord's accountant and Tenant's accountant cannot mutually agree as to sums due pursuant hereto within thirty (30) days after Tenant's receipt of Landlord's notice of protest, the dispute will be resolved pursuant to Section 24 of the Lease. 5. SECURITY DEPOSIT. Tenant shall deposit with Landlord the Security Deposit in the form of one or two irrevocable sight draft letter(s) of credit in form reasonably satisfactory to Landlord drawn on a national bank designated in Section 1.11 of the Summary as follows: A letter of credit in face amount equal to one-half (1/2) of the total Security Deposit shall be provided to Landlord within five (5) days after full execution of this Lease and such letter of credit shall be increased by, or a second letter of credit shall be issued in favor of Landlord with a face amount equal to, one-half (1/2) of the total Security Deposit on or before the date upon which Landlord commences construction of the Tenant Improvements. The letters of credit Security Deposit shall be held by Landlord as security for the full and faithful performance by Tenant of all of the terms, covenants and conditions of this Lease to be performed by Tenant during the Term, except as otherwise provided herein. If Tenant defaults with respect to any of its obligations under this Lease, Landlord may (but shall not be required to) use, apply or retain all or any part of the Security Deposit for the payment of any rent or any other sum in default, or for the payment of any other amount, loss or damage which Landlord may spend, incur or suffer by reason of Tenant's default. If any portion of the Security Deposit is so used or applied, Tenant shall, within ten (10) days after demand therefor, deposit cash with Landlord in an amount sufficient to restore the Security Deposit to its original amount. Landlord shall not be required to keep the Security Deposit separate from its general funds. If Tenant is not in default beyond the period of notice and opportunity to cure provided in Section 23 of this Lease at the expiration of the Term, the Security Deposit or any balance thereof shall be returned to Tenant within two (2) weeks following such expiration, provided that Landlord may retain the Security Deposit until such time as any amount due from Tenant in accordance with Section 4 hereof has been determined and paid in full. If Landlord sells its interest in the Building during the Term and if Landlord deposits with the purchaser the Security Deposit (or balance thereof), then, upon such sale, Landlord shall be discharged from any further liability with respect to the Security Deposit. Provided Tenant is not in default beyond the period of notice and opportunity to cure provided in this Lease, the face amount of the letter(s) of credit shall be reduced as provided herein until the face amount of the letter(s) of credit is reduced to One Hundred Fifty-Five Thousand Dollars ($155,000.00) in the aggregate as follows: (a) the face amount of the letter(s) of credit shall be reduced by Eighty-Seven Thousand Five Hundred Dollars ($87,500.00) upon the first to occur of (i) an increase of Tenant's Base Shareholders' Equity (exclusive of income from extraordinary sources and expenses of extraordinary events) by Ten Million Dollars ($10,000,000.00) or more (the "First Increased Shareholders' Equity") over any period of four (4) consecutive fiscal quarters of the Lease Term (Tenant hereby representing and warranting to Landlord that Tenant's "Base Shareholders' Equity" as of September 30, 2000 is $90,519,000) or (ii) Tenant achieving net income from operations (exclusive of income from extraordinary sources and expenses of extraordinary events) of Eight Million Two Hundred Thirty Thousand Dollars ($8,230,000.00) over any period of four (4) consecutive fiscal quarters of the Lease Term; (b) the face amount of the letter(s) of credit shall further reduce by Eighty-Seven Thousand Five Hundred Dollars ($87,500.00) upon the earlier to occur of (i) such time as Tenant's First Increased Shareholders' Equity (exclusive of income from extraordinary sources and expenses of extraordinary events) shall increase by Ten Million Dollars ($10,000,000.00) or more over any period of four (4) consecutive fiscal quarters of the Lease Term following the most recent prior reduction of the letter(s) of credit (the "Second Increased Shareholders' Equity") or (ii) Tenant achieves net income from operations (exclusive of income from extraordinary sources and expenses of extraordinary events) of Ten Million Dollars ($10,000,000.00) or more over any period of four (4) consecutive fiscal quarters of the Lease Term following the most recent prior reduction of the letter(s) of credit; (c) the face amount of the letter(s) of credit shall further reduce by Eighty-Seven Thousand Five Hundred Dollars ($87,500.00) upon the earlier to occur of (i) such time as Tenant's Second Increased Shareholders' Equity (exclusive of income from extraordinary sources and expenses of extraordinary events) shall increase by Ten Million Dollars ($10,000,000.00) or more over any period of four (4) consecutive fiscal quarters of the Lease Term following the most recent prior reduction of the letter(s) of credit (the "Third Increased Shareholders' Equity") or (ii) Tenant achieving net income from operations (exclusive of income from extraordinary sources and expenses of extraordinary events) increases by Ten Million Dollars ($10,000,000.00) or more over any period of four (4) consecutive fiscal quarters of the Lease Term following the most recent prior reduction of the letter(s) of credit; and (d) the face amount of the letter(s) of credit shall further reduce by Eighty-Seven Thousand Five Hundred Dollars ($87,500.00) upon the earlier to occur of (i) such time as Tenant's Third Increased Shareholders' Equity (exclusive of income from extraordinary sources and expenses of extraordinary events) shall increase by Ten Million Dollars ($10,000,000.00) or more over any period of four (4) consecutive fiscal quarters of the Lease Term following the most recent prior reduction of the letter(s) of credit or (ii) Tenant achieving net income from operations (exclusive of income from extraordinary sources and expenses of extraordinary events) of Ten Million Dollars ($10,000,000.00) or more over any period of four (4) consecutive fiscal quarters of the Lease Term following the most recent prior reduction of the letter(s) of credit. -8- 14 6. USE. 6.1 GENERAL. Tenant shall use the Premises solely for the Permitted Use specified in Section 1.12 of the Summary, and shall not use or permit the Premises to be used for any other use or purpose whatsoever. Tenant shall observe and comply with the "Rules and Regulations" attached hereto as Exhibit "E", and all reasonable non-discriminatory modifications thereof and additions thereto from time to time put into effect and furnished to Tenant by Landlord. Landlord shall endeavor to enforce the Rules and Regulations, but shall have no liability to Tenant for the violation or non-performance by any other tenant or occupant of the Project or the Building of any such Rules and Regulations. Tenant shall, at its sole cost and expense, observe and comply with all recorded covenants, conditions and restrictions now or hereafter affecting the Project, and all laws, statutes, codes, rules and regulations now or hereafter in force relating to or affecting the condition, use, occupancy, alteration or improvement of the Premises, including, without limitation, the provisions of Title III of the Americans with Disabilities Act of 1990 ("ADA") as to provisions thereof in effect after the Commencement Date as it pertains to Tenant's use, occupancy, improvement and alteration of the Premises. Tenant will have no obligation to comply with applicable law related to the structural portion of the Premises, unless resulting from alterations required by Tenant. Tenant reserves the right to contest the applicability of any laws, statutes, codes, rules and regulations relating to the condition of the Premises or use of the Premises. Tenant's obligation with respect to such compliance will cease on the expiration or earlier termination of this Lease and Tenant will not be obligated to deliver the Premises to Landlord in compliance with applicable laws, statutes, codes, rules and regulations, except as the Premises have been modified by Tenant in accordance therewith. Tenant shall not use or allow the Premises to be used (a) in violation of any recorded covenants, conditions and restrictions affecting the Site or of any law or governmental rule or regulation, or of any certificate of occupancy issued for the Premises or Building, or (b) for any unlawful purpose. Tenant shall not do or permit to be done anything which will obstruct or interfere with the rights of other tenants or occupants of the Project or the Building, or injure or annoy them. Tenant shall not cause, maintain or permit any nuisance in, on or about the Premises, the Building, the Project or the Site, nor commit or suffer to be committed any waste in, on or about the Premises. 6.2 PARKING. (a) Tenant's Parking Privileges. During the Term of this Lease, Tenant will be entitled to use without charge (other than Tenant's Percentage of Operating Expenses attributable to parking) the number of parking spaces specified in Section 1.16 of the Summary hereof for use by Tenant's employees, customers, invitees, licensees, contractors and agents in the common parking areas for the Building within the Project. Landlord shall at all times have the right to establish and modify the nature and extent of the parking areas forth a Building and Project (including whether such areas shall be surface, underground and/or other structures) as long as Tenant is provided without charge the number of parking spaces designated in Section 1.16 of the Summary and provided if Landlord shall ever elect to assign parking spaces to any tenants of the building, Tenant shall receive a ratable allocation of assigned parking spaces as well on such terms and conditions upon which such parking may be provided, provided in all events all of Tenant's parking spaces shall be provided to Tenant without charge other than the payment by Tenant of Tenant's Percentage of Operating Expenses attributable to parking. (b) Parking Rules. The use of the parking areas shall be subject to the Parking Rules and Regulations contained in Exhibit "E" attached hereto and any other reasonable, non-discriminatory rules and regulations adopted by Landlord from time to time. Tenant shall not use more parking privileges than its allotment. Tenant's parking privileges shall be used only for parking by vehicles no larger than normally sized passenger automobiles or pick-up trucks or Tenant's usual four (4) or six (6) wheel delivery vans and four (4) wheel vehicles. Tenant shall use all reasonable efforts and due diligence not permit or allow any vehicles that belong to or are controlled by Tenant or Tenant's employees, suppliers, shippers, customers or invitees to be loaded, unloaded, or parked in areas other than those reasonably designated by Landlord for such activities so long as a reasonable loading zone for the Building is designated by Landlord for Tenant's use. If Tenant permits or allows any of the prohibited activities described herein, then Landlord shall have the right, upon reasonable notice, in addition to such other rights and remedies that it may have at law or in equity, to remove or tow away the vehicle involved at the expense of the owner of the vehicle. 6.3 SIGNS AND AUCTIONS. Except for Tenant's name on the directory board in the Building lobby and identity sign at the entry doors of the Premises (which sign shall be consistent with the Building's signage program and otherwise subject to Landlord's prior written approval), Tenant shall have no right to place any sign upon the Premises, the Building, Site or Project or which can be seen from outside the Premises. Tenant shall have no right to conduct any auction in, on or about the Premises, the Building or Site. Provided such signage is approved by the Harbor Bay Isle Association and all governmental agencies with jurisdiction, Tenant will have the right, at Tenant's sole cost and expense, to install during the Term one (1) non-exclusive sign on the exterior of the Building located in approximately the location depicted on Exhibit "A-2" attached hereto ("BUILDING SIGN"), subject to the terms of this Section 6.3. Landlord agrees to support Tenant's application to the Harbor Bay Isle Association for Tenant's Building Sign. The specifications, plans and elevations for the Building Sign (including the graphics, materials, color, design, lettering, height, lighting, size and quality) will be in accordance with the Building's signage program, all applicable governmental laws, rules and regulations and the Harbor Bay Isle Association's sign program, and will be subject to Landlord's prior written approval. The Building Sign must be installed -9- 15 under the supervision of Landlord by a contractor approved by Landlord and must be installed in a lien-free manner in accordance with the provisions of this Lease. The Building Sign must be maintained, at the sole cost and expense of Tenant, pursuant to a maintenance program approved and supervised by Landlord. Upon the expiration or earlier termination of this Lease, Tenant, at Tenant's sole cost and expense (subject to Landlord's supervision), will cause the Building Sign to be removed and the Building to be restored to the condition existing prior to the placement of such sign. If Tenant fails to remove such sign and restore the Building as provided above within thirty (30) days following Landlord's demand therefor, then Landlord may perform such work and all costs and expenses incurred by Landlord in so performing such work will be reimbursed by Tenant to Landlord within ten (10) days following Landlord's delivery to Tenant of an invoice therefor, plus interest at the Interest Rate. The Building Sign rights hereinabove provided are personal to the original Tenant executing this Lease and may not be assigned or transferred to, or utilized by, any other person or entity. Tenant hereby acknowledges that the restrictive covenants, promulgated by the Harbor Bay Isle Association, currently affecting the Premises prohibit the Building Sign permitted by this Section 6.3; however, Tenant may, with Landlord's cooperation (but without any cost to Landlord), apply to the Harbor Bay Isle Association for approval of the Building Sign described herein. Notwithstanding anything to the contrary contained herein, Landlord's consent to Tenant's installation of the Building Sign and Landlord's agreement to cooperate with Tenant's application to the Harbor Bay Isle Association for the approval of such Building Sign, as provided herein, in no manner constitute a warranty by Landlord that Tenant will obtain approval of the Building Sign from the Harbor Bay Isle Association. 6.4 HAZARDOUS MATERIALS. Tenant will (i) obtain and maintain in full force and effect all Environmental Permits that may be required from time to time under any Environmental Laws applicable to Tenant or the Premises and (ii) be and remain in compliance in all material respects with all terms and conditions of all such Environmental Permits and with all other limitations, restrictions, conditions, standards, prohibitions, requirements, obligations, schedules and timetables contained in all Environmental Laws applicable to Tenant or the Premises. As used in this Lease, the term "ENVIRONMENTAL LAW" means any past, present or future federal, state, local or foreign statutory or common law, or any regulation, ordinance, code, plan, order, permit, grant, franchise, concession, restriction or agreement issued, entered, promulgated or approved thereunder, relating to (a) the environment, human health or safety, including, without limitation, emissions, discharges, releases or threatened releases of Hazardous Materials (as defined below) into the environment (including, without limitation, air, surface water, groundwater or land), or (b) the manufacture, generation, refining, processing, distribution, use, sale, treatment, receipt, storage, disposal, transport, arranging for transport, or handling of Hazardous Materials. "ENVIRONMENTAL PERMITS" means, collectively, any and all permits, consents, licenses, approvals and registrations of any nature at any time required pursuant to, or in order to comply with, any Environmental Law. Except for ordinary and general office supplies, such as copier toner, liquid paper, glue, ink and common household cleaning materials (some or all of which may constitute "Hazardous Materials" as defined in this Lease), Tenant agrees not to cause or permit any Hazardous Materials to be brought upon, stored, used, handled, generated, released or disposed of on, in, under or about the Premises, the Building, the Common Areas or any other portion of the Project by Tenant, its agents, employees, subtenants, assignees, licensees, or contractors (collectively, "TENANT'S PARTIES"), without the prior written consent of Landlord, which consent Landlord may withhold in its sole and absolute discretion. Upon the expiration or earlier termination of this Lease, Tenant agrees to promptly remove from the Premises, the Building and the Project, at its sole cost and expense, any and all Hazardous Materials, including any equipment or systems containing Hazardous Materials which are installed, brought upon, stored, used, generated or released upon, in, under or about the Premises, the Building and/or the Project or any portion thereof by Tenant or any of Tenant's Parties. To the fullest extent permitted by law, Tenant agrees to promptly indemnify, protect, defend and hold harmless Landlord and Landlord's partners, officers, directors, employees, agents, successors and assigns (collectively, "LANDLORD INDEMNIFIED PARTIES") from and against any and all claims, damages, judgments, suits, causes of action, losses, liabilities, penalties, fines, expenses and costs (including, without limitation, clean-up, removal, remediation and restoration costs, sums paid in settlement of claims, attorneys' fees, consultant fees and expert fees and court costs) which arise or result from the presence of Hazardous Materials on, in, under or about the Premises, the Building or any other portion of the Project and which are caused (or within the Premises only, permitted) by Tenant or any of Tenant's Parties. Tenant agrees to promptly notify Landlord of any release of Hazardous Materials in the Premises, the Building or any other portion of the. Project which Tenant becomes aware of during the Term of this Lease, whether caused by Tenant or any other persons or entities. In the event of any release of Hazardous Materials caused or permitted by Tenant or any of Tenant's Parties, Landlord shall have the right, but not the obligation, to cause Tenant to immediately take all steps Landlord deems necessary or appropriate to remediate such release and prevent any similar future release to the satisfaction of Landlord and Landlord's mortgagee(s). At all times during the Term of this Lease, upon not less than twenty-four (24) hours prior written notice to Tenant, Landlord will have the right, but not the obligation, to enter upon the Premises to inspect, investigate, sample and/or monitor the Premises to determine if Tenant is in compliance with the terms of this Lease regarding Hazardous Materials. As used in this Lease, the term "HAZARDOUS MATERIALS" shall mean and include any hazardous or toxic materials, substances or wastes as now or hereafter designated under any law, statute, ordinance, rule, regulation, order or ruling of any agency of the State, the United States Government or any local governmental authority, including, without limitation, asbestos, petroleum, petroleum hydrocarbons and petroleum based products, urea formaldehyde foam insulation, polychlorinated biphenyls ("PCBS"), and freon and other chlorofluorocarbons. The provisions of this Section 6.4 will survive the expiration or earlier termination of this Lease. -10- 16 To the fullest extent permitted by law, Landlord agrees to promptly indemnify, protect, defend and hold harmless Tenant and Tenant's officers, directors, employees, contractors, agents, successor and assigns (collectively "TENANT INDEMNIFIED PARTIES") from and against any and all claims, damages, judgments, suits, causes of action, losses, liabilities, penalties, fines, expenses and costs (including without limitation, clean up, removal, remediation and restoration costs, sums paid in settlement of claims, attorneys' fees, consultants fees and expert fees and court costs) which arise as the result from the presence of Hazardous Materials on, in, under or about the Premises, the Building or any other portion of the Project which predates Tenant's occupancy of the Premises or which are caused by Landlord, its agents or employees. Landlord agrees to promptly notify Tenant of any release of Hazardous Materials on any portion of the Project that Landlord becomes aware of during the Term of this Lease. To the extent the presence of Hazardous Materials on the Project which is not caused by Tenant or any Tenant Parties, causes a material interference with the conduct of Tenant's business in the Premises or poses a material health risk to any of the Tenant's Indemnified Parties, Tenant will be entitled to an abatement of rent until the Hazardous Materials are abated. If such interference continues for a period in excess of six (6) months from Landlord's notice thereof or Tenant's discovery thereof, Tenant will be entitled to cancel and terminate this Lease upon written notice to Landlord, in addition to any other remedy available at law or in equity. 6.5 OCCUPANCY LEVEL. Without in any way increasing Landlord's obligations to provide parking in the amount to be provided to Tenant as provided in this Lease, Tenant covenants and agrees that the number of persons occupying the Premises shall not exceed one hundred ninety-five (195) persons. If Landlord at any time reasonably determines that more than one hundred ninety-five (195) persons occupy the Premises on a day-to day basis, Landlord shall notify Tenant and Tenant shall have thirty (30) days after receipt of Landlord's notice to either (a) reduce the occupancy level to one hundred ninety-five (195) persons or less or (b) notify Landlord of Tenant's desire to lease additional space in the Building or elsewhere in the Project. If Landlord does not receive notice of Tenant's desire to lease additional space in the Building or the Project within thirty (30) days after the date of receipt of Landlord's notice of the violation of the maximum occupancy provision, and if the Premises occupancy level remains in excess of the maximum allocation as of the thirtieth (30th) day following the date of receipt of Landlord's notice, Tenant shall automatically be deemed in default of this Lease and Landlord shall be entitled to exercise any and all remedies set forth in this Lease or at law or in equity by reason of such default. If Tenant selects option (b), subject to the availability of space in the Building or the Project, the parties shall in good faith, negotiate a proposal to expand the Premises. If no space will be available in the Building or elsewhere in the Project within ninety (90) days after Landlord's receipt of Tenant's request to lease additional space, or if Landlord and Tenant have not reached an agreement with respect to any available expansion space within thirty (30) days after Landlord's receipt of Tenant's request to lease additional space, Tenant shall have an additional twenty (20) days to reduce the occupancy level of the Premises to the required maximum. Should Tenant fail to reduce the occupancy level within said additional twenty (20) day period, Tenant shall automatically be deemed in default of this Lease and Landlord shall be entitled to exercise any and all remedies set forth in this Lease or at law or in equity by reason of such default. 7. PAYMENTS AND NOTICES. All rent and other sums payable by Tenant to Landlord hereunder shall be paid to Landlord at the first address designated in Section 1.1 of the Summary, or to such other persons and/or at such other places as Landlord may hereafter designate in writing. Any notice required or permitted to be given hereunder must be in writing and may be given by personal delivery (including delivery by nationally recognized overnight courier or express mailing service), facsimile transmission sent by a machine capable of confirming transmission receipt, with a hard copy of such notice delivered no later than one (1) business day after facsimile transmission by another method specified in this Section 7, or by registered or certified mail, postage prepaid, return receipt requested, addressed to Tenant at the address(es) designated in Section 1.2 of the Summary, or to Landlord at the address(es) designated in Section 1.1 of the Summary. Either party may, by written notice to the other, specify a different address for notice purposes. Notice given in the foregoing manner shall be deemed given (i) upon confirmed transmission if sent by facsimile transmission, provided such transmission is prior to 3:00 p.m. on a business day (if such transmission is after 3:00 p.m. on a business day or is on a non-business day, such notice will be deemed given on the following business day), (ii) when actually received or. refused by the party to whom sent if delivered by a carrier or personally served or (iii) if mailed, on the day of actual delivery or refusal as shown by the certified mail return receipt. For purposes of this Section 7, a "BUSINESS DAY" is Monday through Friday, excluding holidays observed by the United States Postal Service. 8. BROKERS. The parties recognize that the broker(s) who negotiated this Lease are stated in Section 1.13 of the Summary, and agree that Landlord shall be solely responsible for the payment of brokerage commissions to said broker(s) pursuant to the terms of a separate commission agreement, and that Tenant shall have no responsibility therefor unless written provision to the contrary has been made. Each party represents and warrants to the other, that, to its knowledge, no other broker, agent or finder (a) negotiated or was instrumental in negotiating or consummating this Lease on its behalf, and (b) is or might be entitled to a commission or compensation in connection with this Lease. Any broker, agent or finder of Tenant whom Tenant has failed to disclose herein shall be paid by Tenant. Tenant shall indemnify, defend (by counsel reasonably approved in writing by Landlord) and hold Landlord harmless from and against any and all claims, judgments, suits, causes of action, damages, losses, liabilities and expenses (including attorneys' -11- 17 fees and court costs) resulting from any breach by Tenant of the foregoing representation, including, without limitation, any claims that may be asserted against Landlord by any broker, agent or finder undisclosed by Tenant herein. Landlord shall indemnify, defend (by counsel reasonably approved in writing by Tenant) and hold Tenant harmless from and against any and all claims, judgments, suits, causes of action, damages, losses, liabilities and expenses (including attorneys' fees and court costs) resulting from any breach by Landlord of the foregoing representation, including, without limitation, any claims that may be asserted against Tenant by any broker, agent or finder undisclosed by Landlord herein. The foregoing indemnities shall survive the expiration or earlier termination of this Lease. 9. SURRENDER; HOLDING OVER. 9.1 SURRENDER OF PREMISES. Upon the expiration or sooner termination of this Lease, Tenant shall surrender all keys for the Premises to Landlord, and exclusive possession of the Premises to Landlord broom clean and in first-class condition and repair, reasonable wear and tear excepted (and casualty damage excepted if this Lease is terminated as a result thereof pursuant to Section 18), with all of Tenant's personal property (and those items, if any, of Tenant Improvements and Tenant Changes identified by Landlord pursuant to Section 12.2 below) removed therefrom and all damage caused by such removal repaired; as required pursuant to Sections 12.2 and 12.3 below. If, for any reason, Tenant fails to surrender the Premises on the expiration or earlier termination of this Lease (including upon the expiration of any subsequent month-to-month tenancy consented to by Landlord pursuant to Section 9.2 below), with such removal and repair obligations completed, then, in addition to the provisions of Section 9.3 below and Landlord's rights and remedies under Section 12.4 and the other provisions of this Lease, Tenant shall indemnify, protect, defend (by counsel approved in writing by Landlord) and hold Landlord harmless from and against any and all claims, judgments, suits, causes of action, damages, losses, liabilities and expenses (including attorneys' fees and court costs) resulting from such failure to surrender, including, without limitation, any claim made by any succeeding tenant based thereon. The foregoing indemnity shall survive the expiration or earlier termination of this Lease. 9.2 HOLD OVER. If, with Landlord's express written consent, Tenant remains in possession of the Premises after the expiration or earlier termination of the Lease Term, Tenant shall become a tenant from month-to-month upon the terms and conditions set forth in this Lease (including Tenant's obligation to pay all Operating Expenses, Real Property Taxes and Assessments, Insurance Costs, and Utilities Costs and any other additional rent under this Lease), but at a Monthly Basic Rent equal to one hundred fifty percent (150%) of the Monthly Basic Rent applicable to the Premises immediately prior to the date of such expiration or earlier termination. Tenant shall pay an entire month's Monthly Basic Rent calculated in accordance with this Section 9.2 for any portion of a month it holds over and remains in possession of the Premises pursuant to this Section 9.2 unless Tenant shall provide Landlord with at least thirty (30) days prior written notice of the precise date upon which Tenant will vacate the Premises in which event the holdover rent shall be prorated for the actual number of days Tenant holds over at the Premises. This Section 9.2 shall not be construed to create any expressed or implied right to holdover beyond the expiration of the Lease Term or any extension thereof. 9.3 NO EFFECT ON LANDLORD'S RIGHTS. The foregoing provisions of this Section 9 are in addition to, and do not affect, Landlord's right of re-entry or any other rights of Landlord hereunder or otherwise provided by law or equity. 10. TAXES ON TENANT'S PROPERTY. Tenant shall be liable for, and shall pay before delinquency, all taxes and assessments (real and personal) levied against (a) any personal property or trade fixtures placed by Tenant in or about the Premises (including any increase in the assessed value of the Premises based upon the value of any such personal property or trade fixtures); and (b) any Tenant Improvements or alterations in the Premises (whether installed and/or paid for by Landlord or Tenant) to the extent such items are assessed at a valuation higher than the valuation at which tenant improvements conforming to the Building's standard tenant improvements are assessed. Tenant will not be obligated to pay any portion of taxes and assessments described in the preceding sentence related to other premises within the Project; Landlord will upon receipt of a written request therefore and, as a condition to Tenant's obligation to pay any portion of such taxes and assessments that are not separately assessed, provide reasonable supporting data to assure Tenant that the amount claimed to be due does not include such items for premises other than the Premises. If any such taxes or assessments are levied against Landlord or Landlord's property, Landlord may, after written notice to Tenant (and under proper protest if requested by Tenant) pay such taxes and assessments, and Tenant shall reimburse Landlord therefor within thirty (30) days after receipt of demand by Landlord accompanied by reasonable supporting data showing Landlord's method of determination of the amount claimed to be due to Landlord; any dispute regarding the foregoing will be resolved pursuant to Section 24 of this Lease. 11. CONDITION OF PREMISES: REPAIRS. 11.1 CONDITION OF PREMISES. Tenant acknowledges that, except as otherwise expressly set forth in this Lease, neither Landlord nor any agent of Landlord has made any representation or warranty with respect to the Premises, the Building, the Site or the Project or their condition, or with respect to the suitability thereof for the conduct of Tenant's business. The taking of possession of the Premises by Tenant shall conclusively establish that the Project, the Site, the Premises, the Tenant Improvements therein, the Building and the Common Areas were at such time complete and in good, sanitary and -12- 18 satisfactory condition and repair with all work required to be performed by Landlord, if any, pursuant to Exhibit "C" completed and without any obligation on Landlord's part to make any alterations, upgrades or improvements thereto, except as provided in Exhibit "C" and except to the extent required by applicable laws, statutes, codes, rules and regulations with respect to the portion of the Premises to be maintained by Landlord pursuant to Section 11.2 hereof. 11.2 LANDLORD'S REPAIR OBLIGATIONS. Subject to Section 18.1 and 18.2 of this Lease, Landlord shall repair, maintain and replace, as necessary (a) as part of Operating Expenses, the Building shell and other structural portions of the Building (including the structural elements of the roof and foundations), provided repair and replacement of structural elements of roof, foundation and structural load bearing walls shall be performed at Landlord's sole cost and expense, (b) as part of Operating Expenses, the basic heating, ventilating, air conditioning ("HVAC"), sprinkler and electrical systems within the Building core and standard conduits, connections and distribution systems thereof within the Premises (but not any above standard improvements installed in the Premises such as, for example, but not by way of limitation, custom lighting, special or supplementary HVAC or plumbing systems or distribution extensions, special or supplemental electrical panels or distribution systems, or kitchen or restroom facilities and appliances to the extent such facilities and appliances are intended for the exclusive use of Tenant), and (c) as part of Operating Expenses, the Common Areas; provided, however, to the extent such maintenance, repairs or replacements are required as a result of any act, neglect, fault or omission of Tenant or any of Tenant's agents, employees, contractors or licensees, Tenant shall be responsible for such maintenance, repairs and replacements. Landlord shall not be liable to Tenant for failure to perform any such maintenance, repairs or replacements, unless Landlord shall fail to perform or commence to perform such maintenance, repairs or replacements and such failure shall continue for more than five (5) business days after Landlord's receipt of Tenant's written notice therefore. Landlord will be deemed to have commenced such maintenance, repair or replacement when Landlord or its agent has inspected the condition and commenced the work or contacted any outside service required in connection therewith provided Landlord proceeds diligently to complete or cause to be completed such work as soon as reasonably possible under the circumstances. In the event of an emergency which creates an immediate threat of injury to persons or damage to property, after reasonable efforts to contact Landlord, Tenant may make such repairs or maintenance as may reasonably be required at Landlord's expense and Landlord will reimburse Tenant its reasonable out of pocket costs within thirty (30) days of receipt of a bill therefor and evidence supporting Tenant's expenditures. Tenant shall be liable for any damage Tenant causes in performing any such repairs on Landlord's behalf. Any dispute will be resolved pursuant to the procedure set forth in Section 24 of this Lease. Except as set forth herein, Tenant waives the right to make repairs at Landlord's expense under any law, statute or ordinance now or hereafter in effect (including the provisions of California Civil Code Section 1942 and any successive sections or statutes of a similar nature). 11.3 TENANT'S REPAIR OBLIGATIONS. Except for Landlord's obligations specifically set forth in Sections 11.1,11.2,16.1,18.1 and 19.2 hereof, Tenant shall at all times and at Tenant's sole cost and expense, keep, maintain, clean, repair, preserve and replace, as necessary, the Premises and all parts thereof including, without limitation, all Tenant Improvements, Tenant Changes, utility meters, all special or supplemental HVAC systems, electrical systems, pipes and conduits, located within the Premises, all fixtures, furniture and equipment, including, without limitation, all computer, telephone and data cabling and equipment, Tenant's signs, locks, closing devices, security devices, windows, window sashes, casements and frames, floors and floor coverings, shelving, kitchen and/or restroom facilities and appliances located within the Premises to the extent such facilities and appliances are intended for the exclusive use of Tenant, if any, custom lighting, and any alterations, additions and other property located within the Premises in first-class condition and repair, reasonable wear and tear excepted. Tenant shall replace, at its expense, any and all plate and other glass in and about the Premises which is damaged or broken from any cause whatsoever except due to the negligence or willful misconduct of Landlord, its agents or employees. Such maintenance and repairs shall be performed with due diligence, lien-free and in a first-class and workmanlike manner, by licensed contractor(s) which are selected by Tenant and approved by Landlord, which approval Landlord shall not unreasonably withhold or delay. Except as otherwise expressly provided in this Lease, Landlord shall have no obligation to alter, remodel, improve, repair, renovate, redecorate or paint all or any part of the Premises. 12. ALTERATIONS. 12.1 TENANT CHANGES; CONDITIONS. After installation of the initial Tenant Improvements for the Premises pursuant to Exhibit "C", Tenant may, at its sole cost and expense, make alterations, additions, improvements and decorations to the Premises (collectively, "TENANT CHANGES") subject to and upon the following terms and conditions: (a) Notwithstanding any provision in this Section 12 to the contrary, Tenant is absolutely prohibited from making any alterations, additions, improvements or decorations which: (i) affect any area outside the Premises; (ii) affect the Building's structure, equipment, services or systems, or the proper functioning thereof, or Landlord's access thereto; (iii) affect the outside appearance, character or use of the Project, the Building or the Common Areas; (iv) weaken or impair the structural strength of the Building; (v) in the reasonable opinion of Landlord, lessen the value of the Project or Building; or (vi) will violate or require a change in any occupancy certificate applicable to the Premises. -13- 19 (b) Before proceeding with any Tenant Change which is not otherwise prohibited in Section 12.1(a) above, Tenant must first obtain Landlord's written approval thereof (including approval of all plans, specifications and working drawings for such Tenant Change), which approval shall not be unreasonably withheld or delayed. Notwithstanding the foregoing, Landlord's prior approval shall not be required for any Tenant Change which satisfies the following conditions (hereinafter a "PRE-APPROVED CHANGE"): (i) the costs of such Tenant Change does not exceed Thirty Thousand Dollars ($30,000.00) individually; (ii) the costs of such Tenant Change when aggregated with the costs of all other Tenant Changes made by Tenant during any year the Term of this Lease do not exceed One Hundred Thousand Dollars ($100,000.00); (iii) Tenant delivers to Landlord final plans, specifications and working drawings for such Tenant Change at least ten (10) days prior to commencement of the work thereof; (iv) Tenant and such Tenant Change otherwise satisfy all other conditions set forth in this Section 12.1; and (v) such Tenant Change does not affect the structure or the mechanical or electrical systems serving the Premises. Landlord's consent to such Tenant Changes shall be deemed granted unless within five (5) business days after receipt of Tenant's written request therefore accompanied by any required plans and specifications, Landlord notifies Tenant that such consent is denied stating the specific reason therefore and any modifications required for such consent. Notwithstanding the foregoing restrictions of this Section 12.1(b), Landlord's consent to recarpeting or painting the interior of the Premises will be not be required; provided Tenant shall notify Landlord of any such installations in advance and shall coordinate such work with Landlord to avoid any interference to other tenants. (c) After Landlord has approved the Tenant Changes and the plans, specifications and working drawings therefor (or is deemed to have approved the Pre-Approved Changes as set forth in Section 12.1(b) above), Tenant shall: (i) enter into an agreement for the performance of such Tenant Changes with such contractors and subcontractors selected by Tenant and approved by Landlord, which approval Landlord shall not unreasonably withhold or delay (provided if Landlord shall not provide its approval or reasonable grounds for disapproval within five (5) business days, Landlord's approval shall be deemed given); (ii) before proceeding with any Tenant Change (including any Pre-Approved Change), provide Landlord with ten (10) days' prior written notice thereof; and (iii) pay to Landlord, within ten (10) days after written demand, the costs of any increased insurance premiums incurred by Landlord to include such Tenant Changes in the fire and extended coverage insurance obtained by Landlord pursuant to Section 21 below. However, Landlord shall be required to include the Tenant Changes under such insurance only to the extent such insurance is actually obtained by Landlord and such Tenant Changes are insurable under such insurance; if such Tenant Changes are not or cannot be included in Landlord's insurance, Tenant shall insure the Tenant Changes under its casualty insurance pursuant to Section 20.1(a) below. In addition, before proceeding with any Tenant Change, Tenant's contractors shall obtain, on behalf of Tenant and at Tenant's sole cost and expense all necessary governmental permits and approvals for the commencement and completion of such Tenant Change. Landlord's approval of any contractor(s) and subcontractor(s) of Tenant shall not release Tenant or any such contractor(s) and/or subcontractors) from any liability for any conduct or acts of such contractor(s) and/or subcontractor(s). (d) Tenant shall pay to Landlord, as additional rent, the reasonable costs not to exceed a total of One Thousand Five Hundred Dollars ($1,500.00) of Landlord's engineers and other consultants (but not Landlord's on-site management personnel) for review of all plans, specifications and working drawings for the Tenant Changes that require Landlord's consent, within thirty (30) business days after Tenant's receipt of invoices either from Landlord or such consultants. In addition to such costs, Tenant shall pay to Landlord, within ten (10) business days after completion of any Tenant Change, the actual, reasonable costs incurred by Landlord for services rendered by Landlord's management personnel (not to exceed $85.00 per hour) and engineers to coordinate and/or supervise any of the Tenant Changes to the extent such services are provided in excess of or after the normal on-site hours of such engineers and management personnel. (e) All Tenant Changes shall be performed: (i) in accordance with the approved plans, specifications and working drawings if Landlord's consent thereto is required; (ii) lien-free and in a first-class workmanlike manner; (iii) in compliance with all laws, rules, regulations of all governmental agencies and authorities including, without limitation, the provisions of the ADA then in effect (provided that Landlord has delivered the Premises in full compliance with all ADA requirements in effect as of the Commencement Date); (iv) in such a manner so as not to unreasonably interfere with the occupancy of any other tenant in the Project or Building, nor impose any additional expense upon nor delay Landlord in the maintenance and operation of the Project or Building; and (v) at such times, in such manner and subject to such reasonable rules and regulations as Landlord may from time to time reasonably designate provided that Tenant shall be entitled to make such Tenant Changes during normal business hours so long as the conduct thereof does not materially interfere with other tenants of the Project. (f) Throughout the performance of the Tenant Changes, Tenant shall obtain, or cause its contractors to obtain, workers compensation insurance and general liability insurance in compliance with the provisions of Section 20 of this Lease. 12.2 REMOVAL OF TENANT CHANGES AND TENANT IMPROVEMENTS. All Tenant Improvements and Tenant Changes in the Premises shall become the property of Landlord upon the expiration or earlier termination of this Lease and shall remain upon and be surrendered with the Premises upon the -14- 20 expiration or earlier termination of this Lease; provided, however, Landlord may, by written notice delivered to Tenant at the time Landlord's consent thereto is granted or, at any time prior to the date which is thirty (30) days before the expiration of the Lease Term (or immediately upon any sooner termination of this Lease) as to those Tenant Changes for which Landlord's consent is not required, identify those items of the Tenant Changes which Landlord shall require Tenant to remove at the end of the Term of this Lease. If Landlord requires Tenant to remove any such items as described above, Tenant shall, at its sole cost, remove the identified items on or before the expiration or sooner termination of this Lease and repair any damage to the Premises caused by such removal (or shall pay to Landlord all of Landlord's costs of such removal and repair if Tenant refuses to remove such items). In no event will Tenant be required to remove carpets or other floor coverings or to repaint the Premises. Tenant hereby represents and warrants that Tenant will invest approximately Seven Hundred Fifty Thousand Dollars ($750,000.00) in the Tenant Improvements in accordance with the terms of the Work Letter Agreement attached to this Lease as Exhibit "C". If Tenant fails to expend Seven Hundred Fifty Thousand Dollars ($750,000.00) on the Tenant Improvements for the Premises, Landlord shall have the right to require that Tenant increase its Security Deposit letter(s) of credit by the difference between Seven Hundred Fifty Thousand Dollars ($750,000.00) and the amount actually expended by Tenant on the Tenant Improvements, and such increased amount shall not be subject to reduction as provided in Section 5. Landlord shall advise Tenant prior to the commencement of construction of the Tenant Improvements, if Tenant shall be obligated to remove any of the Tenant Improvements upon the expiration or earlier termination of the Lease; provided, however, in any event, Tenant shall not be required to remove electrical wiring, wiring trays, terminators, outlets, junction boxes and the like. 12.3 REMOVAL OF PERSONAL PROPERTY. All articles of personal property owned by Tenant or installed by Tenant at its expense in the Premises (including business and trade fixtures, furniture and moveable partitions and all specialized data processing equipment and telecommunications equipment including telecommunications and computer cabling [but excluding conduit and risers for such cabling which Tenant shall not be obligated to remove]) shall be, and remain, the property of Tenant, and shall be removed by Tenant from the Premises, at Tenant's sole cost and expense, on or before the expiration or sooner termination of this Lease. Tenant shall promptly repair any damage caused by such removal. 12.4 TENANT'S FAILURE TO REMOVE. If Tenant fails to remove by the expiration or sooner termination of this Lease all of its personal property, or any items of Tenant Changes identified by Landlord for removal pursuant to Section 12.2 above, or if Tenant fails to comply with its obligations under Section 12.3, Landlord may, at its option, remove and store such items in accordance with applicable law and/or upon ten (10) days' prior notice to Tenant, sell all or any such items at private or public sale for such price as Landlord may obtain as permitted under applicable law. Landlord shall apply the proceeds of any such sale to any amounts due to Landlord under this Lease from Tenant (including Landlord's attorneys' fees and other costs incurred in the removal, storage and/or sale of such items), with any remainder to be paid to Tenant. 13. LIENS. Tenant shall not permit any mechanic's, materialmen's or other liens to be filed against all or any part of the Project, the Site, the Building or the Premises, nor against Tenant's leasehold interest in the Premises, by reason of or in connection with any repairs, alterations, improvements or other work contracted for or undertaken by Tenant or any other act or omission of Tenant or Tenant's agents, employees, contractors, licensees or invitees. Tenant shall, at Landlord's request, provide Landlord with enforceable, unconditional and final lien releases (and other evidence reasonably requested by Landlord to demonstrate protection from liens) from all persons furnishing labor and/or materials with respect to the Premises. Landlord shall have the right at all reasonable times to post on the Premises and record any notices of non-responsibility which it deems necessary for protection from such liens. If any such liens are filed, Tenant shall, at its sole cost, immediately cause such lien to be released of record or bonded to Landlord's reasonable satisfaction so that it no longer affects title to the Project, the Site, the Building or the Premises. If Tenant fails to cause such lien to be so released or bonded within twenty (20) days after filing thereof, Landlord may, without waiving its rights and remedies based on such breach, and without releasing Tenant from any of its obligations, cause such lien to be released by any means it shall deem proper, including payment in satisfaction of the claim giving rise to such lien. Tenant shall pay to Landlord within thirty (30) days after receipt of invoice from Landlord, any sum paid by Landlord to remove such liens, together with interest at the Interest Rate from the date of such payment by Landlord. NOTICE IS HEREBY GIVEN THAT LANDLORD SHALL NOT BE LIABLE FOR ANY LABOR, SERVICES OR MATERIALS FURNISHED OR TO BE FURNISHED TO TENANT, OR TO ANYONE HOLDING THE PREMISES THROUGH OR UNDER TENANT, AND THAT NO MECHANICS' OR OTHER LIENS FOR ANY SUCH LABOR, SERVICES OR MATERIALS SHALL ATTACH TO OR AFFECT THE INTEREST OF LANDLORD IN THE PREMISES. 14. ASSIGNMENT AND SUBLETTING. 14.1 RESTRICTION ON TRANSFER. Except as otherwise expressly provided in this Section 14, Tenant shall not, without the prior written consent of Landlord, which consent Landlord will not unreasonably withhold, assign this Lease or any interest herein or sublet the Premises or any part thereof, or permit the use or occupancy of the Premises by any party other than Tenant (any such assignment, encumbrance, sublease, license or the like shall sometimes be referred to as a "TRANSFER"). In no event may Tenant encumber this Lease. Any Transfer without Landlord's consent (except for a Permitted Transfer pursuant to Section 14.2 below) shall constitute a default by Tenant under this Lease, and in addition to all of -15- 21 Landlord's other remedies at law, in equity or under this Lease, such Transfer shall be voidable at Landlord's election. In addition, this Lease shall not, nor shall any interest of Tenant herein, be assignable by operation of law without the written consent of Landlord. 14.2 PERMITTED CONTROLLED TRANSFERS. Notwithstanding the provisions of Sections 14.1 above to the contrary, Tenant may assign this Lease or sublet the Premises or any portion thereof (herein, a "PERMITTED TRANSFER"), without Landlord's consent and without extending any sublease or termination option to Landlord, to any corporation which controls, is controlled by or is under common control with Tenant, or to any corporation resulting from a merger or consolidation with Tenant, or to any person or entity which acquires all the assets of Tenant's business as a going concern, provided that: (a) at least thirty (30) days prior to such assignment or sublease, Tenant delivers to Landlord the financial statements and other financial and background information of the assignee or sublessee described in Section 14.3 below; (b) if an assignment, the assignee assumes, in full, the obligations of Tenant under this Lease (or if a sublease, the sublessee of a portion of the Premises or Term assumes, in full, the obligations of Tenant with respect to such portion); (c) the financial net worth of the assignee or sublessee equals or exceeds Ninety Million Dollars ($90,000,000.00), as increased on an annual basis by the annual increase in the consumer price index - All Items; (d) Tenant remains fully liable under this Lease except in the case of a merger in which Tenant is not the surviving entity in which event the net worth of the surviving entity shall not be less than Ninety Million Dollars ($90,000,000.00), as increased on an annual basis by the annual increase in the consumer price index - All Items; (e) the use of the Premises under Article 6 remains unchanged; or (f) any license of the use of a portion of the Premises by third party customers, service providers and other parties conducting business with Tenant under a written contract with Tenant (other than a lease, sublease or license for use of space within the Premises), where the portion of the Premises licensed for use by such third parties does not exceed a total of thirty percent (30%) of the rentable square footage of the Premises and Tenant does not derive any rental profit from such licensee occupancies. 14.3 LANDLORD'S OPTIONS. If at any time or from time to time during the Term Tenant desires to effect a Transfer other than a Permitted Transfer, Tenant shall deliver to Landlord written notice ("TRANSFER NOTICE") setting forth the terms and provisions of the proposed Transfer and the identity of the proposed assignee, sublessee or other transferee (sometimes referred to hereinafter as a "TRANSFEREE"). Tenant shall also deliver to Landlord with the Transfer Notice, a current financial statement and financial statements for the preceding two (2) years of the Transferee which have been certified or audited by a reputable independent accounting firm acceptable to Landlord, and such other information concerning the business background and financial condition of the proposed Transferee as Landlord may reasonably request. Except with respect to a Permitted Transfer, Landlord shall have the option, exercisable by written notice delivered to Tenant within twenty (20) days after Landlord's receipt of the Transfer Notice, such financial statements and other information, either to: (a) approve or disapprove such Transfer, which approval shall not be unreasonably withheld or delayed, provided that if Landlord has not declined its consent in writing or stated its election pursuant to (b) below within twenty (20) days from receipt of Tenant's request for consent accompanied by all supporting data required by this Lease stating with specificity the reason therefore, Tenant shall deliver to Landlord a second request for consent, if Landlord has not delivered its consent in writing or stated its election pursuant to (b) below within ten (10) days from receipt of Tenant's second request, then Landlord's consent will be deemed granted; or (b) sublet from Tenant that portion of the Premises which Tenant has requested to sublease at the rental and on the other terms set forth in this Lease prorated for the portion of the Premises to be sublet and for the term set forth in Tenant's Notice, or, in the case of an assignment or encumbrance, terminate this Lease with respect to the entire Premises and recapture the Premises, which termination shall be effective ninety (90) days after Tenant's receipt of Landlord's notice, unless Tenant elects not to proceed with such sublease by written notice to Landlord within thirty (30) days of Landlord's notice to Tenant of its election. If Landlord exercises its option to sublease any such space from Tenant following Tenant's request for Landlord's approval of the proposed sublease of such space, (i) Landlord shall be responsible for the construction of any partitions which Landlord reasonably deems necessary to separate such space from the remainder of the Premises, (ii) Landlord shall pay to Tenant the documented unamortized costs of the Tenant Improvements installed in the Premises at Tenant's cost and any documented unamortized brokerage fees paid by Tenant in connection with its leasing of the Premises, and (iii) Landlord and any sub-subtenant or assignee of Landlord with respect to such subleased space shall have the right to use in common with Tenant all lavatories, corridors and lobbies which are within the Premises and which are reasonably required for the use of such space on the same basis and to the same extent (if any) as any sublessee proposed by Tenant. 14.4 ADDITIONAL CONDITIONS; EXCESS RENT. If for a Transfer other than a Permitted Transfer Landlord does not exercise its sublease or termination option and instead approves of the proposed Transfer pursuant to Section 14.3(a) above, Tenant may enter into the proposed Transfer with such proposed Transferee subject to the following further conditions: (a) the Transfer shall be on substantially the same terms set forth in the Transfer Notice delivered to Landlord (if the terms have materially changed, Tenant must submit a revised Transfer Notice to -16- 22 Landlord and Landlord shall have another thirty (30) days after receipt thereof to make the election in Sections 14.3(a) or 14.3(b) above); (b) no Transfer shall be valid and no Transferee shall take possession of the Premises until an executed counterpart of the assignment, sublease or other instrument affecting the Transfer has been delivered to Landlord pursuant to which the Transferee shall expressly assume all of Tenant's obligations under this Lease (or with respect to a sublease of a portion of the Premises or for a portion of the Term, all of Tenant's obligations applicable to such portion); (c) no Transferee shall have a further right to assign, encumber or sublet, except on the terms herein contained; and (d) fifty percent (50%) of any rent or other economic consideration received by Tenant as a result of such Transfer which exceeds, in the aggregate, (i) the total rent which Tenant is obligated to pay Landlord under this Lease (prorated to reflect obligations allocable to any portion of the Premises subleased), plus (ii) any reasonable brokerage commissions, attorneys' fees and reasonable tenant improvement costs actually paid by Tenant in connection with such Transfer, shall be paid to Landlord within ten (10) days after receipt thereof as additional rental under this Lease, without affecting or reducing any other obligations of Tenant hereunder. 14.5 REASONABLE DISAPPROVAL. Landlord and Tenant hereby acknowledge that Landlord's disapproval of any proposed Transfer (other than a Permitted Transfer) pursuant to Section 14.3(a) shall be deemed reasonably withheld if based upon any reasonable factor, including, without limitation, any or all of the following factors: (a) the proposed Transfer would result in more than two subleases of portions of the Premises being in effect at any one time during the Term; (b) the proposed Transferee is an existing tenant of the Project or is negotiating with Landlord (or has submitted to Landlord or received from Landlord a written proposal to lease in the last six (6) months) for space in the Project; (c) the proposed Transferee is a governmental entity; (d) the portion of the Premises to be sublet or assigned is irregular in shape with inadequate means of ingress and egress; (e) the use of the Premises by the Transferee is not permitted by the use provisions in Section 6 hereof; (f) the Transfer would likely result in significant increase in the use of the parking areas or Common Areas by the Transferee's employees or visitors, and/or significantly increase the demand upon services to be provided by Landlord to the Premises; (g) the Transferee is not in Landlord's reasonable opinion of reputable or good character; or (h) the Transferee does not have the financial capability to fulfill the obligations imposed by this Lease. Notwithstanding any contrary provision of this Lease, if Tenant or any proposed Transferee claims that Landlord has unreasonably withheld or delayed its consent to a proposed Transfer or otherwise has breached its obligations under this Section 14, Tenant's and such Transferee's only remedy shall be to seek a declaratory judgment and/or injunctive relief, and Tenant, on behalf of itself and, to the extent permitted by law, such proposed Transferee waives all other remedies against Landlord, including, without limitation, the right to seek monetary damages or to terminate this Lease except to the extent of any claim that such consent is withheld maliciously or in bad faith. 14.6 NO RELEASE. No Transfer shall release Tenant of Tenant's obligations under this Lease or alter the primary liability of Tenant to pay the rent and to perform all other obligations to be performed by Tenant hereunder. Landlord may require that any Transferee remit directly to Landlord on a monthly basis, all monies due Tenant by said Transferee, and each sublease shall provide that if Landlord gives said sublessee written notice that Tenant is in default under this Lease, said sublessee will thereafter make all payments due under the sublease directly to or as directed by Landlord, which payments will be credited against any payments due under this Lease. Tenant hereby irrevocably and unconditionally assigns to Landlord all rents and other sums payable under any sublease of the Premises; provided, however, that Landlord hereby grants Tenant a license to collect all such rents and other sums so long as Tenant is not in default under this Lease beyond the period of notice and opportunity to cure provided herein. Tenant shall, within ten (10) days after the execution and delivery of any assignment or sublease, deliver a duplicate original copy there of to Landlord. However, the acceptance of rent by Landlord from any other person shall not be deemed to be a waiver by Landlord of any provision hereof. Consent by Landlord to one Transfer shall not be deemed consent to any subsequent Transfer. In the event of default by any Transferee of Tenant or any successor of Tenant in the performance of any of the terms hereof, Landlord may proceed directly against Tenant without the necessity of exhausting remedies against such Transferee or successor. Landlord may consent to subsequent assignments of the Lease or sublettings or amendments or modifications to the Lease with assignees of Tenant, without notifying Tenant, or any 'successor of Tenant, and without obtaining its or their consent thereto and any such actions shall not relieve Tenant or any sublessee or assignee of liability under this Lease. 14.7 ADMINISTRATIVE AND ATTORNEYS' FEES. If Tenant effects a Transfer or requests the consent of Landlord to any Transfer, then Tenant shall, within thirty (30) days after receipt of a bill accompanied by a copy of any legal bill related thereto, pay Landlord any reasonable attorneys' fees and costs not to exceed a total of One Thousand Dollars ($1,000.00) incurred by Landlord in connection with such Transfer or request for consent. Acceptance of and/or reimbursement of Landlord's attorneys' fees shall in no event obligate Landlord to consent to any proposed Transfer. 14.8 MATERIAL INDUCEMENT. Tenant understands, acknowledges and agrees that (a) Landlord's option to sublease from Tenant any space which Tenant proposes to sublease or terminate this Lease upon any proposed assignment or encumbrance of this Lease by Tenant, other than a Permitted Transfer as provided in Section 14.3(b) above, rather than approve the proposed sublease, assignment or -17- 23 encumbrance, and (b) Landlord's right to receive fifty percent (50%) of any excess consideration paid by a Transferee in connection with an approved Transfer as provided in Section 14.4(d) above, are a material inducement for Landlord's agreement to lease the Premises to Tenant upon the terms and conditions herein set forth. 14.9 JUDICIAL REFERENCE. In the event of any dispute between the parties pertaining to any matters under this Article 14, the parties agree to submit such dispute to judicial reference pursuant to Section 24. 15. ENTRY BY LANDLORD. Landlord and its employees and agents shall at all reasonable times have the right to enter the Premises to inspect the same, to supply janitorial service and any other service required to be provided by Landlord to Tenant under this Lease, to exhibit the Premises to prospective lenders or purchasers (or during the last year of the Term, to prospective tenants), to post notices of non-responsibility, and/or to alter, improve or repair the Premises or any other portion of the Building or Project. The foregoing entries by Landlord will not entitle Tenant to an abatement of rent or constitute breach of Landlord's covenant of quiet enjoyment, except to the extent that improvements or repairs to the Premises or the Project are performed by Landlord in a negligent manner (other than those resulting from the acts or neglect of Tenant) and result in a material interference with the conduct of Tenant's business. In exercising such entry rights, Landlord shall endeavor to minimize, as reasonably practicable, the interference with Tenant's business, and shall provide Tenant with reasonable advance written notice of such entry (except in emergency situations and for scheduled services). Any dispute between the parties concerning Landlord's conduct under this Section 15 will be resolved pursuant to Section 24 of this Lease. For each of the foregoing purposes, Landlord shall at all times have and retain a key with which to unlock all of the doors in, upon and about the Premises, excluding Tenant's vaults and safes, and Landlord shall have the means which Landlord may deem proper to open said doors in an emergency in order to obtain entry to the Premises. Except with respect to scheduled janitorial services, Landlord will not be entitled to access to the Premises without the accompaniment of an officer of Tenant or person designated by an officer of Tenant. 16. UTILITIES AND SERVICES. 16.1 STANDARD UTILITIES AND SERVICES. Landlord shall furnish or cause to be furnished to the Premises the following minimum utilities and services (Landlord reserves the right to adopt nondiscriminatory reasonable modifications and additions to the following provisions from time to time): (a) Landlord shall make the elevator of the Building available for Tenant's non-exclusive use, twenty four (24) hours per day. (b) Landlord shall furnish during the Business Hours for the Building specified in Section 1.17 of the Summary, heating, ventilation and air conditioning ("HVAC") for the Premises as required for the comfortable and normal occupancy of the Premises. The cost of maintenance and service calls to adjust and regulate the HVAC system shall be charged to Tenant if the need for maintenance work results from either Tenant's adjustment of room thermostats or Tenant's failure to comply with its obligations under this Section 16, including keeping window coverings closed as needed. Such work shall be charged at hourly rates equal to then-current journeyman's wages for HVAC mechanics. HVAC will be separately metered to the Premises. (c) Landlord shall furnish to the Premises twenty-four (24) hours per day, reasonable quantities of electric current as required by the Final Plans which will be submetered to the Premises. Landlord shall also furnish water to the Premises twenty-four (24) hours per day for drinking and lavatory purposes, in such quantities as required in Landlord's judgment for the comfortable and normal use of the Premises. If Tenant requires or consumes water in excess of what is considered reasonable or normal by Landlord, Landlord may require Tenant to pay to Landlord, as additional rent, the cost as fairly determined by Landlord incurred for such excess usage. (d) Landlord shall furnish janitorial services to the Premises five (5) days per week pursuant to janitorial and cleaning specifications attached as Exhibit "G" to this Lease. No person(s) other than those persons approved by Landlord shall be permitted to enter the Premises for such purposes. Janitor service will not be furnished to rooms occupied after 7:30 p.m. or to rooms which are locked unless a key is furnished to the Landlord for use by the janitorial contractor. Window cleaning shall be done only by Landlord, at such time and frequency as determined by Landlord at Landlord's sole discretion but not less often than twice per annum. Tenant shall pay to Landlord the cost of removal of any of Tenant's refuse and rubbish to the extent that the same exceeds the refuse and rubbish usually attendant upon the use of the Premises as offices. If janitorial services provided to the Premises by Landlord pursuant to and as part of Operating Expenses are inadequate in Tenant's reasonable opinion, Tenant will notify Landlord in writing. Landlord will utilize reasonable efforts and due diligence to satisfy or cause to be satisfied Tenant's reasonable objections to such service. Tenant may require a change in janitorial service to the Premises if such service remains unsatisfactory after providing to Landlord written notice of the details with respect to which such service is unsatisfactory and the expiration of a thirty (30) day period in which to correct such deficiencies, provided that if Landlord and Tenant cannot agree upon a replacement janitorial service within a reasonable time, Tenant shall contract for its own janitorial service to the Premises only (subject to Landlord's right to reasonably approve the -18- 24 scope of janitorial services to the Premises if the scope of such services is other than as set forth on Exhibit "G"), and Tenant shall pay all costs of such service directly, without any limitation on such charges. (e) Landlord may provide security service or protection in the Building, in any manner deemed reasonable by Landlord at Landlord's sole discretion, from the Commencement Date throughout the Term. (f) Landlord will install electricity and HVAC meters in the Premises to measure Tenant's consumption of such utilities, including any after-hours and extraordinary usage described above at Tenant's sole cost and expense or as a charge against the Allowance pursuant to Final Plans. The costs of Building services shall be included in Operating Expenses and all charges with respect to utilities shall be included in Utilities Costs as defined in Section 4.7 above. Landlord may, but is not obligated to, provide additional services requested by Tenant; provided, however, that if Landlord does provide such extra services as requested by Tenant, Tenant agrees to pay a five percent (5%) administration fee for the provisions of such services. Tenant will pay the cost of utilities separately metered to the Premises in lieu of any charge therefore as Utility Costs, except to the extent such utilities are provided to the Common Areas. Landlord shall have the right at any time and from time-to-time during the Lease Term to contract for service from any company or companies providing electricity service other than Alameda Power ("SERVICE PROVIDER"). Tenant shall cooperate with Landlord and the Service Provider at all times and, as reasonably necessary, shall allow Landlord and Service Provider reasonable access to the Building's electric lines, feeders, risers, wiring, and any other machinery within the Premises. Landlord shall in no way be liable or responsible for any loss, damage, or expense that Tenant may sustain or incur by reason of any change, failure, interference, disruption, or defect in the supply or character of the electric energy furnished to the Premises, or if the quantity or character of the electric energy supplied by the Service Provider is no longer available or suitable for Tenant's requirements, no such change, failure, defect, unavailability, or unsuitability shall constitute an actual or constructive eviction, in whole or in part, or entitle Tenant to any abatement or diminution of rent, or relieve Tenant from any of its obligations under the Lease. 16.2 TENANT'S OBLIGATIONS. Tenant shall cooperate fully at all times with Landlord, and abide by all reasonable non-discriminating regulations and requirements which Landlord may prescribe for the proper functioning and protection of the Building's services and systems. Tenant shall not use any apparatus or device in, upon or about the Premises pursuant to the Final Plans which may in any way increase the amount of services or utilities usually furnished or supplied to the Premises or other premises in the Building. In addition, Tenant shall not connect any conduit, pipe, apparatus of other device to the Building's water, waste or other supply lines or systems for any purpose. Neither Tenant nor its employees, agents, contractors, licensees or invitees shall at any time enter, adjust, tamper with, touch or otherwise in any manner affect the mechanical installations or facilities of the Building. 16.3 FAILURE TO PROVIDE UTILITIES. Landlord's failure to furnish any of the utilities and services described in Section 16.1 above when such failure is caused by all or any of the following shall not result in any liability of Landlord: (a) accident, breakage or repairs; (b) strikes, lockouts or other labor disturbances or labor disputes of any such character; (c) governmental regulation, moratorium or other governmental action; (d) inability, despite the exercise of reasonable diligence, to obtain electricity, water or fuel; or (e) any other cause beyond Landlord's reasonable control. In addition, in the event of the failure of any said utilities or services, no eviction of Tenant shall result, Tenant shall not be relieved from the performance of any covenant or agreement in this Lease and Tenant shall not be entitled to any abatement or reduction of rent unless such failure or interruption results from an elective change in Service Providers initiated by Landlord or the negligence of Landlord, its agents, employees or contractors, where such interruption in services continues for more than twenty four (24) hours (except as expressly provided in Sections 18.3 and 19.2 if such failure is a result of a damage or taking described therein and except that if Tenant shall be unable under applicable laws to maintain and operate its back up Generator system as provided in Section 36 below, the time frame for which interruption of utility service shall result in rent abatement as provided herein shall be reduced to eight [8] hours), in which event Tenant will be entitled to as its sole remedy an abatement of rent to the extent of and for the duration of the interruption in utilities and services from the commencement of interruption until utilities or services are restored. In the event of any stoppage or interruption of services or utilities, Landlord shall diligently attempt to resume such services or utilities as promptly as practicable. Tenant hereby waives the provisions of California Civil Code Section 1932(1) or any other applicable existing or future law, ordinance or governmental regulation permitting the termination of this Lease due to an interruption, failure or inability to provide any services. 17. INDEMNIFICATION AND EXCULPATION. 17.1 TENANT'S ASSUMPTION OF RISK AND WAIVER. Subject to the terms of Section 22 and except to the extent such matter is not covered by the insurance required to be maintained by Tenant under this Lease and such matter is attributable to the negligence or willful misconduct of Landlord, Landlord shall not be liable to Tenant, Tenant's employees, agents or invitees for: (i) any damage to property of Tenant, or of others, located in, on or about the Premises, nor for (ii) the loss of or damage to any property of Tenant or of others by theft or otherwise, (iii) any injury or damage to persons or property resulting from fire, -19- 25 explosion, falling plaster, steam, gas, electricity, water, rain or leaks from any part of the Premises or from the pipes, appliance of plumbing works or from the roof, street or subsurface or from any other places or by dampness or by any other cause of whatsoever nature, or (iv) any such damage caused by other tenants or persons in the Premises, occupants of adjacent property of the Project, or the public, or caused by operations in construction of any private, public or quasi-public work. Landlord shall in no event be liable to Tenant for any consequential damages or for loss of revenue or income and Tenant waives any and all claims for any such damages. Notwithstanding anything to the contrary contained in this Section 17.1, all property of Tenant, its agents, employees and invitees kept or stored on the Premises, whether leased or owned by any such parties, shall be so kept or stored at the sole risk of Tenant and Tenant shall hold Landlord harmless from any claims arising out of damage to the same, including subrogation claims by Tenant's insurance carriers, unless such damage shall be caused by the negligence or willful misconduct of Landlord. Landlord or its agents shall not be liable for interference with the light or other intangible rights. 17.2 TENANT'S INDEMNIFICATION OF LANDLORD. Tenant shall be liable for, and shall indemnify, defend, protect and hold Landlord and Landlord's members, partners, officers, directors, shareholders, employees, agents, successors and assigns (collectively, "LANDLORD INDEMNIFIED PARTIES") harmless from and against, any and all claims, damages, judgments, suits, causes of action, losses, liabilities and expenses, including attorneys' fees and court costs (collectively, "INDEMNIFIED CLAIMS"), arising or resulting from (a) any occurrence at the Premises following the date Landlord delivers all or any portion of the Premises to Tenant, unless caused by the negligence or willful misconduct of Landlord or its agents, employees or contractors, (b) any act or omission of Tenant or any of Tenant's agents, employees, contractors, subtenants, assignees, licensees or with respect to acts or omissions within the Premises only, Tenant's invitees (collectively, "TENANT PARTIES"); (c) the use of the Premises and Common Areas and conduct of Tenant's business by Tenant or any Tenant Parties, or any other activity, work or thing done, permitted or suffered by Tenant or any Tenant Parties, in or about the Premises, the Building or elsewhere in the Project; and/or (d) any default by Tenant of any obligations on Tenant's part to be performed under the terms of this Lease or the terms of any contract or agreement to which Tenant is a party or by which it is bound, affecting this Lease or the Premises. Tenant shall in no event be liable to Landlord for any consequential damages or for loss of revenue or income and Landlord waives any and all claims for any such damages. The foregoing indemnification shall include, but not be limited to, any injury to, or death of, any person, or any loss of, or damage to, any property on the Premises, or on adjoining sidewalks, streets or ways, or connected with the use, condition or occupancy thereof, whether or not Landlord or its mortgagee has or should have knowledge or notice of the defect or conditions causing or contributing to such injury, death, loss or damage. In case any action or proceeding is brought against Landlord or any Landlord Indemnified Parties by reason of any such Indemnified Claims, Tenant, upon notice from Landlord, shall defend the same at Tenant's expense by counsel reasonably acceptable to Landlord. 17.3 LANDLORD'S INDEMNIFICATION OF TENANT. Notwithstanding anything to the contrary contained in Section 17.1 or 17.2, Tenant shall not be required to protect, defend, save harmless or indemnify Landlord from any liability for injury, loss, accident or damage to any person resulting from (i) Landlord's negligent acts or omissions or willful misconduct or that of its agents, contractors, servants, employees or licensees, in connection with Landlord's activities on or about the Premises or elsewhere in the Project or (ii) any occurrence within the Project, but outside of the Premises, unless caused by the negligence or willful misconduct of Tenant or any Tenant Parties, and subject to the terms of Section 22, Landlord hereby indemnifies and agrees to protect, defend and hold Tenant harmless from and against Indemnified Claims arising out of Landlord's negligent acts or omissions or willful misconduct or those of its agents, contractors, servants, employees or licensees or any other occurrence anywhere within the Project outside of the Premises unless caused by the negligence or willful misconduct of Tenant or any Tenant Parties, provided Landlord shall in no event be liable to Tenant for any consequential damages or for loss of revenue or income and Tenant waives any and all claims for any such damages. Landlord's and Tenant's indemnification obligations hereunder may or may not be coverable by insurance, but the failure of either Landlord or Tenant to carry insurance covering the indemnification obligation shall not limit their indemnity obligations hereunder. 17.4 SURVIVAL; NO RELEASE OF INSURERS. The indemnification obligations under Section 17.2 and 17.3 shall survive the expiration or earlier termination of this Lease. Landlord's and Tenant's covenants, agreements and indemnification in Sections 17.1, 17.2 and 17.3 above are not intended to and shall not relieve any insurance carrier of its obligations under policies required to be carried by Landlord and Tenant pursuant to the provisions of this Lease. 18. DAMAGE OR DESTRUCTION. 18.1 LANDLORD'S RIGHTS AND OBLIGATIONS. In the event the Premises or any part of the Building is damaged by fire or other casualty to an extent not exceeding fifty percent (50%) of the full replacement cost thereof, and Landlord's contractor estimates in a writing delivered to the parties that the damage thereto is such that the Building and/or Premises may be repaired, reconstructed or restored to substantially its condition immediately prior to such damage within two hundred seventy (270) days, then Landlord shall commence and proceed diligently with the work of repair, reconstruction and restoration and this Lease shall continue in full force and effect. If, however, the Premises or any other part of the Building is damaged to an extent exceeding fifty percent (50%) of the full replacement cost thereof, or Landlord's architect reasonably determines that such work of repair, reconstruction and restoration will require longer than two hundred seventy (270) days to complete, then Landlord may elect to either: -20- 26 (a) repair, reconstruct and restore the portion of the Building and Premises damaged by such casualty (including the Tenant Improvements and, to the extent of insurance proceeds received from Tenant, Tenant Changes), in which case this Lease shall continue in full force and effect; or (b) terminate this Lease effective as of the date which is thirty (30) days after Tenant's receipt of Landlord's election to so terminate. Under any of the conditions of this Section 18.1, Landlord shall give written notice to Tenant of its intention to repair or terminate within thirty (30) days after the casualty. If the Premises are destroyed and Landlord's contractor determines that the Premises cannot be restored within 270 days from the date of the casualty, Tenant will have the right to cancel this Lease by written notice to Landlord within sixty (60) days after the occurrence of the casualty. If Landlord's contractor determines that the Premises can be restored within 270 days and Landlord elects to rebuild the Premises or the Building and such reconstruction is not completed within two hundred seventy (270) days from the date of the casualty (subject to extension for Force Majeure Delays not to exceed 30 days and Tenant Delays) Tenant may terminate this Lease on thirty (30) days written notice to Landlord. 18.2 TENANT'S COSTS AND INSURANCE PROCEEDS. In the event of any damage or destruction of all or any part of the Premises, Tenant shall immediately: (a) notify Landlord thereof; and (b) make available to Landlord by depositing into an escrow account for disbursement to Landlord during the course of reconstruction, all insurance proceeds received by Tenant with respect to the Tenant Improvements (including any Tenant Improvements installed at Tenant's expense as described in the Work Letter) and Tenant Changes in the Premises (excluding proceeds for Tenant's furniture and other personal property). If, for any reason (including Tenant's failure to obtain insurance for the full replacement cost of any Tenant Improvements paid for by Tenant or Tenant Changes which Tenant is required to insure pursuant to Sections 12.1(c) and/or 20.1(a) hereof), Tenant fails to receive insurance proceeds covering the full replacement cost of such Tenant Improvements paid for by Tenant or Tenant Changes which are damaged, Tenant shall be deemed to have self-insured the replacement cost of such Tenant Improvements paid for by Tenant or Tenant Changes, and upon any damage or destruction thereto, Tenant shall make available to Landlord the full replacement cost of such items, less any insurance proceeds actually received by Landlord from Landlord's or Tenant's insurance with respect to such items. If the Lease is terminated pursuant hereto, Tenant will be entitled to retain from Tenant's insurance proceeds all sums in excess of the remaining unamortized balance of the Allowance amortized over the Term of the Lease and the replacement cost of the Tenant Improvements paid for by Tenant and any Tenant Changes amortized over the Lease Term. All such insurance proceeds paid to Landlord shall be utilized to restore the Premises, the Tenant Improvements, and the Tenant Changes. Any remaining sum will be paid to Tenant. 18.3 ABATEMENT OF RENT. In the event that as a result of any such damage, repair, reconstruction and/or restoration of the Premises, the Building or any of the parking to be provided to Tenant hereunder, Tenant is prevented from using, and does not use, the Premises or any portion thereof or any of its allocable share of parking within the Project (and Landlord is unable to provide reasonably proximate replacement parking to satisfy Tenant's parking requirements under this Lease) pursuant to the requirements of Landlord or the City and/or County in which the Premises are located, then the rent shall be abated or reduced, as the case may be, during the period that Tenant continues to be so prevented from using and does not use the Premises or portion thereof or such parking, in the proportion that the Rentable Square Feet of the portion of the Premises that Tenant is prevented from using, and does not use, bears to the total Rentable Square Feet of the Premises, as respects any damage to the Building or the Premises and in the proportion that the number of Tenant's allocable share of parking spaces which Tenant is prevented from using, and does not use, bears to the total number of Tenant's allocable share of parking spaces. Except for abatement of rent as provided hereinabove, Tenant shall not be entitled to any compensation or damages for loss of, or interference with, Tenant's business or use or access of all or any part of the Premises resulting from any such damage, repair, reconstruction or restoration. 18.4 DAMAGE NEAR END OF TERM. In addition to its termination rights in Sections 18.1 and 18.4 above, Landlord shall have the right to terminate this Lease if any damage to the Building or Premises occurs during the last twelve (12) months of the Term of this Lease and Landlord's contractor estimates in a writing delivered to the parties that the repair, reconstruction or restoration of such damage cannot be completed within the earlier of (a) the scheduled expiration date of the Lease Term, or (b) sixty (60) days after the date of such casualty, unless Tenant exercises its option to extend the Term of this Lease pursuant to Rider No. 1 to this Lease. 18.5 WAIVER OF TERMINATION RIGHT. This Lease sets forth the terms and conditions upon which this Lease may terminate in the event of any damage or destruction. Accordingly, the parties hereby waive the provisions of California Civil Code Section 1932, Subsection 2, and Section 1933, Subsection 4 (and any successor statutes thereof permitting the parties to terminate this Lease as a result of any damage or destruction). 19. EMINENT DOMAIN. 19.1 SUBSTANTIAL TAKING. Subject to the provisions of Section 19.4 below in case the whole of the Premises, or such part thereof as shall substantially interfere with Tenant's use and occupancy of the Premises as reasonably determined by Tenant, shall be taken for any public or quasi-public purpose by -21- 27 any lawful power or authority by exercise of the right of appropriation, condemnation or eminent domain, or sold to prevent such taking, Landlord, subject to space availability, shall have the right at Landlord's sole cost and expense to relocate Tenant to comparable space within the Project acceptable to Tenant in its sole discretion, and if no such space is then available, Landlord shall notify Tenant and either party shall have the right to terminate this Lease effective as of the date possession is required to be surrendered to said authority. 19.2 PARTIAL TAKING; ABATEMENT OF RENT. In the event of a taking of a portion of the Premises which does not substantially interfere with the conduct of Tenant's business, then, except as otherwise provided in the immediately following sentence, neither party shall have the right to terminate this Lease and Landlord shall thereafter proceed to make a functional unit of the remaining portion of the Premises, and rent shall be abated with respect to the part of the Premises which Tenant shall be so deprived on account of such taking. Notwithstanding the immediately preceding sentence to the contrary, if any part of the Building or the Site shall be taken (whether or not such taking substantially interferes with Tenant's use of the Premises), Landlord may terminate this Lease upon thirty (30) days' prior written notice to Tenant as long as Landlord also terminates leases of all other tenants in the Building. 19.3 CONDEMNATION AWARD. Subject to the provisions of Section 19.4 below, in connection with any taking of the Premises or Building, Landlord shall be entitled to receive the entire amount of any award which may be made or given in such taking or condemnation without deduction or apportionment for any estate or interest of Tenant, provided Landlord and Tenant shall share equally any such award for any so-called bonus or excess value of this Lease, in which event Tenant shall assert a claim against the taking authority for such bonus or excess value of this Lease. In addition, if any portion of the Premises is taken, Tenant shall have the right to recover from the condemning authority (but not from Landlord) any compensation as may be separately awarded or recoverable by Tenant for the taking of Tenant's furniture, fixtures, equipment and other personal property within the Premises, for the unamortized value of any alterations and Tenant Changes paid for by Tenant (but not for any of the initial Tenant Improvements paid for by Tenant, the award for which Landlord shall be entitled to retain), for Tenant's relocation expenses, and for any loss of goodwill or other damage to Tenant's business by reason of such taking. 19.4 TEMPORARY TAKING. In the event of a taking of the Premises or any part thereof for temporary use, (a) this Lease shall be and remain unaffected thereby and, at Landlord's election, (a) rent shall not abate, or (b) Tenant shall receive for itself such portion or portions of any award made for such use with respect to the period of the taking which is within the Term, provided that if such taking shall remain in force at the expiration or earlier termination of this Lease, Tenant shall perform its obligations under Section 9 with respect to surrender of the Premises and shall pay to Landlord the portion of any award which is attributable to any period of time beyond the Term expiration date. For purpose of this Section 19.4, a temporary taking shall be defined as a taking for a period of two hundred seventy (270) days or less. 19.5 WAIVER OF TERMINATION RIGHT. This Lease sets forth the terms and conditions upon which this Lease may terminate in the event of a taking. Accordingly, the parties waive the provisions of the California Code of Civil Procedure Section 1265.130 and any successor or similar statutes permitting the parties to terminate this Lease as a result of a taking. 20. TENANT'S INSURANCE. 20.1 TYPES OF INSURANCE, On or before the earlier of the Commencement Date or the date Tenant commences or causes to be commenced any work of any type in or on the Premises pursuant to this Lease, and continuing during the entire Term, Tenant shall obtain and keep in full force and effect, the following insurance: (a) Special Form (formerly known as All Risk) insurance, including fire and extended coverage, sprinkler leakage (including earthquake sprinkler leakage), vandalism, malicious mischief plus earthquake and flood coverage upon property of every description and kind owned by Tenant and located in the Premises or Building, or for which Tenant is legally liable or installed by or on behalf of Tenant including, without limitation, furniture, equipment and any other personal property, and any Tenant Changes (but excluding the initial Tenant Improvements previously existing or installed in the Premises), in an amount not less than the full replacement cost thereof. (b) Commercial general liability insurance coverage on an occurrence basis, including personal injury, bodily injury (including wrongful death), broad form property damage, operations hazard, owner's protective coverage, contractual liability, host liquor liability (if Tenant serves alcohol on the Premises), products and completed operations liability, with an initial combined single limit of liability of not less than Three Million Dollars ($3,000,000.00). The limits of liability of such commercial general liability insurance shall be adjusted every five (5) years during the Term of this Lease to an amount reasonably required by Landlord, but not to exceed limits of liability required for comparable office building projects in Alameda County, California. The limits required for Tenant's commercial general liability insurance may be met under an umbrella policy. (c) Worker's compensation and employer's liability insurance, in statutory amounts and limits, covering all persons employed in connection with any work done on or about the Premises for -22- 28 which claims for death or bodily injury could be asserted against Landlord, Tenant or the Premises. (d) Commercial automobile liability insurance. (e) Any other form or forms of insurance as Tenant or Landlord or the mortgagees of Landlord may reasonably require from time to time, in form, amounts and for insurance risks against which a prudent tenant of comparable office parks in the City of Alameda, California would protect itself, but only to the extent such risks and amounts are available in the insurance market at commercially reasonable costs. 20.2 REQUIREMENTS. Each policy required to be obtained by Tenant hereunder shall: (a) be issued by insurers which are authorized to do business in the state in California and rated not less than financial class VIII, and not less than policyholder rating A in the most recent version of Best's Key Rating Guide (provided that, in any event, the same insurance company shall provide the coverages described in Sections 20.1 (a) and 20.1 (d) above); (b) name Tenant as named insured thereunder and shall name by endorsement Landlord and, at Landlord's request, Landlord's mortgagee, property manager, joint venture partner(s) and/or investor(s) as additional insureds thereunder as to Tenant's commercial general liability insurance only, all as their respective interests may appear; (c) not have a deductible amount exceeding Twenty-Five Thousand Dollars ($25,000.00), which deductible amount shall be deemed self-insured with full waiver of subrogation; (d) specifically provide that the insurance afforded by such policy for the benefit of Landlord and any other additional insureds shall be primary, and any insurance carried by Landlord or any other additional insureds shall be excess and non-contributing; (e) contain an endorsement that the insurer waives its right to subrogation as described in Section 22 below; (f) require the insurer to notify Landlord (and any other additional insureds) in writing not less than thirty (30) days prior to any material change, reduction in coverage, cancellation or other termination thereof; (g) contain a cross liability or severability of interest endorsement; and (h) be in amounts sufficient at all times to satisfy any coinsurance requirements thereof. Each property insurance policy shall also provide that any loss otherwise payable thereunder shall be payable notwithstanding (i) any act or omission of Landlord or Tenant which might, absent such provision, result in a forfeiture of all or a part of such insurance payment, (ii) any foreclosure or other action or proceeding taken by any mortgagee pursuant to any provision of the mortgage upon the happening of a default thereunder, or (iii) any change in title or ownership of the Premises provided notice of any such change in title or ownership of the Premises has been provided to Tenant. Tenant agrees to deliver to Landlord, as soon as practicable after the placing of the required insurance, but in no event later than the date Tenant is required to obtain such insurance as set forth in Section 20.1 above, certificates from the insurance company evidencing the existence of such insurance and Tenant's compliance with the foregoing provisions of this Section 20. Tenant shall cause replacement policies or certificates to be delivered to Landlord not less than ten (10) days prior to the expiration of any such policy or policies. If any such initial or replacement policies or certificates are not furnished within the time(s) specified herein, Tenant shall be deemed to be in material default under this Lease, Landlord upon five (5) days notice to Tenant shall have the right, but not the obligation, to procure such policies and certificates at Tenant's expense. 20.3 EFFECT ON INSURANCE. Tenant shall not do or permit to be done anything which will (a) violate or invalidate any insurance policy maintained by Landlord or Tenant hereunder, or (b) increase the costs of any insurance policy maintained by Landlord pursuant to Section 21 or otherwise with respect to the Building or the Project. If Tenant's occupancy or conduct of its business in or on the Premises results in any increase in premiums for any insurance carried by Landlord with respect to the Building or the Project, Tenant shall pay such increase as additional rent within ten (10) days after being billed therefor by Landlord, provided such bill is preceded by a notice to Tenant that gives Tenant a reasonable opportunity to cease such activity and further provided that such bill must state with specificity the amount charged related to such specific activity. If any insurance coverage carried by Landlord pursuant to Section 21 or otherwise with respect to the Building or the Project shall be canceled or reduced (or cancellation or reduction thereof shall be threatened) by reason of the use or occupancy of the Premises by Tenant or by anyone permitted by Tenant to be upon the Premises, and if Tenant fails to remedy such condition within ten (10) days after receipt of notice thereof, Tenant shall be deemed to be in default under this Lease, without the benefit of any additional notice or cure period specified in Section 23.1 below, and Landlord shall have all remedies provided in this Lease, at law or in equity, including, without limitation, the right (but not the obligation) to enter upon the Premises and attempt to remedy such condition at Tenant's cost. 20.4 SELF-INSURANCE. At Tenant's option, provided Tenant maintains a minimum net worth of One Hundred Twenty Five Million Dollars ($125,000,000.00) or more, Tenant may elect to self-insure all or any part of such required insurance coverage. 21. LANDLORD'S INSURANCE. During the Term, Landlord shall insure the Project Common Areas, the Building, the Premises and the Tenant Improvements initially installed in the Premises pursuant to Exhibit "C" (excluding, however, Tenant's furniture, equipment and other personal property and any Tenant Changes) against damage by fire and standard extended coverage perils and with vandalism and malicious mischief endorsements, rental loss coverage for a period not to exceed twelve (12) months, at Landlord's option, earthquake damage coverage. In no event will Tenant be obligated to pay more than Twenty Five Thousand Dollars ($25,000.00) per annum on account of any earthquake and flood insurance. Tenant will not be obligated -23- 29 to pay more than Tenant's Percentage of the Building Percentage of any deductible on Landlord's property insurance policies described herein (Tenant's Percentage of the Building Percentage of Landlord's property insurance deductible amount for the Project as of the date hereof being $165,000.00), provided such maximum liability of Tenant shall reduce effective as of the commencement of the seventh (7th) Lease Year and as of the commencement of each Lease Year thereafter by Twenty Percent (20%), such that commencing as of the commencement of the tenth (10th) Lease Year of the Term, Tenant's maximum liability under this sentence shall be Twenty Percent (20%) of Tenant's Percentage of the Building Percentage of Landlord's then property insurance deductible amount; provided, further, however, that if Tenant exercises its Option to Extend contained in Rider No. 1 to this Lease, Tenant's maximum liability shall be reinstated to 100% of Tenant's Percentage of the Building Percentage of Landlord's property insurance deductible and shall thereafter be reduced effective as of the commencement of the second Lease Year of the Option Term and as of the commencement of each Lease Year thereafter by Twenty Percent (20%), such that commencing as of the commencement of the final Lease Year of the Option Term, Tenant's maximum liability under this sentence shall be Twenty Percent (20%) of Tenant's Percentage of the Building Percentage of Landlord's then property insurance deductible amount. Such insurance shall be in the amount of one hundred percent (100%) of the replacement value with deductibles not exceeding fifteen percent (15%) thereof. Landlord shall also carry commercial general liability insurance, in such reasonable amounts and with such reasonable deductibles as would be carried by a prudent owner of a similar building in the state of California, with deductibles not in excess of commercially reasonable deductibles for comparable office building projects in Alameda County. Each policy required to be obtained by Landlord hereunder shall be issued by insurers which are authorized to do business in the state in California and rated not less than financial class VIII, and not less than policyholder rating A in the most recent version of Best's Key Rating Guide. Landlord's commercial general liability policy shall name Landlord as named insured thereunder and shall name Tenant by endorsement as an additional insured. At Landlord's option, all such insurance may be carried under any blanket or umbrella policies which Landlord has in force for other buildings and projects. In addition, at Landlord's option, provided Landlord maintains a minimum net worth of One Hundred Twenty Five Million Dollars ($125,000,000.00) or more, Landlord may elect to self-insure all or any part of such required insurance coverage. Landlord may, but shall not be obligated to, carry any other form or forms of insurance as Landlord or the mortgagees or ground lessors of Landlord may reasonably determine is advisable. 22. WAIVER OF CLAIMS; WAIVER OF SUBROGATION. 22.1 MUTUAL WAIVER OF PARTIES. Landlord and Tenant hereby waive their rights against each other with respect to any claims or damages or losses which are caused by or result from (a) any peril insured against under any property insurance policy carried by Landlord or Tenant (as the case may be) pursuant to the provisions of this Lease and enforceable at the time of such damage or loss, or (b) any peril which would have been covered under any property insurance required to be obtained and maintained by Landlord or Tenant (as the case may be) under Sections 20 and 21 of this Lease (as applicable) had such property insurance been obtained and maintained as required therein. The foregoing waivers shall be in addition to, and not a limitation of, any other waivers or releases contained in this Lease. 22.2 WAIVER OF INSURERS. Each party shall cause each property insurance policy required to be obtained by it pursuant to Sections 20 and 21 to provide that the insurer waives all rights of recovery by way of subrogation against either Landlord or Tenant, as the case may be, in connection with any claims, losses and damages covered by such policy. If either party fails to maintain any such insurance required hereunder, such insurance shall be deemed to be self-insured with a deemed full waiver of subrogation as set forth in the immediately preceding sentence. 23. TENANT'S DEFAULT AND LANDLORD'S REMEDIES. 23.1 TENANT'S DEFAULT. The occurrence of any one or more of the following events shall constitute a default under this Lease by Tenant: (a) the abandonment of the Premises by Tenant as defined in California Civil code section 1951.3; (b) the failure by Tenant to make any payment of rent or additional rent or any other payment required to be made by Tenant hereunder, when such failure continues for three (3) days after written notice thereof from Landlord that such payment was not received when due; (c) the failure by Tenant to observe or perform any of the express or implied covenants or provisions of this Lease to be observed or performed by Tenant, other than as specified in Sections 23.1(a) or (b) above, where such failure shall continue for a period of thirty (30) days after written notice thereof from Landlord to Tenant; provided, however, that, if the nature of Tenant's default is such that more than thirty (30) days are reasonably required for its cure, then Tenant shall not be deemed to be in default if Tenant shall commence such cure within said thirty (30) day period and thereafter diligently prosecute such cure to completion; (d) If Tenant is otherwise in default beyond the period of notice and opportunity to cure provided in this Lease, (i) the making by Tenant of any general assignment for the benefit of creditors, (ii) the -24- 30 filing by or against Tenant of a petition to have Tenant adjudged a bankrupt or a petition for reorganization or arrangement under any law relating to bankruptcy (unless, in the case of a petition filed against the Tenant, the same is dismissed within sixty (60) days), (iii) the appointment of a trustee or receiver to take possession of substantially all of Tenant's assets located at the Premises or of Tenant's interest in this Lease or of substantially all of the guarantor's assets, where possession is not restored to Tenant within sixty (60) days, or (iv) the attachment, execution or other judicial seizure of substantially all of Tenant's assets located at the Premises or of Tenant's interest in this Lease where such seizure is not discharged within sixty (60) days. (e) any material representation or warranty made by Tenant in this Lease or any other document delivered in connection with the execution and delivery of this Lease or pursuant to this Lease proves to be incorrect in any material respect; and (f) Tenant shall be liquidated or dissolved or shall begin proceedings towards its liquidation or dissolution. Any notice sent by Landlord to Tenant pursuant to this Section 23 shall be in lieu of, and not in addition to, any notice required under California Code of Civil Procedure, Section 1161. 23.2 LANDLORD'S REMEDIES; TERMINATION. In the event of any such default by Tenant, in addition to any other remedies available to Landlord under this Lease, at law or in equity, Landlord shall have the immediate option to terminate this Lease and all rights of Tenant hereunder. In the event that Landlord shall elect to so terminate this Lease, then Landlord may recover from Tenant: (a) the worth at the time of award of any unpaid rent which had been earned at the time of such termination; plus (b) the worth at the time of the award of the amount by which the unpaid rent which would have been earned after termination until the time of award exceeds the amount of such rental loss that Tenant proves could have been reasonably avoided; plus (c) the worth at the time of award of the amount by which the unpaid rent for the balance of the term after the time of award exceeds the amount of such rental loss that Tenant proves could be reasonably avoided; plus (d) any other amount necessary to compensate Landlord for all the detriment proximately caused by Tenant's failure to perform its obligations under this Lease or which, in the ordinary course of things, would be likely to result therefrom including, but not limited to: unamortized Tenant Improvement costs; reasonable attorneys' fees; prorated brokers' commissions; the costs to return the Premises to the condition in which it was delivered by Landlord; and the reasonable costs of removal (including the repair of any damage caused by such removal) and storage (or disposal) of Tenant's personal property, equipment, fixtures, Tenant Changes, Tenant Improvements and any other items which Tenant is required under this Lease to remove but does not remove. As used in Sections 23.2(a) and 23.2(b) above, the "WORTH AT THE TIME OF AWARD" is computed by allowing interest at the Interest Rate set forth in Section 1.14 of the Summary. As used in Section 23.2(c) above, the "WORTH AT THE TIME OF AWARD" is computed by discounting such amount at the discount rate of the Federal Reserve Bank of San Francisco at the time of award plus one percent (1%). 23.3 LANDLORD'S REMEDIES; RE-ENTRY RIGHTS. In the event of any such default by Tenant, in addition to any other remedies available to Landlord under this Lease, at law or in equity, Landlord shall also have the right, with or without terminating this Lease, to re-enter the Premises pursuant to an order of court of competent jurisdiction and remove all persons and property from the Premises; such property may be removed, stored and/or disposed of pursuant to Section 12.4 of this Lease or any other procedures permitted by applicable law. No re-entry or taking possession of the Premises by Landlord pursuant to this Section 23.3, and no acceptance of surrender of the Premises or other action on Landlord's part, shall be construed as an election to terminate this Lease unless a written notice of such intention be given to Tenant or unless the termination thereof be decreed by a court of competent jurisdiction. 23.4 LANDLORD'S REMEDIES; CONTINUATION OF LEASE. In the event of any such default by Tenant, in addition to any other remedies available to Landlord under this Lease, at law or in equity, Landlord shall have the right to continue this Lease in full force and effect, whether or not Tenant shall have abandoned the Premises. The foregoing remedy shall also be available to Landlord pursuant to California Civil Code Section 1951.4 and any successor statute thereof in the event Tenant has abandoned the Premises. In the event Landlord elects to continue this Lease in full force and effect pursuant to this Section 23.4, then Landlord shall be entitled to enforce all of its rights and remedies under this Lease, including the right to recover rent as it becomes due. Landlord's election not to terminate this Lease pursuant to this Section 23.4 or pursuant to any other provision of this Lease, at law or in equity, shall not preclude Landlord from subsequently electing to terminate this Lease or pursuing any of its other remedies. 23.5 LANDLORD'S RIGHT TO PERFORM. Except as specifically provided otherwise in this Lease, all covenants and agreements by Tenant under this Lease shall be performed by Tenant at Tenant's sole -25- 31 cost and expense and without any abatement or offset of rent. If Tenant shall fail to pay any sum of money (other than Monthly Basic Rent) or perform any other act on its part to be paid or performed hereunder and such failure shall continue for ten (10) days with respect to monetary obligations (or thirty (30) days with respect to non-monetary obligations) after Tenant's receipt of written notice thereof from Landlord, Landlord may, without waiving or releasing Tenant from any of Tenant's obligations, make such payment or perform such other act on behalf of Tenant. All sums so paid by Landlord and all necessary incidental costs incurred by Landlord in performing such other acts shall be payable by Tenant to Landlord within thirty (30) days after demand therefor as additional rent. 23.6 INTEREST. If any monthly installment of Rent or Project Operating Expenses, or any other amount payable by Tenant hereunder is not received by the date when due, it shall bear interest at the Interest Rate set forth in Section 1.14 of the Summary from the date due until paid. All interest, and any late charges imposed pursuant to Section 23.7 below, shall be considered additional rent due from Tenant to Landlord under the terms of this Lease. 23.7 LATE CHARGES. Tenant acknowledges that, in addition to interest costs, the late payments by Tenant to Landlord of any Monthly Basic Rent or other sums due under this Lease will cause Landlord to incur costs not contemplated by this Lease, the exact amount of such costs being extremely difficult and impractical to fix. Such other costs include, without limitation, processing, administrative and accounting charges and late charges that may be imposed on Landlord by the terms of any mortgage, deed of trust or related loan documents encumbering the Premises, the Building or the Project. Accordingly, if any monthly installment of Monthly Basic Rent or Project Operating Expenses or any other amount payable by Tenant hereunder is not received by Landlord by the due date, Tenant shall pay to Landlord an additional sum of six percent (6%) of the overdue amount as a late charge, but in no event more than the maximum late charge allowed by law. The parties agree that such late charge represents a fair and reasonable estimate of the costs that Landlord will incur by reason of any late payment as hereinabove referred to by Tenant, and the payment of late charges and interest are distinct and separate in that the payment of interest is to compensate Landlord for the use of Landlord's money by Tenant, while the payment of late charges is to compensate Landlord for Landlord's processing, administrative and other costs incurred by Landlord as a result of Tenant's delinquent payments. Acceptance of a late charge or interest shall not constitute a waiver of Tenant's default with respect to the overdue amount or prevent Landlord from exercising any of the other rights and remedies available to Landlord under this Lease or at law or in equity now or hereafter in effect. Notwithstanding the foregoing, Landlord agrees not to charge Tenant a late charge for the first two late payments in any calendar year if such late payments are paid within ten (10) days of notice of non-payment from Landlord. 23.8 RIGHTS AND REMEDIES CUMULATIVE. All rights, options and remedies of Landlord contained in this Section 23 and elsewhere in this Lease (including Section 28 below) shall be construed and held to be cumulative, and no one of them shall be exclusive of the other, and Landlord shall have the right to pursue any one or all of such remedies or any other remedy or relief which may be provided by law or in equity, whether or not stated in this Lease. Nothing in this Section 23 shall be deemed to limit or otherwise affect Tenant's indemnification of Landlord pursuant to any provision of this Lease. 23.9 INTENTIONALLY OMITTED. 23.10 COSTS UPON DEFAULT AND LITIGATION. Tenant shall pay to Landlord and its mortgagees as additional rent all the expenses incurred by Landlord or its mortgagees in connection with any default by Tenant hereunder or the exercise of any remedy by reason of any default by Tenant hereunder, including reasonable attorneys' fees and expenses if Landlord is the prevailing party in any action related thereto. 24. LANDLORD'S DEFAULT. 24.1 TENANT'S REMEDIES. If Landlord fails to perform or observe any of the covenants, provisions, or conditions contained in this Lease on its part to be performed or observed within twenty (20) days after written notice of default or if more than twenty (20) days are required because of the nature of the default, if Landlord fails to commence the cure of such default within the twenty (20) day period and proceed diligently to cure such default after written notice, then Landlord will be responsible to Tenant for any and all damages sustained by Tenant as a result of Landlord's breach. Notwithstanding anything contained in this Section 24.1 to the contrary, upon any such uncured default by Landlord, Tenant may exercise any of its rights provided at law or in equity; provided, however: (a) Tenant shall have no right to offset or abate rent in the event of any default by Landlord under this Lease, except to the extent offset rights are specifically provided to Tenant in this Lease; (b) Tenant's rights and remedies hereunder shall be limited to the extent (i) Tenant has expressly waived in this Lease any of such rights or remedies and/or (ii) this Lease otherwise expressly limits Tenant's rights or remedies, including the limitation on Landlord's liability contained in Section 31 hereof; and (c) in no event shall Landlord or Tenant be liable for consequential damages. 24.2 JUDICIAL REFERENCE. If this Lease expressly provides that a particular dispute or issue is to be resolved pursuant to Section 24 of this Lease, Landlord or Tenant will have the right within the twenty (20) day period following notice to the other party of the election to invoke this provision to institute a reference proceeding in accordance with the provisions set forth below to resolve such dispute. Any amount in dispute shall be paid by the party contesting such payment obligation pending resolution of such dispute. If it is determined pursuant to such reference proceeding that either party is entitled to recover any -26- 32 monies from the other, payment of all such sums owing shall be made within thirty (30) days after such determination, together with interest thereon pursuant to Section 23.6. Any dispute between Landlord and Tenant which is to be resolved by a reference proceeding pursuant to the provisions of this Lease must be resolved by a proceeding in accordance with the provisions of California Code of Civil Procedure Section 638, et seq., for a determination to be made which will be binding upon the parties as if tried before a court or jury. The parties agree specifically as to the following: (a) Within five (5) business days after service of a demand by a party hereto, the parties will agree upon a single referee who shall then try all issues, whether of fact or law, and then report a finding and judgment thereon. If the parties are unable to agree upon a referee, either party may seek to have one appointed, pursuant to California Code of Civil Procedure, Section 640, et seq., by the presiding judge of the County. (b) The compensation of the referee will be such charge as is customarily charged by the referee for like services. The cost of such proceedings will initially be born equally by the parties. However, the prevailing party in such proceedings will be entitled, in addition to all other costs, to recover its contribution for the cost of the reference as an item of damages and/or recoverable costs. (c) If a reporter is requested by either party, then a reporter will be present at all proceedings, and the fees of such reporter will be born by the party requesting such reporter. Such fees will be an item of recoverable costs. Only a party shall be authorized to request a reporter. (d) The referee will apply all California Rules of Evidence and Procedure (provided that discovery shall be limited as set forth in California Code of Civil Procedure Section 94 unless a party is able to persuade the referee that the matter requires further discovery under Code of Civil Procedure Section 95) and will apply the substantive law of the State in deciding the issues to be heard. Notice of any motions before the referee will be given, and all matters will be set at the convenience of the referee. (e) The referee's decision under California Code of Civil Procedure Section 644 will stand as the judgment of the court, subject to appellate review as provided by the Laws of the State. (f) The parties agree that they will in good faith endeavor to cause any such dispute to be decided within three (3) months. The date of hearing for any proceeding will be determined by agreement of the parties and the referee, or if the parties cannot agree, then by the referee. (g) The referee will have the power to award damages and all other relief. 25. SUBORDINATION. Without the necessity of any additional document being executed by Tenant for the purpose of effecting a subordination, and at the election of Landlord or any mortgagee of a mortgage or a beneficiary of a deed of trust now or hereafter encumbering all or any portion of the Building or Site, or any lessor of any ground or master lease now or hereafter affecting all or any portion of the Building or Site, this Lease shall be subject and subordinate at all times to such ground or master leases (and such extensions and modifications thereof), and to the lien of such mortgages and deeds of trust (as well as to any advances made thereunder and to all renewals, replacements, modifications and extensions thereof). Notwithstanding the foregoing, Landlord and any mortgagee and/or ground lessor of Landlord, as applicable, shall have the right to subordinate or cause to be subordinated any or all ground or master leases or the lien of any or all mortgages or deeds of trust to this Lease. In the event that any ground or master lease terminates for any reason or any mortgage or deed of trust is foreclosed or a conveyance in lieu of foreclosure is made for any reason, at the election of Landlord's successor in interest, Tenant shall attorn to and become the tenant of such successor provided such successor agrees in writing to assume and be bound by all of Landlord's obligations under this Lease. Subject to the preceding sentence, Tenant hereby waives its rights under any current or future law which gives or purports to give Tenant any right to terminate or otherwise adversely affect this Lease and the obligations of Tenant hereunder in the event of any such foreclosure proceeding or sale. Tenant covenants and agrees to execute and deliver to Landlord within twenty (20) days after receipt of written demand by Landlord and in the form reasonably required by Landlord and reasonably acceptable to Tenant, any additional documents evidencing the priority or subordination of this Lease with respect to any such ground or master lease or the lien of any such mortgage or deed of trust or Tenant's agreement to attorn, provided Landlord agrees in writing to pay in each instance a sum on account of Tenant's attorneys' fees not to exceed One Thousand Dollars ($1,000.00). Should Tenant fail to sign and return any such documents within said ten day period, Tenant shall be in default hereunder. Tenant will not be required to execute any subordination agreement that does not contain a non-disturbance provision acceptable to Tenant or that requires the waiver or alteration of Tenant's rights and entitlements or an increase in Tenant's obligations under this Lease. 26. ESTOPPEL CERTIFICATES. 26.1 DELIVERY OF ESTOPPELS. Within twenty (20) business days following receipt of Landlord's written request, Tenant shall execute and deliver to Landlord an estoppel certificate, in a form substantially -27- 33 similar to the form of Exhibit "F" attached hereto, certifying: (a) the Commencement Date of this Lease; (b) that this Lease is unmodified and in full force and effect (or, if modified, that this Lease is in full force and effect as modified, and stating the date and nature of such modifications); (c) the date to which the rent and other sums payable under this Lease have been paid; (d) that there are not, to Tenant's knowledge, any defaults under this Lease by either Landlord or Tenant, except as specified in such certificate; and (e) such other matters as are reasonably requested by Landlord. Landlord will execute a similar estoppel on Tenant's behalf within twenty (20) business days of receipt of Tenant's written request therefore. Any such estoppel certificate delivered pursuant to this Section 26.1 may be relied upon by any mortgagee, beneficiary, purchaser or prospective purchaser of any portion of the Site, as well as their assignees or by anyone to whom Landlord's estoppel is directed. 26.2 FAILURE TO DELIVER. Either party's failure to deliver a requested estoppel certificate within the time provided in Section 26.1 above shall constitute a default and shall be conclusive upon the non-responding party that: (a) this Lease is in full force and effect without modification, except as may be represented by the requesting party; (b) there are no uncured defaults in Landlord's or Tenant's performance (other than the non-responding party's failure to deliver the estoppel certificate); and (c) not more than one (1) month's rental has been paid in advance. 27. INTENTIONALLY OMITTED. 28. MODIFICATION AND CURE RIGHTS OF LANDLORD'S MORTGAGEES AND LESSORS. 28.1 INTENTIONALLY OMITTED. 28.2 CURE RIGHTS. In the event of any default on the part of Landlord, Tenant will give simultaneous notice by registered or certified mail to any beneficiary of a deed of trust or mortgagee covering the Premises or ground lessor of Landlord whose address shall have been furnished to Tenant and such beneficiary or trustee will have an additional cure period of twenty (20) business days after the expiration of any cure period provided for Landlord default under Section 24 within which to cure any such Landlord's default. 29. QUIET ENJOYMENT. Landlord covenants and agrees with Tenant that, upon Tenant performing all of the covenants and provisions on Tenant's part to be observed and performed under this Lease (including payment of rent hereunder), Tenant shall have the right to use and occupy the Premises in accordance with and subject to the terms and conditions of this Lease as against all persons claiming by, through or under Landlord. 30. TRANSFER OF LANDLORD'S INTEREST. The term "LANDLORD" as used in this Lease, so far as covenants or obligations on the part of the Landlord are concerned, shall be limited to mean and include only the owner or owners, at the time in question, of the fee title to, or a lessee's interest in a ground lease of, the Site. In the event of any transfer or conveyance of any such title or interest (other than a transfer for security purposes only), the transferor shall be automatically relieved of all covenants and obligations on the part of Landlord contained in this Lease accruing after the date of such transfer or conveyance, provided (i) the Allowance in Section 5 of Exhibit "C" has been paid, (ii) any Security Deposit has been transferred, and (iii) all of Landlord's obligations under this Lease have been expressly assumed in writing. Subject to the foregoing, Landlord and Landlord's transferees and assignees shall have the absolute right to transfer all or any portion of their respective title and interest in the Site, the Building, the Premises and/or this Lease without the consent of Tenant, and such transfer or subsequent transfer shall not be deemed a violation on Landlord's part of any of the terms and conditions of this Lease. 31. LIMITATION ON LANDLORD'S LIABILITY. Notwithstanding anything contained in this Lease to the contrary, the obligations of Landlord under this Lease (including any actual or alleged breach or default by Landlord) do not constitute personal obligations of the individual partners, directors, officers, members or shareholders of Landlord or Landlord's members or partners, and Tenant shall not seek recourse against the individual partners, directors, officers, members or shareholders of Landlord or against Landlord's members or partners or any other persons or entities having any interest in Landlord, or any of their personal assets for satisfaction of any liability with respect to this Lease. In addition, in consideration of the benefits accruing hereunder to Tenant and notwithstanding anything contained in this Lease to the contrary, Tenant hereby covenants and agrees for itself and all of its successors and assigns that the liability of Landlord for its obligations under this Lease (including any liability as a result of any actual or alleged failure, breach or default hereunder by Landlord (excluding therefrom any damage resulting from Landlord's failure to carry insurance pursuant to Section 21 hereof)), shall be limited solely to, and Tenant's and its successors' and assigns' sole and exclusive remedy shall be against, Landlord's interest in the Project, and no other assets of Landlord. Nothing contained herein will be deemed to constitute a waiver of Tenant's rights to seek recovery for losses covered or required to be covered by Landlord's insurance pursuant to Section 21 of this Lease. -28- 34 32. MISCELLANEOUS. 32.1 GOVERNING LAW. This Lease shall be governed by, and construed pursuant to, the laws of the state in which the Building is located. 32.2 SUCCESSORS AND ASSIGNS. Subject to the provisions of Section 30 above, and except as otherwise provided in this Lease, all of the covenants, conditions and provisions of this Lease shall be binding upon, and shall inure to the benefit of, the parties hereto and their respective heirs, personal representatives and permitted successors and assigns; provided, however, no rights shall inure to the benefit of any Transferee of Tenant unless the Transfer to such Transferee is made in compliance with the provisions of Section 14 of this Lease. 32.3 NO MERGER. The voluntary or other surrender of this Lease by Tenant or a mutual termination thereof shall not work as a merger and shall, at the option of Landlord, either (a) terminate all or any existing subleases, or (b) operate as an assignment to Landlord of Tenant's interest under any or all such subleases. 32.4 PROFESSIONAL FEES. If either Landlord or Tenant should bring suit against the other with respect to this Lease, including for unlawful detainer or any other relief against the other hereunder, then all costs and expenses incurred by the prevailing party therein (including, without limitation, its actual appraisers', accountants', attorneys' and other professional fees and court costs), shall be paid by the other party. If either party or their respective mortgagees or lenders are made a party to any litigation commenced against the other or any litigation pertaining to this Lease, by reason of an negligent or intentional act or omission of the other party or its mortgagee or lender, such other party will indemnify, defend (with counsel reasonably acceptable to the named party) and hold harmless the party named and its mortgagee or lender and will pay all costs incurred or paid by the named party and its mortgagee or lender in connection with such litigation. 32.5 WAIVER. The waiver by either party of any breach by the other party of any term, covenant or condition herein contained shall not be deemed to be a waiver of any subsequent breach of the same or any other term, covenant and condition herein contained, nor shall any custom or practice which may become established between the parties in the administration of the terms hereof be deemed a waiver of, or in any way affect, the right of any party to insist upon the performance by the other in strict accordance with said terms. No waiver of any default of either party hereunder shall be implied from any acceptance by Landlord or delivery by Tenant (as the case may be) of any rent or other payments due hereunder or any omission by the non-defaulting party to take any action on account of such default if such default persists or is repeated, and no express waiver shall affect defaults other than as specified in said waiver. The subsequent acceptance of rent hereunder by Landlord shall not be deemed to be a waiver of any preceding breach by Tenant of any term, covenant or condition of this Lease other than the failure of Tenant to pay the particular rent so accepted, regardless of Landlord's knowledge of such preceding breach at the time of acceptance of such rent. 32.6 TERMS AND HEADINGS. The words "Landlord" and "Tenant" as used herein shall include the plural as well as the singular. Words used in any gender include other genders. The Section headings of this Lease are not a part of this Lease and shall have no effect upon the construction or interpretation of any part hereof. Any deletion of language from this Lease prior to its execution by Landlord and Tenant shall not be construed to raise any presumption, canon of construction or implication, including, without limitation, any implication that the parties intended thereby to state the converse of the deleted language. 32.7 TIME. Time is of the essence with respect to performance of every provision of this Lease in which time or performance is a factor. All references in this Lease to "DAYS" shall mean calendar days unless specifically modified herein to be "business" days. 32.8 PRIOR AGREEMENTS; AMENDMENTS. This Lease (and the Exhibits and Riders attached hereto) contain all of the covenants, provisions, agreements, conditions and understandings between Landlord and Tenant concerning the Premises and any other matter covered or mentioned in this Lease, and no prior agreement or understanding, oral or written, express or implied, pertaining to the Premises or any such other matter shall be effective for any purpose. No provision of this Lease may be amended or added to except by an agreement in writing signed by the parties hereto or their respective successors in interest. The parties acknowledge that all prior agreements, representations and negotiations are deemed superseded by the execution of this Lease to the extent they are not expressly incorporated herein. 32.9 SEPARABILITY. The invalidity or unenforceability of any provision of this Lease (except for Tenant's obligation to pay Monthly Basic Rent and Operating Expenses, Real Property Taxes and Assessments, Insurance Costs, and Utilities Costs) shall in no way affect, impair or invalidate any other provision hereof, and such other provisions shall remain valid and in full force and effect to the fullest extent permitted by law. 32.10 RECORDING. Neither Landlord nor Tenant shall record this Lease. In addition, neither party shall record a short form memorandum of this Lease without the prior written consent (and signature on the memorandum) of the other, and provided that prior to recordation Tenant executes and delivers to Landlord, in recordable form, a properly acknowledged quitclaim deed or other instrument extinguishing all of the Tenant's rights and interest in and to the Site, Building and Premises, and designating Landlord -29- 35 as the transferee, which deed or other instrument shall be held by Landlord and may be recorded by Landlord once the Lease terminates or expires (but not prior thereto). If such short form memorandum is recorded in accordance with the foregoing, the party requesting the recording shall pay for all costs of or related to such recording, including, but not limited to, recording charges and documentary transfer taxes. 32.11 EXHIBITS AND RIDERS. All Exhibits and Riders attached to this Lease are hereby incorporated in this Lease as though set forth at length herein. 32.12 ACCORD AND SATISFACTION. No payment by Tenant or receipt by Landlord of a lesser amount than the rent payment herein stipulated shall be deemed to be other than on account of the rent, nor shall any endorsement or statement on any check or any letter accompanying any check or payment as rent be deemed an accord and satisfaction, and Landlord may accept such check or payment without prejudice to Landlord's right to recover the balance of such rent or pursue any other remedy provided in this Lease. Tenant agrees that each of the foregoing covenants and agreements shall be applicable to any covenant or agreement either expressly contained in this Lease or imposed by any statute or at common law. 32.13 FINANCIAL STATEMENTS. Upon thirty (30) days prior written request from Landlord (which Landlord may make at any time during the Term but no more often that two (2) times in any calendar year), Tenant shall deliver to Landlord (a) a current financial statement of Tenant, and (b) financial statements of Tenant for the two (2) years prior to the current financial statement year. Such statements shall be prepared in accordance with generally acceptable accounting principles and certified as true in all material respects by Tenant (if Tenant is an individual) or by an authorized officer, member/manager or general partner of Tenant (if Tenant is a corporation, limited liability company or partnership, respectively). Financial statements published by Tenant in the ordinary course of its business will be deemed to satisfy this requirement. 32.14 NO PARTNERSHIP. Landlord does not, in any way or for any purpose, become a partner of Tenant in the conduct of its business, or otherwise, or joint venturer or a member of a joint enterprise with Tenant by reason of this Lease. 32.15 FORCE MAJEURE. In the event that either party hereto shall be delayed or hindered in or prevented from the performance of any act required hereunder by reason of strikes, lock-outs, labor troubles, inability to procure materials, failure of power, governmental moratorium or other governmental action or inaction (including failure, refusal or delay in issuing permits, approvals and/or authorizations), injunction or court order, riots, insurrection, war, fire, inclement weather which causes the cessation of work, earthquake, flood or other natural disaster or other reason of a like nature not the fault of the party delaying in performing work or doing acts required under the terms of this Lease (but excluding delays due to financial inability) (herein collectively, "FORCE MAJEURE DELAYS"), then performance of such act shall be excused for the period of the delay and the period for the performance of any such act shall be extended for a period equivalent to the period of such delay. The provisions of this Section 32.15 shall not apply to nor operate to excuse either party from the payment of sums due under this Lease in accordance with its terms. Notwithstanding the foregoing provisions of this Section 32.15, no Force Majeure Delay claim by either party shall be valid unless written notice of the event giving rise to the claimed Force Majeure Delay is provided to the other party within five (5) business days following the occurrence of such event of Force Majeure. 32.16 COUNTERPARTS. This Lease may be executed in one or more counterparts, each of which shall constitute an original and all of which shall be one and the same agreement. 32.17 NONDISCLOSURE OF LEASE TERMS. Tenant acknowledges and agrees that the terms of this Lease are confidential and constitute proprietary information of Landlord. Disclosure of the terms could adversely affect the ability of Landlord to negotiate other leases and impair Landlord's relationship with other tenants. Accordingly, Tenant agrees that it, and its partners, officers, directors, employees, agents and attorneys, shall not intentionally and voluntarily disclose the terms and conditions of this Lease to any newspaper or other publication or any other tenant or apparent prospective tenant of the Building or other portion of the Project, either directly or indirectly, without the prior written consent of Landlord, provided, however, that Tenant may disclose the terms to prospective brokers, subtenants or assignees under this Lease or as required by applicable law or order of court. 32.18 NON-DISCRIMINATION. Tenant acknowledges and agrees that there shall be no discrimination against, or segregation of, any person, group of persons, or entity on the basis of race, color, creed, religion, age, sex, marital status, national origin, or ancestry in the leasing, subleasing, transferring, assignment, occupancy, tenure, use, or enjoyment of the Premises, or any portion thereof. 33. LEASE EXECUTION. 33.1 TENANT'S AUTHORITY. If Tenant executes this Lease as a partnership, corporation or limited liability company, then Tenant and the persons and/or entities executing this Lease on behalf of Tenant represent and warrant that: (a) Tenant is a duly organized and existing partnership, corporation or limited liability company, as the case may be, and is qualified to do business in the state in which the Building is located; and (b) such persons and/or entities executing this Lease are duly authorized to execute and deliver this Lease on Tenant's behalf in accordance with the Tenant's partnership agreement (if Tenant is a partnership), or a duly adopted resolution of Tenant's board of directors and the Tenant's by-laws (if Tenant is a corporation) or with Tenant's operating agreement (if Tenant is a limited liability -30- 36 company). Concurrently with Tenant's execution and delivery of this Lease to Landlord and/or at any time during the Term within twenty (20) days of Landlord's request, Tenant shall provide to Landlord a copy of any documents reasonably requested by Landlord evidencing such qualification, organization, existence and authorization. 33.2 JOINT AND SEVERAL LIABILITY. If more than one person or entity executes this Lease as Tenant: (a) each of them is and shall be jointly and severally liable for the covenants, conditions, provisions and agreements of this Lease to be kept, observed and performed by Tenant; and (b) the act or signature of, or notice from or to, any one or more of them with respect to this Lease shall be binding upon each and all of the persons and entities executing this Lease as Tenant with the same force and effect as if each and all of them had so acted or signed, or given or received such notice. 33.3 INTENTIONALLY OMITTED. 33.4 NO OPTION. The submission of this Lease for examination, or execution by Tenant does not constitute a reservation of or option for the Premises and this Lease shall not become effective as a Lease until it has been executed by Landlord and delivered to Tenant. 34. DUTY TO ACT REASONABLE. Except for determinations expressly described in this Lease as being at the sole discretion of the applicable party, neither Landlord nor Tenant shall unreasonably withhold, condition or delay any consent, approval or other determination provided for hereunder, and determinations subject to sole discretion shall not be unreasonably conditioned or delayed. In addition to the foregoing, whenever this Lease grants Landlord or Tenant the right to take action, exercise discretion, establish rules and regulations, make allocations or other determinations, or otherwise exercise rights or fulfill obligations, Landlord and Tenant shall act reasonably and in good faith and take no action which might result in the frustration of the reasonable expectations of a sophisticated landlord and sophisticated tenant concerning the benefits to be enjoyed under this Lease. 35. WAIVER OF JURY TRIAL. EACH PARTY HEREBY WAIVES ANY RIGHT TO A TRIAL BY JURY IN ANY ACTION SEEKING SPECIFIC PERFORMANCE OF ANY PROVISION OF THIS LEASE, FOR DAMAGES FOR ANY BREACH UNDER THIS LEASE, OR OTHERWISE FOR ENFORCEMENT OF ANY RIGHT OR REMEDY HEREUNDER. 36. SPECIAL TENANT EQUIPMENT The following terms and conditions shall apply to Tenant's use, occupancy, alteration and improvement of the Premises, the Building and the Project with particular improvements for Tenant's use. 36.1 LANDLORD'S APPROVAL RIGHTS. For all purposes of this Section 36, in any case where Landlord's approval is required, Landlord shall not unreasonably withhold, condition or delay its approval. In any event, without limiting the foregoing, Landlord shall have the right to withhold its consent if Tenant fails to obtain a building permit for any Tenant work where a permit is required for such work, or if such work will otherwise not in any way comply with applicable laws, or if the proposed improvements are not consistent with the balance of the improvements in the Project in terms of architectural style, materials, scale, quality and method of construction or such proposed improvements will materially and adversely impact the roof, the roof warranty, the structure or foundation of the Building or any building systems or equipment or any other tenant of the Project or access to or use of the balance of the Building or the Common Areas of the Project by such other tenants or their employees, agents, contractors, customers and other invitees. In all events where Tenant makes improvements which are visible from outside of the Building (including from any areas adjacent to the Building or from other buildings now or hereafter constructed within the Project), Tenant shall cause such improvements to be screened from view in a manner reasonably acceptable to Landlord and comparable and compatible with the improvements and/or landscaping contiguous to such improvements (such as by way of example only with appropriate metal and/or fabric screening, concrete masonry unit block wall fencing or landscaping screening to match adjacent landscaping). All such screening and visible improvements shall be of first class quality and shall be consistent in quality and design with similar improvements and screening in comparable quality office projects in Alameda County, California. 36.2 ROOFTOP COMMUNICATIONS EQUIPMENT. Subject to all applicable governmental laws and regulations and to the provisions of this Lease, Tenant shall have the non-exclusive right to install, maintain and operate, at Tenant's sole cost and expense, up to a maximum of four (4) antennae or other telecommunications equipment, including base site cabinets and appurtenant conduits (i.e., subject to available capacities) and cabinets ("ANTENNAE EQUIPMENT") at a location on the roof of the Building approved by Landlord. Use of the roof top space shall be for Tenant's internal purposes only and shall be in common with Landlord and other occupants of the Building. In no event shall Tenant's Antennae Equipment interfere with the equipment of Landlord or other tenants or occupants of the Building or Building roof and Landlord shall not interfere with nor allow any other tenant or occupant of the Building or Building roof to interfere with Tenant's Antennae Equipment. Tenant reserves the right to run cabling, conduit or wiring across the roof of the portion of the Building which is above Tenant's Premises to appropriate conduit riser that will terminate within the Premises as set forth in plans and specifications, which shall be subject to Landlord's approval including, without limitation, as to scope of work, timing for construction, plans and installation and restoration of improvements. -31- 37 36.3 EMERGENCY POWER GENERATOR. Subject to the terms and conditions set forth in Rider No. 4 which the parties shall complete and incorporate into, or attach as an exhibit to, an amendment to this Lease, and subject to all other terms and conditions in this Lease and to Tenant obtaining all necessary governmental permits and approvals, and so long as Tenant shall not interfere with any Building systems, Tenant shall have the right to install, operate and maintain, at Tenant's sole cost and expense, a back-up generator ("TENANT'S GENERATOR") and an above-ground storage tank (the "AST") for diesel fuel to run Tenant's Generator on the Site near the Building or on the roof of the Building. At such time as Tenant shall determine the specifications for Tenant's Generator and AST, Landlord and Tenant shall enter into an amendment to this Lease attaching or incorporating the terms and conditions of Rider No. 4 to this Lease (incorporating Tenant's specifications for the Generator and AST) which Rider No. 4 the parties agree shall govern Landlord's and Tenant's respective rights, duties and obligations with respect to Tenant's Generator and AST IN WITNESS WHEREOF, the parties have executed this Lease as of the day and year first above written. TENANT: LANDLORD: THE GOOD GUYS-CALIFORNIA, INC., LNR HARBOR BAY, LLC, a California corporation a California limited liability company *By: /s/ GEORGE HECHTMAN *By: /s/ DAVID O. TEAM 1/3/01 -------------------------------- ---------------------------------- Print Name: George Hechtman Print Name: DAVID O. TEAM -------------------- ---------------------- Print Title: V.P. Administration Print Title: VICE PRESIDENT ------------------- --------------------- *By: /s/ ROBERT STOFFREGEN *By: -------------------------------- ---------------------------------- Print Name: Robert Stoffregen Print Name: -------------------- ---------------------- Print Title: CEO Print Title: ------------------- --------------------- *NOTE: IF TENANT IS A CALIFORNIA CORPORATION, then one of the following alternative requirements must be satisfied: (A) This Lease must be signed by two (2) officers of such corporation: one being the chairman of the board, the president or a vice president, and the other being the secretary, an assistant secretary, the chief financial officer or an assistant treasurer. If one (1) individual is signing in two (2) of the foregoing capacities, that individual must sign twice; once as one officer and again as the other officer. (B) If there is only one (1) individual signing in two (2) capacities, or if the two (2) signatories do not satisfy the requirements of (A) above, then Tenant shall deliver to Landlord a certified copy of a corporate resolution in a form reasonably acceptable to Landlord authorizing the signatory(ies) to execute this Lease. IF TENANT IS A CORPORATION INCORPORATED IN A STATE OTHER THAN CALIFORNIA, then Tenant shall deliver to Landlord a certified copy of a corporate resolution in a form reasonably acceptable to Landlord authorizing the signatory(ies) to execute this Lease. -32- 38 EXHIBIT "A" SITE PLAN [BAY VIEW PLAZA SITE PLAN DIAGRAM] EXHIBIT "A" -1- 39 EXHIBIT "B" FLOOR PLAN [BAY VIEW PLAZA BUILDING A DIAGRAM] EXHIBIT "B" -1- 40 EXHIBIT "C" WORK LETTER AGREEMENT [ALLOWANCE] 1. LANDLORD'S WORK/TENANT IMPROVEMENTS. The work to be performed by Landlord with respect to the completion of the Building and the Project Common Areas is described in Schedule "1" to this Exhibit "C" and may be referred to herein as "Landlord's Work". As used in the Lease and this Work Letter Agreement, the term "TENANT IMPROVEMENTS" or "TENANT IMPROVEMENT WORK" means those items of general tenant improvement construction described in the materials denoted on the Index of Drawings attached as Schedule "2" to this Exhibit "C". 2. WORK SCHEDULE. Attached hereto as Schedule "3" is a schedule ("WORK SCHEDULE") which sets forth the timetable for the planning and completion of the installation of the Tenant Improvements and the Commencement Date of the Lease. All plans and drawings required by this Work Letter Agreement and all work performed pursuant thereto are to be prepared and performed in accordance with the Work Schedule. Landlord may, from time to time during construction of the Tenant Improvements, modify the Work Schedule as Landlord reasonably deems appropriate. 3. CONSTRUCTION REPRESENTATIVES. Landlord hereby appoints the following person(s) as Landlord's representative ("LANDLORD'S REPRESENTATIVE") to act for Landlord in all matters covered by this Work Letter Agreement: Tom Ireland. Tenant hereby appoints the following person(s) as Tenant's representative ("TENANT'S REPRESENTATIVE") to act for Tenant in all matters covered by this Work Letter Agreement: George Hechtman. All communications with respect to the matters covered by this Work Letter Agreement are to made to Landlord's Representative or Tenant's Representative, as the case may be, in writing in compliance with the notice provisions of the Lease. Either party may change its representative under this Work Letter Agreement at any time by written notice to the other party in compliance with the notice provisions of the Lease. 4. TENANT IMPROVEMENT PLANS. (a) PLANS. Attached hereto as Schedule "2" is the Index of Drawings which specifies all of the construction drawings which make up the plans for the Tenant Improvements for the Premises (the "Plans"). Landlord hereby approves the Plans. (b) SUBMITTAL OF PLANS. Tenant's architect will submit the Plans to the appropriate governmental agencies for plan checking and the issuance of a building permit. Tenant's architect, with Tenant's and Landlord's cooperation, will make any changes to the Plans which are requested by the applicable governmental authorities to obtain the building permit. After submittal of the Plans for permits, no further material changes may be made without the prior approval of Landlord, and then only after agreement by Tenant to pay any costs resulting from the design and/or construction of such changes in excess of the Allowance. Tenant hereby acknowledges that any such changes will be subject to the terms of Section 9 below. Landlord's approval of the Plans has created no liability or responsibility on the part of Landlord for the completeness of such plans or their design sufficiency or compliance with laws. (c) CHANGES TO SHELL OF BUILDING. If the Plans or any amendment thereof or supplement thereto shall require changes in the Building shell, the increased cost of the Building shell work caused by such changes will be paid for by Tenant or charged against the "Allowance" described in Section 5 below. (d) WORK COST ESTIMATE AND STATEMENT. Attached hereto as Schedule "5" to this Exhibit "C" is a written estimate of the cost (the "WORK COST") to complete the Tenant Improvement Work (the "WORK COST ESTIMATE"). Tenant will utilize Landlord's contractor L.E. Wentz (the "CONTRACTOR"), subject to prior written approval of contractor fees and general condition costs. The Contractor will require a minimum of two (2) bids from subcontractors for electrical, HVAC and carpentry work in the Premises. Landlord and Tenant hereby approve the Work Cost Estimate which shall also be referred to herein as the "WORK COST STATEMENT". Landlord and Tenant agree that the Work Cost Statement is expected to and shall exceed the Allowance described in Section 5 below by a minimum of $750,000.00 which is to be paid by Tenant. Tenant agrees to pay such excess, as additional rent, pro rata as and when Landlord makes payments to the Contractor upon invoice by the Contractor (i.e., Tenant will pay concurrently with each payment by Landlord to the Contractor an amount equal to the total payment to be paid to be Contractor at such time multiplied by a fraction, the numerator of which is the total Work Cost amount minus the Allowance, and the denominator of which is the total Work Cost). Throughout the course of construction, any differences between the estimated Work Cost in the Work Cost Statement and the actual Work Cost will be determined by Landlord and appropriate adjustments and payments by Landlord or Tenant, as the case may be, will be made within fifteen (15) days thereafter. Tenant agrees to pay, as additional rent, any and all commercially reasonable overtime costs -1- 41 incurred by Landlord in connection with the construction of the Tenant Improvements at Tenant's request or with Tenant's prior written approval, within fifteen (15) days of Tenant's receipt of Landlord's request for such payment. 5. PAYMENT FOR THE TENANT IMPROVEMENTS. (a) ALLOWANCE. Landlord hereby grants to Tenant a tenant improvement allowance of $30.00 per rentable square foot of the Premises (the "ALLOWANCE"). The Allowance is to be used only for: (i) Payment of the cost of preparing the Plans, including mechanical, electrical, plumbing and structural drawings and of all other aspects necessary to complete the Plans; (ii) The payment of plan check, permit and license fees relating to construction of the Tenant Improvements; (iii) Construction of the Tenant Improvements, including, without limitation, the following: (1) Installation within the Premises of all partitioning, doors, floor coverings, ceilings, wall coverings and painting, millwork and similar items; (2) All electrical wiring, lighting fixtures, outlets and switches, and other electrical work necessary for the Premises (but excluding computer and telecommunications cabling); (3) The furnishing and installation of all duct work, terminal boxes, diffusers and accessories necessary for the heating, ventilation and air conditioning systems within the Premises, including the cost of meter and key control for after-hour air conditioning; (4) Any additional tenant improvements to the Premises required for Tenant's use of the Premises including, but not limited to, odor control, special heating, ventilation and air conditioning, noise or vibration control or other special systems or improvements, but excluding furniture, fixtures and equipment and personal property; (5) All fire and life safety control systems such as fire walls, sprinklers, halon, fire alarms, including piping, wiring and accessories, necessary for the Premises; (6) All plumbing, fixtures, pipes and accessories necessary for the Premises; (7) Testing and inspection costs; and (8) Fees for the contractor and tenant improvement coordinator including, but not limited to, fees and costs attributable to general conditions associated with the construction of the Tenant Improvements. (9) Subject to Tenant's prior written approval, not to be unreasonably withheld or delayed, all other costs to be expended by Landlord in the construction of the Tenant Improvements, including those costs incurred by Landlord for construction of elements of the Tenant Improvements in the Premises, which construction was performed by Landlord prior to the execution of this Lease by Landlord and Tenant and which construction is for the benefit of tenants and is customarily performed by Landlord prior the execution of leases for space in the Building for reasons of economics (examples of such construction would include, but not be limited to, the extension of mechanical [including heating, ventilating and air conditioning systems] and electrical distribution systems outside of the core of the Building, wall construction, column enclosures and painting outside of the core of the Building, ceiling hanger wires and window treatment). (b) EXCESS COSTS. The cost of each item referenced in Section 5(a) above shall be charged against the Allowance. Tenant agrees that part of the consideration for Landlord agreeing to enter into this Lease upon the terms set forth herein, Tenant is to pay for a minimum of $750,000.00 of the costs of the Tenant Improvements. Tenant agrees to pay to Landlord such excess pro rata as and when Landlord makes payments to the Contractor upon invoice by the Contractor (i.e., Tenant will pay concurrently with each payment by Landlord to the Contractor an amount equal to the total payment to be paid to the Contractor at such time multiplied by a fraction, the numerator of which is the total Work Cost amount minus the Allowance, and the denominator of which is the total Work Cost). In no event will the Allowance be used to pay for Tenant's furniture, artifacts, equipment, or any other item of personal property which is not affixed to the Premises. If the Work Cost does not exceed the Allowance by $750,000.00 or more, Tenant agrees that Landlord shall have the right at its election to either require Tenant to increase the Security Deposit under Section 5 of the Lease, by the amount of such shortfall or to reduce the Allowance by the amount of such shortfall. (c) Changes. If, after the Plans have been prepared and the Work Cost Statement has been established, Tenant requires any changes or substitutions to the Plans, any additional costs related thereto will be added to the total Work Cost and shall be paid by Tenant to Landlord pro rata as and when Landlord makes payments to the Contractor upon invoice by the Contractor. Any changes to the Plans will be approved by Landlord and Tenant in the manner set forth in EXHIBIT "C" -2- 42 Section 4 above and will, if necessary, require the Work Cost Statement to be revised and agreed upon between Landlord and Tenant in the manner set forth in Section 4(d) above. Landlord will have the right to decline Tenant's request for a change to the Plans if such changes are inconsistent with the provisions of Section 4 above, or if the change would unreasonably delay construction of the Tenant Improvements and the Commencement Date of the Lease. (d) GOVERNMENTAL COST INCREASES. If increases in the cost of the Tenant Improvements as set forth in the Work Cost Statement are due to requirements of any governmental agency, such increases will be added to the total Work Cost and shall be paid by Tenant to Landlord pro rata as and when Landlord makes payments to the Contractor upon invoice by the Contractor. (e) UNUSED ALLOWANCE AMOUNTS. Any unused portion of the Allowance upon completion of the Tenant Improvements will not be refunded to Tenant or be available to Tenant as a credit against any obligations of Tenant under the Lease unless Tenant has paid for excess costs as described in Sections 5(b), 5(c) or 5(d), in which case the unused Allowance may be applied toward such excess cost amounts and paid to Tenant. 6. CONSTRUCTION OF TENANT IMPROVEMENTS. Until Tenant approves the Work Cost Statement, Landlord will be under no obligation to cause the construction of any of the Tenant Improvements. Following Tenant's approval of the Work Cost Statement described in Section 4(d) above and upon Tenant's payment of the total amount by which such Work Cost Statement exceeds the Allowance, if any, Landlord's contractor will commence and diligently proceed with the construction of the Tenant Improvements, subject to Tenant Delays (as described in Section 9 below) and Force Majeure Delays (as described in Section 10 below). 7. FREIGHT/CONSTRUCTION ELEVATOR. Landlord will, consistent with its obligation to other tenants in the Building, if appropriate and necessary, make the freight/construction elevator reasonably available to Tenant in connection with initial decorating, furnishing and moving into the Premises. 8. COMMENCEMENT DATE AND SUBSTANTIAL COMPLETION. (a) COMMENCEMENT DATE. The Term of the Lease will commence on the date (the "COMMENCEMENT DATE") which is the earlier of: (i) the date Tenant moves into the Premises to commence operation of its business in all or any portion of the Premises; or (ii) the date the Tenant Improvements have been "substantially completed" (as defined below); provided, however, that if substantial completion of the Tenant Improvements is delayed as a result of any Tenant Delays described in Section 9 below, then the Commencement Date as would otherwise have been established pursuant to this Section 8(a)(ii) will be accelerated by the number of days of such Tenant Delays. (b) SUBSTANTIAL COMPLETION; PUNCH-LIST. For purposes of Section 8(a)(ii) above, the Tenant Improvements will be deemed to be "SUBSTANTIALLY COMPLETED" when Landlord: (a) is able to provide Tenant with reasonable access to the Premises; (b) has substantially performed all of the Tenant Improvement Work required to be performed by Landlord under this Work Letter Agreement, other than the items described on Schedule "4" attached hereto (Possible Scope Of Work Which May Not Be Completed by 2/28/01) and minor "punch-list" type items and adjustments which do not materially interfere with Tenant's access to or use of the Premises; and (c) a certificate of occupancy, temporary certificate of occupancy or final sign off for the Premises. Tenant acknowledges substantial completion will not require completion of those items listed on Schedule "4" attached hereto, which Tenant acknowledges Landlord may complete after Tenant takes occupancy of the Premises. If Landlord does not diligently pursue completion of such items after notice to Landlord and a reasonable opportunity to cure, Tenant shall have the right to pursue completion of such items within the Premises at Landlord's expense and Landlord shall reimburse Tenant within thirty (30) days of demand for the reasonable, actual and documented expenses incurred by Tenant in so completing such items. Within ten (10) days after delivery of the Premises to Tenant and again, within ten (10) days after Landlord completes the Schedule "4" items, Tenant and Landlord will conduct a walk-through inspection of the Premises and prepare a written punch-list specifying those punch-list items which require completion, which items Landlord will thereafter diligently complete. (c) Delivery of Possession. Landlord agrees to deliver possession of the Premises to Tenant when the Tenant Improvements (other than the Schedule "4" items and punch-list items) have been substantially completed in accordance with Section (b) above. The parties estimate that Landlord will deliver possession of the Premises to Tenant and the Term of this Lease will commence on or before the Estimated Commencement Date set forth in Section 1.7 of the Summary. Landlord agrees to use its commercially reasonable efforts to cause the Premises to be substantially completed on or before the Estimated Commencement Date. Tenant agrees that if Landlord is unable to deliver possession of the Premises to Tenant on or prior to the Estimated Commencement Date specified in Section 1.7 of the Summary, the Lease will not be void or voidable, nor will Landlord be liable to Tenant for any loss or damage resulting therefrom except as follows: Tenant will be entitled to occupy the Premises without the payment of rent for one (1) day for every day of delay beyond April 1, 2001 that does not result from Tenant Delays or Force Majeure Delays. EXHIBIT "C" -3- 43 9. TENANT DELAYS. For purposes of this Work Letter Agreement, "TENANT DELAYS" means any delay in the completion of the Tenant Improvements resulting from any or all of the following: (a) Tenant's failure for any reason to provide Landlord with permitted construction drawings for the Tenant Improvements by January 1, 2001 or the date the contractor is ready to commence construction of the Tenant Improvements, whichever is later (provided the result of any Tenant Delay under this subparagraph (a) shall be to extend one day for each day of Tenant Delay, the April 1, 2001 outside date in Section 2.2 of the Lease); (b) Tenant's failure to timely perform any of its obligations pursuant to this Work Letter Agreement, including any failure to complete, on or before the due date therefor, any action item which is Tenant's responsibility pursuant to the Work Schedule delivered by Landlord to Tenant pursuant to this Work Letter Agreement; (c) Tenant's changes to the Final Plans after Landlord's approval thereof; (d) Tenant's request for materials, finishes, or installations which are not readily available or which are incompatible with the Standards; (e) any delay of Tenant in making payment to Landlord for Tenant's share of the Work Cost; or (f) any other act or failure to act by Tenant, Tenant's employees, agents, architects, independent contractors, consultants and/or any other person performing or required to perform services on behalf of Tenant. 10. FORCE MAJEURE DELAYS. For purposes of this Work Letter, "FORCE MAJEURE DELAYS" means any actual delay in the construction of the Tenant Improvements, which is beyond the reasonable control of Landlord or Tenant, as the case may be, as described in Section 32.15 of the Lease. TENANT: LANDLORD: THE GOOD GUYS-CALIFORNIA, INC., LNR HARBOR BAY, LLC, a California corporation a California limited liability company By: By: ---------------------------------- ----------------------------------- Print Name: Print Name: ----------------------- ------------------------ Print Title: Print Title: ---------------------- ----------------------- By: By: ---------------------------------- ----------------------------------- Print Name: Print Name: ----------------------- ------------------------ Print Title: Print Title: ---------------------- ----------------------- EXHIBIT "C" -4- 44 SCHEDULE "1" TO EXHIBIT "C" LANDLORD'S WORK Exhibit A-1 [WENTZ LOGO] Bay View Plaza Job #0708 ATTACHMENT "C" CONTRACT DOCUMENT LOG
Drawing Latest Number Revision Title Area Phase Latest Date Designer - -------------------------------------------------------------------------------------------------------------------------- Architecture A1.1 002 Site Plan OFFICE IFC 5/22/00 FEE A1.2 002 Site Details OFFICE IFC 5/22/00 FEE A2.0 002 Window, Doors & Partition Schedule OFFICE IFC 5/22/00 FEE A2.1 002 First Floor Plans; Bldg. A & B OFFICE IFC 5/22/00 FEE A2.2 002 Second Floor Plans; Bldg. A & B OFFICE IFC 5/22/00 FEE A2.3 002 Roof Plans; Bldg. A & B OFFICE IFC 5/22/00 FEE A3.1 002 Building Elevations OFFICE IFC 5/22/00 FEE A3.2 002 Building Sections: A & B OFFICE IFC 5/22/00 FEE A4.1 003 Enlarged Plans/Entry Lobby & Stairs 1,2,3 OFFICE IFC FEE A4.2 003 Enlarged Section & Elev. OFFICE IFC FEE A4.3 002 Core & Ceiling Plan, Elevations OFFICE IFC 5/22/00 FEE A5.0 001 Foundation Details OFFICE PERMIT 4/12/00 FEE A6.1 002 Wall Sections OFFICE IFC 5/22/00 FEE A6.2 002 Wall Sections OFFICE IFC 5/22/00 FEE A6.3 002 Horizontal Wall Sections OFFICE IFC 5/22/00 FEE A8.1 002 Door & Window Details OFFICE IFC 5/22/00 FEE A8.2 002 Panel, Roof & Misc. Details OFFICE IFC 5/22/00 FEE A8.3 002 Details OFFICE IFC 5/22/00 FEE A9.1 Interior Details 5/22/00 FEE C1 003 Notes OFFICE IFC 5/22/00 RJA C2 003 Details/Sections OFFICE IFC 5/22/00 RJA C3 003 Horizontal Control Plan OFFICE IFC 5/22/00 RJA C4 003 Grading Plan OFFICE IFC 5/22/00 RJA C5 003 Utility Plan OFFICE IFC 5/22/00 RJA C6 003 Striping Plan OFFICE IFC 5/22/00 RJA C7 003 Erosion & Sediment Control Plan OFFICE IFC 5/22/00 RJA Electrical E0.1 001 Electrical Symbols OFFICE IFC 5/30/00 HAYWARD E0.2 001 Building A- One-Line OFFICE IFC 5/30/00 HAYWARD E0.3 001 Building B- One-Line OFFICE IFC 5/30/00 HAYWARD E1.1 001 Site Plan OFFICE IFC 5/30/00 HAYWARD E2.1 001 First Floor Elect OFFICE IFC 5/30/00 HAYWARD E2.2 001 2nd Floor Elect Bldg A & B OFFICE IFC 5/30/00 HAYWARD E2.3 001 Roof Plans; Bldg A & B OFFICE IFC 5/30/00 HAYWARD General Information A0.1 004 Title Sheet OFFICE IFC 6/6/00 FEE
Page 1 of 3 SCHEDULE "1" TO EXHIBIT "C" -1- 45 Exhibit A-1 [WENTZ LOGO] Bay View Plaza Job #0708 ATTACHMENT "C" CONTRACT DOCUMENT LOG
Drawing Latest Number Revision Title Area Phase Latest Date Designer - ------------------------------------------------------------------------------------------------------------------------ General Information A0.2 004 Specifications OFFICE IFC 6/6/00 FEE A0.3 003 Specifications OFFICE IFC 5/22/00 FEE A0.4 002 Title 24 Calculations OFFICE IFC 5/22/00 FEE A0.5 002 Title 24 Calculations OFFICE IFC 5/22/00 FEE HVAC AC0.01 001 Title 24, Mandatory Measures, Drawing Schedule OFFICE IFC 5/30/00 ACCO AC0.02 001 Equipment Schedule OFFICE IFC 5/30/00 ACCO AC1.01 001 First Floor Plan Building A OFFICE IFC 5/30/00 ACCO AC1.02 001 Second Floor Plan Building A OFFICE IFC 5/30/00 ACCO AC1.03 001 Roof Plan Building A OFFICE IFC 5/30/00 ACCO AC1.03B 001 Roof Coordination Plan Building A OFFICE IFC 5/30/00 ACCO AC1.04 001 First Floor Plan Building B OFFICE IFC 5/30/00 ACCO AC1.05 001 Second Floor Plan Building B OFFICE IFC 5/30/00 ACCO AC1.06 001 Roof Plan Building B OFFICE IFC 5/30/00 ACCO AC1.06B 001 Roof Coordination Plan Building B OFFICE IFC 5/30/00 ACCO AC5.01 001 Duct Details OFFICE IFC 5/30/00 ACCO AC6.01 001 Piping Details OFFICE IFC 5/30/00 ACCO AC7.01 001 Wiring Details OFFICE IFC 5/30/00 ACCO Interiors A9.1 001 Interior Details OFFICE IFC 5/22/00 FEE Landscape L-1 002 Landscape Layout & Mounding Plan OFFICE IFC 5/22/00 WILASSOC L-2 002 Irrigation Plan OFFICE IFC 5/22/00 WILASSOC L-3 002 Planting Plan OFFICE IFC 5/22/00 WILASSOC L-4 002 Notes OFFICE IFC 5/22/00 WILASSOC L-5 002 Details OFFICE IFC 5/22/00 WILASSOC L-6 002 Details OFFICE IFC 5/22/00 WILASSOC Plumbing P0.0 001 Plumbing Indes, Schdls, Legends, Calcs & Details OFFICE IFC 5/26/00 KINETIC P1.1 001 Domestic Water Piping Plan, 1st Floor Bldg A & B OFFICE IFC 5/26/00 KINETIC P1.2 001 Domestic Water Piping Plan, 2nd Floor Bldg A & B OFFICE IFC 5/26/00 KINETIC P2.0 001 Sanitary Sewer Underslab Bldg A & B OFFICE IFC 5/26/00 KINETIC P2.1 001 San Sewer & Vent Pip Plan: 1st Fl Bldg A & B OFFICE IFC 5/26/00 KINETIC P2.2 001 San Sewer & Vent Pip Plan: 2nd Fl Bldg A & B OFFICE IFC 5/26/00 KINETIC
SCHEDULE "1" TO EXHIBIT "C" -2- 46 Exhibit A-1 [WENTZ LOGO] Bay View Plaza Job #0708 ATTACHMENT "C" CONTRACT DOCUMENT LOG
Drawing Latest Number Revision Title Area Phase Latest Date Designer - -------------------------------------------------------------------------------------------------------------------------- Plumbing P3.0 001 Roof Piping Plan Building A & B OFFICE IFC 5/26/00 KINETIC Structural S0.1 002 General Notes Schedules OFFICE IFC 5/22/00 SEI S1.0 002 Building A/Foundation Plan OFFICE IFC 5/22/00 SEI S1.1 002 Building B/Foundation Plan OFFICE IFC 5/22/00 SEI S2.0 002 Building A/Second Floor Framing Plan OFFICE IFC 5/22/00 SEI S2.1 002 Building B/Second Floor Framing Plan OFFICE IFC 5/22/00 SEI S3.0 002 Building A/Roof Framing Plan OFFICE IFC 5/22/00 SEI S3.1 002 Building B/Roof Framing Plan OFFICE IFC 5/22/00 SEI S4.0 002 Building A/Panel Elevations OFFICE IFC 5/22/00 SEI S4.1 002 Building A/Panel Elevations OFFICE IFC 5/22/00 SEI S4.2 002 Building B/Panel Elevations OFFICE IFC 5/22/00 SEI S4.3 002 Building B/Panel Elevations OFFICE IFC 5/22/00 SEI S5.0 001 Foundation Details OFFICE IFC 5/22/00 SEI S5.1 002 Foundation Details OFFICE IFC 5/22/00 SEI S6.0 002 2nd Floor Framing Details OFFICE IFC 5/22/00 SEI S6.1 002 2nd Floor Framing Details OFFICE IFC 5/22/00 SEI S6.2 001 2nd Floor Framing Details OFFICE IFC 5/22/00 SEI S7.0 002 Roof Framing Details OFFICE IFC 5/22/00 SEI S7.1 002 Roof Framing Details OFFICE IFC 5/22/00 SEI S8.0 002 Panel Joints OFFICE IFC 5/22/00 SEI S8.1 002 Panel Sections and Details OFFICE IFC 5/22/00 SEI S9.0 002 Building A/Stair Plan & Details OFFICE IFC 5/22/00 SEI S9.1 002 Building B/Stair Plan & Details OFFICE IFC 5/22/00 SEI S9.2 002 Trasin Enclosure Plans & Details OFFICE IFC 5/22/00 SEI
SCHEDULE "1" TO EXHIBIT "C" -3- 47 SCHEDULE "2" TO EXHIBIT "C" INDEX OF DRAWINGS GENERAL - ------- A0.1 TITLE SHEET A0.2 SPEC. SHEET A0.3 SPEC. SHEET A0.4 TITLE 24 CALCULATIONS A0.5 TITLE 24 CALCULATIONS CIVIL - ----- C1 NOTES C2 DETAILS/SECTIONS C3 HORIZONTAL CONTROL PLAN C4 GRADING PLAN C5 UTILITY PLAN C6 STRIPING PLAN C7 EROSION AND SEDIMENT CONTROL PLAN LANDSCAPE - --------- L-1 LANDSCAPE LAYOUT & MOUNDING PLAN L-2 IRRIGATION PLAN L-3 PLANTING PLAN L-4 NOTES L-5 DETAILS L-6 DETAILS ARCHITECTURAL - ------------- A1.1 SITE PLAN A1.2 SITE DETAILS A2.0 WINDOW, DOOR & PARTITION SCHEDULES A2.1 FIRST FLOOR PLANS - BUILDINGS A & B A2.2 SECOND FLOOR PLANS - BUILDINGS A & B A2.3 ROOF PLANS - BUILDINGS A & B A3.1 BUILDING ELEVATIONS - BUILDINGS A & B A3.2 BUILDING SECTIONS - BUILDINGS A & B A4.1 ENLARGED PLANS - LOBBY & STAIRS A4.2 ENLARGED ELEVATIONS & SECTIONS A4.3 ENLARGED CORE PLANS & ELEVATIONS A6.1 WALL SECTIONS A6.2 WALL SECTIONS A6.3 HORIZONTAL WALL SECTIONS A8.1 DOOR & WINDOW DETAILS A8.2 PANEL, ROOF & MISCELLANEOUS DETAILS A8.3 DETAILS A9.1 INTERIOR DETAILS STRUCTURAL - ---------- S0.1 GENERAL NOTES, SCHEDULES S1.0 BUILDING A FOUNDATION PLAN S1.1 BUILDING B FOUNDATION PLAN S2.0 BUILDING A SECOND FLOOR FRAMING PLAN S2.1 BUILDING B SECOND FLOOR FRAMING PLAN S3.0 BUILDING A ROOF FRAMING PLAN S3.1 BUILDING B ROOF FRAMING PLAN S4.0 BUILDING A PANEL ELEVATIONS S4.1 BUILDING A PANEL ELEVATIONS S4.2 BUILDING B PANEL ELEVATIONS S4.3 BUILDING B PANEL ELEVATIONS S5.0 FOUNDATION DETAILS S5.1 FOUNDATION DETAILS S6.0 SECOND FLOOR FRAMING DETAILS S6.1 SECOND FLOOR FRAMING DETAILS S6.2 SECOND FLOOR FRAMING DETAILS S7.0 ROOF FRAMING DETAILS S7.1 ROOF FRAMING DETAILS S8.0 PANEL JOINTS S8.1 PANEL SECTIONS AND DETAILS S9.0 BUILDING A STAIR PLANS AND DETAILS S9.1 BUILDING B STAIR PLANS AND DETAILS S9.2 TRASH ENCLOSURE PLANS AND DETAILS SCHEDULE "2" TO EXHIBIT "C" -1- 48 SCHEDULE "2" TO EXHIBIT "C" INDEX -- TENANT PLANS A0.0 PLOT PLAN AND KEY PLAN A0.1 GENERAL NOTES A0.2 DOOR AND HARDWARE SCHEDULES A1.02 CONSTRUCTION PLAN A2.02 REFLECTED CEILING PLAN A3.02 ELECTRICAL AND TELECOMMUNICATION PLAN A4.02 FINISH PLAN A5.1 ELEVATIONS AND SECTIONS A5.2 ELEVATIONS A6.1 DETAILS M0.0 COVER SHEET, INDEX, LEGENDS, NOTES & MECHANICAL SCHEDULES M1.0 MECHANICAL HVAC PLAN -- 2ND FLOOR M2.0 MECHANICAL ROOF PLAN M3.0 MECHANICAL DETAILS MT.24 MECHANICAL TITLE 24 P0.0 PLUMBING INDEX, LEGENDS, SCHEDULES, NOTES & DETAILS P1.0 SANITARY & VENT ABOVE SLAB -- 1ST FLOOR P1.1 DOMESTIC WATER PIPING -- 1ST FLOOR P1.2 SANITARY & VENT, DOMESTIC WATER -- 2ND FLOOR E.0 CA TITLE 24, LIGHT FIXTURE SCHEDULE E.1 LEGEND, PANEL SCHEDULES E.2 LIGHTING PLAN E.3 POWER AND SIGNAL PLAN 49 SCHEDULE "3" TO EXHIBIT "C" WORK SCHEDULE
- ------------------------------------------------------------------------------------------------------------------------------------ ACT ORIG REM EARLY EARLY START ID DESCRIPTION DUR DUR START FINISH JAN FEB MAR APR - ------------------------------------------------------------------------------------------------------------------------------------ 1000 Mobilize and Layout 5 5 08JAN01 12JAN01 Mobilize and Layout 1010 R/I Overhead Mechanical 16 16 09JAN01 30JAN01 R/I Overhead Mechanical 1020 R/I Overhead Electrical 11 11 10JAN01 24JAN01 R/I Overhead Electrical 1030 Frame Full Height Watts & Fur Ext Walls 11 11 10JAN01 24JAN01 Frame Full Height Walls & Fur Ext Walls 1040 R/I Overhead Sprinklers 18 18 10JAN01 02FEB01 R/I Overhead Sprinklers 1050 R/I VAV Boxes and Piping 18 18 10JAN01 02FEB01 R/I VAV Boxes and Piping 1060 R/I Electrical in Walls 8 8 15JAN01 24JAN01 R/I Electrical in Walls 1070 Gyp Full Height Walls One Side & Furring 7 7 16JAN01 24JAN01 Gyp Full Height Walls One Side & Furring 1080 Tape to Level 5 Finish Full Height Walls 11 11 22JAN01 05FEB01 Tape to Level 5 Finish Full Height Walls 1090 Gyp Full Height Walls Second Side 7 7 25JAN01 02FEB01 Gyp Full Height Walls Second Side 1100 Tape to Level 5 Finish Second Side 10 10 31JAN01 13FEB01 Tape to Level 5 Finish Second Side 1110 Install [Illegible] Grid 10 10 31JAN01 13FEB01 Install [Illegible] Grid 1120 Paint Full Height Walls & Open Office Area 7 7 05FEB01 13FEB01 Paint Full Height Walls & Open Office Area 1130 Carpet Base & VCT Open Office Area 5 5 08FEB01 14FEB01 Carpet Base & VCT Open Office Area 1140 Frame Under Grid Walls 3 3 14FEB01 16FEB01 Frame Under Grid Walls 1150 R/I Under Grid Walls 3 3 19FEB01 21FEB01 R/I Under Grid Walls 1160 Gyp Under Grid Walls 3 3 19FEB01 21FEB01 Gyp Under Grid Walls 1170 Tape Under Grid Walls 8 8 19FEB01 28FEB01 Tape Under Grid Walls 1180 Install Furniture 10 10 15FEB01 28FEB01 Install Furniture 1190 ***Substantial Completion*** 1 1 28FEB01 28FEB01 ***Substantial Completion*** 1200 Doors Frames and Hardware 8 8 19FEB01 28FEB01 Doors Frames and Hardware 1210 Milwork 5 5 26FEB01 02MAR01 Milwork 1220 Paint Under Grid Walls 5 5 26FEB01 02MAR01 Paint Under Grid Walls 1230 Drop Ceiling Tile 5 5 01MAR01 07MAR01 Drop Ceiling Tile 1240 Carpet VCT and Base Inside Rooms 5 5 05MAR01 09MAR01 Carpet VCT and Base Inside Rooms 1250 Clean Up 3 3 07MAR01 09MAR01 Clean Up 1260 Punch List 3 3 07MAR01 09MAR01 Punch List 1270 **"SERVER ROOM"** 35 35 08JAN01 23FEB01 **"SERVER ROOM"** 1280 Layout Walls 3 3 08JAN01 10JAN01 Layout Walls 1290 Layout MEPS 4 4 08JAN01 11JAN01 Layout MEPS 1300 Frame Walls 3 3 11JAN01 15JAN01 Frame Walls 1310 R/I MEPS Overhead and Walls 5 5 11JAN01 17JAN01 R/I MEPS Overhead and walls 1320 Gyp Interior 2 2 18JAN01 19JAN01 Gyp Interior 1330 Tape Interior 6 6 22JAN01 29JAN01 Tape Interior 1340 Install Grid 3 3 30JAN01 01FEB01 Install Grid 1350 Install Lighting 5 5 02FEB01 08FEB01 Install Lighting 1360 Paint 5 5 02FEB01 08FEB01 Paint 1370 Install Computer Floor 5 5 09FEB01 15FEB01 Install Computer Floor 1380 Drop Ceiling Tile 1 1 16FEB01 18FEB01 Drop Ceiling Tile 1390 Set Equipment 5 5 19FEB01 23FEB01 Set Equipment Start date 08JAN01 Early bar Finish date 09MAR01 Wentz Group Progress bar Data date 08JAN01 Good Guys T.I. Critical bar Run date 28DEC00 Summary bar Page Number 14 Start milestone point [ILLEGIBLE] Finish milestone point
50 SCHEDULE "4" TO EXHIBIT "C" POSSIBLE SCOPE OF WORK WHICH MAY NOT BE COMPLETED BY 2/28/01 Good Guys Corporate Office Relocation 12/28/00 Prepared by: Reed Design Group Possible scope of work not completed by 2/28/01 - ----------------------------------------------- These items are shown on the schedule from L.E. Wentz Company dated 12/28/00. This scope of work is referenced to the Good Guys tenant improvement construction documents prepared by Richard Pollock and Assoc. dated 12/14/00. These items will be completed by 3/12/01. Act ID 1210 -- Millwork Cabinet, countertops, and custom millwork for the following rooms: - Copy / Coffee, rooms #207, 243, 247 - Shipping / Receiving, #217 - Lounge, #214 - Lobby, #201 - Training Room, #205 Act ID 1220, 1230, 1240 -- Paint under grid walls, drop ceiling tile, floor finishes inside rooms The offices and conference rooms along the central core may not be finished and ready for occupancy, including the following rooms: - Offices, #203, 219, 234, 237, 241 - Conference and Huddle Rooms, #206, 216, 218, 224, 226, 227, 228, 236, 239, 242, 244, 249 - Storage Rooms, #202, 211, 223, 230, 245, 250 - Video Production Room, #246 Act ID 1250, 1260 -- Cleanup and Punchlist These items will completed as the above work is finished. Phase Two - --------- The following items will be considered as part of a second phase of construction, after the initial scope of work shown in the construction documents is complete. All work will be subject to City of Alameda approvals. Additional items might be added or deleted from this list. - Install a "FM 200" fire suppression system in the Computer Room #209. - Install a roof mounted emergency generator for the Computer Room, electrical and mechanical systems. - Installation of the pivoting doors between the Training Room #205 and Waiting Room #204 SCHEDULE "4" TO EXHIBIT "C" -1- 51 SCHEDULE "5" TO EXHIBIT "C" BUDGET ESTIMATE BAY VIEW PLAZA @ HARBOR BAY GOOD GUYS TENANT IMPROVEMENT ALAMEDA, CA BUDGET ESTIMATE #1 SUMMARY
CSI # ITEM TOTAL - -------------------------------------------------------- 1710 CLEANUP 6,?20 2030 DEMOLITION EXCLUDED 5500 MISCELLANEOUS METAL EXCLUDED 6105 ROUGH CARPENTRY 12,000 6200 FINISH CARPENTRY/MILLWORK 83,540 7100 WATERPROOFING EXCLUDED 7210 INSULATION EXCLUDED 7250 FIREPROOFING EXCLUDED 7530 ROOFING 8,000 7620 SHEET METAL EXCLUDED 7800 ROOF ACCESSORIES EXCLUDED 7920 JOINT SEALANTS/CAULKING 4,500 8110 DOORS/FRAMES/HARDWARE 4?,085 2500 SITE CONCRETE EXCLUDED 8800 GLASS/GLAZING 47,500 9210 LATH/PLASTER/DRIVIT EXCLUDED 9260 DRYWALL METAL STUDS 132,333 9310 CERAMIC TILE EXCLUDED 9510 ACOUSTICAL CEILINGS 5?,08? 9660 RESILIENT TILE/CARPET 181,2?8 9900 PAINTING 20,165 10000 MISC. SPECIALTIES 42,339 10430 MISC. SIGNAGE EXCLUDED 10815 FOLDING PARTITIONS INCLUDED 10820 TOILET PARTITIONS/ACCESSORIES EXCLUDED 12600 WINDOW TREATMENT/BLINDS 7,?47 15400 PLUMBING 16,210 15500 FIRE PROTECTION 65,582 15800 HVAC 358,850 16000 ELECTRICAL 317,750 --------- TOTAL DIRECT COSTS 1,405,229 CONTINGENCY EXCLUDED GENERAL CONDITIONS 90,821 INSURANCE (0.75%) 11,220 BUILDERS RISK INSURANCE EXCLUDED ESCALATION EXCLUDED BOND EXCLUDED FEE (6.0%) 90,438 --------- GRAND TOTAL 1,597,706 =========
SCHEDULE "5" TO EXHIBIT "C" -1- 52 BAY VIEW PLAZA @ HARBOR BAY GOOD GUYS TENANT IMPROVEMENT ALAMEDA, CA QUALIFICATIONS GENERAL QUALIFICATIONS 1 Budget estimate based on preliminary drawings as identified in documents. 2 Staging area will be provided to General Contractor for trailers, storage, etc. 3 Budget estimate includes Design/Build Electrical, Mechanical, Plumbing and Fire Protection. 4 Owner to provide architect, structural engineering, and space planner. 5 Drywall taping to be at level 4 finish. 6 Base building roofing company to complete work for repairs to insure roof warranty. 7 A GMP will be provided once "For Construction" documents are available. 8 Cost of power to run equipment during construction and for equipment start-up is not included in budget. 9 Start up and commissioning of mechanical, electrical systems which are part of a new construction are included in the budget estimate. 9 Tenant improvement construction to start January 2, 2001 and complete April 1, 2000. DOCUMENTS 1 Richard Pollack & Associates Drawings A1.02, A2.02, A3.02 dated: November 21, 2000 2 Good Guys preliminary pricing notes dated: November 21, 2000 EXCLUSIONS 1 All items noted as excluded in the attached budget. 2 All items listed as alternates. 3 Permit and Plan checking fees and other city fees and taxes. 4 Testing and inspection by third parties or municipalities. 5 Builders Risk Insurance, including any deductibles. 6 Interior/exterior furnishings, systems furniture and office furnishings not detailed on drawings. 7 Hazardous material abatement, handling, & disposal of any sort. 8 Architectural & engineering services other than design/build services as stated. 9 Premium time. 10 Cost of shutdown for utility tie-ins, ie: sprinkler, electrical, underground, etc. 11 Utility connection fees for services to facility. 12 Life/access control/fire supervisory systems not detailed on plans. 13 Structural engineering. 14 Sound attenuation and noise abatement during construction. 15 Painting of ceiling, exposed duct, and exposed piping. 16 Liquidated Damages. 17 Delays due to inclemental weather or unforseen site conditions uncovered during construction. 18 Cost of blueprinting or reproduction services. 19 Items not detailed on preliminary drawings and pricing notes. SCHEDULE "5" TO EXHIBIT "C" -2- 53 BAY VIEW PLAZA @ HARBOR BAY GOOD GUYS TENANT IMPROVEMENT ALAMEDA, CA QUALIFICATIONS ALLOWANCES The following allowances are included in the budget estimate as requested: 1 6200 - Millwork; Desk Allowance, $20,000, Board Room Allowance, $20,000. 2 7510 - Roofing: Roof Penetration Repairs, $6000 3 7900 - Caulking & Sealants: Sound & Fire Penetration Caulking $4600 4 9510 - Acoustical Ceilings: Metal Ceiling Panel System, $20,000 5 9660 - Tile & Carpet: Floor Preparation, $12,500 6 9900 - Painting: Paint Wood Siding, $4,050 SCHEDULE "5" TO EXHIBIT "C" -3- 54 BAY VIEW PLAZA @ HARBOR BAY GOOD GUYS TENANT IMPROVEMENT ALAMEDA, CA BE #1 BREAKOUT
CSI # DESCRIPTION QTY UNIT UC SUBTOTAL TOTAL 1710 CONSTRUCTION FINAL CLEAN PERIODIC CLEANING 31,000 SF 0.10 3,100 FINAL CLEANING 31,000 SF 0.12 3,720 6,820 2030 DEMOLITION EXCLUDED 5500 MISCELLANEOUS STEEL EXCLUDED 6100 ROUGH CARPENTRY MISC. BLKG ON ROOF 15 ALLOW 800.00 12,000 12,000 6200 CASEWORK CABINET BUDGET 1 EA 43,540.00 43,540 DESK ALLOWANCE 1 ALLOW 20,000.00 20,000 BOARD ROOM ALLOWANCE 1 ALLOW 20,000.00 20,000 7100 WATERPROOFING 83,540 WATERPROOFING FLOOR COVERING EXCLUDED 7210 INSULATION EXCLUDED 7510 ROOFING REPAIR PENETRATIONS 12 ALLOW 650.00 8,000 6,000 7900 CAULKING/SEALANTS FULL HEIGHT/SOUND CAULKING 1 ALLOW 2,500.00 2,500 FIRE CAULK PENETRATIONS 4 ALLOW 500.00 2,000 4,500 8100 HOLLOW METAL DOORS, HARDWARE & FRAMES DOORS FRAMES & HARDWARE 34 EA 1,180.00 40,120 SUPPLY CARD READER 1 EA 7,945.00 7,945 48,065 2500 CONCRETE EXCLUDED 8800 GLASS/GLAZING INTERIOR FRAMES, GLASS O 1 EA 47,500.00 47,500 HERCULITE DOORS 47,500 9260 DRYWALL/METAL STUDS DRYWALL BUDGET ESTIMATE 1 EA 132,338.00 132,338 INTERIOR WALLS 132,338 9310 ACOUSTICAL CEILINGS ACOUSTICAL CEILING SYSTEM 1 EA 35,085.00 35,085 METAL CEILING PANEL SYSTEM 1 ALLOW 20,000.00 20,000 55,085
SCHEDULE "5" TO EXHIBIT "C" -4- 55 BAY VIEW PLAZA @ HARBOR BAY GOOD GUYS TENANT IMPROVEMENT ALAMEDA, CA BE #1 BREAKOUT ========================================================================================================== CSI# DESCRIPTION QTY UNIT UC SUBTOTAL TOTAL ========================================================================================================== 9660 RESILIENT TILE & CARPET GLUE DOWN CARPET 1 EA 168,738.00 168,738 TREATMENT & PREP 1 ALLOW 12,500.00 12,500 181,238 9900 PAINTING STEEL COLUMNS 1 EA 1,365.00 1,365 HOLLOW METAL FRAMES 34 EA 1,750.00 1,750 WOOD PAINT - FLAT 1 EA 13,000.00 13,000 WOOD SIDING 1 ALLOW 4,050.00 4,050 20,165 10000 MISC. SPECIALTIES FIRE EXTINGUISHERS 6 EA 232.00 1,392 PROJECTION SCREENS 3 EA 3,884.00 11,852 5,400 COMPUTER ROOM FLOOR 1,260 SF 23.26 28,285 NI 42,339 10616 FOLDING PARTITIONS HERCULITE PANELS INCLUDED IN GLASS AND GLAZING INCLUDED 12500 WINDOW TREATMENT FURNISH & INSTALL MINI BLINDS 1 EA 7,247.00 7,247 7,247 15400 PLUMBING SINKS, GARBAGE DISPOSAL 1 EA 18,210.00 18,210 & DISHWASHERS 16,210 15500 FIRE PROTECTION PENDANT HEADS 102 EA 356.00 36,312 PREACTION SYSTEM 1 EA 29,270.00 29,270 65,582 16500 HVAC COMPUTER ROOM W/RH, ALARMS 1 EA 128,350.00 126,350 AND SYSTEMS BACK-UP TI IMPROVEMENT, 37 ZONES 1 EA 232,500.00 232,500 W/HW REHEAT PERIMITER 368,850 18000 ELECTRICAL ELECTRICAL SCOPE BID 1 EA 317,750.00 317,750 317,750 ========================================================================================================== BUILDING TOTAL DIRECT COSTS 1,405,229 1,405,229 ==========================================================================================================
SCHEDULE "5" TO EXHIBIT "C" -5- 56 BAY VIEW PLAZA @ HARBOR BAY GOOD GUYS TENANT IMPROVEMENT ALAMEDA, CA GENERAL CONDITIONS BREAKDOWN PERSONNEL % PROJECT EXECUTIVE 0.10 3.00 MO 19,???.?0 5,820 PROJECT MANAGER 0.50 3.00 MO 12,??0.00 19,485 PROJECT ACCOUNTANT 0.10 3.00 MO 5,198.00 1,559 PROJECT ADMINISTRATOR 0.5? 3.00 MO 5,19?.00 7,794 PROJECT SUPERINTENDENT 1.00 ?.?? MO 1?,?00.00 ?0,70? VEHICLE EXPENSE IN RATES SUBTOTAL 81,421 JOBSITE OFFICE MOBILIZE -- DEMOBILIZE 0.00 LS 1,500.00 W/SHELL JOB TRAILERS - CONTRACTOR/CONFERENCE 0.00 MO 800.00 W/SHELL COPIER RENTAL 0.00 MO 200.00 W/SHELL FAX RENTAL 0.00 MO 200.00 W/SHELL TELEPHONE INSTALLATION LS W/SHELL TELEPHONE SYSTEM - LEASE 0.00 MO ?00.00 W/SHELL TELEPHONE BILLS - MONTHLY 0.00 MO ?00.00 W/SHELL JOB OFFICE - WIRING/NETWORK INSTALLATION EXCLUDED JOB OFFICE - WIRING/NETWORK MONTHLY SERVICE EXCLUDED JOB OFFICE - HARDWARE EXCLUDED DRINKING WATER/COFFEE SERVICE 0.00 MO 125.00 W/SHELL UTILITY BILLS - PG&E 3.00 MO 200.00 600 OFFICE SUPPLIES & EQUIPMENT 3.00 MO 250.00 750 SUBMITTAL BLUEPRINTING 1.00 LS 1,2?0.00 1,??0 POSTAGE & COURIER SERVICE 65.00 DAYS 15.00 W/SHELL FIRST AID SUPPLIES 3.00 MO 60.00 W/SHELL SUBTOTAL 2,?00 JOBSITE EXPENSES PERMITS AND FEES LS BY OWNER CITY BUSINESS LICENSE 0.00 LS 1,500.00 W/SHELL USE TAX LS EXCLUDED GROSS RECEIPTS TAX LS EXCLUDED PROJECT SIGNAGE 0.00 LS 750.00 EXCLUDED SMALL TOOLS & SUPPLIES 0.00 MO ?00.00 600 SECURITY GUARD MO W/SHELL TEMPORARY SECURITY FENCE LS W/SHELL TEMPORARY TOILETS W/SERVICE 1x/WK 3.00 MO 300.00 900 TEMPORARY POWER & PHONE DISTRIBUTION MO W/SHELL TEMPORARY WATER DISTRIBUTION MO W/SHELL UTILITY BILLS - STARTUP COSTS MO BY OWNER PERIODIC CLEAN-UP SF TRADE FINAL CLEAN UP SF TRADE FIRE EXTINGUISHERS 4.00 EA 76.00 ?00 SUBTOTAL 1,800 PRECONSTRUCTION ESTIMATING 1.00 LS 5,000.00 5,000 VALUE ENGINEERING HRS INCLUDED PURCHASING HRS INCLUDED CONSTRUCTABILITY REVIEW HRS INCLUDED SUBTOTAL 5,000 TOTAL GENERAL CONDITIONS 3.00 MO 30,274 90,?21
SCHEDULE "5" TO EXHIBIT "C" -6- 57 EXHIBIT "D" SAMPLE FORM OF NOTICE OF LEASE TERM DATES To: Date: --------------------------------- ---------------------------------- Re: Office Lease dated ___________, ________ between _______________________ ________, a ______________________, Landlord, and _________________________, a _____________________, Tenant, concerning Suite ________ ("PREMISES") located at ______________________________________________________________. Gentlemen: In accordance with the above-referenced Lease, we wish to advise and/or confirm as follows: 1. That the Premises have been accepted by Tenant as being substantially complete in accordance with the Lease, and that there is no deficiency in construction, except those items remaining to be completed pursuant to the punch-list referenced in the Work Letter Agreement attached to the Lease as Exhibit C. 2. That Tenant has accepted and is in possession of the Premises, and acknowledges that under the provisions of the Lease, the Term of the Lease is for ___________________ (___) years, with ______________ (___) options to renew for ________________ (___) years each, and commenced upon the Commencement Date of ___________________, _______ and is currently scheduled to expire on ________________, _______, subject to earlier termination as provided in the Lease. 3. That in accordance with the Lease, rental payment has commenced (or shall commence) on ______________________, _______. 4. If the Commencement Date of the Lease is other than the first day of the month, the first billing will contain a pro rata adjustment. Each billing thereafter, with the exception of the final billing, shall be for the full amount of the monthly installment as provided for in the Lease. 5.Rent is due and payable in advance on the first day of each and every month during the Term of the Lease. Your rent checks should be made payable to _______________________ at _________________________. 6. The exact number of rentable square feet within the Premises is ____________ square feet. The exact number of usable square feet within the Premises is ______________ square feet, subject to adjustment as provided in the Lease. 7. Tenant's Percentage, as adjusted based upon the exact number of rentable square feet within the Premises, is _______%, subject to adjustment as provided in the Lease. AGREED AND ACCEPTED TENANT: LANDLORD: - --------------------------------, --------------------------------------, a a -------------------------------- -------------------------------------- By: By: ------------------------------ ------------------------------------ Print Name: Print Name: ------------------- ------------------------- Print Title: Print Title: ------------------ ------------------------ By: By: ------------------------------ ------------------------------------ Print Name: Print Name: ------------------- ------------------------- Print Title: Print Title: ------------------ ------------------------ SAMPLE ONLY [NOT FOR EXECUTION] EXHIBIT "D" -1- 58 EXHIBIT "E" RULES AND REGULATIONS 1. No sign, advertisement, name or notice shall be installed or displayed on any part of the outside or inside of the Building without the prior written consent of Landlord. Landlord shall have the right to remove, at Tenant's expense and without notice, any sign installed or displayed in violation of this rule. All approved signs or lettering on doors and walls shall be printed, painted, affixed or inscribed at the expense of Tenant by a person approved by Landlord, using materials and in a style and format approved by Landlord. 2. Tenant shall not place anything or allow anything to be placed near the glass of any window, door, partition or wall which may appear unsightly from outside the Premises, No awnings or other projection shall be attached to the outside walls of the Building without the prior written consent of Landlord. No curtains, blinds, shades or screens shall be attached to or hung in, or used in connection with, any window or door of the Premises, other than Building standard materials, without the prior written consent of Landlord. 3. Tenant shall not obstruct any sidewalks, halls, passages, exits, entrances, elevators, escalators or stairways of the Building. The halls, passages, exits, entrances, elevators, escalators and stairways are not for the general public, and Landlord shall in all cases retain the right to control and prevent access thereto of all persons whose presence in the judgment of Landlord would be prejudicial to the safety, character, reputation and interests of the Building and its tenants; provided, that nothing herein contained shall be construed to prevent such access to persons with whom any tenant normally deals in the ordinary course of its business, unless such persons are engaged in illegal activities. Tenant and no employee, invitee, agent, licensee or contractor of Tenant shall go upon or be entitled to use any portion of the roof of the Building, provided that Tenant will be entitled to install antennas or other receiving devices on the roof of the Building so long as such devices are not visible from the Common Areas or adjacent streets. Tenant will utilize Landlord's roofing contractor for such installation. 4. The directory of the Building will be provided exclusively for the display of the name and location of tenants only, and Landlord reserves the right to exclude any other names therefrom. Tenant shall be entitled to one line on the Building lobby directory to identify Tenant. 5. Except as otherwise provided in this Lease, all cleaning and janitorial services for the Building and the Premises shall be provided exclusively through Landlord or Landlord's janitorial contractors in accordance with the provisions of Section 16.1(d) of the Lease. No person or persons other than those approved by Landlord shall be employed by Tenant or permitted to enter the Building for the purpose of cleaning the same. Tenant shall not cause any unnecessary labor by carelessness or indifference to the good order and cleanliness of the Premises. Landlord shall not in any way be responsible to Tenant for loss of property on the Premises, however occurring, or for any damage to Tenant's property by the janitors or any other employee or any other person. 6. Landlord will furnish Tenant, free of charge, with the number of keys to each door lock in the Premises reasonably required by Tenant. Landlord may impose a reasonable charge for any additional keys. Tenant may not make or have made additional keys, and Tenant shall not alter any lock or install a new additional lock or bolt on any door or window of its Premises. Tenant, upon termination of its tenancy, shall deliver to Landlord the keys of all doors which have been furnished to, or otherwise procured by Tenant. 7. Electric wires, telephones, telegraphs, burglar alarms or other similar apparatus shall not be installed in the Premises except as set forth in Tenant's Plans or otherwise reasonably approved by Landlord. Any installation of telephones, telegraphs, electric wires or other electric apparatus made without permission shall be removed by Tenant at Tenant's own expense. No machines other than standard office machines, such as typewriters and calculators, photo copiers, personal computers and word processors, and vending machines permitted by the Lease, shall be used in the Premises without the approval of Landlord, except in the computer room shown on Tenant's Plans. 8. Except in connection with Tenant's initial occupancy of the Building, no furniture, freight, or equipment of any kind shall be brought into the Building without prior notice to Landlord and all moving of the same into or out of the Building shall be done at such time and in such manner as Landlord shall reasonably designate. No furniture, equipment or merchandise shall be received in the Building or carried up or down in the elevator, except between such hours as shall be designated by Landlord which must include Tenant's normal business hours. No deliveries shall be made which impede or materially interfere with other tenants or the operation of the Building. 9. Tenant shall not place a load upon any floor of the Premises which exceeds the load per square foot which such floor was designed to carry which is 100 psf and which is allowed by law. Landlord shall have the right to prescribe the weight, size and position of all equipment, materials, furniture or other property brought into the Building. Heavy objects, if such objects are considered necessary by Tenant, as determined by Landlord, shall stand on such platforms as determined by Landlord to be necessary to properly distribute the weight. Business machines and mechanical equipment which cause noise or vibration that may be transmitted to the structure of the Building or to any space therein to such a degree EXHIBIT "E" -1- 59 as to be objectionable to Landlord or to any tenants in the Building, shall be placed and maintained by Tenant, at Tenant's expense, on vibration eliminators or other devices sufficient to eliminate noise or vibration. Landlord will not be responsible for loss of, or damage to, any such equipment or other property from any cause, and all damage done to the Building by maintaining or moving such equipment or other property shall be repaired at the expense of Tenant after Tenant's receipt of notice and an opportunity to cure provided in the Lease. 10. Tenant shall not use or keep in the Premises any kerosene, gasoline or inflammable or combustible fluid or material other than those limited quantities necessary for the operation or maintenance of office equipment. Tenant shall not use or permit to be used in the Premises any foul or noxious gas or substance, or permit or allow the Premises to be occupied or used in a manner offensive or objectionable to Landlord or other occupants of the Project by reason of noise, odors or vibrations, nor shall Tenant bring into or keep in or about the Premises any birds or animals. 11. Tenant shall not use any method of heating or air-conditioning other than that supplied by Landlord. 12. Tenant shall not waste electricity, water or air-conditioning and agrees to cooperate fully with Landlord to assure the most effective operation of the Building's heating and air-conditioning and to comply with any governmental energy-saving rules, laws or regulations of which Tenant has actual notice, and shall not adjust controls other than room thermostats installed for Tenant's use. Tenant shall keep corridor doors closed. 13. Landlord reserves the right from time to time, in Landlord's sole and absolute discretion, exercisable without prior notice and without liability to Tenant, to: (a) name or change the name of the Building, Site or Project; (b) change the address of the Building or Project, and/or (c) install, replace or change any signs in, on or about the Common Areas, the Building or Site (except for Tenant's signs, if any, which are expressly permitted by the Lease). 14. Landlord reserves the right to exclude from the Building between the hours of 6:00 p.m. and 7:00 a.m., or such other hours as may be established from time to time by Landlord, and on legal holidays, any person unless that person is known to the person or employee in charge of the Building or has a pass or is properly identified. Landlord shall not be liable for damages for any error with regard to the admission to or exclusion from the Building of any person. Tenant shall be responsible for all persons for whom it requests passes and shall be liable to Landlord for all acts of such persons. Landlord reserves the right to prevent access to the Building in case of invasion, mob, riot, public excitement or other commotion by closing the doors or by other appropriate action. 15. Tenant shall close and lock all doors of its Premises and entirely shut off all water faucets or other water apparatus, and, except with regard to Tenant's computers and other equipment which reasonably require electricity on a 24-hour basis, all electricity, gas or air outlets before Tenant and its employees leave the Premises. Tenant shall be responsible for any damage or injuries sustained by other tenants or occupants of the Building or by Landlord for noncompliance with this rule. 16. The toilet rooms, toilets, urinals, wash bowls and other apparatus shall not be used for any purpose other than that for which they were constructed, and no foreign substances of any kind whatsoever shall be thrown therein. 17. Tenant shall not sell, or permit the sale at retail, of newspapers, magazines, periodicals, theater tickets, or any other goods or merchandise to the general public in or on the Premises. Tenant shall not make any room-to-room solicitation of business from other tenants in the Project. Tenant shall not use the Premises for any business or activity other than that specifically provided for in the Lease. 18. Except as otherwise permitted by this Lease, Tenant shall not install any radio or television antenna, loudspeaker or other device on the roof or exterior walls of the Building. Tenant shall not interfere with radio or television broadcasting or reception from or in the Building or elsewhere. 19. Except as expressly permitted in the Lease, Tenant shall not mark, drive nails, screw or drill into the partitions, window mullions, woodwork or plaster, or in any way deface the Premises or any part thereof, except to install normal wall hangings and furniture systems employed by Tenant in the conduct of its business. Tenant shall repair any damage resulting from noncompliance under this rule and all damage resulting from the installation and removal of such furniture systems. 20. Tenant shall not install, maintain or operate upon the Premises any vending machines without the prior written consent of Landlord, except those used exclusively for its employees and invitees. 21. Canvassing, soliciting and distribution of handbills or any other written material, and peddling in and around the Project or the Building are expressly prohibited, and each tenant shall cooperate to prevent same. 22. Landlord reserves the right to exclude or expel from the Project and/or the Building any person who, in Landlord's judgment, is intoxicated or under the influence of liquor or drugs or who is in violation of any of the Rules and Regulations of the Project or Building. EXHIBIT "E" -2- 60 23. Tenant shall store all its trash and garbage within its Premises or in facilities in the Common Areas provided for such purposes. Tenant shall not place in any trash box or receptacle any material which cannot be disposed of in the ordinary and customary manner of trash and garbage disposal. All garbage and refuse disposal shall be made in accordance with directions reasonably issued from time to time by Landlord. 24. The Premises shall not be used for the storage of merchandise held for sale to the general public, or for lodging or for manufacturing of any kind. No cooking shall be done or permitted by Tenant on the Premises, except that use by Tenant of Underwriters' Laboratory-approved equipment for brewing coffee, tea, hot chocolate and similar beverages shall be permitted and the use of a microwave shall be permitted, provided that such equipment and use is in accordance with all applicable federal, state, county and city laws, codes, ordinances, rules and regulations. 25. Tenant shall not use in any space, or in the public halls of the Building, any hand trucks except those equipped with rubber tires and side guards, or such other material-handling equipment as Landlord may approve. Tenant shall not bring any other vehicles of any kind into the Building. 26. Tenant shall not use the name of the Project or Building in connection with, or in promoting or advertising, the business of Tenant, except for Tenant's address. 27. Tenant agrees that it shall comply with all fire and security regulations that may be issued from time to time by Landlord, and Tenant also shall provide Landlord with the name of a designated responsible employee to represent Tenant in all matters pertaining to such fire or security regulations. Tenant shall cooperate fully with Landlord in all matters concerning fire and other emergency procedures. 28. Tenant assumes any and all responsibility for protecting its Premises from theft, robbery and pilferage. Such responsibility shall include keeping doors locked and other means of entry to the Premises closed. 29. Landlord may waive any one or more of these Rules and Regulations for the benefit of Tenant or any other tenant, but no such waiver by Landlord shall be construed as a waiver of such Rules and Regulations in favor of Tenant or any other such tenant, nor prevent Landlord from thereafter enforcing any such Rules and Regulations against any and all of the tenants in the Building. 30. These Rules and Regulations are in addition to, and shall not be construed to in any way modify or amend, in whole or in part, the terms, covenants, agreements and conditions of any lease of premises in the Project or Building. In the event of a conflict between any Rule and Regulation and the terms of the Lease, the terms of the Lease shall prevail. 31. Landlord reserves the right to make such other and reasonable Rules and Regulations as, in its judgment, may from time to time be needed for safety, security, care and cleanliness of the Project and/or Building and for the preservation of good order therein. Tenant agrees to abide by all such Rules and Regulations hereinabove stated and any additional rules and regulations which are adopted, provided that no such additional rules and regulations will be deemed to alter or modify or otherwise effect Tenant's rights or increase its obligations set forth in the Lease. 32. Tenant shall be responsible for the observance of all of the foregoing rules by Tenant's employees, agents, clients, customers, invitees or guests. 33. Tenant shall not lay linoleum, tile, carpet or other similar floor covering so that the same shall be affixed to the floor of the Premises in any manner except by a paste, or other material which may easily be removed with water, the use of cement or other similar adhesive materials being expressly prohibited. The method of affixing any such linoleum, tile, carpet or other similar floor covering shall be subject to the reasonable approval of Landlord. The expense of repairing any damage resulting from a violation of this rule shall be borne by Tenant. 34. Tenant shall not without Landlord's consent, which may be given or withheld in Landlord's sole and absolute discretion, receive, store, discharge, or transport firearms, ammunition, or weapons or explosives of any kind or nature at, on or from the Premises, the Building or the Project. PARKING RULES AND REGULATIONS In addition to the parking provisions contained in the Lease to which this Exhibit "E" is attached, the following rules and regulations shall apply with respect to the use of the Building's parking facilities. 1. Every parker is required to park and lock his/her own vehicle. All responsibility for damage to or loss of vehicles is assumed by the parker and Landlord shall not be responsible for any such damage or loss by water, fire, defective brakes, the act or omissions of others, theft, or for any other cause. 2. Tenant shall not park or permit its employees to park in any parking areas designated by Landlord as areas for parking by visitors to the Project. Tenant shall not leave vehicles in the parking areas overnight nor park any vehicles in the parking areas other than automobiles, motorcycles, motor driven or non-motor driven bicycles or four wheeled trucks. EXHIBIT "E" -3- 61 3. Parking stickers or any other device or form of identification supplied by Landlord as a condition of use of the parking facilities shall remain the property of Landlord. Such parking identification device must be displayed as requested and may not be mutilated in any manner. The serial number of the parking identification device may not be obliterated. Devices are not transferable and any device in the possession of an unauthorized holder will be void. 4. Other than over night and reasonable extended parking for employees in connection with business activities at the Project or business travel, no overnight or extended term storage of vehicles shall be permitted. 5. Vehicles must be parked entirely within painted stall lines of a single parking stall. 6. All directional signs and arrows must be observed. 7. The speed limit within all parking areas shall be five (5) miles per hour. 8. Parking is prohibited: (a) in areas not striped for parking; (b) in aisles; (c) where "no parking" signs are posted; (d) on ramps; (e) in cross-hatched areas; and (f) in reserved spaces and in such other areas as may be designated by Landlord. 9. Loss or theft of parking identification devices must be reported to the Management Office immediately, and a lost or stolen report must be filed by the Tenant or user of such parking identification device at the time. Landlord has the right to exclude any vehicle from the parking facilities that does not have an identification device except for customers and clients of Tenant and other tenants of the Project. 10. Any parking identification devices reported lost or stolen found on any unauthorized car will be confiscated and the illegal holder will be subject to prosecution. 11. Washing, waxing, cleaning or servicing of any vehicle in any area not specifically reserved for such purpose is prohibited. 12. Tenant's continued right to park in the parking facilities is conditioned upon Tenant abiding by these rules and regulations and those contained in this Lease. Further, if the Lease terminates for any reason whatsoever, Tenant's right to park in the parking facilities shall terminate concurrently therewith. 13. Landlord reserves the right to adopt reasonable and non-discriminatory rules and regulations for the parking facilities as it deems necessary for the operation of the parking facilities (excluding parking charges). Landlord may refuse to permit any person who violates these rules to park in the parking facilities, and any violation of the rules shall subject the vehicle to removal, at such vehicle owner's expense. EXHIBIT "E" -4- 62 EXHIBIT "F" SAMPLE FORM OF TENANT ESTOPPEL CERTIFICATE The undersigned _____________________________, a _______________________________ ("TENANT") hereby certifies to __________________________ a ____________________ ("LANDLORD"), and _______________________________, as follows: 1. Attached hereto is a true, correct and complete copy of that certain Office Lease dated ________________, _______ between Landlord and Tenant (the "LEASE"), which demises Premises which are located at _____________________________. The Lease is now in full force and effect and has not been amended, modified or supplemented, except as set forth in Section 6 below. 2. The term of the Lease commenced on _____________________, ________. 3. The term of the Lease is currently scheduled to expire on _______________, _______. 4. Tenant has no option to renew or extend the Term of the Lease except: _______ ____________________________________________________________________________. 5. Tenant has no preferential right to purchase the Premises or any portion of the Building or Site upon which the Premises are located, and Tenant has no rights or options to expand into other space in the Building except: __________________________________________________________. 6. The Lease has: (Initial One) (___) not been amended, modified, supplemented, extended, renewed or assigned. (___) been amended, modified, supplemented, extended, renewed or assigned by the following described agreements, copies of which are attached hereto: ________________________________________________________________ ________________________________________________________________________. 7. Tenant has accepted and is now in possession of the Premises and has not sublet, assigned or encumbered the Lease, the Premises or any portion thereof except as follows: ________________________________________________________________________________ ________________________________________________________________________________ ________________________________________________________________________________ 8. The current Monthly Basic Rent is $______________; and current monthly parking charges are $________________. 9. Tenant's Percentage is __________%, and Tenant's Percentage of Operating Expenses, Real Property Taxes and Assessments, Insurance Costs, and Utilities Costs currently payable by Tenant is $_________________ per month, which amount is Landlord's current estimate of Tenant's Percentage of Operating Expenses, Real Property Taxes and Assessments, Insurance Costs, and Utilities Costs: ________________________________________________________________________________ ________________________________________________________________________________ ________________________________________________________________________________ 10. The amount of security deposit (if any) is $_________________. No other security deposits have been made. 11. All rental payments payable by Tenant have been paid in full as of the date hereof. No rent under the Lease has been paid for more than thirty (30) days in advance of its due date. 12. To Tenant's knowledge, all work required to be performed by Landlord under the Lease has been completed and has been accepted by Tenant, and all tenant improvement allowances have been paid in full. 13. To Tenant's knowledge, as of the date hereof, there are no defaults on the part of Landlord or Tenant under the Lease. 14. To Tenant's knowledge, Tenant has no defense as to its obligations under the Lease and currently claims no set-off or counterclaim against Landlord; Tenant has such defenses as are provided by applicable law or the Lease and this agreement does not constitute a waiver of any unknown claims. 15. Tenant has no right to any concession (rental or otherwise) or similar compensation in connection with renting the space it occupies, except as expressly provided in the Lease. EXHIBIT "F" 63 16. All insurance required of Tenant under the Lease has been provided by Tenant and all premiums have been paid. 17. There has not been filed by or against Tenant a petition in bankruptcy, voluntary or otherwise, any assignment of creditors, any petition seeking reorganization or arrangement under the bankruptcy laws of the United States or any state thereof, or any other action brought pursuant to such bankruptcy laws with respect to Tenant. 18. Tenant pays rent due Landlord under the Lease to Landlord and does not have any knowledge of any other person who has any right to such rents by collateral assignment or otherwise. The foregoing certification is made with the knowledge that is about to [fund a loan to Landlord or purchase the Building from Landlord], and that is relying upon the representations herein made in [funding such loan or purchasing the Building]. Dated:_____________________, _______. TENANT: --------------------------------------, a -------------------------------------- By: ------------------------------------ Print Name: ------------------------- Its: -------------------------------- EXHIBIT "F" 64 JANITORIAL SPECIFICATIONS A. Janitorial Service Specifications for Tenant Suites and Common Areas on Tenant-Occupied Floors 1. Nightly Services a. Secure all lights as soon as possible each night. b. Vacuum carpeted traffic lanes. c. Dust mop all resilient and composition floors with treated dust mops. Damp mop to remove spills and water stains as required. d. Dust desks and office furniture with treated dust cloths. e. Papers and folders on desks are not to be moved. f. Empty all ash trays and urns. Clean and sanitize as required. g. Empty all waste paper baskets and other trash containers. h. Remove all trash from floors to the designated trash areas. i. Remove fingerprints, dirt smudges, graffiti, etc., from all doors, frames, glass partitions, windows, light switches, walls, elevator door jambs and elevator interiors. j. Return chairs and waste baskets to proper positions. k. Clean, sanitize and polish drinking fountains. l. Police all service stair wells. m. Police all interior public corridor planters. n. Dust and remove debris from all metal door thresholds. o. Wipe clean smudged brightwork. p. Spotclean resilient and composition floors as required. ABLE BUILDING MAINTENANCE CO. EXHIBIT G -1- 65 JANITORIAL SPECIFICATIONS page two A. Janitorial Service Specifications for Tenant Suites and Common Areas on Tenant-Occupied Floors (continued) 1. Nightly Services (continued) r. Service all walk-off mats as required. s. Close all drapes. t. Check for burned out lights and report them to supervisor. Janitorial Supervisor to leave list of burned out lights at the lobby console on a nightly basis. 2. Weekly Services a. Dust all low reach areas including, but not limited to, chair rungs, structural and furniture ledges, baseboards, window sills, door louvers, wood panelling molding, etc. b. Dust inside of all door jambs, dust interior window blinds. c. Clean and polish all metal door thresholds. d. Wipe clean and polish all brightwork. e. Sweep all service stair wells. f. Dust all vinyl base. g. Edge all carpeted areas. h. Clean and spray buff all building standard resilient and/or composite flooring. 3. Monthly Services a. Dust all high reach areas including, but not limited to, tops of door frames, structural and furniture ledges, air-conditioning diffusers ABLE BUILDING MAINTENANCE CO. EXHIBIT G -2- 66 JANITORIAL SPECIFICATIONS page three A. Janitorial Service Specifications for Tenant Suites and Common Areas on Tenant-Occupied Floors (continued) and return grilles, tops of partitions, picture frames, parabolic light fixtures, etc. b. Clean and refinish all resilient floors with a slip-retardant finish. 4. Bi-Monthly Services a. Spot clean all corridor walls, trim, etc. B. Restroom Service Specifications 1. Nightly Services a. Restock all restrooms with supplies from the Owner's stock, including paper towels, toilet tissue, seat covers and hand soap, sanitary napkins and tampons as required. Restock all restrooms with trashliners, and sanisacks from Contractor's stock. b. Wash and polish all mirrors, dispensers, faucets, flushometers and brightwork with non-scratch disinfectant cleaner. Wipe dry all sinks. c. Wash and sanitize all toilets, toilet seats, urinals and sinks with non-scratch disinfectant cleaner. d. Remove stains, descale toilets, urinals and sinks, as required. e. Mop all restroom floors with disinfectant germicidal solution. f. Empty and sanitize all waste and sanitary napkin and tampon receptacles. g. Remove all restroom trash. ABLE BUILDING MAINTENANCE CO. EXHIBIT G -3- 67 JANITORIAL SPECIFICATIONS page four B. Restroom Service Specifications (continued) 1. Nightly Services (continued) h. Spotclean finger prints, marks and graffiti from walls, partitions, glass, aluminum and stainless and light switches as required. i. Empty and damp wipe all ashtrays. j. Check for light fixtures burned out lights or not working properly and report them to supervisor. Janitorial Supervisor to leave list at Building Office on a nightly basis. k. Report to Janitorial Supervisor all bathroom fixtures not working properly. 2. Weekly Services a. Dust all high reach areas including, but not limited to, tops of door frames, structural and furniture ledges, air-conditioning diffusers and return grilles, tops of partitions, picture frames, parabolic light fixtures, etc. 3. Monthly Services a. Wipe down all tile walls and metal partitions. Partitions shall be left clean and unstreaked after this work. b. Clean all ventilation grilles. c. Dust all doors and door jambs. d. Thoroughly machine scrub all ceramic tile floors. 4. Quarterly Services a. Reseal all ceramic tile floor using approved sealers. ABLE BUILDING MAINTENANCE CO. EXHIBIT G -4- 68 JANITORIAL SPECIFICATIONS page five C. Main Floor, Elevator Lobbies and Public Corridor Specifications 1. Nightly Services a. Spot clean all glass including low partitions and the corridor side of all windows and glass doors to tenant premises. b. Spot clean all metal brightwork including swinging door hardware, kick plates, base, partition tops, hand rails, waste paper receptacles, planters, elevator call button plates, hose cabinets and visible hardware on the corridor side of tenant entry doors. c. Thoroughly clean all door saddles of dirt and debris. d. Wash and buff lobby floor. e. Spot clean and dust directory board glass and ledges. f. Empty, clean and sanitize as required all waste paper baskets and refuse receptacles. g. Vacuum all carpets as necessary, spot clean as necessary. h. Spot clean all elevator doors and frames. i. Wash and polish all drinking fountains. j. Sweep and/or dust mop all tile floors. 2. Weekly Services a. Buff all corridor halls where tile is installed. b. Spot clean walls and doors in corridors. c. Dust all high precast ledges within interior lobby. ABLE BUILDING MAINTENANCE CO. EXHIBIT G -5- 69 JANITORIAL SPECIFICATIONS page six 3. Monthly Services a. Strip and seal marble lobby floor. 4. Quarterly Services a. Thoroughly scrub and refinish all resilient floors with a slip-retardant finish. D. Passenger Elevator Cleaning Specifications 1. Nightly Services a. Spot clean cab walls and interior doors. b. Spot clean outside surfaces of all elevator doors and frames. c. Vacuum all cab floors thoroughly. Edge thoroughly. d. Vacuum all elevator thresholds. 2. Weekly Services a. Thoroughly clean entire surfaces of all doors and frames and outside surfaces of all doors and frames. b. Steel wool all thresholds. E. Exterior Structure and Grounds Services Specifications 1. Nightly Services a. Police entire perimeter of building, including landscaped areas, storm drain grilles to the property lines on all sides, and loading dock area. ABLE BUILDING MAINTENANCE CO. EXHIBIT G -6- 70 JANITORIAL SPECIFICATIONS page seven E. Exterior Structure and Grounds Services Specifications 1. Nightly Services (continued) b. Spot sweep all accumulations of dirt, papers and leaves in all corner areas where winds tend to cause collections of debris. Spot clean-up once upon arrival (5:00 p.m.) and then again during the janitorial shift. c. Spot clean all exterior glass at building entrances. d. Lift nap on all entry walk-off mats as necessary with a heavy bristle brush and vacuum. e. Sweep sidewalk and steps, including gum removed. f. Hose down sidewalks. ABLE BUILDING MAINTENANCE CO. EXHIBIT G -7- 71 EXTENSION OPTION RIDER RIDER N0. 1 TO OFFICE LEASE This Rider No. 1 is made and entered into by and between LNR HARBOR BAY, LLC, a California Limited Liability Company ("LANDLORD"), and THE GOOD GUYS-CALIFORNIA INC., a California corporation ("TENANT"), as of the day and year of the Lease between Landlord and Tenant to which this Rider is attached. Landlord and Tenant hereby agree that, notwithstanding anything contained in the Lease to the contrary, the provisions set forth below shall be deemed to be part of the Lease and shall supersede any inconsistent provisions of the Lease. All references in the Lease and in this Rider to the "Lease" shall be construed to mean the Lease (and all exhibits and Riders attached thereto), as amended and supplemented by this Rider. All capitalized terms not defined in this Rider shall have the same meaning as set forth in the Lease. 1. Landlord hereby grants to Tenant one (1) option (the "EXTENSION OPTION") to extend the Term of the Lease for one (1) additional period of five (5) years (the "OPTION TERM"), on the same terms, covenants and conditions as provided for in the Lease during the initial ten (10) year Term, except for the Monthly Basic Rent, which shall initially be equal the greater of (a) the Monthly Basic Rent payable by Tenant during the last month of the then current Term immediately preceding the Option Term or (b) ninety-five percent (95%) of the Fair Market Rent for the Premises for the initial year of the Option Term (thereafter, such rent shall be subject to annual adjustments during the remainder of the Option Term, if such adjustments are part of the Fair Market Rent determination) as defined and determined in accordance with the provisions of Section 3 below. 2. The Extension Option must be exercised, if at all, by written notice ("EXTENSION NOTICE") delivered by Tenant to Landlord no sooner than that date which is three hundred sixty-five (365) days and no later than that date which is one hundred eighty (180) days prior to the expiration of the then current term of the Lease. The Extension Option shall, at Landlord's sole option, not be deemed to be properly exercised if, at the time the Extension Option is exercised or on the scheduled commencement date for the Option Term, Tenant is in default beyond the period of notice and opportunity to cure provided in the Lease on either the date of delivery of the Extension Notice or the date the Option Term would commence. Provided Tenant has properly and timely exercised the Extension Option, the then current term of the Lease shall be extended by the Option Term, and all terms, covenants and conditions of the Lease shall remain unmodified and in full force and effect, except that the Monthly Basic Rent shall be as set forth above. 3. If Landlord determines that the Monthly Basic Rent for the Option Term shall be the Monthly Basic Rent payable by Tenant during the last month of the then current Term pursuant to Section 1(a) above, such determination shall be conclusive, Tenant shall have no right to object thereto, and the following provisions regarding the determination of the fair market rental rate shall not apply. If, however, Landlord determines that the Monthly Basic Rent for the applicable Option Term shall be the fair market rental rate pursuant to Section 1(b) above, then such fair market rate shall be determined in accordance with the Fair Market Rental Rate Rider attached to the Lease as Rider No. 2. 4. Notwithstanding the fair market rental rate determined pursuant to Section 3 above, in no event shall the initial Monthly Basic Rent payable during the Option Term be less than the Monthly Basic Rent payable during the last month of the immediately preceding Term. 5. Notwithstanding the fair market rental rate determined pursuant to Section 3 above, Tenant shall have the right to cancel its election to extend the Term upon written notice to Landlord if Tenant disapproves the determination of the Fair Market Rent pursuant to Rider No. 2 provided (i) at such time at least six (6) months remains on Term or the Term is extended such that six (6) months shall remain from the date of Tenant's notice of cancellation until the date Tenant will cease payment of rent under this Lease, (ii) Tenant shall pay rent throughout such six (6) month period at the then Monthly Basic Rent rate for any portion of the original Term remaining and at the Fair Market rental rate determined as provided in Rider No. 2 for any extended period of time needed to provide such six (6) month occupancy period, (iii) Tenant pays all costs of the appraisal process (i.e., both parties' costs). RIDER NO. 1 -1- 72 FAIR MARKET RENTAL RATE RIDER RIDER NO. 2 TO OFFICE LEASE This Rider No. 2 is made and entered into by and between LNR HARBOR BAY, LLC, a California limited liability company ("LANDLORD"), and THE GOOD GUYS - CALIFORNIA, INC., a California corporation ("TENANT"), as of the day and year of the Lease between Landlord and Tenant to which this Rider is attached. Landlord and Tenant hereby agree that, notwithstanding anything contained in the Lease to the contrary, the provisions set forth below shall be deemed to be part of the Lease and shall supersede any inconsistent provisions of the Lease. All references in the Lease and in this Rider to the "Lease" shall be construed to mean the Lease (and all exhibits and Riders attached thereto), as amended and supplemented by this Rider. All capitalized terms not defined in this Rider shall have the same meaning as set forth in the Lease. 1. The term "fair market rental rate" as used in the Lease and any Rider attached thereto shall mean the annual amount per square foot, projected during and throughout the Option Term (i.e., including annual adjustments to rent if such annual adjustments are market at such time), that a willing, non-equity renewal tenant (excluding sublease and assignment transactions) would pay, and a willing, institutional landlord of a comparable quality office building located in the Alameda, California area would accept, in an arm's length transaction (what Landlord is accepting in then current transactions for the Building may be included in the data used for purposes of projecting rent for the Option Term), for space of comparable size, quality and floor height as the Premises, taking into account the age, quality and layout of the existing improvements in the Premises, and taking into account items that professional real estate brokers or professional real estate appraisers customarily consider, including, but not limited to, rental rates, space availability, tenant size, tenant improvement allowances, parking charges and any other lease considerations, if any, then being charged or granted by Landlord or the lessors of such similar office buildings. The fair market rental rate will be an effective rate, not specifically including, but accounting for, the appropriate economic considerations described above. 2. In the event where a determination of fair market rental rate is required under the Lease, Landlord shall provide written notice of Landlord's determination of the fair market rental rate not later than sixty (60) days after the last day upon which Tenant may timely exercise the right giving rise to the necessity for such fair market rental rate determination. Tenant shall have ten (10) days ("Tenant's Review Period") after receipt of Landlord's notice of the fair market rental rate within which to accept such fair market rental rate or to reasonably object thereto in writing. Failure of Tenant to so object to the fair market rental rate submitted by Landlord in writing within Tenant's Review Period shall conclusively be deemed Tenant's approval and acceptance thereof. If within Tenant's Review Period Tenant reasonably objects to or is deemed to have disapproved the fair market rental rate submitted by Landlord, Landlord and Tenant will meet together with their respective legal counsel to present and discuss their individual determinations of the fair market rental rate for the Premises under the parameters set forth in Paragraph 1 above and shall diligently and in good faith attempt to negotiate a rental rate on the basis of such individual determinations. Such meeting shall occur no later than ten (10) days after the expiration of Tenant's Review Period. The parties shall each provide the other with such supporting information and documentation as they deem appropriate. At such meeting if Landlord and Tenant are unable to agree upon the fair market rental rate, they shall each submit to the other their respective best and final offer as to the fair market rental rate. If Landlord and Tenant fail to reach agreement on such fair market rental rate within five (5) business days following such a meeting (the "Outside Agreement Date"), Tenant's Extension Option will be deemed null and void unless Tenant demands appraisal, in which event each party's determination shall be submitted to appraisal in accordance with the provisions of Section 3 below. 3. (a) Landlord and Tenant shall each appoint one (1) independent appraiser who shall by profession be an M.A.I. certified real estate appraiser who shall have been active over the five (5) year period ending on the date of such appointment in the leasing of commercial (including office) properties in the Alameda area. The determination of the appraisers shall be limited solely to the issue of whether Landlord's or Tenant's last proposed (as of the Outside Agreement Date) best and final fair market rental rate for the Premises is the closest to the actual fair market rental rate for the Premises as determined by the appraisers, taking into account the requirements specified in Section 1 above. Each such appraiser shall be appointed within fifteen (15) days after the Outside Agreement Date. (b) The two (2) appraisers so appointed shall within fifteen (15) days of the date of the appointment of the last appointed appraiser agree upon and appoint a third appraiser who shall be qualified under the same criteria set forth hereinabove for qualification of the initial two (2) appraisers. (c) The three (3) appraisers shall within thirty (30) days of the appointment of the third appraiser reach a decision as to whether the parties shall use Landlord's or Tenant's submitted best and final fair market rental rate, and shall notify Landlord and Tenant thereof. During such thirty (30) day period, Landlord and Tenant may submit to the appraisers such information and documentation to support their respective positions as they shall deem reasonably relevant and Landlord and Tenant may each appear before the appraisers jointly to question and respond to questions from the appraisers. (d) The decision of the majority of the three (3) appraisers shall be binding upon Landlord and Tenant and neither party shall have the right to reject the decision or to undo the exercise of the Option. If either Landlord or Tenant fails to appoint an appraiser within the time period specified in Section 3(a) RIDER NO. 2 -1- 73 hereinabove, the appraiser appointed by one of them shall within thirty (30) days following the date on which the party failing to appoint an appraiser could have last appointed such appraiser reach a decision based upon the same procedures as set forth above (i.e., by selecting either Landlord's or Tenant's submitted best and final fair market rental rate), and shall notify Landlord and Tenant thereof, and such appraiser's decision shall be binding upon Landlord and Tenant and neither party shall have the right to reject the decision or to undo the exercise of the Option. (e) If the two (2) appraisers fail to agree upon and appoint a third appraiser, either party, upon ten (10) days written notice to the other party, can apply to the Presiding Judge of the Superior Court of Alameda County to appoint a third appraiser meeting the qualifications set forth herein. The third appraiser, however selected, shall be a person who has not previously acted in any capacity for either party. (f) The cost of each party's appraiser shall be the responsibility of the party selecting such appraiser, and the cost of the third appraiser (or arbitration, if necessary) shall be shared equally by Landlord and Tenant. (g) If the process described hereinabove has not resulted in a selection of either Landlord's or Tenant's submitted best and final fair market rental rate by the commencement of the applicable lease term, then the fair market rental rate estimated by Landlord will be used until the appraiser(s) reach a decision, with an appropriate rental credit and other adjustments for any overpayments of Monthly Basic Rent or other amounts if the appraisers select Tenant's submitted best and final estimate of the fair market rental rate. The parties shall enter into an amendment to this Lease confirming the terms of the decision. (h) As provided in Rider 2, once the fair market rental rate for the Premises has been established, the rental rate for the Premises shall be set at ninety five percent (95%) of such fair market rental rate (including annual adjustments, if applicable, at 95% of the adjusted rates per annum). RIDER NO. 2 -2- 74 FIRST RIGHT TO LEASE RIDER NO. 3 TO OFFICE LEASE This Rider No. 3 is made and entered into by and between LNR HARBOR BAY, LLC, a California limited liability company ("LANDLORD"), and THE GOOD GUYS-CALIFORNIA, INC., a California corporation ("TENANT"), as of the day and year of the Lease between Landlord and Tenant to which this Rider is attached. Landlord and Tenant hereby agree that, notwithstanding anything contained in the Lease to the contrary, the provisions set forth below shall be deemed to be part of the Lease and shall supersede any inconsistent provisions of the Lease. All references in the Lease and in this Rider to the "Lease" shall be construed to mean the Lease (and all exhibits and Riders attached thereto), as amended and supplemented by this Rider. All capitalized terms not defined in this Rider shall have the same meaning as set forth in the Lease. 1. Tenant shall have a continuing right of first offer to lease ("Tenant's Right of First Offer") any space in the Building which becomes available for lease to third parties after the expiration of any existing lease for such space during the Lease Term, including the expiration of all renewal or extension options, and after the existing tenant or occupant vacates such space ("First Offer Space"). Before making any such First Offer Space available to any third parties, Landlord will give Tenant written notice ("Landlord's Availability Notice") of the availability of any First Offer Space and the date the existing tenant or occupant, if any, is expected to vacate such space, together with the rental rate for the First Offer Space which shall be equal to ninety-five percent (95%) of the then prevailing "fair market rental rate" for the First Offer Space as defined in Rider 2 to this Lease. Tenant's Right of First Offer shall, at Landlord's sole option upon written notice to Tenant, not be deemed to be properly exercised if, at the time the Right of First Offer is exercised, Tenant is in default beyond the period of notice and opportunity to cure provided in the Lease. 2. Within three (3) business days after receipt of Landlord's Availability Notice, Tenant must give Landlord written notice pursuant to which Tenant shall elect to either: (1) lease such First Offer Space for 95% of such fair market rental rate and upon the same non-economic terms as are set forth in the Lease with respect to the Premises; (2) refuse to lease such First Offer Space, specifying that such refusal is not based upon the fair market rental rate, but upon Tenant's lack of need for such First Offer Space, in which event Landlord may at any time thereafter lease such First Offer Space to any party upon any terms Landlord deems appropriate; or (3) refuse to lease the First Offer Space, specifying that such refusal is based upon the fair market rental rate, in which event Tenant will also specify the rental rate upon which Tenant is willing to lease such First Offer Space. Tenant's failure to timely choose either clause (1), clause (2) or clause (3) above will be deemed to be Tenant's choice of clause (2) above. If Tenant gives Landlord notice pursuant to clause (3) above, Landlord may elect, within five (5) days following receipt of such notice from Tenant, either to: (i) lease such First Offer Space to Tenant upon such revised fair market rental rate proposed by Tenant, and the same other non-economic terms as set forth in the Lease; or (ii) lease the First Offer Space at any time thereafter to any third party upon terms which are not substantially more favorable to said party than the 95% of the fair market rental rate originally proposed by Tenant. Landlord's failure to timely choose either clause (i) or clause (ii) above will be deemed to be Landlord's choice of clause (ii) above. If Tenant chooses (or is deemed to have chosen) clause (2) above, or if Landlord chooses (or is deemed to have chosen) clause (ii) above, Tenant's Right to Lease any First Offer Space will be null and void until Landlord once again delivers to Tenant a Landlord's Availability Notice as requested herein, in which event, the procedures and sequences set forth above will be followed. If Tenant exercises its Right of First Offer as provided herein, the parties will promptly thereafter execute an amendment to the Lease to include the First Offer Space in the Premises and to document the lease terms thereof. 3. If Tenant chooses (or is deemed to have chosen) clause (2) above more than three (3) times during the Term, as extended, Tenant's Right of First Offer shall terminate. RIDER NO. 3 -1- 75 RIDER NO. 4 TO OFFICE LEASE Landlord and Tenant agree to incorporate into or attach as an exhibit to an amendment to the Lease, the terms and conditions of this Rider No. 4 at such time as Tenant shall determine the specifications for Tenant's Generator and AST as defined herein. 1. Emergency Power Generator. Subject to the terms and conditions set forth in this Lease and to Tenant obtaining all necessary governmental permits and approvals, and so long as Tenant shall not interfere with any Building systems, Tenant shall have the right to install, operate and maintain, at Tenant's sole cost and expense, a maximum ____ kilowatt back-up generator ("TENANT'S GENERATOR") on the Site near the Building or on the roof of the Building at Landlord's discretion. Tenant shall not be obligated to pay any rental or other charges with respect to the area designated for Tenant's Generator. Landlord shall have the right to review and approve Tenant's plans and specifications for the proposed equipment, including, without limitation, the size, method of installation and visibility of such equipment. Notwithstanding the foregoing, in no event may the installation of Tenant's Generator involve the installation of an underground storage tank. The above-ground storage tank associated with Tenant's Generator (the "AST") shall not exceed ____ gallons in capacity, shall be double walled in thickness, shall contain diesel fuel only (to power Tenant's Generator only), and shall employ at a minimum a double containment system whereby if the first containment system fails, a second containment system shall be present to prevent releases of Hazardous Materials, all in accordance with applicable laws and environmental regulations. For these purposes, a sealed, uncracked concrete slab containment area without drains shall be sufficient (but shall not be the exclusive method) to constitute the second containment system, provided it is large enough to completely contain a release of the maximum volume of Hazardous Materials which could be present in the first containment system. Landlord, in its sole and absolute discretion, shall determine the location of Tenant's Generator and the AST. Tenant acknowledges that any loss of parking attributable to the location of Tenant's Generator and/or AST will be at Tenant's sole risk and come out of Tenant's share of parking. All handling, use, storage and disposal of Hazardous Materials relating to the AST or Tenant's Generator shall be accomplished by Tenant at its sole cost and expense in accordance with and subject to the terms of the Lease regarding Hazardous Materials. In conjunction with the installation of Tenant's Generator, subject to Landlord's prior approval of Tenant's plans and specifications, Tenant shall have the right to install an emergency generator connection on the outside of the Building for the purpose of connecting Tenant's Generator to the Premises and an appurtenant electrical grounding system. Furthermore, Tenant shall have the right to install ______(___) ______(__) inch conduits from Tenant's Generator to the Premises, provided, however, that such conduits are installed below grade to Landlord's reasonable satisfaction in accordance with the design and architectural standards for the Building. Prior to or within sixty (60) days following the expiration, or earlier termination of the Term of this Lease, Tenant agrees upon Landlord's request to (i) promptly remove from the Project, at its sole cost and expense, the AST (including, at Landlord's request, the basement slab), if any, and Tenant's Generator and all Hazardous Materials which are brought upon, stored, used, generated or released upon, in, under or about the Premises, the Project or any portion thereof by Tenant or any Tenant Parties in connection with Tenant's Generator or AST, and (ii) return the Premises and the balance of the Project to substantially the condition existing prior to Tenant's installation of Tenant's Generator and AST. Tenant shall be solely responsible for complying with any and all Environmental Laws relating to the AST, Tenant's Generator and all Hazardous Materials associated with either of the same, including, without limitation, all permitting and tank installations, monitoring and removal/closure obligations. For purposes of all Environmental Laws, Tenant shall be the owner and operator of the AST. Tenant shall be responsible for ensuring compliance by all Tenant Parties with all Environmental Laws relating to the AST and Tenant's Generator. Any acknowledgment, consent or approval by Landlord of Tenant's use or handling of Hazardous Materials shall not constitute an assumption of risk respecting the same nor a warranty or certification by Landlord that Tenant's proposed use and handling of Hazardous Materials is safe or reasonable or in compliance with Environmental Laws. From time to time during the Term and for up to one hundred eighty (180) days thereafter, Landlord may, and upon Landlord's request, Tenant shall, retain a registered environmental consultant ("CONSULTANT") acceptable to Landlord to conduct an environmental investigation of the Project ("ENVIRONMENTAL ASSESSMENT") (i) for Hazardous Materials contamination in, about or beneath the Project relative to the AST or Tenant's Generator, and (ii) to assess the activities of Tenant and all Tenant Parties with respect to Tenant's Generator and the AST for compliance with all Environmental Laws and to recommend the use of procedures intended to reasonably reduce the risk of a release of Hazardous Materials. If the Environmental Assessment discloses any material breach of Environmental Laws by Tenant or any Tenant Parties, then the cost thereof shall be the sole responsibility of Tenant, payable as additional rent under this Lease. Otherwise, the costs of the Environmental Assessment shall be the responsibility of Landlord. If Landlord so requires, Tenant shall comply, at its sole cost and expense, with all reasonable recommendations contained in the Environmental Assessment, including any reasonable recommendations with respect to precautions which should be taken with respect to Tenant's or Tenant Parties' activities at the Project relative to the AST or Tenant's Generator or any recommendations for additional testing and studies to detect the presence of Hazardous Materials relative to the AST or Tenant's Generator. Tenant covenants to reasonably cooperate with the Consultant and to allow entry RIDER NO. 4 -1- 76 and reasonable access to the AST and Tenant's Generator for the purpose of the Consultant's investigations. If any cleanup or monitoring procedure is required by any applicable governmental authorities in or about the Project as a consequence of any Hazardous Materials contamination by Tenant or any of Tenant's Parties arising out of Tenant's Generator or AST use, and the procedure for cleanup is not completed (to the satisfaction of all applicable governmental authorities) prior to the expiration or earlier termination of the Term of this Lease (referred to herein as "TENANT'S FAILURE TO CLEAN-UP"), then, without limiting any of Landlord's other rights and remedies contained in this Lease (including, without limitation, any indemnity and restoration obligations of Tenant contained in this Lease), Tenant will additionally be liable for any revenue of Landlord lost to the extent Landlord is precluded from re-leasing the Premises or any other portion of the Project as a result of such contamination. Subject to Tenant obtaining all necessary governmental permits and approvals, Tenant shall have the right, at Tenant's sole cost and expense, to test Tenant's Generator once per month during the Term at a time after normal business hours mutually agreed upon by Landlord and Tenant. Tenant shall indemnify and hold Landlord harmless from any and all liability, losses, damages, actions or causes of action, judgments, costs and expenses arising in any way from Tenant's installation, operation, maintenance and removal of Tenant's Generator and the AST, or any breach of Tenant's obligations under this Lease with respect to Tenant's Generator and the AST. The representations, warranties and agreements of the Tenant set forth in this Rider No. 4 shall survive the expiration of the Lease Term or the earlier termination of the Lease for any reason. 2. Compliance With Laws. Nothing contained in this Exhibit shall in any way limit or negate Tenant's obligation to comply with all applicable laws and to obtain all necessary governmental approvals in accordance with the terms of the Lease. 3. Initial Installation and Testing. Upon written notice to Landlord, Tenant shall have the right, at Tenant's sole cost and expense, at any time following the execution of this Lease by Tenant in a form mutually acceptable to Landlord and Tenant, to enter upon the Building and Site and to carry out any tests, inspections, pre-installation and installation activities on the Premises and Site as necessary for the construction and installation of the Equipment, including without limitation, engineering and environmental surveys (excluding any Phase II environmental surveys or any other environmental surveys which may violate Landlord's environmental insurance policy, physical inspections, soil test borings, and underground trenching). Immediately following the completion of such tests, inspections or pre-installation activities, Tenant shall, at Tenant's sole cost and expense, repair any damage to the Building and Site caused by such inspections or pre-installation activities, including repaving and re-landscaping any affected areas of the Project and Site. Any such entry onto the Premises and Site prior to the Commencement Date of the Lease shall be on all of the terms and provisions of the Lease, including without limitation, Tenant's indemnification and insurance obligations thereunder, except for Tenant's obligation to pay rent. 4. Equipment Ownership; Surrender. All improvements, alterations, augmentations, installations and modifications shall become part of the Premises or Project, as the case may be, upon installation and shall remain with the Premises or Project, as the case may be, and belong to Landlord upon the expiration or sooner termination of the Lease, unless Landlord shall notify Tenant of Landlord's election that Tenant remove any or all of such items, in which event Tenant shall remove such items at Tenant's sole cost and expense and shall restore the Premises and other portions of the Project modified by Tenant to the condition existing prior to Tenant's modifications. If Tenant fails to remove any such items Tenant is required to remove as provided herein, Landlord shall have the right to remove all such items at Tenant's expense and Tenant hereby indemnifies Landlord from and against any and all such costs. 5. Condition at Surrender. Subject to the provisions of this Rider No. 4 above, on or before Lease termination and Tenant's surrender of the Premises to Landlord, Tenant shall remove all of its Equipment, personal property and any of the special tenant improvement installations, including, without limitation, those items for which Landlord, at the time of its approval of the plans for the improvements, notifies Tenant in writing that such improvements are to be removed at Lease termination. Tenant shall repair any damage caused by the removal of any and all equipment, personal property or tenant improvements from the Premises, the Building and the Site, and shall restore the Premises, the Building and the Site to the condition existing as of the later of (i) the date the Lease was fully executed, or (ii) the date of installation of such items by Tenant. RIDER NO. 4 -2- EX-10.23 4 f72537ex10-23.txt EXHIBIT 10.23 1 EXHIBIT 10.23 ROYALTY AND SERVICES AGREEMENT This Royalty and Services Agreement (the "AGREEMENT") is entered into as of this 1st day of January, 2000 (the "EFFECTIVE DATE"), by and between The Good Guys-California, Inc., a California corporation ("GOOD GUYS") and goodguys.com, inc., a Delaware corporation ("DOTCOM"). PRELIMINARY STATEMENTS A. In consideration for the fulfillment of the various obligations and services contemplated by this Agreement, Dotcom and Good Guys desire to enter into an arrangement whereby Dotcom shall pay a recurring royalty to Good Guys (the "ROYALTY") and certain other amounts and undertakings, all upon and subject to the terms and conditions set forth herein; B. To enable Dotcom to obtain the benefits of purchasing discounts available to Good Guys and to secure for Good Guys the benefit of discounts for increased volumes of purchases Good Guys desires to supply Products (as defined below) to Dotcom, upon and subject to the terms and conditions set forth herein; C. Good Guys desires to facilitate certain fulfillment functions of Dotcom, upon and subject to the terms and conditions set forth herein; D. Good Guys and Dotcom desire to engage in certain co-marketing and crosspromotion of their respective businesses, upon and subject to the terms and conditions set forth herein; and E. Dotcom and Good Guys desire to share certain database information upon and subject to the terms and conditions set forth herein. NOW, THEREFORE, in consideration of the mutual promises and agreements herein contained and for other good, valuable and binding consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto, intending to be legally bound, hereby agree as follows: STATEMENT OF AGREEMENT I. ROYALTY OBLIGATION 1.1. Royalty. In consideration of the various obligations and services contemplated by this Agreement, Dotcom shall pay to Good Guys a Royalty on Dotcom's actual net sales exclusive of bad debt allowance, chargebacks, customer credits, returns, shipping, sales tax (and other transaction related taxes) and other direct costs of sales ("NET SALES"). Prior to the occurrence of a Liquidity Event, the Royalty shall be three percent (3%) of Net Sales. After a Liquidity Event, the Royalty shall be one percent (1%) of Net Sales. The term "LIQUIDITY EVENT" shall mean: (i) a sale of all or substantially all of the assets or business of Dotcom, (ii) a merger of Dotcom with or into another entity (or corporate reorganization of similar effect), or (iii) an underwritten initial public offering of Dotcom's common stock registered under the Securities Act of 1933. 2 1.2. Payments. Royalty payments calculated as provided above ("ROYALTY PAYMENTS") shall be due and payable monthly within thirty (30) days after the end of each calendar month. II. SUPPLY AND FULFILLMENT OBLIGATION 2.1. Purchase of Products. (a) Good Guys shall provide Dotcom with a list (the "GOOD GUYS PRODUCT LIST") of all products offered for sale from time to time by Good Guys through Good Guys' retail stores and/or available from Good Guys' suppliers (the "GOOD GUYS PRODUCTS") and shall keep such list current. In addition, Good Guys shall make available to Dotcom all copy, photos and other print and electronic material related to Good Guys Products as Dotcom may reasonably request. Subject to the terms and conditions hereof, Good Guys shall sell to Dotcom, and Dotcom shall purchase from Good Guys, substantially all of Dotcom's requirements for Good Guys Products. Upon the request of Dotcom, Good Guys agrees to use commercially reasonable efforts to assist Dotcom in obtaining the right to sell Product Protection Guarantee service contracts provided by Good Guys' vendors of such services. (b) Dotcom may at any time elect to cease purchasing all or any part of Good Guys Products hereunder upon thirty (30) days prior written notice to Good Guys. Thereafter, the royalty payment shall continue at three percent (3%) pre-Liquidity Event and one percent (1%) post-Liquidity Event. Good Guys shall use reasonable efforts to facilitate Dotcom's purchasing, merchandising, executive management and product development services with respect to Good Guys Products. (c) The parties acknowledge that Dotcom may market and sell products that are not Good Guys Products (the "OTHER PRODUCTS"). Subject to the terms and conditions of this Agreement, Good Guys shall have the right, but not the obligation, to supply Other Products to Dotcom upon the same terms and conditions as apply to Good Guys Products. Prior to marketing or selling any Other Products, Dotcom shall notify Good Guys in writing of the anticipated quantities of such Other Products that it requires. Within two (2) business days after receipt of Dotcom's notice, Good Guys shall notify Dotcom in writing if it wishes to supply such Other Products, which notice shall confirm Good Guy's ability to deliver such Other Products to the schedule and specifications required by Dotcom and upon the terms set forth herein. If Good Guys does not so elect within such two (2) business day period, then Dotcom may enter into such contractual or other relationships to purchase such Other Products from persons or entities other than Good Guys. (d) Dotcom shall not commence or continue to market or sell any Other Product that, in the reasonable judgment of Good Guys, is of lower quality than Good Guys Products generally or does not comply with applicable government regulations (an "OBJECTIONABLE PRODUCT"). Good Guys shall promptly notify Dotcom in writing of any Other Products that are or become an Objectionable Product in Good Guys' reasonable judgment, and Dotcom shall cease to market or sell such Objectionable Product promptly upon receipt of such notice. 2 3 (e) Dotcom shall distribute all Good Guys Products and Other Products that are not Objectionable Products (collectively, the "PRODUCTS") only through channels of distribution that constitute the Business (as defined below). Good Guys shall not sell Products to any person or entity other than Dotcom through channels of distribution that constitute the Business. The term "BUSINESS" shall mean the sale and offer of sale of consumer electronics products through one or more Internet websites operated by Dotcom, toll-free numbers owned by Dotcom (not involving toll-free numbers owned by Good Guys), and other electronic media and other non-bricks and mortar modalities (whether now existing or hereafter created) operated by Dotcom. In no event shall "Business" be deemed to include (i) the retail sale of consumer electronics products through traditional bricks and mortar retail stores, (ii) mail-order operations involving catalogs as the seller's primary means of marketing or (iii) wholesale distribution and resale of entertainment electronics products. (f) Good Guys hereby assigns to Dotcom all vendor warranties with respect to Products purchased by Dotcom to the full extent permitted by such warranties. If any such vendor warranty may not be assigned by its terms, then Good Guys shall use commercially reasonable efforts to cause Dotcom to obtain the benefits of such warranty. In addition, Dotcom shall have the right to return any Products acquired by Dotcom from Good Guys (or any of its affiliates) at any time during the first forty-five (45) days after purchase thereof and receive a credit equal to one hundred percent (100%) of the purchase price thereof, provided that the supplier agrees to accept the return of such Product by Good Guys. All other returns shall be subject to a ten percent (10%) restocking charge. (g) Good Guys shall use commercially reasonable efforts to: (i) facilitate all vendor relationships reasonably required to conduct the Business and (ii) ensure that all required vendor consents are secured. (h) Dotcom agrees to abide in all respects with the terms and conditions of Good Guys' various vendor agreements, and to the extent required or requested by such vendors, to enter into such other and further agreements as those vendors may reasonably require. 2.2. Fulfillment Facilitation Services. (a) Dotcom shall be solely and exclusively responsible for all Product fulfillment related to its customer orders. (b) Upon placement of a Product order by Dotcom, Good Guys shall fill that order in accordance with the following guidelines: (i) To the extent such Product is in stock at an immediately adjacent or adjoining facility, then the order shall be filled as soon as possible, and in any event, on a "same-day" basis. (ii) To the extent such Product is in stock at a Good Guys location other than an adjacent facility, then the order shall be filled as soon as practicable, applying commercially reasonable standards to that determination. 3 4 (iii) To the extent the Product is not in stock, then the order shall be filled as soon as the Product can be sourced from a third party and delivered to Dotcom. (iv) Good Guys acknowledges that for all purposes of this Section 2, time is of the essence. (c) Upon delivery of the Product to Dotcom by Good Guys, Dotcom shall thereupon take immediate title to such Product and shall assume all risk of loss associated therewith. Dotcom shall cooperate with Good Guys in connection with the completion and filing of any resale exemption or other certificates. (d) Without the consent of Good Guys, which consent shall not be unreasonably withheld or delayed, Dotcom shall not enter into any contractual relationship with any person or entity other than Good Guys for the supply of any then in stock Good Guys Products or Other Products that Good Guys has elected to supply. Notwithstanding the foregoing, if at any time Dotcom determines in its reasonable discretion that the quality of supply and fulfillment facilitation services then provided by Good Guys hereunder fails to meet the standards that it requires in order to remain competitive in its business, Dotcom shall have the right to terminate this Agreement and to source Products and fulfillment facilitation from any other party. In such event, the Royalty Payment obligation shall continue but shall be reduced to (or, if post-Liquidity Event, maintained at) one percent (1%). (e) Notwithstanding the foregoing, Good Guys shall continue to provide the Good Guys Product List and updates. 2.3. No Customer Returns or Warranty Service. (a) Good Guys shall have no obligation to accept exchanges, customer satisfaction returns, or warranty or guarantee returns of Products sold by Dotcom. (b) Good Guys shall have no obligation to provide repair and warranty services to purchasers of Products from Dotcom. Good Guys shall have no obligation to provide services to purchasers of Product Protection Guarantee contracts sold by Dotcom, including but not limited to exchanges of Products where authorized under such contracts. 2.4. Pricing and Compensation. (a) Product Cost. For all Products purchased by Dotcom under this Agreement, Good Guys shall charge Dotcom and Dotcom shall pay the Actual Net Cost (as defined below) to Good Guys for such Products plus Incremental Cost (as defined below). The term "ACTUAL NET COST" shall mean the actual cost paid by Good Guys to the suppliers of such Products net of any and all allowances, rebates, credits, discounts or similar arrangements (other than early or prompt payment discounts) that have the effect of reducing the stated cost of such Products (collectively, "DISCOUNTS"). The term "INCREMENTAL COST" shall mean the direct cost, if any, reasonably incurred by Good Guys to third parties, in excess of the cost that would have been incurred in the absence of the performance by Good Guys of its product supply and fulfillment facilitation obligations hereunder. The parties acknowledge that in order to facilitate Good Guys' cash management program, Dotcom will be invoiced and will pay an amount equal 4 5 to Good Guys' actual cost (not reflecting any adjustment for trailing Discounts). Within thirty (30) days after the end of each fiscal quarter, Good Guys shall calculate total Discounts allocable to Dotcom during the prior quarter and shall immediately issue to Dotcom a credit equal to such amount. (b) Payment. Payment for Products supplied by Good Guys shall be made within five (5) business days of delivery of such Products to Dotcom. (c) Books and Records. Good Guys shall maintain accurate books and records which reflect Actual Net Costs and all other relevant costs including Incremental Cost. At its own expense, Dotcom or its representatives may examine and copy such books and records. Dotcom and its representatives may make examinations only during usual business hours and at the place at which Good Guys usually keeps its books and records. Dotcom shall be required to notify Good Guys at least ten (10) days before the date of planned examination. If an examination has not been completed within two months after commencement, Good Guys may require Dotcom to terminate the examination on seven (7) days notice to Dotcom, so long as Good Guys has cooperated in full with Dotcom in the examination of such books and records. III. CO-MARKETING OBLIGATION 3.1. Retail Store References. Good Guys shall provide the following promotional references to an Internet website URL designated by Dotcom (the "WEBSITE URL") in each retail store that it owns or operates during the Term: (a) all shopping bags, business cards, printed cash register receipts, in-store signage and other in-store items bearing Good Guys signage shall contain a reference to the Website URL; and (b) subject to any landlord restrictions, the display windows of each Good Guys retail store shall include a reference to the Website URL which is not less than 2 1/2 inches in height. Good Guys agrees to use commercially reasonable efforts to promptly secure any required landlord consents. 3.2. Other Promotional References. Good Guys shall provide the following additional promotional references to the Website URL during the Term: (a) all packaging and shipping materials, packing slips and invoices, and transmittal advices used by Good Guys shall contain a reference to the Website URL; (b) each vehicle owned by Good Guys that is marked with the Good Guys logo or tradename shall include a reference to the Website URL; (c) each print advertisement and print promotional piece produced by Good Guys or purchased by Good Guys from third parties shall contain a reference to the Website URL; 5 6 (d) all radio and television advertisements of Good Guys shall contain a reference to the Website URL; and (e) Dotcom may include additional references in Good Guys' radio and television advertisements (beyond those required by Section 3.2(d) above), provided that Dotcom pays its proportional share of the direct costs thereof. 3.3. Website References. During the Term, Dotcom's Website (i) shall contain functionality to enable customers to request the Good Guys toll-free telephone number from one or more of its pages, including the Dotcom home page, and (ii) shall contain on one or more of its pages a store locator for Good Guys' retail locations, which locator shall be directly accessible from the Dotcom home page. Dotcom shall update such store locator from time to time at the request of Good Guys. In addition, Dotcom's Website will display a link to the Good Guys corporate website. 3.4. Negative Covenants. During the Term, Good Guys will not publish any advertisement in any media or in any retail store that promotes any other online seller offering any consumer electronics. IV. DATABASE OBLIGATION 4.1. Grant of License. (a) Subject to any restrictions contained in any agreements with third parties and to the terms and conditions hereof, Dotcom and Good Guys hereby grant to, each other a non-exclusive, royalty-free right and license (the "LICENSE") to use the following database and informational materials, including without limitation any additions, revisions and modifications made thereto by the owner of such materials during the Term (collectively, the "LICENSED MATERIALS"): (i) Good Guys' product information regarding each Product that Good Guys is then supplying to Dotcom, as such information may exist from time to time; and (ii) each party's lists regarding its customers, including their transactional histories and demographic information (collectively, the "CUSTOMER LISTS"), as such information may exist from time to time. (b) The Licensed Materials shall be made available at such times and in such format as the parties shall mutually agree. Each party shall use commercially reasonable efforts to keep the Licensed Materials current and accurate in all material respects. (c) Neither party shall disclose, sell, lease or rent the Licensed Materials to any third party without the other party's prior written consent. (d) To the extent that Dotcom acquires any information regarding Retail Customers (as defined below) through its own sales, such information shall be provided to Good 6 7 Guys periodically, but in no event less frequently than quarterly. To the extent that Good Guys acquires any information regarding Internet Customers (as defined below) through its own sales, such information shall be provided to Dotcom periodically, but in no event less frequently than quarterly. Except as expressly provided in this Agreement to the contrary, either party may use the information provided to it hereunder for any purpose, in its sole discretion. The term "INTERNET CUSTOMER" shall mean any customer who purchased from Dotcom during the 12-month period ending immediately prior to the date of determination. The term "RETAIL CUSTOMER" shall mean any customer who purchased from Good Guys during the 12-month period ending immediately prior to the date of determination. The parties expressly acknowledge that a person may be both an Internet Customer and a Retail Customer. 4.2. Limited Warranty. Each party hereby represents and warrants to the other that (a) it owns or otherwise has the right to use the Licensed Materials as to which it grants the License, (b) it has the right and power to grant the License as provided herein and (c) the grant of the License as provided herein does not require the consent of any third party. EXCEPT AS EXPRESSLY PROVIDED IN THE FOREGOING SENTENCE, NEITHER PARTY MAKES ANY REPRESENTATION OR WARRANTY WHATSOEVER, WHETHER EXPRESS OR IMPLIED, WITH RESPECT TO ANY OF THE LICENSED MATERIALS OR ANY INFORMATION, REPORTS OR OUTPUT GENERATED THEREBY. EACH PARTY HEREBY DISCLAIMS ANY IMPLIED WARRANTIES OF MERCHANTABILITY OR FITNESS FOR ANY PARTICULAR PURPOSE. IN NO EVENT SHALL EITHER PARTY BE LIABLE TO THE OTHER HEREUNDER FOR ANY CONSEQUENTIAL, PUNITIVE OR INCIDENTAL DAMAGES. 4.3. Ownership of Licensed Materials. All Licensed Materials, including any copies, translations or compilations of all or any part thereof, and any revisions, modifications or additions thereto made by Good Guys or Dotcom, as the case may be, are and shall remain the sole exclusive property of their respective owner, except for any revisions, modifications or additions thereto which were made solely by the party granted a License to use such Licensed Materials hereunder. Any such revisions, modifications or additions shall be owned by the party that made them, but the owner of the Licensed Materials shall hereby be granted a non-exclusive, perpetual, non-revocable, non-transferable license to use the same. 4.4. Confidentiality. Each party acknowledges that the Licensed Materials constitute valuable, confidential and proprietary information and trade secrets of the other. Accordingly, neither party shall, directly or indirectly, during or after the term of this Agreement, disclose or divulge to any third party, or permit any third party to use or have access to, any of the Licensed Materials, without the prior written consent of the other. 4.5. Effect of Termination. Upon termination of this Agreement: (i) the License granted hereunder shall terminate; (ii) each party shall cease to use the Licensed Materials; (iii) each party shall promptly return to the other or destroy all copies of the Licensed Materials; and (iv) each party shall execute and deliver to the other any documents reasonably requested by the other to confirm the other's ownership of the Licensed Materials. 7 8 V. TERM AND TERMINATION 5.1. The term of this Agreement (the "TERM") shall commence on the date hereof and continue in full force and effect until the thirtieth (30th) anniversary of the Effective Date or until otherwise terminated in accordance with this Agreement. 5.2. Either party shall have the right, but not the obligation, to terminate this Agreement immediately if at any time: (a) the other party shall be in material breach of any of its obligations hereunder or under any other material agreement between the parties, and such breach shall not be cured within thirty (30) days after receipt of written notice thereof; (b) the other party shall be the subject of a voluntary petition in bankruptcy or any voluntary proceeding relating to insolvency, receivership, liquidation or assignment for the benefit of creditors; (c) the other party shall become the subject of any involuntary petition in bankruptcy or any involuntary proceeding relating to insolvency, receivership, liquidation or assignment for the benefit of creditors, and such petition or proceeding shall not be dismissed within 60 days of filing; (d) the business of the other party shall be liquidated or otherwise terminated on any basis; or (e) Dotcom or its successor ceases to be actively and continuously engaged in activities constituting the Business. 5.3. Dotcom shall have the right to terminate this Agreement as contemplated by Section 2.2(d). 5.4. A party may exercise its right to terminate pursuant to this Agreement by written notice to the other party. No exercise by a party of its rights hereunder shall limit its remedies by reason of the other party's default, the party's rights to exercise any other rights under this section or any other rights of that party. 5.5. This Agreement will automatically and without necessity of notice terminate upon the effective date of termination of that certain Trademark License Agreement between the parties of even date herewith. VI. MISCELLANEOUS 6.1. Assignment. Neither party may assign this Agreement or its rights and obligations hereunder in whole or in part without the other party's prior written consent which consent may not be unreasonably withheld or delayed. Any attempt to assign this Agreement without such consent shall be void and of no effect. Notwithstanding the foregoing, either party 8 9 may assign this Agreement or its rights and obligations hereunder to any entity controlled by it or to any entity by which it is acquired by merger, purchase of capital stock, transfer of substantially all assets or otherwise; provided that such entity shall thereafter succeed to all obligations of such party under this Agreement; and provided further, that no such assignment will be effective unless the assignee succeeds to the assigning party's interest in the Trademark License Agreement and Assignment of Domain Name Agreement, of even date herewith. 6.2. Amendment. No modification or amendment hereof shall be valid and binding, unless it be in writing and signed by the parties hereto. 6.3. Relationship of the Parties. The parties intend to create a relationship of independent contractors, and not of partnership, co-venture, joint venture, or agency. Neither party shall have the power to bind the other or to incur obligations on behalf of the other without the other's prior written consent. Under no circumstances is either party intended to be, nor shall it be deemed to be, an agent of the other. 6.4. Governing Law. This Agreement shall be governed by the internal laws of the State of Delaware without giving effect to the conflict of law principles thereof. 6.5. Entire Agreement. This Agreement sets forth the entire agreement between the parties hereto with respect to the subject matter hereof and is intended to supersede all prior negotiations, understandings and agreements. 6.6. Counterparts. This Agreement may be executed in one or more counterparts, each of which shall be deemed an original and together which shall constitute one and the same instrument. 6.7. Waiver. The failure of any party to exercise any right or remedy provided for herein shall not be deemed a waiver of any right or remedy hereunder. 6.8. Severability. If any provision of this Agreement is determined by a court of competent jurisdiction to be invalid or otherwise unenforceable, such determination shall not affect the validity or enforceability of any remaining provisions of this Agreement. If any provision of this Agreement is invalid under any applicable statute or rule of law, it shall be enforced to the maximum extent possible so as to effect the intent of the parties, and the remainder of this Agreement shall continue in full force and effect. 6.9. Survival. The provisions of Section 4.4 and this Section 6 shall survive any termination of this Agreement. 6.10. Headings. The section headings used herein are for the convenience of the parties only, are not substantive and shall not be used to interpret or construe any of the provisions contained herein. 6.11. Successors and Assigns. This Agreement and the undertakings and representations herein contained shall inure to the benefit of and bind the parties and their respective successors and assigns. 9 10 6.12. Notice. Any and all notices or other communications hereunder shall be sufficiently given if in writing and sent by hand, telecopier, reputable overnight courier or by certified mail, return receipt requested, postage prepaid, addressed to the party to receive the same at its address as set forth below, or to such other address as the party to receive the same shall have specified by written notice given in the manner provided for herein. Such notices or other communications shall be deemed to have been given on the date of such delivery. Any party may change its address for the purpose of this Agreement by notice to the other parties given as aforesaid. Notice to Good Guys: Notice to Dotcom: The Good Guys-California, Inc. goodguys.com, inc. 7000 Marina Blvd. 9009 S.W. Hall Blvd. Brisbane, CA 94005 Second Floor Attn: Chief Executive Officer Tigard, OR 97223 Attn: Chief Executive Officer [SIGNATURE PAGE FOLLOWS] 10 11 IN WITNESS WHEREOF, the parties hereto have executed this Agreement on the date first set forth above. THE GOOD GUYS-CALIFORNIA, INC. GOODGUYS.COM, INC. By: /s/ RONALD UNKEFER By: /s/ STUART N. JOHNSON ------------------------- --------------------------- Name: RONALD UNKEFER Name: STUART N. JOHNSON ------------------------- --------------------------- Title: Title: ------------------------- --------------------------- 12 TRADEMARK LICENSE AGREEMENT This Trademark License Agreement (the "AGREEMENT") is entered into as of this 1st day of January, 2000 (the "EFFECTIVE DATE"), by and between The Good Guys-California, Inc., a California corporation ("LICENSOR"), and goodguys.com, inc., a Delaware corporation ("LICENSEE"). PRELIMINARY STATEMENTS A. Licensor is the owner of the Marks listed in Schedule A (collectively, the "EXISTING MARKS"), including any federal or state registrations or applications pertaining thereto. B. Licensee wishes to establish an internet-based retail business branded with new marks formed by combining the Existing Marks with a high level Internet domain names (for instance, without limitation, "goodguys.com," "goodguys.net," and "goodguys.org") (collectively, the "NEW MARKS") and in connection therewith wishes to obtain a license to use the Existing Marks as a component of the New Marks. C. In furtherance of their respective strategic goals, Licensor and Licensee have determined that it is in their mutual best interests to enter into a contractual arrangement whereby Licensor grants to Licensee a license to use the Existing Marks as described below. NOW, THEREFORE, in consideration of the mutual promises and agreements herein contained and for other good, valuable and binding consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto, intending to be legally bound, hereby agree as follows: STATEMENT OF AGREEMENT 1. Grant of License. a. Licensor hereby grants to Licensee during the Term hereof a nontransferable, worldwide right and license (the "LICENSE") to use, display, and reproduce the Existing Marks as part of the New Marks, solely for use in connection with Licensee's activities constituting the Business (as defined below). Licensee is not licensed to use the Existing Marks in connection with any business or activities other than the Business. Except as expressly permitted by this Agreement or as otherwise agreed in writing between the parties, Licensee is not licensed to use the Existing Marks standing alone and not as part of the New Marks. The term "Business" shall mean the sale and offer of sale of consumer electronics products through one or more Internet websites operated by Licensee, toll-free numbers owned by Licensee (not involving toll-free numbers owned by Licensor), and other electronic media and other non-bricks and mortar modalities (whether now existing or hereafter created) operated by Licensee. In no event shall "BUSINESS" be deemed to include (i) the retail sale of consumer electronics products through traditional bricks and mortar retail stores, (ii) mail-order operations involving catalogs as the seller's primary means of marketing and (iii) wholesale distribution and resale of entertainment electronics products. 13 b. Licensee shall have the right to use the Existing Marks in combination with any top-level Internet domain name (including without limitation ".com", ".net", or ".org"). Licensee shall automatically have the right, on the terms and conditions set forth herein, to use any. c. In addition, Licensor hereby grants to Licensee the right to authorize third parties to use, display, and reproduce the Existing Marks as part of the New Marks for the purpose of marketing of Licensee's products and services as Licensee shall deem necessary or appropriate in the conduct of the Business. d. During the Term of this Agreement, Licensor will not license any other person to use the Existing Marks in connection with activities constituting the Business, nor will Licensor itself use the Existing Marks in connection with any of Licensor's own activities constituting the Business without the consent of Licensee. e. Nothing in this Agreement is intended to nor shall it limit or impair Licensor's rights, during the Term, to (i) use or otherwise license the Existing Marks to the extent not licensed to Licensee hereunder; or (ii) use or license the Existing Marks to promote and advertise the sale of consumer electronics and other items customarily sold by Licensor in its retail consumer electronics stores. 2. Restrictions on Use and Quality Control. a. Licensee shall use the Existing Marks as part of the New Marks only in a manner and form (i) designed to maintain the high quality of the Existing Marks; (ii) consistent with the use of the Existing Marks by Licensor and its other licensees; (iii) that protects Licensor's ownership interest therein; and (iv) that complies will all applicable federal, state, local and foreign laws, rules and regulations, including, without limitation, all applicable trademark laws, rules and regulations. b. Licensee represents and warrants that all products or services placed in commerce and identified with the New Marks will meet all applicable legal standards for health and safety and shall be in compliance with all Federal, State, and local laws, rules and regulations. c. Licensee will, upon request by Licensor, deliver to Licensor at the address listed below a copy of the pages comprising the Website and any other use of the New Marks for the purpose of allowing Licensor to monitor the quality of the use of the Marks. d. Licensee will upon request made from time to time, provide to Licensor a list of third parties that Licensee has authorized to use, display, and reproduce the New Marks. 3. Protection of the Existing Marks and the New Marks. a. Licensee will at its expense take action that is necessary and appropriate, including without limitation the commencement of litigation or other legal proceedings, to protect the New Marks from infringement by any person or party, and Licensee shall be entitled to all amounts received in connection therewith. Licensor will have the right to intervene in any 2 14 such proceeding in order to protect the Existing Marks from infringement by any person or party. Licensee shall promptly notify Licensor in writing of any infringement or suspected infringement involving the Marks. b. Licensee expressly acknowledges that its use of the Existing Marks hereunder inures to the benefit of Licensor and shall not confer on Licensee any proprietary rights to the Existing Marks, which shall at all times remain with Licensor and its assignees. c. Licensee shall not question, contest or challenge, either during or after the Term, Licensor's ownership of the Existing Marks, and Licensee shall claim no interest therein, except the right to use the Existing Marks as part of the New Marks on the terms and conditions set forth herein. Licensee shall not attempt to register the Existing Marks, or any of them. 4. Consideration. In consideration for the License, Licensor shall pay to Licensee the Royalty Payment described in the Royalty and Services Agreement of even date herewith by and between Licensor and Licensee, calculated as provided therein. 5. Term. a. This term of this Agreement (the "TERM") shall commence on the date hereof and continue in full force and effect until the thirtieth (30th) anniversary of the Effective Date or until otherwise terminated in accordance with the provisions hereof. b. Either party shall have the right, but not the obligation, to terminate this Agreement immediately if at any time: (1) the other party shall be in material breach of any of its obligations hereunder, or under any other material agreement between the parties or between Licensee and The Good Guys, Inc., a Delaware Corporation, and such breach shall not be cured within thirty (30) days after receipt of written notice thereof; (2) the other party shall be the subject of a voluntary petition in bankruptcy or any voluntary proceeding relating to insolvency, receivership, liquidation or assignment for the benefit of creditors; (3) the other party shall become the subject of any involuntary petition in bankruptcy or any involuntary proceeding relating to insolvency, receivership, liquidation or assignment for the benefit of creditors, and such petition or proceeding shall not be dismissed within 60 days of filing; (4) the business of the other party shall be liquidated or otherwise terminated on any basis; (5) Licensee ceases to be actively and continuously engaged in activities constituting the Business; or (7) the other party performs any illegal acts; 3 15 c. Licensee shall have the right, but not the obligation, to terminate this Agreement at any time upon 180 days prior notice to Licensor. d. Licensor will have the right, but not the obligation, to terminate This Agreement if Licensee is in material breach of its obligations under that certain subscription and Royalty Agreement of even date herewith. e. A party may exercise its right to terminate pursuant to this section 4 by written notice to the other party. No exercise by a party of its rights under this section 4 shall limit its remedies by reason of the other party's default, the party's rights to exercise any other rights under this section 4 or any other rights of that party. f. Upon the termination of this Agreement, Licensee will assign back to Licensor for no additional consideration all of Licensee's right, title, and interest anywhere in the world in and to the New Marks, along with the goodwill symbolized by the New Marks, and all registrations and applications for registration with respect thereto. 6. Representations and Warranties; Indemnity. a. Licensor represents and warrants to Licensee that: (i) it is the owner of the Existing Marks; (ii) it has the right and power to grant the License to Licensee as provided herein; and (iii) the grant of the License to Licensee as provided herein does not require the consent of any third party. b. Licensor will indemnify and hold Licensee harmless from and against any and all claims, judgments, damages, losses, costs and expenses (including attorneys' fees and costs) arising out of a proceeding in which it is asserted that Licensee's use of the Existing Marks as part of the New Marks infringes the statutory or common law trademark rights of any third party. Licensor will, at its sole cost and expense, defend all such claims, actions, suits and proceedings on behalf of Licensee, with counsel of Licensor's choice, provided that Licensee promptly notifies Licensor of such claims, actions suits, or proceedings. 7. Injunctive Relief. Licensee and Licensor acknowledge that money damages would not adequately compensate either of them in the event of a breach hereunder, and that injunctive relief would be essential for each party to adequately protect itself hereunder. Accordingly, the parties agree that, in addition to any other remedies available at law or in equity, each shall be entitled to injunctive relief in the event of a breach of any covenant or agreement contained herein. 8. Miscellaneous. a. Assignment. Neither party may assign this Agreement or its rights and obligations hereunder in whole or in part without the other party's prior written consent which consent may not be unreasonably withheld or delayed. Any attempt to assign this Agreement without such consent shall be void and of no effect. Notwithstanding the foregoing, either party may assign this Agreement or its rights and obligations hereunder to any entity controlled by it or to any entity by which it is acquired by merger, purchase of capital stock, transfer of substantially all assets or otherwise; provided that such entity shall thereafter succeed to all 4 16 obligations of such party under this Agreement; and provided further, that no such assignment will be effective unless the assignee succeeds to the assigning party's interest in the Royalty and Services Agreement and Assignment of Domain Name Agreement, of even date herewith. b. Amendment. No modification or amendment hereof shall be valid and binding, unless it be in writing and signed by the parties hereto. c. Governing Law. This Agreement shall be governed by the internal laws of the State of Delaware without giving effect to the conflict of law principles thereof. d. Entire Agreement. This Agreement sets forth the entire agreement between the parties hereto with respect to the subject matter hereof and is intended to supersede all prior negotiations, understandings and agreements. e. Counterparts. This Agreement may be executed in one or more counterparts, each of which shall be deemed an original and together which shall constitute one and the same instrument. f. Waiver. The failure of any party to exercise any right or remedy provided for herein shall not be deemed a waiver of any right or remedy hereunder. g. Severability. If any provision of this Agreement is determined by a court of competent jurisdiction to be invalid or otherwise unenforceable, such determination shall not affect the validity or enforceability of any remaining provisions of this Agreement. If any provision of this Agreement is invalid under any applicable statute or rule of law, it shall be enforced to the maximum extent possible so as to effect the intent of the parties, and the remainder of this Agreement shall continue in full force and effect. h. Headings. The section headings used herein are for the convenience of the parties only, are not substantive and shall not be used to interpret or construe any of the provisions contained herein. i. Successors and Assigns. This Agreement and the undertakings and representations herein contained shall inure to the benefit of and bind the parties and their respective successors and assigns. j. Notice. Any and all notices or other communications hereunder shall be sufficiently given if in writing and sent by hand, telecopier, reputable overnight courier or by certified mail, return receipt requested, postage prepaid, addressed to the party to receive the same at its address as set forth below, or to such other address as the party to receive the same shall have specified by written notice given in the manner provided herein. Such notices or other communications shall be deemed to have been given on the date of such delivery. Any party may change its address for the purpose of this Agreement by notice to the other parties given as aforesaid. 5 17 Notice to Licensor: Notice to Licensee: The Good Guys-California, Inc. goodguys.com, inc. 7000 Marina Blvd. 9009 S.W. Hall Blvd. Brisbane, CA 94005 Second Floor Attn: Chief Executive Officer Tigard, OR 97223 Attn: Chief Executive Officer [SIGNATURE PAGE FOLLOWS] 6 18 IN WITNESS WHEREOF, the parties hereto have executed this Agreement on the date first set forth above. THE GOOD GUYS-CALIFORNIA, INC. GOODGUYS.COM, INC. By: /s/ RONALD UNKEFER By: /s/ STUART N. JOHNSON ------------------------- ---------------------------- Name: RONALD UNKEFER Name: STUART N. JOHNSON ------------------------- ---------------------------- Title: Title: ------------------------- ---------------------------- 19 SCHEDULE A The Good Guys The Good Guys! The Good Guys (Stylized Letters) Good Guys Good Guys (Stylized Letters) The Good Guys Logo 20 EXHIBIT D Form of Tigard Sublease 21 ASSIGNMENT OF DOMAIN NAME AGREEMENT This Assignment of Domain Name Agreement (the "AGREEMENT") is entered into as of this 1st day of January, 2000 (the "EFFECTIVE DATE"), by and between The Good Guys-California, Inc., a California corporation and The Goods Guys, Inc., a Delaware corporation (collectively "ASSIGNORS"), and goodguys.com, inc., a Delaware corporation ("ASSIGNEE"). PRELIMINARY STATEMENTS A. Either or both of the Assignors is the registered owner of the domain names listed in Schedule A which constitutes all of the domain names owned by either the Assignor (the "DOMAIN NAMES"); and B. Assignee desires to acquire the Domain Names. NOW, THEREFORE, in consideration of the mutual promises and agreements herein contained and for other good, valuable and binding consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto, intending to be legally bound, hereby agree as follows: STATEMENT OF AGREEMENT 1. Each Assignor hereby assigns to Assignee all of its right, title and interest, throughout the world, in and to the Domain Names. 2. Each Assignor and Assignee agree to execute whatever additional instruments either party may reasonably request to effectuate or evidence any of the transactions intended under this Agreement, including such documentation as Network Solutions, Inc. or any other relevant entity may require to transfer ownership of the Domain Names from the relevant Assignor to Assignee. 3. Each Assignor acknowledges that Assignee shall have the right to register in Assignee's name any derivation of domain names, including those using different suffixes. 4. The Domain Names are assigned to Assignee pursuant to on an "AS IS" basis, without any representations or warranties whatsoever, except that Assignee represents and warrants that it has not heretofore assigned the Domain Names to any person or entity. Without limiting the generality of the foregoing, EACH PARTY DISCLAIMS ANY AND ALL OTHER WARRANTIES OR REPRESENTATIONS, EXPRESS OR IMPLIED, INCLUDING, BUT NOT LIMITED TO, THE IMPLIED WARRANTIES OF MERCHANTABILITY, TITLE, NON-INFRINGEMENT AND FITNESS FOR A PARTICULAR PURPOSE. 5. Upon termination of that certain Trademark License Agreement between the parties of even date herewith, Assignee shall have a right to acquire all of Assignee's right, title, and interest in and to the Domain Names for an amount equal to the then fair market value thereof. The closing of any such acquisition shall occur on the ninth (9th) month anniversary of the termination of the Trademark License Agreement. 22 6. Miscellaneous. a. This Agreement shall be governed by the internal laws of the State of Delaware without giving effect to the conflict of law principles thereof. b. This Agreement sets forth the entire agreement between the parties hereto with respect to the subject matter hereof and is intended to supersede all prior negotiations, understandings and agreements. No provision of this Agreement may be waived or amended, except by a writing signed by Assignor and Assignee. c. This Agreement may be executed in one or more counterparts, each of which shall be deemed an original and together which shall constitute one and the same instrument. d. The failure of any party to exercise any right or remedy provided for herein shall not be deemed a waiver of any right or remedy hereunder. e. If any provision of this Agreement is determined by a court of competent jurisdiction to be invalid or otherwise unenforceable, such determination shall not affect the validity or enforceability of any remaining provisions of this Agreement. If any provision of this Agreement is invalid under any applicable statute or rule of law, it shall be enforced to the maximum extent possible so as to effect the intent of the parties, and the remainder of this Agreement shall continue in full force and effect. 2 23 f. Any and all notices or other communications hereunder shall be sufficiently given if in writing and sent by hand, telecopier, reputable overnight courier or by certified mail, return receipt requested, postage prepaid, addressed to the party to receive the same at its address as set forth below, or to such other address as the party to receive the same shall have specified by written notice given in the manner provided for herein. Such notices or other communications shall be deemed to have been given on the date of such delivery. Any party may change its address for the purpose of this Agreement by notice to the other parties given as aforesaid. Notice to Assignor: Notice to Assignee: The Good Guys-California, Inc. goodguys.com, inc. 7000 Marina Blvd. 9009 S.W. Hall Blvd. Brisbane, CA 94005 Second Floor Attn: Chief Executive Officer Tigard, OR 97223 Attn: Chief Executive Officer IN WITNESS WHEREOF, the parties hereto have executed this Agreement on the date first set forth above. THE GOOD GUYS-CALIFORNIA; INC. GOODGUYS.COM, INC. By: /s/ RONALD UNKEFER By: /s/ STUART N. JOHNSON --------------------------- -------------------------------- Name: RONALD UNKEFER Name: STUART N. JOHNSON ------------------------- ------------------------------ Title: Title: ------------------------ ----------------------------- Date: Date: ------------------------- ------------------------------ THE GOOD GUYS, INC. By: /s/ RONALD UNKEFER --------------------------- Name: RONALD UNKEFER ------------------------- Title: ------------------------ Date: ------------------------- 3 24 SCHEDULE A EACH OF THE FOLLOWING* thegoodguys.com thegoodguys.org thegoodguys.net goodguys.com goodguys.org egoodguys.com oe-goodguys.com And all other domain names owned by The Good Guys-California, Inc. and/or by The Good Guys, Inc. *And any other names that differ from the following only with respect to capitalization of certain letters. 4 25 EXHIBIT C Trademark License Agreement 26 STOCK AND WARRANT SUBSCRIPTION AGREEMENT This Stock and Warrant Subscription Agreement (the "AGREEMENT") is made and entered into as of the 1st day of January, 2000 (the "EFFECTIVE DATE"), by and between goodguys.com, inc., a Delaware corporation ("DOTCOM"), and The Good Guys-California, Inc., a California corporation ("GOOD GUYS"). PRELIMINARY STATEMENTS A. Dotcom desires to issue to Good Guys and Good Guys desires to subscribe for and purchase from Dotcom, One Million One Hundred Forty Thousand Seven Hundred Ninety Five (1,140,795) shares of Common Stock, par value $0.001, of Dotcom (the "COMMON SHARES"). B. Dotcom desires to issue to Good Guys and Good Guys desires to subscribe for and purchase from Dotcom the stock purchase warrant described herein (the "WARRANT"). NOW, THEREFORE, for good, valuable and binding consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto, intending to be legally bound hereby, now agree as follows: STATEMENT OF AGREEMENT 1. Subscription. (a) Common Shares. Good Guys hereby subscribes for the Common Shares, which shares equal nineteen and eighty seven one-hundredths percent (19.87%) of the issued and outstanding shares of Dotcom's common stock on and as of the date hereof. Dotcom hereby issues to and registers in the name of Good Guys one or more certificates evidencing the Common Shares. (b) Warrant. Good Guys hereby purchases and subscribes for the Dotcom Warrant attached hereto as Exhibit A. 2. Consideration. In consideration for the subscription of the Common Shares and the Warrant, Good Guys has entered into each of the Assignment of Domain Name Agreement attached hereto as Exhibit B and the Trademark License Agreement attached hereto as Exhibit C; and sublease space to Dotcom substantially upon the terms and conditions set forth on Exhibit D. Concurrently herewith, certain investors have subscribed for not less than $2.25MM of the common stock of Dotcom. 3. Anti-Dilution Protection. Notwithstanding any other provision hereof, Dotcom agrees that the Common Shares shall be protected from dilution resulting from any issuance of capital stock by Dotcom after the date hereof up to the "Anti-Dilution Threshold." For purposes 27 hereof, the Anti-Dilution Threshold shall mean, in the aggregate, issuances of shares equal to fifteen percent (15%) of Dotcom's issued and outstanding shares as of the date hereof. 4. Representations and Warranties of Good Guys. Good Guys hereby represents and warrants to Dotcom as follows: (a) Authorization. This Agreement constitutes Good Guys's valid and legally binding obligation, enforceable in accordance with its terms except as may be limited by applicable bankruptcy, insolvency, reorganization or other laws of general application relating to or affecting the enforcement of creditors' rights generally, and the effect of rules of law governing the availability of equitable remedies. Good Guys represents that it has full power and authority to enter into this Agreement. (b) Access to Information. Good Guys has had an opportunity to receive and review all documents and information that it considers material to its purchase of the Common Shares and to ask questions of and receive satisfactory answers from Dotcom, concerning Dotcom and the terms and conditions of the purchase of the Common Shares and the Warrant, and all such questions have been answered to the full satisfaction of Good Guys. (c) Knowledgeable Investor. Good Guys has such knowledge and experience in financial and business matters that it is capable of evaluating the merits and risks of purchasing the Common Shares. (d) Accredited Investor. Good Guys is an "accredited investor" within the meaning of Regulation D promulgated under the Securities Act. (e) Investment Intent. Good Guys understands that neither the Common Shares nor the Warrant have been registered under the Securities Act of 1933 (the "SECURITIES ACT"), or any other applicable state or federal securities statutes (collectively, the "ACTS"). Good Guys is purchasing the Common Shares and the Warrant for investment, for its own account, and with no present intention of reselling, directly or indirectly participating in any distribution of or otherwise disposing of the Common Shares. Good Guys understands that the Common Shares are subject to restrictions on transfer and that Good Guys may bear the economic risk of purchasing the Common Shares for an indefinite period of time. (f) No Brokers. Good Guys has not authorized any broker, dealer, agent or finder to act on its behalf nor does Good Guys have any knowledge of any broker; dealer, agent or finder purporting to act on its behalf with respect to this transaction. (g) Legend. Good Guys acknowledges that a legend substantially as follows will be placed on the certificates representing the Common Shares and the Warrant: THE SECURITIES HAVE NOT BEEN REGISTERED UNDER EITHER THE SECURITIES ACT OF 1933 OR THE SECURITIES LAWS OF ANY STATE AND MAY NOT BE SOLD, OFFERED FOR SALE, TRANSFERRED, ASSIGNED, PLEDGED OR HYPOTHECATED IN THE ABSENCE OF AN 2 28 EFFECTIVE REGISTRATION STATEMENT WITH RESPECT TO THE SECURITIES UNDER THE SECURITIES ACT OF 1933 AND ANY APPLICABLE STATE SECURITIES LAWS OR AN OPINION OF COUNSEL SATISFACTORY TO THE ISSUER THAT SUCH REGISTRATION IS NOT REQUIRED. (h) Reliance. Good Guys understands that the Common Shares and the Warrant are being offered and sold to it in reliance on specific provisions of federal and state securities laws and that Dotcom is relying upon the truth and accuracy of the representations, warranties, agreements, acknowledgements and understandings of Good Guys set forth herein in order to determine the applicability of such provisions; 5. Representations and Warranties of Dotcom. Dotcom hereby represents and warrants to Good Guys as follows: (a) Organization. Dotcom has been duly incorporated and is validly existing and in good standing under the laws of the State of Delaware, with full corporate power and authority to own, lease and operate its properties and to conduct its business as currently conducted, and is duly registered and qualified to conduct its business and is in good standing in each jurisdiction or place where the nature of its properties or the conduct of its business requires such registration or qualification, except where the failure to register or qualify is not reasonably anticipated to have a material adverse effect on the condition (financial or otherwise), business, properties, net worth or results of operations of Dotcom; (b) Shares. The Common Shares are duly authorized and validly issued, and when issued and delivered, shall be fully paid and non-assessable; (c) Authorization. This Agreement has been duly authorized, validly executed and delivered on behalf of Dotcom and is a valid and binding agreement of Dotcom enforceable in accordance with its terms, subject to general principles of equity and bankruptcy or other laws affecting the enforcement of creditors' rights generally, and Dotcom has full power and authority to execute and deliver this Agreement and the other agreements and documents contemplated hereby and to perform its obligations hereunder and thereunder; (d) No Conflict. The execution and delivery of this Agreement, the issuance of the Common Shares and the consummation of the transactions contemplated by this Agreement, will not conflict with or result in a breach of or a default under any of the terms or provisions of Dotcom's certificate of incorporation or by-laws, or of any material provision of any indenture, mortgage, deed of trust or other material agreement or instrument to which Dotcom is a party or by which it or any of its properties or assets is bound, any provision of any law, statute, rule, regulation, or any existing applicable decree, judgment or order by any court, federal or state regulatory body, administrative agency, or other governmental body having jurisdiction over Dotcom, or any of its properties or assets or will result in the creation or imposition of any lien, charge or encumbrance upon any property or assets of Dotcom pursuant to the terms of any 3 29 agreement or instrument to which Dotcom is a party or by which Dotcom may be bound or to which any of Dotcom's property or Dotcom is subject; and (e) No Proceedings. There is no action, suit or proceeding before or by any court or governmental agency or body, domestic or foreign, now pending, or to Dotcom's knowledge, threatened, against or affecting Dotcom, or any of its properties, which would reasonably be anticipated to result in any material adverse change in the condition (financial or otherwise) or in the earnings, business affairs, business prospects, properties or assets of Dotcom. 6. Miscellaneous. (a) Restrictions. Neither the Common Shares nor the Warrant may be offered for sale, sold or transferred except pursuant to (i) an effective registration under the Securities Act or in a transaction which is otherwise in compliance with the Securities Act, (ii) an effective registration under any applicable state securities statute or in a transaction otherwise in compliance with any applicable state securities statute, and (iii) evidence of compliance with the applicable securities laws of other jurisdictions. Good Guys shall furnish to Dotcom and Dotcom shall be entitled to rely upon an opinion of competent securities counsel acceptable to Dotcom with respect to compliance with the above laws. (b) Integration. This Agreement, together with the Exhibits hereto, sets forth the entire agreement between the parties hereto with respect to the subject matter hereof and is intended to supersede all prior negotiations, understandings and agreements. (c) Amendment. No modification or amendment hereof shall be valid and binding, unless it be in writing and signed by the parties hereto. (d) Successors and Assigns. This Agreement and the undertakings and representations herein contained shall inure to the benefit of and bind the parties and their respective successors and assigns. (e) Survival of Representations, Warranties and Covenants. The representations, warranties and covenants contained in this Agreement shall survive the issuance of the Common Shares to Good Guys and its payment therefor, and shall remain effective. (f) Headings. The section headings used herein are for the convenience of the parties only, are not substantive and shall not be used to interpret or construe any of the provisions herein. (g) Governing Law. This Agreement shall be governed by the internal laws of the state of Delaware without giving effect to the conflict of law principles thereof. 4 30 (h) Counterparts. This Agreement may be executed in one or more counterparts, each of which shall be deemed an original and together which shall constitute one and the same instrument. 5 31 IN WITNESS WHEREOF, this Agreement was duly executed on the date first above written. GOOD GUYS.COM, INC. By: /s/ STUART N. JOHNSON ------------------------------------- Name: STUART N. JOHNSON ----------------------------------- Title: ---------------------------------- THE GOOD GUYS-CALIFORNIA, INC. By: /s/ RONALD UNKEFER ------------------------------------- Name: RONALD UNKEFER ----------------------------------- Title: ---------------------------------- 32 EXHIBIT A Warrant to Purchase Common Stock of goodguys.com, inc. 33 THIS WARRANT HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, OR ANY APPLICABLE STATE SECURITIES LAWS, AND MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED OR HYPOTHECATED IN THE ABSENCE OF REGISTRATION UNDER SUCH ACT AND APPLICABLE LAWS, OR THE AVAILABILITY OF AN EXEMPTION FROM SUCH REGISTRATION, OR AN OPINION OF COUNSEL SATISFACTORY TO THE COMPANY THAT SUCH REGISTRATION IS NOT LEGALLY REQUIRED. No. 001 WARRANT TO PURCHASE COMMON STOCK OF GOODGUYS.COM, INC. This certifies that, beginning on the date of this Warrant, for value received, The Good Guys-California, Inc., a California corporation ("GOOD GUYS"), or registered assigns (the "HOLDER"), is entitled to purchase from goodguys.com, inc., a Delaware corporation (the "COMPANY"), shares of the Common Stock of the Company, $.001 par value (the "COMMON STOCK"), in the amount set forth in Section 2, upon surrender hereof, at the principal office of the Company referred to below, with a duly executed Notice of Exercise in the form attached, and simultaneous payment therefor in lawful money of the United States or otherwise as hereinafter provided, at the Exercise Price as set forth in Section 3. The number, character and Exercise Price of such shares of Common Stock are subject to adjustment as provided below. The term "WARRANT" as used herein shall include this Warrant, and any warrants delivered in substitution or exchange therefor as provided herein. 1. Term of Warrant. Subject to the terms and conditions set forth herein, this Warrant shall be exercisable, in whole or in part, beginning upon the occurrence of a Liquidity Event (as defined below) and ending ten (10) business days thereafter. Subject to the notice requirements of Section 10 hereof, after such date, this Warrant shall be void. The term "LIQUIDITY EVENT" shall mean: (i) a sale of all or substantially all of the assets of the Company, (ii) a merger of the Company with or into another entity (or corporate reorganization of similar effect), or (iii) an initial public offering of shares of the Company's common stock. 2. Number of Shares Which May Be Purchased. The total number of shares of Common Stock purchasable pursuant to this Warrant is equal to the number of shares that, when added to the number of shares issued to Good Guys under the Stock and Warrant Subscription Agreement dated January 1, 2000 by and between the Company and Good Guys, equals forty-nine and nine-tenths percent (49.9%) of the Company's issued and outstanding Common Stock as of the date hereof, as calculated on a fully 34 diluted basis (including all options, warrants, securities convertible into Common Stock, and other rights to acquire Common Stock, and assuming for purposes of such calculation employee options equal to fifteen percent (15%) of the Common Stock as of the date hereof). 3. Exercise Price. The purchase price per share for the Common Stock purchased under this Warrant (the "EXERCISE PRICE") shall be one cent ($.01) per share, as adjusted from time to time pursuant to Section 12 hereof. 4. Exercise of Warrant. (a) Method of Exercise. The purchase rights represented by this Warrant are exercisable by the Holder in whole or in part, at any time, or from time to time, during the term hereof as described in Section 1 above, by the surrender of this Warrant and the Notice of Exercise annexed hereto duly completed and executed on behalf of the Holder, at the office of the Company, and upon payment equal to the aggregate Exercise Price of the Common Stock being purchased in cash or by check payable to the Company. (b) Other Matters. This Warrant shall be deemed to have been exercised immediately prior to the close of business on the date of its surrender for exercise as provided above, and the person entitled to receive the shares of Common Stock issuable upon such exercise shall be treated for all purposes as the holder of record of such shares as of the close of business on such date. As promptly as practicable on or after such date and in any event within ten (10) days thereafter, the Company at its expense shall issue and deliver to the person or persons entitled to receive the same a certificate or certificates for the number of shares issuable upon such exercise. In the event that this Warrant is exercised in part, the Company at its expense will execute and deliver a new Warrant of like tenor exercisable for the remaining number of shares for which this Warrant may then be exercised. 5. No Fractional Shares or Scrip. No fractional shares or scrip representing fractional shares shall be issued upon the exercise of this Warrant. In lieu of any fractional share to which the Holder would otherwise be entitled, the Company shall make a cash payment equal to the Exercise Price multiplied by such fraction. 6. Replacement of Warrant. On receipt of evidence reasonably satisfactory to the Company of the loss, theft, destruction or mutilation of this Warrant and, in the case of loss, theft or destruction, on delivery of an indemnity agreement reasonably satisfactory in form and substance to the Company or, in the case of mutilation, on surrender and cancellation of this Warrant, the Company at its expense shall execute and deliver, in lieu of this Warrant, a new warrant of like tenor and amount. 7. No Rights as Stockholder. This Warrant shall not entitle its Holder, as such, to any of the rights of a stockholder of the Company. 2 35 8. Transfer of Warrant. (a) Warrant Register. The Company will maintain a register (the "Warrant Register") containing the names and addresses of the Holder or Holders. Any Holder of this Warrant or any portion thereof may change his or her address as shown on the Warrant Register by written notice to the Company requesting such change. Any notice or written communication required or permitted to be given to the Holder may be delivered or given by mail to such Holder as shown on the Warrant Register and at the address shown on the Warrant Register. Until this Warrant is transferred on the Warrant Register of the Company, the Company may treat the Holder as shown on the Warrant Register as the absolute owner of this Warrant for all purposes, notwithstanding any notice to the contrary. (b) Transferability and Nonnegotiability of Warrant. This Warrant may not be transferred or assigned in whole or in part without compliance with all applicable federal and state securities laws by the transferor and the transferee (including the delivery of investment representation letters and legal opinions reasonably satisfactory to the Company, if such are requested by the Company). Subject to compliance with the Securities Act of 1933 (the "ACT"), and applicable state securities laws, title to this Warrant may be transferred by endorsement (by the Holder executing the Assignment Form annexed hereto) and delivery in the same manner as a negotiable instrument transferable by endorsement and delivery. (c) Exchange of Warrant Upon a Transfer. On surrender of this Warrant for exchange, properly endorsed on the Assignment Form and subject to the provisions of this Warrant with respect to compliance with the Act and with the limitations on assignments and transfers contained in this Section 8, the Company at its expense shall issue to or on the order of the Holder a new warrant or warrants of like tenor, in the name of the Holder or as the Holder (on payment by the Holder of any applicable transfer taxes) may direct, for the number of shares issuable upon exercise hereof. (d) Compliance with Securities Laws. (i) The Holder of this Warrant, by acceptance hereof, acknowledges that this Warrant and the shares of Common Stock to be issued upon exercise hereof are being acquired solely for the Holder's own account for investment, and that the Holder will not offer, sell or otherwise dispose of this Warrant or any shares of Common Stock to be issued upon exercise hereof except under circumstances that will not result in a violation of the Act or any state securities laws. Upon exercise of this Warrant, the Holder shall, if requested by the Company, confirm in writing, in a form satisfactory to the Company, that the shares of Common Stock so purchased are being acquired for investment, and not with a view toward distribution or resale in violation of applicable securities laws. 3 36 (ii) All shares, of Common Stock issued upon exercise hereof shall be stamped or imprinted with a legend in substantially the following form (in addition to any legend required by state securities laws): THE SECURITIES REPRESENTED HEREBY HAVE BEEN ACQUIRED FOR INVESTMENT AND HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 OR ANY APPLICABLE STATE SECURITIES LAWS. SUCH SECURITIES MAY NOT BE SOLD OR TRANSFERRED IN THE ABSENCE OF SUCH REGISTRATION OR AN EXEMPTION THEREFROM UNDER SAID ACT AND APPLICABLE LAWS. 9. Reservation of Stock. The Company covenants that during the term this Warrant is exercisable, the Company will reserve from its authorized and unissued Common Stock a sufficient number of shares to provide for the issuance of Common Stock upon the exercise of this Warrant and, from time to time, will take all steps necessary to amend its corporate charter to provide sufficient reserves of shares of Common Stock issuable upon exercise of the Warrant. The Company further covenants that all shares that may be issued upon the exercise of rights represented by this Warrant and payment of the Exercise Price, all as set forth herein, will be free from all taxes, liens and charges in respect of the issue thereof. 10. Notices. (a) Holder shall notify the Company of its intent to exercise the Warrant within ten (10) business days of receipt of notice of a pending Liquidation Event. (b) Whenever the Exercise Price or number of shares purchasable hereunder shall be adjusted pursuant to Section 12 hereof, the Company shall issue a certificate signed by its Chief Financial Officer setting forth, in reasonable detail, the event requiring the adjustment, the amount of the adjustment, the method by which such adjustment was calculated, and the Exercise Price and number of shares purchasable hereunder after giving effect to such adjustment, and shall cause a copy of such certificate to be mailed (by first-class mail, postage prepaid) to the Holder of this Warrant. (c) In case: (i) the Company shall take a record of the holders of its Common Stock (or other stock or securities at the time receivable upon the exercise of this Warrant) for the purpose of entitling them to receive any dividend or other distribution, or any right to subscribe for or purchase any shares of stock of any class or any other securities, or to receive any other right, or (ii) of any capital reorganization of the Company, any reclassification of the capital stock of the Company, any consolidation or merger of the Company with or into another corporation, or any conveyance of all or substantially all of the assets of the Company to another corporation, or 4 37 (iii) of any voluntary dissolution, liquidation or winding-up of the Company, then, and in each such case, the Company will mail or cause to be mailed to the Holder or Holders a notice specifying, as the case may be, (A) the date on which a record is to be taken for the purpose of such dividend, distribution or right, and stating the amount and character of such dividend, distribution or right, or (B) the date on which such reorganization, reclassification, consolidation, merger, conveyance, dissolution, liquidation or winding-up is to take place, and the time, if any is to be fixed, as of which the holders of record of Common Stock (or such stock or securities at the time receivable upon the exercise of this Warrant) shall be entitled to exchange their shares of Common Stock (or such other stock or securities) for securities or other property deliverable upon such reorganization, reclassification, consolidation, merger, conveyance, dissolution, liquidation or winding-up. Such notice shall be mailed at least 15 days prior to the date therein specified. (d) All such notices, advices and communications shall be deemed to have been received (i) in the case of personal delivery, on the date of such delivery and (ii) in the case of mailing, on the third business day following the date of such mailing. 11. Amendments. Any term of this Warrant may be amended with the written consent of the Company and all of the Holders of this Warrant. 12. Adjustments. The Exercise Price and the number of shares purchasable hereunder are subject to adjustment from time to time as follows: (a) Merger, Sale of Assets, etc. If at any time while this Warrant, or any portion thereof, is outstanding and unexpired there shall be (i) a reorganization (other than a combination, reclassification, exchange or subdivision of shares otherwise provided for herein), (ii) a merger of consolidation of the Company with or into another corporation in which the Company is not the surviving entity, or a reverse triangular merger in which the Company is the surviving entity but the shares of the Company's capital stock outstanding immediately prior to the merger are converted by virtue of the merger into other property, whether in the form of securities, cash, or otherwise, or (iii) a sale or transfer of the Company's properties and assets as, or substantially as, an entirety to any other person, then, as a part of such reorganization, merger, consolidation, sale or transfer, provision shall be made so that the holder of this Warrant shall thereafter be entitled to receive upon exercise of this Warrant, during the period specified herein and upon payment of the Exercise Price then in effect, the number of shares of stock or other securities or property of the successor corporation resulting from such reorganization, merger, consolidation, sale or transfer that a holder of the shares deliverable upon exercise of this Warrant would have been entitled to receive in such reorganization, merger, consolidation, sale or transfer if this Warrant had been exercised immediately before such reorganization, merger, consolidation, sale or transfer, all subject to further adjustment as provided in this Section 12. The foregoing provisions of this Section 12(a) 5 38 shall similarly apply to successive reorganizations, consolidations, mergers, sales and transfers and to the stock or securities of any other corporation that are at the time receivable upon the exercise of this Warrant. If the per-share consideration payable to the holder hereof for shares in connection with any such transaction is in a form other than cash or marketable securities, then the value of such consideration shall be determined in good faith by the Company's Board of Directors. In all events, appropriate adjustment (as determined in good faith by the Company's Board of Directors) shall be made in the application of the provisions of this Warrant with respect to the rights and interests of the Holder after the transaction, to the end that the provisions of this Warrant shall be applicable after that event, as near as reasonably may be, in relation to any shares or other property deliverable after that event upon exercise of this Warrant. (b) Reclassification, etc. If the Company, at any time while this Warrant, or any portion hereof, remains outstanding and unexpired, by reclassification of securities or otherwise, shall change any of the securities as to which purchase rights under this Warrant exist into the same or a different number of securities of any other class or classes, this Warrant shall thereafter represent the right to acquire such number and kind of securities as would have been issuable as the result of such change with respect to the securities that were subject to the purchase rights under this Warrant immediately prior to such reclassification or other change, and the Exercise Price therefor shall be appropriately adjusted, all subject to further adjustment as provided in this Section 12. (c) Split, Subdivision or Combination of Shares. If the Company at any time while this Warrant, or any portion hereof, remains outstanding and unexpired shall split, subdivide or combine the securities as to which purchase rights under this Warrant exist, into a different number of securities of the same class, the Exercise Price for such securities shall be proportionately decreased in the case of a split or subdivision or proportionately increased in the case of a combination. (d) Adjustments for Dividends in Stock or Other Securities or Property. If while this Warrant, or any portion hereof, remains outstanding and unexpired the holders of the securities as to which purchase rights under this Warrant exist at the time shall have received, or, on or after the record date fixed for the determination of eligible stockholders, shall have become entitled to receive, without payment therefor, other or additional stock or other securities or property (other than cash) of the Company by way of dividend, then and in each case, this Warrant shall represent the right to acquire, in addition to the number of shares of the security receivable upon exercise of this Warrant, and without payment of any additional consideration therefor, the amount of such other or additional stock or other securities or property (other than cash) of the Company that such holder would hold on the date of such exercise had it been the holder of record of the security receivable upon exercise of this Warrant on the date hereof and had thereafter, during the period from the date hereof to and including the date of such exercise, retained such shares and/or all other additional stock available by it as aforesaid 6 39 during such period, giving effect to all adjustments called for during such period by the provisions of this Section 12. (e) Certificate as to Adjustments. Upon the occurrence of each adjustment or readjustment pursuant to this Section 12, the Company at its expense shall promptly compute such adjustment or readjustment in accordance with the terms hereof and furnish to each Holder of this Warrant a Certificate setting forth such adjustment or readjustment and showing in detail the facts upon which such adjustment or readjustment is based. The Company shall, upon the written request, at any time, of any such Holder, furnish or cause to be furnished to such Holder a like certificate setting forth: (i) such adjustments and readjustments; (ii) the Exercise Price at the time in effect; and (iii) the number of shares and the amount, if any, of other property that at the time would be received upon the exercise of the Warrant. (f) No Impairment. The Company will not, by any voluntary action, avoid or seek to avoid the observance or performance of any of the terms to be observed or performed hereunder by the Company, but will at all times in good faith assist in the carrying out of all the provisions of this Section 12 and in the taking of all such action as may be necessary or appropriate in order to protect the rights of the Holder of this Warrant against impairment. 13. Miscellaneous. (a) Successors and Assigns. This Warrant and the rights evidenced hereby shall inure to the benefit of and be binding upon the successors of the Company and the Holder and their respective permitted assigns. The provisions of this Warrant are intended to be for the benefit of all Holders from time to time of this Warrant, and shall be enforceable by any such Holder. (b) Headings. The headings of the Sections of this Warrant are for the convenience of reference only and shall not, for any purpose, be deemed a part of this Warrant. (c) Governing Law. This Warrant shall be governed by the laws of the State of Delaware, excluding that body of law relating to conflicts of laws. (d) Notices. All notices, requests, demands and other communications hereunder shall be in writing and shall be deemed to have been duly given when personally delivered or mailed, by registered or certified mail as follows: if to Holder: The Good Guys-California, Inc. 7000 Marina Blvd. Brisbane, CA 94005 Attn: Chief Executive Officer 7 40 if to Company: goodguys.com, inc. 9009 S.W. Hall Blvd., Second Floor Tigard, OR 97223 Attn: Chief Executive Officer Such addresses may be changed from time to time by written notice to the other party. [SIGNATURE PAGE FOLLOWS] 8 41 IN WITNESS WHEREOF, the undersigned has caused this Warrant to be executed by its officers thereunto duly authorized. Dated: January 1, 2000. The Company: GOODGUYS.COM, INC. By: /s/ STUART N. JOHNSON --------------------------------- Name: STUART N. JOHNSON --------------------------------- Title: --------------------------------- 42 NOTICE OF EXERCISE (1) The undersigned hereby elects to purchase ___________ shares of Common Stock of goodguys.com, inc., pursuant to the provisions of Section 4(a) of the attached Warrant, and tenders herewith payment of the purchase price for such shares in full. (2) In exercising this Warrant, the undersign hereby confirms and acknowledges that the shares of Common Stock are being acquired solely for investment, and that the undersigned will not offer, sell or otherwise dispose of any such shares of Common Stock except in compliance with the Securities Act of 1933 or any applicable state securities laws. (3) Please issue a certificate or certificates representing said shares of Common Stock in the name of the undersigned or in the following name: ___________________. (4) Please issue a new Warrant for the unexercised portion of the attached Warrant in the name of the undersigned or in the following name: ___________________. Dated: -------------------------- --------------------------------------- By: -------------------------------- Name: -------------------------------- Title: -------------------------------- 43 ASSIGNMENT FORM FOR VALUE RECEIVED, the undersigned registered owner of this Warrant hereby sells, assigns and transfers unto the Assignee named below all of the rights of the undersigned under the within Warrant, with respect to the number of shares of Common Stock set forth below: NAME OF ASSIGNEE ADDRESS NO. OF SHARES and does hereby irrevocably constitute and appoint _____________ to make such transfer on the books of goodguys.com, inc., maintained for the purpose, with full power of substitution in the premises. The undersigned also represents that, by assignment hereof, the Assignee acknowledges that this Warrant and the shares of stock to be issued upon exercise hereof are being acquired for investment and that the Assignee will not offer, sell or otherwise dispose of this Warrant or any shares of stock to be issued upon exercise hereof except in compliance with the Securities Act of 1933 or any state securities laws. Further, the Assignee has acknowledge that upon exercise of this Warrant, the Assignee shall, if requested by the Company, confirm in writing, in a form satisfactory to the Company, that the shares of stock so purchased are being acquired for investment and not with a view toward distribution or resale. Dated: -------------------------- --------------------------------------- By: -------------------------------- Name: -------------------------------- Title: -------------------------------- 44 EXHIBIT B Assignment of Domain Name Agreement EX-21.1 5 f72537ex21-1.txt EXHIBIT 21.1 1 EXHIBIT 21.1 LIST OF SUBSIDIARIES Name Place of Incorporation ---- ---------------------- Good Guys California, Inc. California -1- EX-23.1 6 f72537ex23-1.txt EXHIBIT 23.1 1 EXHIBIT 23.1 INDEPENDENT AUDITORS' CONSENT We consent to the incorporation by reference in this Registration Statement of Good Guys, Inc. on Form S-8 of our report dated December 5, 2000, appearing in and incorporated by reference in the Annual Report on Form 10-K of Good Guys, Inc. for the year ended September 30, 2000, our report dated March 16, 2001 appearing in the Annual Report on Form 11-K of the Good Guys! Deferred Pay Plan for the fiscal year ended September 30, 2000 and our report dated April 13, 2001, appearing in the Form 10-K of Good Guys, Inc. for the five-month transition period ended February 28, 2001. DELOITTE & TOUCHE LLP May 24, 2001 Oakland, California EX-24.1 7 f72537ex24-1.txt 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 Ronald A. Unkefer and Robert A. Stoffregen, and each of them, 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 the five-month transition period ended February 28, 2001, 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: April 11, 2001 /s/ Stanley R. Baker /s/ Russell M. Solomon - ------------------------------------ ------------------------------------ Stanley R. Baker Russell M. Solomon /s/ Joseph P. Clayton /s/ John E. Martin - ------------------------------------ ------------------------------------ Joseph P. Clayton John E. Martin /s/ Joseph M. Schell /s/ Gary M. Lawrence - ------------------------------------ ------------------------------------ Joseph M. Schell Gary M. Lawrence /s/ Kenneth R. Weller - ------------------------------------ Kenneth R. Weller EX-99.1 8 f72537ex99-1.txt EXHIBIT 99.1 1 EXHIBIT 99.1 THE GOOD GUYS, INC, ------------------------ NOTICE OF ANNUAL MEETING OF SHAREHOLDERS TO BE HELD JANUARY 31, 2001 The Annual Meeting of Shareholders of The Good Guys, Inc. will be held at the Ritz-Carlton Hotel, located at 600 Stockton Street, San Francisco, California on Wednesday, January 31, 2001, at 11:00 a.m., for the following purposes: 1. To elect Directors to serve for the ensuing year and until their successors are duly elected and qualified. 2. To approve an increase by 700,000 in the number of shares covered by the 1994 Stock Incentive Plan. 3. To approve an increase by 400,000 in the number of shares covered by the Employee Stock Purchase Plan. 4. To ratify the selection of Deloitte & Touche LLP as independent certified public accountants for the Company. 5. To transact such other business as may properly come before the meeting. Only shareholders of record at the close of business on December 15, 2000, are entitled to notice of and to vote at the meeting and any adjournment thereof. BY ORDER OF THE BOARD OF DIRECTORS /s/ RONALD A. UNKEFER Ronald A. Unkefer Chairman and Chief Executive Officer Brisbane, California January 2, 2001 WHETHER OR NOT YOU PLAN TO ATTEND THE MEETING PLEASE SIGN AND RETURN THE ENCLOSED PROXY AS PROMPTLY AS POSSIBLE IN THE ENCLOSED POST-PAID ENVELOPE. IF YOU ARE ABLE TO ATTEND THE MEETING, AND WISH TO VOTE YOUR SHARES PERSONALLY, YOU MAY DO SO AT ANY TIME BEFORE THE PROXY IS EXERCISED. 2 THE GOOD GUYS, INC. 7000 MARINA BOULEVARD BRISBANE, CALIFORNIA 94005-1840 ------------------------ PROXY STATEMENT ------------------------ The enclosed proxy is solicited on behalf of the Board of Directors of The Good Guys, Inc., a Delaware corporation (the "Company"), for use at the Annual Meeting of Shareholders to be held at the Ritz-Carlton Hotel, 600 Stockton Street, San Francisco, California, on Wednesday, January 31, 2001, at 11:00 a.m. Any proxy given may be revoked by a shareholder at any time before it is voted by filing with the Secretary of the Company a notice in writing revoking it, or by duly executing a proxy bearing a later date. Proxies may also be revoked by any shareholder present at the meeting who expresses a desire to vote his or her shares in person. Subject to any such revocation, all shares represented by properly executed proxies which are received prior to the meeting will be voted in accordance with the specifications on the proxy. If no specification is made with regard to a proposal set forth in the proxy, the shares will be voted in favor of the proposal. A copy of the Annual Report of the Company for its fiscal year ended September 30, 2000, is being mailed to shareholders with this proxy statement. The approximate date on which this proxy statement and the accompanying proxy are being sent to shareholders is January 2, 2001. VOTING Only shareholders of record on December 15, 2000 (the "Record Date"), will be entitled to notice of and to vote at the meeting. At the close of business on the Record Date, the Company had 22,867,055 shares of common stock outstanding. Each holder of record of common stock on the Record Date is entitled to one vote per share on each matter to be considered at the Annual Meeting of Shareholders. A majority of all shares represented in person or by proxy at the Annual Meeting constitutes a quorum for the transaction of business at the meeting. Abstentions are considered as shares present and entitled to vote and therefore will have the same effect as a vote against a matter presented at the meeting. Brokers who hold shares in street name for customers have the authority to vote on certain matters; with respect to any other matters, shares as to which brokers have not received discretionary voting authority from their customers are considered as shares not entitled to vote with respect to such matters, but are counted toward the establishment of a quorum. Each participant in The Good Guys! Profit-Sharing Plan and The Good Guys! Deferred Pay Plan is entitled to instruct the respective Plan's Trustee to vote the shares of common stock allocated to such participant's account on each matter to be considered at the Annual Meeting of Shareholders. If a participant does not give voting instructions to the Trustee, the shares of common stock as to which he or she was entitled to provide instructions shall be voted by the Trustee in the manner directed by the respective Plan's Administrative Committee. Unallocated shares of common stock shall be voted in the same proportion as the allocated shares of common stock in each respective Plan. ELECTION OF DIRECTORS Directors are elected to hold office until the next annual shareholders' meeting or until their successors have been elected. Based upon the announced change in the Company's fiscal year to one ending on February 28 of each year, it is anticipated that the directors elected at this meeting will serve at least until May or June of 2002, when the next annual meeting will be held. The eight nominees receiving the highest number of the affirmative votes of the shares represented in person or by proxy and entitled to vote at the Annual Meeting of Shareholders shall be elected as directors. 3 Unless otherwise instructed by the shareholder, it is intended that the shares represented by the enclosed proxy will be voted for the nominees named below. Although management anticipates that all of the nominees will be able to serve, if any nominee is unable or unwilling to serve at the time of the meeting, the proxy may be voted for a substitute nominee chosen by management. All of the nominees are presently directors of the Company and no nominee has any family relationship with any other nominee or executive officer. In April 2000, Horst H. Schulze resigned as a director and in August 2000, Kenneth R. Weller was elected as a director to fill the vacancy created by Mr. Schulze's resignation. W. Howard Lester is not standing for reelection and in December 2000, the Board of Directors pursuant to the Company's Bylaws decreased the authorized number of directors to eight, effective immediately prior to the vote for directors at the Annual Meeting of Shareholders. The beneficial ownership of the Company's stock by the nominees is set forth under "Certain Shareholders." The following table and biographical summaries set forth the names and ages of the nominees, their principal occupations at present, the positions and offices held by each of them with the Company in addition to the position as director, and the period during which each of them has served as a director of the Company.
DIRECTOR CONTINUOUSLY NOMINEE AGE SINCE ------- --- ------------ Ronald A. Unkefer........................................... 56 1999 Stanley R. Baker(1)......................................... 56 1976 Russell M. Solomon(2)....................................... 75 1986 John E. Martin.............................................. 55 1990 Gary M. Lawrence(2)......................................... 44 1999 Joseph P. Clayton(1)........................................ 51 1999 Joseph M. Schell(1)(2)...................................... 54 1999 Kenneth R. Weller........................................... 52 2000
- --------------- (1) Member of Compensation Committee (2) Member of Audit Committee Ronald A. Unkefer founded the Company on July 1, 1973. From 1973 to 1993, he served as Chairman and Chief Executive Officer. In January 1993, he retired from the position of Chief Executive Officer to pursue venture capital and broadcasting interests and continued to serve as Chairman of the Company until January 1996. Mr. Unkefer returned to the Company as its Chairman and Chief Executive Officer on July 1, 1999. Currently, he also serves as Chairman of First Ventures, a venture capital fund investing in internet and technology companies in Silicon Valley and is Chairman of First Broadcasting, an owner and developer of major market radio stations. Stanley R. Baker has been a director of the Company since its incorporation in 1976 and was Secretary of the Company from 1976 until his resignation as an employee of the Company in August 1991. Mr. Baker became Vice President, Video Merchandising in 1986, and Vice President, Co-Head of Merchandising in 1990. From August 1991 to the present Mr. Baker has been a private investor. In May, 2000, Mr. Baker was appointed Vice Chairman of the Company and from March 2000 to the present, he has acted as a consultant to the Company in the merchandising and advertising areas. Russell M. Solomon is the founder and Chairman of MTS Incorporated (dba Tower Records). John E. Martin has served as Chairman of Easyriders, Inc., an operator of restaurants and apparel stores, since June 1997, and also has served as Chairman of Diedrich Coffee, Inc., an operator of specialty coffee stores, since November 1997. From October 1996 to June 1997, he served as Chairman and Chief Executive Officer of PepsiCo Casual Restaurants International, a subsidiary of PepsiCo. From 1983 until October 1996, he served as Chief Executive Officer of Taco Bell, another subsidiary of PepsiCo and he also served as Chairman of Taco Bell from June 1994 until October 1996. Mr. Martin is a director of Williams-Sonoma, Inc. 2 4 Gary M. Lawrence has been a partner in the law firm of Akin, Gump, Strauss, Hauer & Feld, L.L.P., a leading international law firm with offices in the United States, Europe and Russia, since 1989. Mr. Lawrence was Chair of the Mergers and Acquisitions Group from 1997 to 1999 and is currently Chair of the Technology Practice Group. Mr. Lawrence is also a member of the firm-wide management and strategic planning committees of Akin Gump. Joseph P. Clayton has more than 24 years of experience in the consumer electronics industry. From June 1997 to September 1999 he served as Chief Executive Officer of Frontier Corporation and since September 1999 has been President and Chief Executive Officer -- North America and a director of Global Crossing, Ltd., a publicly-held communications company, following its merger with Frontier. From March 1992 to January 1997, he served as Executive Vice President of Marketing and Sales for Thomson Consumer Electronics for the Americas and Asia. Mr. Clayton serves as a director of Asia Global Crossing, a publicly-held communications company, and E.W. Scripps, a publicly-held communications company. Joseph M. Schell became Chairman of Global Technology Investment Banking of Merrill Lynch & Co. in February 2000. From May 1985 until June 1999, he served as the Senior Managing Director, Director of Investment Banking and a member of the Executive Committee of NationsBank Montgomery Securities. Mr. Schell serves on the Boards of Directors of Dycom Industries, a publicly held engineering, construction and maintenance services company, and Sanmina Corporation, a publicly held electronics contract manufacturing services company. Kenneth R. Weller became President of the Company in August 2000. From April 1993 until August 2000, Mr. Weller served as Vice President of Sales of Best Buy and from July 1982 to April 1993 he served as Vice President of Stores of the Company. The Board of Directors has established an Audit Committee and a Compensation Committee, but has not established a Nominating Committee. The Compensation Committee met four times during fiscal 2000. The function of the Compensation Committee is to approve stock plans and option grants and review and make recommendations to the Board of Directors regarding executive compensation and benefits. The Audit Committee met three times during fiscal 2000. Responsibilities of the Audit Committee include (1) reviewing financial statements and consulting with the independent auditors concerning the Company's financial statements, accounting and financial policies, and internal controls, (2) reviewing the scope of the independent auditors' activities and the fees of the independent auditors, and (3) reviewing the independence of the auditors. All of the members of the Audit Committee meet the independence standards established by the National Association of Securities Dealers, with the exception of Mr. Lawrence, whose law firm has provided legal services to the Company. The Board concluded that, based upon Mr. Lawrence's background, his service on the Audit Committee was in the best interests of the Company and it shareholders. The Audit Committee has adopted a charter, a copy of which is attached to this Proxy Statement as Appendix A. The total number of meetings of the Board of Directors during fiscal 2000 was six. Each of the incumbent directors other than Mr. Lester attended at least 75% of the aggregate of (1) the meetings of the Board during the year and (2) the total number of meetings of all committees of the Board on which he served. THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" EACH NOMINEE. COMPENSATION OF DIRECTORS AND EXECUTIVE OFFICERS COMPENSATION OF DIRECTORS Directors who are employees of the Company do not receive additional compensation for their service as directors. During the fiscal year ended September 30, 2000, each of Messrs. Baker, Lester, Martin, Solomon, Lawrence, Clayton and Schell received 4,885 shares of restricted common stock under the Company's 1994 Stock Incentive Plan (determined by dividing $40,000 by the fair market value of the Company's common 3 5 stock on the date of grant) as full compensation for the year that commenced on the date of the last annual meeting of stockholders; such stock vests one year after such date, or, if earlier, on the death or disability of the director. Under the Company's 1994 Stock Incentive Plan, each person who is not an employee of the Company, upon becoming a member of the Board of Directors for the first time, is awarded a non-qualified option to purchase 20,000 shares of common stock of the Company. Directors are reimbursed for expenses incurred in attending meetings. Stanley R. Baker received $238,750 for consulting services rendered to the Company in the merchandising and advertising areas during the fiscal year and also received in consideration for his agreement to continue rendering such services an option to acquire 25,000 shares of common stock having a one-year vesting period and an exercise price of $3.25 per share, which was the fair market value of the Company's common stock on the date of grant. COMPENSATION OF EXECUTIVE OFFICERS The following table shows specific compensation information for the fiscal years ending September 30, 2000, 1999 and 1998 for the Chief Executive Officer, the three others who were serving as of September 30, 2000, and received over $100,000 dollars for the fiscal year then ended, and a former executive officer who would have been included among the most highly compensated officers had he remained in the employ of the Company through September 30, 2000. SUMMARY COMPENSATION TABLE
LONG-TERM COMPENSATION ANNUAL COMPENSATION AWARDS -------------------------------------------------------- ------------ RESTRICTED SHARES STOCK UNDERLYING OTHER ANNUAL AWARDS OPTIONS NAME AND PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION(1) ($) (NUMBER) --------------------------- ---- -------- ------- --------------- ---------- ------------ Ronald A. Unkefer............... 2000 $500,043 $ 0 $ 0 $ 0 0 Chief Executive Officer(2) 1999 $125,005 $ 0 $ 0 $ 0 0 Cathy A. Stauffer............... 2000 $199,591 $ 0 $ 6,754 $ 0 30,000 Vice President, 1999 $185,994 $ 0 $19,619 $60,000 17,500 Merchandising 1998 $170,925 $ 0 $ 0 $ 0 0 George J. Hechtman.............. 2000 $106,254 $ 0 $ 6,477 $ 0 100,000 Vice President of 1999 $ 0 $ 0 $ 0 $ 0 0 Administration(3) 1998 $ 0 $ 0 $ 0 $ 0 0 Richard C. Gazlay............... 2000 $167,506 $15,000 $ 0 $ 0 0 Vice President of 1999 $ 53,343 $75,679 $ 0 $ 0 26,000 Operations(4) 1998 $103,587 $94,203 $ 0 $ 0 1,000 Vance R. Schram................. 2000 $189,060 $ 0 $ 339 $ 0 0 Vice President, Finance 1999 $155,637 $ 0 $ 0 $90,000 20,500 and Secretary(5) 1998 $ 91,852 $20,000 $ 0 $ 0 7,500
- --------------- (1) Consists of perquisites and other personal benefits, including long term disability, life insurance premiums paid by the Company, accrued vacation for terminated employees, and the tax gross up for relocation expenses. (2) Mr. Unkefer became Chief Executive Officer of the Company on July 1, 1999. (3) Mr. Hechtman became Vice President of Administration in April 2000. (4) Mr. Gazlay became Vice President of Operations in February 2000 and prior to then was Director of Service. In October 2000, Mr. Gazlay requested a return to the position of Director of Service and will now again give his undivided attention to the service organization. (5) Mr. Schram resigned as an officer of the Company in September 2000. 4 6 STOCK OPTION TABLES The following table shows information concerning stock options granted to the individuals named in the Summary Compensation Table above during the fiscal year ended September 30, 2000. OPTION GRANTS IN FISCAL 2000
INDIVIDUAL GRANTS ------------------------------------------------ POTENTIAL REALIZABLE % OF TOTAL VALUE AT ASSUMED NUMBER OF OPTIONS RATES OF STOCK PRICE SECURITIES GRANTED TO APPRECIATION FOR UNDERLYING EMPLOYEES OPTION TERM(2)(3) OPTIONS IN EXERCISE EXPIRATION --------------------- NAME GRANTED(1) FISCAL YEAR PRICE DATE 5% 10% ---- ---------- ----------- -------- ---------- --------- --------- Ronald A. Unkefer.................. 0 0 -- -- -- -- Cathy A. Stauffer.................. 25,000 1.79% $5.9375 2/11/10 $ 93,352 $236,571 5,000 .36% $4.6250 3/17/10 $ 14,543 $ 36,855 George J. Hechtman................. 100,000 7.15% $2.8750 4/26/10 $180,807 $458,201 Richard C. Gazlay.................. 0 0 -- -- -- -- Vance R. Schram.................... 0 0 -- -- -- --
- --------------- (1) All of the above options were granted under the 1994 Stock Incentive Plan with the exception that the options granted to George Hechtman were granted outside that Plan. The options are non-qualified stock options that were granted at 100% of the fair market value of the common stock on the date of grant. The options expire ten years from the date of grant, unless otherwise earlier terminated upon the occurrence of certain events related to termination of employment. Options granted vest 33.3% per year on the first three anniversaries of the option grant date. Additional vesting of the right to exercise the options ceases when the optionee's employment terminates. (2) The 5% and the 10% assumed rates of appreciation applied to the option exercise price over the ten-year option term are prescribed by the rules of the Securities and Exchange Commission and do not represent the Company's estimate or projection of the future price of common stock. If the Company's common stock does not appreciate relative to the exercise price, the named executive officers will receive no benefit from the options. (3) At assumed annual rates of appreciation of 5% and 10%, the aggregate potential realizable increase in value for shares held by all stockholders as of September 30, 2000 for the ten-year period from February 11, 2000 to February 11, 2010 would be $84,999,174 and $215,404,596, for the ten-year period from March 17, 2000 to March 17, 2010 would be $66,209,883 and $167,788,843, and for the ten-year period from April 26, 2000 to April 26, 2010 would be $41,157,495 and $104,301,173. (4) All information given in this table and the following table as to exercise prices and values is as of September 30, 2000. 5 7 The following table shows the number of shares covered by both exercisable and non-exercisable stock options held by the individuals named in the Summary Compensation Table above as of September 30, 2000 and the value of unexercised options as of that date.
VALUE(1) OF UNEXERCISED NUMBER OF UNEXERCISED IN-THE-MONEY OPTIONS AT SHARES OPTIONS AT 9/30/00 9/30/00 ACQUIRED VALUE --------------------------- --------------------------- NAME ON EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE ---- ----------- -------- ----------- ------------- ----------- ------------- Ronald A. Unkefer.............. -- -- 0 0 $ 0 $ 0 Cathy A. Stauffer.............. -- -- 9,375 38,375 $17,871 $ 53,925 George J. Hechtman............. -- -- -- 100,000 $ 0 $412,500 Richard C. Gazlay.............. -- -- 12,666 13,334 $15,041 $ 15,834 Vance R. Schram................ -- -- 7,833 0 $11,911 $ 0
- --------------- (1) The value of unexercised options is calculated by multiplying the number of options outstanding by the difference between the option exercise price and the September 30, 2000 closing price of $7.00 per share of the Company's common stock as reported on the Nasdaq National Market. Options with an exercise price in excess of the September 30, 2000 closing price were not included in this calculation. EMPLOYMENT ARRANGEMENTS On June 2, 1999, the Company entered into an Employment Agreement with Ronald A. Unkefer, providing for his appointment to the Company's Board of Directors and his election as Chairman and Chief Executive Officer of the Company, effective as of July 1, 1999. The Agreement provides for a minimum annual base salary of $500,000, an annual cash incentive bonus in an amount of up to 100% of Mr. Unkefer's annual base pay as reasonably determined by the Board of Directors, and for the payment of relocation expenses for Mr. Unkefer and his family. Either party may terminate the Agreement upon 30 days written notice to the other party for any reason whatsoever. There is no provision in the Agreement for any severance payments in the event of termination of Mr. Unkefer's employment by the Company. Effective as of the close of business on the 15th day of August 2000, the Company entered into an Employment Agreement with Kenneth R. Weller, providing for his appointment to the Company's Board of Directors and his election as President of the Company. The Agreement provides for a minimum base salary of $400,000, an annual cash incentive bonus in an amount of up to 100% of Mr. Weller's annual base pay as reasonably determined by the Board of Directors, and for the payment of relocation expenses. The initial term of employment is for three years. The Company, however, may terminate Mr. Weller's employment at anytime, provided that if the termination is without cause, Mr. Weller will be entitled to receive one year severance pay based upon Mr. Weller's then current annual base salary. Mr. Weller was granted an option outside of the 1994 Stock Option Plan to purchase 1,000,000 shares of the Company's common stock, exercisable over a period of three years, and vesting at the rate of one-third per year (subject to full vesting in the event of a change of control or termination for any reason other than the voluntary resignation by Mr. Weller or dismissal for cause). The option is exercisable at an exercise price of $3.75 per share, the fair market value of the Company's common stock as of the date of grant. Mr. Weller also purchased 500,000 shares of restricted stock of the Company at fair market value (with 50% warrant coverage at that same price), as more fully described under Certain Relationships and Related Transactions. Cathy A. Stauffer, Vice President, Merchandising, and George J. Hechtman, Vice President of Administration, have severance agreements that provide for severance payments in the event of their termination without cause by the Company or termination by them for good reason following a change in control of the Company; the maximum payment under either agreement would be 12 months of salary. COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION The members of the Compensation Committee of the Company are Stanley R. Baker, Joseph M. Schell and Joseph P. Clayton, all of whom are outside directors. None of the members of the Committee is or was an 6 8 officer of the Company or any of its subsidiaries, with the exception of Stanley R. Baker. Mr. Baker resigned as an officer and employee in August 1991 and was appointed Vice Chairman of the Board of Directors of the Company in May 2000 (a position without compensation). He was compensated in a consulting capacity during the fiscal year. See "Director Compensation." BOARD COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION OVERVIEW AND PHILOSOPHY The Compensation Committee (the "Committee") of the Board of Directors is responsible for establishing the Company's policies and administering the Company's programs governing stock incentive plans and executive compensation, including annual salaries, bonuses (if any), and awards under stock and long-term cash incentive plans. The Committee has from time to time engaged a nationally recognized compensation and benefits consulting firm to assist the Committee and the Company in reviewing the compensation program of the Company's executive officers. The objectives of the Company's executive compensation program are to provide the following: - Overall compensation opportunities that are competitive within the Company's executive labor markets and that enable the Company to attract and retain highly talented, experienced executives capable of furthering the Company's objectives; - Annual cash incentive compensation tied primarily to the overall financial performance of the Company, but also recognizing business unit and individual performance as appropriate; and - Long term incentives which directly align the financial interests of management with those of the shareholders and which provide an incentive to remain in the Company's employ. To achieve compensation opportunities that are competitive, the Company focuses on compensation survey data for retailers of comparable size. Although not determinative, the Company takes into consideration the percentile competitive executive pay levels and average annual percentage increases in executive compensation granted by comparable companies. EXECUTIVE OFFICER COMPENSATION PROGRAM The Company's executive officer compensation program is comprised of base salary, annual cash incentive compensation, long-term incentive compensation in the form of stock options, and various other common benefits. BASE SALARY Base salary levels for the Company's executive officers are competitively set relative to companies in the Company's industry and other comparable companies. In determining salaries, the Committee also takes into account the Company's financial performance and the executive's demonstrated skill, experience and performance. ANNUAL INCENTIVE COMPENSATION The Company's system of annual cash incentive compensation for its executive officers for fiscal 1999 and 1998 took the form of cash bonuses that were determined by overall Company performance as measured by earnings per share in relation to budgeted earnings per share, and, where appropriate, individual performance. The target bonus for an executive officer (other than the Chief Executive Officer) was multiplied by a percentage, ranging from zero to 125%, that could be adjusted by the Chief Executive Officer based on his assessment of the officer's job performance. For officers with responsibility for sales, merchandising, real estate and store operations, a portion of their annual bonus was directly tied to the achievement of specific financial or other goals developed at the beginning of the year. No bonuses were paid under the Company's plans in the event the Company did not achieve at least 75% of its budgeted earnings per share, which was the case in fiscal 1998 and 1999. A cash incentive compensation plan for fiscal 2000 was not established, but discretionary 7 9 bonuses were paid to two officers after taking into consideration their target bonus percentages and their job performance. STOCK OPTION PROGRAM The stock option program is the Company's principal long-term incentive plan for executive officers and key managers. The objectives of the program are to align executive and shareholder long-term interests by creating a strong and direct link between executive compensation and shareholder return, and to enable executives to develop and maintain a significant long-term ownership position in the Company's common stock. The Committee attempts to grant options sufficient to deliver competitive gains assuming the Company's stock price performance is competitive, but the Committee also considers the dilutive impact of options granted. Stock options are granted at an option price equal to the fair market value of the Company's common stock on the date of grant, generally have ten-year terms and vest ratably over a three-year period (vesting was over a four year period prior to August 26, 1999). BENEFITS The Company provides benefits to the executive officers that are generally available to Company employees. CHIEF EXECUTIVE OFFICER COMPENSATION Ronald A. Unkefer's employment as Chairman and Chief Executive Officer commenced on July 1, 1999. Mr. Unkefer's annual salary and bonus were negotiated prior to the commencement of his employment and are described under Employment Arrangements above. No bonus was paid to Mr. Unkefer for fiscal 2000. The Committee has reviewed the total compensation of all executive officers in fiscal 2000 and has concluded that their compensation is reasonable and consistent with the Company's compensation philosophy and industry practice. Section 162(m) of the Internal Revenue Code, enacted in 1993, limits the amount of compensation a corporation may deduct as a business expense. Section 162(m) generally disallows deductions for compensation in excess of $1 million to a company's Chief Executive Officer or to any of its four other most highly compensated executive officers. Based upon fiscal 2000 compensation, no such limits on the deductibility of compensation applied for any officer of the Company. Compensation that is "performance-based" is not subject to that limit if certain requirements are met and the Committee will when possible try to meet those requirements. Although the Committee reserves the right to award compensation to its executives that may not qualify under Section 162(m) as deductible compensation, the Committee will continue to consider all elements of the cost to the Company of providing such compensation, including the potential impact of Section 162(m). The foregoing report of the Compensation Committee shall not be deemed incorporated by reference by any general statement incorporating by reference the Proxy Statement into any filing under the Securities Act of 1933 or the Securities Exchange Act of 1934, except to the extent that the Company specifically incorporates this information by reference, and shall not otherwise be deemed filed under such Acts. COMPENSATION COMMITTEE OF THE BOARD OF DIRECTORS Joseph P. Clayton Joseph M. Schell Stanley R. Baker 8 10 PERFORMANCE GRAPH The following graph shows a five-year comparison of cumulative total returns for the Company's common stock, the Nasdaq Stock Market (US) Index and the Nasdaq-Retail Trade Index, each of which assumes reinvestment of dividends. [PERFORMANCE GRAPH]
- -------------------------------------------------------------------------------- 1995 1996 1997 1998 1999 2000 - -------------------------------------------------------------------------------- The Good Guys! Stock 100 70 65 52 56 62 NASDAQ Stock Market 100 119 163 165 270 359 NASDAQ Retail Trade Stocks 100 120 137 117 140 104 - --------------------------------------------------------------------------------
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The Company has opened five WOW!, Multimedia Superstores, one in Nevada and four in California. The WOW! Multimedia Superstores, which range in size from 40,500 to 61,350 square feet, are jointly operated with Tower Records under an Operating Agreement between the Company and Tower Records. The Company and Tower Records have separate leases for their respective stores, and the Operating Agreement governs the joint operation of the facilities. The Company and Tower Records share equally certain expenses in connection with operation of these facilities, but do not share any profits on their respective sales. Russell M. Solomon, Chairman of MTS Incorporated (dba Tower Records) is a member of the Company's Board of Directors. The Company also subleases a portion of one of its other stores to MTS Incorporated and the income received by the Company from that sublease during the fiscal year ended September 30, 2000, was $326,077. Gary M. Lawrence is a member of a law firm that has been retained from time to time by the Company to provide services to the Company. In August 2000, the Company completed a private placement of $9.36 million of its common stock. Participants in the offering included every member of the Company's Board of Directors, including Chairman and Chief Executive Officer, Ronald A. Unkefer and newly appointed President Kenneth R. Weller and Richard C. Gazlay. The investors purchased 2,017,647 restricted shares of the Company's common stock at $4.64 a share, the closing price of the Company's common stock on the NASDAQ National Market at the time of purchase. Investors also received warrants exercisable for three years to purchase 1,008,822 additional shares of common stock at the same price. The individual purchases by the directors (or trusts established or controlled by them) and executive officers were as follows: Ronald A. Unkefer 646,468 Shares/323,234 Warrants; Stanley R. Baker: 161,617 Shares/80,808 Warrants; Russell M. Solomon: 5,387 Shares/2,694 9 11 warrants held in the Michael T. Solomon Trust and 5,387 Shares/2693 Warrants held in the David T. Solomon Trust; H. Howard Lester: 107,744 Shares/53,872 Warrants; John E. Martin: 215,489 Shares/ 107,744 Warrants; Gary M. Lawrence: 107,744 Shares/53,872 Warrants; Joseph P. Clayton: 20,000 Shares/ 10,000 Warrants; Joseph M. Schell: 215,489 Shares/107,744 Warrants; Kenneth R. Weller: 500,000 Shares/ 250,000 Warrants; and Richard C. Gazlay: 10,774 Shares/5,387 Warrants. The shares of common stock issued to each investor were not registered under the Securities Act of 1933 as amended, but the Company is required to file a Registration Statement covering those shares. The Company in January 2000 entered into a royalty and services agreement with GoodGuys.com, Inc., a company formed to maximize opportunities for electronic commerce in the consumer entertainment electronics industry. The Company will facilitate certain functions for purchase and delivery of product to GoodGuys.com and both the Company and GoodGuys.com desire the benefit from the cross promotion of their businesses. The Company will receive a percentage of sales to GoodGuys.com. In addition, the Company received an equity participation in GoodGuys.com of approximately 20% and warrants to acquire up to an additional 29.9% of equity, exercisable only upon the occurrence of certain events. Outside investors and members of the Company's management and Board of Directors provided the initial funding for GoodGuys.com. Investments made by members of management and members of the Board of Directors were as follows: Ronald A. Unkefer -- $1,046,000; Joseph M. Schell -- $250,000; Gary M. Lawrence -- $250,000; Joseph P. Clayton -- $50,000; Stanley R. Baker -- $100,000; Cathy A. Stauffer -- $10,000; and Richard C. Gazlay -- $150,000. REPORT OF AUDIT COMMITTEE The Audit Committee reviewed the Company's financial statements with the Board of Directors and discussed with Deloitte & Touche LLP, the Company's independent auditors during the 2000 fiscal year, the matters required to be discussed by Statement of Auditing Standard No. 61. The Audit Committee received from Deloitte & Touche LLP the written disclosures required by Independence Standards Board Standard No. 1 and discussed with them their independence. After reviewing and discussing the financial statements with management and the auditors, the Audit Committee, based upon such review and discussions, recommended that the financial statements be included in the Company's annual report on Form 10-K. This report of the Audit Committee shall not be deemed incorporated by reference by any general statement incorporating by reference this Proxy Statement into any filing under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, except to the extent that the Company specifically incorporates this information by reference, and shall not otherwise be deemed filed under such Acts. AUDIT COMMITTEE OF THE BOARD OF DIRECTORS Joseph M. Schell Gary M. Lawrence Russell M. Solomon AMENDMENT TO 1994 STOCK INCENTIVE PLAN The Company believes that all key employees and directors should have a significant stake in the Company's stock price performance under programs that link compensation to shareholder return. There remain, however, only approximately 110,189 shares of stock available for grant for this purpose under the Company's 1994 Stock Incentive Plan (the "Plan"). Due to the limited availability of shares under the Plan, during the fiscal year ended September 30, 2000, options covering 1,125,000 shares were granted outside the Plan to induce key employees to join the Company. 10 12 Rather than adopting a new stock incentive plan at this time, the Compensation Committee and the Board of Directors of the Company approved in December 2000 an increase by 700,000 in the number of shares available for the grant of options under the Plan. The affirmative vote of the holders of at least a majority of the outstanding shares of common stock represented in person or by proxy and entitled to vote at the Annual Meeting of Shareholders is required for approval of the amendment. The following is a summary of the material features of the Plan. GENERAL If the amendment to the Plan is approved, the aggregate number of shares of common stock which may be issued under the Plan will be 2,500,000 shares, of which approximately 810,000 shares will remain available for awards under the Plan. The Plan presently provides that the maximum number of shares covered by all grants or awards in any fiscal year of the Company to any participant cannot exceed 250,000, subject to adjustment in the event of stock splits or similar events. No awards may be granted under the Plan after November 13, 2004. Approximately 145 persons are eligible to participate in the Plan. ADMINISTRATION The Plan will be administered by the Compensation Committee of the Board of Directors (the "Committee"). The Committee selects key employees and directors who will receive awards, determines the amount, vesting requirements, performance criteria, if any, and other conditions of each award, interprets the provisions of the Plan and makes all other decisions regarding the operation of the Plan. The types of awards which the Committee will have authority to grant consist of (1) stock options, (2) restricted shares, (3) restricted share units, (4) performance units and (5) bonus shares. Each of these types of awards is described below. STOCK OPTIONS Stock options granted by the Committee may be either "incentive stock options" (stock options qualifying under Section 422 of Code, which may only be granted to employees of the Company), "non-qualified stock options" (stock options which do not so qualify) or both types of stock options (but not in tandem), provided that the aggregate value (at the time the option is granted) of the stock with respect to which incentive stock options are exercisable for the first time by any Optionee during any calendar year may not exceed $100,000. On the date on which a person who is not an employee becomes a member of the Board for the first time, such director will be awarded a non-qualified stock option under the Plan to purchase 20,000 shares of common stock. The option price for each stock option may not be less than 100% of the fair market value of the common stock on the date the stock option is granted, with the exception that in the case of incentive stock options granted to an employee who owns 10% or more of the total combined voting power of all classes of stock of the Company or its subsidiaries (a "ten percent employee") the exercise price must be not less than 110% of such fair market value. On December 15, 2000, the fair market value of a share of the Company's common stock was $3.938. No stock option may be exercised by an optionee during the first six months of its term unless the exercise date has been accelerated as described under "Rights in Certain Events" below. No stock option may be exercised after the expiration of ten years from the date of grant (five years in the case of an incentive stock option granted to a ten percent employee). A stock option to the extent exercisable at any time may be exercised in whole or in part. Unless otherwise determined by the Committee in its discretion, if the employment or directorship of an optionee terminates for any reason other than the death or disability any then outstanding stock option held by such grantee shall be exercisable by the grantee (but only to the extent exercisable by the grantee immediately 11 13 prior to such termination) at any time prior to the expiration date of such stock option or within three months after the date of such termination, whichever is the shorter period. In the event of termination by reason of death or disability, the Plan provides for limited periods following any such termination during which stock options held by the optionee at the time of termination may be exercised by the optionee or his or her estate. The option price for each stock option will be payable in full in cash at the time of exercise; however, in lieu of cash any optionee may pay the option price in whole or in part by delivering to the Company shares of common stock having a fair market value on the date of exercise of the stock option equal to the option price for the shares being purchased, except that any portion of the option price representing a fraction of a share must be paid in cash and no shares of common stock which have been held less than six months may be delivered in payment of the option price of a stock option. With the exception of certain transfers allowed for estate planning purposes, no stock option granted under the Plan is transferable other than by will or by the laws of descent and distribution and a stock option may be exercised during an optionee's lifetime only by the optionee. Subject to the foregoing and other provisions of the Plan, stock options granted under the Plan may be exercised at such times and in such amounts and be subject to such restrictions and other terms and conditions, if any, as will be determined, in its discretion, by the Committee. Unless otherwise specifically provided in the agreements covering options, options granted under the Plan will vest at the rate of 33 1/3% on each of the first three anniversaries of the date of grant of the option. RESTRICTED SHARES OR RESTRICTED SHARE UNITS Restricted shares of common stock or restricted share units awarded by the Committee will be subject to such restrictions as the Committee may impose thereon and will be subject to forfeiture if certain events (which may, in the discretion of the Committee, include termination of employment and/or performance-based events) specified by the Committee occur prior to the lapse of the restrictions. The agreement between the Company and the grantee will set forth the number of restricted shares or restricted share units awarded to the grantee, the restrictions imposed thereon, the duration of such restrictions, the events the occurrence of which would cause a forfeiture and such other terms and conditions as the Committee in its discretion deems appropriate. Following a restricted share award and prior to the lapse or termination of the applicable restrictions, share certificates for the restricted shares will be held in escrow. Upon the lapse or termination of the restrictions, the share certificates will be delivered to the grantee. From the date a restricted share award is effective, however, the grantee will be a shareholder with respect to the restricted shares and will have all the rights of a shareholder with respect to such shares, including the right to vote the shares and to receive all dividends and other distributions paid with respect to the shares, subject only to the restrictions imposed by the Committee. Restricted shares or restricted share units may be issued for no consideration or for such consideration as shall be determined at the time of the award by the Committee. PERFORMANCE UNITS The Committee may award performance units (expressed in dollars or shares) to be earned by an awardee based on the level of performance of the Company, a subsidiary or subsidiaries, a branch, department or other unit thereof or the awardee individually over a specified period of not less than one year ("Performance Period"). For each Performance Period the Committee will establish a Performance Target, and a Minimum Target which may be the same or less than the Performance Target. Targets may be expressed in terms of earnings per share, return on assets, return on equity, asset growth, ratio of capital to assets or such other level or levels of performance by the Company, a subsidiary or subsidiaries, a branch, department or other unit thereof or the awardee individually as the Committee may establish. An awardee will earn the performance unit in full by meeting the Performance Target for the Performance Period. If the Minimum Target has not been attained but the Performance Target is not 12 14 attained, the portion of the performance unit earned by the awardee will be determined on the basis of a formula established by the Committee. Payment in respect of earned performance units, whether expressed in dollars or shares, may be made in cash, in shares of common stock, or partly in cash and partly in shares of common stock, as determined by the Committee at the time of payment. For this purpose, performance units expressed in dollars will be converted to shares, and performance units expressed in shares will be converted to dollars, based on the fair market value of the common stock as of the date the amount payable is determined by the Committee. Except as otherwise provided below under "Rights in Certain Events," if the employment of an awardee terminates prior to the close of a Performance Period for any reason other than voluntary termination with the consent of the Company or a subsidiary, retirement under any retirement plan of the Company or a subsidiary or death, the performance units of the awardee will be deemed not to have been earned, and no portion of such performance units may be paid. If prior to the close of the Performance Period the employment of an awardee is voluntarily terminated with the consent of the Company or a subsidiary or the awardee retires under any retirement plan of the Company or a subsidiary or the awardee dies during employment, the Committee may in its discretion determine to pay all or any part of the performance unit based upon the extent to which the Committee determines the Performance Target or Minimum Target has been achieved as of the date of termination of employment, retirement or death, the period of time remaining until the close of the Performance Period and/or such other factors as the Committee may deem relevant. Performance unit awards may have such other terms and conditions as the Committee in its discretion deems appropriate. BONUS SHARES The Committee will have the authority in its discretion to award bonus shares of common stock in recognition of the contribution of the awardee to the performance of the Company, a subsidiary or subsidiaries, or a branch, department or other unit, in recognition of the awardee's individual performance or on the basis of such other factors as the Committee may deem relevant. Any bonus shares awarded would not be subject to any restrictions or possibilities of forfeiture. RIGHTS IN CERTAIN EVENTS With respect to options granted under the Plan prior to November 8, 2000, the Plan provides for certain additional rights upon the occurrence of one or more events described in Section 9A of the Plan ("Section 9A Events"). Such an event is deemed to have occurred when (1) the Company acquires actual knowledge that any person (other than the Company, a subsidiary or any employee benefit plan sponsored by the Company or a person approved under certain circumstances by the Board of Directors) has acquired beneficial ownership, directly or indirectly, of securities of the Company representing 20% or more of the voting power of the Company, (2) a tender offer is made to acquire securities of the Company representing 20% or more of the voting power of the Company, (3) a person other than the Company solicits proxies relating to the election or removal of 50% or more of any class of the Board of Directors or (4) the shareholders of the Company approve a merger, consolidation, share exchange, division or sale or other disposition of assets of the Company as a result of which the shareholders of the Company immediately prior to the transaction will not own a majority of the voting power of the surviving or resulting company or any company which acquires the stock of the Company or more than 20% of its consolidated assets. Unless the agreement between the Company and the awardee otherwise provides, if any Section 9A Event occurs (1) all outstanding stock options will become immediately and fully exercisable, (2) all stock options held by an awardee whose employment with the Company or a subsidiary terminates within one year of any Section 9A Event for any reason other than voluntary termination with the consent of the Company or a subsidiary, retirement under any retirement plan of the Company or subsidiary or death will be exercisable for a period of three months from the date of such termination of employment, but in no event after the expiration date of the stock option, (3) all restrictions applicable to restricted shares awarded under the plan will lapse and (4) all performance units for which the 13 15 performance period has not yet expired will be deemed to have been fully earned as of the date of the Section 9A Event, regardless of the attainment or nonattainment of the performance target or any minimum target. With respect to a change in control (as defined in the Plan) of the Company after November 7, 2000, the Company will endeavor to cause the successor entity in the transaction either to assume all of the options which have been granted after such date and which are outstanding as of the closing of such transaction, or to issue (or cause to be issued) in substitution therefor comparable options of such successor entity (or of its parent or its subsidiary). If the successor entity is unwilling to either assume such option or grant comparable options in substitution for such options on terms that are acceptable to the Company as determined by the Board in the exercise of its discretion, then with respect to each outstanding option, that portion of the option which remains unvested will become vested immediately prior to the closing; and the Board may cancel all outstanding options, and terminate this Plan, effective as of the closing, provided that it will notify the grantee of the proposed change of control transaction a reasonable amount of time prior to the closing so that the grantee will be given the opportunity to exercise his or her option (after giving effect to the acceleration of such vesting) prior to closing. In the event of a change of control transaction, the Board will also have the discretion to waive restricted share or restricted share unit restrictions and determine that performance units have been fully earned. The provisions of the Plan providing for the acceleration of the exercise date of stock options, the lapse of restrictions applicable to restricted shares and the deemed earnout of performance units upon the occurrence of a Section 9A Event and for the extension of the period during which stock options may be exercised upon termination of employment following a Section 9A Event may be considered as having an anti-takeover effect. MISCELLANEOUS The Board of Directors may amend or terminate the Plan at any time, except (1) the Board may not alter adversely or terminate any outstanding award without the consent of the holders thereof and (2) shareholder approval is required for any amendment that increases the total number of shares which may be issued under the Plan or if such approval is required to maintain the favorable tax treatment of incentive stock options granted under the Plan. FEDERAL INCOME TAX CONSEQUENCES The following is a brief summary of the principal Federal income tax consequences of the grant and exercise of awards under present law. Incentive Stock Options. An optionee will not recognize any taxable income for Federal income tax purposes upon receipt of an incentive stock option or, generally, at the time of exercise of any incentive stock option. The exercise of an incentive stock option generally will result in an increase in an optionee's taxable income for alternative minimum tax purposes. If an optionee exercises an incentive stock option and does not dispose of the shares received in a subsequent "disqualifying disposition" (generally, a sale, gift or other transfer within two years after the date of grant of the incentive stock option or within one year after the shares are transferred to the optionee), upon disposition of the shares any amount realized in excess of the optionee's tax basis in the shares disposed of will be treated as a long-term capital gain, and any loss will be treated as a long-term capital loss. In the event of a "disqualifying disposition," the difference between the fair market value of the shares received on the date of exercise and the option price (limited, in the case of a taxable sale or exchange, to the excess of the amount realized upon disposition over the optionee's tax basis in the shares) will be treated as compensation received by the optionee in the year of disposition. Any additional gain will be taxable as a capital gain and any loss as a capital loss, which will be long-term or short-term depending on whether the shares were held for more than one year. Under proposed regulations, special rules apply in determining the compensation income recognized upon a disqualifying disposition if the option price of the incentive stock option is paid with shares of common stock or, in certain limited circumstances, if the optionee is subject to Section 16(b) of the 1934 Act. If shares of common stock received upon the prior exercise of an incentive stock option are transferred to the Company 14 16 in payment of the option price of an incentive stock option within either of the periods referred to above, the transfer will be considered a "disqualifying disposition" of the shares transferred, but, under proposed regulations, only compensation income determined as stated above, and no capital gain or loss, will be recognized. Neither the Company nor any of its subsidiaries will be entitled to a deduction with respect to shares received by an optionee upon exercise of an incentive stock option and not disposed of in a "disqualifying disposition." If an amount is treated as compensation received by an optionee because of a "disqualifying disposition," the Company or one of its subsidiaries generally will be entitled to a corresponding deduction in the same amount for compensation paid. Non-qualified Stock Options. An optionee will not recognize any taxable income for Federal income tax purposes upon receipt of a non-qualified stock option. Upon the exercise of a non-qualified stock option the amount by which the fair market value of the shares received, determined as of the date of exercise, exceeds the option price will be treated as compensation received by the optionee in the year of exercise. If the option price of a non-qualified stock option is paid in whole or in part with shares of common stock, no income, gain or loss will be recognized by the optionee on the receipt of shares equal in value on the date of exercise to the shares delivered in payment of the option price. The fair market value of the remainder of the shares received upon exercise of the non-qualified stock option, determined as of the date of exercise, less the amount of cash, if any, paid upon exercise will be treated as compensation income received by the optionee on the date of exercise of the stock option. Special rules will apply upon the exercise of a non-qualified stock option in certain limited circumstances by an optionee who is subject to Section 16(b) of the 1934 Act. The Company or one of its subsidiaries generally will be entitled to a deduction for compensation paid in the same amount treated as compensation received by the optionee. Restricted Shares. A grantee of restricted shares will not recognize any taxable income for Federal income tax purposes in the year of the award, provided the shares are subject to restrictions (that is, they are nontransferable and subject to a substantial risk of forfeiture). If a grantee is subject to Section 16(b) of the 1934 Act on the date of the award, the shares generally will be deemed to be subject to restrictions (in addition to the restrictions imposed by the award) for at least six months following the date of the award. However, the grantee may elect under Section 83(b) of the Code to recognize compensation income in the year of the award in an amount equal to the fair market value of the shares on the date of the award, determined without regard to the restrictions. If the grantee does not make a Section 83(b) election, the fair market value of the shares on the date the restrictions lapse will be treated as compensation income to the grantee and will be taxable in the year the restrictions lapse. The Company or one of its subsidiaries generally will be entitled to a deduction for compensation paid in the same amount treated as compensation income to the grantee. Performance Units. An awardee of performance units will not recognize any taxable income for Federal income tax purposes upon receipt of the award. Any cash or shares of common stock received pursuant to the award will be treated as compensation income received by the awardee generally in the year in which the awardee receives such cash or shares of common stock. If performance units are expressed in dollars but paid in whole or in part in shares of common stock and the awardee is subject to Section 16(b) of the 1934 Act on the date of receipt of such shares, the awardee generally will not recognize compensation income until the expiration of six months from the date or receipt, unless the awardee makes an election under Section 83(b) of the Code to recognize compensation income on the date of receipt. In each case, the amount of compensation income will equal the amount of cash and the fair market value of the shares of common stock on the date compensation income is recognized. The Company or one of its subsidiaries generally will be entitled to a deduction for compensation paid in the same amount treated as compensation income to the awardee. Bonus Shares. Any shares of common stock received pursuant to an award of bonus shares will be treated as compensation income received by the awardee generally in the year in which the awardee receives such shares. If the awardee is subject to Section 16(b) of the 1934 Act on the date of receipt of the bonus shares, the awardee generally will not recognize compensation income until the expiration of six months from 15 17 the date of receipt, unless the awardee makes an election under Section 83(b) of the Code to recognize compensation income on the date of receipt. In each case, the amount of compensation income will equal the fair market value of the shares of common stock on the date compensation income is recognized. The Company or one of its subsidiaries generally will be entitled to a corresponding deduction in the same amount for compensation paid. Other Tax Matters. The exercise of a stock option by an awardee, the lapse of restrictions on restricted shares, or the deemed earnout of performance units following the occurrence of a Section 9A Event, in certain circumstances, may result in (i) a 20% Federal excise tax (in addition to Federal income tax) to the awardee on certain payments of common stock or cash resulting from such exercise or deemed earnout of performance units or, in the case of restricted shares, on all or a portion of the fair market value of the shares on the date the restrictions lapse and (ii) the loss of a compensation deduction which would otherwise be allowable to the Company or one of its subsidiaries as explained above. THE BOARD OF DIRECTORS RECOMMENDS THAT THE SHAREHOLDERS VOTE "FOR" THE APPROVAL OF THE AMENDMENT TO THE PLAN AMENDMENT TO EMPLOYEE STOCK PURCHASE PLAN The Board of Directors in December 2000 approved an increase by 400,000 in the number of shares covered by the Employee Stock Purchase Plan (the "Purchase Plan"). Approval of the increase in the number of shares covered by the Purchase Plan by the holders of at least a majority of the shares of Common Stock represented in person or by proxy and entitled to vote at the Annual Meeting of Shareholders is required. Through December 15, 2000, there have been 3,309,598 shares purchased under the Purchase Plan, in which all of the Company's full-time employees may participate (approximately 580 employees are participating) and if the proposed amendment to the Purchase Plan is adopted, 690,402 shares will remain available for purchase under the Purchase Plan. The continued success of the Company depends upon its ability to attract and retain highly qualified and competent employees. The Purchase Plan enhances that ability and provides additional incentive to such personnel to advance the interests of the Company and its shareholders. The Purchase Plan is described below. GENERAL All employees (except any employee who owns 5% or more of the stock of the Company or whose customary employment by the Company is for five months or less in any calendar year or for an average of less than 20 hours per week) are eligible to participate in the Purchase Plan commencing on the first enrollment date (January 1, April 1, July 1, or October 1) following the commencement of their employment. Each employee enrolling in the Purchase Plan elects to make contributions by payroll deductions of any whole integer amount ranging from 1% to 15% of monthly gross pay. The rate of contribution may be either increased or decreased to such amounts on any subsequent enrollment date. No employee may purchase stock under the Purchase Plan exceeding $25,000 in fair market value in any calendar year, and no employee may make contributions for any period during which he or she is not receiving pay from the Company or its subsidiaries. Employee contributions are credited to each participant's individual account and, on March 31, June 30, September 30 and December 31 of each year, the funds then in the participant's account are applied to the purchase of whole shares of Common Stock, unless the member has previously advised the Company that he or she does not wish shares purchased for his or her account. Shares purchased must be held by its members for a period of one year from the last day of the three-month period with respect to which the shares were purchased. The cost to each participant's account for the shares so purchased will be not less than 85% of the lower of the closing price on (a) the first trading day of each three-month period or (b) the last trading day of each three-month period. If the number of shares members desire to purchase at the end of any three-month period 16 18 exceeds the number of shares then available under the Purchase Plan, the shares available will be allocated among such members in proportion to their contributions during the three-month period. No rights of any members are assignable by operation of law or otherwise, except to the extent that there has been a designation of a beneficiary or except as permitted by the laws of descent and distribution if a beneficiary is not designated. Membership in the Purchase Plan will be terminated when the member (a) voluntarily elects to withdraw his or her entire account, (b) resigns or is discharged from the Company or one of its subsidiaries, (c) dies, or (d) does not receive pay from the Company or one of its eligible subsidiaries for 12 consecutive months, unless this period is due to illness, injury or for other reasons approved by the person or persons appointed by the Company to administer the Purchase Plan. Upon termination of membership, the terminated member will not be entitled to rejoin the Purchase Plan until the first day of the three-month period immediately following the three-month period in which the termination occurs. Upon termination of membership, the member will be entitled to the amount of his or her individual account within 15 days after termination. ADMINISTRATION The Purchase Plan is administered by Robert A. Stoffregen, the Company's Chief Financial Officer and Secretary. The Purchase Plan may be terminated or amended at any time by the Board of Directors. FEDERAL INCOME TAX CONSEQUENCES The following is a brief summary of the principal Federal income tax consequences of participation under the Purchase Plan under present law. The Purchase Plan is intended to be a "qualified employee stock purchase plan" under the Internal Revenue Code. The granting of the right to purchase shares under the Purchase Plan has no tax effect on the participants of the Company. No income is recognized to participants at the date shares are issued under the Purchase Plan. If shares purchased under the Purchase Plan are held for more than one year from the time they are received and for more than two years from the date the rights to purchase are granted, amounts realized on a sale of the shares are compensation to the employee taxable as ordinary income only to the extent of the lesser of (a) the amount by which the fair market value of the Common Stock at the date of such grant exceeds the price paid for the shares or (b) the amount by which the sale price exceeds the purchase price. Any further gain is treated as long-term capital gain. The same tax treatment is applicable to shares acquired pursuant to the valid exercise of the right to purchase subsequent to the death of an employee except that the holding period requirements do not apply. If the shares are sold within the one-year or two-year holding periods, the employee realizes compensation taxable as ordinary income to the extent the fair market value of the Shares at the date of purchase was greater than the purchase price; the difference between the proceeds of sale and the fair market value of the shares at the date of purchase is a capital gain or loss (which will be long-term if the shares have been held for more than one year). For purposes of determining the beginning of the two-year holding period for shares, the date the rights to purchase are granted is deemed to be the first day of that particular three-month period in which the shares are purchased. To the extent the employee realizes ordinary income on a disposition of the shares by reason of failing to meet the requisite holding periods, the Company has a corresponding deduction. THE BOARD OF DIRECTORS RECOMMENDS VOTE "FOR" APPROVAL OF THE AMENDMENT TO THE PURCHASE PLAN 17 19 PLAN BENEFITS The following table sets forth the number of options and shares of restricted stock granted under the 1994 Stock Incentive Plan from October 1, 1999 through September 30, 2000 and the number of shares purchased under the Employee Stock Purchase Plan during that period, with respect to each person named in the Summary Compensation Table, all current executive officers as a group (including the named executive officers who are currently executive officers), all current directors who are not executive officers as a group, and all employees other than executive officers as a group.
STOCK INCENTIVE PLAN --------------------------------------- PURCHASE PLAN NUMBER OF OPTIONS ---------------------------------- GRANTED IN FISCAL NUMBER OF SHARES NUMBER OF 2000(1) OF RESTRICTED STOCK DOLLAR VALUE(2) SHARES PURCHASED ----------------- ------------------- --------------- ---------------- Ronald A. Unkefer................. 0 0 George J. Hechtman................ 0 0 $ 1,447 385 Cathy A. Stauffer................. 30,000 0 $ 2,259 1,096 Richard C. Gazlay................. 0 0 $ 10,401 5,994 Vance R. Schram................... 0 0 0 0 Current Executive Officer Group... 30,000 0 $ 14,107 7,475 Non-Executive Officer Director Group........................... 0 34,195 0 0 Non-Executive Officer Employee Group........................... 243,950 79,000 $963,015 476,981
- --------------- (1) Does not include options covering 1,125,000 shares of common stock granted outside the 1994 Stock Incentive Plan in fiscal 2000, including an option covering 100,000 shares granted to George J. Hechtman and an option covering 1,000,000 shares granted to Kenneth R. Weller. (2) The amounts in this column reflect the difference between the market value of the shares purchased on the date of purchase and the purchase price under the Employee Stock Purchase Plan and may not represent amounts actually realized by the participants. RATIFICATION OF SELECTION OF AUDITORS Touche Ross & Co. commenced service as the independent certified public accountants for the Company in 1984. Deloitte, Haskins & Sells and Touche Ross & Co. merged, effective December 3, 1989. Representatives of Deloitte & Touche LLP are expected to be present at the shareholders' meeting with the opportunity to make a statement if they desire to do so and are expected to be available to respond to appropriate questions. This matter is not required to be submitted for shareholder approval, but the Board of Directors has elected to seek ratification of its selection of independent public accountants by the affirmative vote of the holders of a majority of the shares present and entitled to vote at the meeting. Management has not determined what action it will take in the event the shareholders do not ratify the selection of independent public accountants. 18 20 CERTAIN SHAREHOLDERS The following table sets forth information as of December 15, 2000, unless otherwise noted, regarding securities ownership by (i) each person who is known by the Company to own beneficially more than five percent of the Company's common stock, (ii) each current executive officer named in the Summary Compensation Table, (iii) the directors and nominees individually, and (iv) all executive officers and directors as a group.
COMMON STOCK BENEFICIALLY OWNED(1) ---------------------- NAME NUMBER PERCENT ---- ---------- -------- Lord, Abbett & Co.(2)....................................... 2,831,196 10.9% 767 Fifth Avenue, 11th Floor New York, NY 10153 First Pacific Advisors(2)................................... 1,785,500 6.9% 11400 West Olympic Blvd., Suite 1200 Los Angeles, CA 90064 Dimensional Fund Advisors(2)................................ 1,463,400 5.6% 1299 Ocean Avenue, 11th Floor Santa Monica, CA 90401 Ronald A. Unkefer(3)........................................ 2,898,202 11.2% Kenneth R. Weller(4)........................................ 750,000 2.9% John E. Martin(5)........................................... 729,836 2.8% Joseph M. Schell(6)......................................... 450,644 1.7% Stanley R. Baker(7)......................................... 433,278 1.7% Gary M. Lawrence(8)......................................... 269,813 1.0% W. Howard Lester(9)......................................... 248,219 1.0% Russell M. Solomon(10)...................................... 72,764 * Joseph P. Clayton(11)....................................... 60,011 * George J. Hechtman.......................................... 20,000 * Cathy A. Stauffer(12)....................................... 48,384 * All executive officers and directors as a group (12 persons)(13).............................................. 5,989,542 23.3%
- --------------- * Represents less than 1% of the outstanding shares. (1) The stockholders named in the table have sole voting and investment power with respect to all shares of stock shown as beneficially owned by them, subject to community property laws where applicable and the information contained in the footnotes to this table. (2) As of September 30, 2000. (3) Includes 801,734 shares issuable upon the exercise of outstanding warrants that are exercisable within 60 days. Mr. Unkefer is a member of the administrative committees for The Good Guys! Profit Sharing Plan, the trustee of which currently holds 535,006 shares on behalf of plan participants, and The Good Guys! Deferred Pay Plan, the trustee of which currently holds 358,459 shares on behalf of plan participants. If a participant fails to vote his or her shares under either Plan, such shares will be voted in the manner determined by the administrative committees. (4) Includes 250,000 shares issuable upon the exercise of outstanding warrants that are exercisable within 60 days. (5) Includes 133,744 shares issuable upon the exercise of outstanding stock options and warrants that are exercisable within 60 days. (6) Includes 127,744 shares issuable upon the exercise of outstanding stock options and warrants that are exercisable within 60 days. (7) Includes 106,808 shares issuable upon the exercise of outstanding stock options and warrants that are exercisable within 60 days. 19 21 (8) Includes 73,872 shares issuable upon the exercise of outstanding stock options and warrants that are exercisable within 60 days. (9) Includes 79,872 shares issuable upon the exercise of outstanding stock options and warrants that are exercisable within 60 days. (10) Includes 31,387 shares issuable upon the exercise of outstanding stock options and warrants that are exercisable within 60 days, and also includes shares held in trusts established by him as to which he disclaims beneficial interest. (11) Includes 30,000 shares issuable upon the exercise of outstanding stock options and warrants that are issuable within 60 days. (12) Includes 139 shares held by the trustee of The Good Guys! Profit-Sharing Plan and allocated to Ms. Stauffer, as to which Ms. Stauffer has voting power, 2,298 shares held by the trustee of The Good Guys! Deferred Pay Plan and allocated to Ms. Stauffer's individual account, as to which Ms. Stauffer has voting power, and 19,584 shares issuable upon exercise of outstanding stock options that are exercisable within 60 days. (13) Includes 139 shares held by the trustee of The Good Guys! Profit-Sharing Plan and allocated to the individual accounts of members of the group, as to which such individuals have voting power; 2,298 shares held by the trustee of The Good Guys! Deferred Pay Plan and allocated to the individual accounts of such members, as to which such individuals have voting power, and 1,680,631 shares issuable upon exercise of outstanding stock options and warrants that are exercisable within 60 days. SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE Under the securities laws of the United States, the Company's directors and executive officers, and any persons holding more than ten percent of the Company's common stock, are required to report their initial ownership of the Company's common stock and any subsequent changes in that ownership to the Securities and Exchange Commission. Specific due dates for these reports have been established and the Company is required to disclose in this proxy statement any failure to file by such dates of which it becomes aware during the fiscal year. Subject to the foregoing, the Company believes that during the last fiscal year its directors and officers filed on a timely basis all such reports required to be filed, with the exception of a Form 3 filed by Mr. Gazlay and a Form 3 filed by Mr. Hechtman. STOCKHOLDERS PROPOSALS The Company recently announced a change in its fiscal year to correspond to one ending on February 28 of each year. Therefore, the next annual meeting of stockholders, the date of which has not yet been determined, is expected to occur in May or June of 2002 following the completion of the Company's fiscal year ending February 28, 2002. When such meeting date is set, the Company will announce the date to its stockholders in a Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission. Due to the change in fiscal year, proposals that stockholders wish to include in the Proxy Statement for the next annual meeting of stockholders must be received by the Company a reasonable time before the Company begins to print and mail its proxy materials and must satisfy the conditions established by the Securities and Exchange Commission for such proposals. EXPENSES OF SOLICITATION The expense of preparing, assembling, printing and mailing the forms of proxy and the material used in the solicitation of proxies will be paid by the Company. In addition to the solicitation of proxies by use of the mails, some of the officers, directors and regular employees of the Company, none of whom will receive additional compensation therefor, may solicit proxies by telephone, telegram or personal interview, the cost of which will be borne by the Company. Arrangements will also be made for the forwarding of soliciting material by nominees, custodians and fiduciaries to their principals. 20 22 OTHER MATTERS Management knows of no other matters which will be brought before the meeting, but if such matters are properly presented, the proxies solicited hereby will be voted in accordance with the judgment of the persons holding such proxies. BY THE BOARD OF DIRECTORS /s/ RONALD A. UNKEFER -------------------------------------- Ronald A. Unkefer Chairman and Chief Executive Officer Brisbane, California January 2, 2001 21 23 APPENDIX A CHARTER OF THE AUDIT COMMITTEE OF THE BOARD OF DIRECTORS OF THE GOOD GUYS, INC. I. PURPOSE The primary purposes of the Audit Committee are to assist the Board of Directors in fulfilling its oversight responsibilities with regard to the financial reporting process and internal controls of the Corporation and to provide an avenue for open communication among the independent accountants, financial and senior management and the Board of Directors. II. COMPOSITION The Audit Committee shall be comprised of three or more directors as determined by the Board, each of whom shall be an independent director and free from any relationship that in the opinion of the Board would interfere with the exercise of his or her independent judgment as a member of the Committee. The members of the Committee shall be elected by the Board at the annual organizational meeting of the Board. Unless a Chair is elected by the full Board, the members of the Committee may designate a Chair by majority vote of the full Committee membership. III. MEETINGS The Committee shall hold such regular meetings as it deems necessary and such special meetings as may be called by the Chairman of the Audit Committee or at the request of the independent accountants. IV. RESPONSIBILITIES AND DUTIES To fulfill its responsibilities and duties the Audit Committee shall: DOCUMENTS/REPORTS REVIEW 1. Review the Corporation's annual financial statements and make a recommendation to the Board whether they should be included in the Corporation's Annual Report on Form 10-K. 2. Review with financial management and the independent accountants each Form 10-Q prior to its filing. The Chair of the Committee may represent the entire Committee for purposes of this review. -1- 24 INDEPENDENT ACCOUNTANTS 3. Recommend to the Board the selection of the independent accountants and approve the fees and other compensation to be paid to the independent accountants. On an annual basis, the Committee shall review and discuss with the accountants all significant relationships the accountants have with the Corporation to determine their independence and shall receive from them the disclosures regarding their independence required by Independent Standards Board Standard No. 1. 4. Review the performance of the independent accountants and approve any proposed discharge of the independent accountants when circumstances warrant. 5. Periodically consult with the independent accountants out of the presence of management about internal controls and the fullness and accuracy of the organization's financial statements. FINANCIAL REPORTING PROCESSES 6. Meet with the independent accountants and financial management of the Corporation to review the scope of the proposed audit for the current year and the audit procedures to be utilized, and at the conclusion thereof review such audit, including any comments or recommendations of the independent accountants. 7. Review with the independent accountants and financial and accounting personnel the adequacy and effectiveness of the accounting and financial controls of the corporation, and elicit any recommendations for the improvement of such controls, with emphasis on the adequacy of such controls to expose any payments, transactions, or procedures that might be deemed illegal or otherwise improper. 8. Consider the independent accountants' judgments about the quality and appropriateness of the Corporation's accounting principles as applied in its financial reporting. 9. Consider and approve, if appropriate, major changes to the Corporation's auditing and accounting principles and practices as suggested by the independent accountant's or management. 10. Following completion of the annual audit, review with the independent accountants the matters covered by Statement on Auditing Standard No. 61, including (a) any significant difficulties encountered during the course of the audit, including any restrictions on the scope of work or access to required information, (b) methods used to account for significant unusual transactions; (c) the effect of significant accounting policies in controversial or emerging areas for which there is a lack of authoritative guidance or consensus; and (d) the process used by management in -2- 25 formulating any particularly sensitive accounting estimates and the basis for the auditor's conclusions regarding the reasonableness of those estimates. 11. Review any significant disagreement among management and the independent accountants in connection with the preparation of the financial statements, including whether there were any disagreements with regard to the application of accounting principles, the basis for management's accounting estimates or the disclosures in the financial statements. 12. Review with the independent accountants and management the extent to which changes or improvements in financial or accounting practices, as approved by the Audit Committee, have been implemented. ETHICAL AND LEGAL COMPLIANCE 13. Review periodically the Corporation's Code of Conduct and its system for enforcing the Code. 14. Review with counsel legal matters that could have a significant impact on the Corporation's financial statements. REPORT OF AUDIT COMMITTEE 15. Deliver a report for inclusion in the Proxy Statement of the Corporation for its Annual Meeting of Shareholders on whether the Audit Committee has (a) reviewed and discussed the audited financial statements with management, (b) discussed with the independent auditors the matters required to be discussed by Statement on Auditing Standard No. 61 and (c) received from the independent accountants disclosures regarding their independence required by Independence Standards Board Standard No. 1, which report shall state whether, based upon such review and discussions, the Audit Committee recommended to the Board the inclusion of the audited financial statements in the Corporation's Annual Report on Form 10-K for the last fiscal year. -3- -----END PRIVACY-ENHANCED MESSAGE-----