UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported): February 28, 2005
SOURCE INTERLINK COMPANIES, INC.
(Exact name of registrant as specified in this charter)
Delaware 001-13437 20-2428299
(State or other jurisdiction (Commission (IRS Employer
of incorporation) File Number) Identification No.)
27500 Riverview Center Blvd., Suite 400, Bonita Springs, FL 34134
(Address of Principal Executive Offices and Zip Code)
Registrant's Telephone Number, including area code: (239) 949-4450
Not applicable
(Former Name or Former Address, if Changes Since Last Report)
Check the appropriate box below if the Form 8-K filing is intended to
simultaneously satisfy the filing obligation of the registrant under any of the
following provisions (see General Instruction A.2. below):
[ ] Written communications pursuant to Rule 425 under the Securities Act (17 CFR
230.425)
[ ] Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR
240.14a-12)
[ ] Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange
Act (17 CFR 240.14d-2(b))
[ ] Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange
Act (17 CFR 240.13e-4(c))
ITEM 1.01 - ENTRY INTO A MATERIAL DEFINITIVE AGREEMENT
REINCORPORATION MERGER AGREEMENT
On February 28, 2005, Source Interlink Companies, Inc., a Missouri
corporation ("SOURCE MISSOURI" and, prior to the consummation of the
Reincorporation (as defined below), the "REGISTRANT") and Source Interlink
Companies, Inc., a Delaware corporation and a wholly owned subsidiary of Source
Missouri ("SOURCE DELAWARE" and, upon and following the consummation of the
Reincorporation, the "REGISTRANT"), entered into an Agreement and Plan of Merger
(the "REINCORPORATION MERGER AGREEMENT"). Under the terms of the Reincorporation
Merger Agreement, Source Missouri merged with and into Source Delaware, with
Source Delaware succeeding to all of the rights, properties, assets and
liabilities of Source Missouri (the "REINCORPORATION").
In accordance with Missouri law and Source Missouri's articles of
incorporation and bylaws, consummation of the Reincorporation was subject to the
condition that the holders of two-thirds (2/3) of Source Missouri's issued and
outstanding common stock approve the Reincorporation. The requisite shareholder
approval was received, and the Reincorporation was consummated, on February 28,
2005. The Reincorporation did not result in any change in the Registrant's name,
headquarters, business, jobs, management, location of offices or facilities,
number of employees, assets, liabilities or net worth. The Registrant's common
stock will continue to trade on the Nasdaq National Market under the symbol
"SORC."
Pursuant to the Reincorporation Merger Agreement, the certificate of
incorporation and bylaws of Source Delaware in effect immediately prior to the
consummation of the Reincorporation became the certificate of incorporation and
bylaws of the Registrant immediately following the consummation of the
Reincorporation. Source Delaware's officers and directors immediately prior to
the consummation of the Reincorporation became the officers and directors of the
Registrant immediately following the consummation of the Reincorporation, until
their successors are duly elected and qualified, or until their earlier death,
resignation or removal. Each outstanding share of Source Missouri common stock,
par value $0.01 per share, was automatically converted into one share of Source
Delaware common stock, par value $0.01 per share. Each stock certificate
representing issued and outstanding shares of Source Missouri's common stock
will continue to represent the same number of shares of common stock of Source
Delaware. It is not necessary for the Registrant's shareholders to exchange
their existing stock certificates for stock certificates of Source Delaware.
A copy of the Reincorporation Merger Agreement is included as Exhibit 2.2
to this Current Report and is incorporated herein by reference. The foregoing
summary of the terms of the Reincorporation Merger Agreement is qualified in its
entirety by reference to such exhibit.
SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN
On February 28, 2005, the compensation committee of the board of directors
of the Registrant (the "COMPENSATION COMMITTEE") approved the Source Interlink
Companies, Inc. Supplemental Executive Retirement Plan, effective as of March 1,
2005 (the "SERP"). The SERP is a nonqualified defined benefit plan.
The SERP provides that certain members of the Registrant's management and
other highly compensated employees (within the meaning of the Employment
Retirement Income Security Act of 1974, as amended) ("ELIGIBLE SERP
PARTICIPANTS") are entitled to receive certain retirement benefits from the
Registrant pursuant to an executive participation agreement entered into in
connection with the SERP. Under the SERP, an Eligible SERP Participant who
terminates employment with the Registrant and retires will be eligible to
receive retirement benefits as follows:
(1) Upon the Termination for Cause (as defined in the SERP) of the
Eligible SERP Participant by the Registrant, the participant will not be
entitled to receive any retirement benefits;
(2) If the Eligible SERP Participant resigns from the Registrant, the
participant will be entitled to receive a retirement benefit commencing at the
age of 65; provided, that the participant has served with the Registrant for a
period of more than five years from the effective date of the executive
participation agreement and is at least 55 years old at the time of resignation;
(3) If the Registrant terminates the employment of the Eligible SERP
Participant for Disability (as defined in the SERP), the participant will be
entitled to receive a retirement benefit commencing at the age of 65;
(4) If the Eligible SERP Participant terminates employment with the
Registrant and retires at or after the age of 65, the participant will be
entitled to receive a Normal Retirement Benefit (as defined in the SERP)
commencing at the age of retirement;
(5) If the Eligible SERP Participant terminates employment with the
Registrant and retires at or after the age of 55, but before the age of 65, the
participant will be entitled to receive an Early Retirement Benefit (as defined
in the SERP) commencing at the age of early retirement; and
(6) If the Registrant terminates the employment of the Eligible SERP
Participant prior to the age of 55 without cause for reasons other than death or
Disability (as defined in the SERP), the participant will be entitled to receive
a retirement benefit commencing at the age of 65.
If the Eligible SERP Participant is entitled to receive retirement
benefits from the Registrant, the amount of retirement benefits will be
calculated in accordance with such participant's executive participation
agreement. The Eligible SERP Participant's retirement benefits will be offset by
retirement benefits payable under any defined benefit plans (as defined under
the Employee Retirement Income Security Act of 1974, as amended) sponsored by
the Registrant.
Benefits under the SERP are to be paid monthly for the Eligible SERP
Participant's lifetime, but for not less than 60 months. If an Eligible SERP
Participant dies before the end of such 60-month period, monthly payments will
continue for the remainder of such 60-month period to the participant's
surviving spouse or estate, as applicable. In the event of a Change of Control
(as defined in the SERP) while the SERP is in effect, there will be no
acceleration of any benefits under the SERP or any other additional benefits.
A copy of the SERP is filed as Exhibit 10.55 to this Current Report and is
incorporated herein by reference. The foregoing summary of the terms of the SERP
is qualified in its entirety by reference to such exhibit.
EXECUTIVE PARTICIPATION AGREEMENTS
Form of Executive Participation Agreement
On March 1, 2005, in connection with participation in the SERP, the
Registrant entered into executive participation agreements with certain Eligible
SERP Participants. Pursuant to the executive participation agreements, upon an
Eligible SERP Participant's retirement at the age of 65, the Registrant will pay
to the Eligible SERP Participant a monthly Normal Retirement Benefit of: (i) 25%
of the average of the three highest annual base salaries during the five year
period preceding the retirement of the Eligible SERP Participant (the "SERP BASE
AMOUNT") after five years of service with the Registrant; (ii) 50% of the SERP
Base Amount after ten years of service with the Registrant; or (iii) 75% of the
SERP Base Amount after 15 years of service with the Registrant. The maximum
payout to an Eligible SERP Participant under the executive participation
agreement is 75% of the SERP Base Amount. If an Eligible SERP Participant elects
to delay receipt of retirement benefit payments until after the age of 65, the
Registrant will pay the Eligible SERP Participant a monthly retirement benefit
for his or her lifetime calculated on a present value basis as actuarially
discounted at 6.25% or the then current One Year Treasury Rate, whichever is
higher.
At any time after an Eligible SERP Participant reaches age 55 and has been
eligible to participate for a minimum of five full years, the Eligible SERP
Participant may retire or resign and choose to either (i) delay payments until
age 65, at which time the Eligible SERP Participant would receive the full
current benefit amount at the time of resignation as calculated payable for the
remainder of his or her life from age 65 or (ii) begin receiving Early
Retirement Benefits immediately at the time of retirement, which amounts would
be actuarially discounted on a present value basis as actuarially discounted at
6.25% or the then current One Year Treasury Rate, whichever is higher.
Upon Termination for Cause (as defined in the SERP), no benefit is payable
to the Eligible SERP Participant. Upon termination for other than cause, death
or Disability (as defined in the SERP), the Registrant will pay to the Eligible
SERP
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Participant, commencing at age 65, the Normal Retirement Benefit described
above but with the following adjustments: (i) 5% of the SERP Base Amount payable
at age 65 after one year of service; (ii) 10% of the SERP Base Amount payable at
age 65 after two years of service; (iii)15% of the SERP Base Amount payable at
age 65 after three years of service; or (iv) 20% of the SERP Base Amount payable
at age 65 after four years of service.
A copy of the form of executive participation agreement is filed as
Exhibit 10.58 tothis Current Report and is incorporated herein by reference. The
foregoing summary of the terms of the form of executive participation agreement
is qualified in its entirety by reference to such exhibit.
Executive Participation Agreement with James R. Gillis
On March 1, 2005, the Registrant entered into an executive participation
agreement with James R. Gillis in connection with his participation in the SERP.
The terms of Mr. Gillis' executive participation agreement are substantially
similar to the terms of the form of executive participation agreement described
above, except that the schedule of Normal Retirement Benefit payments is altered
in light of Mr. Gillis' age relative to other younger Eligible SERP
Participants. Pursuant to Mr. Gillis' executive participation agreement, Mr.
Gillis is entitled to receive his full benefit paid, without discount,
immediately upon his retirement based on the following schedule of payments: (i)
25% of the SERP Base Amount payable immediately after five years of service with
the Registrant; (ii) 30% of the SERP Base Amount payable immediately after six
years of service with the Registrant; (iii) 35% of the SERP Base Amount payable
immediately after seven years of service with the Registrant; (iv) 40% of the
SERP Base Amount payable immediately after eight years of service with the
Registrant; (v) 45% of the SERP Base Amount payable immediately after nine years
of service with the Registrant; (vi) 50% of the SERP Base Amount payable
immediately after ten years of service with the Registrant; (vii) 55% of the
SERP Base Amount payable immediately after 11 years of service with the
Registrant; (viii) 60% of the SERP Base Amount payable immediately after 12
years of service with the Registrant; (ix) 65% of the SERP Base Amount payable
immediately after 13 years of service with the Registrant; (x) 70% of the SERP
Base Amount payable immediately after 14 years of service with the Registrant;
or (xi) 75% of the SERP Base Amount payable immediately after 15 years of
service with the Registrant. The maximum payout to Mr. Gillis under his
executive participation agreement is 75% of the SERP Base Amount.
A copy of Mr. Gillis' executive participation agreement is filed as
Exhibit 10.57 to this Current Report and is incorporated herein by reference.
The foregoing summary of the terms of Mr. Gillis' executive participation
agreement is qualified in its entirety by reference to such exhibit.
CHALLENGE GRANT PROGRAM
On February 28, 2005, the Compensation Committee approved the Source
Interlink Companies, Inc. Challenge Grant Program, effective as of March 1, 2005
(the "CHALLENGE GRANT"). The Challenge Grant provides that S. Leslie Flegel, the
Registrant's chairman and chief executive officer, and any member of the
Registrant's management and other highly compensated employees (within the
meaning of the Employment Retirement Income Security Act of 1974, as amended)
that Mr. Flegel and the Compensation Committee (when required under the
Challenge Grant) designate as eligible to participate in the Challenge Grant
("ELIGIBLE CHALLENGE GRANT PARTICIPANTS") are entitled to share an aggregate
payout (the "AGGREGATE PAYOUT") tied to the attainment by the Registrant of
certain specified consolidated net operating income targets over the period
commencing March 1, 2005 and ending January 31, 2008 (the "CHALLENGE PERIOD").
Payment of the Aggregate Payout amounts will be made at the conclusion of
the Challenge Period and will be allocated among Eligible Challenge Grant
Participants in such amounts as determined by Mr. Flegel and the Compensation
Committee (when required under the Challenge Grant); provided, that no more that
35% of the Aggregate Payout will be allocated to Mr. Flegel. The Compensation
Committee reserves the right, but has no obligation, to adjust upward or
downward the consolidated net operating income targets under the Challenge Grant
if, during the Challenge Period, the Registrant completes the acquisition or
disposition of a significant amount of assets otherwise than in the ordinary
course of business. Any such adjustment during the Challenge Period will be
reasonably related to any increase or decrease in the net operating income to
the Registrant expected to result from the completion of such acquisition or
disposition.
A copy of the Challenge Grant is filed as Exhibit 10.56 to this Current
Report and is incorporated herein by reference. The foregoing summary of the
terms of the Challenge Grant is qualified in its entirety by reference to such
exhibit.
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EMPLOYMENT AGREEMENT WITH S. LESLIE FLEGEL
On March 1, 2005, the Registrant entered into an executive employment
agreement (the "LESLIE FLEGEL EMPLOYMENT AGREEMENT") with S. Leslie Flegel, its
chairman and chief executive officer. Under the Leslie Flegel Employment
Agreement, the Registrant will continue to employ Mr. Flegel in his current
capacity as its chairman and chief executive officer for a term commencing March
1, 2005 and ending January 31, 2010. Mr. Flegel will have the usual and
customary duties, responsibilities and authority of chairman and chief executive
officer and will perform such other and additional duties and responsibilities
as are consistent with that position and as the Registrant's board of directors
may reasonably require.
The Registrant will pay Mr. Flegel (i) $750,000 in cash upon the execution
and delivery of the Leslie Flegel Employment Agreement and (ii) a base salary of
$915,000 per year during the period of Mr. Flegel's employment with the
Registrant.
In addition, Mr. Flegel is entitled to receive a short term incentive
payment following each fiscal year ended during his employment with the
Registrant if and to the extent earned, but subject to the maximum amount
specified, under the Short Term Incentive Program attached as Exhibit B to the
Leslie Flegel Employment Agreement. The Short Term Incentive Program entitles
Mr. Flegel to earn a short term incentive payment amount in any given fiscal
year, up to $1,800,000, which amount is tied to the attainment by the Registrant
of certain net operating income performance goals expressed as a percentage of
the Registrant's board-approved annual budget.
Mr. Flegel is also eligible to participate in the Registrant's Challenge
Grant Program and to receive a disbursement of up to 35% of the aggregate payout
contemplated thereby.
The Registrant will also permit Mr. Flegel to participate in any
equity-based incentive, healthcare, retirement, life insurance, disability
income and other benefits plans offered by the Registrant with respect to its
executive officers generally.
Under the Leslie Flegel Employment Agreement, Mr. Flegel's employment with
the Registrant is subject to early termination at any time (i) at the
Registrant's election, by dismissal of Mr. Flegel from employment with or
without Proper Cause (as defined in the Leslie Flegel Employment Agreement)
pursuant to resolution of the Registrant's board of directors, (ii) at the
Registrant's election, upon Mr. Flegel's disability as determined pursuant to
the Leslie Flegel Employment Agreement, (iii) upon Mr. Flegel's death or (iv) at
Mr. Flegel's election, with or without Good Reason (as defined in the Leslie
Flegel Employment Agreement), by voluntary resignation upon 30 days' advance
written notice.
In the event of Mr. Flegel's early termination by the Registrant without
Proper Cause or by Mr. Flegel for Good Reason, and if Mr. Flegel agrees to
specified restrictions on competitive activities, the Registrant will be
obligated to pay to Mr. Flegel (or his estate) within five business days, an
amount equal to the sum of: (a) his base salary (without further adjustment)
through January 31, 2010; (b) all fixed retainer fees that would have been paid
under the Leslie Flegel Consulting Agreement (as defined below); (c)an amount
equal to the product of $900,000 times the number of fiscal years remaining to
be concluded under the Leslie Flegel Employment Agreement; and (d) an amount, in
full settlement of Mr. Flegel's interest in the Challenge Grant Program, equal
to (i) $3.5 million, if such early termination occurs during the Registrant's
fiscal year 2006, (ii) $4.375 million, if such early termination occurs during
the Registrant's fiscal year 2007, and (iii) $5.25 million, if such early
termination occurs during the Registrant's fiscal year 2008. The Registrant
would also be obligated to continue to provide healthcare benefits to Mr. Flegel
until the earlier of January 31, 2010 or his death.
In the event of Mr. Flegel's early termination by the Registrant with
Proper Cause or by Mr. Flegel without Good Reason, the Registrant will be
relieved of its obligations to pay or provide any compensation or benefits under
the Leslie Flegel Employment Agreement, except for accrued and unpaid items.
In the event of Mr. Flegel's early termination due to disability (as
determined pursuant to the Leslie Flegel Employment Agreement), the Registrant
agrees to pay to Mr. Flegel (i) a disability income benefit in an amount equal
to 33 1/3% of Mr. Flegel's base salary, payable monthly, commencing on the date
of early termination and ending on the earliest to occur of January 31, 2010,
Mr. Flegel's death or the termination of 24 months following the date of early
termination and (ii) a payment equal to the pro rata short term incentive
payment due Mr. Flegel for the months he worked prior to his early
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termination. The Registrant would also be obligated to continue to provide
healthcare benefits to Mr. Flegel until the earliest of his death, January 31,
2010 or the expiration of 24 months, and to pay a death benefit to Mr. Flegel's
estate of $2 million regardless of the date of Mr. Flegel's death. The
Registrant will be entitled to credit, against its obligation to pay such
disability income benefit, any amounts received from time to time by Mr. Flegel
pursuant to any disability income insurance policy maintained by the Registrant.
In the event of Mr. Flegel's early termination due to his death, the
Registrant will pay to Mr. Flegel's estate (i) a payment equal to the pro rata
short term incentive payment due Mr. Flegel for the months he worked prior to
his death and (ii) a death benefit of $2 million.
During his term of employment and during the Restricted Period (as defined
in the Leslie Flegel Employment Agreement), Mr. Flegel is prohibited from,
directly or indirectly, managing, operating, controlling, accepting employment
or a consulting position with or otherwise advising or assisting or being
connected with, or owning or having any financial interest in, any Competitive
Enterprise (as defined in the Leslie Flegel Employment Agreement). These
noncompetition provisions terminate if the Registrant terminates Mr. Flegel
without Proper Cause or if Mr. Flegel terminates his employment for Good Reason.
The Leslie Flegel Employment Agreement further provides that, effective
upon the expiration of the employment term, the Registrant and Mr. Flegel will
enter into a consulting agreement substantially in the form attached as Exhibit
A to the Leslie Flegel Employment Agreement (the "LESLIE FLEGEL CONSULTING
AGREEMENT").
Under the Leslie Flegel Consulting Agreement, the Registrant is obligated
to engage Mr. Flegel as a consultant for a period of five years commencing
February 1, 2010 and ending January 31, 2015, subject to certain early
termination rights. The Registrant will pay Mr. Flegel: (i) a fixed retainer fee
of $415,000 per year and (ii) compensation as a non-employee director in
accordance with then corporate policy. The parties agree to execute and deliver
the Leslie Flegel Consulting Agreement on or about October 31, 2009 and cause it
to become effective February 1, 2010, subject to early termination rights.
Under the Leslie Flegel Consulting Agreement, Mr. Flegel's engagement with
the Registrant is subject to early termination at any time (i) at the
Registrant's election, by dismissal of Mr. Flegel from engagement with or
without Proper Cause (as defined in the Consulting Agreement) pursuant to
resolution of the Registrant's board of directors, (ii) at the Registrant's
election, upon Mr. Flegel's disability as determined pursuant to the Leslie
Flegel Consulting Agreement, (iii) upon Mr. Flegel's death or (iv) at Mr.
Flegel's election, with or without Good Reason (as defined in the Leslie Flegel
Consulting Agreement), by voluntary resignation upon 30 days' advance written
notice.
In the event of Mr. Flegel's early termination by the Registrant without
Proper Cause or by Mr. Flegel for Good Reason, the Registrant will remain
obligated to pay to Mr. Flegel, in cash, an amount equal to the sum of (a) all
fixed retainer fees for the remaining term under the Leslie Flegel Consulting
Agreement and (b) all accrued and unpaid items.
In the event of Mr. Flegel's early termination by the Registrant with
Proper Cause or by Mr. Flegel without Good Reason, the Registrant will be
relieved of its obligations to pay or provide any compensation or benefits under
the Consulting Agreement, except for accrued and unpaid items.
In the event of Mr. Flegel's early termination due to disability (as
determined pursuant to the Leslie Flegel Employment Agreement) on or before
January 31, 2015, the Registrant will be relieved of its obligations to pay or
provide any compensation or benefits under the Leslie Flegel Consulting
Agreement, except that the Registrant will pay Mr. Flegel or his Beneficiary (as
defined in the Leslie Flegel Consulting Agreement) (a) a death benefit of $2
million not later than 90 days after Mr. Flegel's death without regard to the
date of Mr. Flegel's death and (b) all accrued and unpaid items.
In the event of Mr. Flegel's early termination due to his death, the
Registrant will be relieved of its obligations to pay or provide any
compensation or benefits under the Leslie Flegel Consulting Agreement (except
for accrued and unpaid items) but, in the case such death occurs on or before
January 31, 2015, the Registrant will be obligated to pay to Mr. Flegel's
Beneficiary a death benefit of $2 million not later than 90 days after Mr.
Flegel's death.
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During his term of engagement and during the Restricted Period (as defined
in the Leslie Flegel Consulting Agreement), Mr. Flegel is prohibited from,
directly or indirectly, managing, operating, controlling, accepting employment
or a consulting position with or otherwise advising or assisting or being
connected with, or owning or having any financial interest in, any Competitive
Enterprise (as defined in the Leslie Flegel Consulting Agreement). These
noncompetition provisions terminate if the Registrant terminates Mr. Flegel
without Proper Cause or if Mr. Flegel terminates his engagement for Good Reason.
A copy of the Leslie Flegel Employment Agreement is filed as Exhibit 10.21
to this Current Report and is incorporated herein by reference. The foregoing
summary of the terms of the Leslie Flegel Employment Agreement is qualified in
its entirety by reference to such exhibit.
EMPLOYMENT AGREEMENT WITH JAMES R. GILLIS
On February 28, 2005, the Registrant entered into an executive employment
agreement (the "GILLIS EMPLOYMENT AGREEMENT") with James R. Gillis, its
president and chief operating officer. Under the Gillis Employment Agreement,
the Registrant will continue to employ Mr. Gillis in his current capacity as its
president and chief operating officer for a five-year term commencing February
28, 2005. Mr. Gillis will have the usual and customary duties, responsibilities
and authority of president and chief operating officer and will perform such
other and additional duties and responsibilities as are consistent with that
position and as the Registrant's board of directors may reasonably require.
The Registrant will pay Mr. Gillis (a) $300,000 in cash upon the execution
and delivery of the Gillis Employment Agreement and (b) a base salary of (i)
$475,000 during fiscal year 2006, (ii) $525,000 during fiscal year 2007, (iii)
$600,000 during fiscal year 2008, (iv) $624,000 during fiscal year 2008 and (v)
$649,000 from the beginning of fiscal year 2009 through the expiration of the
Gillis Employment Agreement.
In addition, Mr. Gillis is entitled to receive a guaranteed bonus each
year during his employment with the Registrant in an amount equal to 50% of his
base salary in effect in a given year (payable in equal quarterly installments),
or such other amount as the Compensation Committee may approve in its sole
discretion; except that in the first year no quarterly bonus payment will be
less than $62,500. The Registrant will also permit Mr. Gillis to participate in
any equity-based incentive, healthcare, retirement, life insurance, disability
income and other benefits plans offered by the Registrant with respect to its
executive officers generally.
Under the Gillis Employment Agreement, Mr. Gillis' employment with the
Registrant is subject to early termination at any time (i) at the Registrant's
election, by dismissal of Mr. Gillis from employment with or without Proper
Cause (as defined in the Gillis Employment Agreement) pursuant to resolution of
the Registrant's board of directors, (ii) at the Registrant's election, upon Mr.
Gillis' disability as determined pursuant to the Gillis Employment Agreement,
(iii) upon Mr. Gillis' death or (iv) at Mr. Gillis' election, with or without
Good Reason (as defined in the Gillis Employment Agreement), by voluntary
resignation upon 30 days' advance written notice.
In the event of Mr. Gillis' early termination by the Registrant without
Proper Cause or by Mr. Gillis for Good Reason, the Registrant will remain
obligated to pay to Mr. Gillis (or his estate) (a) his base salary (without
further adjustment and payable in accordance with the Registrant's payroll
policies) for the remaining term of the Gillis Employment Agreement and (b) the
guaranteed bonus for each remaining year of the Gillis Employment Agreement. The
Registrant would also be obligated to continue to provide healthcare benefits to
Mr. Gillis under and subject to the same terms and provisions as are applicable
to the Registrant's executive officers generally.
In the event of Mr. Gillis' early termination by the Registrant with
Proper Cause or by Mr. Gillis without Good Reason, the Registrant will be
relieved of its obligations to pay or provide any compensation or benefits under
the Gillis Employment Agreement, except for accrued and unpaid items.
In the event of Mr. Gillis' early termination due to disability (as
determined pursuant to the Gillis Employment Agreement), the Registrant agrees
to pay to Mr. Gillis (i) a disability income benefit in an amount equal to 50%
of Mr. Gillis' base salary, payable monthly, commencing on the date of early
termination and ending on the termination of 24 months following the date of
early termination and (ii) a supplemental disability income benefit equal to
$12,000 per month for the
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period commencing on the date of early termination and ending on January 4, 2018
or Mr. Gillis' earlier death. The Registrant would also be obligated to continue
to provide healthcare benefits to Mr. Gillis under and subject to the same terms
and provisions as are applicable to the Registrant's executive officers
generally. The Registrant will be entitled to credit, against its obligation to
pay the foregoing disability income benefits, any amounts received from time to
time by Mr. Gillis pursuant to any disability income insurance policy maintained
by the Registrant or under the SERP.
In the event of Mr. Gillis' early termination due to his death, the
Registrant will be relieved of its obligations to pay or provide any and all
compensation and benefits under the Gillis Employment Agreement, except accrued
and unpaid items.
During his term of employment and during the Restricted Period (as defined
in the Gillis Employment Agreement), Mr. Gillis is prohibited from, directly or
indirectly, managing, operating, controlling, accepting employment or a
consulting position with or otherwise advising or assisting or being connected
with, or owning or having any financial interest in, any Competitive Enterprise
(as defined in the Gillis Employment Agreement).
A copy of the Gillis Employment Agreement is filed as Exhibit 10.6 to this
Current Report and is incorporated herein by reference. The foregoing summary of
the terms of the Gillis Employment Agreement is qualified in its entirety by
reference to such exhibit.
EMPLOYMENT AGREEMENT WITH JASON S. FLEGEL
On February 28, 2005, the Registrant entered into an executive employment
agreement (the "JASON FLEGEL EMPLOYMENT AGREEMENT") with Jason S. Flegel, its
executive vice president. Under the Jason Flegel Employment Agreement, the
Registrant will continue to employ Mr. Flegel in his current capacity as its
executive vice president for a five-year term commencing February 28, 2005. Mr.
Flegel will have the usual and customary duties, responsibilities and authority
of an executive vice president and will perform such other and additional duties
and responsibilities as are consistent with that position and as the
Registrant's board of directors may reasonably require.
The Registrant will pay Mr. Flegel (a) $125,000 in cash upon the execution
and delivery of the Jason Flegel Employment Agreement and (b) a base salary of
(i) $400,000 during fiscal year 2006, (ii) $450,000 during fiscal year 2007,
(iii) $475,000 during fiscal year 2008, (iv) $500,000 during fiscal year 2008
and (v) $520,000 from the beginning of fiscal year 2009 through the expiration
of the Jason Flegel Employment Agreement.
In addition, Mr. Flegel is entitled to receive an annual bonus in an
amount, not to exceed 75% of Mr. Flegel's base salary in effect in a given year,
to be determined by the Compensation Committee in its sole discretion. The
Registrant will also permit Mr. Flegel to participate in any equity-based
incentive, healthcare, retirement, life insurance, disability income and other
benefits plans offered by the Registrant with respect to its executive officers
generally.
Under the Jason Flegel Employment Agreement, Mr. Flegel's employment with
the Registrant is subject to early termination at any time (i) at the
Registrant's election, by dismissal of Mr. Flegel from employment with or
without Proper Cause (as defined in the Jason Flegel Employment Agreement)
pursuant to resolution of the Registrant's board of directors, (ii) at the
Registrant's election, upon Mr. Flegel's disability as determined pursuant to
the Jason Flegel Employment Agreement, (iii) upon Mr. Flegel's death or (iv) at
Mr. Flegel's election, with or without Good Reason (as defined in the Jason
Flegel Employment Agreement), by voluntary resignation upon 30 days' advance
written notice.
In the event of Mr. Flegel's early termination by the Registrant without
Proper Cause or by Mr. Flegel for Good Reason, the Registrant will remain
obligated to pay to Mr. Flegel (or his estate) his base salary (without further
adjustment and payable in accordance with the Registrant's payroll policies) for
the remaining term of the Jason Flegel Employment Agreement. The Registrant
would also be obligated to continue to provide healthcare benefits to Mr. Flegel
under and subject to the same terms and provisions as are applicable to the
Registrant's executive officers generally.
In the event of Mr. Flegel's early termination by the Registrant with
Proper Cause or by Mr. Flegel without Good Reason, the Registrant will be
relieved of its obligations to pay or provide any compensation or benefits under
the Jason Flegel Employment Agreement, except for accrued and unpaid items.
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In the event of Mr. Flegel's early termination due to disability (as
determined pursuant to the Jason Flegel Employment Agreement), the Registrant
agrees to pay to Mr. Flegel (i) a disability income benefit in an amount equal
to 50% of Mr. Flegel's base salary, payable monthly, commencing on the date of
early termination and ending on the termination of 24 months following the date
of early termination and (ii) a supplemental disability income benefit equal to
$12,000 per month for the period commencing on the date of early termination and
ending on September 30, 2030 or Mr. Flegel's earlier death. The Registrant would
also be obligated to continue to provide healthcare benefits to Mr. Flegel under
and subject to the same terms and provisions as are applicable to the
Registrant's executive officers generally. The Registrant will be entitled to
credit, against its obligation to pay the foregoing disability income benefits,
any amounts received from time to time by Mr. Flegel pursuant to any disability
income insurance policy maintained by the Registrant or under the SERP.
In the event of Mr. Flegel's early termination due to his death, the
Registrant will be relieved of its obligations to pay or provide any and all
compensation and benefits under the Jason Flegel Employment Agreement, except
accrued and unpaid items.
During his term of employment and during the Restricted Period (as defined
in the Jason Flegel Employment Agreement), Mr. Flegel is prohibited from,
directly or indirectly, managing, operating, controlling, accepting employment
or a consulting position with or otherwise advising or assisting or being
connected with, or owning or having any financial interest in, any Competitive
Enterprise (as defined in the Jason Flegel Employment Agreement).
A copy of the Jason Flegel Employment Agreement is filed as Exhibit 10.22
to this Current Report and is incorporated herein by reference. The foregoing
summary of the terms of the Jason Flegel Employment Agreement is qualified in
its entirety by reference to such exhibit.
EMPLOYMENT AGREEMENT WITH ALAN TUCHMAN
On February 28, 2005, the Registrant entered into an executive employment
agreement (the "TUCHMAN EMPLOYMENT AGREEMENT") with Alan Tuchman, its executive
vice president. Under the Tuchman Employment Agreement, the Registrant will
employ Mr. Tuchman as its executive vice president for a five-year term
commencing February 28, 2005. Mr. Tuchman will have the usual and customary
duties, responsibilities and authority of an executive vice president and will
perform such other and additional duties and responsibilities as are consistent
with that position and as the Registrant's board of directors may reasonably
require.
The Registrant will pay Mr. Tuchman a base salary of (i) $475,000 during
fiscal year 2006, (ii) $500,000 during fiscal year 2007, (iii) $520,000 during
fiscal year 2008, (iv) $540,800 during fiscal year 2008 and (v) $562,432 from
the beginning of fiscal year 2009 through the expiration of the Tuchman
Employment Agreement.
In addition, Mr. Tuchman is entitled to receive an annual bonus in an
amount, not to exceed 75% of Mr. Tuchman's base salary in effect in a given
year, to be determined by the Compensation Committee in its sole discretion. The
Registrant will also permit Mr. Tuchman to participate in any equity-based
incentive, healthcare, retirement, life insurance, disability income and other
benefits plans offered by the Registrant with respect to its executive officers
generally.
Under the Tuchman Employment Agreement, Mr. Tuchman's employment with the
Registrant is subject to early termination at any time (i) at the Registrant's
election, by dismissal of Mr. Tuchman from employment with or without Proper
Cause (as defined in the Tuchman Employment Agreement) pursuant to resolution of
the Registrant's board of directors, (ii) at the Registrant's election, upon Mr.
Tuchman's disability as determined pursuant to the Tuchman Employment Agreement,
(iii) upon Mr. Tuchman's death or (iv) at Mr. Tuchman's election, with or
without Good Reason (as defined in the Tuchman Employment Agreement), by
voluntary resignation upon 30 days' advance written notice.
In the event of Mr. Tuchman's early termination by the Registrant without
Proper Cause or by Mr. Tuchman for Good Reason, the Registrant will remain
obligated to pay to Mr. Tuchman (or his estate) his base salary (without further
adjustment and payable in accordance with the Registrant's payroll policies) for
the remaining term of the Tuchman
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Employment Agreement. The Registrant would also be obligated to continue to
provide healthcare benefits to Mr. Tuchman under and subject to the same terms
and provisions as are applicable to the Registrant's executive officers
generally.
In the event of Mr. Tuchman's early termination by the Registrant with
Proper Cause or by Mr. Tuchman without Good Reason, the Registrant will be
relieved of its obligations to pay or provide any compensation or benefits under
the Tuchman Employment Agreement, except for accrued and unpaid items.
In the event of Mr. Tuchman's early termination due to disability (as
determined pursuant to the Tuchman Employment Agreement), the Registrant agrees
to pay to Mr. Tuchman (i) a disability income benefit in an amount equal to 50%
of Mr. Tuchman's base salary, payable monthly, commencing on the date of early
termination and ending on the termination of 24 months following the date of
early termination and (ii) a supplemental disability income benefit equal to
$12,000 per month for the period commencing on the date of early termination and
ending on March 24, 2024 or Mr. Tuchman's earlier death. The Registrant would
also be obligated to continue to provide healthcare benefits to Mr. Tuchman
under and subject to the same terms and provisions as are applicable to the
Registrant's executive officers generally. The Registrant will be entitled to
credit, against its obligation to pay the foregoing disability income benefits,
any amounts received from time to time by Mr. Tuchman pursuant to any disability
income insurance policy maintained by the Registrant or under the SERP (if Mr.
Tuchman is a participant therein).
In the event of Mr. Tuchman's early termination due to his death, the
Registrant will be relieved of its obligations to pay or provide any and all
compensation and benefits under the Tuchman Employment Agreement, except accrued
and unpaid items.
During his term of employment and during the Restricted Period (as defined
in the Tuchman Employment Agreement), Mr. Tuchman is prohibited from, directly
or indirectly, managing, operating, controlling, accepting employment or a
consulting position with or otherwise advising or assisting or being connected
with, or owning or having any financial interest in, any Competitive Enterprise
(as defined in the Tuchman Employment Agreement).
A copy of the Tuchman Employment Agreement is filed as Exhibit 10.49 to
this Current Report and is incorporated herein by reference. The foregoing
summary of the terms of the Tuchman Employment Agreement is qualified in its
entirety by reference to such exhibit.
EMPLOYMENT AGREEMENT WITH MARC FIERMAN
On February 28, 2005, the Registrant entered into an executive employment
agreement (the "FIERMAN EMPLOYMENT AGREEMENT") with Marc Fierman, its executive
vice president and chief financial officer. Under the Fierman Employment
Agreement, the Registrant will continue to employ Mr. Fierman in his current
capacity as its executive vice president and chief financial officer for a
five-year term commencing February 28, 2005. Mr. Fierman will have the usual and
customary duties, responsibilities and authority of executive vice president and
chief financial officer and will perform such other and additional duties and
responsibilities as are consistent with that position and as the Registrant's
board of directors may reasonably require.
The Registrant will pay Mr. Fierman (a) $135,000 in cash upon the
execution and delivery of the Fierman Employment Agreement and (b) a base salary
of (i) $325,000 during fiscal year 2006, (ii) $350,000 during fiscal year 2007,
(iii) $375,000 during fiscal year 2008, (iv) $400,000 during fiscal year 2008
and (v) $425,000 from the beginning of fiscal year 2009 through the expiration
of the Fierman Employment Agreement.
In addition, Mr. Fierman is entitled to receive an annual bonus in an
amount, not to exceed 50% of Mr. Fierman's base salary in effect in a given
year, to be determined by the Compensation Committee in its sole discretion. The
Registrant will also permit Mr. Fierman to participate in any equity-based
incentive, healthcare, retirement, life insurance, disability income and other
benefits plans offered by the Registrant with respect to its executive officers
generally.
Under the Fierman Employment Agreement, Mr. Fierman's employment with the
Registrant is subject to early
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termination at any time (i) at the Registrant's election, by dismissal of Mr.
Fierman from employment with or without Proper Cause (as defined in the Fierman
Employment Agreement) pursuant to resolution of the Registrant's board of
directors, (ii) at the Registrant's election, upon Mr. Fierman's disability as
determined pursuant to the Fierman Employment Agreement, (iii) upon Mr.
Fierman's death or (iv) at Mr. Fierman's election, with or without Good Reason
(as defined in the Fierman Employment Agreement), by voluntary resignation upon
30 days' advance written notice.
In the event of Mr. Fierman's early termination by the Registrant without
Proper Cause or by Mr. Fierman for Good Reason, the Registrant will remain
obligated to pay to Mr. Fierman (or his estate) his base salary (without further
adjustment and payable in accordance with the Registrant's payroll policies) for
the remaining term of the Fierman Employment Agreement. The Registrant would
also be obligated to continue to provide healthcare benefits to Mr. Fierman
under and subject to the same terms and provisions as are applicable to the
Registrant's executive officers generally.
In the event of Mr. Fierman's early termination by the Registrant with
Proper Cause or by Mr. Fierman without Good Reason, the Registrant will be
relieved of its obligations to pay or provide any compensation or benefits under
the Fierman Employment Agreement, except for accrued and unpaid items.
In the event of Mr. Fierman's early termination due to disability (as
determined pursuant to the Fierman Employment Agreement), the Registrant agrees
to pay to Mr. Fierman (i) a disability income benefit in an amount equal to 50%
of Mr. Fierman's base salary, payable monthly, commencing on the date of early
termination and ending on the termination of 24 months following the date of
early termination and (ii) a supplemental disability income benefit equal to
$12,000 per month for the period commencing on the date of early termination and
ending on November 22, 2025 or Mr. Flegel's earlier death. The Registrant would
also be obligated to continue to provide healthcare benefits to Mr. Fierman
under and subject to the same terms and provisions as are applicable to the
Registrant's executive officers generally. The Registrant will be entitled to
credit, against its obligation to pay the foregoing disability income benefits,
any amounts received from time to time by Mr. Fierman pursuant to any disability
income insurance policy maintained by the Registrant or under the SERP.
In the event of Mr. Fierman's early termination due to his death, the
Registrant will be relieved of its obligations to pay or provide any and all
compensation and benefits under the Fierman Employment Agreement, except accrued
and unpaid items.
During his term of employment and during the Restricted Period (as defined
in the Fierman Employment Agreement), Mr. Fierman is prohibited from, directly
or indirectly, managing, operating, controlling, accepting employment or a
consulting position with or otherwise advising or assisting or being connected
with, or owning or having any financial interest in, any Competitive Enterprise
(as defined in the Fierman Employment Agreement).
A copy of the Fierman Employment Agreement is filed as Exhibit 10.41 to
this Current Report and is incorporated herein by reference. The foregoing
summary of the terms of the Fierman Employment Agreement is qualified in its
entirety by reference to such exhibit.
SPLIT-DOLLAR INSURANCE AGREEMENTS WITH EXECUTIVE OFFICERS
On March 1, 2005, the Registrant entered into split-dollar insurance
agreements with certain members of management and other key executive personnel
of the Registrant. Each employee entering into a split-dollar insurance
agreement will be issued a life insurance policy and will have the right to
designate the beneficiary of a portion of the policy's death benefit in an
amount equal to three times the employee's annual base salary. The entire
premium on the policy will be paid by the Registrant and the employee will not
have the option to purchase the policy. Each split-dollar insurance agreement
may be terminated by the Registrant, with or without the consent of the
employee, upon written notice to the employee. An employee's split-dollar
insurance agreement will terminate automatically upon termination of such
employee's employment with the Registrant for any reason other than such
employee's death. The form of split-dollar insurance agreement is filed as
Exhibit 10.59 to this Current Report and is incorporated herein by reference.
The foregoing summary of the terms of the form of split-dollar insurance
agreement is qualified in its entirety by reference to such exhibit.
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STOCKHOLDER'S AGREEMENT WITH AEC ASSOCIATES LLC
In connection with the Agreement and Plan of Merger (the "MERGER
AGREEMENT") dated November 18, 2004, among the Registrant, Alliance
Entertainment Corp. ("ALLIANCE") and Alligator Acquisition, LLC ("MERGER SUB"),
the Registrant and Alliance's majority stockholder, AEC Associates LLC ("AEC
ASSOCIATES"), entered into a stockholder's agreement (the "STOCKHOLDER'S
AGREEMENT") on February 28, 2005, upon the consummation of the merger of
Alliance with and into Merger Sub (the "MERGER"). As a result of the Merger,
which was consummated on February 28, 2005, AEC Associates owns approximately
34.9% of the outstanding shares of the Registrant's common stock.
Pursuant to the Stockholder's Agreement and subject to certain conditions
specified therein, the Registrant and AEC Associates agreed that, upon
consummation of the Merger, the Registrant's board of directors will be
comprised of 11 members, including six members designated by the Registrant and
five members designated by Alliance. Six of the directors will be "independent"
under the rules of the Securities and Exchange Commission ("SEC") and the
Nasdaq Stock Market, Inc. ("NASDAQ") with respect to the Registrant. Until such
time as AEC Associates (together with its members and affiliates acting as a
group) no longer owns an aggregate of at least 10% of the Registrant's
outstanding common stock, AEC Associates has the right to designate an
individual (or individuals) of its choice for election by the Registrant's board
for any seat that is last occupied or vacated by a director designated by
Alliance or AEC Associates, except if such designation would result in the
director designated by AEC Associates having a disproportionate board
representation to AEC Associates' (together with its members and affiliates)
ownership of the Registrant's common stock. The Registrant and AEC Associates
agree that AEC Associates will designate three individuals for election at the
Registrant's 2005 annual meeting. The Registrant will not place any other
nominees on the ballot for the 2005 annual meeting for election as a director
unless required by law. Furthermore, as soon as reasonably practicable after the
consummation of the Merger, the Registrant will cause each standing committee of
its board to include at least one director designated by Alliance and be
comprised of a majority of directors designated by the Registrant. Each
Alliance-designated director that is "independent" or fulfills an SEC or Nasdaq
requirement that is unable to fulfill his or her term will be replaced by a
director of similar credentials to satisfy the requirement.
Pursuant to the Stockholder's Agreement, the Registrant agreed to amend
its bylaws upon consummation of the Merger to provide, among other things, that
the board will consist of between three and 11 members, a change of control of
the Registrant will be approved by supermajority of at least 75% of the members
of the Registrant's board, and for as long as AEC Associates (together with its
members and affiliates acting as a group) owns an aggregate of at least 10% of
the Registrant's outstanding common stock, if an Alliance or Source Interlink
director is unable to fulfill his or her term in office, the remaining Alliance
or Source Interlink directors, as the case may be, will have the exclusive right
to designate an individual to fill the vacancy.
Through the Registrant's 2007 annual meeting of shareholders, AEC
Associates agrees to vote for all board nominees, be present at all meetings, in
person or by proxy and not, without supermajority board approval, take any
action, directly or indirectly, intended to remove or that will result in
removing any director from the board.
Shares of the Registrant's common stock held by AEC Associates will
initially be locked up following the consummation of the Merger, after which
time such shares will be released from the lock-up as follows: (i) one-third of
its shares will be released three months following the consummation of the
Merger, (ii) an additional one-third of its shares will be released six months
following the consummation of the Merger and (iii) the remaining one-third of
its shares will be released nine months following the consummation of the
Merger. After the initial lock-up period expires, AEC Associates is entitled to
three demand registrations (only as to shares that are then free from the
lock-up), which must be in firmly committed, underwritten public offerings. AEC
Associates is entitled to unlimited piggyback registration rights, which are
subject to underwriter cutbacks. AEC Associates also agreed to certain
disposition restrictions, market standoff limitations and noncompetition
covenants under the Stockholder's Agreement.
A copy of the Stockholder's Agreement is filed as Exhibit 4.4 to this
Current Report and is incorporated herein by reference. The foregoing summary of
the terms of the Stockholder's Agreement is qualified in its entirety by
reference to such exhibit.
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CONSULTING AGREEMENT WITH THE YUCAIPA COMPANIES, LLC
On February 28, 2005, in connection with the Merger Agreement, the Registrant
and The Yucaipa Companies, LLC, an entity affiliated with AEC Associates
("YUCAIPA"), entered into a consulting agreement (the "YUCAIPA CONSULTING
AGREEMENT"). Pursuant to the Yucaipa Consulting Agreement and subject to certain
conditions specified therein, Yucaipa agreed to provide the Registrant, upon
request, with consulting and financial services for an annual fee of $1 million,
plus out-of-pocket expenses. The term of the Yucaipa Consulting Agreement is for
a period of five years. Either party may terminate the Yucaipa Consulting
Agreement at any time; however, if the Registrant terminates the Consulting
Agreement then it will pay Yucaipa a cash termination payment equal to the
remaining unpaid portion of the fees owed for the term in which the termination
occurs plus $1 million. Yucaipa agrees, during the term of the Yucaipa
Consulting Agreement and for one year thereafter, not to solicit any employees
or consultants of the Registrant or Alliance.
A copy of the Yucaipa Consulting Agreement is filed as Exhibit 10.60 to
this Current Report and is incorporated herein by reference. The foregoing
summary of the terms of the Yucaipa Consulting Agreement is qualified in its
entirety by reference to such exhibit.
AMENDED AND RESTATED LOAN AGREEMENT WITH WELLS FARGO FOOTHILL
On February 28, 2005, the Registrant entered into an amended and restated
secured financing arrangement with Wells Fargo Foothill, Inc. ("WFF"), as
arranger and administrative agent (the "WORKING CAPITAL LOAN AGENT") for each of
the lenders that may become a participant in such arrangement, and their
successors and assigns (the "WORKING CAPITAL LENDERS") pursuant to which the
Working Capital Lenders will make revolving loans ("WORKING CAPITAL LOANS") to
the Registrant and its subsidiaries of up to $200 million ("ADVANCES") and
provide for the issuance of letters of credit. The terms and conditions of the
arrangement are governed primarily by the Amended and Restated Loan Agreement
dated February 28, 2005 by and among the Registrant, its subsidiaries, and WFF
(the "AMENDED AND RESTATED LOAN AGREEMENT"). The proceeds of the Working Capital
Loans will be used to (i) finance transaction expenses incurred in connection
with the Merger and the Reincorporation (including, without limitation, payment
for fractional shares and payments to dissenting shareholders), (ii) repay
certain existing indebtedness of Alliance and its subsidiaries, (iii) repay
certain existing indebtedness of the Registrant to WFF under the Registrant's
previous credit facility (including, without limitation, a $10 million term
loan) and (iv) for working capital and general corporate purposes, including the
financing of acquisitions. Outstanding Advances bear interest at a variable
annual rate equal to the prime rate announced by Wells Fargo Bank, National
Association's San Francisco office, plus a margin of between 0% and 1.00% based
upon a ratio of the Registrant's EBITDA to interest expense ("INTEREST COVERAGE
RATIO"). The Registrant also has the option of selecting up to five traunches of
at least $1 million each to bear interest at LIBOR plus a margin of between
2.00% and 3.00% based upon the Registrant's Interest Coverage Ratio. To secure
repayment of the Working Capital Loans and other obligations of the Registrant
to the Working Capital Lenders, the Registrant and its subsidiaries granted a
security interest in all of their personal property assets to the Working
Capital Loan Agent, for the benefit of the Working Capital Lenders. The Working
Capital Loans mature on October 31, 2010.
The commitment of the Working Capital Lenders to make Advances is subject
to the existence of sufficient eligible assets to support such Advances under a
specified borrowing base formula and compliance with, among other things,
certain financial covenants. Under the Amended and Restated Loan Agreement, the
Registrant is required to maintain a specified minimum level of EBITDA and
compliance with specified fixed charge coverage and debt to EBITDA ratios. In
addition, the Registrant is prohibited, without consent from the Working Capital
Lenders, from: (i) incurring or suffering to exist additional indebtedness or
liens on the Registrant's personal property assets; (ii) engaging in any merger,
consolidation, acquisition or disposition of assets or other fundamental
corporate change; (iii) permitting a change of control of the Registrant; (iv)
paying any dividends or making any other distribution on capital stock or other
payments in connection with the purchase, redemption, retirement or acquisition
of capital stock; (v) changing the Registrant's fiscal year or methods of
accounting; and (vi) making capital expenditures in excess of $19.3 million
during any fiscal year.
The Registrant's borrowing base is calculated in part on the amount of
eligible VHS, CD, DVD, video game and related inventory. Such inventory is
encumbered by liens in favor of certain of the Registrant's vendors, which liens
must be subordinated to the prior lien of the Working Capital Loan Agent.
Failure to obtain such subordination within 30 days after closing will result in
such inventory being ineligible under the borrowing base. Failure to obtain such
subordination within 60 days after closing will result in an event of default
under the Amended and Restated Loan Agreement. Additional events of default
under the Amended and Restated Loan Agreement include, among others, (i) failure
of the Registrant to pay its
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obligations to the Working Capital Lenders or to otherwise observe its covenants
under the Amended and Restated Loan Agreement and other loan documents, (ii) the
Registrant or any of its subsidiaries becomes insolvent or bankrupt or has any
material portion of its assets seized or encumbered, and (iii) a material breach
or default under any of the Registrant's material contracts, including contracts
for indebtedness.
A copy of the Amended and Restated Loan Agreement is filed as Exhibit
10.44 to this Current Report and is incorporated herein by reference. The
foregoing summary of the terms of the Amended and Restated Loan Agreement is
qualified in its entirety by reference to such exhibit.
ITEM 2.01 - COMPLETION OF ACQUISITION OR DISPOSITION OF ASSETS
COMPLETION OF MERGER WITH ALLIANCE
On February 28, 2005, the Registrant consummated the Merger with Alliance
pursuant to the terms and conditions of the Merger Agreement. The Merger
Agreement is described in the Registrant's Current Report on Form 8-K filed
November 24, 2004 and such description is incorporated herein by reference.
Amendments to the articles of incorporation of the Registrant and a
proposal to approve the issuance of shares of the Registrant's common stock (and
any shares issuable upon the exercise of outstanding options, warrants and other
rights to acquire the Registrant's common stock) were adopted and approved at a
special meeting of the shareholders of the Registrant on February 28, 2005.
The Registrant's shareholders will not receive consideration directly from
the Merger. Each share of the Registrant's common stock and each option, warrant
and other right to acquire the Registrant's common stock will remain
outstanding.
Alliance common stockholders will receive for each share of Alliance
common stock they hold 0.2582 shares of the Registrant's common stock (the
"EXCHANGE RATIO"). In lieu of receiving fractional shares of the Registrant's
common stock, Alliance stockholders will receive cash in an amount equal to such
fraction multiplied by the average of the closing prices reported on the Nasdaq
National Market for the Registrant's common stock for the ten trading days
immediately preceding the effective date of the Merger. Each option, warrant or
other right to acquire Alliance capital stock outstanding immediately prior to
the Merger will automatically become an option, warrant or other right to
acquire shares of the Registrant's common stock. The number of shares of the
Registrant's common stock that may be acquired under such option, warrant or
other right will be equal to the product of the number of Alliance shares that
were directly or indirectly issuable upon the exercise of such option, warrant
or other right to acquire Alliance capital stock before the Merger multiplied by
the Exchange Ratio. The exercise price per share for such option, warrant or
other right to acquire the Registrant's common stock will be the pre-Merger
exercise price per share for such option, warrant or other right to acquire
Alliance capital stock divided by the Exchange Ratio.
The foregoing summary is qualified in its entirety by reference to the
text of the Merger Agreement, which is incorporated herein by reference to
Exhibit 2.1 to the Registrant's Current Report on Form 8-K filed on November 24,
2004.
COMPLETION OF REINCORPORATION INTO DELAWARE
On February 28, 2005, the Registrant consummated the Reincorporation into the
State of Delaware through a merger of Source Missouri with and into Source
Delaware, pursuant to the terms of the Reincorporation Merger Agreement (as
described in Item 1.01 above). The Reincorporation was adopted and approved by
consent of Source Delaware's sole stockholder, Source Missouri, and a proposal
to approve the Reincorporation was approved at a special meeting of the
shareholders of Source Missouri by the holders of at least two-thirds (2/3) of
the issued and outstanding shares of Source Missouri's common stock.
Each outstanding share of Source Missouri's common stock was automatically
converted into one share of common stock of Source Delaware. Each stock
certificate representing issued and outstanding shares of Source Missouri's
common stock will continue to represent the same number of shares of common
stock of Source Delaware. It is not necessary for Source Missouri's shareholders
to exchange their existing stock certificates for stock certificates of Source
Delaware.
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The foregoing summary is qualified in its entirety by reference to the
text of the Reincorporation Merger Agreement, which is incorporated herein by
reference to Exhibit 2.2 to this Current Report.
ITEM 2.03 - CREATION OF A DIRECT FINANCIAL OBLIGATION OR AN OBLIGATION UNDER AN
OFF-BALANCE SHEET ARRANGEMENT OF A REGISTRANT
The information provided in Item 1.01 above relating to the Amended and
Restated Loan Agreement is incorporated herein by reference.
ITEM 3.03 - MATERIAL MODIFICATION TO RIGHTS OF SECURITY HOLDERS
In connection with the Reincorporation, the rights of the Registrant's
stockholders, which prior to the Reincorporation were governed by Missouri law
and by the articles of incorporation and bylaws of Source Missouri, are now
governed by Delaware law and by the certificate of incorporation and bylaws of
Source Delaware. Certain differences in the rights of stockholders arise from
distinctions between Missouri law and Delaware law, as well as from differences
between the charter instruments of Source Missouri and Source Delaware. These
differences are described in the section entitled "Comparison of Stockholder
Rights and Corporate Governance Matters" on pages 149-165 of the Registrant's
Registration Statement on Form S-4/A filed on January 18, 2005, which section is
incorporated herein by reference.
ITEM 5.02 - DEPARTURE OF DIRECTORS OR PRINCIPAL OFFICERS; ELECTION OF DIRECTORS;
APPOINTMENT OF PRINCIPAL OFFICERS
RESIGNATION OF CERTAIN DIRECTORS
On February 28, 2005, as contemplated by the Merger Agreement and
effective immediately prior to the consummation of the Merger, each of Harry L.
Franc, III, Randall S. Minix and Kenneth F. Teasdale resigned his position as
director of the Registrant. Prior to their resignations, (i) Mr. Franc served on
the nominating and corporate governance committee and chaired the capital
markets committee of the Registrant's board of directors, (ii) Mr. Minix served
on the audit committee of the Registrant's board of directors and (iii) Mr.
Teasdale served on the nominating and corporate governance committee and the
compensation committee of the Registrant's board of directors. There were no
disagreements with any of Messrs. Franc, Minix or Teasdale.
APPOINTMENT OF CERTAIN DIRECTORS
On February 28, 2005, as contemplated by the Merger Agreement and
effective immediately following the Merger, the board of directors of Source
Delaware voted to expand the board to 11 members. S. Leslie Flegel,
James R. Gillis, A. Clinton Allen, Ariel Emanuel, Aron S. Katzman and Allan R.
Lyons, each of whom served as a director of the Registrant immediately prior to
the Merger, remained directors of the Registrant immediately following the
Merger and the Reincorporation. As required by the terms of the Merger
Agreement, Alliance designated five individuals to serve as its nominees on the
Registrant's board of directors until their successors have been duly appointed
or elected and seated, or until otherwise removed. These individuals are:
- Governor Gray Davis (Ret.), Of Counsel to Loeb & Loeb, Los Angeles
- Michael R. Duckworth, Partner for The Yucaipa Companies, LLC
- David R. Jessick, Consultant to Rite Aid Corporation
- Gregory Mays, Consultant and Private Investor
- Tony Schnug, Chief Executive Officer of Americold Realty Trust
Gray Davis is Of Counsel in the Los Angeles office of Loeb & Loeb LLP, a
multi-service national law firm. Before joining Loeb & Loeb, Mr. Davis served as
Governor of California (1998-2003), Lieutenant Governor of California
(1995-1999), California State Controller (1987-1995), California State Assembly
Representative for Los Angeles County (1983-1987) and Chief of Staff to
California Governor Edmund G. Brown, Jr.(1975-1981). Mr. Davis will serve as a
member of the nominating and corporate governance committee and capital markets
committee of the board of directors of the Registrant.
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Michael Duckworth is a partner of Yucaipa, a Los Angeles-based private
investment firm specializing in acquiring and operating companies in the retail,
distribution, logistics and technology areas. From 2000-2003, he was Managing
Director, Investment Banking for Merrill Lynch & Co. in Los Angeles where he was
responsible for all client activity including public and private debt, equity
and origination and private equity fund raising as well as managing client
relationships with west coast private equity firms including Texas Pacific
Group, Hellman & Friedman, Leonard Green, Francisco Partners, Fremont, and
others. From 1988-2000, Mr. Duckworth served as Managing Director, Financial
Sponsor Coverage for Deutsche Bank Securities (formerly Bankers Trust Company).
Mr. Duckworth will serve as chairman of the capital markets committee of the
board of directors of the Registrant.
David Jessick is currently a consultant to Rite Aid Corporation where he
served as a Senior Executive Vice President and Chief Administrative Officer
from December 1999 to June 2002. Prior to that, from 1997 to 1998, Mr. Jessick
was the Chief Financial Officer and Executive Vice President of Finance and
Investor Relations for Fred Meyer, Inc. From 1979 to 1996, he was Executive Vice
President and Chief Financial Officer at Thrifty Payless Holdings, Inc. He is
currently a director of WKI Holding Company, Inc. (chairman of the audit and the
compensation committees), Pinnacle Foods Group, Inc. and Dollar Financial Corp.
(chairman of the audit committee). Mr. Jessick will serve as a member of the
audit committee of the board of directors of the Registrant.
Gregory Mays has been a consultant and private investor from February 1999
to present. Throughout his career, Mr. Mays has held numerous executive and
financial positions primarily in the supermarket industry, most recently, from
1995 to 1999, as Executive Vice President of Ralphs Grocery. Prior to that, from
1992 to 1995, he was Executive Vice President of Food4Less Inc. From 1990 to
1992, Mr. Mays was Chief Executive Officer and President of Almacs Supermarkets.
Mr. Mays is currently a director and Chief Financial Officer of Simon Marketing.
Mr. Mays will serve as a member of the compensation committee of the board of
directors of the Registrant.
Tony Schnug is the Chief Executive Officer of Americold Realty Trust.
Prior to that, Mr. Schnug had been affiliated with Yucaipa for more than 12
years. Mr. Schnug served as Executive Vice President of Corporate Operations at
Fred Meyer from 1997 to 1998. From 1995 to 1997, he was at Ralphs Grocery
Company and oversaw post-merger integrations for both the Ralphs-Food4Less
acquisition in 1995 and the Fred Meyer-Ralphs merger in 1997. He also served as
Senior Vice President of Administration at Food4Less from 1990 to 1995. Prior to
that, Mr. Schnug was the Managing Partner for Sage Worldwide, a wholly owned
subsidiary of advertising giant, Ogilvy & Mather. Mr. Schnug is a director of
Digital On-Demand, Inc., and Americold Realty Trust. He is a former director of
Alliance.
On March 1, 2005, the Registrant issued a press release containing
information related to the nomination of the above-referenced individuals. A
copy of this press release is attached as Exhibit 99.1 to this Current Report
and is incorporated herein by reference.
ELECTION OF ALAN TUCHMAN
On February 28, 2005, in connection with the Merger, the Registrant's
board of directors elected Alan Tuchman to the position of executive vice
president of the Registrant.
ITEM 5.03 - AMENDMENTS TO ARTICLES OF INCORPORATION OR BYLAWS; CHANGE IN FISCAL
YEAR
AMENDMENT TO ARTICLES OF INCORPORATION
On February 28, 2005, in connection with the Merger and following the
affirmative vote of the holders of a majority of the Registrant's issued and
outstanding common stock, the Registrant's articles of incorporation were
amended to increase the number of authorized shares from 40 million to 100
million. The increase in the number of authorized shares was necessary to
provide a sufficient number of shares of the Registrant's common stock for
issuance to Alliance stockholders in connection with the Merger. A copy of the
amendment to the Registrant's articles of incorporation that was filed with the
Missouri Secretary of State is filed as Exhibit 3.8 to this Current Report and
is incorporated herein by reference.
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CERTIFICATE OF INCORPORATION OF SOURCE DELAWARE
On February 28, 2005, following the Reincorporation, the certificate of
incorporation of Source Delaware became the certificate of incorporation of the
Registrant, superseding all prior charters. A copy of the certificate of
incorporation of Source Delaware is filed as Exhibit 3.9 to this Current Report
and is incorporated herein by reference.
ADOPTION OF AMENDED AND RESTATED BYLAWS
On February 28, 2005, as contemplated by the Merger Agreement and effective
immediately following the Merger and the Reincorporation, the board of directors
of the Registrant amended and restated the bylaws of Source Delaware. The
amended and restated bylaws provide for, among other things, the obligation of
the Registrant pursuant to the Merger Agreement to allow Alliance to designate
five nominees to the board of directors of the Registrant. A copy of the amended
and restated bylaws of Source Delaware is filed as Exhibit 3.10 to this Current
Report and is incorporated herein by reference.
ITEM 5.05 - AMENDMENTS TO THE REGISTRANT'S CODE OF ETHICS, OR WAIVER OF A
PROVISION IN THE CODE OF ETHICS
On February 28, 2005, immediately following the Reincorporation, the board of
directors of Source Delaware adopted the Code of Business Conduct and Ethics
("CODE OF ETHICS") attached as Exhibit 14.1 to this Current Report, effectively
amending the Registrant's previous code of ethics, which had been Source
Missouri's code of ethics. The Code of Ethics is applicable to all executive
officers and all other employees and agents of the Registrant and its
subsidiaries, as well as to the Registrant's directors. In addition, the board
of directors adopted a Code of Ethics for Chief Executive Officer and Financial
Executives attached as Exhibit 14.2 to this Current Report and a Code of Conduct
for Directors and Executive Officers attached as Exhibit 14.3 to this Current
Report, which supplement the Code of Ethics. Each of these exhibits is
incorporated herein by reference.
ITEM 8.01 - OTHER EVENTS
CHANGE IN STATE OF INCORPORATION
Effective February 28, 2005, the Registrant changed its state of
incorporation from Missouri to Delaware. The change in the Registrant's state of
incorporation was approved by its shareholders at a special meeting of
shareholders held on February 28, 2005.
The Reincorporation into the State of Delaware was accomplished by the
merger of Source Missouri with and into Source Delaware, which was the surviving
corporation in the merger. The Reincorporation will not result in any change in
the Registrant's name, headquarters, business, jobs, management, location of
offices or facilities, number of employees, assets, liabilities or net worth.
The Registrant's common stock will continue to trade on the Nasdaq National
Market under the symbol "SORC." Source Missouri shareholders will not be
required to undertake a mandatory exchange of their shares. Certificates for
Source Missouri's shares automatically represent an equal number of shares of
Source Delaware.
ITEM 9.01 - FINANCIAL STATEMENTS AND EXHIBITS
(a) Financial Statements of Business Acquired
The financial statements required by this Item will be filed by the
Registrant pursuant to an amendment to this Current Report no later than 71
calendar days after the date this initial Current Report must be filed.
(b) Pro Forma Financial Information
The pro forma financial information required by this Item will be filed by
the Registrant pursuant to an amendment to this Current Report no later than 71
calendar days after the date this initial Current Report must be filed.
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(c) Exhibits
2.2 Agreement and Plan of Merger dated February 28, 2005, between Source
Interlink Companies, Inc., a Missouri corporation and Source
Interlink Companies, Inc., a Delaware corporation
3.8 Amendment to Articles of Incorporation of Source Interlink
Companies, Inc., a Missouri corporation
3.9 Certificate of Incorporation of Source Interlink Companies, Inc., a
Delaware corporation
3.10 Amended and Restated Bylaws of Source Interlink Companies, Inc., a
Delaware corporation
4.1 Form of Common Stock Certificate of Source Interlink Companies,
Inc., a Delaware corporation
4.4 Stockholder's Agreement dated February 28, 2005, between the
Registrant and AEC Associates, LLC
10.6 Employment Agreement dated February 28, 2005 between the Registrant
and James R. Gillis
10.21 Employment Agreement dated February 28, 2005 between the Registrant
and S. Leslie Flegel
10.22 Employment Agreement dated February 28, 2005 between the Registrant
and Jason S. Flegel
10.41 Employment Agreement dated February 28, 2005 between the Registrant
and Marc Fierman
10.44 Amended and Restated Loan Agreement dated February 28, 2005 by and
among the Registrant, its subsidiaries, and Wells
Fargo Foothill, Inc., as arranger and administrative agent
10.49 Employment Agreement dated February 28, 2005 between the Registrant
and Alan Tuchman
10.55 Source Interlink Companies, Inc. Supplemental Executive Retirement
Plan, effective as of March 1, 2005
10.56 Source Interlink Companies, Inc. Challenge Grant Program, effective
as of March 1, 2005
10.57 Executive Participation Agreement dated February 28, 2005 between
the Registrant and James R. Gillis
10.58 Form of Executive Participation Agreement
10.59 Form of Split-Dollar Insurance Agreement
10.60 Consulting Agreement dated February 28, 2005 between the Registrant
and The Yucaipa Companies, LLC
14.1 Code of Business Conduct and Ethics of Source Interlink Companies,
Inc., a Delaware corporation
14.2 Code of Ethics for Chief Executive Officer and Financial Executives
of Source Interlink Companies, Inc., a Delaware corporation
14.3 Code of Conduct for Directors and Executive Officers of Source
Interlink Companies, Inc., a Delaware corporation
99.1 Press Release Regarding New Directors
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SIGNATURES
Pursuant to the requirements 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.
Date: March 4, 2005
SOURCE INTERLINK COMPANIES, INC.
By: /s/ Marc Fierman
-----------------------------------------
Marc Fierman
Executive Vice President and Chief
Financial Officer
EXHIBIT INDEX
2.2 Agreement and Plan of Merger dated February 28, 2005, between Source
Interlink Companies, Inc., a Missouri corporation and Source
Interlink Companies, Inc., a Delaware corporation
3.8 Amendment to Articles of Incorporation of Source Interlink
Companies, Inc., a Missouri corporation
3.9 Certificate of Incorporation of Source Interlink Companies, Inc., a
Delaware corporation
3.10 Amended and Restated Bylaws of Source Interlink Companies, Inc., a
Delaware corporation
4.1 Form of Common Stock Certificate of Source Interlink Companies,
Inc., a Delaware corporation
4.4 Stockholder's Agreement dated February 28, 2005, between the
Registrant and AEC Associates, LLC
10.6 Employment Agreement dated February 28, 2005 between the Registrant
and James R. Gillis
10.21 Employment Agreement dated February 28, 2005 between the Registrant
and S. Leslie Flegel
10.22 Employment Agreement dated February 28, 2005 between the Registrant
and Jason S. Flegel
10.41 Employment Agreement dated February 28, 2005 between the Registrant
and Marc Fierman
10.44 Amended and Restated Loan Agreement dated February 28, 2005 by and
among the Registrant, its subsidiaries, and Wells
Fargo Foothill, Inc., as arranger and administrative agent
10.49 Employment Agreement dated February 28, 2005 between the Registrant
and Alan Tuchman
10.55 Source Interlink Companies, Inc. Supplemental Executive Retirement
Plan, effective as of March 1, 2005
10.56 Source Interlink Companies, Inc. Challenge Grant Program
10.57 Executive Participation Agreement dated February 28, 2005 between
the Registrant and James R. Gillis
10.58 Form of Executive Participation Agreement
10.59 Form of Split-Dollar Insurance Agreement
10.60 Consulting Agreement dated February 28, 2005 between the Registrant
and The Yucaipa Companies, LLC
14.1 Code of Business Conduct and Ethics of Source Interlink Companies,
Inc., a Delaware corporation
14.2 Code of Ethics for Chief Executive Officer and Financial Executives
of Source Interlink Companies, Inc., a Delaware corporation
14.3 Code of Conduct for Directors and Executive Officers of Source
Interlink Companies, Inc., a Delaware corporation
99.1 Press Release Regarding New Directors