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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K405
(Mark One)
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 26, 1998
OR
TRANSITION REPORT PURSUANT OT SECTION 13 or 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____ to ____
Commission file number 0-22359
TRACK 'n TRAIL
(Exact name of registrant as specified in its charter)
------------------------------
Delaware 91-1778085
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
4961-A Windplay Drive,
El Dorado Hills, California 95762
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (916) 933-4525
Securities Registered Pursuant to Section 12(b) of the Act : NONE
Securities Registered Pursuant to Section 12(g) of the Act:
Common Stock, $.01 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 tht 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 the registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-K or any amendment to this Form 10-K [X].
The aggregate market value of Common Stock held by non-affiliates of the
registrant on March 1, 1999 was $2.9 million.
On March 1, 1999 the rgistrant had 6,865,899 shares of Common Stock
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Part III incorporates information by reference from the definitive Proxy
Statement for the 1999 Annual Meeting of Stockholders, to be filed with the
Commission no later than 120 days after the end of the registrant's fiscal
year covered by this Form 10-K.
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PART I
ITEM 1. BUSINESS
Track 'n Trail, a Delaware corporation (together with its
subsidiaries, unless the context otherwise requires, the "Company"), is one of
the largest full-service specialty retailers in the United States focusing on a
broad range of high-quality branded casual, outdoor and adventure footwear and
apparel. The Company has increased its number of stores and net sales each year
since inception. Pursuant to the reorganization (the "Reorganization") effected
in October 1997, the Company acquired the businesses conducted by its
subsidiaries, Track 'n Trail, a California corporation ("Track 'n Trail-
California"), and Overland Management Corporation ("Overland"). On August 26,
1998, the Company acquired Nevin's Eagles Nest, Inc. ("Eagles Nest"), a retailer
of premium branded outdoor apparel. The Company operates in a single business
segment.
As of December 26, 1998, the Company operated 192 stores in 36
states under the Track 'n Trail, Overland Trading and Eagles Nest names. All but
two of the Company's stores are located in regional or super-regional shopping
malls, located throughout the United States. Each Track 'n Trail and Overland
store offers a wide range of rugged walking and fashion casual shoes, sandals
and boots, featuring brands such as Timberland, Dr. Martens, Birkenstock, Vans,
Teva, Airwalk, Clarks, Ecco and Rockport. In addition to offering many of the
same footwear brands as Track 'n Trail and Overland, each Eagles Nest store
specializes in sport and outdoor apparel lines featuring such brands as The
North Face, Columbia, Patagonia, Woolrich and Ex Officio.
The Company targets middle to upper income consumers, with the
Track 'n Trail stores focusing on consumers in the 15- to 40-year-old age group
and the Overland Trading and Eagles Nest stores focusing on the 25- to
55-year-old age group. The Company markets to these two different customer
segments through distinct merchandise assortments and store designs. The Track
'n Trail stores offer a merchandise selection that emphasizes fashionable,
performance-oriented footwear and typically feature an all-glass front, often
accented with rock fixtures, and earth-tone interiors reminiscent of an outdoor
setting. The Company's Overland Trading stores are merchandised and designed to
appeal to a slightly older and more conservative consumer, with a focus on
traditional and comfort-oriented styles displayed in a contemporary, natural
wood setting. The newly acquired Eagles Nest stores are merchandised and
designed to appeal to an active outdoor customer with an emphasis on functional
and fashion related sportswear, outerwear and accessories. Track 'n Trail stores
average approximately 1,969 square feet in size, the Overland Trading stores
average approximately 1,488 square feet and the Eagles Nest stores currently
average approximately 5,160 square feet in size. As of December 26, 1998, the
Company operated 141 Track 'n Trail stores in 34 states, 46 Overland Trading
stores in 13 states and five Eagles Nest stores in two states.
The Company obtained 33 Overland Trading stores by acquiring
control of Overland on October 25, 1996. In addition to obtaining a distinct
retail venue, by acquiring Overland the Company strengthened its presence in the
northeastern United States. The Company entered the apparel market by
acquiring control of Nevin's Eagles Nest and its five Eagles Nest stores on
August 26, 1998. The Company expects Eagles Nest to provide not only access to
the apparel market but also new customer streams for its footwear lines. The
Company believes these acquisitions increase its purchasing power and
negotiating position with suppliers and real estate developers, permit it to
realize operational economies of scale, and increase the potential number of
stores it can open in both existing and future markets.
OPERATING STRATEGIES
The Company's goal is to become the premier destination
specialty retailer of better casual, outdoor and adventure footwear and apparel.
To accomplish its goal, the Company is pursuing the following operational
strategies:
- - BRAND NAME MERCHANDISE. Management believes that brand name
identity is of paramount importance to its target customer in
making footwear purchasing decisions. The Company focuses on
carrying authentic, well-established brand names for each
product category. For example, the Company offers the
Timberland brand for quality hiking, work, performance and
casual boots and shoes. For younger buyers of "alternative"
footwear, the Company offers Dr. Martens, Vans, and Airwalk
shoes. The Company features the Ecco and Rockport brands
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in the walking shoe and rugged walking category and the
Birkenstock brand in walking sandals. In the category of
performance, water and active sandals, the Company offers the
Teva brand. The Eagles Nest stores offer sportswear and
outdoor wear by Ex Officio, Patagonia and Royal Robbins, which
management believes meet the demand for high performance
apparel required for adventure travel. Management believes
that each of the foregoing brands is recognized as one of the
originals in the primary category it represents.
- - CUSTOMER SERVICE AND CONVENIENCE. The Company is committed to
achieving customer satisfaction and to building a loyal
customer base by providing a high level of knowledgeable,
attentive and personalized customer service. The Company
believes that educating consumers about the features and
benefits of its product offerings is a critical component of
its success, and management considers its sales associates'
knowledge of the Company's customers and products to be
essential to its marketing approach and customer satisfaction.
The Company's extensive employee training and development
programs are designed to provide its field personnel with the
knowledge and skills needed to understand and communicate the
performance characteristics of the Company's merchandise, and
to better serve its customers' needs.
- - CAPITALIZE ON TWO DISTINCT DEMOGRAPHIC GROUPS. Management
believes that the Company's distinct retail concepts enable it
to serve two diverse and rapidly growing demographic groups.
Track 'n Trail stores are designed and merchandised to target
15- to 40-year-olds, while Overland Trading and Eagles Nest
stores target 25- to 55-year-olds. The Track 'n Trail strategy
is to focus on products that reflect an active and
performance-oriented lifestyle, which the Company believes are
particularly popular with the fast-growing 15- to 24-year-old
age group. Overland Trading and Eagles Nest stores are
designed to appeal more to the large 25- to 55-year-old age
group. Management plans to differentiate the two footwear
retail concepts to a greater degree in malls in which the
Company operates both a Track 'n Trail store and an Overland
Trading store and/or an Eagles Nest store.
- - FOCUSED MERCHANDISING STRATEGY. To tailor merchandise mix to
individual stores' customer profiles, increase inventory
efficiency and minimize lost sales due to out-of-stock
occurrences, the Company analyzes detailed sales and inventory
data generated by the Company's advanced information and
distribution systems on a daily basis. The Company's systems,
which feature automatic replenishment, point-of-sale ("POS")
data collection and electronic data interchange ("EDI"),
capture net sales and inventory data daily on a store-by-store
basis for each stock keeping unit ("SKU").
- - RECOGNIZE AND RESPOND TO CHANGING LIFESTYLE TRENDS. The
Company strives to recognize and quickly respond to lifestyle
trends that affect customer preferences. Most recently,
prevailing lifestyle trends that have affected retail apparel
and footwear sales have included (i) the growth in alternative
sports such as skateboarding, snowsports, in-line skating and
mountain biking as well as the apparel and footwear trends
these sports have inspired, (ii) the movement to outdoor
activities and to nature as evidenced by the resurgence of
walking, hiking, biking, fly fishing and camping and (iii) the
increased acceptance of casual dress for both work and social
settings. Management believes that it has developed strong
relationships with the primary suppliers of the more than 100
brand names that the Company carries. These relationships
provide access to market information regarding emerging
merchandise trends. Management believes that the breadth and
strength of these relationships, together with the Company's
focused merchandising strategy, provide the Company with the
flexibility necessary to permit it to respond accurately and
quickly to changing customer preferences.
- - ESTABLISH COMPLEMENTARY PRIVATE LABEL BRANDS. The Company's
brand strategy is complemented by its private label
merchandise, which is marketed in several product categories
under brand names including Forza-TM-, Mole-TM-, New
Terrain-TM-, Nordic Trail-TM- , Coloma Trail-TM-, and Quo
Vadis-TM-. Private label merchandise, which represented
approximately 10% of total net sales in fiscal 1998, has
provided the Company with higher maintained gross margins than
branded products. The Company's private label strategy is to
offer merchandise with quality and features equal or superior
to branded products at lower prices.
MERCHANDISING
The Company's footwear merchandising philosophy is to maintain
a core group of basic styles while identifying and stocking emerging brands and
styles. The Company avoids taking significant inventory risk on new items by
carefully
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testing and monitoring their sales. The Company generally tests and monitors
numerous new styles each year. After evaluation of market performance and other
criteria, a new style may be distributed to a broader segment of stores or
system-wide.
Merchandising decisions, including merchandise mix, pricing,
promotions and markdowns, are made at the Company's corporate offices. The
Company's product purchasing is coordinated through a centralized merchandising
department under the direction of its Executive Vice President-Merchandising.
The merchandising department currently consists of approximately 20 persons,
including three merchandising managers, five buyers for the Track 'n Trail
stores, two buyers for the Overland Trading stores and two buyers for the Eagles
Nest stores. The Company's Track 'n Trail, Overland Trading and Eagles Nest
buyers operate independently, allowing them to focus on their distinct
customers' merchandise preferences and lifestyles. These buyers are supported by
stock allocation analysts and assistants, who manage the Company's computerized
merchandise planning system. Management also receives input from the Company's
23 district managers and three regional managers regarding local or regional
factors relevant to merchandising decisions.
The principal categories of product offered by the Company's
concepts and selected vendors for each, are summarized below:
MEN'S AND WOMEN'S FUNCTIONAL AND SPORT SPECIFIC MERCHANDISE
Functional products are designed to perform under adverse
conditions or for a specific activity such as hiking and water sports, field and
duty, skateboarding, snowsports and inclement weather.
<TABLE>
<CAPTION>
SELECTED TRACK 'N TRAIL VENDORS SELECTED OVERLAND TRADING VENDORS SELECTED EAGLES NEST VENDORS
<S> <C> <C>
Timberland Rockport The North Face
Solomon Sperry Patagonia
Vasque Sorel Columbia
Caterpillar Timberland Marmot
Teva Ex Officio
Etnies Royal Robbins
Vans
Airwalk
Columbia
</TABLE>
MEN'S AND WOMEN'S CASUAL WEAR
Casual footwear and sportswear is designed primarily for
everyday wear such as walking shoes and casual tops and bottoms including
shorts, trousers, pants, T-shirts, knit and woven shirts, blouses, dresses and
skirts.
<TABLE>
<CAPTION>
SELECTED TRACK 'N TRAIL VENDORS SELECTED OVERLAND TRADING VENDORS SELECTED EAGLES NEST VENDORS
<S> <C> <C>
Birkenstocks Timberland Tommy Bahama
Rockport Clarks Ceramicci
Timberland Joseph Seibel Tsunami
Dr. Martens Rockport Royal Robbins
Born Easentials True Grit
Simple Bostonian Woolrich
Stegmann
</TABLE>
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The following table sets forth the Company's merchandise assortment by category
as a percentage of net sales for the periods shown:
<TABLE>
<CAPTION>
FISCAL
-------------------------
1998 1997 1996
------ ------ ------
<S> <C> <C> <C>
Men's and Women's Functional and Sport Specific Footwear .. 28 % 31 % 32 %
Men's and Women's Casual Footwear ......................... 60 60 58
Apparel ................................................... 2 -- --
Men's, Women's and Children's Slippers .................... 1 1 2
Children's Footwear ....................................... 1 1 1
Shoe Care Products, Hosiery and Accessories ............... 8 7 7
--- --- ---
100% 100% 100%
--- --- ---
--- --- ---
</TABLE>
Private label merchandise accounted for approximately 10% of
the Company's net sales in fiscal 1998. The Company sells its private label
merchandise under names such as Forza-TM-, New Terrain-TM-, Mole-TM-, Nordic
Trail-TM- , Coloma Trail-TM- and Quo VadIs-TM-.
ACCESSORIES
The Company also offers accessories, including socks,
neckware, belts, backpacks and shoe care products such as sprays and polishes.
Some of these accessories carry the same brand names as the ready-to-wear and
footwear sold by the Company, although most are supplied by different
manufacturers than the Company's footwear suppliers. Accessories accounted for
approximately 7.8% of net sales at the Track 'n Trail and Overland Trading
stores in fiscal 1998.
PURCHASING AND SOURCING
The Company believes that its ability to buy in large
quantities directly from suppliers helps it to plan merchandise flow effectively
and to obtain competitive pricing and trade terms. Although the Company deals
with approximately 100 vendors, a substantial portion of the Company's
merchandise is provided by a limited number of brand name suppliers. The
Company's ten largest suppliers accounted for approximately 68.4% of the
Company's net sales in fiscal 1998. In fiscal 1998, Dr. Martens, Timberland and
Birkenstock accounted for 21.0%, 15.7% and 8.1% of the Company's total net
sales, respectively.
The Company strives to build and maintain strong and
interactive relationships with its major suppliers. Buyers meet regularly with
major vendors to stay abreast of new product lines, new features and changes in
styling direction. The Company frequently shares information with its vendors
about market research, merchandising trends and the Company's goals. In
addition, the Company has established EDI programs with most of its major
suppliers in order to improve its inventory efficiency. The Company develops and
transmits purchase orders through its EDI links, and receives information about
order status, delivery times and pricing. These programs thus permit more rapid
merchandise replenishment and faster inventory turns. The Company believes that
its relationships with major suppliers improve its ability to obtain desired
styles and give the Company flexibility to adjust to shifting market demand for
different vendors' products from season to season. In an effort to secure
appropriate quantities of items in high demand, the Company advises its major
vendors of its forecasted needs approximately six to 12 months in advance.
However, the Company has no long-term purchase contracts or other contractual
assurances of continued supply or pricing with any of its suppliers. See "Risk
Factors."
Most of the Company's private label products are sourced from
Europe (primarily Italy, Spain and Portugal) and the Far East (primarily China,
Taiwan and South Korea). The Company's Director of Product Development is
responsible for developing styles for private label manufacture and locating
suitable manufacturers. The Company actively seeks advantageous sourcing
opportunities and works with a variety of manufacturers. During fiscal 1998, the
Company relied on approximately 50 private label manufacturers. Generally,
private label products are delivered to the Company approximately four to six
months after initial order placement, with longer lead times for products
manufactured in the Far East. Upon order, the Company typically posts an
irrevocable letter of credit in the amount of the purchase price. The
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Company has no long-term contracts with its manufacturing sources and competes
with other companies for production facilities. See "Risk Factors".
STORE OPERATIONS
The Company operated 192 stores as of December 26, 1998, all
but two of which were located in regional or super-regional shopping malls.
Although all stores are integrated into the Company's inventory control,
distribution and management information systems, Track 'n Trail, Overland
Trading and Eagles Nest stores differ in format, merchandise content and decor
because of their different targeted customer bases.
TRACK 'N TRAIL STORE FORMAT
The Track 'n Trail storefront design typically features an all
glass 20- to 30-foot front, enabling customers to view featured products on
display as well as the extensive product assortment available inside the store.
The edges of the storefront are often accented with rock fixtures that are a
signature element in the Track 'n Trail design theme. Product display fixtures
at several stores are designed to represent rock formations, which may also be
incorporated into customer seating fixtures and waterfall display pieces. The
store interiors feature natural-tone walls, accent trim, furniture and fixtures.
Floor coverings are natural wood or soft earth-tone carpeting, and often include
colorful murals depicting outdoor scenes, providing an environment that is both
aesthetically pleasing and complementary to the product displays. Each style of
footwear is displayed by category, such as hiking boots or sandals. Merchandise
is typically featured on rock displays or fixtures along the walls of the
stores, with product categories indicated by an overhead sign. The six Track 'n
Trail stores located in the Mills malls feature a contemporary "industrial"
decor, and utilize industrial equipment throughout as props and fixtures. Track
'n Trail stores average approximately 1,969 square feet in size, of which 40% to
60% is devoted to the sales floor.
OVERLAND TRADING STORE FORMAT
Overland Trading stores generally feature interiors that are
well lighted, open and inviting. Most stores have two display windows in which a
representative collection of merchandise is presented. Store furnishings are
constructed of high-quality light woods that contrast against the rich, emerald
green floor coverings. Management believes that the Overland Trading stores'
more traditional environment conveys the high quality of merchandise and service
sought by the Overland Trading concept's more mature target consumer. The
Overland Trading merchandising approach focuses on the high-quality brands
carried. Each major brand is housed as a "collection" in a distinct wall
section, which is delineated by architectural elements and by a distinctive,
back-lit overhead sign carrying the vendor's logo. For example, men's Timberland
footwear is presented as a collection within a defined wall section, with a
back-lit Timberland sign overhead. Overland Trading stores have sales floors
similar in size to those at Track 'n Trail stores, but the stores acquired by
the Company in October 1996 have smaller stockrooms. The Company has
incorporated larger stockrooms in the Overland Trading stores opened after the
acquisition of Overland in order to minimize missed sales opportunities due to
shortages of high-demand products. Overland Trading stores average approximately
1,488 square feet in size, of which 40% to 60% is devoted to the sales floor.
EAGLES NEST STORE FORMAT
Eagles Nest stores are designed with expansive, all glass
storefronts framed in rich slate and warm natural wood design elements. Windows
feature mannequins showing the most current sportswear and active wear
collections and accessories. Store interiors feature a contemporary outdoor
environment created through wall elements that are used to create mountain
silhouettes depicting the heritage of this company's Rocky Mountain roots.
Vignettes featuring natural wood and slate elements emphasize sportswear, travel
and active wear collections throughout the store's interior. Impact brand
signing is used to call attention to the collections of premium quality and
unique brands carried in the Eagles Nest stores. Eagles Nest stores average
approximately 5,160 square feet in size, of which 75% to 85% is devoted to the
sales floor.
STORE MANAGEMENT AND COMPENSATION
The Company's Vice President-Stores, three regional managers
and 23 district managers visit each of the Track 'n Trail, Overland and Eagles
Nest stores on a regular basis to review the implementation of Company policy,
monitor operations and review inventories and the merchandise presentation. Each
store has a store manager who is responsible for
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supervision and overall operations, two to three assistant managers and
approximately four to eight sales associates, most of whom work part-time.
The regional, district and store managers receive fixed
salaries and are eligible for incentive bonuses, primarily based on their
achievement of the goals stated in the Company's Management by Objective ("MBO")
program. The MBO program focuses on reviewing, managing and improving three key
objectives: net sales, selling cost and inventory shrinkage. All field incentive
compensation programs are based upon goals within these three key objectives. To
support the MBO program, the Company has developed an appraisal system to
monitor each store's performance on a monthly and quarterly basis. Each
appraisal focuses on a store's performance in a key compliance area such as
customer service, visual presentation, store operations or loss prevention, to
support performance in the three key MBO objectives. The Company also monitors
many other store-level variables from its corporate offices, including payroll
costs, refund levels, register variances, telephone bills and similar items.
The Company intends for store employees to focus a substantial
portion of their efforts on customer service. As a consequence, the Company has
centralized as many administrative functions as possible, including buying,
development of in-store merchandising displays, inventory allocation, human
resources and accounting functions, at its El Dorado Hills, California corporate
offices.
CUSTOMER SERVICE
The Company is committed to achieving customer satisfaction and
to building a loyal customer base by providing a high level of knowledgeable,
attentive and personalized customer service. The Company believes that educating
consumers about the features and benefits of its product offerings is a critical
component of its success, and management considers its sales associates'
knowledge of the Company's customers and products to be essential to its
marketing approach and customer satisfaction.
To develop knowledgeable, responsive sales associates, the
Company has devoted significant resources to developing and implementing
employee development and incentive programs. All store employees receive
extensive training on merchandise features, benefits and technology, as well as
customer relations and selling skills. The training program focuses on "six
steps" to achieve sales and customer satisfaction: greeting the customer;
assessing his or her needs; exceeding customer expectations; overcoming
objections; suggestive selling; and closing the sale. In addition to training
from the store manager, each employee attends regional product information
seminars, receives in-store training through vendor presentations and
vendor-supplied videotapes, and is required to complete a formal, written
training program. Store managers are also required to complete a 12-week
training program, during which they are instructed in the technical aspects of
the merchandise, management skills and employee relations. To provide managers
with hands-on training, new store and district managers are typically required
to work alongside individuals in comparable positions for two to three weeks
before they are asked to perform their duties without direct supervision.
Managers also attend a minimum of three management training meetings per year.
Supplemental product information bulletins are distributed frequently from the
Company's corporate offices to educate store managers and sales associates about
new products as they are introduced. The Company also employs an independent
agency to send unidentified "mystery shoppers" to Company stores, and to report
on the service provided to these shoppers by store personnel. The Company also
monitors the level of customer service on an ongoing basis through various
initiatives, such as telephone surveys.
STORE LOCATIONS
The Company considers its ability to obtain attractive,
high-traffic store locations to be a critical element of its business and a key
factor in the Company's future growth and profitability. In determining new
store locations, the Company considers regional and local economic conditions
and household income data, mall locations, site locations within the mall,
vacancy rates, sales per square foot, "anchor" tenant stores, tenant mix,
consumer traffic, competition and occupancy, construction and other costs
associated with opening a store. Site selection and lease negotiation are
supervised by the Company's Vice President-Real Estate and senior management.
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The Company operated 192 stores in 36 states as of December
26, 1998, as set forth in the following table:
TRACK 'N TRAIL STORES
<TABLE>
<CAPTION>
CURRENT CURRENT
STATE STORES STATE STORES
- ----- ------ ----- ------
<S> <C> <C> <C>
Alabama.................................. 1 Michigan.................................... 11
Alaska .................................. 2 Minnesota .................................. 4
Arkansas ................................ 1 Missouri ................................... 1
California .............................. 27 North Carolina ............................. 1
Colorado................................. 6 Nebraska ................................... 1
Connecticut.............................. 5 Nevada...................................... 1
Florida ................................ 4 New Hampshire............................... 3
Georgia ................................. 4 New York.................................... 8
Idaho.................................... 1 Ohio........................................ 4
Illinois................................. 9 Oregon...................................... 4
Indiana.................................. 5 Pennsylvania................................ 3
Iowa .................................... 1 South Carolina ............................. 1
Kentucky ................................ 3 Tennessee................................... 2
Louisiana ............................... 1 Texas ...................................... 4
Maine.................................... 2 Virginia.................................... 4
Maryland................................. 2 Washington.................................. 7
Massachusetts............................ 4 Wisconsin................................... 4
</TABLE>
OVERLAND TRADING STORES
<TABLE>
<CAPTION>
CURRENT CURRENT
STATE STORES STATE STORES
- ----- ------ ----- ------
<S> <C> <C> <C>
California ............................. 2 New York..................................... 10
Connecticut ............................. 2 Ohio......................................... 5
Florida ................................. 2 Pennsylvania................................. 2
Georgia ................................. 1 Tennessee .................................. 4
Kentucky ................................ 1 Utah ........................................ 1
Massachusetts ........................... 8 Virginia .................................... 3
New Jersey .............................. 5
</TABLE>
EAGLES NEST STORES
<TABLE>
<CAPTION>
CURRENT CURRENT
STATE STORES STATE STORES
- ----- ------ ----- ------
<S> <C> <C> <C>
Colorado ................................ 4 Nevada ..................................... 1
</TABLE>
The Company leases all of its store space. Initial lease terms
of the Company's stores generally range from eight to ten years in duration
without renewal options, ten-year leases being the most common. The leases
generally provide for a fixed minimum rental plus a percentage of store sales in
excess of a specified amount.
MARKETING
The Company's policy is to price its merchandise competitively
with department stores and specialty retailers in the particular mall in which
each Company store is located. The Company is primarily a full-price retailer,
selling most merchandise at full retail prices. However, the Company conducts
promotions that generally revolve around themes such as back-to-school, and
holiday seasons. In addition, the Company promotes individual items as needed to
increase sales activity.
The Company relies primarily on mall traffic and the visual
appeal of its stores to attract customers, and on the breadth of its product
offering and the quality of its customer service to retain them. In-store
promotions with point-of-purchase materials are also an important part of the
Company's marketing strategy. The Company also takes advantage of advertising
and promotional assistance from many of its suppliers, which takes the form of
cooperative advertising programs, point-of-purchase materials, product training
for employees and other programs. The Company
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spends very little on advertising, primarily contributing to mall merchant
association funds which advertise both the mall and individual stores within the
mall.
DISTRIBUTION
The Company believes that strong distribution support for its
stores is a critical element in its strategy to maintain a low cost operating
structure and to expand in the future. In order to support the needs of a
growing store base, the Company relocated its central distribution center to a
larger facility located in West Sacramento, California, approximately 30 miles
from the previous location in El Dorado Hills, California. The new facility
contains approximately 50,000 square feet of storage space, more than double the
capacity of the previous facility. The Company believes the new facility will
provide distribution support for up to 500 stores.
The Company receives approximately 85% of its merchandise at
its central distribution center in West Sacramento, California. Other
merchandise is drop-shipped from vendors directly to individual stores. The
Overland Trading stores currently receive a higher proportion of drop-shipped
merchandise than the Track 'n Trail stores. Virtually all of the merchandise for
the Eagles Nest stores is drop shipped. The Company intends to process an
increasing percentage of the Eagles Nest merchandise through the central
distribution center.
The central distribution center is operated primarily as a
"cross-docking" facility rather than as a warehouse. The Company attempts to
retain minimal inventory at this facility, although it will occasionally
back-stock high-demand items that are expected to be in short supply and
inventory for peak seasonal needs. The central distribution center has
multi-access docks, enabling the Company to receive and ship simultaneously and
to pack separate trailers for shipments to different regions of the country at
the same time.
Upon receipt at the central distribution center, merchandise
is inspected, recorded in the Company's MIS system, allocated to stores by the
system's automatic replenishment function, processed and repackaged for
distribution . Merchandise is typically shipped via common carrier from the
central distribution center to the various stores once a week, or more often as
needed during peak seasonal periods.
MANAGEMENT INFORMATION SYSTEMS
The Company has a computerized management information system
that includes a network of terminals at the corporate offices to support
management decision making, along with PC-based POS computers at the stores that
are connected via modem to the computers at the corporate offices. Each store's
POS system accumulates detailed sales transaction data that is polled by the
Company's main system nightly and reviewed by management each day. The system's
perpetual inventory feature enables the Company's buyers to review and analyze
daily the inventory levels at each individual store by department, class and SKU
in order to replenish fast-selling items on a timely basis. The system also
includes an automated replenishment system for core products that orders
replacement stock of such products based on factors such as current sales trends
or store inventory levels. The minimal inventory that is maintained at the
Company's central distribution center is also managed through daily inventory
management reports. In January, 1999, the Company upgraded the computer hardware
at its corporate offices to accommodate its current and presently anticipated
growth. The Company also completed the integration of the Eagles Nest stores
into its management information system in February 1999.
COMPETITION
The business in which the Company is engaged is highly
competitive. Most of the items sold by the Company are sold by department
stores, outdoor and sporting goods stores, athletic footwear and apparel stores
and traditional shoe and apparel stores. Some of these stores are owned or
franchised by major suppliers of the Company. Many of the stores with which the
Company competes are units of large national and regional chains that have
substantially greater financial and other resources than the Company. To a
lesser extent, the Company competes with mail order retailers. In many cases,
the Company's stores are located in shopping malls in which one or more of its
competitors also has a store.
8
<PAGE>
The Company believes that it has been able to compete
favorably with its competitors by operating attractive, well-stocked stores in
high retail traffic areas, offering competitive prices and providing
knowledgeable and courteous customer service. The Company seeks to provide
competitive pricing by effectively mixing high profile, brand name merchandise
with private label merchandise and opportunistic purchases of other brand name
merchandise, and by controlling both store and administrative expenses.
EMPLOYEES
As of December 26, 1998, the Company had approximately 870
full-time employees and 690 part-time employees, none of whom is represented by
a labor union. The number of part-time employees fluctuates depending on
seasonal needs. The Company considers its relationship with its employees to be
good and has not experienced any interruptions of operations due to labor
disagreements.
RISK FACTORS
THIS REPORT CONTAINS, IN ADDITION TO HISTORICAL INFORMATION,
FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES. THE COMPANY'S
ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THE RESULTS DISCUSSED IN THE
FORWARD-LOOKING STATEMENTS. FACTORS THAT COULD CAUSE OR CONTRIBUTE TO SUCH
DIFFERENCES INCLUDE THOSE DISCUSSED BELOW, AS WELL AS THOSE DISCUSSED ELSEWHERE
IN THIS REPORT.
RISKS ASSOCIATED WITH EXPANSION
The Company's continued growth will depend largely upon the
Company's ability to open or acquire new stores in a timely manner and to
operate them profitably. The Company opened 47 stores (including the five Eagles
Nest stores acquired in August 1998) in fiscal 1998 and 22 stores in fiscal
1997. The Company plans on scaling back store openings in 1999 until sustained
comparable store gains are achieved. Thus, the Company presently anticipates
opening eight stores (one net of closures) in fiscal 1999. The success of the
Company's future expansion efforts will depend on many factors, including the
Company's ability to secure suitable store sites on satisfactory leasing terms
and to complete any necessary construction or refurbishment of these sites, the
hiring, training and retention of qualified managers and other personnel and the
successful integration of new stores into existing operations. No assurance
can be given that the Company will be able to expand as planned, that new
stores will achieve results similar to those achieved at prior locations, or
that the Company will be able to manage any future growth successfully.
Because the Company's business is highly seasonal, any delays in store
openings past peak selling periods could significantly reduce the new stores'
near-term contribution to total net sales. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations".
DEPENDENCE ON MAJOR SUPPLIERS
The Company's business depends to a significant degree upon
its ability to obtain timely and plentiful shipments of brand name merchandise
at competitive prices. In fiscal 1998, the Company's ten largest suppliers
accounted for approximately 68.4% of its net sales. The extent to which the
Company is dependent upon any particular supplier varies from season to season.
The Company does not have any long-term supply agreements or other contractual
assurances of continued supply, pricing or access to new products. The
deterioration of the Company's relationship with any key vendor could result in
delivery delays, merchandise shortages or less favorable trade terms than the
Company currently enjoys. The Company has occasionally received allocations of
merchandise from vendors, particularly merchandise in high demand by many
footwear retailers, that are insufficient to meet the Company's desired
inventory levels of such merchandise. There can be no assurance that the Company
will receive its desired levels of such merchandise in the future. The Company's
business is also affected by its suppliers' ability to manufacture and deliver
merchandise in a timely and cost-effective manner, which depends upon a number
of factors beyond the Company's control, including fluctuations in currency
exchange rates, trade barriers, and economic, labor and political conditions in
the countries in which the Company's vendors have manufacturing operations.
9
<PAGE>
UNCERTAINTIES IN MERCHANDISE TRENDS
The Company's success depends in part on its ability to
anticipate and respond to changing merchandise trends and consumer demands in a
timely manner. Any failure by the Company to identify and respond to emerging
trends could adversely affect consumer acceptance of the merchandise in the
Company's stores, which in turn could adversely affect the Company's business,
financial condition and results of operations. Failure to anticipate and respond
to changing consumer preferences could lead to, among other things, shortages of
styles in high demand, lower net sales, additional markdowns and lower margins,
which would have a material adverse effect on the Company's results of
operations and financial condition.
DEPENDENCE ON MALL TRAFFIC
All but two of the Company's stores are located in regional or
super-regional shopping malls. The Company's net sales are derived, in large
part, from the volume of traffic in these malls, particularly because the
Company does little independent advertising to attract customers. The Company
therefore depends upon the ability of mall "anchor" tenants and other mall
attractions to generate consumer traffic in the vicinity of the Company's
stores, as well as the continuing popularity of malls as shopping destinations.
Mall traffic and the Company's net sales and profitability may be adversely
affected by "anchor" tenants or declines in the desirability of the shopping
environment in a particular mall. As with other specialty footwear retailers,
the Company's business is also subject to general economic conditions, including
the possibility of a nationwide recession, consumer confidence and the level of
consumer spending.
SEASONALITY; WEATHER
The Company's business is highly seasonal. The Company
typically incurs losses in the first three months of each fiscal year and
recorded a larger loss in the first quarter of fiscal 1998 than in the first
quarter of fiscal 1997, due to the fixed operating costs associated with a
larger store base during a period of historically low sales. The Company derives
a substantial percentage of its annual net sales and operating profitability
during the "back-to-school" and year-end holiday periods. In anticipation of
increased net sales activity during these periods, the Company incurs
significant additional expenses, including the hiring of a substantial number of
temporary employees. A slowdown in sales during these peak periods will tend to
have a particularly pronounced effect on the Company's results of operations.
For example, the Company's fiscal 1998 results were negatively affected by
slower than expected "back-to-school" and year-end holiday sales. In addition,
as a result of this seasonality, the Company's working capital needs are
greatest in October and early November, and late in the first quarter of each
fiscal year. The Company's net sales are also affected by weather patterns,
particularly during the Spring and Fall selling seasons. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources."
COMPETITION
The retail footwear business is intensely competitive. Most of
the items sold by the Company are sold by department stores, outdoor and
sporting goods stores, athletic footwear and apparel stores and traditional shoe
and apparel stores. Some of these stores are owned or franchised by the
Company's footwear suppliers. Many of the stores with which the Company competes
are units of large national or regional chains that have substantially greater
financial and other resources than the Company. In many cases, the Company's
stores are located in shopping malls in which one or more of its competitors
also has a presence. To a lesser extent, the Company also competes with mail
order retailers. A significant change in price, level of promotion or other
strategies by the Company's competitors could have a material adverse effect on
the Company's results of operations. For example, in fiscal 1998 the closeout of
the Kinney footwear stores adversely affected both Company sales and margins.
See "Business--Competition" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
UNCERTAINTIES ASSOCIATED WITH PRIVATE LABEL SOURCING
Private label products accounted for approximately 10% of net
sales in fiscal 1998. The Company has no long-term contracts with its private
label manufacturing sources and competes with other companies for production
facilities. In addition, the Company's private label products may experience
higher mark-downs than branded products, because
10
<PAGE>
they require longer lead times and must be ordered in larger volumes, and
because the Company is typically unable to return private label product to its
manufacturers. There can be no assurance that the foregoing factors will not
disrupt the Company's supply of private label goods or otherwise adversely
impact the Company's operations in the future. See "Business--Purchasing and
Sourcing."
INTERNATIONAL PURCHASING RISKS
Substantially all of the Company's private label manufacturers
are located outside of the United States. Accordingly, the Company is subject to
the risks typically associated with an import business, including unexpected
changes in foreign regulatory requirements, disruptions or delays in shipments
and the risks associated with United States import laws and regulations,
including quotas, duties, taxes, tariffs and other restrictions. The Company has
not, to date, been materially affected by any such risk, but there can be no
assurance that such risks will not adversely impact the Company's operations in
the future. See "Business--Purchasing and Sourcing."
POTENTIAL FOREIGN CURRENCY FLUCTUATIONS
Because a portion of the Company's purchases of private label
goods are denominated in foreign currencies, the Company's operating results are
subject to fluctuations in the exchange rates between such currencies and the
U.S. dollar. The Company has not typically engaged in hedging transactions
designed to manage currency fluctuation risks. There can be no assurance that
exchange rate fluctuations will not have a material adverse effect on the
Company's future operating results or financial condition. See
"Business--Purchasing and Sourcing."
RISKS ASSOCIATED WITH YEAR 2000
Many computer programs were designed and developed utilizing
only two digits in the date field, thereby creating the inability to recognize
the year 2000 or years thereafter. The year 2000 issue creates risks for the
Company for unforeseen or unanticipated problems in its internal computer
systems as well as from computer systems of suppliers, lessors and other
vendors. Failures of these systems or untimely corrections could have a material
adverse impact on the Company's ability to conduct its business and results of
operations. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Year 2000."
RISKS ASSOCIATED WITH ACQUISITIONS
The Company's business strategy includes expanding when
appropriate through acquisitions, as well as through new store openings. No
assurance can be given that any acquisition by the Company will occur, or that
any such acquisition will enhance the Company's results of operations. Any
acquisition will involve numerous risks, including difficulties in the
assimilation of the acquired company's operations, the diversion of management's
attention, uncertainties associated with operating stores in new markets and the
potential loss of the acquired company's key employees. Acquisitions may also
result in potentially dilutive issuances of equity securities, the incurrence of
debt and contingent liabilities, potential reductions in income due to losses
incurred by the acquired business and increased amortization expense related to
intangible assets acquired, any of which could materially adversely affect the
Company's financial condition and results of operations.
CONTROL BY CERTAIN STOCKHOLDERS
David L. Suechting, Jr., the Company's Chairman of the Board,
Barbara Suechting, a director of the Company, and Deborah Suechting (the
"Pre-Offering Stockholders") in the aggregate own beneficially approximately 60%
of the Company's outstanding shares of Common Stock. As a result, the
Pre-Offering Stockholders, acting together, are able to control all matters
requiring approval by the stockholders of the Company, including the election of
the Board of Directors.
11
<PAGE>
FUTURE CAPITAL NEEDS
The Company expects that anticipated cash flow from operations
and anticipated borrowings under its credit facility will satisfy its cash
requirements through fiscal 1999. To the extent that the foregoing cash
resources are insufficient to fund the Company's activities, including new store
openings planned for 1999, additional funds will be required. There can be no
assurance that additional financing will be available on reasonable terms or at
all. Failure to obtain such financing could delay or prevent the Company's
planned expansion, which could adversely affect the Company's business,
financial condition and operating results. In addition, if additional capital is
raised through the sale of additional equity or convertible securities, dilution
to the Company's stockholders could occur. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Liquidity and Capital
Resources."
DEPENDENCE ON KEY PERSONNEL
The Company's future success depends to a significant extent
on the efforts and abilities of its executive officers. The loss of the services
of certain of these individuals could have a material adverse effect on the
Company's business, financial condition and results of operations. The Company
does not maintain any key man life insurance. The Company's recent growth,
particularly as a result of the acquisition of Overland and Eagles Nest, has
resulted in an increase in responsibilities for management personnel. The
Company's ability to manage growth effectively will require it to continue to
train, motivate and manage its employees, and to attract, motivate and retain
additional skilled managerial and merchandising personnel. Competition for such
personnel is intense, and there can be no assurance that the Company will be
successful in attracting, assimilating and retaining the personnel it requires
to grow and operate profitably.
INTELLECTUAL PROPERTY
Prior to being acquired by Track 'n Trail, Overland entered
into an agreement with a third party for the exclusive use of the Overland
Trading Company trademark in nine Midwestern states. The agreement prohibits the
Company from opening Overland Trading stores in those states until the agreement
is terminated. There can be no assurance that the activities of the third party
will not detract from the Company's efforts to maintain its Overland Trading
stores as a distinct retail concept, particularly in the Midwest, or from the
Company's reputation.
ITEM 2. PROPERTIES
The Company entered into a new 10-year lease on a single
50,240 square foot distribution center in West Sacramento, California commencing
on November 1, 1998. The Company believes that its new central distribution
facility will support as many as 500 stores, which the Company believes is
sufficient to continue to service existing stores and to accommodate anticipated
growth. The Company also has a lease on a 6,000 square foot merchandise staging
facility in Rancho Cordova, California, which expires on March 31, 1999. The
Company does not plan on renewing this lease. The corporate office is a 16,000
square foot facility located in El Dorado Hills, California. This facility's
lease expires on March 31, 1999. The Company presently anticipates negotiating a
new 10-year lease on the corporate office facility. The Company also maintains a
5-year lease on a 2,681 square foot office facility in Littleton, Colorado to
support the sales operations and merchandising management team for the Eagles
Nest stores. This lease expires on October 31, 2001.
ITEM 3. LEGAL PROCEEDINGS
Although the Company is subject to various claims and legal
actions that arise in the ordinary course of its business, the Company is not
presently a party to any material legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS
No matters were submitted to a vote of the Company's
stockholders during the fourth quarter of the fiscal year covered by this
report.
12
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Company's initial public offering of its Common Stock (the
"Offering") occurred in October 1997. The Company's Common Stock is listed on
the Nasdaq National Market under the symbol "TKTL". For the period from
commencement of trading through December 27, 1997 the high and low sale prices
reported by Nasdaq were $11.88 and $8.50, respectively. The following table sets
forth for the quarterly periods indicated the high and low prices per share of
common stock as reported by Nasdaq:
<TABLE>
<CAPTION>
FISCAL 1998 HIGH LOW
----------- ---- ----
<S> <C> <C>
1st Quarter $ 9.00 $ 4.75
2nd Quarter 9.13 4.38
3rd Quarter 5.44 3.50
4th Quarter 3.63 1.88
</TABLE>
As of March 1, 1999, there were 60 holders of record of the
Company's Common Stock.
The Company has never paid or declared any cash dividends on
its Common Stock or other securities and does not anticipate paying cash
dividends in the foreseeable future. In addition, the Company's current line of
credit prohibits the payment of cash dividends on its capital stock without the
bank's consent.
13
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
The balance sheet and statement of operations data as of
December 26, 1998 and December 27, 1997, and for each of the three fiscal years
in the period ended December 26, 1998, are derived from audited consolidated
financial statements of the Company included herein and should be read in
conjunction with such financial statements. The balance sheet and statement of
operations data as of December 28, 1996, December 30, 1995 and December 31,
1994, and for each of the two fiscal years in the period ended December 30, 1995
are derived from audited consolidated financial statements of the Company which
are not included herein. The information for all periods set forth below under
the captions "Pro Forma Statement of Operations Data" and "Selected Store
Operating Data" is derived from unaudited data. The data set forth below are
qualified by, and should be read in conjunction with, "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and the
consolidated financial statements and related notes included elsewhere in this
report.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
---------------------------------------------------------------------
1998 1997 1996 1995 1994(1)
--------- --------- --------- --------- ---------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE, PER SQUARE FOOT AND NUMBER OF
STORES DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net Sales ........................................... $ 99,851 $ 91,834 $ 66,233 $ 50,691 $ 48,165
Cost of sales ....................................... 53,615 47,677 34,062 26,192 25,080
--------- --------- --------- --------- ---------
Gross profit ........................................ 46,236 44,157 32,171 24,499 23,085
Selling and marketing expense ....................... 37,186 30,780 21,060 16,852 14,975
Administrative and distribution ..................... 7,741 6,840 5,508 4,826 4,935
--------- --------- --------- --------- ---------
Operating income .................................... 1,309 6,537 5,603 2,821 3,175
Interest expense .................................... 369 1,260 670 435 324
Other expense (income) .............................. 173 (21) (24) (41) 37
--------- --------- --------- --------- ---------
Income before income taxes and
minority interest ................................ 767 5,298 4,957 2,427 2,814
Income tax expense .................................. 371 118 488 41 67
Minority interest ................................... -- -- 105 -- --
--------- --------- --------- --------- ---------
Net income .......................................... $ 396 $ 5,180 $ 4,364 $ 2,386 $ 2,747
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Historical earnings per share (3):
Basic ............................................ $ .06 $ 1.10 $ 1.06 $ 0.58 $ 0.67
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Diluted .......................................... $ .06 $ 1.03 $ 1.04 $ 0.58 $ 0.67
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Weighted average shares outstanding:
Basic ............................................ 6,847 4,700 4,108 4,108 4,108
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Diluted .......................................... 7,154 5,027 4,202 4,108 4,108
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
PRO FORMA STATEMENT OF OPERATIONS DATA (2):
Historical income before income taxes
and minority interest ............................ $ 5,298 $ 4,957 $ 2,427 $ 2,814
Pro forma income tax expense (2) .................... 2,119 1,983 971 1,126
Minority interest ................................... -- 105 -- --
--------- --------- --------- ---------
Pro forma net income ................................ $ 3,179 $ 2,869 $ 1,456 $ 1,688
--------- --------- --------- ---------
--------- --------- --------- ---------
Pro forma earnings per share (3):
Basic ............................................. $ 0.68 $ 0.70
--------- ---------
--------- ---------
Diluted ........................................... $ 0.58 $ 0.57
--------- ---------
--------- ---------
Weighted average shares outstanding:
Basic ............................................ 4,700 4,108
--------- ---------
--------- ---------
Diluted .......................................... 5,448 5,030
--------- ---------
--------- ---------
SELECTED STORE OPERATING DATA:
Store contribution(4) ............................... $ 9,050 $ 13,377 $ 11,111 $ 7,647 $ 8,110
Number of stores:
Opened or acquired during period ............... 47(5) 22 51(6) 12 9
Closed during period ........................... 5 0 5 4 4
Open at end of period .......................... 192(7) 150 128 82 74
Total weighted average square feet(8) .............. 306,737 236,095 168,966 144,612 130,542
Weighted average net sales per square foot(9) ....... $ 326 $ 389 $ 392 $ 351 $ 369
Average square feet per store ....................... 1,937 1,780 1,744 1,873 1,894
Increase(decrease) in comparable stores net sales(10) (9.1)% 0.6% 3.1% (1.4)% 0.6%
</TABLE>
14
<PAGE>
<TABLE>
<CAPTION>
AS OF
-------------------------------------------------------------------
DECEMBER 26, DECEMBER 27, DECEMBER 28, DECEMBER 30, DECEMBER 31,
1998 1997 1996 1995 1994
------------ ----------- ------------ ----------- ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital ..................................... $25,116 $21,896 $ 9,430 $ 6,710 $ 5,742
Total assets ........................................ 61,279 44,133 31,858 17,050 15,630
Total debt .......................................... 11,510 236 10,765 2,734 2,396
Stockholders' equity ................................ 32,538 32,082 10,646 7,648 6,349
</TABLE>
(1) Fiscal 1994 consisted of 53 weeks. All other fiscal years
presented consisted of 52 weeks. During the 53rd week of
fiscal 1994, the Company generated $1.2 million in net sales.
As a result, the Company's operating results in fiscal 1994
are not comparable to its results in any other fiscal year
presented.
(2) Includes pro forma provision for income taxes using an assumed
combined federal and state tax rate of 40%, which the Company
believes approximates the statutory federal and state income
tax rates that would have been applied had Track 'n
Trail-California been taxed as a C corporation. Commencing
June 28, 1992 and until the Reorganization, Track 'n
Trail-California operated as an S corporation and was not
subject to federal and certain state income taxes. The
Company's earnings during such periods have been taxed
directly to the Company's stockholders, rather than to the
Company. In connection with the Reorganization on October 7,
1997, the S corporation election of Track 'n Trail-California
and the Company, respectively, was terminated under
circumstances under which income reported by the Company and
Track 'n Trail-California for their respective terminated S
corporation taxable years was determined utilizing a "closing
of the books" method.
(3) Shares outstanding include approximately 327,000 and 94,000
shares issuable upon exercise of stock options outstanding at
December 27, 1997 and December 28, 1996, respectively, after
applying the treasury stock method. In applying the treasury
stock method for determining the dilution applicable to stock
options outstanding, the incremental shares assumed issued
(excess of shares assumed issued over the number of shares
assumed purchased) was determined using the sum of exercise
proceeds, future compensation and the tax benefit to the
Company upon exercise of the options as the assumed proceeds
that would have been used to purchase shares at the average
value during the period. Average market value was based on
estimated fair values for periods prior to the Company's
initial public offering in October 1997 (the "Offering") and
market prices thereafter. Distribution shares of approximately
421,000 included in pro forma diluted earnings per share for
fiscal 1997 represents the number of shares of Common Stock
sold in the Offering, the proceeds of which were necessary to
pay the excess of S corporation distributions paid or declared
during the twelve month period preceding the Offering over
earnings during the twelve month period preceding the
Offering. Distribution shares of approximately 828,000
included in pro forma diluted earnings per share for fiscal
1996 represent the number of shares of Common Stock sold in
the Offering, the proceeds of which were necessary to pay the
excess of S corporation distributions paid or declared during
fiscal 1996 through the Offering over fiscal 1996 earnings.
All warrants outstanding and certain options with exercise
prices in excess of market value were not dilutive and,
accordingly, were not included.
(4) Store contribution refers to gross profit after deducting
selling and marketing expenses. Store contribution is
presented to provide additional information about the Company
and is commonly used as a performance measurement by retail
companies. Store contribution should not be considered in
isolation or as a substitute for operating income, cash flow
from operating activities and other income or cash flow data
prepared in accordance with generally accepted accounting
principles, or as a measure of the Company's profitability or
liquidity.
(5) On August 26, 1998, the Company acquired five Eagles Nest
stores.
(6) On October 25, 1996, the Company acquired 33 Overland Trading
stores. The Company opened one additional Overland Trading
store in November 1996 pursuant to a commitment previously
entered into by Overland.
(7) Stores open at the end of fiscal 1998 consist of 141 Track 'n
Trail stores, 46 Overland Trading stores and five Eagles Nest
stores.
(8) Weighted to reflect store openings and closings during each
period, assuming that all periods presented consisted of 52
weeks.
(9) Weighted average net sales for fiscal 1994 have been adjusted
as if such year consisted of 52 weeks.
(10) Comparable store net sales include only those stores that were
open both for the full fiscal period and for the full prior
fiscal period. The fiscal 1995 and 1994 increases have been
calculated by comparing net sales in such years to net sales
for the prior 52 and 53 weeks, respectively. The decrease for
fiscal 1998 excludes the Eagles Nest stores acquired in August
1998.
15
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
PRIVATE SECURITIES LITIGATION REFORM ACT SAFE HARBOR
STATEMENT. In addition to historical information, this Management's Discussion
and Analysis includes certain forward-looking statements regarding events and
financial trends which may affect the Company's future operating results and
financial position. Such statements are subject to risks and uncertainties that
could cause the Company's actual results and financial position to differ
materially. Factors that could cause or contribute to such differences include
those discussed below. These and other risks and uncertainties related to the
business are described in detail in this report. See "Business--Risk Factors."
Readers are cautioned not to place undue reliance on these forward-looking
statements, which speak only as of the date hereof. The Company undertakes no
obligation to publicly release the result of any revisions to these
forward-looking statements to reflect events or circumstances after the date
hereof or to reflect the occurrence of unanticipated events. The following
discussion should be read in conjunction with the financial statements and notes
thereto of the Company included elsewhere in this report.
The Company is one of the largest full-service specialty
retailers in the United States focusing on a broad range of high-quality branded
casual, outdoor and adventure footwear and apparel. On August 26, 1998, the
Company acquired the outstanding common stock of Nevin's Eagles Nest, Inc.
("Eagles Nest") for $1.5 million in cash, of which the remaining $100,000 is
expected to be paid in August 1999 provided that certain conditions are met (see
attached "Notes to Consolidated Financial Statements"). Eagles Nest is a
mall-based retailer primarily of premium branded outdoor apparel and operates
five stores, four in Colorado and one in Nevada. The Eagles Nest acquisition
represents the Company's entrance into the apparel market, an expansion that
also is expected to provide new customer streams for the footwear lines. As is
common in the apparel industry, Eagles Nest margins are lower than those that
the Company currently experiences in its footwear business. As of December 26,
1998, the Company operated 141 Track 'n Trail stores, 46 Overland Trading
stores, and five Eagles Nest stores in 36 states.
Comparable store sales are commonly used as a performance
measurement by retail companies. The Company defines comparable stores as those
stores that were open for the full fiscal period and for the full prior fiscal
year. The Company's comparable store net sales decreased 9.1% in fiscal 1998,
excluding the acquired Eagles Nest stores. Had the Eagles Nest stores acquired
by the Company on August 26, 1998 been included in the Company's comparable
store net sales comparison since the acquisition, comparable store net sales
would have decreased by 9.0% in fiscal 1998.
Track 'n Trail-California was treated as an S corporation for
federal and certain state income tax purposes from June 28, 1992, until its S
corporation status terminated and it became a wholly owned subsidiary of the
Company as a result of the Reorganization on October 7, 1997 (the "Termination
Date"). As a result, the earnings of Track 'n Trail-California during such
period were taxed, with certain exceptions, directly to the stockholders of
Track 'n Trail-California rather than to Track 'n Trail-California. Thereafter,
the Company has been subject to state and federal income taxes as a C
corporation, and all references to net income for periods prior to fiscal 1998
in this "Management's Discussion and Analysis of Financial Condition and Results
of Operations" are presented as if Track 'n Trail-California, prior to the
Reorganization, had been subject to income taxes at a combined state and federal
income tax rate of 40%.
RESULTS OF OPERATIONS
The following table sets forth certain operating data as
a percentage of net sales for the periods indicated:
<TABLE>
<CAPTION>
FISCAL
------------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Net sales ................................................ 100.0% 100.0% 100.0%
Cost of sales ............................................ 53.7 51.9 51.4
----- ----- -----
Gross profit ............................................. 46.3 48.1 48.6
Selling and marketing expenses ........................... 37.2 33.5 31.8
----- ----- -----
Store contribution (1) ................................... 9.1 14.6 16.8
Administrative and distribution
expenses ............................................ 7.8 7.5 8.3
----- ----- -----
Operating income ......................................... 1.3 7.1 8.5
Interest expense ......................................... 0.4 1.4 1.0
Other (income) expense ................................... 0.1 (0.1) (0.0)
----- ----- -----
Income before income taxes
and minority interest ............................... 0.8 5.8 7.5
Income tax provision (2) ................................. 0.4 2.3 3.0
Minority interest ........................................ -- -- 0.2
----- ----- -----
Net income (2) ........................................... 0.4% 3.5% 4.3%
----- ----- -----
----- ----- -----
</TABLE>
16
<PAGE>
(1) Store contribution refers to gross profit after deducting
selling and marketing expenses. Store contribution is
presented to provide additional information about the Company
and is commonly used as a performance measurement by retail
companies. Store contribution should not be considered in
isolation or as a substitute for operating income, cash flow
from operating activities and other income or cash flow data
prepared in accordance with generally accepted accounting
principles, or as a measure of the Company's profitability or
liquidity.
(2) For 1997 and 1996, reflects an assumed combined federal and
state tax rate of 40%, which the Company believes approximates
the statutory federal and state income tax rates that would
have been applied had Track 'n Trail-California been taxed as
a C corporation. From June 28, 1992, through the Termination
Date, Track 'n Trail-California operated as an S corporation
and was not subject to federal and certain state income taxes.
FISCAL 1998 COMPARED TO FISCAL 1997
NET SALES
Net sales increased to $99.9 million in fiscal 1998, an
increase of $8.0 million, or 8.7%, over fiscal 1997 net sales. The 42 stores
opened by the Company in fiscal 1998 generated $8.0 million in net sales. In
addition, the 20 stores (net of closures) opened in fiscal 1997 were responsible
for $5.9 million more in net sales in fiscal 1998 than in fiscal 1997 and, the
five Eagles Nest stores acquired in fiscal 1998 contributed $2.9 million in
fiscal 1998. These additions to net sales were partially offset by a decrease in
comparable store net sales of $7.7 million, or 9.1%, for fiscal 1998, a $378,000
decrease, relative to fiscal 1997, in net sales attributable to the closing of
five stores during fiscal 1998, and a $773,000 decrease, relative to fiscal
1997, in net sales attributable to the relocation of three stores and the
remodeling of one store in fiscal 1998. The decrease in comparable store sales
is primarily due to the disruptions caused by unseasonable weather conditions
consisting of a wet and cold spring associated with El Nino and a warm fall
season. In addition, heavy discounting by competitors (related, in part, to
competitor store closures) put pressure on both the customer stream and prices.
GROSS PROFIT
Gross profit was $46.2 million for fiscal 1998, an increase of
$2.1 million, or 4.7%, over the gross profit for fiscal 1997. Approximately $1.2
million of the increase in gross profit is attributable to the Eagles Nest
stores acquired in 1998. Gross profit as a percentage of net sales decreased to
46.3% for fiscal 1998 from 48.1% in fiscal 1997. This decrease was primarily the
result of markdowns taken to liquidate winter goods in the first quarter and in
response to competitor discounting in the third and fourth quarters.
SELLING AND MARKETING EXPENSES
Selling and marketing expenses were $37.2 million for fiscal
1998, an increase of $6.4 million, or 20.8%, over the $30.8 million in selling
and marketing expenses for fiscal 1997. Approximately $664,000, or 10.4%, of
this increase is attributable to the Eagles Nest stores acquired in 1998. The
remaining increase is primarily attributable to operating costs related to
operating 42 additional stores at December 26, 1998 versus December 27, 1997. As
a percentage of net sales, selling and marketing expenses increased to 37.2% in
fiscal 1998 from 33.5% in fiscal 1997, primarily as a result of operating a
larger store base during a period in which the Company experienced declining
comparable store sales and opened new stores which have a lower initial sales
base.
ADMINISTRATIVE AND DISTRIBUTION EXPENSES
Administrative and distribution expenses were $7.7 million for
fiscal 1998, an increase of $901,000, or 13.2%, over $6.8 million in
administrative and distribution expenses for fiscal 1997. This increase is
primarily attributable to the increases in personnel and related expenses
associated with the Company's expansion and becoming a public company.
Approximately $201,000 of the increase in administrative and distribution
expenses is attributable to the Eagles Nest acquisition in August 1998. As a
percentage of net sales, administrative and distribution expenses increased to
7.8% in fiscal 1998 from 7.5% in fiscal 1997, predominately as a result of the
decrease in comparable store sales.
17
<PAGE>
INTEREST EXPENSE
Interest expense decreased to $369,000, or 0.4% of net sales,
for fiscal 1998, from $1.3 million, or 1.4% of net sales, in fiscal 1997. This
decrease is primarily attributable to repayment of debt incurred in connection
with the acquisition of Overland and reduction of the outstanding principal
balance of the Company's credit facility from the proceeds from the Offering.
Interest expense attributable to debt incurred in connection with the Eagles
Nest acquisition was $88,000, or 23.9% of total interest expense for fiscal
1998.
NET INCOME
The Company's net income for fiscal 1998 was $396,000, a
decrease of $2.8 million, or 87.5 %, from $3.2 million in fiscal 1997.
Approximately $107,000 of net income for fiscal 1998 is attributable to the
Eagles Nest acquisition in August 1998. The decrease in net income of $2.9
million (excluding Eagles Nest) is primarily attributable to fixed operating
costs associated with a larger store base during a period in which the Company
experienced declining comparable store sales and the start up costs associated
with a larger base of new stores in fiscal 1998.
FISCAL 1997 COMPARED TO FISCAL 1996
NET SALES
Net sales for fiscal 1997 were $91.8 million, an increase of
$25.6 million, or 38.7%, over fiscal 1996 net sales of $66.2 million. The 37
Overland Stores accounted for $17.9 million or 69.9% of the increase in net
sales, while the 19 Track 'n Trail stores opened during the year accounted for
an additional $3.2 million. A comparable store net sales increase of 0.6% for
the Track 'n Trail stores contributed $290,000 to the net sales gain. The
remaining increase in net sales of $4.2 million is primarily attributable to
stores opened in fiscal 1996. The modest comparable store net sales increase for
the Track 'n Trail stores is a result of lower than expected year-end holiday
sales.
GROSS PROFIT
Gross profit was $44.2 million in fiscal 1997, an increase of
$12.0 million, or 37.3%, over the $32.2 million gross profit in fiscal 1996.
Gross profit as a percentage of net sales decreased to 48.1% in fiscal 1997 from
48.6% in fiscal 1996. Gross profit at the Track 'n Trail stores in fiscal 1997
was 48.8% of net sales, a 0.2% margin improvement over the 48.6% gross profit as
a percentage of net sales in fiscal 1996. This increase was primarily
attributable to enhanced cumulative markups and lower markdowns. Overland's
gross profit in fiscal 1997 was $11.3 million, or 46.2% of net sales, which had
a negative impact on the consolidated gross profit as a percentage of net sales.
The level of gross profit as a percentage of net sales realized at the Overland
Trading stores represented an improvement over the 43.2% gross profit margin
recorded by Overland under previous management in the comparable period in 1996.
This improvement was due, in part, to increased purchasing economies of scale
after the acquisition of Overland. Management also believes that liquidity
problems at Overland contributed to Overland's low gross profit margin in the
comparable period in 1996.
SELLING AND MARKETING EXPENSES
Selling and marketing expenses were $30.8 million in fiscal
1997, an increase of $9.7 million, or 46.2%, over fiscal 1996. Overland
accounted for $6.7 million of the increase. The remaining $3.0 million increase
is primarily attributable to the 17 Track 'n Trail stores opened in 1996 and the
19 Track 'n Trail stores opened in 1997 which were not open for the full
comparable period in the prior year. As a percentage of net sales, selling and
marketing expenses increased to 33.5% in fiscal 1997 from 31.8% in fiscal 1996,
primarily as a result of higher operating expenses as a percentage of net sales
at Overland, which were 34.1% of Overland's net sales in fiscal 1997. As a
percentage of net sales, selling and marketing expenses at the Track 'n Trail
stores increased slightly to 33.3% in fiscal 1997 from 32.6% in the comparable
period in 1996, primarily due to the timing of new store openings.
18
<PAGE>
ADMINISTRATIVE AND DISTRIBUTION EXPENSES
Administrative and distribution expenses were $6.8 million in
fiscal 1997, an increase of $1.3 million, or 24.2%, over the $5.5 million
recorded in fiscal 1996. Overland accounted for $1.2 million of the increase.
The remaining $123,000 increase is attributable to increases in the Track 'n
Trail staff and associated expenses as a result of the Company's expansion. As a
percentage of net sales, administrative and distribution expenses decreased to
7.5% in fiscal 1997 from 8.3% in fiscal 1996. In the absence of the Overland
acquisition, administrative and distribution expenses would have been 7.5% of
Track 'n Trail net sales, down from the 8.3% experienced in fiscal 1996, as a
result of spreading such expenses over a larger revenue base.
INTEREST EXPENSE
Interest expense increased to $1.3 million, or 1.4% of net
sales in fiscal 1997, from $670,000, or 1% of net sales, in fiscal 1996. This
$590,000 increase was primarily attributable to $421,000 of interest on the debt
incurred in connection with the Overland acquisition (all of which was repaid in
October 1997), and $157,000 of interest on Overland's borrowings under its line
of credit.
NET INCOME
The Company's net income in fiscal 1997 was $3.2 million, an
increase from the $2.9 million net income in fiscal 1996. The increase in net
income is attributable to the increase in net sales and the effect of the other
factors discussed above.
19
<PAGE>
QUARTERLY RESULTS OF OPERATIONS
The Company typically incurs losses in the first quarter, and
derives a substantial percentage of its annual net sales and operating
profitability during the "back-to-school" and year-end holiday periods. The
table below sets forth quarterly operating data of the Company, including such
data as a percentage of net sales for fiscal 1998 and fiscal 1997. This
quarterly information is unaudited, but in management's opinion reflects all
adjustments, consisting only of normal recurring adjustments, necessary for a
fair presentation of the information for the periods presented when read in
conjunction with the audited consolidated financial statements of the Company
and notes thereto. The operating results for any quarter are not necessarily
indicative of results for any future period.
<TABLE>
<CAPTION>
Fiscal 1998 Fiscal 1997
------------- -------------
FIRST SECOND THIRD FOURTH FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER
-------- -------- -------- -------- -------- -------- -------- --------
(In thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales ......................... $ 18,908 $ 22,311 $ 25,662 $ 32,970 $ 16,867 $ 20,660 $ 24,761 $ 29,546
Cost of sales ..................... 10,065 11,385 13,927 18,238 8,857 10,556 12,975 15,289
-------- -------- -------- -------- -------- -------- -------- --------
Gross profit ...................... 8,843 10,926 11,735 14,732 8,010 10,104 11,786 14,257
Selling and marketing expenses .... 8,239 8,523 9,511 10,913 7,194 7,333 7,787 8,466
-------- -------- -------- -------- -------- -------- -------- --------
Store contribution(1) ............. 604 2,403 2,224 3,819 816 2,771 3,999 5,791
Administrative and distribution
expenses ..................... 2,007 1,908 1,945 1,881 1,780 1,664 1,777 1,619
-------- -------- -------- -------- -------- -------- -------- --------
Operating income (loss) ........... $ (1,403) $ 495 $ 279 $ 1,938 $ (964) $ 1,107 $ 2,222 $ 4,172
Interest expense .................. 5 46 89 229 289 442 440 89
Other expense (income) ............ 5 4 29 135 (10) 30 (26) (15)
-------- -------- -------- -------- -------- -------- -------- --------
Income (loss) before income taxes . $ (1,413) $ 445 $ 161 $ 1,574 $ (1,243) $ 635 $ 1,808 $ 4,098
Income tax provision (benefit) .... (565) 178 64 694 (416) 44 125 365
-------- -------- -------- -------- -------- -------- -------- --------
Net income (loss) ................. (848) 267 97 880 (827) 591 1,683 3,733
-------- -------- -------- -------- -------- -------- -------- --------
-------- -------- -------- -------- -------- -------- -------- --------
Historical earnings per share:
Basic ........................ $ (0.12) $ 0.04 $ 0.01 $ 0.13 $ (0.20) $ 0.14 $ 0.41 $ 0.58
-------- -------- -------- -------- -------- -------- -------- --------
-------- -------- -------- -------- -------- -------- -------- --------
Diluted ...................... $ (0.12) $ 0.04 $ 0.01 $ 0.12 $ (0.20) $ 0.14 $ 0.39 $ 0.54
-------- -------- -------- -------- -------- -------- -------- --------
-------- -------- -------- -------- -------- -------- -------- --------
Weighted average shares outstanding:
Basic ........................ 6,842 6,843 6,851 6,852 4,108 4,108 4,108 6,478
-------- -------- -------- -------- -------- -------- -------- --------
-------- -------- -------- -------- -------- -------- -------- --------
Diluted ...................... 6,842 7,256 7,070 7,074 4,108 4,302 4,330 6,973
-------- -------- -------- -------- -------- -------- -------- --------
-------- -------- -------- -------- -------- -------- -------- --------
Historical income (loss) before
income taxes ................. (1,243) 635 1,808 4,098
Pro forma income tax provision
(benefit) .................... (497) 254 723 1,639
-------- -------- -------- --------
Pro forma net income (loss) (2) ... $ (746) $ 381 $ 1,085 $ 2,459
-------- -------- -------- --------
-------- -------- -------- --------
Pro forma earnings per share:
Basic ........................ $ (0.18) $ 0.09 $ 0.26 $ 0.38
-------- -------- -------- --------
-------- -------- -------- --------
Diluted ...................... $ (0.16) $ 0.08 $ 0.22 $ 0.35
-------- -------- -------- --------
-------- -------- -------- --------
Weighted average shares outstanding:
Basic......................... 4,108 4,108 4,108 6,478
-------- -------- -------- --------
-------- -------- -------- --------
Diluted ...................... 4,786 4,888 4,880 7,044
-------- -------- -------- --------
-------- -------- -------- --------
As a percentage of net sales
Net sales ......................... 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of sales ..................... 53.2 51.0 54.3 55.3 52.5 51.1 52.4 51.7
-------- -------- -------- -------- -------- -------- -------- --------
Gross profit ...................... 46.8 49.0 45.7 44.7 47.5 48.9 47.6 48.3
Selling and marketing expenses .... 43.6 38.2 37.0 33.1 42.7 35.5 31.5 28.7
-------- -------- -------- -------- -------- -------- -------- --------
Store contribution(1) ............. 3.2 10.8 8.7 11.6 4.8 13.4 16.1 19.6
Administrative and distribution
expenses ..................... 10.6 8.6 7.6 5.7 10.6 8.1 7.1 5.5
-------- -------- -------- -------- -------- -------- -------- --------
Operating income (loss) ........... (7.4) 2.2 1.1 5.9 (5.8) 5.3 9.0 14.1
Interest expense .................. 0.1 0.2 0.4 0.7 1.7 2.1 1.8 0.3
Other expense (income) ............ 0.0 0.0 0.1 0.4 (0.1) 0.1 (0.1) (0.1)
-------- -------- -------- -------- -------- -------- -------- --------
Income (loss) before income taxes (7.5) 2.0 0.6 4.8 (7.4) 3.1 7.3 13.9
Income tax provision (benefit) .... (3.0) 0.8 0.2 2.1 (2.5) 0.2 0.5 1.2
Net income (loss) ................. (4.5)% 1.2% 0.4% 2.7% (4.9)% 2.9% 6.8% 12.7%
-------- -------- -------- -------- -------- -------- -------- --------
-------- -------- -------- -------- -------- -------- -------- --------
Historical income (loss) before
income taxes ...................... (7.4) 3.1 7.3 13.9
Pro forma income tax provision
(benefit) ......................... (3.0) 1.3 2.9 5.6
-------- -------- -------- --------
Pro forma net income (loss) (2) ... (4.4)% 1.8% 4.4% 8.3%
-------- -------- -------- --------
-------- -------- -------- --------
</TABLE>
20
<PAGE>
(1) Store contribution refers to gross profit after deducting
selling and marketing expenses. Store contribution is
presented to provide additional information about the Company
and is commonly used as a performance measurement by retail
companies. Store contribution should not be considered in
isolation or as a substitute for operating income, cash flow
from operating activities and other income or cash flow data
prepared in accordance with generally accepted accounting
principles, or as a measure of the Company's profitability or
liquidity.
(2) Reflects an assumed combined federal and state tax rate of
40%, which the Company believes approximates the statutory
federal and state income tax rates that would have been
applied had Track 'n Trail-California been taxed as a C
corporation. From June 28, 1992, through the Termination Date,
Track 'n Trail-California operated as an S corporation and was
not subject to federal and certain state income taxes.
The Company anticipates that operating results will fluctuate
as a result of a number of factors, including seasonality, weather, changes in
pricing or promotion policies by the Company, its competitors or its suppliers,
the availability and cost of merchandise, consumer acceptance of the products
sold by the Company, and the number and timing of store openings and closures.
The availability and cost of merchandise may, in turn, fluctuate due to a number
of factors including changes in the Company's relationships with major
suppliers, the Company's access to private label manufacturing capacity, foreign
currency fluctuations and other risks associated with importing private label
products from foreign countries.
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its operations from internally
generated cash flow, borrowings under its revolving line of credit, and equity
financing. The Company's liquidity requirements relate primarily to the
financing of inventories, build-out of new stores and remodeling of existing
stores. In fiscal 1998, the Company also used funds for the acquisition of
Eagles Nest and the relocation of its distribution facility from El Dorado
Hills, California to West Sacramento, California. In connection with the
acquisition of Eagles Nest, the Company paid off the Eagles Nest line of credit
and other debt of approximately $1.4 million.
Net cash used for operating activities for fiscal 1998 and
fiscal 1997 was $2.8 million and $1.3 million, respectively. Cash provided by
operating activities for fiscal 1996 was $5.1 million. Net cash used
for/provided by operating activities has historically been driven by net income
levels combined with fluctuations in inventory and accounts payable. Inventory
levels have increased throughout these periods due to an increase in the number
of stores. Inventories at the end of fiscal 1998 were $37.0 million compared to
$27.9 million at the end of fiscal 1997, an increase of $9.1 million. The
Company's average store inventories vary throughout the year and increase in
advance of the peak selling periods of back-to-school and Christmas. The five
Eagles Nest stores acquired accounted for $1.6 million of the increase. The
remaining increase in inventory between December 27, 1997 and December 26, 1998
relates primarily to the opening of 37 new Track 'n Trail and Overland Trading
stores (net of closures) and increased inventory levels in six larger format
stores.
The Company had $25.1 million in working capital at the end of
fiscal 1998 compared to $21.9 million at the end of fiscal 1997, an increase of
$3.2 million. The increase in working capital is primarily attributable to an
increase in inventory due to a larger store base, which increase was partially
offset by the use of cash for the construction of 42 new stores and the
acquisition of Eagles Nest. The Company's working capital needs are somewhat
seasonal and typically peak in the second and fourth quarters. The peak in the
second quarter is due to the incurrence of operating losses in the first quarter
and increased inventory purchased for the Spring selling season. Working capital
needs peak in the fourth quarter due to increases in inventory in advance of the
holiday selling season, and payments coming due for back-to-school merchandise.
In addition, the Company requires incremental working capital to stock each new
store upon opening. Seasonally strong holiday sales at the end of the fourth
quarter, and relatively low first quarter inventory levels, typically reduce
working capital needs in the first quarter.
Capital expenditures excluding the cost of acquisitions were
$6.9 million, $2.3 million and $1.7 million in fiscal 1998, 1997, and 1996,
respectively. Capital expenditures for fiscal 1998 were primarily for the
build-out of 42 new stores, four of which are temporary locations to be
completed in 1999, the completion of four stores opened in 1997, the remodeling
of three stores, the relocation of three stores and the distribution facility,
and the full build-out of a store to be opened in the first quarter of 1999. An
additional $1.4 million of cash was used in 1998 for the acquisition of Eagles
Nest.
21
<PAGE>
During fiscal 1999, the Company plans to open approximately
eight new stores, complete the build-out of the four temporary stores opened in
fiscal 1998 and remodel 14 existing stores. In addition, the Company plans to
complete the capital improvements to the new distribution facility and upgrade
certain computer hardware and software. The Company estimates that total capital
expenditures in fiscal 1999 will be approximately $3.5 million.
The Company reviews the operating performance of its stores on
an ongoing basis to determine which stores, if any, to close. The Company closed
two stores in the first quarter of 1998 and closed three additional stores in
the third quarter. The Company anticipates closing seven stores in fiscal 1999.
Financing activities provided cash of $10.5 million and $5.0
million in fiscal 1998 and fiscal 1997, respectively. The Company used cash of
$2.7 million in financing activities in fiscal 1996. Net cash provided in fiscal
1998 is primarily attributable to additional borrowings under the Company's
revolving line of credit to fund working capital requirements and the
acquisition of Eagles Nest. Cash was also used from financing activities for the
early retirement of long-term debt. In fiscal 1997 the Company consummated its
initial public offering which generated $25 million in net proceeds. The
proceeds were utilized to repay all indebtedness then outstanding under the
Company's revolving credit facility ($10.2 million) and other debt totaling $7.5
million, and to make a $6.4 million distribution to the Pre-Offering
Stockholders.
In October 1998 the Company increased its revolving line of
credit availability to $20.0 million. Pursuant to the revised terms of the
credit facility, the Company has the right to convert as of October 11, 1999,
the date upon which the revolving line is scheduled to mature, up to $10.0
million of the revolving line to term debt with principal amortizing over a five
year term expiring on October 30, 2004. The Company's revolving line bears
interest at the option of the Company at either the bank's reference rate or the
London Inter-Bank Offered Rate plus 2%, and is collateralized by all of the
Company's assets. Of the $20.0 million available under this facility, up to $1.5
million may be allocated to letters of credit with durations of up to 180 days.
Advances under the revolving line are limited to 50% of eligible inventory,
subject to reduction by any amounts outstanding under letters of credit. The
credit facility prohibits the Company from paying dividends without the bank's
consent and limits the Company's capital expenditures to $4.0 million in 1999.
In addition, the credit facility requires the Company to meet certain financial
covenants, including minimum financial ratios and profitability tests. As of
December 26, 1998, $11.3 million was outstanding under the credit facility.
Management believes that operating cash flow and borrowing
under its credit facility will be sufficient to complete the Company's fiscal
1999 planned store expansions and to satisfy the Company's other capital
requirements through fiscal 1999. The Company's capital requirements may vary
significantly from those anticipated depending upon such factors as operating
results, the number and timing of new store openings, and the number and size of
any future acquisitions. When the term of the Company's current bank credit
facility expires, management believes that it will be able to either obtain an
extension to the Company's current revolving line of credit or obtain a new
credit facility.
As part of its growth strategy, the Company may, when
appropriate, pursue opportunities to acquire complementary businesses. To the
extent that the foregoing cash resources are insufficient to fund the purchase
price of future acquisitions, if any, or the operations of any acquired
business, additional external capital may be required. There can be no assurance
that additional financing will be available on reasonable terms or at all.
IMPACT OF INFLATION
Management does not believe that inflation has had a material
adverse effect on the Company's results of operations. However, the Company
cannot predict accurately the effect of inflation on future operating results.
YEAR 2000
The Year 2000 problem concerns the inability of some computer
programs to recognize a year that begins with "20" instead of the familiar "19".
For computer programs that were written using two digits instead of four to
define the applicable year, they may recognize a date using "00" as the year
1900 instead of the year 2000. Computer programs which are not Year 2000
compliant may fail or create erroneous results after December 31, 1999 (and in
some cases before), causing disruptions of operations, including, among other
things, a temporary inability to process transactions or send and receive
electronic data to or from third parties or engage in similar normal business
activities.
22
<PAGE>
STATE OF READINESS
The Company has developed a Year 2000 plan (the "Y2K Plan")
with the objective of having all of its information technology ("IT") systems
and non-IT systems functioning properly with respect to the Year 2000 by
December 31, 1999. The Y2K Plan consists of the following phases: 1) assess the
Year 2000 compliance of IT and non-IT systems and identify potential problems;
2) assign priorities to identified Year 2000 problems; 3) remediation; 4) test
IT and non-IT systems; and 5) develop contingency plans, including the
possibility of securing alternate sources of supplies and services, increasing
inventory and supply levels, and adjusting store and office staffing levels. The
Company defines IT systems as all applications, operating systems and hardware
on mainframe, PC or LAN platforms. Non-IT systems refer to systems with embedded
software or hardware that may have a time element. The Company has identified
three areas of focus for its Y2K Plan: corporate headquarters, store sites, and
"key" third parties (the "Third Parties"). Third Parties include suppliers,
vendors and service providers that are deemed to be critical to the Company's
business operations. All phases of the Y2K Plan are being applied to these three
areas.
An outside vendor provides the mainframe system software used
at the Company's corporate office. The software contains an operating system and
seven modules. The outside vendor has tested the operating system, merchandise,
accounts payable, sales audit, fixed assets and general ledger modules and
verified to the Company that such software is Year 2000 compliant. The Company
has received Year 2000 compliant upgrade software for the electronic data
exchange and report writing modules, and expects installation and testing to be
complete in second quarter 1999. The manufacturer of the mainframe hardware has
tested the hardware and advised the Company that it is Year 2000 compliant.
As of December 26, 1998, the Company had assessed approximately
75% of the personal computers at the corporate headquarters, of which
approximately 50% were found to be non-Year 2000 compliant. The Company expects
the remaining personal computers and non-IT systems will be assessed by the end
of second quarter 1999. Retrofitting and/or replacement and subsequent testing
of non-compliant systems is scheduled for the third quarter of 1999. The local
area network (LAN) software and hardware manufacturers have advised the Company
that the LAN software and hardware is Year 2000 compliant.
The Company utilizes software produced by an outside vendor for
its human resource and payroll functions. In the third quarter of 1998, the
outside vendor upgraded and tested both systems and verified to the Company that
they are Year 2000 compliant.
The Company has identified the systems most critical to ongoing
operations within the corporate headquarters category. Contingency planning for
this category began in third quarter 1998 and is scheduled for completion in
third quarter 1999.
The Company uses point of sale (POS) hardware and software
provided by an outside vendor at each of its Track 'n Trail and Overland stores
to record sales transactions. Eagles Nest was converted to the same POS system
in the first quarter of 1999. Of the Company's 192 stores, eleven require
hardware upgrades to become Year 2000 compliant as of the end of fiscal 1998.
Additionally, the Company expects to receive a Year 2000 compliant software
upgrade for its POS systems and expects to retrofit all of its stores with the
upgraded software version by the end of the second quarter of 1999. POS systems
for new stores, if any, will be installed with the upgraded version of the
software. Contingency planning for this category is scheduled to begin in the
first quarter of 1999 and is expected to be completed by the end of the second
quarter of 1999.
The Company has initiated formal communications with all Third
Parties to determine the extent to which the Company is vulnerable to a Third
Parties failure to remediate its own Year 2000 issues. To the extent that the
Company does not receive adequate assurances, it will develop contingency plans,
with completion of these plans scheduled for the end of the second quarter of
1999.
COSTS
The Company expects its costs associated with becoming Year
2000 compliant to be approximately $53,000, exclusive of system additions,
upgrades or replacements incurred in the normal course of business and assuming
that implementation of contingency plans will not be necessary. The Company
estimates that $21,000 of this amount will have been incurred repairing software
problems and $32,000 will have been incurred in connection with replacement of
problem
23
<PAGE>
systems and equipment. Costs incurred through December 26, 1998 have been
approximately $12,000. The remaining costs are expected to be incurred in the
first nine months of fiscal 1999. The Company does not separately track the
internal costs incurred for the Y2K Plan. Such internal costs are principally
related to the payroll of the Company's Management Information Systems
department. The Company's policy is to expense maintenance and modification
costs and capitalize hardware and software purchases and upgrades. The Company
intends to fund the foregoing from operating cash flow.
RISKS
The failure to correct a material Year 2000 problem could
result in an interruption in, or failure of, certain normal business activities
or operations of the Company. Such failures could materially and adversely
affect the Company's results of operations, liquidity and financial condition.
Because of the range of possible issues and large number of variables involved,
it is impossible to quantify the total potential cost of Year 2000 problems or
to determine the Company's worst- case scenario in the event the Company's Year
2000 remediation efforts or the efforts of those with whom it does business are
not successful. In order to deal with the uncertainty associated with the Year
2000 problem, the Company is developing contingency plans to address the
possibility that efforts to mitigate the Year 2000 risk are not successful
either in whole or part. These plans will include manual processing of
information for critical information technology systems, increasing store
staffing levels and inventory levels, identifying alternative suppliers and
increasing cash on hand. The contingency plans are expected to be completed by
the end of the second quarter of fiscal 1999, after which the appropriate
implementation training is scheduled to take place. The Company believes that,
upon completion of the Y2K Plan as scheduled, the possibility of material
interruptions of normal operations also should be substantially lowered. No
assurances can be given, however, that the Company may not suffer material
interruptions of normal operations, or that such interruptions, even after the
implementation of any contingency plans, will not have a material adverse
effect.
IMPACT OF RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board (FASB)
issued Statements of Financial Accounting Standard (SFAS) No. 133, ACCOUNTING
FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES, which requires that all
derivative instruments be recorded on the balance sheet at fair value, and that
changes in the fair value of the derivative instruments be recorded in net
earnings or comprehensive earnings. SFAS 133 must be adopted for fiscal years
beginning after June 15, 1999, with earlier adoption permitted. Management has
determined that adoption of SFAS 133 will not have a material impact on the
Company's consolidated financial statements.
ITEM 7a. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The market risk inherent in the Company's market risk
sensitivity instruments is the potential loss arising from adverse changes in
interest rates and foreign currency exchange rates. All financial instruments
held by the Company and described below are held for purposes other than
trading.
INTEREST RATE RISK
The Company's revolving line of credit exposes earnings to
changes in short-term interest rates since the interest rates on the revolving
line of credit are variable. If the variable rates on the Company's revolving
line of credit were to increase by 1% from the rate at December 26, 1998 and the
Company borrowed the maximum amount available under its revolving line of credit
($20.0 million) for all of fiscal 1999, solely as a result of the increase in
interest rates, the Company's interest expense would increase, resulting in a
$113,000 decrease in net income. The marginal income tax rate of 48.4% was used.
This analysis does not consider the effects of the reduced level of overall
economic activity that could exist in such an environment. Further, in the event
of a change of such magnitude, management would likely take actions to further
mitigate its exposure to the change. The fair value of the Company's revolving
line of credit is not affected by changes in market interest rates.
FOREIGN EXCHANGE RISK
The Company typically does not hedge its foreign currency
exposure. Management does not believe its exposure to foreign currency rate
fluctuations to be material.
24
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
<S> <C>
Report of independent accountants. 26
Consolidated balance sheets as of December 26, 1998
and December 27, 1997. 27
Consolidated statements of income for each of the three fiscal
years in the period ended December 26, 1998. 28
Consolidated statements of changes in stockholders' equity for
each of the three fiscal years in the period ended December 26, 1998. 29
Consolidated statements of cash flows for each of the three fiscal
years in the period ended December 26, 1998. 30
Notes to financial statements. 31
</TABLE>
25
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders
Track 'n Trail and Subsidiaries
El Dorado Hills, California
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of income, stockholders' equity and cash flows
present fairly, in all material respects, the financial position of Track 'n
Trail and its subsidiaries at December 26, 1998 and December 27, 1997, and
the results of their operations and their cash flows for each of the fiscal
years ended December 26, 1998, December 27, 1997 and December 28, 1996, in
conformity with generally accepted accounting principles. These financial
statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based
on our audits. We conducted our audits in accordance with generally accepted
auditing standards which 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, assessing
the accounting principles used and significant estimates made by management,
and evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for the opinion expressed above.
/s/PricewaterhouseCoopers LLP
Sacramento, California
February 11, 1999
26
<PAGE>
TRACK 'N TRAIL AND
SUBSIDIARIES
REPORT ON AUDITS OF FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 26, 1998
AND DECEMBER 27, 1997
<PAGE>
TRACK 'N TRAIL AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
DECEMBER 26, DECEMBER 27,
ASSETS 1998 1997
------------ ------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 1,808 $ 2,383
Accounts receivable 2,510 1,540
Income taxes receivable 130 -
Inventories 36,998 27,852
Prepaid expenses 432 311
Deferred income taxes 675 317
------------ ------------
Total current assets 42,553 32,403
Fixed assets, net 11,849 7,284
Goodwill, net 4,852 3,084
Deferred income taxes 2,025 1,362
------------ ------------
Total assets $ 61,279 $ 44,133
------------ ------------
------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 1,746 $ 116
Accounts payable 12,481 6,958
Accrued payroll and bonuses 561 668
Sales tax payable 952 874
Income taxes payable 687 1,089
Accrued expenses and other liabilities 1,010 802
------------ ------------
Total current liabilities 17,437 10,507
Deferred rent 1,540 1,424
Long-term debt, net of current portion 9,764 120
------------ ------------
Total liabilities 28,741 12,051
------------ ------------
Commitments and contingencies (Notes 4, 7 and 13)
Stockholders' equity:
Preferred stock, $0.01 par value; 2,000,000 shares
authorized; no shares issued or outstanding - -
Common stock, $0.01 par value; 20,000,000 shares
authorized; 6,851,961 and 6,839,811 shares issued
and outstanding at December 26, 1998 and
December 27, 1997, respectively 69 68
Additional paid-in capital 25,831 25,772
Retained earnings 6,638 6,242
------------ ------------
Total stockholders' equity 32,538 32,082
------------ ------------
Total liabilities and stockholders' equity $ 61,279 $ 44,133
------------ ------------
------------ ------------
</TABLE>
The accompanying notes are an intergral part of the financial statements.
27
<PAGE>
TRACK 'N TRAIL AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (IN THOUSANDS, EXCEPT SHARE DATA)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
-----------------------------------------------------------
DECEMBER 26, DECEMBER 27, DECEMBER 28,
1998 1997 1996
------------------ ------------------ -------------------
<S> <C> <C> <C>
Net sales $ 99,851 $ 91,834 $ 66,233
Cost of sales 53,615 47,677 34,062
------------------ ------------------ -------------------
Gross profit 46,236 44,157 32,171
------------------ ------------------ -------------------
Operating expenses:
Selling and marketing 37,186 30,780 21,060
Administrative and distribution 7,741 6,840 5,508
------------------ ------------------ -------------------
Total operating expenses 44,927 37,620 26,568
------------------ ------------------ -------------------
Operating income 1,309 6,537 5,603
Other (income) expenses:
Interest expense 369 1,260 670
Other, net 173 (21) (24)
------------------ ------------------ -------------------
Income before provision for income taxes
and minority interest 767 5,298 4,957
Income tax provision 371 118 488
------------------ ------------------ -------------------
Income before minority interest 396 5,180 4,469
Minority interest in net income of consolidated
subsidiaries - - 105
------------------ ------------------ -------------------
Net income $ 396 $ 5,180 $ 4,364
------------------ ------------------ -------------------
------------------ ------------------ -------------------
Historical earnings per share:
Basic $ 0.06 $ 1.10 $ 1.06
------------------ ------------------ -------------------
------------------ ------------------ -------------------
Diluted $ 0.06 $ 1.03 $ 1.04
------------------ ------------------ -------------------
------------------ ------------------ -------------------
Pro forma income data (unaudited):
Historical income before income
taxes and minority interest $ 5,298 $ 4,957
Pro forma income tax provision 2,119 1,983
------------------ -------------------
Pro forma income before minority interest 3,179 2,974
Minority interest - 105
------------------ -------------------
Pro forma net income $ 3,179 $ 2,869
------------------ -------------------
------------------ -------------------
Pro forma earnings per share:
Basic $ 0.68 $ 0.70
------------------ -------------------
------------------ -------------------
Diluted $ 0.58 $ 0.57
------------------ -------------------
------------------ -------------------
</TABLE>
The accompanying notes are an intergral part of the financial statements.
28
<PAGE>
TRACK 'N TRAIL AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (IN THOUSANDS,
EXCEPT SHARE DATA)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
NOTES
RECEIVABLE
COMMON STOCK ADDITIONAL FROM
----------------------- PAID-IN RELATED RETAINED
NUMBER AMOUNT CAPITAL PARTIES EARNINGS TOTAL
--------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 30, 1995 4,107,608 $ 41 $ 24 $ (1,069) $ 8,652 $ 7,648
Cash advances to stockholders - - - (591) - (591)
Distribution of notes to stockholders - - - 1,660 (1,660) -
Distributions to stockholders - - - - (1,475) (1,475)
Exchange of stock appreciation rights
for stock option grants - - 597 - - 597
Compensation recorded under stock
option plans - - 103 - - 103
Net income - - - - 4,364 4,364
--------- ----------- ----------- ----------- ----------- -----------
BALANCE, DECEMBER 28, 1996 4,107,608 41 724 - 9,881 10,646
Issuance of common stock upon
initial public offering, net of
offering costs of $3,649 2,727,272 27 24,961 - - 24,988
Issuance of common stock upon
exercise of options 4,931 - 20 - - 20
Distributions to stockholders - - - - (8,819) (8,819)
Compensation recorded under stock
option plans - - 67 - - 67
Net income - - - - 5,180 5,180
--------- ----------- ----------- ----------- ----------- -----------
BALANCE, DECEMBER 27, 1997 6,839,811 68 25,772 - 6,242 32,082
Issuance of common stock under the
employee stock purchase plan 12,150 1 59 - - 60
Net income - - - - 396 396
--------- ----------- ----------- ----------- ----------- -----------
BALANCE, DECEMBER 26, 1998 6,851,961 $ 69 $ 25,831 $ - $ 6,638 $ 32,538
--------- ----------- ----------- ----------- ----------- -----------
--------- ----------- ----------- ----------- ----------- -----------
</TABLE>
The accompanying notes are an intergral part of the financial statements.
29
<PAGE>
TRACK 'N TRAIL AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 396 $ 5,180 $ 4,364
Adjustments to reconcile to cash (used for)
provided by operating activities:
Depreciation and amortization 2,119 1,743 1,121
Loss on disposal of fixed assets 122 - -
Minority interest - - 105
Compensation recorded in connection
with stock option plans - 67 103
Deferred income taxes (408) (1,161) 81
Cash provided by (used for) changes in
operating assets and liabilities, net of
effects of business combinations:
Accounts receivable (384) (530) (375)
Income taxes receivable (130) - -
Inventories (7,946) (7,984) (1,008)
Prepaid expenses (104) (99) 88
Accounts payable and accrued liabilities 3,916 831 293
Income taxes payable (402) 613 291
Deferred rent 64 29 42
-------- -------- --------
Cash (used for) provided by operating activities (2,757) (1,311) 5,105
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of fixed assets (6,942) (2,306) (1,721)
Proceeds from sale of fixed assets - 27 -
Cash paid for business combinations (1,401) - (240)
-------- -------- --------
Cash used for investing activities (8,343) (2,279) (1,961)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Bank line of credit:
Borrowings 48,431 44,819 31,154
Repayments (37,732) (45,499) (33,484)
Other long-term debt:
Borrowings - - 2,487
Repayments (960) (10,513) (747)
Book overdraft 726 - -
Advances to related parties under notes receivable - - (591)
Net proceeds from issuance of common stock 60 24,988 -
Proceeds from exercise of stock options - 20 -
Payment of distributions to stockholders - (8,819) (1,475)
-------- -------- --------
Cash provided by (used for) financing activities 10,525 4,996 (2,656)
-------- -------- --------
(Decrease) increase in cash and cash equivalents (575) 1,406 488
Cash and cash equivalents, beginning of year 2,383 977 489
-------- -------- --------
Cash and cash equivalents, end of year $ 1,808 $ 2,383 $ 977
-------- -------- --------
-------- -------- --------
</TABLE>
The accompanying notes are an integral part of the financial statements.
30
<PAGE>
TRACK 'N TRAIL AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
1. SIGNIFICANT ACCOUNTING POLICIES
BACKGROUND
Track n' Trail, a Delaware corporation (Company), is a retailer of
footwear, apparel and related accessories. As of December 26, 1998 and
December 27, 1997, the Company operated 192 and 150 stores in 36 and 29
states, respectively, under the Track `n Trail, Overland Trading and Eagles
Nest names. Each Track `n Trail and Overland Trading store offers a wide
range of rugged walking and fashion casual shoes, sandals and boots. Each
Eagles Nest store offers premium outdoor apparel and footwear.
The Company ends its fiscal year on the last Saturday in December.
The Company is the successor to businesses formerly conducted by Track 'n
Trail, a California corporation (Track 'n Trail-California), and its
subsidiary, Overland Management Corporation (Overland). In connection with
the formation of the Company, the Company issued an aggregate of 40,816
shares of its common stock to existing stockholders of Track 'n
Trail-California. A reorganization of Track 'n Trail-California (the
Reorganization) was effected on October 7, 1997, in which the Track 'n
Trail-California stockholders exchanged 100% of their Track 'n
Trail-California common stock for 4,107,608 shares of the Company's common
stock, inclusive of the 40,816 shares of the Company's common stock issued
upon formation. The Reorganization, which was accounted for in a manner
similar to a pooling-of-interests, was accomplished in an exchange of
approximately 100 shares of the Company's common stock for each share of
Track 'n Trail-California common stock. In connection with the
Reorganization, all of the common stock of Overland was transferred to the
Company in the form of a dividend resulting in the predecessor businesses
being wholly owned subsidiaries of the Company. The accompanying financial
statements reflect, for all periods presented prior to the Reorganization,
the capital structure and number of shares outstanding resulting from the
Reorganization. Accordingly, all references to the number of common and
common equivalent shares and to per share information in the consolidated
financial statements have been adjusted to reflect the capital structure
resulting from the Reorganization on a retroactive basis for all periods
presented.
The Company operates in a single business segment of retailing. The Company
acquires its merchandise from a number of manufacturers; however, during
the fiscal years ended December 26, 1998 and December 27, 1997, 44.8% and
42.9%, respectively, of the Company's net sales were related to merchandise
purchased from three manufacturers.
INITIAL PUBLIC OFFERING
On October 16, 1997, the Company completed its initial public offering
(Offering) of its common stock. In connection with the Offering, the
Company issued 2,727,272 shares of common stock and received net proceeds
of $24,988,000, net of underwriting discounts and offering expenses.
Upon closing of the Offering, the Company's nonqualified and incentive
stock options vested, resulting in a non-cash compensation charge reducing
net income by $33,000, after the related income tax effect of $22,000.
Certain notes payable, which had an aggregate balance of approximately
$17.7 million at the date of the Offering became due and payable upon
closing of the Offering. The Company used a portion of its proceeds of the
Offering to retire these obligations.
31
<PAGE>
During 1997, Track 'n Trail-California declared distributions to its
stockholders of substantially all previously undistributed accumulated S
corporation earnings remaining at the date of the Reorganization. Of such
distributions, $6,400,000 were paid from a portion of the Company's
proceeds from the Offering.
PRINCIPLES OF CONSOLIDATION
The financial statements include the consolidated accounts of the Company
and its three subsidiaries, Track 'n Trail-California, Overland and Nevin's
Eagles Nest, Inc. (Eagles Nest). Overland became a 79.0% owned subsidiary
on October 25, 1996, and a wholly owned subsidiary effective January 1,
1997 and Eagles Nest became a wholly owned subsidiary on August 26, 1998.
All intercompany transactions and balances have been eliminated in
consolidation.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include cash balances and all highly liquid
investments with an original maturity of three months or less at the date
of purchase. Cash deposits periodically exceed the Federal Deposit
Insurance Corporation insured limit of $100,000 for each account.
In the ordinary course of business the Company periodically has outstanding
checks in excess of its bank balance (book overdraft). At December 26,
1998, the Company had book overdrafts of $726,000, which are included in
accounts payable.
INVENTORIES
Inventories are stated at lower of cost (retail method) or market.
FIXED ASSETS
Fixed assets are stated at cost and depreciated on the straight-line method
over the assets' estimated useful lives ranging from three to ten years;
the cost of leasehold improvements are amortized over the shorter of the
lease term or useful life of the related assets. When assets are retired or
otherwise disposed of, the cost and related accumulated depreciation are
removed from the accounts and any resulting gain or loss is reflected in
income for the period. The cost of maintenance and repairs is charged to
income as incurred; significant renewals and betterments are capitalized.
STORE PRE-OPENING COSTS
Costs of a noncapital nature incurred prior to store openings are expensed
as incurred.
GOODWILL
Goodwill represents the excess of the purchase price over the fair value of
the net assets of acquired companies and is being amortized using the
straight-line method over 20 years.
MINORITY INTEREST
Minority interest represents the minority stockholders' proportionate share
of the equity of Overland, including their share of Overland's net income
during the period from October 25, 1996 to December 28, 1996. At December
28, 1996, Track 'n Trail-California owned 79.0% of the common stock of
Overland and Track 'n Trail-California's stockholders owned the 21.0%
minority interest. Effective January 1, 1997, Track 'n Trail-California
acquired the remaining 21.0% interest in Overland.
32
<PAGE>
INCOME TAXES
The Company accounts for income taxes under the provisions of Statement of
Financial Accounting Standards (SFAS) No. 109, Accounting for Income Taxes,
using the liability method. The estimated future tax effect of differences
between the basis in assets and liabilities for tax and accounting purposes
is accounted for as deferred taxes. In accordance with the provisions of
SFAS No. 109, a valuation allowance would be established to reduce deferred
tax assets if it were more likely than not that all, or some portion, of
such deferred tax assets would not be realized. No allowance against
deferred tax assets was provided as of December 26, 1998 or December 27,
1997.
Commencing June 28, 1992, and until the Reorganization on October 7, 1997,
Track 'n Trail-California had elected S corporation status for federal
income taxes and most state income taxes while Overland operated as a C
corporation for federal and state income tax purposes. Under S corporation
status, Track 'n Trail-California's income, other than that of Overland,
was taxable to its stockholders personally, with only minimal state income
taxes charged to Track 'n Trail-California. Upon completion of the
Reorganization in October 1997, Track 'n Trail-California converted from an
S corporation to a C corporation under provisions of the Internal Revenue
Code and state statutes and, accordingly, became subject to federal and
state income tax on all of its income. Upon termination of the S
corporation election, deferred income taxes of $1,324,000, representing the
net tax effect of differences between Track 'n Trail-California's financial
statement and tax bases in certain assets and liabilities, became a net
asset and was included in the consolidated balance sheet with a
corresponding non-recurring decrease in tax expense in the consolidated
statement of operations as of the date of the Reorganization. Such deferred
tax assets relate primarily to differences in the financial statement and
tax bases of fixed assets and inventory and the effect of rent and stock
compensation plan deductions for accounting, but not tax, purposes.
Pro forma net income (unaudited) for 1997 and 1996 has been computed to
include a provision for income taxes at an effective tax rate of 40.0%
representing management's estimate of the effective tax rate as if the
Reorganization had been in effect and Track 'n Trail-California had been a
C corporation for all periods presented.
STOCK OPTIONS
As permitted by SFAS No. 123, Accounting for Stock-Based Compensation, the
Company has elected to measure and record compensation costs relative to
employee stock option and purchase plans in accordance with the provisions
of Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock
Issued to Employees, and make pro forma disclosure of net income and
earnings per share as if the fair value based method of valuing stock
options had been applied.
RENT EXPENSE
Rent expense is recognized on a straight-line basis over the respective
lease term. Rents accrued but not contractually due are reported as
deferred rent. Contingent rental expense, based on store sales, is
recognized when incurred.
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 amount of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
33
<PAGE>
2. EARNINGS PER SHARE
A reconciliation of the numerators and denominators used in the computation
of basic and diluted earnings per share is as follows (in thousands, except
per share information):
<TABLE>
<CAPTION>
HISTORICAL EARNINGS PER SHARE
--------------------------------------
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Income available to common stockholders
(net income) for basic and diluted
earnings per share $ 396 $ 5,180 $ 4,364
---------- ---------- ----------
---------- ---------- ----------
Weighted average shares for basic 6,847 4,700 4,108
earnings per share
Dilutive effect of stock options
(treasury stock method) 307 327 94
---------- ---------- ----------
Weighted average shares for
diluted earnings per share 7,154 5,027 4,202
---------- ---------- ----------
---------- ---------- ----------
Historical earnings per share:
Basic $ 0.06 $ 1.10 $ 1.06
---------- ---------- ----------
---------- ---------- ----------
Diluted $ 0.06 $ 1.03 $ 1.04
---------- ---------- ----------
---------- ---------- ----------
<CAPTION>
PRO FORMA EARNINGS
PER SHARE (UNAUDITED)
----------------------------
1997 1996
------------ ------------
<S> <C> <C>
Income available to common stockholders
(pro forma net income) for basic and
diluted earnings per share $ 3,179 $ 2,869
------------ ------------
------------ ------------
Weighted average shares for
basic earnings per share 4,700 4,108
Dilutive effect of stock options
(treasury stock method) 327 94
Distribution shares 421 828
------------ ------------
Weighted average shares for diluted
earnings per share 5,448 5,030
------------ ------------
------------ ------------
Pro forma earnings per share:
Basic $ 0.68 $ 0.70
------------ ------------
------------ ------------
Diluted $ 0.58 $ 0.57
------------ ------------
------------ ------------
</TABLE>
All warrants outstanding and certain options with exercise prices in excess
of market value were not dilutive and, accordingly, were not included in
the weighted average number of common and common equivalent shares
outstanding.
34
<PAGE>
In applying the treasury stock method for determining the dilution
applicable to stock options outstanding, the incremental shares assumed
issued (excess of shares assumed issued over the number of shares assumed
purchased) were determined using the sum of exercise proceeds, future
compensation and tax benefit to the Company upon exercise of the options as
the assumed proceeds that would have been used to purchase shares at the
average value during the period. Average market value was based on
estimated fair values for periods prior to the Offering and market prices
thereafter.
Distribution shares included in weighted average common shares outstanding
used to compute pro forma diluted earnings per share (unaudited) for fiscal
1997 represents the weighted number of shares of common stock sold in the
Offering, the net proceeds of which were necessary to pay the excess of S
corporation distributions paid or declared during the twelve month period
preceding the Offering over earnings during the twelve month period
preceding the Offering. Distribution shares included in the computation of
pro forma diluted earnings per share (unaudited) for fiscal 1996 represents
the number of shares of common stock sold in the Offering, the proceeds of
which would be necessary to pay the excess of S corporation distributions
paid or declared during fiscal 1996 and thereafter until the consummation
of the Offering over earnings during fiscal 1996.
3. FIXED ASSETS
Fixed assets consist of (in thousands):
<TABLE>
<CAPTION>
DECEMBER 26, DECEMBER 27,
1998 1997
------------- -------------
<S> <C> <C>
Leasehold improvements $ 11,814 $ 8,645
Furniture, fixtures and equipment 5,736 4,493
------------- -------------
17,550 13,138
Less accumulated depreciation (5,701) (5,854)
------------- -------------
Fixed assets, net $ 11,849 $ 7,284
------------- -------------
------------- -------------
</TABLE>
Depreciation expense for fiscal years 1998, 1997 and 1996, was $1,922,000,
$1,579,000, and $1,098,000, respectively.
During 1998, the Company recorded an impairment write-down for assets of
closed stores and stores planned to be closed. Such adjustments resulted in
a loss of approximately $122,000 consisting of a reduction of cost of
$2,205,000 and a reduction of accumulated depreciation of $2,083,000.
35
<PAGE>
4. LONG-TERM DEBT
Long-term debt consists of (in thousands):
<TABLE>
<CAPTION>
DECEMBER 26, DECEMBER 27,
1998 1997
------------------- -------------------
<S> <C> <C>
Revolving Line of credit $ 11,299 $ -
Promissory note, interest at 9.36%, collateralized
by leasehold improvements, due 2000 99 162
Payable to sellers of Eagles
Nest, due 1999 100 -
Construction notes to store lessors, repaid
in 1998 - 74
Capital lease, final payment due 2002 12 -
------------------- -------------------
Total 11,510 236
Less current portion (1,746) (116)
------------------- -------------------
Long-term portion $ 9,764 $ 120
------------------- -------------------
------------------- -------------------
</TABLE>
In 1997, the Company had a revolving loan agreement which was paid in full
from a portion of the proceeds of the Offering. Upon the consummation of
the Offering, the Company obtained a $10.0 million revolving line of credit
(Revolving Line) from a bank.
In October 1998, the Company obtained an amendment (October 1998 Amendment)
to the Revolving Line. The October 1998 Amendment increased the Revolving
Line to $20.0 million, including $1.5 million in letters of credit (of
which $550,000 were issued at December 26, 1998), and limited borrowings
and letters of credit to a percentage of eligible inventory. The October
1998 Amendment also granted the Company the right to convert as of October
11, 1999, the date upon which the Revolving Line is scheduled to mature, up
to $10.0 million of the Revolving Line to term debt with principal
amortizing over a five year term expiring on October 30, 2004. As the
Company intends to either obtain an extension of the Revolving Line or
convert $10.0 million to a term note, $9.7 million ($10.0 million less
principal due on the term note in 1999) of the amount outstanding on the
Revolving Line at December 26, 1998, has been classified as a noncurrent
liability.
Available additional borrowings or letters of credit under the Revolving
Line were approximately $6.9 million at December 26, 1998. Borrowings under
the Revolving Line are collateralized by substantially all of the Company's
assets.
The Revolving Line bears interest, at the option of the Company, at either
the bank's reference rate (7.75% at December 26, 1998) or LIBOR (5.63% at
December 26, 1998), plus 2.0%, payable monthly, plus an annual commitment
fee of $75,000. The weighted average interest rates for fiscal years 1998,
1997 and 1996, were 7.99%, 8.94% and 8.77%, respectively.
The Revolving Line requires the Company to meet certain financial covenants
including minimum earnings before income taxes, depreciation and
amortization (EBITDA), and limits on dividends and acquisitions of capital
assets. Such covenants were amended as part of the October 1998 Amendment,
and were further amended in December 1998.
36
<PAGE>
Scheduled maturities of long-term debt (assuming $10.0 million of the
Revolving Line is converted to term debt at October 1999) at December 26,
1998, are as follows (in thousands):
<TABLE>
<S> <C>
1999 $ 1,746
2000 1,760
2001 1,868
2002 2,015
2003 2,175
Thereafter 1,946
------------
Total $ 11,510
------------
------------
</TABLE>
5. STOCK OPTION AND PURCHASE PLANS
STOCK APPRECIATION RIGHTS
Until canceled on July 1, 1996, the Company had granted stock appreciation
rights to certain key employees, which were measured and were vesting over
the period from 1992 to 1997. Under the agreements, the employees were to
receive certain percentages of appreciation of the Company's capital stock
during the measurement period based on agreed-upon appreciation measurement
methodologies. Compensation expense was accrued over the term of the
agreements for the cost of the stock appreciation rights.
The stock appreciation rights were canceled on July 1, 1996, in exchange
for grants of nonqualified options under the Company's 1996 Stock Option
Plan, as described below. The accrued liability at the date of cancellation
in connection with compensation previously recognized under the stock
appreciation rights was offset against total compensation inherent in the
nonqualified stock options granted.
STOCK OPTION PLAN
In June 1996, Track 'n Trail-California stockholders approved the adoption
of the 1996 Stock Option Plan (Plan). Effective upon the Reorganization,
the Company assumed the Plan and, effective as of the date of the Offering,
amended and restated the Plan. Upon the Reorganization, options to purchase
shares of the Company's common stock were exchanged for all stock options
then outstanding pursuant to the Plan to purchase shares of the common
stock of Track 'n Trail-California. The terms and conditions of the options
exchanged were equivalent. A total of 1,055,735 shares of common stock are
reserved for issuance under the Plan.
The Plan provides for the granting of nonstatutory stock options (NSOs) to
employees, directors, consultants and advisors of the Company. The Plan
also provides for the granting of incentive stock options (ISOs) to
employees. The Plan provides for formula grants to non-employee directors
of the Company (Outside Directors). Each such Outside Director
automatically received NSOs to purchase 5,000 shares of common stock upon
their initial appointment as an Outside Director and, upon each annual
meeting of stockholders after their initial appointment, is entitled to
receive NSOs to purchase 1,250 shares (unless the Outside Director was
appointed prior to such a meeting, in which case the annual grant will
occur at the second annual meeting following the initial appointment). The
Plan provides that the option exercise price for ISOs and Outside Director
options must be at least equal to 100% of the fair market value of the
common stock on the date of grant. Options will have exercise and vesting
terms as determined at the date of the grant by a compensation committee of
the
37
<PAGE>
Company's board of directors; however, the options must have exercise and
vesting terms of no more than ten years from the date of grant.
The following is a summary of the activity in stock options granted during
the fiscal years ended December 26, 1998, December 27, 1997 and December
28, 1996:
<TABLE>
<CAPTION>
INCENTIVE STOCK NONQUALIFIED STOCK
OPTIONS OPTIONS
------------------------- --------------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
EXERCISE EXERCISE
SHARES PRICE SHARES PRICE
------------- ---------- -------------- ----------
<S> <C> <C> <C> <C>
Outstanding as of December 30, 1995 - $ - - $ -
Granted 501,168 4.00 350,618 0.01
------------- --------------
------------- --------------
Outstanding as of December 28, 1996 501,168 4.00 350,618 0.01
Granted - - 10,000 9.75
Cancelled (20,127) 4.00 - -
Exercised (4,931) 4.00 - -
------------- --------------
Outstanding as of December 27, 1997 476,110 4.00 360,618 0.28
Granted 40,000 9.75 - -
------------- --------------
Outstanding as of December 26, 1998 516,110 $ 4.45 360,618 $ 0.28
------------- ---------- -------------- ----------
------------- ---------- -------------- ----------
Options exercisable as of December 26, 1998 476,110 $ 4.00 353,118 $ 0.08
------------- ---------- -------------- ----------
------------- ---------- -------------- ----------
Options exercisable as of December 27, 1997 476,110 $ 4.00 350,618 $ 0.01
------------- ---------- -------------- ----------
------------- ---------- -------------- ----------
</TABLE>
The weighted average remaining contractual life of all options outstanding at
December 26, 1998, was:
<TABLE>
<CAPTION>
INCENTIVE STOCK NONQUALIFIED STOCK
OPTIONS OPTIONS
----------------------- ----------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
REMAINING REMAINING
CONTRACTUAL CONTRACTUAL
EXERCISE LIFE EXERCISE LIFE
PRICE (IN YEARS) PRICE (IN YEARS)
-------- ------------- ------- -------------
<S> <C> <C> <C>
$ 4.00 7.5 $ 0.01 7.5
$ 9.75 4.9 $ 9.75 8.8
</TABLE>
ISOs for 100,228 shares vested on December 15, 1996, and an additional
380,813 shares vested upon the Offering. ISOs granted in 1998 for 40,000
shares vest at a rate of 20% per year. No compensation resulted from the
grant of ISOs in fiscal 1996 or fiscal 1998.
38
<PAGE>
NSOs for 177,825 shares vested upon grant, 34,558 shares vested on December
15, 1996, and an additional 138,235 shares vested upon the Offering. The
remaining NSOs for 10,000 shares (granted to the Outside Directors upon
appointment) vest prorata over four years.
The excess of the fair value of common stock at the date of the grant over
the exercise price of the NSOs represents the per share compensation of the
NSOs that is recorded as compensation and as an increase in additional
paid-in capital when the stock options vest. A one-time increase in
additional paid-in capital of $597,000 was recorded in 1996 for the
liability that was eliminated upon exchange of the stock appreciation
rights for NSOs.
Compensation expense recognized for stock compensation awards, including
stock appreciation rights, amounted to $0, $67,000 and $116,000 during the
1998, 1997 and 1996 fiscal years, respectively.
EMPLOYEE STOCK PURCHASE PLAN
In April 1997, the Company adopted the Employee Stock Purchase Plan
(Purchase Plan) effective as of the closing of the Offering. The Purchase
Plan covers an aggregate of 150,000 shares of common stock and is intended
to qualify as an employee stock purchase plan within the meaning of Section
423 of the Internal Revenue Code. The plan administrator, appointed by the
Company's board of directors, may authorize participation by eligible
employees, including officers, in periodic Purchase Plan offerings. Under
its terms, the board of directors may amend, modify or terminate the
Purchase Plan at any time without notice.
Substantially all full-time (as defined) employees with at least one year
service prior to the commencement of the participation period are eligible
to participate in the Purchase Plan; however, any highly compensated
employee (as defined) who owns 3.0% or more of the outstanding stock in the
Company may not participate in the Purchase Plan. Employees who participate
in a Purchase Plan offering may have a percentage of their earnings (as
established by the plan administrator) withheld pursuant to the Purchase
Plan. The amount withheld will be used to purchase shares of common stock
on dates specified by the board at a price that will be equal to 85.0% of
the lesser of the fair market value of the common stock at the commencement
of each Purchase Plan offering period or at the relevant purchase date.
Employees may end their participation in a Purchase Plan offering at any
time during the Purchase Plan offering period except as provided under the
terms of the Purchase Plan offering. Participation ends automatically on
termination of employment with the Company.
The initial Purchase Plan offering commenced in October 1997 and terminated
on December 31, 1997. Two additional Purchase Plan offerings plans
commenced, the first on January 1, 1998, and the second on July 1, 1998,
and terminated on June 30, 1998 and December 30, 1998, respectively.
Another Purchase Plan offering commenced January 1, 1999, and will
terminate no later than December 31, 2000. As of December 26, 1998, and
December 27, 1997, 12,150 and -0-shares had been issued under the Purchase
Plan, respectively. In January 1999, 13,938 shares of common stock were
issued pursuant to the Purchase Plan for $24,000.
PRO FORMA RESULTS OF OPERATIONS
The weighted-average, grant-date fair value, computed in accordance with
the measurement provisions of SFAS No. 123, Accounting for Stock-Based
Compensation, of all options granted during fiscal 1998, 1997 and 1996, net
of the liability recorded in 1996 in connection with stock appreciation
rights canceled in exchange for the NSOs, was $95,000, $61,000 and
$170,000,
39
<PAGE>
respectively. The weighted average, grant-date fair value was estimated in
fiscal 1998, 1997 and 1996, respectively, assuming risk-free interest rates
of 5.22%, 5.97% and 6.49%, an expected life of five years, expected
volatility of 61.4% for 1998, 55.0% for 1997, and no expected volatility
for l996 as the Company had no trading record and no expected dividends.
Results of operations, computed on a pro forma basis to assume that the
measurement provisions of SFAS No. 123 had been adopted, would have been
the same as the results of operations, as reported, for fiscal year 1996,
and as follows for fiscal 1998 and 1997 (in thousands, except per share
information):
<TABLE>
<CAPTION>
1998 1997
-------------------------- -----------------------
AS REPORTED PRO FORMA AS REPORTED PRO FORMA
------------ ------------ ---------- ---------
<S> <C> <C> <C> <C>
Net income $ 396 $ 377 $ 5,180 $ 5,173
------------ ------------ ---------- ---------
------------ ------------ ---------- ---------
Pro forma net income, as though a
C corporation $ 3,179 $ 3,173
---------- ---------
---------- ---------
Historical earnings per share:
Basic earnings per share $ 0.06 $ 0.06 $ 1.10 $ 1.10
------------ ------------ ---------- ---------
------------ ------------ ---------- ---------
Diluted earnings per share $ 0.06 $ 0.05 $ 1.03 $ 1.03
------------ ------------ ---------- ---------
------------ ------------ ---------- ---------
Pro forma earnings per share, as though a C corporation:
Basic earnings per share $ 0.68 $ 0.68
---------- ---------
---------- ---------
Diluted earnings per share $ 0.58 $ 0.58
---------- ---------
---------- ---------
</TABLE>
6. NOTES RECEIVABLE FROM RELATED PARTIES
Notes receivable from related parties at December 30, 1995, consisted of
$1,036,000 in stockholder demand notes and $33,000 in related party demand
notes. The balance was distributed to the stockholders in 1996 along with
additional notes of $591,000 related to advances made to such parties in
1996.
40
<PAGE>
7. LEASE COMMITMENTS
The Company operates its stores, main office and warehouse from facilities
under operating lease agreements which expire at various dates through
2010. The store leases require minimum annual rentals plus, in some cases,
periodic increases stipulated in the lease agreements (fixed amounts or
percentages, in some cases, and increases indexed to consumer price
increases, in other cases). Some leases also provide for contingent rentals
based on sales. The Company is generally responsible for maintenance,
insurance and property taxes. At December 26, 1998, future minimum lease
payments under all noncancelable leases are as follows (in thousands):
<TABLE>
<CAPTION>
<S> <C>
1999 $ 12,261
2000 11,340
2001 11,030
2002 10,836
2003 10,190
Thereafter 30,892
-------------
Total $ 86,549
-------------
-------------
</TABLE>
Rent expense was $11,293,000, $8,912,000, and $6,160,000 during fiscal
years 1998, 1997 and 1996, including contingent rentals of $62,000,
$119,000, and $123,000, respectively.
8. EMPLOYEE BENEFIT PLAN
The Company has a 401(k) profit-sharing plan for the benefit of employees
who meet certain eligibility requirements. Participants may make tax
deferred contributions of up to 15% of earned income, limited to the
maximum allowed under the Internal Revenue Code. Employer contributions
match at least 50% of participant contributions to a maximum of 4% of
earned income. Employee contributions vest immediately. Employer
contributions vest based on years of employment with the Company, with full
vesting in five years. The profit-sharing expense was $61,000, $81,000, and
$50,000 in fiscal years 1998, 1997 and 1996, respectively.
41
<PAGE>
9. INCOME TAXES
The provision for income taxes consists of (in thousands)
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
-----------------------------------------------------------
DECEMBER 26, DECEMBER 27, DECEMBER 28,
1998 1997 1996
------------------ ------------------ ------------------
<S> <C> <C> <C>
Currently payable:
Federal $ 525 $ 1,264 $ 282
State 254 15 125
Deferred:
Federal (351) (13) 56
State (57) 176 25
Net deferred tax assets recorded
upon change in tax status from
S corporation to C corporation - (1,324) -
------------------ ------------------ ------------------
$ 371 $ 118 $ 488
------------------ ------------------ ------------------
------------------ ------------------ ------------------
</TABLE>
The components of deferred income taxes are (in thousands):
<TABLE>
<CAPTION>
DECEMBER 26, DECEMBER 27,
1998 1997
------------- --------------
<S> <C> <C>
Depreciation $ 1,149 $ 860
Inventory - Uniform capitalization 337 253
Inventory - method change 131 32
Stock compensation programs 240 248
Deferred rent and other accrued liabilities 484 362
Net operating loss carryforward 436 -
Federal effect of deferred state taxes (105) 50
Other 28 (126)
------------- --------------
$ 2,700 $ 1,679
------------- --------------
------------- --------------
</TABLE>
In assessing the realizability of deferred tax assets, management considers
whether it is more likely than not that some portion or all of the deferred
taxes will not be realized. No allowance against deferred tax assets has
been provided as management believes the existing net deductible temporary
differences will reverse during periods in which carrybacks are available
and/or in which the Company generates net taxable income.
42
<PAGE>
Federal and state tax net operating loss carryforwards at December 26,
1998, generated from Eagles Nest prior to its acquisition by the Company,
and available to reduce future taxable income are approximately $1,081,000
and will expire as follows:
<TABLE>
<CAPTION>
<S> <C>
2008 $ 114,000
2009 795,000
2010 40,000
2011 35,000
2012 97,000
</TABLE>
The net operating loss carryforwards can only be used to offset taxable
income generated by Eagles Nest. Due to the change in ownership rules under
Internal Revenue Code Section 382 the use of Eagles Nest NOL's is limited
to approximately $75,000 annually.
Differences between the Company's provision for income taxes and the
federal statutory tax rate are:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
--------------------------------------------------------
DECEMBER 26, DECEMBER 27, DECEMBER 28,
1998 1997 1996
-------------- --------------- ---------------
<S> <C> <C> <C>
Federal statutory rate 34.0% 34.0% 34.0%
Benefit due to Subchapter S
tax status - (12.0) (28.3)
State income taxes 5.2 3.6 3.9
Nondeductable goodwill and
other permanent differences 9.2 1.4 0.2
Effect of change from S to C
corporation tax status - (24.9) -
Other - 0.1 -
-------------- --------------- ---------------
48.4% 2.2% 9.8%
-------------- --------------- ---------------
-------------- --------------- ---------------
</TABLE>
10. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used by the Company in
estimating the fair value of its significant financial instruments:
CASH AND CASH EQUIVALENTS: The carrying amounts reported in the
consolidated balance sheets approximate fair value because of the
immediate or short-term maturity of these financial instruments.
LONG-TERM DEBT: The carrying amounts, totaling $11,510,000 and $236,000
at December 26, 1998 and December 27, 1997, respectively, are believed
to approximate fair value due to the floating interest rate on the
majority of these financial instruments.
43
<PAGE>
11. SUPPLEMENTAL CASH FLOW INFORMATION
Supplemental cash flow information is as follows (in thousands):
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
----------------------------------------------------
DECEMBER 26, DECEMBER 27, DECEMBER 28,
1998 1997 1996
-------------- -------------- --------------
<S> <C> <C> <C>
Interest paid $ 294 $ 1,360 $ 615
-------------- -------------- --------------
-------------- -------------- --------------
Income taxes paid $ 1,312 $ 644 $ 73
-------------- -------------- --------------
-------------- -------------- --------------
Noncash investing and financing transactions:
Acquisitions of businesses:
Purchase price, including
acquisition costs $ 1,501 $ 558 $ 2,733
Minority interest eliminated - 105 -
Less debt issued in connection
with the acquisition - (663) (2,493)
Less retention (100) - -
-------------- -------------- --------------
Cash paid for acquisitions $ 1,401 $ - $ 240
-------------- -------------- --------------
-------------- -------------- --------------
Distribution of notes receivable to
stockholders $ - $ - $ 1,660
-------------- -------------- --------------
-------------- -------------- --------------
Cancellation of stock appreciation
rights $ - $ - $ 596
-------------- -------------- --------------
Receivables recorded for tenant
improvement allowances $ 577 $ - $ -
-------------- -------------- --------------
-------------- -------------- --------------
</TABLE>
12. BUSINESS COMBINATIONS
OVERLAND TRADING COMPANY
On October 25, 1996, Track 'n Trail-California, together with its
stockholders, obtained 33 Overland Trading stores by acquiring the
outstanding common stock of Overland (Note 1, Principles of Consolidation;
Minority Interest). Track 'n Trail-California purchased the 79.0% interest
for approximately $2,733,000 consisting of promissory notes to the sellers
of approximately $2,493,000 and warrants issued to the sellers valued at
nominal amounts, plus acquisition costs of $240,000. The warrants give the
sellers the right to purchase up to 49,392 shares of the Company's common
stock at $10.50 per share until October 25, 2001.
Effective on January 1, 1997, Track 'n Trail-California acquired from its
stockholders the remaining 21.0% interest in Overland at their purchase
price by assuming the $663,000 Seller Notes previously issued by Track 'n
Trail-California's stockholders.
44
<PAGE>
Total promissory notes issued by Track 'n Trail-California and its
stockholders in exchange for the common stock of Overland was $3,157,000
(the Seller Notes). The Seller Notes were repaid with a portion of the
proceeds of the Offering in October 1997.
Also, in connection with the acquisition, Overland repurchased all of its
outstanding preferred stock in exchange for a $3,500,000 subordinated
promissory note (the Subordinated Note) and borrowed $2,559,000 under a
line of credit arranged by Track 'n Trail-California, which was used to
repay Overland's outstanding line of credit, retire a note payable, pay
accumulated dividends to its preferred stockholders and provide additional
working capital, all of which were recorded by Overland in connection with
the acquisition. Track 'n Trail-California guaranteed the Subordinated
Note. The Subordinated Note was repaid with a portion of the proceeds of
the Offering in October 1997.
Additionally, Track 'n Trail-California issued warrants to an investment
bank in consideration of financial advisory services rendered in connection
with the acquisition of Overland. The warrants allow the investment bank to
purchase up to 74,089 shares of the Company's common stock at $12.60 per
share for four years commencing October 1998. Under their terms, the
warrants may be exercised prior to October 1998 upon a change in control of
the Company. The warrants held by both the Overland sellers and the
investment bank were assigned only a nominal value because of the
restrictive terms of the warrants when issued.
The assets and liabilities of Overland were recorded at the fair value at
the time of the acquisition, based on management's estimates of value, and
the excess of the purchase price over amounts allocated to identifiable net
assets was recorded as goodwill, as follows (in thousands):
<TABLE>
<CAPTION>
79.0% 21.0%
INTEREST INTEREST
------------- -------------
<S> <C> <C>
Inventory $ 6,911 $ -
Store fixtures, leasehold improvements
and office equipment 1,908 -
Accounts receivable and prepaid expenses 406 -
Deferred income taxes 555 -
Accounts payable and accrued liabilities (3,040) -
Line of credit and long-term debt (6,124) -
Other liabilities (608) -
Minority interest (21.0%) in net assets - 105
Goodwill 2,725 558
------------- -------------
Purchase price $ 2,733 $ 663
------------- -------------
------------- -------------
</TABLE>
Accumulated amortization at December 26, 1998 and December 27, 1997, on
goodwill recorded in connection with the Overland acquisition, was $363,000
and $199,000, respectively.
Results of operations of Overland are included in the consolidated
financial statements from October 25, 1996, with the portion attributable
to the 21.0% minority interest held by Track 'n Trail-California's
stockholders shown as minority interest in 1996.
45
<PAGE>
NEVIN'S EAGLES NEST
On August 26, 1998, the Company acquired all the outstanding shares of
capital stock of Eagles Nest. The purchase price of the shares was $1.5
million in cash, $100,000 of which remained payable at December 26, 1998
(Retention). Substantially all of the cash was provided by the Company's
Revolving Line.
The acquisition was accounted for using the purchase method of accounting.
The purchase price was allocated to the fair value of the assets and
liabilities acquired as follows: $1.3 million to current assets, $244,000
to property, plant and equipment, $518,000 to other assets, $1.1 million to
accounts payable and other accrued liabilities and $1.4 million to debt and
capital lease obligations. This resulted in goodwill of $2.0 million. Upon
closing of the Eagles Nest acquisition, the Company extinguished $1.4
million of Eagles Nest debt.
Accumulated amortization at December 26, 1998 and December 27, 1997, on
goodwill recorded in connection with the Eagles Nest acquisition, was
$33,000 and $0, respectively.
The following unaudited pro forma summary combines the consolidated results
of operations of the Company and Eagles Nest as if the acquisition had
occurred at the beginning of fiscal 1997 and fiscal 1998 after giving
effect to certain adjustments, including amortization of goodwill, revised
depreciation based on estimated fair market values, and revised interest
expense based on the additional borrowings and interest rate differentials
on Eagles Nest debt retired at acquisition. The pro forma summary does not
necessarily reflect the results of operations as they would have been if
the Company and Eagles Nest had constituted a single entity during such
periods (in thousands, except per share information):
<TABLE>
<CAPTION>
PRO FORMA, ASSUMING
ACQUISITION OCCURRED AT
BEGINNING OF
FISCAL
YEARS ENDED
(UNAUDITED)
-----------------------------------
DECEMBER 26, DECEMBER 27,
1998 1997
-------------- ---------------
<S> <C> <C>
Net sales $ 103,224 $ 98,731
-------------- ---------------
-------------- ---------------
Net income before income taxes $ 218 $ 5,077
Income tax 178 59
-------------- ---------------
-------------- ---------------
Net income $ 40 $ 5,018
-------------- ---------------
-------------- ---------------
Earnings per share:
Basic $ 0.01 $ 1.07
-------------- ---------------
-------------- ---------------
Diluted $ 0.01 $ 1.00
-------------- ---------------
-------------- ---------------
Net income before income taxes $ 5,077
Pro forma income tax provision (Note 1) 2,031
---------------
---------------
Pro forma net income $ 3,046
---------------
---------------
Pro forma earnings per share:
Basic $ 0.65
---------------
---------------
Diluted $ 0.56
---------------
---------------
</TABLE>
46
<PAGE>
13. CONTINGENCIES
The Company is involved in various claims arising out of the normal course
of the conduct of business. Management believes, after reviewing such
matters with legal counsel, that the outcome of pending claims will not
have a material adverse effect on the Company's consolidated results of
operations or consolidated financial position.
47
<PAGE>
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.
Information with respect to this item is incorporated by
reference from the registrant's definitive Proxy Statement
to be filed with the Commission not later than 120 days after the end of the
registrant's fiscal year.
ITEM 11. EXECUTIVE COMPENSATION.
Information with respect to this item is incorporated by
reference from the registrant's definitive Proxy Statement
to be filed with the Commission not later than 120 days after the end of the
registrant's fiscal year.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
Information with respect to this item is incorporated by
reference from the registrant's definitive Proxy Statement
to be filed with the Commission not later than 120 days after the end of the
registrant's fiscal year.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Information with respect to this item is incorporated by
reference from the registrant's definitive Proxy Statement
to be filed with the Commission not later than 120 days after the end of the
registrant's fiscal year.
48
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) The following documents are filed as a part of this Form 10-K:
1. Financial Statements:
Reference is made to the Index to Consolidated
Financial Statements under Item 8 in Part II of this
Form 10-K.
2. Financial Statement Schedules:
Financial statement schedules are omitted because
they are not applicable or the required information
is shown in the financial statements or notes
thereto.
3. Exhibits:
The exhibits listed below are required by Item 601 of
Regulation S-K. Each management contract or compensatory
plan or arrangement required to be filed as an exhibit to
this Form 10-K has been identified.
49
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER NOTES DESCRIPTION OF DOCUMENT
---------- ------- -------------------------
<S> <C> <C>
3.1 (1) Amended and Restated Certificate of Incorporation of the Registrant.
3.2 (1) Amended and Restated Bylaws of the Registrant.
4.1 (1) Form of Common Stock Certificate.
4.2 (1) Registration Rights Agreement among the Registrant and certain stockholders.
10.1 (1) Employment Agreement dated January 3, 1994 between Registrant and
Gregory M. Kilgore.
10.2 (1) Employment Agreement dated January 3, 1994 between Registrant and
John E. Wilkinson.
10.3 (1) Employment Agreement dated January 3, 1994 between Registrant and
Daniel J. Nahmens.
10.4 (1) Employment Agreement dated January 3, 1994 between Registrant and
David T. Morgan.
10.5 (1) Amended and Restated 1996 Stock Option Plan.
10.6 (1) Form of Incentive Stock Option and Stock Option Agreement, as amended.
10.7 (1) Form of Nonqualified Stock Option and Stock Option Agreement, as amended.
10.8 (1) Agreement for Distribution of Accumulated Adjustments Account and
Tax Indemnification.
10.9 (1) Form of Indemnification Agreement between the Company and directors and
certain officers.
10.10 (1) Stock Exchange Agreement between the Company, Track 'n Trail-California
and certain stockholders.
10.11 (1) Warrant to Purchase Common Stock issued to Ladenburg Thalmann & Co. Inc.
10.12 (1) Form of Warrant to Purchase Common Stock issued to stockholders of Overland
Management Corporation.
10.13 (2) Amended and Restated Loan Agreement dated as of October 9, 1998 between Union
Bank of California, N.A. and the subsidiaries of the Registrant.
10.14 (3) Continuing Guaranty dated as of September 25, 1997 between Union Bank of
California, N.A. and the Registrant.
10.15 (4) 1998 Bonus Plan for Officers of the Registrant.
10.16 1999 Bonus Plan for Officers of the Registrant.
10.17 Lease Agreement dated as of September 18, 1998 between Spieker Properties,
L.P. and the Registrant.
21.1 (1) List of Subsidiaries of the Registrant.
23.1 Consent of PricewaterhouseCoopers LLP.
24.1 Power of Attorney (see page 51 of this Form 10-K).
27.1 Financial Data Schedule.
</TABLE>
Notes
(1) Filed with Registrant's Registration Statement on Form S-1
(File No. 333-23195).
(2) Filed with Registrant's Quarterly Report on Form 10-Q for the
quarter ended September 26, 1998.
(3) Filed with Registrant's Annual Report on Form 10-K for the
year ended December 27, 1997.
(4) Filed with Registrant's Quarterly Report on FORM 10-Q for the
quarter ended March 28, 1998.
(b) Reports on Form 8-K.
There were no reports on Form 8-K filed during the last quarter of
the fiscal year covered by this report.
50
<PAGE>
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 March 1, 1999 on its behalf by the undersigned, thereunto duly
authorized.
TRACK 'N TRAIL
By /s/ GREGORY M. KILGORE
Gregory M. Kilgore
President and Chief Operating Officer
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose
signature appears below constitutes and appoints Gregory M. Kilgore and Daniel
J. Nahmens, and each of them, his or her true and lawful attorneys-in-fact, each
with full power of substitution, for him or her in any and all capacities, to
sign any amendments to this report on Form 10-K and to file the same, with
exhibits thereto and other documents in connection therewith, with the
Securities and Exchange Commission, hereby ratifying and confirming all that
each of said attorneys-in-fact or their substitute or substitutes may do or
cause to be done by virtue hereof.
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.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
<S> <C> <C>
/s/ GREGORY M. KILGORE President, Chief Operating Officer
(Principal Executive Officer), and
Director 3/1/99
/s/ DANIEL J. NAHMENS Executive Vice President - Finance, Chief Financial
Officer (Principal Financial and
Accounting Officer), Treasurer and Secretary 3/1/99
/s/ DAVID L. SUECHTING, JR. Chairman of the Board 3/1/99
/s/ BARBARA J. SUECHTING Director 3/1/99
/s/ HELEN C. BULWIK Director 3/1/99
/s/ STEVEN D. TOUGH Director 3/1/99
</TABLE>
51
<PAGE>
APPROVED________ DATE 12/7/98
1999 PRESIDENT'S BONUS PROGRAM
WE ARE PLEASED TO ANNOUNCE THE 1999 BONUS PLAN FOR YOU, FOR THE PERIOD ENDING
DECEMBER 25, 1999. YOUR BONUS EARNINGS WILL BE BASED SOLELY ON EPS.
PROFITABILITY
- $50,000 FOR ATTAINING EPS AS PER ANNEX $50,000
- $5,000 FOR EACH $.01 OF EPS OVER ANNEX EPS $5,000/$.01
THE BONUS PAY OUT FOR FISCAL 1999 WILL OCCUR ON OR BEFORE 3/15/00, FOR EACH
PARTICIPANT THAT WAS EMPLOYED AS OF 12/25/99.
THIS BONUS PLAN IS EFFECTIVE FOR FISCAL 1999 ONLY, AND THE COMPANY RESERVES
THE RIGHT TO ELIMINATE OR CHANGE THE BONUS PROGRAM FOR FUTURE PERIODS.
<PAGE>
APPROVED________ DATE 12/7/98
1999 CHIEF FINANCIAL OFFICER'S BONUS PROGRAM
WE ARE PLEASED TO ANNOUNCE THE 1999 BONUS PLAN FOR YOU, FOR THE PERIOD ENDING
DECEMBER 25, 1999. YOUR BONUS EARNINGS WILL BE BASED SOLELY ON EPS.
PROFITABILITY
- $40,000 FOR ATTAINING EPS AS PER ANNEX $40,000
- $4,000 FOR EACH $.01 OF EPS OVER ANNEX EPS $4,000/$.01
THE BONUS PAY OUT FOR FISCAL 1999 WILL OCCUR ON OR BEFORE 3/15/00, FOR EACH
PARTICIPANT THAT WAS EMPLOYED AS OF 12/25/99.
THIS BONUS PLAN IS EFFECTIVE FOR FISCAL 1999 ONLY, AND THE COMPANY RESERVES
THE RIGHT TO ELIMINATE OR CHANGE THE BONUS PROGRAM FOR FUTURE PERIODS.
<PAGE>
APPROVED________ DATE 12/7/98
1999 EXECUTIVE VICE-PRESIDENT OF MERCHANDISING'S BONUS PROGRAM
WE ARE PLEASED TO ANNOUNCE THE 1999 BONUS PLAN FOR YOU, FOR THE PERIOD ENDING
DECEMBER 25, 1999. YOUR BONUS EARNINGS WILL BE BASED UPON TWO AREAS OF
COMPANY PERFORMANCE AS FOLLOWS:
1) PROFITABILITY
- $30,000 FOR ATTAINING PLAN EPS AS PER ANNEX $30,000
- $3,000 FOR EACH $.01 OF EPS OVER ANNEX EPS $3,000/$.01
2) COMP STORE SALE GAIN - TARGET AS PER ANNEX FOR TRACK 'N TRAIL
AND OVERLAND TRADING STORES CONSOLIDATED. $15,000
-$5,000 FOR EACH 1% OVER ANNEX $5,000/1%
THE EMPLOYEE WILL NOT BE ELIGIBLE TO PARTICIPATE IN THE BONUS PROGRAM UNLESS
THE FIRST GOAL OF ATTAINING ANNEX EPS IS MET.
THE BONUS PAY OUT FOR FISCAL 1999 WILL OCCUR ON OR BEFORE 3/15/00, FOR EACH
PARTICIPANT THAT WAS EMPLOYED AS OF 12/25/99.
THIS BONUS PLAN IS EFFECTIVE FOR FISCAL 1999 ONLY, AND THE COMPANY RESERVES
THE RIGHT TO ELIMINATE OR CHANGE THE BONUS PROGRAM FOR FUTURE PERIODS.
<PAGE>
APPROVED________ DATE 12/7/98
1999 VICE-PRESIDENT STORES BONUS PROGRAM
WE ARE PLEASED TO ANNOUNCE THE 1999 BONUS PLAN FOR YOU, FOR THE PERIOD ENDING
DECEMBER 25, 1999. YOUR BONUS EARNINGS WILL BE BASED UPON TWO AREAS OF
TOTAL COMPANY PERFORMANCE AS FOLLOWS:
1) PROFITABILITY
- $20,000 FOR ATTAINING PLAN EPS AS PER ANNEX $17,500
- $3,000 FOR EACH $.01 OF EPS OVER ANNEX EPS $3,000/$.01
2) COMP STORE SALES GAIN - TARGET AS PER ANNEX FOR TRACK 'N TRAIL
AND OVERLAND TRADING STORES CONSOLIDATED. $25,000
-$7,500 FOR EACH 1% OVER ANNEX $7,500/1%
THE EMPLOYEE WILL NOT BE ELIGIBLE TO PARTICIPATE IN THE BONUS PROGRAM UNLESS
THE FIRST GOAL OF ATTAINING ANNEX EPS IS MET.
THE BONUS PAY OUT FOR FISCAL 1999 WILL OCCUR ON OR BEFORE 3/15/00, FOR EACH
PARTICIPANT THAT WAS EMPLOYED AS OF 12/25/99.
THIS BONUS PLAN IS EFFECTIVE FOR FISCAL 1999 ONLY, AND THE COMPANY RESERVES
THE RIGHT TO ELIMINATE OR CHANGE THE BONUS PROGRAM FOR FUTURE PERIODS.
<PAGE>
APPROVED________ DATE 12/7/98
1999 VICE-PRESIDENT REAL ESTATE'S BONUS PROGRAM
WE ARE PLEASED TO ANNOUNCE THE 1999 BONUS PLAN FOR YOU, FOR THE PERIOD ENDING
DECEMBER 25, 1999. YOUR BONUS EARNINGS WILL BE BASED UPON THREE AREAS OF
TOTAL COMPANY PERFORMANCE AS FOLLOWS:
1) PROFITABILITY
- $15,000 FOR ATTAINING EPS AS PER ANNEX $15,000
- $3,000 FOR EACH $.01 OF EPS OVER ANNEX EPS $3,000/$.01
2) TIMELY STORE OPENINGS
CONSTRUCTION WILL BE CONSIDERED TIMELY IF THE TOTAL "OPEN" WEEKS
FOR THE PROJECTS IDENTIFIED ON THE ATTACHED ANNEX MEETS OR
EXCEEDS THE TOTAL WEEKS AS PER ANNEX
THE SUM OF THE ACTUAL DAYS OPEN IN THE FISCAL YEAR WILL BE SUMMED
AND DIVIDED BY 7 TO DETERMINE BONUS "WEEKS"
STORE OPENINGS WILL FOLLOW THE FISCAL CALENDAR,
(I.E. AN APRIL STORE OPENING WILL COMMENCE ON MARCH 28TH)
STORES OPEN IN EXCESS OF THE ATTACHED SCHEDULE WILL BE ADDED TO THE
PLANNED WEEKS OPEN FOR BONUS CALCULATIONS. REMODELS ARE NOT INCLUDED.
STORE RELOCATIONS ARE NOT CONSIDERED STORE OPENINGS.
- $15,000 FOR ATTAINING "OPEN" WEEKS AS PER ANNEX $15,000
- $225 FOR EACH ADDITIONAL WEEK OPEN $225
3) CONSTRUCTION BUDGET MET - $15,000
THE CONSTRUCTION BUDGET WILL BE CONSIDERED MET IF TOTAL CAPITALIZED
COSTS FALL AT OR BELOW THE TOTAL AS PER ANNEX. IN THE EVENT THAT NOT ALL
STORES ARE BUILT, THE CFO WILL REMOVE THE BUDGET FROM THE STORES NOT
BUILT. STORES CONSTRUCTED IN EXCESS OF THE ORIGINAL PLAN WILL BE
ADDED TO THE CAPITAL BUDGET AT $95,000 FOR TNT STORES AND $105,000
FOR OTC STORES, ASSUMING THEY ARE A FULL BUILD-OUT (EXCLUDING TEMPS).
THE CALCULATIONS WILL BE PERFORMED BY THE CFO, AND ALL DECISIONS REST
SOLELY WITH THE COMPANY. AS A NOTE, REMODELS HAVE BEEN EXCLUDED
FROM THE ATTACHED LIST AND WILL NOT FACTOR INTO THE BONUS
CALCULATIONS.
<PAGE>
CONSTRUCTION BUDGET SAVINGS
PARTICIPANT WILL EARN 5% OF THE SAVINGS BY WHICH THEY FALL UNDER THE
FINAL CAPITAL BUDGET. CONTRIBUTIONS FROM THE LANDLORD WHICH ARE
SPECIFICALLY TENANT IMPROVEMENT ALLOWANCES (CONTRIBUTIONS TO THE
CONSTRUCTION COSTS) WILL BE DEDUCTED FROM THE TOTAL COST TO ARRIVE
AT THE ACTUAL COST FOR BONUS PURPOSES. "FREE" RENT OR ANY OTHER
MONIES RECEIVED WHICH ARE NOT SPECIFICALLY CONSTRUCTION MONIES (AS
DETERMINED BY ACCOUNTING PRINCIPLES) WILL NOT BE CONSIDERED FOR THIS
REDUCTION. CONSTRUCTION QUALITY MUST BE COMPLETED WITHIN THE
SPECIFICATIONS AS APPROVED BY THE PRESIDENT.
NOTE: THERE ARE MANY VARIABLES IN THIS BONUS PROGRAM WHICH MAY BE DIFFICULT
TO PREDICT OR ADDRESS AT THIS TIME. DUE TO THIS REASON, THE CFO WILL RESOLVE
ISSUES AS NECESSARY WHICH ARE NOT DIRECTLY ADDRESSED THROUGH THE ORIGINAL
INTENT OF THE PLAN. ALL DECISIONS ARE FINAL AND REST SOLELY WITH THE CFO OR
PRESIDENT.
THE EMPLOYEE WILL NOT BE ELIGIBLE TO PARTICIPATE IN THE BONUS PROGRAM UNLESS
THE FIRST GOAL OF ATTAINING ANNEX EPS IS MET.
THE BONUS PAYOUT FOR FISCAL 1999 WILL OCCUR ON OR BEFORE 3/15/00, FOR EACH
PARTICIPANT THAT WAS EMPLOYED AS OF 12/25/99.
THE BONUS PLAN IS EFFECTIVE FOR FISCAL 1999 ONLY, AND THE COMPANY RESERVES
THE RIGHT TO ELIMINATE OR CHANGE THE BONUS PROGRAM FOR FUTURE PERIODS.
<PAGE>
BASIC LEASE INFORMATION
INDUSTRIAL NET
<TABLE>
<S> <C>
LEASE DATE: September 18, 1998
TENANT: Track 'n Trail, a Delaware corporation
TENANT'S NOTICE ADDRESS: 4961-A Windplay Drive, El Dorado Hills, CA 95762-9632
Attention: Director of Real Estate
TENANT'S BILLING ADDRESS: 4961-A Windplay Drive, El Dorado Hills, CA 95762-9632
TENANT CONTACT: Dave Morgan PHONE NUMBER: 916/933-4525
FAX NUMBER: 916/933-4521
LANDLORD: Spieker Properties, L.P., a California limited partnership
LANDLORD'S NOTICE ADDRESS: 2150 River Plaza Drive, Suite 160, Sacramento, CA 95833
LANDLORD'S REMITTANCE ADDRESS: P.O. Box 45587, Department 11551, San Francisco, CA
94145-0587
PROJECT DESCRIPTION: Two one-story buildings totaling approximately 199,553 square feet in West
Sacramento, California and more commonly known as Seaport Distribution Center,
as outlined in green on the attached Exhibit "B".
BUILDING DESCRIPTION: An approximately 100,008 square foot building located at Seaport Distribution
Center and designated as 3700 Seaport Boulevard, as outlined in blue on the
attached Exhibit "B".
PREMISES: An approximately 50,240 square feet of warehouse area located in 3700 Seaport
Boulevard of Seaport Distribution Center, West Sacramento, California, as
outlined in red on Exhibit "B", commonly known as Suite 40.
PERMITTED USE: General warehousing and distribution of sporting goods and related legal uses
(including ancillary office) not injurious to the facility.
PARKING DENSITY: 40 spaces
SCHEDULED TERM COMMENCEMENT DATE: November 1, 1998
SCHEDULED LENGTH OF TERM: One Hundred Twenty (120) months
SCHEDULED TERM EXPIRATION DATE: October 31, 2008
RENT:
BASE RENT: Months 01-12: 11/01/98-10/31/99 $15,072.00 per month
Months 13-24: 11/01/99-10/31/00 $15,448.80 per month
Months 25-36: 11/01/00-10/31/01 $15,835.02 per month
Months 37-48: 11/01/01-10/31/02 $16,230.90 per month
Months 49-60: 11/01/02-10/31/03 $16,636.67 per month
Months 61-72: 11/01/03-10/31/04 $17,052.58 per month
Months 73-84: 11/01/04-10/31/05 $17,478.90 per month
Months 85-96: 11/01/05-10/31/06 $17,915.87 per month
Months 97-108: 11/01/06-10/31/07 $18,363.77 per month
</TABLE>
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<TABLE>
<S> <C>
Months 109-120: 11/01/07-10/31/08 $18,822.86 per month
ESTIMATED FIRST YEAR OPERATING EXPENSES: $2,512.00 per month
SECURITY DEPOSIT: None
TENANT'S PROPORTIONATE SHARE:
OF BUILDING: 50.24%
OF PROJECT: 25.18%
</TABLE>
The foregoing Basic Lease Information is incorporated into and made a part of
this Lease. Each reference in this Lease to any of the Basic Lease Information
shall mean the respective information above and shall be construed to
incorporate all of the terms provided under the particular Lease paragraph
pertaining to such information. In the event of any conflict between the Basic
Lease Information and the Lease, the latter shall control.
LANDLORD TENANT
Spieker Properties, L.P., Track 'n Trail,
a California limited partnership a Delaware corporation
By: Spieker Properties, Inc.,
a Maryland corporation, By: /s/ Greg Kilgore
its general partner -------------------------------
Greg Kilgore
Its: President
By: /s/ Peter C. Thompson By: /s/ Dan Nahmens
----------------------------------- -------------------------------
Peter C. Thompson Dan Nahmens
Its: Senior Vice President Its: Chief Financial Officer
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<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
Basic Lease Information...................................................1
Table of Contents.........................................................2
1. Premises..................................................................4
2. Possession and Lease Commencement.........................................4
3. Term......................................................................4
4. Use.......................................................................4
5. Rules and Regulations.....................................................6
6. Rent......................................................................6
7. Operating Expenses........................................................6
8. Insurance and Indemnification............................................10
9. Waiver of Subrogation....................................................11
10. Landlord's Repairs and Maintenance.......................................12
11. Tenant's Repairs and Maintenance.........................................12
12. Alterations..............................................................13
13. Signs....................................................................13
14. Inspection/Posting Notices...............................................14
15. Services and Utilities...................................................14
16. Subordination............................................................15
17. Financial Statements.....................................................15
18. Estoppel Certificate.....................................................15
19. Security Deposit.........................................................16
20. Limitation of Tenant's Remedies..........................................16
21. Assignment and Subletting................................................16
22. Authority of Tenant......................................................17
23. Condemnation.............................................................17
24. Casualty Damage..........................................................18
25. Holding Over.............................................................19
26. Default..................................................................19
27. Liens....................................................................21
28. Substitution.............................................................21
29. Transfers by Landlord....................................................21
30. Right of Landlord to Perform Tenant's Covenants..........................21
31. Waiver...................................................................21
32. Notices..................................................................22
33. Attorney's Fees..........................................................22
34. Successors and Assigns...................................................22
35. Force Majeure............................................................22
36. Surrender of Premises....................................................22
37. Miscellaneous............................................................23
38. Additional Provisions....................................................24
39. Brokers..................................................................24
40. Jury Trial Waiver........................................................25
41. Right of First Refusal...................................................25
42. Renewal Option...........................................................25
Signatures...............................................................25
Exhibits:
Exhibit A.............................................Rules and Regulations
Exhibit B...................................Site Plan, Property Description
Exhibit C................................Preliminary Space Plan of Premises
Exhibit D.........................................Non-Disturbance Agreement
</TABLE>
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LEASE
THIS LEASE is made as of the 18th day of September, 1998, by and between Spieker
Properties, L.P., a California limited partnership (hereinafter called
"LANDLORD"), and Track 'n Trail, a Delaware corporation (hereinafter called
"TENANT").
1. PREMISES
Landlord leases to Tenant and Tenant leases from Landlord, upon the terms and
conditions hereinafter set forth, those premises (the "PREMISES") outlined in
red on EXHIBIT B and described in the Basic Lease Information. The Premises
shall be all or part of a building (the "BUILDING") and of a project (the
"PROJECT"), which may consist of more than one building and additional
facilities, as described in the Basic Lease Information. The Building and
Project are outlined in blue and green respectively on EXHIBIT B. Landlord and
Tenant acknowledge that physical changes may occur from time to time in the
Premises, Building or Project, and that the number of buildings and additional
facilities which constitute the Project may change from time to time, which may
result in an adjustment in Tenant's Proportionate Share, as defined in the Basic
Lease Information, as provided in Paragraph 7.A.
2. POSSESSION AND LEASE COMMENCEMENT
A. TERM COMMENCEMENT DATE. The term commencement date ("TERM COMMENCEMENT
DATE") shall be the date on which the improvements to be constructed or
performed in the Premises by Landlord shall have been substantially completed in
accordance with Section 38 below. If for any reason Landlord cannot
substantially complete the improvements by the scheduled Term Commencement Date,
Landlord shall not be subject to any liability therefor, nor shall Landlord be
in default hereunder nor shall such failure affect the validity of this Lease,
and Tenant agrees to accept possession of the Premises at such time as such
improvements have been substantially completed, which date shall then be deemed
the Term Commencement Date. Tenant shall , pursuant to Section 38.B below, have
the right to use and occupy the Premises from and after the parties' full
execution of this Lease; during such period of early occupancy, and until
substantial completion has been achieved, Tenant's total Rent obligation shall
be $10,000.00 per month. "Substantial completion" shall be deemed to have
occurred as of the date that all of the following events have occurred: (i) the
work to be performed by Landlord under this Lease shall have been completed
(with the exception of punchlist items that do not materially interfere with
Tenant's use or enjoyment of the Premises), and (ii) a certificate of occupancy
(or its equivalent) shall have been issued, such that Tenant can lawfully occupy
the Premises for the Permitted Use. Substantial completion shall have occurred
notwithstanding Tenant's submission of a punchlist to Landlord, which Tenant
shall submit, if at all, within ten (10) business days after the Term
Commencement Date or otherwise in accordance with any improvement agreement
appended to this Lease. Upon Landlord's request, Tenant shall promptly execute
and return to Landlord a "Start-Up Letter" in which Tenant shall agree, among
other things, to acceptance of the Premises and to the determination of the Term
Commencement Date, in accordance with the terms of this Lease, but Tenant's
failure or refusal to do so shall not negate Tenant's acceptance of the Premises
or affect determination of the Term Commencement Date.
B. TENANT DELAY. If, as a direct result of a Tenant Delay (as defined below),
Landlord has not substantially completed the Premises by April 1, 1999, Landlord
may, at its option, thereafter (i) terminate this Lease upon 30 days' prior
written notice to Tenant given prior to the date of substantial completion,
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in which case each party shall thereafter be released of all further obligations
under this Lease, or (ii) require Tenant to begin payment of the Base Rent
required to be paid pursuant to the "Basic Lease Information" page (i.e.,
$15,072 per month), plus Tenant's Proportionate Share of Operating Expenses. As
used in this Lease, "TENANT DELAY" shall mean any unreasonable interference or
delay caused by Tenant's Parties, provided that no Tenant Delay shall be deemed
to have occurred unless Landlord, within two (2) business days after the
occurrence of the event allegedly constituting a Tenant Delay, advises Tenant in
writing that such a delay has occurred, which notice must specify the corrective
actions to be taken by Tenant.
3. TERM
The term of this Lease (the "TERM") shall commence on the Term Commencement
Date and continue in full force and effect for the number of months specified as
the Length of Term in the Basic Lease Information or until this Lease is
terminated as otherwise provided herein. If the Term Commencement Date is a date
other than the first day of the calendar month, the Term shall be the number of
months of the Length of Term in addition to the remainder of the calendar month
following the Term Commencement Date.
4. USE
A. GENERAL. Tenant shall use the Premises for the permitted use specified in
the Basic Lease Information, and with prior notice to the Landlord, "warehouse
sales" to the public (provided that such sales are no more frequent than three
(3) times per calendar year) (collectively, "PERMITTED USE") and for no other
use or purpose. Tenant shall control Tenant's employees, agents, customers,
visitors, invitees, licensees, contractors, assignees and subtenants
(collectively, "TENANT'S PARTIES") in such a manner that Tenant and Tenant's
Parties cumulatively do not exceed the parking density specified in the Basic
Lease Information (the "PARKING DENSITY") at any time. So long as Tenant is
occupying the Premises, Tenant and Tenant's Parties shall have the nonexclusive
right to use, in common with other parties occupying the Building or Project,
the parking areas, driveways and other common areas of the Building and Project,
subject to the terms of this Lease and such rules and regulations as Landlord
may from time to time prescribe. Notwithstanding any provision of this Lease or
the rules and regulations, Tenant shall be entitled to the use of the number of
spaces specified as the Parking Density, and if reasonably necessary, Landlord
shall designate a portion of the parking facility as being reserved exclusively
for Tenant's use. Landlord reserves the right, without notice or liability to
Tenant, and without the same constituting an actual or constructive eviction, to
alter or modify the common areas from time to time, including the location and
configuration thereof, and the amenities and facilities which Landlord may
determine to provide from time to time.
B. LIMITATIONS. Tenant shall not permit any odors, smoke, dust, gas,
substances, noise or vibrations to emanate from the Premises or from any portion
of the common areas as a result of Tenant's or any Tenant's Party's use thereof,
nor take any action which would constitute a nuisance or would unreasonably
disturb, obstruct or endanger any other tenants or occupants of the Building or
Project or elsewhere, or interfere with their use of their respective premises
or common areas. Storage outside the Premises of materials, vehicles or any
other items is prohibited. Tenant shall not use or allow the Premises to be used
for any immoral, improper or unlawful purpose, nor shall Tenant cause or
maintain or permit any nuisance in, on or about the Premises. Tenant shall not
commit or suffer the commission of any waste in, on or about the Premises.
Tenant shall not allow any sale by auction upon the Premises, or place any loads
upon the floors, walls or ceilings which could endanger the structure, or place
any harmful substances in the drainage system of the Building or Project. No
waste, materials or refuse shall be dumped upon or permitted to remain outside
the Premises except in trash containers placed inside exterior enclosures
designated for that purpose by Landlord. Landlord shall not be responsible to
Tenant for the non-compliance by any other tenant or occupant of the Building or
Project with any of the above-referenced rules or any other terms or provisions
of such tenant's or occupant's lease or other contract.
C. COMPLIANCE WITH REGULATIONS. By entering the Premises, Tenant accepts the
Premises in the condition existing as of the date of such entry, subject,
however, to the terms of this Section 4.C below. Tenant shall at its sole cost
and expense strictly comply with all existing or future applicable municipal,
state
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and federal and other governmental statutes, rules, requirements, regulations,
laws and ordinances, including zoning ordinances and regulations, and covenants,
easements and restrictions of record governing and relating to the use,
occupancy or possession of the Premises, to Tenant's use of the common areas, or
to the use, storage, generation or disposal of Hazardous Materials (hereinafter
defined) (collectively "REGULATIONS"). Tenant shall at its sole cost and expense
obtain any and all licenses or permits necessary for Tenant's use of the
Premises. Tenant shall at its sole cost and expense promptly comply with the
requirements of any board of fire underwriters or other similar body now or
hereafter constituted. Tenant shall not do or permit anything to be done in, on,
under or about the Project or bring or keep anything which will in any way
increase the rate of any insurance upon the Premises, Building or Project or
upon any contents therein or cause a cancellation of said insurance or otherwise
affect said insurance in any manner. Tenant shall indemnify, defend (by counsel
reasonably acceptable to Landlord), protect and hold Landlord harmless from and
against any loss, cost, expense, damage, attorneys' fees or liability arising
out of the failure of Tenant to comply with any Regulation. Tenant's obligations
pursuant to the foregoing indemnity shall survive the expiration or earlier
termination of this Lease. Nothing in this Section 4.C shall, however: (i)
diminish Landlord's obligations under Section 38 below; (ii) relieve Landlord of
its obligation to correct any latent defects; (iii) impose any obligation on
Tenant to make any alterations to the Premises, except to the extent that such
alterations are required as a result of (x) Tenant's specific use of the
Premises (as opposed to general warehouse and ancillary office use); or (y)
Alterations to the Premises made by Tenant.
D. HAZARDOUS MATERIALS. As used in this Lease, "HAZARDOUS MATERIALS" shall
include, but not be limited to, hazardous, toxic and radioactive materials and
those substances defined as "hazardous substances," "hazardous materials,"
"hazardous wastes," "toxic substances," or other similar designations in any
Regulation. Tenant shall not cause, or allow any of Tenant's Parties to cause,
any Hazardous Materials to be handled, used, generated, stored, released or
disposed of in, on, under or about the Premises, the Building or the Project or
surrounding land or environment in violation of any Regulations. Tenant must
obtain Landlord's written consent prior to the introduction of any Hazardous
Materials onto the Project. Notwithstanding the foregoing, Tenant may handle,
store, use and dispose of products containing small quantities of Hazardous
Materials for "warehouse and general office purposes" (such as toner for
copiers) to the extent customary and necessary for the Permitted Use of the
Premises; provided that Tenant shall always handle, store, use, and dispose of
any such Hazardous Materials in a safe and lawful manner and never allow such
Hazardous Materials to contaminate the Premises, Building, or Project or
surrounding land or environment. Tenant shall immediately notify Landlord in
writing of any Hazardous Materials' contamination of any portion of the Project
of which Tenant becomes aware, whether or not caused by Tenant. Landlord shall
have the right at all reasonable times to inspect the Premises and to conduct
tests and investigations to determine whether Tenant is in compliance with the
foregoing provisions, the costs of all such inspections, tests and
investigations to be borne by Tenant. Tenant shall indemnify, defend (by counsel
reasonably acceptable to Landlord), protect and hold Landlord harmless from and
against any and all claims, liabilities, losses, costs, loss of rents, liens,
damages, injuries or expenses (including attorneys' and consultants' fees and
court costs), demands, causes of action, or judgments directly or indirectly
arising out of or related to the use, generation, storage, release, or disposal
of Hazardous Materials by Tenant or any of Tenant's Parties in, on, under or
about the Premises, the Building or the Project or surrounding land or
environment, which indemnity shall include, without limitation, damages for
personal or bodily injury, property damage, damage to the environment or natural
resources occurring on or off the Premises, losses attributable to diminution in
value or adverse effects on marketability, the cost of any investigation,
monitoring, government oversight, repair, removal, remediation, restoration,
abatement, and disposal, and the preparation of any closure or other required
plans, whether such action is required or necessary prior to or following the
expiration or earlier termination of this Lease. Neither the consent by Landlord
to the use, generation, storage, release or disposal of Hazardous Materials nor
the strict compliance by Tenant with all laws pertaining to Hazardous Materials
shall excuse Tenant from Tenant's obligation of indemnification pursuant to this
Paragraph 4.D. Tenant's obligations pursuant to the foregoing indemnity shall
survive the expiration or earlier termination of this Lease.
E. LANDLORD'S RESPONSIBILITY REGARDING HAZARDOUS SUBSTANCES.
(a) Landlord represents, warrants (to the best of Landlord's
knowledge), and covenants to Tenant that, as of the Commencement Date, the
Premises and Building, are free of Hazardous Materials (other than reasonable
quantities typically associated with normal warehouse and office activities) and
are presently and shall remain in compliance in all material respects with all
laws governing Hazardous Materials. Landlord shall indemnify and hold harmless
Tenant from and against any and all claims, demands, liabilities, actions,
suits, proceedings, judgments, losses, damages (including punitive damages),
fines, penalties, costs and expenses (including attorneys', consultants', and
experts' fees) arising from (i) a breach of any representation or warranty of
Landlord set forth in this paragraph; (ii) the presence, use, generation,
storage, disposal, discharge or release of Hazardous Materials in, on, under or
about the Premises or Building as of the Commencement Date; and (iii) any
violation or alleged violation of any applicable laws governing Hazardous
Materials, to the extent caused by Landlord or Landlord's representatives. The
foregoing indemnification obligation shall survive the expiration or earlier
termination of this Lease.
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(b) Landlord shall, at Landlord's sole expense, remove from the
Premises any existing Hazardous Materials, not later than the Commencement Date.
5. RULES AND REGULATIONS
Tenant shall faithfully observe and comply with the building rules and
regulations attached hereto as EXHIBIT A and any other rules and regulations and
any modifications or additions thereto which Landlord may from time to time
prescribe in writing for the purpose of maintaining the proper care,
cleanliness, safety, traffic flow and general order of the Premises or the
Building or Project. Tenant shall cause Tenant's Parties to comply with such
rules and regulations provided that Tenant's quiet enjoyment of the Premises is
not disturbed. Landlord shall not be responsible to Tenant for the
non-compliance by any other tenant or occupant of the Building or Project with
any of such rules and regulations, any other tenant's or occupant's lease or any
Regulations. In the event of any inconsistency between such rules and
regulations and this Lease, the terms of this Lease shall govern. All existing
and future rules and regulations must be reasonable and nondiscriminatory. Any
consent required to be obtained by Tenant pursuant to the rules and regulations
shall not be unreasonably withheld or delayed.
6. RENT
A. BASE RENT. Tenant shall pay to Landlord and Landlord shall receive,
without notice or demand throughout the Term, Base Rent as specified in the
Basic Lease Information, payable in monthly installments in advance on or before
the first day of each calendar month, in lawful money of the United States,
without deduction or offset whatsoever (except as provided in this Lease or by
applicable law), at the Remittance Address specified in the Basic Lease
Information or to such other place as Landlord may from time to time designate
in writing. Base Rent for the first full month of the Term shall be paid by
Tenant upon Tenant's execution of this Lease. If the obligation for payment of
Base Rent commences on a day other than the first day of a month, then Base Rent
shall be prorated and the prorated installment shall be paid on the first day of
the calendar month next succeeding the Term Commencement Date. The Base Rent
payable by Tenant hereunder is subject to adjustment as provided elsewhere in
this Lease, as applicable. As used herein, the term "Base Rent" shall mean the
Base Rent specified in the Basic Lease Information as it may be so adjusted from
time to time.
B. ADDITIONAL RENT. All monies other than Base Rent required to be paid by
Tenant hereunder, including, but not limited to, Tenant's Proportionate Share of
Operating Expenses, as specified in Paragraph 7 of this Lease, charges to be
paid by Tenant under Paragraph 15, the interest and late charge described in
Paragraphs 26.C. and D., and any monies spent by Landlord pursuant to Paragraph
30, shall be considered additional rent ("ADDITIONAL RENT"). "RENT" shall mean
Base Rent and Additional Rent.
7. OPERATING EXPENSES
A. OPERATING EXPENSES. In addition to the Base Rent required to be paid
hereunder, Tenant shall pay as Additional Rent, Tenant's Proportionate Share of
the Building and/or Project (as applicable), as defined in the Basic Lease
Information, of Operating Expenses (defined below) in the manner set forth
below. Tenant shall pay the applicable Tenant's Proportionate Share of each such
Operating Expenses. Landlord and Tenant acknowledge that if the number of
buildings which constitute the Project increases or decreases, or if physical
changes are made to the Premises, Building or Project or the configuration of
any thereof, Landlord may at its discretion reasonably adjust Tenant's
Proportionate Share of the Building or Project to reflect the change. Landlord's
determination of Tenant's Proportionate Share of the Building and of the Project
shall be conclusive so long as it is reasonably and consistently applied, and
provided furthermore, that such Proportionate Share shall not exceed, in case of
the Building, the number (expressed as a percentage) obtained by dividing the
leasable area of the Premises by the leasable area of the Building, and in terms
of the Project, the number (expressed as a percentage) obtained by dividing the
leasable area of the Premises by the leasable area of the Project. "OPERATING
EXPENSES" shall mean all expenses and costs of every kind and nature which
Landlord shall pay or become obligated to pay, because of or in connection with
the ownership, management, maintenance, repair, preservation, replacement and
operation of the Building or Project and its supporting facilities and such
additional facilities now and in subsequent years as may be determined by
Landlord to be necessary or desirable to the Building and/or Project (as
determined in a reasonable manner) other than those expenses and costs which are
specifically attributable to Tenant or which are expressly made the financial
responsibility of Landlord or specific tenants of the Building or Project
pursuant to this Lease. Operating Expenses shall include, but are not limited
to, the following:
(1) TAXES. All real property taxes and assessments, possessory
interest taxes, sales taxes, personal property taxes, business or
license taxes or fees, gross receipts taxes, service payments in lieu
of such taxes or fees, annual or periodic license or use fees, excises,
transit charges, and other impositions, general and special, ordinary
and extraordinary, unforeseen as well as foreseen, of any kind
(including fees "in-lieu" of any such tax or assessment) which are now
or hereafter assessed, levied, charged, confirmed, or imposed by any
public authority upon the Building or Project, its operations or the
Rent (or any portion or component thereof), or any tax, assessment or
fee imposed
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in substitution, partially or totally, of any of the above. Operating
Expenses shall also include any taxes, assessments, reassessments, or
other fees or impositions with respect to the development, leasing,
management, maintenance, alteration, repair, use or occupancy by Tenant
of the Premises, Building or Project or any portion thereof, including,
without limitation, by or for Tenant, and all increases therein or
reassessments thereof whether the increases or reassessments result
from increased rate and/or valuation (whether upon a transfer of the
Building or Project or any portion thereof or any interest therein or
for any other reason). Operating Expenses shall not include inheritance
or estate taxes imposed upon or assessed against the interest of any
person in the Project, or taxes computed upon the basis of the net
income of any owners of any interest in the Project. If it shall not be
lawful for Tenant to reimburse Landlord for all or any part of such
taxes, the monthly rental payable to Landlord under this Lease shall be
revised to net Landlord the same net rental after imposition of any
such taxes by Landlord as would have been payable to Landlord prior to
the payment of any such taxes.
(2) INSURANCE. All insurance premiums and costs, including, but not
limited to, any deductible amounts, premiums and other costs of
insurance incurred by Landlord, including for the insurance coverage
set forth in Paragraph 8.A. herein.
(3) COMMON AREA MAINTENANCE.
(a) Repairs, replacements, and general maintenance of and for
the Building and Project and public and common areas and
facilities of and comprising the Building and Project,
including, but not limited to, the roof and roof membrane,
elevators, mechanical rooms, alarm systems, pest extermination,
landscaped areas, parking and service areas, driveways,
sidewalks, truck staging areas, rail spur areas, fire sprinkler
systems, sanitary and storm sewer lines, utility services,
heating/ventilation/air conditioning systems, electrical,
mechanical or other systems, telephone equipment and wiring
servicing, plumbing, lighting, and any other items or areas
which affect the operation or appearance of the Building or
Project, which determination shall be at Landlord's reasonable
discretion, except for: those items expressly made the financial
responsibility of Landlord pursuant to Paragraph 10 hereof;
those items to the extent paid for by the proceeds of insurance;
and those items attributable solely or jointly to specific
tenants of the Building or Project.
(b) Repairs, replacements, and general maintenance shall
include the cost of any capital improvements made to or capital
assets acquired for the Project or Building that in Landlord's
discretion will reduce any other Operating Expenses (but only to
the extent of the reduction reasonably anticipated), including
present or future repair work, are reasonably necessary for the
health and safety of the occupants of the Building or Project,
or are required to comply with any Regulation that was not in
effect on the Commencement Date, such costs or allocable
portions thereof to be amortized over such reasonable period as
Landlord shall determine (in accordance with applicable IRS
regulations), together with interest on the unamortized balance
at the publicly announced "prime rate" charged by Wells Fargo
Bank, N.A. (San Francisco) or its successor at the time such
improvements or capital assets are constructed or acquired, plus
two (2) percentage points, or in the absence of such prime rate,
then at the U.S. Treasury six-month market note (or bond, if so
designated) rate as published by any national financial
publication selected by Landlord, plus four (4) percentage
points, but in no event more than the maximum rate permitted by
law. In no event shall the total amount of capital expenditures
in any single year included in Operating Expenses for the
Project exceed $15,000.00.
(c) Payment under or for any easement, license, permit,
operating agreement, declaration, restrictive covenant or
instrument relating to the Building or Project.
(d) All expenses and rental related to services and costs of
supplies, materials and equipment used in operating, managing
and maintaining the Premises, Building and Project, the
equipment therein and the adjacent sidewalks, driveways, parking
and service areas, including, without limitation, expenses
related to service agreements regarding security, fire and other
alarm systems, janitorial services to the extent not addressed
in Paragraph 11 hereof, window cleaning, building exterior
maintenance, landscaping and expenses related to the
administration, management and operation of the Project
(provided that such management and administrative fees are
included within the fee referred in subparagraph (g) below),
including without limitation salaries, wages and benefits and
management office rent.
(e) The cost of supplying any services and utilities which
benefit all or a portion of the Premises, Building or Project to
the extent not addressed in Paragraph 15 hereof.
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(f) Legal expenses and the cost of audits by certified public
accountants in connection with calculating or reducing Operating
Expenses; provided, however, that legal expenses chargeable as
Operating Expenses shall not include the cost of negotiating
leases, collecting rents, evicting tenants nor shall it include
costs incurred in legal proceedings with or against any tenant
or to enforce the provisions of any lease.
(g) A management and accounting cost recovery fee equal to
five percent (5%) of the sum of the Project's base rents and
Operating Expenses (other than such management fee).
Operating Expenses shall not include the cost of providing tenant improvements
or other specific costs incurred for the account of, separately billed to and
paid by specific tenants of the Building or Project, the initial construction
cost of the Building or Project, or debt service on any mortgage or deed of
trust recorded with respect to the Project other than pursuant to Paragraph
7.A.(3)(b) above, nor shall it include any of the following:
(a) Any ground lease rental.
(b) Costs incurred by Landlord for the repair of damage to the
Building and/or the Project to the extent that Landlord is
reimbursed by insurance or condemnation proceeds or by tenants,
warrantors or other third parties.
(c) Salaries, bonuses and other compensation of officers and
executives of Landlord above the level of Project Manager.
(d) Except as expressly permitted pursuant to Section 7.A
(3)(b) above, costs of a capital nature, including, without
limitation, capital improvements, capital replacements, capital
repairs, capital equipment and capital tools, all as determined
in accordance with generally accepted accounting practices,
consistently applied.
(e) Brokerage commissions, finders' fees, attorneys' fees and
other costs incurred by Landlord in leasing or attempting to
lease space in the Project.
(f) Expenses in connection with services or other benefits
which are not offered to Tenant or for which Tenant is charged
directly but which are provided to another tenant or occupant of
the Project.
(g) Costs incurred by Landlord due to the violation by
Landlord of the terms and conditions of any lease of space in
the Project.
(h) Any cost representing an amount paid to any person, firm,
corporation or other entity related to or affiliated with
Landlord, which amount is in excess of the amount which would
have reasonably been paid in the absence of such relationship
for comparable work or services involving the Project or
comparable buildings in the general vicinity of the Project
(i) Costs due to Landlord's violation of law.
(j) The amount of any deductible (in excess of $5,000 as to
any occurrence) with respect to Landlord's insurance, the costs
of self-insurance or any risk against which Landlord has elected
to self-insure.
(k) Curing of construction defects.
(l) Except as expressly permitted pursuant to Section 7.A
(3)(b) above, any and all costs of Landlord in bringing the
Building into compliance with building codes and other laws,
unless such compliance is necessitated by Tenant's acts or
omissions.
(m) Any and all costs of Landlord in complying with
environmental regulations including, but not limited to, the
costs and expenses of clean-up, remediation, environmental
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surveys/assessments, compliance with environmental laws,
consulting fees, treatment and monitoring charges,
transportation expenses and disposal fees, etc.
(n) Any real estate taxes and assessments to the extent they
exceed the amount payable to the taxing/assessing authority if
paid over the longest period of time allowed by law.
(o) Any increase in Operating Expenses for any calendar year
over the immediately preceding year in excess of five percent
(5%).
Notwithstanding anything herein to the contrary, in any instance
wherein Landlord, in Landlord's reasonable discretion, deems Tenant (because of
some use of the Premises that varies dramatically from that of other tenants in
the Project) to be responsible for usage of water or sewer service in an amount
greater than Tenant's Proportionate Share, Landlord shall have the right to
allocate costs in any manner Landlord deems appropriate, provided that such
allocation is fair to Tenant and is supported by reasonable documentation. The
above enumeration of services and facilities shall not be deemed to impose an
obligation on Landlord to make available or provide such services or facilities
except to the extent if any that Landlord has specifically agreed elsewhere in
this Lease to make the same available or provide the same. Without limiting the
generality of the foregoing, Tenant acknowledges and agrees that it shall be
responsible for providing adequate security for its use of the Premises, the
Building and the Project and that Landlord shall have no obligation or liability
with respect thereto, except to the extent if any that Landlord has specifically
agreed elsewhere in this Lease to provide the same.
A. PAYMENT OF ESTIMATED OPERATING EXPENSES. "ESTIMATED OPERATING EXPENSES"
for any particular year shall mean Landlord's estimate of the Operating Expenses
for such fiscal year made with respect to such fiscal year as hereinafter
provided. Landlord shall have the right from time to time to revise its fiscal
year and interim accounting periods so long as the periods as so revised are
reconciled with prior periods in a reasonable manner. During the last month of
each fiscal year during the Term, or as soon thereafter as practicable, Landlord
shall give Tenant written notice of the Estimated Operating Expenses for the
ensuing fiscal year. Tenant shall pay Tenant's Proportionate Share of the
Estimated Operating Expenses with installments of Base Rent for the fiscal year
to which the Estimated Operating Expenses applies in monthly installments on the
first day of each calendar month during such year, in advance. Such payment
shall be construed to be Additional Rent for all purposes hereunder. If at any
time during the course of the fiscal year, Landlord determines that Operating
Expenses are projected to vary from the then Estimated Operating Expenses by
more than five percent (5%), Landlord may, by written notice to Tenant, revise
the Estimated Operating Expenses for the balance of such fiscal year, and
Tenant's monthly installments for the remainder of such year shall be adjusted
so that by the end of such fiscal year Tenant has paid to Landlord Tenant's
Proportionate Share of the revised Estimated Operating Expenses for such year,
such revised installment amounts to be Additional Rent for all purposes
hereunder.
B. COMPUTATION OF OPERATING EXPENSE ADJUSTMENT. "OPERATING EXPENSE
ADJUSTMENT" shall mean the difference between Estimated Operating Expenses and
actual Operating Expenses for any fiscal year determined as hereinafter
provided. Within one hundred twenty (120) days after the end of each fiscal
year, or as soon thereafter as practicable, Landlord shall deliver to Tenant a
statement of actual Operating Expenses for the fiscal year just ended,
accompanied by a computation of Operating Expense Adjustment. If such statement
shows that Tenant's payment based upon Estimated Operating Expenses is less than
Tenant's Proportionate Share of Operating Expenses, then Tenant shall pay to
Landlord the difference within thirty (30) days after receipt of such statement,
such payment to constitute Additional Rent for all purposes hereunder. If such
statement shows that Tenant's payments of Estimated Operating Expenses exceed
Tenant's Proportionate Share of Operating Expenses, then (provided that Tenant
is not in default under this Lease) Landlord shall pay to Tenant the difference
within thirty (30) days after delivery of such statement to Tenant. If this
Lease has been terminated or the Term hereof has expired prior to the date of
such statement, then the Operating Expense Adjustment shall be paid by the
appropriate party within thirty (30) days after the date of delivery of the
statement. Should this Lease commence or terminate at any time other than the
first day of the fiscal year, Tenant's Proportionate Share of the Operating
Expense Adjustment shall be prorated based on a month of 30 days and the number
of calendar months during such fiscal year that this Lease is in effect.
Notwithstanding anything to the contrary contained in Paragraph 7.A or 7.B,
Landlord's failure to provide any notices or statements within the time periods
specified in those paragraphs shall in no way excuse Tenant from its obligation
to pay Tenant's Proportionate Share of Operating Expenses. As a condition to
Tenant's obligation to pay any Additional Rent, the Additional Rent must be
billed to Tenant within one hundred eighty (180) days after the expiration of
the calendar year during the term of this Lease to which such Additional Rent
applies and within one hundred eighty (180) days after the termination of this
Lease with respect to Additional Rent applicable to the calendar year during
which this Lease terminates.
C. NET LEASE. This shall be a triple net Lease and Base Rent shall be paid to
Landlord absolutely net of all costs and expenses, except as specifically
provided to the contrary in this Lease. The provisions for payment of Operating
Expenses and the Operating Expense Adjustment are intended to pass on to Tenant
and
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reimburse Landlord for all costs and expenses of the nature described in
Paragraph 7.A. incurred in connection with the ownership, management,
maintenance, repair, preservation, replacement and operation of the Building
and/or Project and its supporting facilities and such additional facilities now
and in subsequent years as may be determined by Landlord to be necessary or
desirable to the Building and/or Project.
D. TENANT AUDIT. If Tenant shall dispute the amount set forth in any
statement provided by Landlord under Paragraph 7.B. or 7.C. above, Tenant shall
have the right, not later than one hundred eighty (180) days following receipt
of such statement and upon the condition that Tenant shall first deposit with
Landlord the full amount in dispute, to cause Landlord's books and records with
respect to Operating Expenses for such fiscal year to be audited by certified
public accountants selected by Tenant and subject to Landlord's reasonable right
of approval. The Operating Expense Adjustment shall be appropriately adjusted on
the basis of such audit. If such audit discloses a liability for a refund in
excess of five percent (5%) of Tenant's Proportionate Share of the Operating
Expenses previously reported, the cost of such audit shall be borne by Landlord;
otherwise the cost of such audit shall be paid by Tenant. If Tenant shall not
request an audit in accordance with the provisions of this Paragraph 7.E. within
one hundred twenty (120) days after receipt of Landlord's statement provided
pursuant to Paragraph 7.B. or 7.C., such statement shall be final and binding
for all purposes hereof.
E. 100% LIMIT ON OPERATING EXPENSES. Landlord will not collect or be entitled
to collect Operating Expenses from all of the Building tenants and occupants in
an amount which is in excess of one hundred percent (100%) of the Operating
Expenses actually paid by Landlord in connection with the operation of the
Building, and Landlord shall make no profit from Landlord's collection of
Operating Expenses. All Operating Expenses must be actually and reasonably
incurred by Landlord.
8. INSURANCE AND INDEMNIFICATION
A. LANDLORD'S INSURANCE. All insurance maintained by Landlord shall be for
the sole benefit of Landlord and under Landlord's sole control.
(1) PROPERTY INSURANCE. Landlord agrees to maintain property insurance
insuring the Building against damage or destruction due to risk including
fire, vandalism, and malicious mischief in an amount not less than the
replacement cost thereof, in the form and with deductibles and
endorsements as selected by Landlord. At its election, Landlord may
instead (but shall have no obligation to) obtain "All Risk" coverage, and
may also obtain earthquake, pollution, and/or flood insurance in amounts
selected by Landlord.
(2) OPTIONAL INSURANCE. Landlord, at Landlord's option, may also (but
shall have no obligation to) carry insurance against loss of rent, in an
amount equal to the amount of Base Rent and Additional Rent that Landlord
could be required to abate to all Building tenants in the event of
condemnation or casualty damage for a period of twelve (12) months.
Landlord may also (but shall have no obligation to) carry such other
insurance as Landlord may deem prudent or advisable, including, without
limitation, liability insurance in such amounts and on such terms as
Landlord shall determine. Landlord shall not be obligated to insure, and
shall have no responsibility whatsoever for any damage to, any furniture,
machinery, goods, inventory or supplies, or other personal property or
fixtures which Tenant may keep or maintain in the Premises, or any
leasehold improvements, additions or alterations within the Premises.
B. TENANT'S INSURANCE.
(1) PROPERTY INSURANCE. Tenant shall procure at Tenant's sole cost and
expense and keep in effect from the date of this Lease and at all
times until the end of the Term, insurance on all personal
property and fixtures of Tenant and all improvements, additions or
alterations made by or for Tenant to the Premises on an "All Risk"
basis, insuring such property for the full replacement value of
such property, or, in the alternative, Tenant may self-insure such
risks.
(2) LIABILITY INSURANCE. Tenant shall procure at Tenant's sole cost
and expense and keep in effect from the date of this Lease and at
all times until the end of the Term Commercial General Liability
insurance covering bodily injury and property damage liability
occurring in or about the Premises or arising out of the use and
occupancy of the Premises and the Project, and any part of either,
and any areas adjacent thereto, and the business operated by
Tenant or by any other occupant of the Premises. Such insurance
shall include contractual liability coverage insuring all of
Tenant's indemnity obligations under this Lease. Such coverage
shall have a minimum combined single limit of liability of at
least Two Million Dollars ($2,000,000.00), and a minimum general
aggregate limit of Three Million Dollars ($3,000,000.00), with an
"Additional Insured - Managers or Lessors of Premises Endorsement"
and the "Amendment of the Pollution Exclusion Endorsement." All
such policies shall be written to apply to all bodily injury
(including death), property damage or loss, personal and
advertising injury and other covered loss, however occasioned,
occurring during the policy term, shall be endorsed to add
Landlord and any party holding an interest to which this Lease
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may be subordinated as an additional insured, and shall provide
that such coverage shall be "PRIMARY" and non-contributing with
any insurance maintained by Landlord, which shall be excess
insurance only. Such coverage shall also contain endorsements
including employees as additional insureds if not covered by
Tenant's Commercial General Liability Insurance. All such
insurance shall provide for the severability of interests of
insureds; and shall be written on an "OCCURRENCE" basis, which
shall afford coverage for all claims based on acts, omissions,
injury and damage, which occurred or arose (or the onset of which
occurred or arose) in whole or in part during the policy period.
(3) WORKERS' COMPENSATION AND EMPLOYERS' LIABILITY INSURANCE.
Tenant shall carry Workers' Compensation Insurance as required by
any Regulation, throughout the Term at Tenant's sole cost and
expense. Tenant shall also carry Employers' Liability Insurance in
amounts not less than One Million Dollars ($1,000,000) each
accident for bodily injury by accident; One Million Dollars
($1,000,000) policy limit for bodily injury by disease; and One
Million Dollars ($1,000,000) each employee for bodily injury by
disease, throughout the Term at Tenant's sole cost and expense.
(4) COMMERCIAL AUTO LIABILITY INSURANCE. Tenant shall procure
at Tenant's sole cost and expense and keep in effect from the date
of this Lease and at all times until the end of the Term
commercial auto liability insurance with a combined limit of not
less than One Million Dollars ($1,000,000) for bodily injury and
property damage for each accident. Such insurance shall cover
liability relating to any auto (including owned, hired and
non-owned autos).
(5) GENERAL INSURANCE REQUIREMENTS. All coverages described in
this Paragraph 8.B. shall be endorsed to (i) provide Landlord with
thirty (30) days' notice of cancellation or change in terms; and
(ii) waive all rights of subrogation by the insurance carrier
against Landlord (subject, however, to the limitations set forth
in Section 9 below). If at any time during the Term the amount or
coverage of insurance which Tenant is required to carry under this
Paragraph 8.B. is, in Landlord's reasonable judgment, materially
less than the amount or type of insurance coverage typically
carried by owners or tenants of properties located in the general
area in which the Premises are located which are similar to and
operated for similar purposes as the Premises or if Tenant's use
of the Premises should change with or without Landlord's consent,
Landlord shall have the right to require Tenant to increase the
amount or change the types of insurance coverage required under
this Paragraph 8.B. All insurance policies required to be carried
by Tenant under this Lease shall be written by companies rated A X
or better in "Best's Insurance Guide" and authorized to do
business in the State of California. In any event deductible
amounts under all insurance policies required to be carried by
Tenant under this Lease shall not exceed Five Thousand Dollars
($5,000.00) per occurrence. Tenant shall deliver to Landlord on or
before the Term Commencement Date, and thereafter at least thirty
(30) days before the expiration dates of the expired policies,
certified copies of Tenant's insurance policies, or a certificate
evidencing the same issued by the insurer thereunder; and, if
Tenant shall fail to procure such insurance, or to deliver such
policies or certificates, Landlord may, at Landlord's option and
in addition to Landlord's other remedies in the event of a default
by Tenant hereunder, procure the same for the account of Tenant,
and the cost thereof shall be paid to Landlord as Additional Rent.
C. TENANT INDEMNIFICATION. Tenant shall indemnify, defend by counsel
reasonably acceptable to Landlord, protect and hold Landlord harmless from and
against any and all claims, liabilities, losses, costs, loss of rents, liens,
damages, injuries or expenses, including reasonable attorneys' and consultants'
fees and court costs, demands, causes of action, or judgments, directly or
indirectly arising out of or related to: (1) claims of injury to or death of
persons or damage to property occurring or resulting directly or indirectly from
the use or occupancy of the Premises, Building or Project by Tenant or Tenant's
Parties, or from activities or failures to act of Tenant or Tenant's Parties;
(2) claims arising from work or labor performed, or for materials or supplies
furnished to or at the request of Tenant in connection with performance of any
work done for the account of Tenant within the Premises or Project; (3) claims
arising from any breach or default on the part of Tenant in the performance of
any covenant contained in this Lease; and (4) claims arising from the negligence
or intentional acts or omissions of Tenant or Tenant's Parties. The foregoing
indemnity by Tenant shall not be applicable to claims to the extent arising from
the negligence or willful misconduct of Landlord. Landlord shall not be liable
to Tenant and Tenant hereby waives all claims against Landlord for any injury or
damage to any person or property in or about the Premises, Building or Project
by or from any cause whatsoever (other than Landlord's negligence or willful
misconduct) and, without limiting the generality of the foregoing, whether
caused by water leakage of any character from the roof, walls, basement or other
portion of the Premises, Building or Project, or caused by gas, fire, oil or
electricity in, on or about the Premises, Building or Project. The provisions of
this Paragraph shall survive the expiration or earlier termination of this
Lease. Notwithstanding this Section 8.C or any other provision of this Lease to
the contrary, Tenant is not waiving any claim against Landlord arising from
Landlord's intentional misconduct or negligence resulting in any loss to Tenant
except to the extent that such loss is to property (rather than injury to
persons) and Tenant is fully compensated for such loss by insurance proceeds.
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D. LANDLORD Indemnification Subject to the releases and waivers of
subrogation contained in this Lease, Landlord shall indemnify, defend by counsel
reasonably acceptable to Tenant, protect and hold Tenant harmless from and
against any and all claims, liabilities, losses, costs, damages, injuries or
expenses, including reasonable attorneys' and consultants' fees and court costs,
demands, causes of action, or judgments directly or indirectly arising out of or
relating to the negligence or willful misconduct of the Landlord.
Notwithstanding the foregoing or anything to the contrary contained in this
Lease, Landlord shall in no event be liable to Tenant and Tenant hereby waives
all claims against Landlord for any injury or damage to any person or property
in or about the Premises, Building or Project, including without limitation the
common areas, by or from any cause whatsoever (other than Landlord's negligence
or willful misconduct) and, without limiting the generality of the foregoing,
whether caused by theft, fire, rain or water leakage of any character from the
roof, walls, plumbing, sprinklers, pipes, basement or any other portion of the
Premises, Building or Project, or caused by gas, fire, oil or electricity in, on
or about the Premises, Building or Project, or from any other systems, or by
acts of God (including without limitation flood or earthquake), acts of a public
enemy, riot, strike, insurrection, war, court order, requisition or order of
governmental body or authority or for any damage or inconvenience which may
arise through repair, except as expressly otherwise provided in Paragraph 10 of
this Lease. In addition, Landlord shall in no event be liable for (i) injury to
Tenant's business or any loss of income or profit therefrom or from
consequential damages, or (ii) sums up to the amount of insurance proceeds
received by Tenant. The foregoing indemnity by Landlord shall not be applicable
to claims to the extent arising from the negligence or willful misconduct of
Tenant or Tenant's Parties.
9. WAIVER OF SUBROGATION
To the extent permitted by law and without affecting the coverage provided by
insurance to be maintained hereunder or any other rights or remedies, Landlord
and Tenant each waive any right to recover against the other for: (a) damages
for injury to or death of persons; (b) damages to property, including personal
property; (c) damages to the Premises or any part thereof; and (d) claims
arising by reason of the foregoing due to hazards covered by insurance
maintained or required to be maintained pursuant to this Lease to the extent of
proceeds recovered therefrom, or proceeds which would have been recoverable
therefrom in the case of the failure of any party to maintain any insurance
coverage required to be maintained by such party pursuant to this Lease. This
provision is intended to waive fully, any rights and/or claims arising by reason
of the foregoing, but only to the extent that any of the foregoing damages
and/or claims referred to above are covered or would be covered, and only to the
extent of such coverage, by insurance actually carried or required to be
maintained pursuant to this Lease by either Landlord or Tenant. This provision
is also intended to waive fully, and for the benefit of each party, any rights
and/or claims which might give rise to a right of subrogation on any insurance
carrier. Subject to all qualifications of this Paragraph 9, Landlord waives its
rights as specified in this Paragraph 9 with respect to any subtenant that it
has approved pursuant to Paragraph 21 but only in exchange for the written
waiver of such rights to be given by such subtenant to Landlord upon such
subtenant taking possession of the Premises or a portion thereof. Each party
shall cause each insurance policy obtained by it to provide that the insurance
company waives all right of recovery by way of subrogation against either party
in connection with any damage covered by any policy.
10. LANDLORD'S REPAIRS AND MAINTENANCE
Landlord shall at Landlord's expense maintain in good repair, reasonable wear
and tear excepted, the structural soundness of the roof, foundations, and
exterior walls of the Building; in addition, and subject to reimbursement as
Operating Expenses to the extent permitted under Section 7 above, Landlord
shall, throughout the term of this Lease, maintain, repair, and, if necessary,
replace (i) the roof membrane and otherwise assure that the Premises remain
watertight, and (ii) all unexposed plumbing, electrical and other utility
systems. The Premises shall be delivered to Tenant with the HVAC, electrical,
plumbing and Building components in good condition and repair. The term
"exterior walls" as used herein shall not include windows, glass or plate glass,
doors, dock bumpers or dock plates, special store fronts or office entries. Any
damage caused by or repairs necessitated by any negligence or act of Tenant or
Tenant's Parties may be repaired by Landlord at Landlord's option and Tenant's
expense. Tenant shall immediately give Landlord written notice of any defect or
need of repairs in such components of the Building for which Landlord is
responsible, after which Landlord shall have a reasonable opportunity and the
right to enter the Premises at all reasonable times to repair same. Landlord's
liability with respect to any defects, repairs, or maintenance for which
Landlord is responsible under any of the provisions of this Lease shall be
limited to the cost of such repairs or maintenance, and there shall be no
abatement of rent and no liability of Landlord by reason of any injury to or
interference with Tenant's business arising from the making of repairs,
alterations or improvements in or to any portion of the Premises, the Building
or the Project or to fixtures, appurtenances or equipment in the Building,
except as provided in Paragraph 24. By taking possession of the Premises, Tenant
accepts them "as is," as being in good order, condition and repair and the
condition in which Landlord is obligated to deliver them and suitable for the
Permitted Use and Tenant's intended operations in the Premises, whether or not
any notice of acceptance is given, subject, however, to all the other terms and
conditions of this Lease, including, but not limited to, Section 38 below.
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11. TENANT'S REPAIRS AND MAINTENANCE
Except as provided in Section 10 above, Tenant shall at all times during the
Term at Tenant's expense maintain all parts of the Premises and such portions of
the Building as are within the exclusive control of Tenant in a first-class,
good, clean and secure condition and promptly make all necessary repairs and
replacements (subject to the limitations set forth in the final sentence of this
Section 11) including but not limited to, all windows, glass, doors, walls,
including demising walls, and wall finishes, floors and floor covering, heating,
ventilating and air conditioning systems, ceiling insulation, truck doors,
hardware, dock bumpers, dock plates and levelers, plumbing work and fixtures,
downspouts, entries, skylights, smoke hatches, roof vents, electrical and
lighting systems, and fire sprinklers, with materials and workmanship of the
same character, kind and quality as the original. Tenant shall at Tenant's
expense also perform regular removal of trash and debris. If Tenant uses rail
and if required by the railroad company, Tenant agrees to sign a joint
maintenance agreement governing the use of the rail spur, if any. Tenant shall,
at Tenant's own expense, enter into a regularly scheduled preventative
maintenance/service contract with a maintenance contractor for servicing all hot
water, heating and air conditioning systems and equipment within or serving the
Premises. The maintenance contractor and the contract must be approved by
Landlord. The service contract must include all services suggested by the
equipment manufacturer within the operation/maintenance manual and must become
effective and a copy thereof delivered to Landlord within thirty (30) days after
the Term Commencement Date. Landlord may, upon notice to Tenant, enter into such
a service contract on behalf of Tenant or perform the work and in either case
charge Tenant the cost thereof along with a reasonable amount for Landlord's
overhead. Notwithstanding anything to the contrary contained herein, Tenant
shall, at its expense, promptly repair any damage to the Premises or the
Building or Project resulting from or caused by any negligence or act of Tenant
or Tenant's Parties. Nothing herein shall expressly or by implication render
Tenant Landlord's agent or contractor to effect any repairs or maintenance
required of Tenant under this Paragraph 11, as to all of which Tenant shall be
solely responsible. Provided that Tenant has faithfully and fully performed its
maintenance and repair obligations under this Lease, Tenant's responsibility
under this Lease is limited to repairs and maintenance, and Tenant shall have no
responsibility for the replacement or renovation of any fixtures, equipment,
appurtenances or other components of the Premises.
12. ALTERATIONS
A. Tenant shall not make, or allow to be made, any alterations,
physical additions, improvements or partitions, including without limitation the
attachment of any fixtures or equipment, in, about or to the Premises
("ALTERATIONS") without obtaining the prior written consent of Landlord, which
consent shall not be unreasonably withheld with respect to proposed Alterations
which: (a) comply with all applicable Regulations; (b) are, in Landlord's
reasonable opinion, compatible with the Building or the Project and its
mechanical, plumbing, electrical, heating/ventilation/air conditioning systems,
and will not cause the Building or Project or such systems to be required to be
modified to comply with any Regulations (including, without limitation, the
Americans With Disabilities Act), unless Tenant agrees to pay for such
modifications; and (c) will not interfere with the use and occupancy of any
other portion of the Building or Project by any other tenant or its invitees.
Specifically, but without limiting the generality of the foregoing, Landlord
shall have the right of written consent for all plans and specifications for the
proposed Alterations, construction means and methods, all appropriate permits
and licenses, any contractor or subcontractor to be employed on the work of
Alterations, and the time for performance of such work, and may impose rules and
regulations for contractors and subcontractors performing such work. Tenant
shall also supply to Landlord any documents and information reasonably requested
by Landlord in connection with Landlord's consideration of a request for
approval hereunder. Tenant shall cause all Alterations to be accomplished in a
first-class, good and workmanlike manner, and to comply with all applicable
Regulations and Paragraph 27 hereof. Tenant shall at Tenant's sole expense,
perform any additional work required under applicable Regulations due to the
Alterations hereunder. No review or consent by Landlord of or to any proposed
Alteration or additional work shall constitute a waiver of Tenant's obligations
under this Paragraph 12. Tenant shall reimburse Landlord for all reasonable,
out-of-pocket costs which Landlord may incur in connection with granting
approval to Tenant for any such Alterations, including any costs or expenses
which Landlord may incur in electing to have outside architects and engineers
review said plans and specifications, and shall pay Landlord an administration
fee of fifteen percent (15%) . All such Alterations shall remain the property of
Tenant until the expiration or earlier termination of this Lease, at which time
they shall be and become the property of Landlord; provided, however, that
Landlord may, at Landlord's option, require that Tenant, at Tenant's expense,
remove any or all Alterations made by Tenant and restore the Premises by the
expiration or earlier termination of this Lease, to their condition existing
prior to the construction of any such Alterations, provided that such
requirement is communicated in writing to Tenant at the time that Landlord
consents to such alterations. In no event shall Landlord's consent be required
for (but all the other terms and conditions of this Section 12 shall apply to)
any Alteration costing less than $10,000.00 that does not require a building
permit. All such removals and restoration shall be accomplished in a first-class
and good and workmanlike manner so as not to cause any damage to the Premises or
Project whatsoever. If Tenant fails to remove such Alterations or Tenant's trade
fixtures or furniture or other personal property, Landlord may keep and use them
or remove any of them and cause them
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to be stored or sold in accordance with applicable law, at Tenant's sole
expense. In addition to and wholly apart from Tenant's obligation to pay
Tenant's Proportionate Share of Operating Expenses, Tenant shall be responsible
for and shall pay prior to delinquency any taxes or governmental service fees,
possessory interest taxes, fees or charges in lieu of any such taxes, capital
levies, or other charges imposed upon, levied with respect to or assessed
against its fixtures or personal property, on the value of Alterations within
the Premises, and on Tenant's interest pursuant to this Lease, or any increase
in any of the foregoing based on such Alterations. To the extent that any such
taxes are not separately assessed or billed to Tenant, Tenant shall pay the
amount thereof as invoiced to Tenant by Landlord.
A. Landlord may require Tenant to remove, at the expiration or earlier
termination of this Lease, any Alterations made by Tenant without Landlord's
prior approval (even if, as is the case with respect to certain Alterations
costing less than $10,000.00 as noted above, Landlord's consent to such
Alterations was not required). In compliance with Paragraph 27 hereof, at least
ten (10) business days before beginning construction of any Alteration, Tenant
shall give Landlord written notice of the expected commencement date of that
construction to permit Landlord to post and record a notice of
non-responsibility. Upon substantial completion of construction, if the law so
provides, Tenant shall cause a timely notice of completion to be recorded in the
office of the recorder of the county in which the Building is located.
13. SIGNS
Tenant shall not place, install, affix, paint or maintain any signs, notices,
graphics or banners whatsoever or any window decor which is visible in or from
public view or corridors, the common areas or the exterior of the Premises or
the Building, in or on any exterior window or window fronting upon any common
areas or service area or upon any truck doors or man doors without Landlord's
prior written approval which Landlord shall have the right to withhold in its
absolute and sole discretion; provided that Tenant's name shall be included in
any Building-standard door and directory signage, if any, in accordance with
Landlord's Building signage program, including without limitation, payment by
Tenant of any reasonable, nondiscriminatory fee charged by Landlord for
maintaining such signage, which fee shall constitute Additional Rent hereunder.
Any installation of signs, notices, graphics or banners on or about the Premises
or Project approved by Landlord shall be subject to any Regulations and to any
other requirements imposed by Landlord. Tenant shall remove all such signs or
graphics by the expiration or any earlier termination of this Lease. Such
installations and removals shall be made in such manner as to avoid injury to or
defacement of the Premises, Building or Project and any other improvements
contained therein, and Tenant shall repair any injury or defacement including
without limitation discoloration caused by such installation or removal.
14. INSPECTION/POSTING NOTICES
After reasonable notice and during Tenant's regular business hours, except in
emergencies where no such notice shall be required, Landlord and Landlord's
agents and representatives, shall have the right to enter the Premises to
inspect the same, to clean, to perform such work as may be permitted or required
hereunder, to make repairs, improvements or alterations to the Premises,
Building or Project or to other tenant spaces therein, to deal with emergencies,
to post such notices as may be permitted or required by law to prevent the
perfection of liens against Landlord's interest in the Project or to exhibit the
Premises to prospective tenants (during the last six (6) months of the term),
purchasers, encumbrancers or to others, or for any other purpose as Landlord may
deem necessary or desirable; provided, however, that Landlord shall use
reasonable efforts not to unreasonably interfere with Tenant's business
operations. Tenant shall not be entitled to any abatement of Rent by reason of
the exercise of any such right of entry. Tenant waives any claim for damages for
any injury or inconvenience to or interference with Tenant's business, any loss
of occupancy or quiet enjoyment of the Premises, and any other loss occasioned
thereby. 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 ,
safes, and other special security areas; provided, however, that Landlord shall
only enter the Premises without a representative of Tenant in the case of an
emergency; in all other instances, Landlord shall give Tenant prior notice,
which may be telephonic. Landlord shall have the right to use any and all means
which Landlord may deem necessary or proper to open said doors in an emergency,
in order to obtain entry to any portion of the Premises, and any entry to the
Premises or portions thereof obtained by Landlord by any of said means, or
otherwise, shall not be construed to be a forcible or unlawful entry into, or a
detainer of, the Premises, or an eviction, actual or constructive, of Tenant
from the Premises or any portions thereof. At any time within six (6) months
prior to the expiration of the Term or following any earlier termination of this
Lease or agreement to terminate this Lease, Landlord shall have the right to
erect on the Premises, Building and/or Project a suitable sign indicating that
the Premises are available for lease.
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15. SERVICES AND UTILITIES
A. Tenant shall pay directly for all water, gas, heat, air conditioning,
light, power, telephone, sewer, sprinkler charges and other utilities and
services used on or from the Premises, together with any taxes, penalties,
surcharges or the like pertaining thereto, and maintenance charges for utilities
and shall furnish all electric light bulbs, ballasts and tubes. If any such
services are not separately billed or metered to Tenant, Tenant shall pay a
proportion, as reasonably determined by Landlord, of all charges jointly serving
other premises (Tenant acknowledges that, pursuant to Section 7 above, if Tenant
uses an amount of water or sewer service that exceeds Tenant's Proportionate
Share, it may be charged for such excess usage). All sums payable under this
Paragraph 15 shall constitute Additional Rent hereunder.
B. Tenant acknowledges that Tenant has inspected and accepts the water,
electricity, heat and air conditioning and other utilities and services being
supplied or furnished to the Premises as of the date Tenant takes possession of
the Premises, if any, as being sufficient in their present condition, "as is,"
for the Permitted Use, and for Tenant's intended operations in the Premises,
subject, however, to the other terms of this Lease. Tenant also agrees at all
times to cooperate fully with Landlord and to abide by all of the regulations
and requirements which Landlord may prescribe for the proper functioning and
protection of electrical, heating, ventilating and air conditioning systems.
C. Landlord shall not be liable for any damages directly or indirectly
resulting from : (a) the installation, use or interruption of use of any
equipment used in connection with the furnishing of any such utilities or
services, or any change in the character or means of supplying or providing any
such utilities or services or any supplier thereof; (b) the failure to furnish
or delay in furnishing any such utilities or services when such failure or delay
is caused by acts of God or the elements, labor disturbances of any character,
or any other accidents or other conditions beyond the reasonable control of
Landlord or because of any interruption of service due to Tenant's use of water,
electric current or other resource in excess of that being supplied or furnished
for the use of the Premises as of the date Tenant takes possession of the
Premises; or (c) the inadequacy, limitation, curtailment, rationing or
restriction on use of water, electricity, gas or any other form of energy or any
other service or utility whatsoever serving the Premises or Project otherwise;
or (d) the partial or total unavailability of any such utilities or services to
the Premises or the Building, whether by Regulation or otherwise; nor shall any
such occurrence constitute an actual or constructive eviction of Tenant. If any
utility or other service to the Premises is interrupted, and the cause of such
interruption is reasonably curable by Landlord, Tenant shall, as of the tenth
(10th) consecutive business day of such interruption, thereafter be entitled to
an abatement of Rent (proportionate to the degree to which Tenant's use of the
Premises for the Permitted Use is interfered with) until such interruption is
cured by Landlord. Landlord shall use diligent and good faith efforts to
promptly restore utility service. Landlord shall further have no obligation to
protect or preserve any apparatus, equipment or device installed by Tenant in
the Premises, including without limitation by providing
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additional or after-hours heating or air conditioning. Landlord shall be
entitled to cooperate voluntarily and in a reasonable manner with the efforts of
national, state or local governmental agencies or utility suppliers in reducing
energy or other resource consumption. The obligation to make services available
hereunder shall be subject to the limitations of any such voluntary, reasonable
program. In addition, Landlord reserves the right to change the supplier or
provider of any such utility or service from time to time, provided that such
supplier or provider is competitively priced and is otherwise acceptable to
Tenant. Landlord may, but shall not be obligated to, upon notice to Tenant,
contract with or otherwise obtain any electrical or other such service for or
with respect to the Premises or Tenant's operations therein from any supplier or
provider of any such service, provided that such supplier or provider is
competitively priced and is otherwise acceptable to Tenant. Tenant shall
cooperate with Landlord and any supplier or provider of such services designated
by Landlord from time to time to facilitate the delivery of such services to
Tenant at the Premises and to the Building and Project, including without
limitation allowing Landlord and Landlord's suppliers or providers, and their
respective agents and contractors, reasonable access to the Premises for the
purpose of installing, maintaining, repairing, replacing or upgrading such
service or any equipment or machinery associated therewith.
16. SUBORDINATION
Without the necessity of any additional document being executed by
Tenant for the purpose of effecting a subordination, this Lease shall be and is
hereby declared to be subject and subordinate at all times to: (a) all ground
leases or underlying leases which may now exist or hereafter be executed
affecting the Premises and/or the land upon which the Premises and Project are
situated, or both; and (b) any mortgage or deed of trust which may now exist or
be placed upon the Building, the Project and/or the land upon which the Premises
or the Project are situated, or said ground leases or underlying leases, or
Landlord's interest or estate in any of said items which is specified as
security. Notwithstanding the foregoing, Landlord shall have the right to
subordinate or cause to be subordinated any such ground leases or underlying
leases or any such liens to this Lease. If any ground lease or underlying 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, Tenant shall,
notwithstanding any subordination, attorn to and become the Tenant of the
successor in interest to Landlord provided that Tenant shall not be disturbed in
its possession under this Lease by such successor in interest so long as Tenant
is not in default under this Lease. Within thirty (30) days after request by
Landlord, Tenant shall execute and deliver any additional documents evidencing
Tenant's attornment or the subordination of this Lease with respect to any such
ground leases or underlying leases or any such mortgage or deed of trust, in the
form requested by Landlord or by any ground landlord, mortgagee, or beneficiary
under a deed of trust, subject to such nondisturbance requirement. Landlord
shall promptly obtain a commercially reasonable nondisturbance agreement (in
substantially the form attached hereto as Exhibit D) from the landlord under any
ground lease or other underlying leasehold interest and from the holder and/or
beneficiary under any mortgage or deed of trust (collectively "ENCUMBRANCE") in
existence as of the Commencement Date (Landlord has advised Tenant that no
Encumbrance will be in effect as of the Commencement Date), and from the holder
of any Encumbrance to whom Tenant is required to subordinate pursuant to this
Section 16. The subordination of this Lease pursuant to this Section 16 and any
requirement of Tenant to attorn pursuant to this Section 16 is conditioned upon
receipt of such nondisturbance agreements.
17. FINANCIAL STATEMENTS
At the request of Landlord from time to time, Tenant shall provide to Landlord
Tenant's and any guarantor's current financial statements or other information
discussing financial worth of Tenant and any guarantor, which Landlord shall use
solely for purposes of this Lease and in connection with the ownership,
management, financing and disposition of the Project. In no event shall Landlord
request financial statements of Tenant more frequently than one (l) time per
calendar year, and Tenant shall only be obligated to provide such financial
statements as are readily available to Tenant without incurring any expense.
Landlord shall keep all financial information regarding Tenant strictly
confidential.
18. ESTOPPEL CERTIFICATE
Tenant agrees from time to time, within thirty (30) days after request of
Landlord, to deliver to Landlord, or Landlord's designee, an estoppel
certificate stating that this Lease is in full force and effect, that this Lease
has not been modified (or stating all modifications, written or oral, to this
Lease), the date to which Rent has been paid, the unexpired portion of this
Lease, that there are no current defaults by Landlord or Tenant under this Lease
(or specifying any such defaults), that the leasehold estate granted by this
Lease is the sole interest of Tenant in the Premises and/or the land at which
the Premises are situated, and such other matters pertaining to this Lease as
may be reasonably requested by Landlord or any mortgagee, beneficiary, purchaser
or prospective purchaser of the Building or Project or any interest therein.
Failure by Tenant to execute and deliver such certificate shall constitute an
acceptance of the Premises and acknowledgment by
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Tenant that the statements included are true and correct without exception.
Tenant agrees that if Tenant fails to execute and deliver such certificate
within such thirty (30) day period, Landlord may execute and deliver such
certificate on Tenant's behalf and that such certificate shall be binding on
Tenant. Landlord and Tenant intend that any statement delivered pursuant to this
Paragraph may be relied upon by any mortgagee, beneficiary, purchaser or
prospective purchaser of the Building or Project or any interest therein. The
parties agree that Tenant's obligation to furnish such estoppel certificates in
a timely fashion is a material inducement for Landlord's execution of this
Lease, and shall be an event of default if Tenant fails to fully comply
(provided that Landlord has given Tenant a second written notice affording an
additional five (5) business day cure period) or makes any material misstatement
in any such certificate.
19. SECURITY DEPOSIT
Tenant agrees to deposit with Landlord upon execution of this Lease, a security
deposit as stated in the Basic Lease Information (the "SECURITY DEPOSIT"), which
sum shall be held and owned by Landlord, without obligation to pay interest, as
security for the performance of Tenant's covenants and obligations under this
Lease. The Security Deposit is not an advance rental deposit or a measure of
damages incurred by Landlord in case of Tenant's default. Upon the occurrence of
any event of default by Tenant, Landlord may from time to time, without
prejudice to any other remedy provided herein or by law, use such fund as a
credit to the extent necessary to credit against any arrears of Rent or other
payments due to Landlord hereunder, and any other damage, injury, expense or
liability caused by such event of default, and Tenant shall pay to Landlord, on
demand, the amount so applied in order to restore the Security Deposit to its
original amount. Although the Security Deposit shall be deemed the property of
Landlord, any remaining balance of such deposit shall be returned by Landlord to
Tenant at such time after termination of this Lease that all of Tenant's
obligations under this Lease have been fulfilled, reduced by such amounts as may
be required by Landlord to remedy defaults on the part of Tenant in the payment
of Rent or other obligations of Tenant under this Lease, to repair damage to the
Premises, Building or Project caused by Tenant or any Tenant's Parties and to
clean the Premises. Landlord may use and commingle the Security Deposit with
other funds of Landlord.
20. LIMITATION OF TENANT'S REMEDIES
The obligations and liability of Landlord to Tenant for any default by Landlord
under the terms of this Lease are not personal obligations of Landlord or of the
individual or other partners of Landlord or its or their partners, directors,
officers, or shareholders, and Tenant agrees to look solely to Landlord's
interest in the Project for the recovery of any amount from Landlord, and shall
not look to other assets of Landlord nor seek recourse against the assets of the
individual or other partners of Landlord or its or their partners, directors,
officers or shareholders. Any lien obtained to enforce any such judgment and any
levy of execution thereon shall be subject and subordinate to any lien, mortgage
or deed of trust on the Project. Under no circumstances shall Tenant have the
right to offset against or recoup Rent or other payments due and to become due
to Landlord hereunder except as expressly provided in this Lease, which Rent and
other payments shall be absolutely due and payable hereunder in accordance with
the terms hereof.
21. ASSIGNMENT AND SUBLETTING
A. (1) GENERAL. This Lease has been negotiated to be and is granted as
an accommodation to Tenant. Accordingly, this Lease is personal to Tenant,
and Tenant's rights granted hereunder do not include the right to assign
this Lease or sublease the Premises, or to receive any excess, either in
installments or lump sum, over the Rent which is expressly reserved by
Landlord as hereinafter provided, except as otherwise expressly
hereinafter provided. Tenant shall not assign or pledge this Lease or
sublet the Premises or any part thereof, whether voluntarily or by
operation of law, or permit the use or occupancy of the Premises or any
part thereof by anyone other than Tenant, or suffer or permit any such
assignment, pledge, subleasing or occupancy, without Landlord's prior
written consent except as provided herein. If Tenant desires to assign
this Lease or sublet any or all of the Premises, Tenant shall give
Landlord written notice (the "TRANSFER NOTICE") at least thirty (30) days
prior to the anticipated effective date of the proposed assignment or
sublease, which shall contain all of the information reasonably requested
by Landlord to address Landlord's decision criteria specified hereinafter.
Landlord shall then have a period of twenty (20) days following receipt of
the Transfer Notice to notify Tenant in writing that Landlord elects
either: (i) to terminate this Lease as to the space so affected as of the
date so requested by Tenant (provided, however, that such termination
right shall not apply to or transfer to an Affiliate (as defined below));
or (ii) to consent to the proposed assignment or sublease, subject,
however, to Landlord's prior written consent of the proposed assignee or
subtenant and of any related documents or agreements associated with the
assignment or sublease. If Landlord should fail to notify Tenant in
writing of such election within said period, Landlord shall be deemed to
have waived option (i) above, but written consent by Landlord of the
proposed assignee or subtenant shall still be required. If Landlord does
not exercise option (i) above, Landlord's consent to a proposed assignment
or sublease shall not be unreasonably withheld, conditioned or delayed.
Consent to any assignment or subletting shall not constitute consent to
any subsequent transaction to which this Paragraph 21 applies.
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(2) CONDITIONS OF LANDLORD'S CONSENT. Without limiting the other instances
in which it may be reasonable for Landlord to withhold Landlord's consent
to an assignment or subletting, Landlord and Tenant acknowledge that it
shall be reasonable for Landlord to withhold Landlord's consent in the
following instances: if the proposed assignee does not agree to be bound
by and assume the obligations of Tenant under this Lease in form and
substance reasonably satisfactory to Landlord; the use of the Premises by
such proposed assignee or subtenant would not be a Permitted Use or would
violate any exclusivity or other arrangement which Landlord has with any
other tenant or occupant or any Regulation or would increase the Occupancy
Density or Parking Density of the Building or Project, or would otherwise
result in an undesirable tenant mix for the Project as reasonably
determined by Landlord; the proposed assignee or subtenant is not of sound
financial condition as determined by Landlord in Landlord's reasonable
discretion (taking into account the continuing, primary liability of
Tenant); the proposed assignee or subtenant is a governmental agency; the
proposed assignee or subtenant does not have a good reputation as a tenant
of property or a good business reputation; the proposed assignee or
subtenant is a person with whom Landlord is negotiating to lease space in
the Project or is a present tenant of the Project (and Landlord has space
available on terms acceptable to that party); the assignment or subletting
would entail any Alterations which would lessen the value of the leasehold
improvements in the Premises or use of any Hazardous Materials or other
noxious use or use which may disturb other tenants of the Project; or
Tenant is in default of any obligation of Tenant under this Lease
(following notice and passage of the applicable cure period under Section
26 below). Upon a termination under Paragraph 21.A.(1)(i), Landlord may
lease the Premises to any party, including parties with whom Tenant has
negotiated an assignment or sublease, without incurring any liability to
Tenant. At the option of Landlord, a surrender and termination of this
Lease shall operate as an assignment to Landlord of some or all subleases
or subtenancies. Landlord shall exercise this option by giving notice of
that assignment to such subtenants on or before the effective date of the
surrender and termination. In connection with each request for assignment
or subletting, Tenant shall pay to Landlord Landlord's standard fee for
approving such requests (not to exceed $500.00), as well as all
reasonable, out-of-pocket costs incurred by Landlord or any mortgagee or
ground lessor in approving each such request and effecting any such
transfer, including, without limitation, reasonable attorneys' fees.
B. BONUS RENT. Any Rent or other consideration realized by Tenant under
any such sublease or assignment in excess of the Rent payable hereunder, after
amortization of a reasonable brokerage commission and other out-of-pocket costs
incurred by Tenant, shall be divided and paid, twenty percent (20%) to Tenant,
eighty percent (80%) to Landlord. In any subletting or assignment undertaken by
Tenant, Tenant shall diligently seek to obtain the maximum rental amount
available in the marketplace for comparable space available for primary leasing.
C. CORPORATION. If Tenant is a corporation, a transfer of corporate
shares by sale, assignment, bequest, inheritance, operation of law or other
disposition (including such a transfer to or by a receiver or trustee in federal
or state bankruptcy, insolvency or other proceedings) resulting in a change in
the present control of such corporation or any of its parent corporations by the
person or persons owning a majority of said corporate shares, shall constitute
an assignment for purposes of this Lease. This Section 21.C shall not apply to
Tenant if Tenant is a publicly traded corporation.
D. UNINCORPORATED ENTITY. If Tenant is a partnership, joint venture,
unincorporated limited liability company or other unincorporated business form,
a transfer of the interest of persons, firms or entities responsible for
managerial control of Tenant by sale, assignment, bequest, inheritance,
operation of law or other disposition, so as to result in a change in the
present control of said entity and/or of the underlying beneficial interests of
said entity and/or a change in the identity of the persons responsible for the
general credit obligations of said entity shall constitute an assignment for all
purposes of this Lease.
E. LIABILITY. No assignment or subletting by Tenant, permitted or
otherwise, shall relieve Tenant of any obligation under this Lease or alter the
primary liability of the Tenant named herein for the payment of Rent or for the
performance of any other obligations to be performed by Tenant, including
obligations contained in Paragraph 25 with respect to any assignee or subtenant.
Landlord may collect rent or other amounts or any portion thereof from any
assignee, subtenant, or other occupant of the Premises, permitted or otherwise,
and apply the net rent collected to the Rent payable hereunder, but no such
collection shall be deemed to be a waiver of this Paragraph 21, or the
acceptance of the assignee, subtenant or occupant as tenant, or a release of
Tenant from the further performance by Tenant of the obligations of Tenant under
this Lease. Any assignment or subletting which conflicts with the provisions
hereof shall be void.
F. AFFILIATES. Tenant may assign this Lease at any time, or sublease all
or part of the Premises, without receipt of Landlord's consent (but with prior
notice to Landlord), to any entity which acquires all or part of Tenant, or
which is acquired in whole or in part by Tenant, or which is controlled directly
or indirectly by Tenant, or which entity controls, directly or indirectly,
Tenant ("Affiliate"), or which owns or is owned by
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the Affiliate, so long as such transaction was not entered into as a subterfuge
to avoid the obligations and restrictions of this Lease.
22. AUTHORITY
Landlord represents and warrants that it has full right and authority to enter
into this Lease and to perform all of Landlord's obligations hereunder and that
all persons signing this Lease on its behalf are authorized to do. Tenant and
the person or persons, if any, signing on behalf of Tenant, jointly and
severally represent and warrant that Tenant has full right and authority to
enter into this Lease, and to perform all of Tenant's obligations hereunder, and
that all persons signing this Lease on its behalf are authorized to do so.
23. CONDEMNATION
A. CONDEMNATION RESULTING IN TERMINATION. If the whole or any
substantial part of the Premises should be taken or condemned for any public use
under any Regulation, or by right of eminent domain, or by private purchase in
lieu thereof, and the taking would prevent or materially interfere with the
Permitted Use of the Premises, either party shall have the right to terminate
this Lease at its option. If any material portion of the Building or Project is
taken or condemned for any public use under any Regulation, or by right of
eminent domain, or by private purchase in lieu thereof, Landlord may terminate
this Lease at its option. In either of such events, the Rent shall be abated
during the unexpired portion of this Lease, effective when the physical taking
of said Premises shall have occurred.
B. CONDEMNATION NOT RESULTING IN TERMINATION. If a portion of the
Project of which the Premises are a part should be taken or condemned for any
public use under any Regulation, or by right of eminent domain, or by private
purchase in lieu thereof, and the taking prevents or materially interferes with
the Permitted Use of the Premises, and this Lease is not terminated as provided
in Paragraph 23.A. above, the Rent payable hereunder during the unexpired
portion of this Lease shall be reduced, beginning on the date when the physical
taking shall have occurred, to such amount as may be fair and reasonable under
all of the circumstances, but only after giving Landlord credit for all sums
received or to be received by Tenant by the condemning authority.
Notwithstanding anything to the contrary contained in this Paragraph, if the
temporary use or occupancy of any part of the Premises shall be taken or
appropriated under power of eminent domain during the Term, this Lease shall be
and remain unaffected by such taking or appropriation and Tenant shall continue
to pay in full all Rent payable hereunder by Tenant during the Term; in the
event of any such temporary appropriation or taking, Tenant shall be entitled to
receive that portion of any award which represents compensation for the use of
or occupancy of the Premises during the Term, and Landlord shall be entitled to
receive that portion of any award which represents the cost of restoration of
the Premises and the use and occupancy of the Premises.
C. AWARD. Landlord shall be entitled to (and Tenant shall assign to
Landlord) any and all payment, income, rent, award or any interest therein
whatsoever which may be paid or made in connection with such taking or
conveyance and Tenant shall have no claim against Landlord or otherwise for any
sums paid by virtue of such proceedings, whether or not attributable to the
value of any unexpired portion of this Lease, except as expressly provided in
this Lease. Notwithstanding the foregoing, any compensation specifically and
separately awarded Tenant for Tenant's personal property and moving costs, shall
be and remain the property of Tenant.
D. WAIVER OF CCP Section 1265.130. Each party waives the provisions of
California Civil Code Procedure Section 1265.130 allowing either party to
petition the superior court to terminate this Lease as a result of a partial
taking.
24. CASUALTY DAMAGE
A. GENERAL. If the Premises or Building should be damaged or destroyed
by fire, tornado, or other casualty (collectively, "CASUALTY"), Tenant shall
give immediate written notice thereof to Landlord. Within thirty (30) days after
Landlord's receipt of such notice, Landlord shall notify Tenant whether in
Landlord's estimation material restoration of the Premises can reasonably be
made within one hundred eighty (180) days from the date of such notice and
receipt of required permits for such restoration. Landlord's reasonable
determination shall be binding on Tenant.
B. WITHIN 180 DAYS. If the Premises or Building should be damaged by
Casualty to such extent that material restoration can in Landlord's estimation
be reasonably completed within one hundred eighty (180) days after the date of
such notice and receipt of required permits for such restoration, this Lease
shall not terminate. Provided that insurance proceeds are received by Landlord
to fully repair the damage, Landlord shall proceed to rebuild and repair the
Premises in the manner determined by Landlord, except that Landlord shall not be
required to rebuild, repair or replace any part of the Alterations which may
have been placed on or about the Premises by Tenant. If the Premises are
untenantable in whole or in part following such damage, the Rent payable
hereunder during the period in which they are untenantable shall be abated
proportionately, but only to the extent of rental abatement insurance proceeds
received by Landlord during the time and to the extent the Premises are unfit
for occupancy.
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C. GREATER THAN 180 DAYS. If the Premises or Building should be damaged
by Casualty to such extent that rebuilding or repairs cannot in Landlord's
estimation be reasonably completed within one hundred eighty (180) days after
the date of such notice and receipt of required permits for such rebuilding or
repair, then Landlord shall have the option of either: (1) terminating this
Lease effective upon the date of the occurrence of such damage, in which event
the Rent shall be abated during the unexpired portion of this Lease; or (2)
electing to rebuild or repair the Premises diligently and in the manner
determined by Landlord. Landlord shall notify Tenant of its election within
thirty (30) days after Landlord's receipt of notice of the damage or
destruction. Notwithstanding the above, Landlord shall not be required to
rebuild, repair or replace any part of any Alterations which may have been
placed, on or about the Premises by Tenant. If the Premises are untenantable in
whole or in part following such damage, the Rent payable hereunder during the
period in which they are untenantable shall be abated proportionately, but only
to the extent of rental abatement insurance proceeds received by Landlord during
the time and to the extent the Premises are unfit for occupancy.
D. TENANT'S FAULT.
E. INSURANCE PROCEEDS. Notwithstanding anything herein to the contrary,
if the Premises or Building are damaged or destroyed and are not fully covered
by the insurance proceeds received by Landlord or if the holder of any
indebtedness secured by a mortgage or deed of trust covering the Premises
requires that the insurance proceeds be applied to such indebtedness, then in
either case Landlord shall have the right to terminate this Lease by delivering
written notice of termination to Tenant within thirty (30) days after the date
of notice to Landlord that said damage or destruction is not fully covered by
insurance or such requirement is made by any such holder, as the case may be,
whereupon this Lease shall terminate.
F. WAIVER. This Paragraph 24 shall be Tenant's sole and exclusive remedy
in the event of damage or destruction to the Premises or the Building. As a
material inducement to Landlord entering into this Lease, Tenant hereby waives
any rights it may have under Sections 1932, 1933(4), 1941 or 1942 of the Civil
Code of California with respect to any destruction of the Premises, Landlord's
obligation for tenantability of the Premises and Tenant's right to make repairs
and deduct the expenses of such repairs, or under any similar law, statute or
ordinance now or hereafter in effect.
G. TENANT'S PERSONAL PROPERTY. In the event of any damage or destruction
of the Premises or the Building, under no circumstances shall Landlord be
required to repair any injury or damage to, or make any repairs to or
replacements of, Tenant's personal property.
H. TENANT'S RIGHTS. In no event shall Landlord be entitled to terminate
this Lease pursuant to this Section 24 unless Landlord simultaneously terminates
the leases of all other similarly affected tenants within the Building. Tenant
may elect to terminate this Lease, effective as of the date of any Casualty
described in Section 24.C under either of the following circumstances: (i) if
the Premises are not, or cannot reasonably be, completed within two hundred
seventy (270) days from the date of the Casualty, or (ii) if damage or
destruction of the Premises is such that it materially affects the habitability
of the Premises and occurs during the last twelve (12) months of the term,
including any extended terms.
25. HOLDING OVER
Unless Landlord expressly consents in writing to Tenant's holding over, Tenant
shall be unlawfully and illegally in possession of the Premises, whether or not
Landlord accepts any rent from Tenant or any other person while Tenant remains
in possession of the Premises without Landlord's written consent. If Tenant
shall retain possession of the Premises or any portion thereof without
Landlord's consent following the expiration of this Lease or sooner termination
for any reason, then Tenant shall pay to Landlord for each day of such retention
two hundred percent (200%) of the amount of daily rental as of the last month
prior to the date of expiration or earlier termination. Tenant shall also
indemnify, defend, protect and hold Landlord harmless from any loss, liability
or cost, including consequential and incidental damages and reasonable
attorneys' fees, incurred by Landlord resulting from delay by Tenant in
surrendering the Premises, including, without limitation, any claims made by the
succeeding tenant founded on such delay. Acceptance of Rent by Landlord
following expiration or earlier termination of this Lease, or following demand
by Landlord for possession of the Premises, shall not constitute a renewal of
this Lease, and nothing contained in this Paragraph 25 shall waive Landlord's
right of reentry or any other right. Additionally, if upon expiration or earlier
termination of this Lease, or following demand by Landlord for possession of the
Premises, Tenant has not fulfilled its obligation with respect to repairs and
cleanup of the Premises or any other Tenant obligations as set forth in this
Lease, then Landlord shall have the right to perform any such obligations as it
deems necessary at Tenant's sole cost and expense, and any time required by
Landlord to complete such obligations
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shall be considered a period of holding over and the terms of this Paragraph 25
shall apply. The provisions of this Paragraph 25 shall survive any expiration or
earlier termination of this Lease.
26. DEFAULT
A. EVENTS OF DEFAULT. The occurrence of any of the following shall
constitute an event of default on the part of Tenant:
(1) ABANDONMENT OR VACATION OF THE PREMISES . Tenant waives any right to
notice Tenant may have under Section 1951.3 of the Civil Code of the State
of California, the terms of this Paragraph 26.A being deemed such notice
to Tenant as required by said Section 1951.3. In no event shall Tenant be
deemed to have "abandoned" or "vacated" the Premises unless Tenant shall
have vacated the Premises, and failed to pay rent within the fourteen
(14)-day period required by said Section 1951.3.
(2) NONPAYMENT OF RENT. Failure to pay any installment of Rent or any
other amount due and payable hereunder within five (5) days after written
notice that said payment is due, as to which time is of the essence.
(3) OTHER OBLIGATIONS. Failure to perform any obligation, agreement or
covenant under this Lease other than those matters specified in
subparagraphs (1) and (2) of this Paragraph 26.A., such failure continuing
for fifteen (15) business days after written notice of such failure, as to
which time is of the essence.
(4) GENERAL ASSIGNMENT. A general assignment by Tenant for the benefit
of creditors.
(5) BANKRUPTCY. The filing of any voluntary petition in bankruptcy by
Tenant, or the filing of an involuntary petition by Tenant's creditors,
which involuntary petition remains undischarged for a period of thirty
(30) days. If under applicable law, the trustee in bankruptcy or Tenant
has the right to affirm this Lease and continue to perform the obligations
of Tenant hereunder, such trustee or Tenant shall, in such time period as
may be permitted by the bankruptcy court having jurisdiction, cure all
defaults of Tenant hereunder outstanding as of the date of the affirmance
of this Lease and provide to Landlord such adequate assurances as may be
necessary to ensure Landlord of the continued performance of Tenant's
obligations under this Lease.
(6) RECEIVERSHIP. The employment of a receiver to take possession of
substantially all of Tenant's assets or the Premises, if such appointment
remains undismissed or undischarged for a period of fifteen (15) days
after the order therefor.
(7) ATTACHMENT. The attachment, execution or other judicial seizure of
all or substantially all of Tenant's assets or Tenant's leasehold of the
Premises, if such attachment or other seizure remains undismissed or
undischarged for a period of fifteen (15) days after the levy thereof.
(8) INSOLVENCY. The admission by Tenant in writing of its inability to
pay its debts as they become due.
B. REMEDIES UPON DEFAULT.
(1) TERMINATION. In the event of the occurrence of any event of default,
Landlord shall have the right to give a written termination notice to
Tenant, and on the date specified in such notice, Tenant's right to
possession shall terminate, and this Lease shall terminate unless on or
before such date all Rent in arrears and all costs and expenses incurred
by or on behalf of Landlord hereunder shall have been paid by Tenant and
all other events of default of this Lease by Tenant at the time existing
shall have been fully remedied to the satisfaction of Landlord. At any
time after such termination, Landlord may recover possession of the
Premises or any part thereof and expel and remove therefrom Tenant and any
other person occupying the same, including any subtenant or subtenants
notwithstanding Landlord's consent to any sublease, by any lawful means,
and again repossess and enjoy the Premises without prejudice to any of the
remedies that Landlord may have under this Lease, or at law or equity by
any reason of Tenant's default or of such termination. Landlord hereby
reserves the right, but shall not have the obligation, to recognize the
continued possession of any subtenant. The delivery or surrender to
Landlord by or on behalf of Tenant of keys, entry codes, or other means to
bypass security at the Premises shall not terminate this Lease.
(2) CONTINUATION AFTER DEFAULT. Even though an event of default may have
occurred, this Lease shall continue in effect for so long as Landlord does
not terminate Tenant's right to possession under Paragraph 26.B.(1)
hereof, and Landlord may enforce all of Landlord's rights and remedies
under this Lease and at law or in equity, including without limitation,
the right to recover Rent as it becomes due, and Landlord, without
terminating this Lease, may exercise all of the rights and remedies of a
landlord under Section 1951.4 of the Civil Code of the State of California
or any successor code section. Acts of maintenance, preservation or
efforts to lease the Premises or the
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appointment of a receiver under application of Landlord to protect
Landlord's interest under this Lease or other entry by Landlord upon the
Premises shall not constitute an election to terminate Tenant's right to
possession.
C. DAMAGES AFTER DEFAULT. Should Landlord terminate this Lease pursuant
to the provisions of Paragraph 26.B.(1) hereof, Landlord shall have the rights
and remedies of a Landlord provided by Section 1951.2 of the Civil Code of the
State of California, or any successor code sections. Upon such termination, in
addition to any other rights and remedies to which Landlord may be entitled
under applicable law or at equity, Landlord shall be entitled to recover from
Tenant: (1) the worth at the time of award of the unpaid Rent and other amounts
which had been earned at the time of termination, (2) the worth at the time of
award of the amount by which the unpaid Rent and other amounts that would have
been earned after the date of termination until the time of award exceeds the
amount of such Rent loss that Tenant proves could have been reasonably avoided;
(3) the worth at the time of award of the amount by which the unpaid Rent and
other amounts for the balance of the Term after the time of award exceeds the
amount of such Rent loss that the Tenant proves could be reasonably avoided; and
(4) any other amount and court costs necessary to compensate Landlord for all
detriment proximately caused by Tenant's failure to perform Tenant's obligations
under this Lease or which, in the ordinary course of things, would be likely to
result therefrom. The "worth at the time of award" as used in (1) and (2) above
shall be computed at the Applicable Interest Rate (defined below). The "worth at
the time of award" as used in (3) above shall be computed by discounting such
amount at the Federal Discount Rate of the Federal Reserve Bank of San Francisco
at the time of award plus one percent (1%). If this Lease provides for any
periods during the Term during which Tenant is not required to pay Base Rent or
if Tenant otherwise receives a Rent concession, then upon the occurrence of an
event of default, Tenant shall owe to Landlord the full amount of such Base Rent
or value of such Rent concession, plus interest at the Applicable Interest Rate,
calculated from the date that such Base Rent or Rent concession would have been
payable.
D. LATE CHARGE. In addition to its other remedies, Landlord shall have
the right without notice or demand to add to the amount of any payment required
to be made by Tenant hereunder, and which is not paid and received by Landlord
on or before the sixth day after its due date, an amount equal to eight percent
(8%) of the delinquency for each month or portion thereof that the delinquency
remains outstanding to compensate Landlord for the loss of the use of the amount
not paid and the administrative costs caused by the delinquency, the parties
agreeing that Landlord's damage by virtue of such delinquencies would be
extremely difficult and impracticable to compute and the amount stated herein
represents a reasonable estimate thereof. Any waiver by Landlord of any late
charges or failure to claim the same shall not constitute a waiver of other late
charges or any other remedies available to Landlord.
E. INTEREST. Interest shall accrue on all sums not paid when due
hereunder at the lesser of eighteen percent (18%) per annum or the maximum
interest rate allowed by law ("APPLICABLE INTEREST RATE") from the due date
until paid. Any sum owing from Landlord to Tenant shall accrue interest at the
Applicable Interest Rate.
F. REMEDIES Cumulative. All rights, privileges and elections or
remedies of the parties are cumulative and not alternative, to the extent
permitted by law and except as otherwise provided herein.
27. LIENS
Tenant shall at all times keep the Premises and the Project free from liens
arising out of or related to work or services performed, materials or supplies
furnished or obligations incurred by or on behalf of Tenant or in connection
with work made, suffered or done by or on behalf of Tenant in or on the Premises
or Project. If Tenant shall not, within ten (10) days following the imposition
of any such lien, cause the same to be released of record by payment or posting
of a proper bond, Landlord shall have, in addition to all other remedies
provided herein and by law, the right, but not the obligation, to cause the same
to be released by such means as Landlord shall deem proper, including payment of
the claim giving rise to such lien. All sums paid by Landlord on behalf of
Tenant and all expenses incurred by Landlord in connection therefor shall be
payable to Landlord by Tenant on demand with interest at the Applicable Interest
Rate as Additional Rent. Landlord shall have the right at all times to post and
keep posted on the Premises any notices permitted or required by law, or which
Landlord shall deem proper, for the protection of Landlord, the Premises, the
Project and any other party having an interest therein, from mechanics' and
materialmen's liens, and Tenant shall give Landlord not less than ten (10)
business days prior written notice of the commencement of any work in the
Premises or Project which could lawfully give rise to a claim for mechanics' or
materialmen's liens to permit Landlord to post and record a timely notice of
non-responsibility, as Landlord may elect to proceed or as the law may from time
to time provide, for which purpose, if Landlord shall so determine, Landlord may
enter the Premises. Tenant shall not remove any such notice posted by Landlord
without Landlord's consent, and
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in any event not before completion of the work which could lawfully give rise to
a claim for mechanics' or materialmen's liens.
28. SUBSTITUTION
29. TRANSFERS BY LANDLORD
In the event of a sale or conveyance by Landlord of the Building or a
foreclosure by any creditor of Landlord, the same shall operate to release
Landlord from any liability upon any of the covenants or conditions, express or
implied, herein contained in favor of Tenant, to the extent required to be
performed after the passing of title to Landlord's successor-in-interest. In
such event, Tenant agrees to look solely to the responsibility of the
successor-in-interest of Landlord under this Lease with respect to the
performance of the covenants and duties of "Landlord" to be performed after the
passing of title to Landlord's successor-in-interest. This Lease shall not be
affected by any such sale and Tenant agrees to attorn to the purchaser or
assignee. Landlord's successor(s)-in-interest shall not have liability to Tenant
with respect to the failure to perform any of the obligations of "Landlord," to
the extent required to be performed prior to the date such
successor(s)-in-interest became the owner of the Building.
30. RIGHT OF LANDLORD TO PERFORM TENANT'S COVENANTS
All covenants and agreements to be performed by Tenant under any of the terms of
this Lease shall be performed by Tenant at Tenant's sole cost and expense and
without any abatement of Rent. If Tenant shall fail to pay any sum of money,
other than Base Rent, required to be paid by Tenant hereunder or shall fail to
perform any other act on Tenant's part to be performed hereunder, including
Tenant's obligations under Paragraph 11 hereof, and such failure shall continue
for fifteen (15) days after notice thereof by Landlord, in addition to the other
rights and remedies of Landlord, Landlord may make any such payment and perform
any such act on Tenant's part. In the case of an emergency, no prior
notification by Landlord shall be required. Landlord may take such actions
without any obligation and without releasing Tenant from any of Tenant's
obligations. All sums so paid by Landlord and all incidental costs incurred by
Landlord and interest thereon at the Applicable Interest Rate, from the date of
payment by Landlord, shall be paid to Landlord on demand as Additional Rent.
31. WAIVER
If either Landlord or Tenant waives the performance of any term, covenant or
condition contained in this Lease, such waiver shall not be deemed to be a
waiver of any subsequent breach of the same or any other term, covenant or
condition contained herein, or constitute a course of dealing contrary to the
expressed terms of this Lease. The acceptance of Rent by Landlord shall not
constitute a waiver of any preceding breach by Tenant of any term, covenant or
condition of this Lease, regardless of Landlord's knowledge of such preceding
breach at the time Landlord accepted such Rent. Failure by Landlord to enforce
any of the terms, covenants or conditions of this Lease for any length of time
shall not be deemed to waive or decrease the right of Landlord to insist
thereafter upon strict performance by Tenant. Waiver by Landlord of any term,
covenant or condition contained in this Lease may only be made by a written
document signed by Landlord, based upon full knowledge of the circumstances.
32. NOTICES
Each provision of this Lease or of any applicable governmental laws, ordinances,
regulations and other requirements with reference to sending, mailing, or
delivery of any notice or the making of any payment by Landlord or Tenant to the
other shall be deemed to be complied with when and if the following steps are
taken:
A. RENT. All Rent and other payments required to be made by Tenant to
Landlord hereunder shall be payable to Landlord at Landlord's Remittance Address
set forth in the Basic Lease Information, or at such other address as Landlord
may specify from time to time by written notice delivered in accordance
herewith. Tenant's obligation to pay Rent and any other amounts to Landlord
under the terms of this Lease shall not be deemed satisfied until such Rent and
other amounts have been actually received by Landlord.
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B. OTHER. All notices, demands, consents and approvals which may or are
required to be given by either party to the other hereunder shall be in writing
and either personally delivered, sent by commercial overnight courier, mailed,
certified or registered, postage prepaid or sent by facsimile with confirmed
receipt (and with an original sent by commercial overnight courier), and in each
case addressed to the party to be notified at the Notice Address for such party
as specified in the Basic Lease Information or to such other place as the party
to be notified may from time to time designate by at least fifteen (15) days
notice to the notifying party. Notices shall be deemed served upon receipt or
refusal to accept delivery.
C. REQUIRED NOTICES. Tenant shall immediately notify Landlord in
writing of any notice of a violation or a potential or alleged violation of any
Regulation that relates to the Premises or the Project, or of any inquiry,
investigation, enforcement or other action that is instituted or threatened by
any governmental or regulatory agency against Tenant or any other occupant of
the Premises, or any claim that is instituted or threatened by any third party
that relates to the Premises or the Project.
33. ATTORNEYS' FEES
If Landlord places the enforcement of this Lease, or any part thereof, or the
collection of any Rent due, or to become due hereunder, or recovery of
possession of the Premises in the hands of an attorney, Tenant shall pay to
Landlord, upon demand, Landlord's reasonable attorneys' fees and court costs,
whether incurred at trial, appeal or review. In any action which Landlord or
Tenant brings to enforce its respective rights hereunder, the unsuccessful party
shall pay all costs incurred by the prevailing party including reasonable
attorneys' fees, to be fixed by the court, and said costs and attorneys' fees
shall be a part of the judgment in said action.
34. SUCCESSORS AND ASSIGNS
This Lease shall be binding upon and inure to the benefit of Landlord, its
successors and assigns, and shall be binding upon and inure to the benefit of
Tenant, its successors, and to the extent assignment is approved by Landlord as
provided hereunder, Tenant's assigns.
35. FORCE MAJEURE
If performance by a party of any portion of this Lease is made impossible by any
prevention, delay, or stoppage caused by strikes, lockouts, labor disputes, acts
of God, inability to obtain services, labor, or materials or reasonable
substitutes for those items, government actions, civil commotions, fire or other
casualty, or other causes beyond the reasonable control of the party obligated
to perform, performance by that party for a period equal to the period of that
prevention, delay, or stoppage is excused. Tenant's obligation to pay Rent,
however, is not excused by this Paragraph 35.
36. SURRENDER OF PREMISES
Tenant shall, upon expiration or sooner termination of this Lease, surrender the
Premises to Landlord in the same condition as existed (reasonable wear and tear,
and damage by Casualty excepted) on the date Tenant originally took possession
thereof (subject, however, to Section 38 below), including, but not limited to,
all interior walls cleaned, all interior painted surfaces repainted in the
original color, all holes in walls repaired, all carpets shampooed and cleaned,
all HVAC equipment in operating order and in good repair, and all floors
cleaned, waxed, and free of any Tenant-introduced marking or painting, all to
the reasonable satisfaction of Landlord. Tenant shall remove all of its debris
from the Project. At or before the time of surrender, Tenant shall comply with
the terms of Paragraph 12.A. hereof with respect to Alterations to the Premises
and all other matters addressed in such Paragraph. If the Premises are not so
surrendered at the expiration or sooner termination of this Lease, the
provisions of Paragraph 25 hereof shall apply. All keys to the Premises or any
part thereof shall be surrendered to Landlord upon expiration or sooner
termination of the Term. Tenant shall give written notice to Landlord at least
thirty (30) days prior to vacating the Premises and shall meet with Landlord for
a joint inspection of the Premises at the time of vacating, but nothing
contained herein shall be construed as an extension of the Term or as a consent
by Landlord to any holding over by Tenant. In the event of Tenant's failure to
give such notice or participate in such joint inspection, Landlord's inspection
at or after Tenant's vacating the Premises shall conclusively be deemed correct
for purposes of determining Tenant's responsibility for repairs and restoration.
Any delay caused by Tenant's failure to carry out its obligations under this
Paragraph 36 beyond the term hereof, shall constitute unlawful and illegal
possession of Premises under Paragraph 25 hereof.
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37. MISCELLANEOUS
A. GENERAL. The term "Tenant" or any pronoun used in place thereof
shall indicate and include the masculine or feminine, the singular or plural
number, individuals, firms or corporations, and their respective successors,
executors, administrators and permitted assigns, according to the context
hereof.
B. TIME. Time is of the essence regarding this Lease and all of its
provisions.
C. CHOICE OF LAW. This Lease shall in all respects be governed by the
laws of the State of California.
D. ENTIRE AGREEMENT. This Lease, together with its Exhibits, addenda
and attachments and the Basic Lease Information, contains all the agreements of
the parties hereto and supersedes any previous negotiations. There have been no
representations made by the Landlord or understandings made between the parties
other than those set forth in this Lease and its Exhibits, addenda and
attachments and the Basic Lease Information.
E. MODIFICATION. This Lease may not be modified except by a written
instrument signed by the parties hereto. Tenant accepts the area of the Premises
as specified in the Basic Lease Information as the approximate area of the
Premises for all purposes under this Lease, and acknowledges and agrees that no
other definition of the area (rentable, usable or otherwise) of the Premises
shall apply. Tenant shall in no event be entitled to a recalculation of the
square footage of the Premises, rentable, usable or otherwise, and no
recalculation, if made, irrespective of its purpose, shall reduce Tenant's
obligations under this Lease in any manner, including without limitation the
amount of Base Rent payable by Tenant or Tenant's Proportionate Share of the
Building and of the Project.
F. SEVERABILITY. If, for any reason whatsoever, any of the provisions
hereof shall be unenforceable or ineffective, all of the other provisions shall
be and remain in full force and effect.
G. RECORDATION. Tenant shall not record this Lease, but may record a
short form memorandum hereof.
H. EXAMINATION OF LEASE. Submission of this Lease to Tenant does not
constitute an option or offer to lease and this Lease is not effective otherwise
until execution and delivery by both Landlord and Tenant.
I. ACCORD AND SATISFACTION. No payment by Tenant of a lesser amount
than the total Rent due nor any endorsement on any check or letter accompanying
any check or payment of Rent shall be deemed an accord and satisfaction of full
payment of Rent, and Landlord may accept such payment without prejudice to
Landlord's right to recover the balance of such Rent or to pursue other
remedies. All offers by or on behalf of Tenant of accord and satisfaction are
hereby rejected in advance.
J. EASEMENTS. Landlord may grant easements on the Project and dedicate
for public use portions of the Project without Tenant's consent; provided that
no such grant or dedication shall materially interfere with Tenant's Permitted
Use of the Premises. Upon Landlord's request, Tenant shall execute, acknowledge
and deliver to Landlord documents, instruments, maps and plats necessary to
effectuate Tenant's covenants hereunder.
K. DRAFTING AND DETERMINATION PRESUMPTION. The parties acknowledge that
this Lease has been agreed to by both the parties, that both Landlord and Tenant
have consulted with attorneys with respect to the terms of this Lease and that
no presumption shall be created against Landlord because Landlord drafted this
Lease. Whenever a provision of this Lease (i) requires that the consent of a
party be obtained, such consent shall not be unreasonably withheld or delayed,
or (ii) provides that a party may make a demand or request of the other party,
such demand or request shall be reasonable and made in good faith. If Landlord
fails to respond to any request for its consent within the time period, if any,
specified in this Lease, Landlord shall be deemed to have disapproved such
request.
L. EXHIBITS. The Basic Lease Information, and the Exhibits, addenda and
attachments attached hereto are hereby incorporated herein by this reference and
made a part of this Lease as though fully set forth herein.
M. NO LIGHT, AIR OR VIEW EASEMENT. Any diminution or shutting off of
light, air or view by any structure which may be erected on lands adjacent to or
in the vicinity of the Building shall in no way affect this Lease or impose any
liability on Landlord.
N. NO THIRD PARTY BENEFIT. This Lease is a contract between Landlord
and Tenant and nothing herein is intended to create any third party benefit.
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<PAGE>
O. QUIET ENJOYMENT. Upon payment by Tenant of the Rent, and upon the
observance and performance of all of the other covenants, terms and conditions
on Tenant's part to be observed and performed, Tenant shall peaceably and
quietly hold and enjoy the Premises for the term hereby demised without
hindrance or interruption by Landlord or any other person or persons lawfully or
equitably claiming by, through or under Landlord, subject, nevertheless, to all
of the other terms and conditions of this Lease. Except as provided by this
Lease, Landlord shall not be liable for any hindrance, interruption,
interference or disturbance by other tenants or third persons, nor shall Tenant
be released from any obligations under this Lease because of such hindrance,
interruption, interference or disturbance.
P. COUNTERPARTS. This Lease may be executed in any number of
counterparts, each of which shall be deemed an original.
Q. MULTIPLE PARTIES. If more than one person or entity is named herein
as Tenant, such multiple parties shall have joint and several responsibility to
comply with the terms of this Lease.
R. PRORATIONS. Any Rent or other amounts payable to Landlord by Tenant
hereunder for any fractional month shall be prorated based on a month of 30
days. As used herein, the term "fiscal year" shall mean the calendar year or
such other fiscal year as Landlord may deem appropriate.
38. ADDITIONAL PROVISIONS
A. TENANT IMPROVEMENTS. In accordance with the space plan and detailed
specifications in accordance to Exhibit C attached hereto, Landlord, at
Landlord's sole cost and expense, shall construct the following Tenant
Improvements:
1. OFFICE: Approximately 1,700 square feet of office space consisting
of the following:
a. three (3) private offices, two (2) with windows to the warehouse
b. one (1) bull pen area
c. one (1) break room, including sink, counter facilities to
accommodate refrigerator, microwave and vending machines
d. two (2) ADA compliant rest rooms to code for approximately 40
employees.
2. WAREHOUSE: Approximately 48,540 square feet consisting of the
following:
a. ELECTRICAL: one (1) 400 AMP, 277/480 volt electrical service
distributed as follows:
- three (3) dedicated 208V/3 phase circuits
- 208V/3 phase service to the center of the warehouse for
conveyor system
- two (2) forklift charging stations, location to be mutually
agreed upon
- 110V service along the east wall, 1-4 plex outlet every 30
feet
b. DOCK EQUIPMENT: ten (10) edge of dock load levelers
c. INSULATION: insulation (R-19) throughout warehouse ceiling
3. All work performed by Landlord shall comply with all applicable
building Regulations.
B. EARLY ACCESS: On or after October 1, 1998, subject to existing tenant Crum
and Crum Enterprises vacating Premises, and prior to Landlord's completion
of Tenant Improvements as stated above, Landlord shall grant Tenant access
to Premises for warehousing and distribution purposes only. Said access and
occupancy to warehouse shall be conducted as not to interfere with or delay
Landlord's completion of the improvements to the Premises.
39. BROKERS
Tenant represents that, with the exception of Tenant's agent, Tom
Shuler of Tom Shuler Real Estate ("Tenant's Broker") and Landlord's agents,
Tenant has not worked with any other broker to consummate this transaction.
Landlord shall pay Tenant's Broker a commission equal to five percent (5%) of
the total Base Rent for years 1 through 5 of the Term, and two and one half
percent (2 1/2%) for years 6 through 10 of the Term, one half of which
commission shall be paid upon the full execution of this Lease, with the
balance paid upon the date that Tenant commences the payment of Base Rent.
40. JURY TRIAL WAIVER
EACH PARTY HERETO (WHICH INCLUDES ANY ASSIGNEE, SUCCESSOR HEIR OR PERSONAL
REPRESENTATIVE OF A PARTY) SHALL NOT SEEK A JURY TRIAL, HEREBY WAIVES TRIAL BY
JURY, AND HEREBY FURTHER WAIVES ANY OBJECTION TO VENUE IN THE COUNTY IN
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<PAGE>
WHICH THE BUILDING IS LOCATED, AND AGREES AND CONSENTS TO PERSONAL JURISDICTION
OF THE COURTS OF THE STATE IN WHICH THE PROPERTY IS LOCATED, IN ANY ACTION OR
PROCEEDING OR COUNTERCLAIM BROUGHT BY ANY PARTY HERETO AGAINST THE OTHER ON ANY
MATTER WHATSOEVER ARISING OUT OF OR IN ANY WAY CONNECTED WITH THIS LEASE, THE
RELATIONSHIP OF LANDLORD AND TENANT, TENANT'S USE OR OCCUPANCY OF THE PREMISES,
OR ANY CLAIM OF INJURY OR DAMAGE, OR THE ENFORCEMENT OF ANY REMEDY UNDER ANY
STATUTE, EMERGENCY OR OTHERWISE, WHETHER ANY OF THE FOREGOING IS BASED ON THIS
LEASE OR ON TORT LAW. EACH PARTY REPRESENTS THAT IT HAS HAD THE OPPORTUNITY TO
CONSULT WITH LEGAL COUNSEL CONCERNING THE EFFECT OF THIS PARAGRAPH 39. THE
PROVISIONS OF THIS PARAGRAPH 39 SHALL SURVIVE THE EXPIRATION OR EARLIER
TERMINATION OF THIS LEASE.
41. RIGHT OF FIRST REFUSAL
Tenant shall, provided that Tenant is not in default under this Lease, have the
right of first refusal to lease the balance of the Building (for purposes of
this paragraph only, the "REFUSAL SPACE") on the terms set forth in this
Paragraph. If at any time during the term of this Lease, Landlord receives a
bona fide offer from a third person for the lease of all or any part of the
Refusal Space, which offer Landlord desires to accept (the "LEASE OFFER"),
Landlord shall promptly deliver to Tenant a copy of such Lease Offer. Tenant
may, within ten (10) business days thereafter, elect to lease the Refusal Space
or the portion thereof offered to be leased on the same terms as those set forth
in such Lease Offer. If Tenant declines to lease the Refusal Space, or fails to
respond to the Lease Offer, then Landlord shall be free to lease the Refusal
Space on the terms set forth in the Lease Offer for a period of six (6) months
after the Lease Offer is delivered to Tenant; if such lease is not consummated
within said six (6)-month period, then Landlord shall again be obligated to
offer the Refusal Space to Tenant on the terms set forth in the Lease Offer. If
any acceptable Lease Offer for the Refusal Space shall include other property,
Tenant's right of first refusal shall be applicable to the entire property
covered by such offer.
42. RENEWAL OPTION
A. OPTION TO RENEW. Tenant shall, provided that Tenant is not in default
under this Lease, have one (1) option to renew this Lease for a term of five (5)
years, for the Premises on the same terms and conditions set forth in this
Lease, except as modified by the terms, covenants and conditions set forth
below:
(1) If Tenant elects to exercise such option, then Tenant shall provide
Landlord with written notice no earlier than the date which is 270 days
prior to the expiration of the then current term of this Lease, but no later
than 5:00 p.m. (Pacific Standard Time) on the date which is 210 days prior
to the expiration of the then current term of this Lease. If Tenant fails to
provide such notice, Tenant shall have no further or additional right to
extend or renew the term of this Lease.
(2) The Base Rent in effect at the expiration of the then current term of
this Lease shall be increased to reflect the current fair market rental for
comparable space in the Building or Project and in other similar buildings
in the same rental market as of the date the renewal term is to commence,
taking into account the specific provisions of this Lease which will remain
constant, and the Building amenities, location, quality, age, term of lease,
tenant improvements, services provided, and other pertinent items.
(3) Landlord shall advise Tenant of the new Base Rent for the Premises for
the applicable renewal term based on Landlord's determination of fair market
rental value, as well as additional terms and conditions for the renewal
term, no later than fifteen (15) days after receipt of notice of Tenant's
exercise of its option to renew.
(4) If Landlord and Tenant cannot agree on the rental rate for the renewal
term within thirty (30) days of the date that Landlord provides Tenant with
Landlord's determination of the new rent, then within thirty (30) days after
such failure to reach agreement, Landlord shall furnish to Tenant a notice
in writing ("LANDLORD'S NOTICE") stating what Landlord perceives to be the
fair market rent projected to the commencement date of the renewal term.
Landlord's Notice shall be accompanied by a statement from a qualified real
estate broker stating the broker's opinion of fair market rent and that it
has been determined in accordance with this Paragraph.
(5) If Tenant disagrees with the estimate of fair market rent submitted by
Landlord with Landlord's Notice, then within thirty (30) days after receipt
of Landlord's Notice, Tenant shall have the right to submit to Landlord an
estimate by a qualified real estate broker of fair market rent effective as
of the commencement date of the renewal term. If the higher estimate is not
more than one hundred five percent (105%) of the lower estimate, the new
rent shall be established as the average of the two estimates. If not, the
two brokers acting on behalf of Landlord and Tenant, shall, within fifteen
(15) days after Tenant's estimate has been submitted, jointly appoint a
third qualified real estate broker (the "Referee"). If the two brokers are
unable to agree upon the selection of a Referee, then the Referee shall
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<PAGE>
be selected within fifteen (15) days thereafter by an arbitrator pursuant to
the rules of the American Arbitration Association.
(6) The Referee shall, within thirty (30) days after appointment, render his
decision which decision shall be strictly limited to choosing one of the two
determinations made by the two brokers chosen by Landlord and Tenant with
respect to fair market rent. The decision of the Referee shall be binding
upon Landlord and Tenant and shall constitute the Base Rent for the
applicable renewal term. Landlord and Tenant shall each pay for their own
estimate, and the cost of the Referee shall be shared equally by Landlord
and Tenant. In determining fair market rent, the brokers shall each take
into account the following: (i) the amount of space and length of term taken
by the Tenant; (ii) the credit worthiness and quality of Tenant; and (iii)
rent in comparable buildings in the relevant competitive market including
concessions offered to new tenants such as free rent, tenant improvement
allowances, moving allowances and other such concessions.
(7) Any real estate broker used by the parties pursuant to this Section 42
must be an active, licensed broker having a minimum of five years'
experience in leasing properties similar to the Premises, and must be
unbiased and have not represented either party in real estate transactions
within the immediately preceding five years.
IN WITNESS WHEREOF, the parties hereto have executed this Lease as of the day
and the year first above written.
LANDLORD
Spieker Properties, L.P.,
a California limited partnership
By: Spieker Properties, Inc.,
a Maryland corporation,
its general partner
By: /s/ Peter C. Thompson
------------------------------------------
Peter C. Thompson
Its: Senior Vice President
Date: 10/2/98
-------------------------------------------
TENANT
Track 'n Trail,
a Delaware corporation
By: /s/ Greg Kilgore
---------------------------------------------
Greg Kilgore
Its: President
Date: 10/2/98
---------------------------------------------
By: /s/ Dan Nahmens
---------------------------------------------
Dan Nahmens
Its: Chief Financial Officer
Date: 10/2/98
---------------------------------------------
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<PAGE>
[LETTERHEAD]
- --------------------------------------------------------------------------------
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in Registration Statements No.
333-39833 and 333-39835 of Track 'n Trail on Form S-8 of our report dated
February 1, 1999, appearing in the Annual Report on Form 10-K of Track 'n Trail
for the year ended December 26, 1998.
/s/ PricewaterhouseCoopers LLP
Sacramento, California
March 4, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 12-MOS
<FISCAL-YEAR-END> DEC-26-1998 DEC-26-1998
<PERIOD-START> SEP-27-1998 DEC-28-1997
<PERIOD-END> DEC-26-1998 DEC-26-1998
<CASH> 1,808 1,808
<SECURITIES> 0 0
<RECEIVABLES> 2,510 2,510
<ALLOWANCES> 0 0
<INVENTORY> 36,998 36,998
<CURRENT-ASSETS> 42,553 42,553
<PP&E> 17,550 17,550
<DEPRECIATION> 5,701 5,701
<TOTAL-ASSETS> 61,279 61,279
<CURRENT-LIABILITIES> 17,437 17,437
<BONDS> 0 0
0 0
0 0
<COMMON> 69 69
<OTHER-SE> 36,469 36,469
<TOTAL-LIABILITY-AND-EQUITY> 61,279 61,279
<SALES> 32,970 99,851
<TOTAL-REVENUES> 32,970 99,851
<CGS> 18,238 53,615
<TOTAL-COSTS> 10,913 37,186
<OTHER-EXPENSES> 2,016 7,914
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 229 369
<INCOME-PRETAX> 1,574 767
<INCOME-TAX> 694 371
<INCOME-CONTINUING> 880 396
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 880 396
<EPS-PRIMARY> 0.13 0.06
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</TABLE>
