<PAGE> 1
FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One)
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (FEE REQUIRED)
For the fiscal year ended January 31, 1995
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
For the transition period from__________ to __________
Commission file number 0-14611
FRETTER, INC.
(Exact name of Registrant as specified in its charter)
MICHIGAN 38-1557359
(State of Incorporation) (IRS Employer Identification No.)
12501 GRAND RIVER
BRIGHTON, MICHIGAN 48116
(810) 220-5000
(Address of principal executive offices and telephone number)
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
Indicate by check mark whether the Registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter period
that the Registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes__X__ No_____
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of Regulation S-4 is not contained herein, and will not be
contained, to the best of Registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. [ ]
As of April 22, 1995, the aggregate market value of the
Registrant's voting stock held by nonaffiliates of the Registrant was
approximately $5,970,116 computed by reference to the closing sales price on
such date as reported on NASDAQ NMS.
As of April 22, 1995, there were 10,577,392 shares of the
Registrant's common stock issued and outstanding.
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DOCUMENTS INCORPORATED BY REFERENCE
The registrant's proxy statement for the Annual Meeting of
Shareholders to be held on June 21, 1995 which will be filed pursuant to
Regulation 14A within 120 days of the close of the registrant's fiscal year, is
incorporated by reference in answer to Part III of this report to the extent
noted herein.
PART I
ITEM 1. BUSINESS
GENERAL
The Company is a large volume specialty retailer of home entertainment
products, consumer electronics and appliances. The Company currently operates
a total of 237 retail stores in 22 states under various trade names: (a) 45
retail stores under the name of Fretter, Inc. in Massachusetts, Michigan, New
Hampshire and Ohio; (b) 137 retail stores under the name of "Silo" and 14
retail stores under the name of "Yes! Your Electronics Store" through its
wholly-owned subsidiary Silo Holdings, Inc. and its subsidiaries in Arizona,
California, Washington, Delaware, Illinois, Indiana, Louisiana, Nevada, New
Jersey, New Mexico, New York, Oregon, Pennsylvania, Texas and Utah; (c) 22
retail stores under the name of and through its wholly-owned subsidiary Fred
Schmid Appliance & TV Co. ("Schmid") in Colorado, Montana and Wyoming; and (d)
19 retail automotive electronic stores under the name of and through its
wholly-owned subsidiary Dash Concepts in Indiana, Michigan and Ohio. Unless
otherwise indicated, all references to the Company refer to Fretter, Inc.
("Fretter"), and collectively its predecessors and subsidiaries.
In March 1990, the Company formed two subsidiaries: Fretter Finance,
Inc. and Fretter Auto Sound, Inc. d/b/a Dash Concepts. The former subsidiary
was established to facilitate collection of commissions attributable to credit
life and disability insurance policies purchased by the Company's customers in
conjunction with their product purchases. The latter subsidiary was formed to
perform installations of automobile stereos, cellular telephones and alarm
systems in the Company's customers' automobiles. This latter subsidiary also
sells products similar to products otherwise sold by the Company with emphasis
upon higher end automobile electronic products, and in substantially smaller
retail stores than typical Fretter stores.
On September 30, 1991, Fretter Acquisition Company, Inc., a
wholly-owned subsidiary of Fretter formed in August 1991, acquired from the
Fred Schmid Appliance & TV Co. Employee Stock Ownership Plan all the
outstanding shares of Schmid. The Schmid acquisition purchase price of
$1,020,000 was accounted for using the purchase method.
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In December 1993, in a transaction accounted for as a purchase,
Fretter acquired all of the outstanding shares of Dixons U.S. Holdings, Inc.
("DUS") from Dixons America Holdings, Inc. ("DAH"). The ultimate parent of DAH
is Dixons Group plc, a public limited company ("Dixons"), which (through
subsidiaries) is the largest consumer electronics retailer in the United
Kingdom and is a public company listed on the London Stock Exchange. In
exchange for the DUS shares, Fretter issued 3,164,804 shares of Common Stock,
3,000,000 shares of Convertible Preferred Stock, Series A, and 1,500,000 shares
of Preferred Stock, Series B, to DAH. Immediately prior to the acquisition,
Gabrielle Co. (a newly-formed, wholly-owned subsidiary of the Company) was
merged into Fretter, and as a result shareholders on that date were entitled to
receive $3.00 in exchange for each .49 of each share of Fretter Common Stock
owned, and retained the remaining .51 of each share. As a result of
this acquisition, the Company increased its total stores (inclusive of Fretter,
Fred Schmid and Dash Concepts stores) from 102 to 237 stores (after giving
effect to store closures contemplated as part of the overall combination) and
increased its total revenues from $361 million for Fiscal year ended January
31, 1993 to 858,849,000 for Fiscal year ended January 31, 1995.
MARKETING STRATEGY
The Company's marketing strategy is based on building customer
satisfaction and loyalty by endeavoring to provide (1) the lowest prices
available in its market areas; (2) a broad range of quality, brand name
products and models; (3) spacious stores that convey the impression of depth of
product selection in key product categories and which stores are in most cases
located near large regional shopping malls; (4) specially trained sales
personnel, and (5) a high standard of after-purchase customer satisfaction
through a combination of a liberal return policy and service performed by
in-house service employees for certain products in certain markets and
independently-owned service companies for other products and in other markets.
PRICES. The Company's strategy is to price merchandise at or below
its competitors' prices. The Company's retail prices are established by its
merchandising and marketing departments, with review at the regional level, and
with local store authority to beat any price offered by a competitor.
PRODUCTS. The Company offers customers an extensive selection
of quality, brand name home entertainment products, consumer electronics and
appliances.
The table which follows shows the approximate percentage of total
product and service sales for each major product group for each of the last
three fiscal years. The percentage by product group is affected by promotional
activities, consumer trends, and
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the development and introduction of new products. Historical percentages may
not be indicative of percentages in future years, and, because gross margins
vary widely among the product groups and among the products within the groups,
the percentages set forth in the table are not necessarily indicative of the
relative contributions to net earnings.
<TABLE>
<CAPTION>
PERCENTAGE OF TOTAL PRODUCT AND SERVICE SALES(1) FOR
TWELVE MONTHS ENDED
Jan. 31, 1995(2) Jan. 31, 1994(3) Jan. 31, 1993
<S> <C> <C> <C>
----------------------------------------------------------------------------------------------
PRODUCT GROUP
Video(4)............... 35.2% 37.7% 37.2%
----------------------------------------------------------------------------------------------
Appliances(5).......... 30.6% 30.7% 35.6%
----------------------------------------------------------------------------------------------
Audio(6)............... 10.8% 15.2% 10.9%
----------------------------------------------------------------------------------------------
Personal Electronics(7) 17.3% 12.4% 11.1%
----------------------------------------------------------------------------------------------
Service Contracts(8)... 6.1% 4.1% 5.2%
----------------------------------------------------------------------------------------------
100.0% 100.0% 100.0%
</TABLE>
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(1) Includes net sales, less credit card discounts and net increases to
deferred service contract revenue.
(2) Reflects combined Company and DUS sales for all of Fiscal year ended
January 31, 1995.
(3) Reflects Company only sales prior to December11, 1993, and Company and
DUS (Silo) sales from December 11, 1993 through January 31, 1994.
(4) Includes, from time to time, color and black-and-white televisions
(portable, table-top and console), projection televisions, cassette
recorders, camcorders and related accessories, video enhancement
devices, tripods, blank video tapes and television stands.
(5) Includes, from time to time, automatic washers and dryers,
dishwashers, refrigerators, freezers, ranges, microwave ovens, air
conditioners, dehumidifiers and trash compactors.
(6) Includes, from time to time, compact disc players, home stereo
systems, receivers, speakers, cassette decks, turntables, amplifiers,
tuners, equalizers, prepackaged audio systems, audio furniture,
compact music systems, headphones, microphones and cartridges.
(7) Includes, from time to time, portable tape recorders with and without
radios, portable radios, car stereo equipment, cellular phones,
computer hardware and peripherals, personal radios, clock radios,
conventional telephones, cordless telephones, telephone answering
devices, heaters, fans, humidifiers, blank audio tapes, facsimile
machines, water and air purifiers, car and home alarms, ready to
assemble furniture and other miscellaneous items.
(8) See "Customer Relations and Service."
The Company offers a broad choice of models and price ranges. Each
store carries a standard inventory of models determined by the Company's
merchandising department, and each store may carry other models depending on
regional customer preferences and store size. Within a typical store, a
customer can choose from a broad spectrum
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of products from many different manufacturers. New products are added
frequently.
STORES. The Company's stores have selling space ranging from
approximately 5,000 to 25,000 square feet. Most stores are located near one of
the largest regional shopping malls in their respective market areas.
Merchandise is arranged by product category, such as audio, video, appliances,
personal electronic items and home office equipment. Each store maintains a
full inventory in most product categories, enabling customers in most cases to
take immediate delivery of purchased merchandise, except for certain large
products which are directly distributed from warehouses. Most of the Company's
stores are open seven days and six nights, every week, including certain
holidays.
STORE PERSONNEL. The Company's sales personnel are cross-trained to
sell merchandise from various product categories to better service the
customers. The Company believes this arrangement creates more professional and
effective sales personnel who are better able to serve customers' needs.
Compensation for sales personnel is primarily in the form of commissions.
The Company's sales training programs consist of three areas: (1) new
hiring training, (2) basic sales training with continuing education for
deficient performance and (3) vendor sponsored product training. The purpose
of the new-hire program is to train newly hired sales personnel in the first
thirty days of employment, with the necessary skills to properly sell the
Company's products, properly serve its customers and to be conscientious
stewards of the Company's assets through proper utilization of the POS (Point
of Sale) systems and procedures. Newly hired sales personnel spend three days
in classroom training, one day dedicated to basic selling skills, one day to
product knowledge training and one day dedicated to systems and compliance
training. Sales performance is monitored by the training and development
personnel. Sales personnel with performances below established standards for
sales, gross margin and service are given refresher training and are counseled
on their performance. Vendor training is scheduled in all major markets on a
monthly basis and smaller markets on a bi-monthly basis. This training allows
the vendors to give specific detailed training on their products as well as
reinforce the general sales skills necessary to sell the generic product line.
CUSTOMER RELATIONS AND SERVICE. Virtually all of the products sold by
the Company carry manufacturers' warranties (which usually extend for either 90
days or one year from the date of purchase, depending on the product). In
addition to these manufacturers' warranties, the Company also offers its
customers extended service contracts under which the customers' products will,
except in the event of misuse or abuse of the products, be repaired for a
period generally ranging from one to five years from the date of purchase for
appliances, televisions, video cassette recorders, video
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cameras, home office, mobile phones and audio products. A variation of these
extended service contracts is also offered for less expensive personal
electronic items, under which the customers' products will, except in cases of
misuse or abuse of the products, be either repaired, replaced or the purchase
price refunded for a period of one year after purchase. For fiscal years 1994
and 1995, 4.1% and 6.1%, respectively, of the Company's total product and
service sales was attributable to its extended service contracts. Prior to
November 1, 1994, such extended service contracts were issued by the Company to
its customers. Beginning November 1, 1994, the Company instituted a program to
offer for sale to its customers third party service contracts by which an
independent entity issues the Company's customers the extended service contract
sold by the Company's salespersons.
The Company employs a staff of qualified technicians in several market
areas to service most electronic items it sells. In addition, the Company
contracts with a network of independently owned service companies employing
qualified technicians to service the products it sells, but does not itself
service. The Company uses these technicians during the original warranty
period as well as during its own extended service period. In addition, the
independent issuer of post-November 1, 1994 extended service contracts and the
Company have entered into an agreement by which the Company and its network of
independently owned service companies will, for a fee, service the customers'
products.
The Company provides in-home service for major appliances and console
televisions in certain major metropolitan areas, both during the period of the
manufacturers' warranty and during the period covered by the extended service
contracts.
ADVERTISING AND PROMOTION
The Company believes that its advertising and promotional activities
have resulted in significant name recognition in each of its marketing areas.
The Company advertises on television and in newspapers. The Company's
television commercials and print advertisements generally emphasize its every
day low price strategies, expanded high quality brand name selection and
non-price benefits such as rapid delivery service of customers' purchases,
customer service and attention before and after the sale and the Company's
ability to service and repair the products which it sells. Advertisement
themes are carefully selected to reinforce the Company's foregoing strategies
of every day low prices and offering to customers specific non-price benefits
of purchasing products from the Company. The Company also promotes the sales
of its products through special event sales such as "Midnight Madness Sales",
"Christmas in July Sales", Presidents' birthday sales, and the like.
Television commercials are produced by an independent advertising agency
working in conjunction with the Company's own
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advertising personnel; and the Company produces its own newspaper
advertisements.
Advertising costs were approximately $29.0 million in fiscal year
1995. The Company believes that its substantial advertising expenditures have
a positive impact on its sales and ability to retain and, in some cases,
increase its market share of products sold.
ORGANIZATION AND SALES OPERATIONS
The Sales Operations department is divided into two segments: National
Sales Operations and Divisional Sales Operations. The National Sales
Operations area is responsible for all communications, policies, procedures,
compensation and incentives that affect the stores. In addition, this segment
also controls loss prevention, in-store mobile installation and Dash Concepts
(a 19 store, free standing 12 volt mobile installation business).
The Divisional Sales Operations segment is divided into two regions,
split geographically: the Eastern Division, headquartered in Brighton, oversees
118 stores; the Western Division, located in Chicago, oversees 119 stores.
Each division's sales team is headed by a Divisional Vice President who is
supported by a Divisional Operations Manager, Divisional Sales Manager,
Divisional Loss Prevention Manager and District Managers. The District
Managers handle an average of 17 stores and, via their Store Managers, are
responsible for overall sales and operational performance.
Each store is staffed by a General Manager, an Assistant Manager in
stores with annual sales in excess of $5 million, two to three Sales Managers
and a commissioned Sales Staff.
The Company believes that this organizational structure provides the
benefits of centralized management coupled with the ability to rapidly adapt to
dynamic regional retail conditions.
DISTRIBUTION
Most of the Company's merchandise is delivered by suppliers to
Distribution Centers from which shipments are made on a regular basis to each
store in each respective market. Principal Distribution Centers are located in
the geographical markets of Chicago, Boston, Denver, Detroit, Philadelphia,
Seattle and Phoenix. The Upstate New York market is serviced by the
Philadelphia Distribution Center and the Salt Lake City market is serviced by
the Phoenix Distribution Center. The Company's system of major market
distribution facilities is intended to facilitate control over inventory while
ensuring that the inventory is distributed in sufficient proximity to the
stores, both of which help maximize inventory turnover. In Denver, Company
employees perform the distribution functions. In all other Distribution
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Centers, the distribution functions are handled by independent warehousing
companies through their own employees. In general, all transportation of
products from the Distribution Centers to the stores and all deliveries of
merchandise to the customers are handled by independent trucking companies.
In the Denver and Upstate New York markets, Company employees are used to
provide some home delivery functions. The Company believes that the use of
independent trucking and labor management companies adds flexibility to its
distribution system and reduces the amount of resources and management time
that the Company is required to devote to the distribution and transportation
functions.
SYSTEMS
The Company's accounting, purchasing and computer operations are
centralized at its principal offices in Brighton, Michigan.
The Company' s computer systems are integrated into most major aspects
of the Company's operations, from merchandising, warehousing, and inventory
control to cash and payables management. The Company principally uses IBM
hardware with its own proprietary software. The Company's data processing
system is "on-line," whereby in conjunction with each sale, a specific entry is
made by the sales associate at the store which feeds directly into the
Company's central computer in Brighton, Michigan. Upon each sale entry,
inventory is reduced, gross margin, commission, and other data are calculated,
and any unusual transactions are revealed.
During fiscal year 1993, the Company completed its upgrade of its
central computer system to accommodate the Schmid acquisition stores as well as
new stores added to the existing Fretter stores. The Company also instituted a
new program to integrate its product service department into the main data
processing system, thus increasing the centralization and availability of
management information, as well as making information from the product service
department available at the retail store level.
During fiscal year 1994, the Company completed the integration of its
Product Service Department into the main data processing system and prepared
for and began the implementation of a program to enhance its central computer
system to accommodate the DUS acquisition by the Company of the Silo retail
stores. As of April 15, 1994, this enhancement was complete and all Silo
stores were incorporated into the Company's pre-existing and since enhanced
central computer system.
SUPPLIERS AND PURCHASING
A substantial portion of the Company's inventory is quality, brand
name, nationally advertised merchandise which the Company purchases directly
from manufacturers and distributors.
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The Company's top ten suppliers (in alphabetical order) during fiscal
year 1995 were General Electric, JVC, Maycor, Packard Bell, Raytheon, Sony,
Thompson, Toshiba, Whirlpool and Zenith. The Company has not experienced
significant difficulties in obtaining satisfactory sources of supply and its
management believes that sufficient supplies will continue to exist for the
types of products it sells. However the Company has experienced and may in the
future experience industry - wide spot shortages of particular products due to
market or other conditions.
The Company believes that it has a good relationship with its
suppliers and that its size and membership in Nationwide Television and
Appliance Associates, Inc. ("Nationwide"), one of the largest national
electronics buying groups in the United States, provides it with substantial
buying power. The Company is not obligated to make purchases through
Nationwide.
EXPANSION
The Company's strategy of opening new stores and upgrading existing
stores is designed to improve market penetration by increasing both the overall
number of the Company's stores and the proportion of its stores situated in the
most effective locations and in optimal amounts of space.
The following table provides a history of the Company's store
portfolio (inclusive of both full-scale consumer electronics and home appliance
stores and the Company's Dash Concepts mobile electronics stores) over the last
three fiscal years ended January 31.
<TABLE>
<CAPTION>
Fiscal year ended
January 31,
1995 1994 1993
----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Number of stores open at beginning
of period.......................... 242 100 91
Number of stores opened............ 6 191(1) 9
Number of stores closed............ 11 49(2) 0
Number of stores open at end of
period............................. 237 242 100
</TABLE>
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(1) Fiscal year 1994 store openings include 182 stores acquired on
December 3, 1993 with the acquisition of DUS.
(2) In connection with the Company's December 3, 1993 acquisition of DUS,
the Company implemented a plan to close 53 stores in Colorado,
Illinois, Los Angeles and Louisiana. The fiscal year 1994 reference
to "Number of stores closed during the period" treats all such
stores as closed, notwithstanding (a) the Company, on a temporary
basis, continued to operate several of such locations after the end
of such fiscal year to effectuate an orderly winding down of
operations at such stores and (b) the Company continues to operate a
relatively few such locations until satisfactory arrangements for the
closure thereof can be structured with the respective landlords
of those locations.
The Company's ability to expand and upgrade stores in the future will
depend on, among other things, general economic and business conditions,
competition, the Company's ability to obtain desirable sites on satisfactory
terms, and the availability of funds.
CONSUMER CREDIT
Due to the relatively high cost of many of the products sold by the
Company, a substantial amount of its sales are made on credit, and its business
can be affected by consumer credit availability, which varies with the state of
the economy and the location of specific stores. In fiscal year 1995,
approximately 32.5% of the Company's sales were for cash and approximately
58.1% of its sales were made through the use of bank credit cards and also
through private label Fretter, Silo and Fred Schmid Preferred Credit Card sales
under which credit is extended through outside financing entities. The
remaining 9.4% of its sales were made through other consumer financing
arrangements with banks and independent finance companies for which
applications are available at certain of the Company's stores. Beyond the
applicable provisions regarding the adequacy of transaction documentation,
there are no recourse provisions relating to the sales through available
consumer financing arrangements.
SEASONAL BUSINESS
As with other retail businesses, the Company's net sales are
substantially greater during the year end holiday season than during other
periods of the year. Net sales for the fourth quarter (which includes the
holiday season) were $267.3 million, or 31.1% of net sales in fiscal year 1995.
In fiscal year 1994 such fourth quarter sales were $285.7 million, or 52.4% of
the net sales for the entire fiscal year. The 1994 level of sales and
percentage of total annual net sales is not consistent with prior years'
results and is not necessarily indicative of future fourth quarter or annual
sales because fourth quarter fiscal year 1994 sales included sales attributable
to stores acquired as part of the Silo
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acquisition, as well as inventory liquidation sales resulting from planned
store closures (and subsequent closures of such stores) in Los Angeles,
Colorado and Illinois. Such store closures affected subsequent comparable
periods in at least three respects: (a) the liquidation of inventory
attributable to such locations will not re-occur, (b) such stores will not be
in operation, and (c) in Colorado and Illinois, the elimination of both Fred
Schmid and Silo stores, and Fretter and Silo stores, respectively.
EMPLOYEES
On April 7, 1995, the Company had 3,577 employees of whom 3,086
operate in stores, warehousing and distribution; 296 in product and customer
service; and 195 operate at the Company's headquarters and regional offices in
administrative functions. The Company's sales employees work predominantly on
commission. The Company hires additional sales personnel, primarily on a
part-time basis, during the Christmas season.
SERVICE MARKS
The name "Fretter" has been in use in Michigan in the specialty
retailing of consumer electronics and appliances since 1953 and is currently in
use by the Company in four states: Michigan, Massachusetts, New Hampshire and
Ohio. "Fretter" is a service mark registered with the U.S. Patent & Trademark
Office both for retail store services and for provision of extended warranty
and service contracts for appliances and home entertainment products.
"Homeworks Get The Works For Your Home Office" is a service mark registered
with the U.S. Patent and Trademark Office for retail electronic, computer and
office supply store sales and services. The Company is the owner of four
additional federally registered marks: "We Care Line" for provision of service
assistance by telephone, "Double the Difference" for retail store services,
"Dash Concepts" for installation and servicing of electronic equipment for
automotive vehicles, and "Audio Dimension" with respect to speakers and
electronic equipment manufactured for the Company.
Through its Schmid acquisition, the Company is the owner of one
additional federally registered mark, "Christmas in July" and State of
Colorado registrations of the marks "Fred Schmid Appliances," "Fred Schmid
Appliance Sales and Distribution Center," "Fred Schmid's Rocky Mountain T.V.
Stereo Service Co." and "Like Nothing You've Ever Seen."
Through its DUS acquisition, the Company is the owner of registered
principal marks "Silo," "Tipton" and "YES! Your Electronics Store" with
the U.S. Patent and Trademark Office.
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COMPETITION
The brand name home entertainment products, consumer electronics and
appliance business is highly competitive, with price and customer service being
the principal competitive factors. The Company's competition comes from a
variety of sources, including other retailers specializing in the sale of home
entertainment products, consumer electronics and appliances, catalogue
showrooms, discount stores, department stores, furniture stores and cable
television shopping and discount clubs. Some of the Company's competitors are
national in scope and have greater financial resources than the Company.
However, the Company strives to achieve one of the leading market positions in
each of its established metropolitan markets.
The Company's management maintains close ties with manufacturers and
industry trade groups, closely monitors consumer and industry trends, and
attempts to adjust its product mix to changes in the industry and in consumer
preferences.
ITEM 2. PROPERTIES
The Company owns and leases its stores, warehouses, service centers,
installation locations and office space. In connection with and following the
Company's acquisition of DUS, the Company acquired a warehouse and office
facility in Brighton, Michigan, to centralize the majority of its office and
administrative functions, by consolidating the DUS and Company offices from
Denver, Colorado; Chicago, Illinois; Detroit, Southfield and Livonia, Michigan;
and Philadelphia, Pennsylvania.
The Company's principal warehouses are located in Brighton and
Livonia, Michigan; Chicago, Illinois; Westwood, Massachusetts; Denver,
Colorado; Philadelphia, Pennsylvania; Seattle, Washington; and Phoenix,
Arizona. Of the foregoing, the Michigan and Westwood warehouses are owned by
the Company and the remaining warehouses are leased from third parties.
Of the Company's 237 retail store locations, 42 are operated in
buildings owned by the Company and 195 are leased from third parties. Of the
195 leased locations, 10 are operated as concession departments within Marshall
Fields department stores in the greater Chicago, Illinois area. The unexpired
lease terms range from one to fifteen years; the average unexpired lease term
being approximately five years. Of the 195 retail store leases, 111 contain so
called "percentage rent" clauses whereby rental payments increase as sales at
the particular location exceed specified base amounts.
At the time the Company acquired DUS, the Company operated 103 retail
locations and DUS operated 185 retail locations. DUS
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previously closed 50 retail store locations in early 1993. As contemplated at
the time of the acquisition, the Company determined to exit the Los Angeles and
New Orleans retail markets and to close certain of its locations in Colorado
and Illinois in which Fretter or Fred Schmid locations were in relatively close
proximity to and overlapped with Silo stores; thus leaving the Company 242
retail locations operating as of April 15, 1995. The Company plans to close an
additional 5 locations in Chicago, Denver, Los Angeles and New Orleans at such
time as satisfactory arrangements can be made with each applicable Landlord;
thus leaving 237 retail locations.
The remaining lease terms on the closed locations range from less than
one year to over 20 years; with the average lease term expiring in
approximately six years. At the time of the DUS acquisition on December 3,
1993, inclusive of the locations DUS had then previously closed, but for which
lease obligations remained, and planned store closures of the Company, there
existed 80 non-operating or then soon to be non-operating locations. As of
April 15, 1995, 49 of such locations were disposed of through lease termination
agreements, lease assignments, subleases and agreements to assign; and there
remain 31 locations for disposal.
The following table summarizes the number and location of stores by
market as of April 15, 1995:
<TABLE>
<CAPTION>
Eastern Division - 118*
----------------
<S> <C>
Delaware - 4
Louisiana - 1
Massachusetts - 12
Michigan - 29
New Hampshire - 2
New Jersey - 10
New York - 11
Ohio - 19
Pennsylvania - 30
Western Region - 119*
--------------
Arizona - 12
California - 12
Colorado - 20
Illinois - 30
Marshall Fields Locations - 10
Indiana - 5
</TABLE>
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<TABLE>
<S> <C>
New Mexico - 2
Montana - 1
Nevada - 2
Oregon - 4
Texas - 2
Utah - 6
Washington - 12
Wyoming - 1
-----
Total Retail Locations** - 237
</TABLE>
* Inclusive of 19 Dash Concepts Stores as follows:
<TABLE>
<S> <C>
Indiana - 2
Michigan - 11
Ohio - 6
</TABLE>
** Reflecting the planned closure of 5 currently operating locations.
The Company also owns or leases properties that it leases or subleases
to unaffiliated third parties in many states.
ITEM 3. LEGAL PROCEEDINGS
From time to time the Company is party to various legal proceedings
relating to the conduct of its business. Many of these claims are covered by
insurance. Management is of the opinion that the outcome of any of these
currently pending legal proceedings will not have a material adverse effect on
the Company's business, financial condition or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 4A. EXECUTIVE OFFICERS OF THE REGISTRANT
Pursuant to General Instruction G(3) of Form 10-K, the following
information with respect to the executive officers of the Company is included
herein in lieu of being included in the Company's Proxy Statement for its
Annual Meeting of Shareholders to be held June 21, 1995.
-13-
<PAGE> 15
MANAGEMENT
<TABLE>
<CAPTION>
NAME AGE POSITIONS
<S> <C> <C>
Ernest L. Grove, Jr. 70 Chairman of the Board of Directors and Director
John B. Hurley 55 President, Chief Executive Officer and Director
Dale R. Campbell 38 Executive Vice President, Treasurer and Director
Daniel Hourigan 47 Senior Vice President-Store Operations
Julian L. Potts 47 Senior Vice President-Advertising, Merchandising and
Marketing
Stuart G. Garson 39 Vice President, Secretary and General Counsel
</TABLE>
Ernest L. Grove, Jr. has been the Chairman of the Board of the Company
since December 1993. Mr. Grove has been a director of the Company since 1987.
He is the retired Vice Chairman of the Board, Chief Financial Officer and
Director of The Detroit Edison Company, is a Director of Standard Federal Bank
and is a Trustee of Cranbrook Funds, an investment company.
John B. Hurley has been President of the Company since 1985. Prior to
that, he was Executive Vice President. Mr. Hurley has been employed by the
Company since 1975 and has been a director since 1978.
Dale R. Campbell has been employed by the Company since 1988. He has
been a Director since December 1993, and an Executive Vice President of the
Company since June 1989. Prior to that he was General Counsel of the Company
from October 1988. From 1984 to 1988, he was engaged in the private practice
of law in the areas of general business and tax law with Seyburn, Kahn, Ginn,
et al.
Daniel Hourigan became the Senior Vice President of Store Operations
in February 1994. Previous to that, since 1991, he held the same position at
Silo, Inc., a subsidiary of Dixons US Holdings, Inc., which was acquired by the
Company in December, 1993. Prior to joining Silo, Mr. Hourigan served as a
director at Dixons Stores Group Limited in England, and held senior positions in
Operations, Property and Sales; most recently as divisional director of Dixons
Store Group Limited, where he had responsibility for Sales, Marketing,
Personnel, Training, Security and Financial Information Services. Prior to
joining Dixons in 1981, Mr. Hourigan held various senior management positions
within the electronics industry.
-14-
<PAGE> 16
Julian L. Potts, employed by the Company since 1979, has been Senior
Vice President-Advertising, Merchandising and Marketing since December 1993.
From September 1991 to December 1993, he was Senior Vice President-Sales,
Operations, Marketing and Market Development. Previous to that he was Senior
Vice President-Eastern Region since September 1990. From 1987 to late 1990 he
was Vice President-Sales. He became Assistant Vice President of the Company in
early 1987 and was Regional Manager in charge of new markets from 1981 to 1987.
Stuart G. Garson, employed by the Company since 1989, has been Vice
President, Secretary and General Counsel since December 1993. From November
1989 to December 1993, he was General Counsel. Previously he was a shareholder
and employee of Seyburn, Kahn, Ginn, et al, a Southfield, Michigan law firm,
practicing in the areas of general business and real estate law.
Executive officers are elected annually by the Board of Directors and
serve at the pleasure of the Board.
-15-
<PAGE> 17
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The following table sets forth the high and low bid prices for the
Company's Common Stock as quoted on the Nasdaq National Market System for the
period from February 1, 1993 through January 31, 1995. Such quotations reflect
inter-dealer prices, without retail mark-up, mark-down, or commission and may
not necessarily represent actual transactions.
<TABLE>
<CAPTION>
High Low
<S> <C> <C> <C>
First Quarter (2/1/93-4/30/93) 3 3/8 2 3/8
Second Quarter (5/1/93-7/31/93) 3 1/2 2 7/8
Third Quarter (8/1/93-10/31/93) 4 5/8 2 7/8
Fourth Quarter (11/1/93-1/31/94) 5 3/4 2 1/2
--------------
First Quarter (2/1/94-4/30/94) 5 1/4 3 1/2
Second Quarter (5/1/94-7/31/94) 5 1/4 3 3/4
Third Quarter (8/1/94-10/31/94) 4 7/8 3 1/8
Fourth Quarter (11/1/94-1/31/95) 3 1/2 2 1/4
</TABLE>
On April 22, 1995 the last reported sales price of the Company's
Common Stock on the Nasdaq National Market System was $3.25 per share. As of
March 31, 1995 there were approximately 800 record holders of the Company's
Common Stock.
The Company currently intends to retain its earnings in order to
provide funds for the operation and expansion of its business and does not
anticipate paying cash dividends in the foreseeable future.
-16-
<PAGE> 18
ITEM 6. SELECTED FINANCIAL DATA
Sale statistics for the three fiscal years ending January 31, 1995 are
set forth in Item 7.
<TABLE>
<CAPTION>
(Dollar amounts in thousands except per share data) Twelve Months Ended
JAN. 31, JAN. 31, JAN. 31, JAN. 31, JAN. 31,
1995 1994(3) 1993 1992(2) 1991(1)
<S> <C> <C> <C> <C> <C>
Net sales.............................. $858,849 $545,508 $361,603 $292,698 $217,352
New earnings (loss) available for
common shareholders.................... $ 3,665 $ (1,096) $ 5,719 $ 4,003 $ (9,969)
Earnings (loss) per common share*...... $ .35 $ (.14) $ .77 $ .55 $ (1.37)
Total assets........................... $468,608 $456,802 $177,131 $164,431 $131,602
Short-term obligations................. $ 4,601 $ 590 $ 534 $ 1,577 $ 844
Long-term obligations, less current
portion(4)............................. $145,961 $ 88,584 $ 40,939 $ 41,302 $ 23,313
Shareholders' equity................... $ 34,359 $ 30,994 $ 64,019 $ 57,307 $ 52,572
</TABLE>
- ---------------
* Per share information has been restated to reflect the December 3,
1993 exchange as if the transaction occurred as of the beginning of
the respective periods.
(1) Included in net loss and loss per common share at January 31, 1992 is
a cumulative effect on prior years of a change in accounting principle
for recognition of service contract revenue of $8.8 million and $1.20,
respectively.
(2) Included in all selected financial data is the effect of the
acquisition of Schmid which occurred September 30, 1992.
Additionally, included in net earnings and earnings per common share
is an extraordinary credit of $.8 million and $.10, respectively,
related to the utilization of net operating loss carryforward.
(3) Included in all selected financial data is the effect of the December
3, 1993 acquisition of DUS. For financial statement purposes,
post-December 11, 1993 operations for DUS are included in January 31,
1994 data. Additionally, included in net loss and net loss per common
share at January 31, 1994 is a gain related to the cumulative effect
on the prior years of a change in accounting principle for accounting
for income taxes of $2.8 million and $.35, respectively, a store
closure provision of $4.0 million and $.50, respectively, and the
write-off of deferred taxes of $8.1 million and $1.01, respectively.
(4) Long-term obligations, less current portion, includes redeemable
preferred stock at January 31, 1995 and 1994.
-17-
<PAGE> 19
Presented below is additional operating data (unaudited):
<TABLE>
<CAPTION>
TWELVE MONTHS ENDED
-------------------
JANUARY 31,
-----------
1995 1994 1993 1992 1991
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Sales per weighted average gross square foot . . . . $ 234 $ 282 $ 294 $ 302 $ 283
Sales per weighted average selling square foot . . . $ 346 $ 398 $ 419 $ 414 $ 389
Average net sales per store . . . . . . . . . . . . . $3,827 $4,207 $4,301 $3,961 $3,788
Number of stores open at end of period . . . . . . . 237 242 100 91 61
Stores opened during period . . . . . . . . . . . . . 6 9 9 7 5
Stores acquired during period . . . . . . . . . . . . 0 182 0 18 0
Stores closed during period . . . . . . . . . . . . . 11 49 0 0 0
</TABLE>
-18-
<PAGE> 20
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW. The Company is a large volume specialty retailer of home
entertainment products, consumer electronics and appliances.
On December 3, 1993, Fretter issued 3,164,804 shares of common stock,
3,000,000 shares of Convertible Series A Preferred Stock and 1,500,000 shares
of Series B Preferred to Dixons America Holdings, Inc. ("DAH") in exchange for
the outstanding shares of equity securities of Dixons U.S. Holdings, Inc.
("DUS"). As a result of this transaction, the Company owns and controls the
business assets and operations of DUS.
The ultimate parent company of DAH is Dixons Group plc ("Dixons")
which (through certain subsidiaries) is the largest consumer electronics
retailer in the United Kingdom and is a public limited company listed on the
London Stock Exchange. DUS is the holding company of Silo Holdings, Inc.,
which together with its subsidiaries (including Silo, Inc.), comprise the
business referred to as "Silo."
Currently the Company operates 237 retail stores, 45 of which are in
Massachusetts, Michigan, New Hampshire and Ohio under the name Fretter; 137
retail stores under the name Silo in Arizona, California, Delaware, Illinois,
Indiana, Nevada, New Jersey, New Mexico, New York, Oregon, Pennsylvania, Texas,
Utah and Washington, operated through DUS; 14 retail stores under the name YES!
Your Electronics Superstore in Illinois (Marshall Fields locations), Louisiana
and New York, operated through DUS; 22 retail stores in Colorado, Montana and
Wyoming operated through Fred Schmid Appliance & TV Co. ("Schmid"), a
wholly-owned subsidiary of the Company; and 19 automotive electronic retail
stores in Indiana, Michigan and Ohio operated through Dash Concepts, a
wholly-owned subsidiary of the Company.
As a result of this acquisition, the Company has closed a number of
locations where there were overlapping and competing stores, low performing
stores and duplicate facilities. Inventory liquidation sales were held in the
Los Angeles, Denver and New Orleans markets under the Silo name and the
Indianapolis and Chicago markets under the Fretter name. As of April 30, 1995,
all liquidation sales were substantially completed.
Estimated costs related to the closure of the Fretter locations,
approximately $4.0 million, were charged to income in the quarter ended October
31, 1993. As of January 31, 1995, reserves recorded for future costs related
to store closures aggregate $14.6 million, including $7.9 million expected
to be incurred in fiscal year 1996. Such reserves are primarily for estimated
future lease costs. See the liquidity section of the Management Discussion and
Analysis for Further Discussion.
-19-
<PAGE> 21
Deferred service revenue attributable to sales of extended warranties
of DUS prior to December 11, 1993 were written down to reflect the actual cost
to service such warranties. DUS extended warranties sold after such date are
being amortized over the life of the warranty. As of January 31, 1995,
approximately $17.1 million of current revenue was deferred without the
availability of revenue from prior years sales.
Effective November 1, 1994, the Company instituted a program to offer
for sale to its customers third party service contracts by which an independent
entity issues to the Company's customers the extended service contracts sold by
the Company's salespersons. The Company records the sale of these contracts as
a component of net sales and records the amount payable to the third party as a
component of cost of goods sold at the time of sale to a customer. For the
quarter and year ended January 31, 1995, the Company recorded net sales of
$17.1 million related to the sale of these contracts.
In conjunction with the acquisition of DUS, the Company has recorded
liabilities in relation to two defined benefit pension plans and a
post-retirement benefit liability. The post-retirement benefit liability
represents the actuarial present value of future obligations of certain health
and life insurance benefits payable to eligible retired employees of Silo.
During fiscal year 1995 with respect to the two defined benefit
pension plans, the Company has recorded an actuarial gain of approximately $3.6
million, a curtailment gain of approximately $2.7 and current year expense of
approximately $1.1 million. The curtailment gain is due to the freezing of
benefits and a reduction of work force.
In addition, with respect to the post-retirement benefit liability,
the Company has recorded an actuarial gain of approximately $12.9 million and a
current year expense of approximately $5.4 million, thus resulting in a $7.5
million net gain.
The actuarial gains relate primarily to an increase in the discount
rate used at year end. The Company's policy is to immediately recognize gains
and losses from the effect of changes in actuarial assumptions and so has
recognized these gains as a component of administrative expenses on a current
basis.
The Company effectively and significantly reduced the combined
administrative expenses compared to the expenses previously experienced by the
separate Fretter and DUS companies. During the year, the Company incurred the
following non-recurring costs, with regard to the acquisition of Silo:
-- Consolidating corporate headquarters, regions and
warehouses, and other consolidation expenses; approximately
$2.8 million.
-- Adjustment of store selling expense; approximately $8.0
million.
-- Training cost of Silo personnel; approximately $.5 million.
-20-
<PAGE> 22
The Company believes these costs will not reoccur in fiscal year 1996.
Other significant factors affecting the Company's operations during
fiscal year 1995 include:
-- DUS was acquired December 3, 1993 and the results of its
operations are included as of December 12, 1993, DUS' first
period beginning after the acquisition. For fiscal year
ending January 31, 1995, DUS operations are included for the
entire year.
-- The Company completed liquidation of its New Orleans market
except for one store which is required to remain open under a
continuous operation lease and one store in Baton Rouge which
was converted to the YES! store format and is not part of the
New Orleans closure.
-- Severe weather conditions in the Eastern United States
negatively affected the Company's Pennsylvania and New
England markets during The first quarter.
-- Sales of DUS customer extended service contracts for the
fiscal year through October 31, 1994 are deferred over the
life of such contracts without the Company's receipt of
concomitant deferred service contract revenue from prior years
of DUS customer extended service contracts.
-- All Silo stores were converted to the Fretter Point of Sale
System.
-- The Company's efforts to reduce its breadth and quantity of
product inventory resulted in occasional shortages of product
-- particularly air conditioners in the preceding summer.
-- Concentration of the Company's efforts toward completion of
the consolidation of the Company and DUS operations affected
the ability of the Company to maximize sales.
The following table sets forth the percentage relationship to net
sales of certain items, shown in the Company's Consolidated Statement of
Operations.
-21-
<PAGE> 23
<TABLE>
<CAPTION>
Year Ended January 31,
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Net sales.................................................. 100.0% 100.0% 100.0%
Cost of goods sold......................................... 73.4 74.6 72.8
----- ----- -----
Gross profit............................................. 26.6 25.4 27.2
Operating expenses......................................... 25.0 23.0 24.4
----- ----- -----
Operating profit......................................... 1.6 2.4 2.8
Interest and other income.................................. .5 .4 .5
Interest expense........................................... (1.1) (.6) (.9)
Store Closure Provision.................................... (.7)
----- ----- ----
Earnings before income taxes and cumulative effect of a
change in accounting principle........................... 1.0 1.5 2.4
Income taxes............................................... .3 2.1 .8
----- ----- ----
Earnings (loss) before cumulative effect of a change in
accounting principle..................................... .7 (.6) 1.6
Cumulative effect of change in accounting for income
taxes...................................................... - .5 -
----- ----- ----
Net earnings (loss) before preferred stock dividend........ .7 (.1) 1.6
Preferred stock dividend requirements.................... (.3) (.1) -
----- ----- ----
Net Earnings (Loss) Available for Common Shareholders.... .4 (.2) 1.6
===== ===== ====
</TABLE>
NET SALES. Net sales increased $313.3 million in fiscal year 1995 to
$858.8 million (57.4%) from $545.5 million in fiscal year 1994. The increase
in net sales is attributable to the acquisition of DUS.
Comparable store sales decreased $25.9 million (13.1%) in fiscal year
1995 as compared to fiscal year 1994. The decrease in comparable store sales is
primarily due to increased competition in The Company's key markets; and efforts
to consolidate the business operations of DUS and the Company negatively
affected the ability of the Company to maximize its sales.
Net sales rose $183.9 million in fiscal year 1994 to $545.5 million
(50.9%) from $361.6 million in fiscal year 1993. $167.1 million (90.9%) of the
$183.9 million increase in net sales is attributable to the acquisition of DUS.
The remaining net sales increase is due to the increase in comparable store
sales, new stores opened in fiscal year 1994 and stores opened for a full
fiscal year in 1994 as compared to a partial fiscal year in 1993.
Comparable store sales increased $19.6 million (7.2%) in fiscal year
1994 as compared to fiscal year 1993.
Comparable store sales relates each store's sales in a current fiscal
period to the same store's sales in the same period in the prior fiscal year.
The comparable store sales decrease for fiscal year 1995 does not include the
sales from any of the closed Fretter locations nor does it include the sales
from any of the DUS
-22-
<PAGE> 24
locations. Additionally, such sales do not include any sales from the Illinois
or Colorado regions. Nine Fretter locations were closed in Illinois and the
remaining Illinois locations were converted from Fretter to Silo stores.
Further, two Schmid locations were closed in Colorado and six Silo locations in
Colorado were converted to Schmid locations. Because of this conversion and
the liquidation of inventory in the markets pursuant thereto, the results of
these markets were excluded from comparable store sales computations.
Accordingly, of the 237 currently operating stores, 42 are used in the
comparable store sales analysis; therefor the comparable store sales analysis
is not necessarily indicative of the overall comparable store sales performance
of all currently operating retail locations.
Fiscal years 1993 to 1995 reflect significant increases in sales from
$361 million to $858.8 million. These results were achieved principally
through the acquisition of DUS in the fourth quarter of fiscal year 1994, in
which fiscal year 1995 was the first full year sales were included.
Revenue from service contract sales in fiscal year 1995 was $47.3
million compared to $22.1 million in fiscal year 1994 and $18.7 million in
fiscal year 1993. In addition, the Company was required through October 31,
1994 to defer the recognition of sales of extended service contracts without a
recognition of prior years sales of extended service contracts by DUS.
As previously discussed, as of November 1, 1994, the Company instituted a
program to offer for sale to its customers service contracts issued by an
independent third party. The Company recorded net sales of $17.1 million and
costs of $7.2 million related to the sale of these contracts for fiscal year
1995. The remaining increase of approximately $8.1 million is primarily
attributable to the acquisition of DUS. The increase from fiscal year 1993 to
fiscal year 1994 was primarily due to the increase in recognition of deferred
service contract revenue from service contract sales in previous years. This
revenue is recorded in accordance with Financial Accounting Standards Board's
Technical Bulletin No. 90-1, under which revenue on contracts sold prior to
November 1, 1994 is recognized on a straight line basis over the life of the
service contract. The Company has deferred as of January 31, 1995, $61.1
million of service contract revenue of which $24.9 million will be recognized
in fiscal year 1996. As of January 31, 1994, the Company had deferred $50.3
million of service contract revenue of which $21.3 million was recognized in
fiscal year 1995.
COST OF GOODS SOLD. Cost of goods sold increased $223.3 million
(54.8%) and gross profit by $90.0 million (65.1%) in fiscal year 1995 compared
to fiscal year 1994. The primary increase in cost of goods sold and gross
margin is due to the acquisition of DUS. Cost of goods sold as a percentage of
sales decreased 1.2% from fiscal year 1994 to fiscal year 1995. Accordingly,
gross profit as a percentage of sales increased by 1.2% for the same period.
-23-
<PAGE> 25
The decrease in cost of goods sold and the increase in gross profit of
approximately 1.2% as a percentage of sales is principally due to the
consolidation of inventory and improved product mix.
Cost of goods sold as a percentage of sales increased 1.8% from fiscal
year 1993 to fiscal year 1994. Gross profit as a percentage of sales declined
by 1.8% for the same period.
The increase in cost of goods sold and the decline in gross profit of
approximately 1.9% as a percentage of sales is principally due to the
following: (1) liquidation sales in Illinois, Indiana, Colorado and Los
Angeles and (2) no revenue was recognized related to service contracts sold by
DUS prior to the December 3, 1993 acquisition.
OPERATING EXPENSES. Operating expenses consist of selling and
service, warehouse and delivery and administrative expenses. Sales personnel
are principally compensated by commission, thus as sales increase, a
proportionate increase in such expense occurs. Operating expenses increased by
$89.7 million (71.6%) in fiscal year 1995 as compared to fiscal year 1994. As
a percentage of net sales, operating expenses increased to 25.0% during fiscal
year 1995 as compared to 23.0% during fiscal year 1994.
The increase in operating expenses as a percentage of net sales for
fiscal year 1995 is primarily attributable to an increase in store occupancy
costs resulting from the acquisition of DUS. Fiscal year 1994 operating
expenses reflect relatively fixed store occupancy costs for the DUS acquired
retail stores in the period subsequent to December 11, 1993 while the sales for
such stores were at a seasonal peak, thus reflecting disproportionately lower
operating expenses as a percent of sales. Silo locations typically are leased
as opposed to Fretter locations, a majority of which are owned, thus leading to
increased overall occupancy costs. In addition, the Company experienced
significant expenses associated with the closure of the DUS Philadelphia
headquarters, consolidation from three to two regions, consolidation of
warehouse operations and temporary duplicated labor expenses.
The Company incurred as operational expenses $11.3 million associated
with its consolidation, adjustment of store selling expenses and training of
DUS personnel; and reduced its operational expenses by recording, with respect
to the DUS deferred benefit pension plans and post-retirement liability, $12.7
million in actuarial gains and curtailment gains, net of expenses incurred in
the year with respect thereto.
Operating expenses increased by $36.9 million (41.8%) in fiscal year
1994 as compared to fiscal year 1993. As a percentage of net sales, operating
expenses decreased to 23.0% during fiscal year 1994 as compared to 24.4% during
fiscal year 1993. Such decrease is, in principal part, explained in the
preceding paragraph. The decrease in operating expenses in fiscal year 1994 as
a percentage of net sales primarily resulted from management's efforts to
control variable costs. The foregoing decrease, as a percentage of net sales,
is also attributable to the fixed costs portion of operating expenses
increasing at a lower rate than the increase in net sales.
-24-
<PAGE> 26
INTEREST AND OTHER INCOME. Interest and other income increased $2.6
million (115.1%) from fiscal year 1994. The increase is primarily due to the
acquisition of DUS and subsequent increase in private label credit card sales.
Interest and other income as a percentage of net sales was .5%, .4%
and .5% for fiscal years 1995, 1994 and 1993.
INTEREST EXPENSE. Interest expense increased $6.2 million (178.1%)
from fiscal year 1994 primarily due to the acquisition of DUS and the overall
increase in net borrowings.
Interest expense increased $325,000 (10.3%) from fiscal year 1993 to
fiscal year 1994 primarily due to increased borrowings in the months of December
and January as a result of the acquisition of DUS. Interest expense as a
percentage of net sales was 1.1%, .6% and .9% for fiscal years 1995, 1994 and
1993 respectively.
STORE CLOSURE PROVISION. In conjunction with the acquisition of DUS,
the Company established a store closure reserve at October 31, 1993 of
$4.0 million. This planned store closure provision was estimated to reflect
anticipated losses associated with the disposal of inventory, lease disposition
costs, employee severance costs and fixed asset write-offs for closed Fretter
stores. As of January 31, 1995, the Company utilized the entire original
reserve and does not need to provide any additional reserves relating to the
Fretter stores.
INCOME TAXES. The effective income tax rate for fiscal year 1995 was
29.2% compared to 144.1% in fiscal year 1994 and 34.0% in fiscal year 1993.
The effective tax rate for fiscal year 1995 of 29.2% is primarily a
result of recording a carryback benefit of approximately $1.4 million for
Fretter's current year net operating loss, offset by the deferred charge of
approximately $3.9 million relating to the utilization of acquired tax
attributes. The $3.9 million deferred charge offsets the Company's goodwill and
does not represent an actual cash payment obligation.
The effective tax rate for fiscal year 1994 of 144.1% is primarily due
to a valuation allowance of $8.1 million established for the write-off of
deferred income taxes. The effective tax rate
-25-
<PAGE> 27
for fiscal year 1994, exclusive of the valuation allowance, was 41.2%. The
increase in the effective rate of 7% is primarily due to adjustments mandated
by purchase accounting.
In connection with the acquisition of DUS, the Company reviewed the
carrying value of deferred tax assets. As a result of this review a valuation
allowance included as described above was provided during the fiscal year
ended January 31, 1994.
The Company has approximately $260.2 million of net operating loss
carryforwards which expire through the year 2010.
No benefit for acquired net deferred tax assets or net operating loss
carryforwards has been recognized in the statement of operations. As the
acquired net deferred tax assets or net operating loss carryforwards are
utilized, such amounts will first reduce goodwill. Once goodwill is reduced to
zero, a benefit will be included in income as a reduction of income tax
expense.
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING. The Company has adopted
Statement of Financial Accounting Standard No. 109 ("SFAS 109") "Accounting for
Income Taxes," effective February 1, 1993. The adoption of SFAS 109 changes
the method of accounting for income taxes from the deferred method (APB 11) to
an asset and liability method. The asset and liability method recognizes the
deferred tax assets and liabilities for the expected future tax consequences of
temporary differences between the carrying amount and the tax basis of the
assets and liabilities.
Pursuant to SFAS 109, assets and liabilities acquired in purchase
accounting were assigned their fair values assuming equal tax and financial
reporting bases and deferred taxes are provided for basis differences.
Under APB 11, values were assigned net of tax. In adopting SFAS 109,
the Company adjusted the carrying values of assets so acquired. The cumulative
effect of the change in accounting principle effective February 1, 1993 was
$2.8 million or $.35 per share.
PREFERRED STOCK DIVIDEND REQUIREMENTS. At the time of and in
connection with the acquisition of DUS, the Company issued to DAH 3,000,000
shares of newly-created Convertible Preferred Stock, Series A, and 1,500,000
shares of newly-created Preferred Stock, Series B, each having a stated value
of $10 per share, representing all authorized shares. Dividends on the Series
A and Series B Preferred shares at an
NET EARNINGS. Due to the factors discussed above, net earnings
increased to $3.7 million in fiscal year 1995 compared to a net loss of $1.1
million in fiscal year 1994. Net earnings decreased $6.8 million in fiscal
year 1994 to a net loss of $1.1 million from net income of $5.7 million in
fiscal year 1993.
-26-
<PAGE> 28
annual rate of 5% and 6%, respectively, are cumulative from the issue date and
are payable quarterly. Additional dividends at the rate of 5% and 6% per year,
respectively, accrue on any unpaid cumulating dividends. Total dividends
payable for fiscal year 1996 will be $2.4 million.
LIQUIDITY AND CAPITAL RESOURCES. Traditionally, the Company's
principal needs for capital are to support its inventory, particularly during
the Christmas holiday season, and to fund new store openings and to remodel or
relocate existing stores. For fiscal year 1995, the Company opened 6 new
stores and closed 11 stores -- exclusive of planned closures.
In connection with the acquisition of DUS, the Company entered into a
revolving credit agreement expiring December 1, 1996 with a commercial credit
company which committed a maximum of $140 million to the Company for cash
borrowing and letters of credit. Interest on amounts outstanding under this
facility is calculated at 1.25% above the bank's prime rate. This agreement is
secured by accounts receivable, personal property and inventory of the Company,
as defined in the credit agreement. A fee on the unused portion of the
facility is payable at the rate of 0.5% per year. Additionally, on the
issuance of any standby letter of credit, the Company pays a fee of 0.25% on
the face amount of that standby letter of credit, and a 2% per year fee is
charged on the outstanding face amount of all such letters of credit. As of
January 31, 1995, $82.9 million was outstanding under the revolving loan and
$10.0 million in letters of credit were outstanding.
During 1993, the Company amended and restated its existing loan and
financing agreement with another bank which increased the maximum amount
committed from $20 million to $50 million for lines of credit (including a
standby letter of credit), and changed the terms of the facility. The
commitment is comprised of a $25 million line of credit (to fund obligations
under a letter of credit issued to the credit organization that finances the
Company's merchandise purchases described below), and a $25 million capital
expenditure line of credit for certain eligible real estate, as defined.
Those facilities expire November 1, 1996 and December 1, 1996, respectively,
and are secured by substantially all of the Company's owned real estate. The
line of credit to fund obligations under the letter of credit is payable on
demand plus three days. Letter of credit fees equal to 1.25% per annum are
charged on the undrawn amount. The capital expenditure line of credit requires
interest only monthly payments and the outstanding principal balance on
December 1st of 1994, 1995 and 1996 must be refinanced under a separate term
loan. The term of the notes and amortization of each of the notes vary based
upon the year the note is funded. A fee of 1.5% is charged for each cash
advance. At January 31, 1995, there was $6.7 million outstanding under the
capital expenditure line of credit and no borrowing against the line of credit
to fund obligations under the letter of credit.
-27-
<PAGE> 29
The Company also maintains a loan agreement with an independent credit
organization that finances certain of its merchandise purchases. The loan
agreement expires November 1, 1996 at which time the balance outstanding
becomes payable. Borrowings under the loan agreement are collateralized by the
$25.0 million letter of credit issued by the bank described above. Interest on
amounts outstanding is calculated at .7% under prime. The maximum financing
provision of the loan agreement limits the borrowing to $30 million. Covenants
of the loan agreement, among other things, require the Company to maintain
certain levels of tangible net worth, as defined and places restrictions or
limitations on the pledging of merchandise inventory and equipment as
collateral for present and future obligations of the Company. At January 31,
1995 a total of $14.9 million was outstanding under this loan agreement.
Net decrease in cash and cash equivalents in fiscal year 1995 was $3.0
million. The decrease is due to the net cash used for operations ($52.5
million) and investing activities ($13.7 million), offset by net cash provided
by financing of $63.2 million.
The net cash used for operations of $52.5 million is primarily the
result of cash used for store closure of $31.9 million and cash used for other
liabilities of $54.1 million. These amounts were effectively offset by cash
proceeds on long term obligations of $66.1 million.
In conjunction with the acquisition of DUS on December 3, 1993, the
Company financed the payment of a pre-acquisition intercompany debt of DUS of
$43.6 million and cash payments to the Company's shareholders of $43.6 million.
The Company will continue to open new stores to the extent that
economically feasible transactions can be structured. The Company anticipates
fiscal year 1996 capital expenditures to be approximately $7.3 million. The
funds required for future expansion are expected to be generated through
operations and existing credit facilities. The Company expects that cash from
operations together with the credit sources described above will be sufficient
to meet its long and short term liquidity needs.
In conjunction with the acquisition of DUS, the Company developed a
plan to integrate operations and improve the profitability of the combined
entities. The plan included the elimination of duplicate facilities and the
closure of overlapping and competing stores and other low performing stores.
At the time of the December 3, 1993 acquisition, Fretter operated 105 retail
locations and DUS operated 182 retail locations. The Company's integration
plan included closure of certain DUS and Fretter locations, principally located
in Colorado, Illinois, Indiana, Los Angeles and Louisiana. In addition, prior
to the time of acquisition, DUS had closed 50 stores in early 1993.
-28-
<PAGE> 30
Estimated exit costs for former DUS stores, including stores
previously closed, were recorded as adjustments to the fair value of the assets
and liabilities acquired. The estimated costs for Fretter stores of
approximately $4.0 million have been charged to the store closure provision in
the statement of operations during the year ended January 31, 1994. Such
charge consisted of estimated losses associated with the disposal of
merchandise ($1.7 million), fixed assets ($1.4 million) and leases ($.7
million), and employee termination and other costs ($.2 million).
During the year ended January 31, 1995 estimates for closure of the
former DUS locations were revised based upon available information. The
adjustments to the reserve for store closures as a result of these revisions
has been recorded as an adjustment to goodwill in the current year.
The following table sets forth the store closure activity during
fiscal year 1995 (thousands):
<TABLE>
<CAPTION>
Lease Operating Severance
Cost Losses and Other Total
<S> <C> <C> <C> <C>
Balance 1/31/94 $26,072 $ 6,529 $12,215 $44,816
Cost incurred (9,630) (5,861) (16,383) (31,874)
Adjustments charged to goodwill
(2,679) (168) 4,508 1,661
Balance 1/31/95 $13,763 $ 500 $ 340 $14,603
</TABLE>
The Company expects to utilize approximately $7.9 million of the
remaining reserve in fiscal year 1996. The Company expects to incur these
costs on a consistent basis during the year.
-29-
<PAGE> 31
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements and schedules of the Company filed herein are
listed on the following index.
<TABLE>
<CAPTION>
Index to Consolidated Financial Statements
and Supplementary Data
<S> <C>
Report of Independent Accountants................ F-1
Consolidated Balance Sheets...................... F-2
Consolidated Statements of Operations............ F-3
Consolidated Statements of Shareholders' Equity.. F-4
Consolidated Statements of Cash Flows............ F-5
Notes to Consolidated Financial Statements....... F-6 to 21
</TABLE>
All schedules are omitted because they are not applicable or the
required information is shown in the consolidated financial statements or
notes thereto.
-30-
<PAGE> 32
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
and Shareholders of
Fretter, Inc.
In our opinion, the consolidated financial statements listed in the index on
page 30 present fairly, in all material respects, the financial position of
Fretter, Inc. and its subsidiaries at January 31, 1995 and 1994, and the
results of their operations and their cash flows for each of the three years in
the period ended January 31, 1995, 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 of these
statements 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.
As discussed in Note 10 to the consolidated financial statements, the Company
adopted Statement of Financial Accounting Standards No. 109, "Accounting for
Income Taxes", effective February 1, 1993.
PRICE WATERHOUSE LLP
Detroit, Michigan
April 28, 1995
F-1
<PAGE> 33
FRETTER, INC.
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
JANUARY 31,
1995 1994
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents $ 13,787 $ 16,805
Accounts receivable, net 24,058 23,987
Merchandise inventory 207,066 224,445
Prepaid expenses and other 4,926 3,015
Deferred commissions 4,872 3,960
------------ ------------
Total current assets 254,709 272,212
Property and equipment, net 111,985 110,954
Goodwill, net 87,809 63,616
Other assets 6,991 4,587
Deferred commissions 7,114 5,433
------------ ------------
$ 468,608 $ 456,802
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Current portion of long-term obligations $ 4,601 $ 590
Accounts payable 49,491 28,864
Current portion of deferred service contract revenue 24,933 21,290
Accrued liabilities 73,021 97,069
Reserve for store closings 7,881 33,385
Income taxes payable 2,143 3,558
------------ ------------
Total current liabilities 162,070 184,756
Long-term obligations 105,161 43,584
Other noncurrent liabilities 26,008 42,622
Deferred service contract revenue 36,169 29,058
Employee benefit obligations 64,041 80,788
------------ ------------
TOTAL LIABILITIES 393,449 380,808
------------ ------------
Redeemable preferred stock 40,800 45,000
------------ ------------
Commitments and contingencies (Note 11) - -
------------ ------------
Shareholders' equity
Preferred stock - authorized: 5,000,000 shares of
$.01 par value; issued: none
Common stock - authorized: 50,000,000 shares of
$.01 par value; issued: 10,577,392 and 10,577,467
shares at January 31, 1995 and 1994, respectively 106 106
Additional contributed capital 1,641 1,641
Retained earnings 32,612 29,247
------------ ------------
34,359 30,994
------------ ------------
$ 468,608 $ 456,802
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-2
<PAGE> 34
FRETTER, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
YEARS ENDED JANUARY 31,
1995 1994 1993
<S> <C> <C> <C>
Net sales $ 858,849 $ 545,508 $ 361,603
Cost of goods sold 630,435 407,129 263,077
------------ ------------ -----------
Gross profit 228,414 138,379 98,526
------------ ------------ -----------
Operating expenses
Selling 168,041 94,619 63,007
Warehouse and delivery 29,480 15,154 10,654
Administrative (Note 12) 17,501 15,556 14,717
------------ ----------- -----------
215,022 125,329 88,378
------------ ------------ -----------
Other income (expense)
Interest and other 4,894 2,275 1,682
Interest expense (9,721) (3,496) (3,171)
Store closure provision (4,000)
------------ ----------- -----------
(4,827) (5,221) (1,489)
------------ ----------- -----------
Earnings before income taxes and cumulative
effect of change in accounting principle 8,565 7,829 8,659
------------ ----------- -----------
Income taxes
Current (1,400) 2,783 4,161
Deferred 6,986 (1,221)
Benefit of acquired net deferred tax
assets used to reduce goodwill 3,900 1,512
------------ ----------- -----------
2,500 11,281 2,940
------------ ----------- -----------
Earnings (loss) before cumulative effect of change
in accounting principle 6,065 (3,452) 5,719
Cumulative effect of change in accounting for
income taxes (Note 10) 2,756
------------ ----------- -----------
Net earnings (loss) before preferred dividends 6,065 (696) 5,719
Preferred stock dividend requirements 2,400 400
------------ ----------- -----------
Net earnings (loss) available for common shareholders $ 3,665 $ (1,096) $ 5,719
============ =========== ===========
Weighted average number of common shares 10,577,430 7,918,676 7,420,462
============ =========== ===========
Earnings (loss) per weighted average
number of common shares:
Earnings (loss) per common share before
cumulative effect of change in accounting principle $ .35 $ (.49) $ .77
Cumulative effect of change in accounting
for income taxes .35
------- ------- ------
Net earnings (loss) per common share $ .35 $ (.14) $ .77
======= ======== ======
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE> 35
FRETTER, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED JANUARY 31, 1993, 1994 AND 1995
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
COMMON STOCK
-------------------------
ADDITIONAL
$0.01 PAR CONTRIBUTED RETAINED
SHARES VALUE CAPITAL EARNINGS TOTAL
<S> <C> <C> <C> <C> <C>
Balance at January 31, 1992 14,514,294 $ 145 $ 32,539 $ 24,624 $ 57,308
Net earnings for the year
ended January 31, 1993 5,719 5,719
Common stock issued for
exercise of stock options 155,556 1 992 993
Common stock redeemed (129,136) (1) (1)
------------ ------ --------- --------- --------
Balance at January 31, 1993 14,540,714 145 33,531 30,343 64,019
Net loss for the year ended
January 31, 1994 (696) (696)
Common stock issued for exercise
of stock options 6,929 28 28
Common stock redeemed (13,010)
Common stock cash
distribution (Note 9) (7,121,970) (71) (43,533) (43,604)
Common stock issued for
the acquisition of Dixons
U.S. Holdings, Inc. (Note 2) 3,164,804 32 11,615 11,647
Preferred stock dividend requirements (400) (400)
------------ ------ --------- --------- --------
Balance at January 31, 1994 10,577,467 106 1,641 29,247 30,994
Net earnings for the year ended
January 31, 1995 6,065 6,065
Common stock redeemed (75)
Preferred stock dividend requirements (2,400 ) (2,400)
Preferred stock accretion (300) (300)
------------ ------ --------- --------- --------
Balance at January 31, 1995 10,577,392 $ 106 $ 1,641 $ 32,612 $ 34,359
============ ====== ========= ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE> 36
FRETTER, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
YEARS ENDED JANUARY 31,
1995 1994 1993
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net earnings (loss) before preferred dividends $ 6,065 $ (696) $ 5,719
Adjustments to reconcile net earnings (loss) to
net cash provided by (used for) operating activities
Depreciation and amortization 17,774 7,667 5,916
Stock compensation expense 1,979 1,243 996
Employee benefit plans, net benefit and
curtailment gain (12,688)
Non cash tax charge (benefit) 3,900 3,117 (1,329)
Other 2,237 998
Change in assets and liabilities, net of DUS
acquisition in fiscal year 1994 and adjustments to
goodwill in 1995
Merchandise inventory (12,326) 109,471 (9,094)
Other assets (4,903) 27,865 865
Accounts payable 20,627 (31,620) 1,770
Reserve for store closing (31,874) (10,385)
Deferred service contract revenue 10,754 12,294 2,630
Other liabilities (54,088) (2,683) 2,958
------------ ----------- ----------
NET CASH PROVIDED BY (USED FOR)
OPERATING ACTIVITIES (52,543) 117,271 10,431
------------ ----------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition of DUS (4,896)
Payment of pre-acquisition intercompany
obligation of DUS, net of cash acquired (43,615)
Purchase of property and equipment (13,663) (12,951) (4,102)
------------ ----------- ----------
NET CASH USED FOR INVESTING ACTIVITIES (13,663) (61,462) (4,102)
------------ ----------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES
Net payments under line of credit (1,000)
Proceeds from long-term obligations 66,149 22,705 827
Payments of long-term obligations (561) (19,714) (1,233)
Preferred stock dividends (2,400)
Payment of financing fees (4,651)
Cash distribution to common shareholders (43,604)
Purchase of redeemable common stock (83) (518)
Issuance of common stock 28
------------ ----------- ----------
NET CASH PROVIDED BY (USED FOR)
FINANCING ACTIVITIES 63,188 (45,319) (1,924)
------------ ----------- ----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (3,018) 10,490 4,405
Cash and cash equivalents at beginning of year 16,805 6,315 1,910
------------ ----------- ----------
Cash and cash equivalents at end of year $ 13,787 $ 16,805 $ 6,315
============ =========== ==========
SUPPLEMENTAL CASH FLOW INFORMATION
Interest paid, net of amounts capitalized $ 8,700 $ 2,936 $ 3,137
Federal income taxes paid $ - $ 3,600 $ 1,675
Acquisition of DUS in fiscal year 1994 and
adjustments to goodwill in 1995
Fair value of assets acquired, including goodwill $ 4,332 $ 406,561
Liabilities assumed $ 8,832 $ 345,018
Redeemable preferred stock issued $ (4,500) $ 45,000
Common stock issued $ 11,647
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE> 37
FRETTER, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF ACCOUNTING POLICIES
BASIS OF PREPARATION
The consolidated financial statements include Fretter, Inc. and its
wholly-owned subsidiaries (the Company). The Company is a retailer of
consumer electronic goods and appliances. All significant intercompany
accounts and transactions have been eliminated.
CASH EQUIVALENTS/STATEMENT OF CASH FLOWS
For purposes of the consolidated statements of cash flows, the Company
considers all highly-liquid debt instruments purchased with an original
maturity of three months or less to be cash equivalents.
MERCHANDISE INVENTORY
Merchandise inventory is stated at the lower of cost or market. Cost is
determined by the first-in, first-out (FIFO) method.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Major replacements and
refurbishments are capitalized while replacements, repairs and
maintenance that do not extend the life of the respective property are
expensed when incurred. Interest costs relating to the construction of
capital assets are capitalized; such costs were not material during
fiscal years 1995, 1994 and 1993.
Depreciation and amortization are computed using the straight-line method
for financial reporting purposes and accelerated methods for income tax
reporting purposes. Estimated useful lives for computing depreciation
and amortization for financial reporting purposes are as follows:
<TABLE>
<S> <C>
Buildings and improvements 18-40 years
Furniture, fixtures and office equipment 5-10 years
Automotive equipment 3-8 years
Leasehold improvements Lesser of lease term or 10 years
</TABLE>
LEASES
Leases which meet the accounting criteria for capital leases are recorded
as property and equipment, and the related capital lease obligations (the
aggregate present value of future minimum lease payments, excluding
executory costs such as taxes, maintenance and insurance) are included in
long-term obligations. Depreciation and interest are charged to expense,
and rent payments are treated as payments of long-term debt, accrued
interest and executory costs. All other leases are accounted for as
operating leases.
DEFERRED FINANCING COSTS
Included in other assets as of January 31, 1995 and January 31, 1994 are
deferred financing costs of $5.1 million and $4.7 million, respectively,
associated with obtaining the revolving credit agreement and in amending
and restating the Company's loan and financing agreement (as described in
Note 6) in connection with the acquisition of DUS. Such costs are being
amortized over the term of the related agreements. Amortization
aggregated $1.7 million in the year ended January 31, 1995. Accumulated
amortization was $2.0 million and $.3 million as of January 31, 1995 and
1994, respectively.
F-6
<PAGE> 38
FRETTER, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF ACCOUNTING POLICIES (CONTINUED)
GOODWILL
The excess of cost over the fair value of assets acquired is shown as
goodwill, which is being amortized on a straight-line basis over thirty
years. Recoverability of goodwill is evaluated based upon actual and
projected results of operations and cash flows to determine if any
impairment in the carrying amount has occurred. Accumulated amortization
at January 31, 1995 and 1994 was $3.7 million and $.6 million,
respectively. Goodwill amortization recorded during the years ended
January 31, 1995, 1994 and 1993 was $3.1 million, $.4 million and $.1
million, respectively.
SERVICE CONTRACTS
The Company recognizes revenue from the sale of service contracts sold by
the Company on a straight-line basis over the life of the contract.
Incremental direct costs resulting from the sale of such contracts
(primarily commissions) are also deferred and recognized on a
straight-line basis over the same period.
Effective November 1, 1994 the Company discontinued selling its own
service contracts and instituted a program to offer for sale to its
customers third party service contracts by which an independent entity
issues the Company's customers the extended service contract sold by the
Company's salespersons. The Company records the sale of these contracts
as a component of net sales, records the amount payable to the third
party as a component of cost of goods sold and records salesperson
commissions as a component of selling expense at the time of sale to a
customer. For the year ended January 31, 1995 the Company recorded net
sales of approximately $17.1 million related to the sale of these
contracts.
The Company has recorded a liability for the estimated costs of servicing
contracts of DUS which existed at the acquisition date. No revenue or
costs associated with these acquired contracts will be recognized. The
current and noncurrent portions of the liability are included in accrued
liabilities and other noncurrent liabilities, respectively.
INCOME TAXES
Deferred taxes are provided to give recognition to the effect of expected
future tax consequences of temporary differences between the carrying
amount of assets and liabilities for financial reporting purposes and the
related tax basis for income tax purposes. See Note 10.
PREOPENING COSTS
The Company expenses preopening costs of new retail stores, such as
training and advertising, as incurred.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying value of financial instruments, including cash and cash
equivalents, accounts receivable, accounts payable and long-term debt,
approximates fair value. The carrying value of the redeemable preferred
stock was determined based upon an independent appraisal as of the DUS
acquisition date.
F-7
<PAGE> 39
FRETTER, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF ACCOUNTING POLICIES (CONTINUED)
EARNINGS PER SHARE
Primary earnings (loss) per weighted average number of common shares is
based upon the average number of common shares outstanding plus common
share equivalents arising from dilutive stock options. Fully diluted
earnings per share assumes conversion of the convertible preferred stock
into common stock, if dilutive. The inclusion of such items did not have
an impact on primary or fully diluted earnings per share in the years
presented as they were either insignificant or antidilutive.
RECLASSIFICATION
Certain amounts in prior years' consolidated financial statements have
been reclassified to conform with the current year presentation.
2. ACQUISITION OF DIXONS U.S. HOLDINGS, INC. (DUS)
On December 3, 1993, the Company acquired DUS. In exchange for all of
the issued and outstanding equity securities of DUS, the Company issued
to Dixons America Holdings, Inc. ("DAH") 3,164,804 shares of the
Company's Common Stock, 3,000,000 shares of newly-created Convertible
Preferred Stock, Series A, and 1,500,000 shares of newly-created
Preferred Stock, Series B (the "Share Issuance"). Immediately prior to
the consummation of the Share Issuance, Company shareholders were granted
$3.00 in exchange for .49 of each share of Company Common Stock owned as
of December 3, 1993. The acquisition of DUS was accounted for using the
purchase method and, accordingly, the purchase price was allocated to the
acquired assets and liabilities based upon their respective fair values
at the date of acquisition. Fair values were determined based on
independent appraisals, valuations and other studies, some of which had
not yet been completed at January 31, 1994. The excess of the purchase
price (consisting of $11.6 million of common stock, $40.5 million of the
fair market value of Series A preferred stock and Series B preferred
stock and $5.0 million of transaction costs) over the fair value of the
net assets acquired has been recorded as goodwill and is being amortized
on a straight-line basis over thirty years.
During the year ended January 31, 1995 the Company completed the
determination of the fair values of assets acquired and liabilities
assumed. Accordingly, goodwill related to the DUS acquisition was
increased by $31.2 million.
The operating results of DUS are included in the Fretter consolidated
statement of earnings from December 12, 1993, the effective date of the
acquisition for purchase accounting purposes. Set forth below are
summarized pro forma combined results of operations of Fretter and DUS
for the years ended January 31, 1994 and 1993 assuming the acquisition
had taken place as of the beginning of each year. The pro forma combined
results of operations are not indicative of future earnings or earnings
that would have been reported for the periods presented had the
transaction been completed when assumed. See also Note 5 regarding store
closings.
F-8
<PAGE> 40
FRETTER, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. ACQUISITION OF DIXONS U.S. HOLDINGS, INC. (DUS) (CONTINUED)
<TABLE>
<CAPTION>
YEARS ENDED
JANUARY 31,
1994 1993
(THOUSANDS; UNAUDITED)
<S> <C> <C>
Net sales $ 1,067,550 $ 1,034,519
============= ==============
Loss for common stock before cumulative
effect of a change in accounting principles $ (68,807) $ (122,388)
Cumulative effect of a change in accounting
for income taxes 2,756
------------- --------------
Net loss for common stock $ (66,051) $ (122,388)
============= ==============
Per share:
Loss per common share before cumulative
effect of change in accounting principle $ (6.51) $ (11.56)
Cumulative effect of change in accounting
for income taxes .26
------------- --------------
Net loss per common share $ (6.25) $ (11.56)
============= ==============
3. PROPERTY AND EQUIPMENT
Property and equipment consists of:
<CAPTION>
JANUARY 31,
1995 1994
(THOUSANDS)
<S> <C> <C>
Buildings and improvements $ 50,783 $ 50,355
Furniture, fixtures and equipment 42,860 35,264
Automotive equipment 1,430 1,475
Leasehold improvements 32,843 32,770
----------- -----------
127,916 119,864
Accumulated depreciation and amortization (39,153) (32,159)
------------ -----------
88,763 87,705
Land 23,124 22,811
Construction-in-process 98 438
------------ -----------
$ 111,985 $ 110,954
============ ===========
</TABLE>
F-9
<PAGE> 41
FRETTER, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. ACCRUED LIABILITIES
Accrued liabilities consist of:
<TABLE>
<CAPTION>
JANUARY 31,
1995 1994
(THOUSANDS)
<S> <C> <C>
Workers' compensation $ 8,375 $ 7,914
Accrued salary and wages 5,309 3,353
Vacation 1,517 3,435
Medical claims 1,908 2,874
Other employee related accruals 2,058 2,950
Advertising accrual 13,194 28,162
Service contract liability 9,907 14,648
Property related accruals 3,136 5,299
Customer deposits 5,675 8,790
In-transit inventory 6,523 104
Sales tax accrual 1,789 4,422
Other 13,630 15,118
----------- ----------
$ 73,021 $ 97,069
=========== ==========
</TABLE>
5. RESERVE FOR STORE CLOSINGS
In conjunction with the acquisition of DUS, the Company developed a plan
to integrate operations and improve the profitability of the combined
entities. The plan included the elimination of duplicate facilities and
the closure of overlapping and competing stores and other low performing
stores. At the time of the December 3, 1993 acquisition, Fretter
operated 105 retail locations and DUS operated 182 retail locations. The
Company's integration plan included closure of certain former DUS
locations and existing Fretter locations, principally located in
Colorado, Illinois, Indiana, Los Angeles and Louisiana. In addition,
prior to the time of acquisition, DUS had closed 50 stores in early 1993.
Estimated exit costs for former DUS stores, including stores previously
closed, were recorded as adjustments to the fair value of the assets and
liabilities acquired. The estimated costs for Fretter stores of
approximately $4.0 million were charged to the store closure provision in
the statement of operations during the year ended January 31, 1994. Such
charge consisted of estimated losses associated with the disposal of
merchandise ($1.7 million), fixed assets ($1.4 million) and leases ($.7
million), and employee termination and other costs ($.2 million).
During the year ended January 31, 1995 estimates for closure of the
former DUS locations were revised based upon available information. The
adjustments to the reserve for store closures as a result of these
revisions has been recorded as an adjustment to goodwill in the current
year.
F-10
<PAGE> 42
FRETTER, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5. RESERVE FOR STORE CLOSINGS (CONTINUED)
The following table sets forth the store closure reserve activity during
1995:
<TABLE>
<CAPTION>
(THOUSANDS)
-----------------------------------------------------
LEASE OPERATING SEVERANCE
COSTS LOSSES AND OTHER TOTAL
<S> <C> <C> <C> <C>
Balance January 31, 1994 $ 26,072 $ 6,529 $ 12,215 $ 44,816
Adjustment charged to goodwill (2,679) (168) 4,508 1,661
Costs incurred (9,630) (5,861) (16,383) (31,874)
---------- ---------- --------- ----------
Balance January 31, 1995 $ 13,763 $ 500 $ 340 $ 14,603
========== ========== ========= ==========
</TABLE>
6. LONG-TERM OBLIGATIONS
Long-term obligations consist of:
<TABLE>
<CAPTION>
JANUARY 31,
1995 1994
(THOUSANDS)
<S> <C> <C>
Bank credit agreement $ 82,893 $ 18,279
Capital expenditure line of credit 6,736 5,626
Inventory financing agreement 14,905 14,482
Notes payable and other 5,228 5,787
----------- -----------
109,762 44,174
Less - Current portion (4,601) (590)
------------ -----------
$ 105,161 $ 43,584
============ ===========
</TABLE>
Principal payments on long-term obligations for the five years subsequent
to 1995 are: 1996 - $4.6 million; 1997 - $98.5 million; 1998 - $.5
million; 1999 - $.5 million; 2000 - $.5 million; thereafter - $5.2
million.
In conjunction with the acquisition of DUS, the Company entered into a
revolving credit agreement with a commercial credit company which
committed a maximum of $140.0 million to the Company for cash borrowings
and letters of credit. Interest on amounts outstanding under this
facility is calculated at 1.25% above the bank's prime rate. This
facility expires on December 1, 1996. Borrowings under the credit
agreement are secured by accounts receivable, personal property and
inventory of the Company, as defined. A fee
F-11
<PAGE> 43
FRETTER, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. LONG-TERM OBLIGATIONS (CONTINUED)
on the unused portion of the facility is payable at the rate of 0.5% per
annum. Additionally, the agreement provides for a payment of a fee of
0.25% on the face amount of each standby letter of credit upon its
issuance and 2% per annum on the outstanding face amount of such letters
of credit. At January 31, 1995 and 1994, there was $82.9 million and
$18.3 million, respectively, outstanding under the revolving loan and
$7.5 million and $10.0 million, respectively, in letters of credit
outstanding under the facility.
During 1993, the Company amended and restated its existing loan and
financing agreement with a bank which increased the maximum amount
committed from $20.0 million to $50.0 million for lines of credit
(including standby letters of credit) and changed the terms of the
facility. The commitment is comprised of a $25.0 million line of credit
(to fund obligations under a letter of credit issued to the credit
organization that finances the Company's merchandise purchases described
below) and a $25.0 million capital expenditure line of credit for
eligible real estate, as defined. The facilities expire November 1, 1996
and December 1, 1996, respectively. Borrowings under the line of credit
to fund obligations under letters of credit are payable on demand plus
three days. Letter of credit fees equal to 1.25% per annum are charged
on the undrawn amount. The capital expenditure line of credit requires
interest-only monthly payments. The outstanding principal balance on
December 1st of 1994, 1995, and 1996 will be refinanced under separate
term loans. The term and amortization of each of the notes vary based
upon the year the note is funded. A fee of 1.5% is charged for each cash
advance. At January 31, 1995 and 1994, there was $6.7 million and $5.6
million, respectively, outstanding under the capital expenditure line of
credit and no borrowing outstanding against the line of credit to fund
obligations under letters of credit. The letter of credit issued by the
bank is secured by owned real estate, not previously pledged to the bank.
Covenants of the above agreements require the Company to maintain minimum
amounts of consolidated net worth, net income and interest coverage
ratio, and limits the amounts for capital expenditures, debt service
payments and additional indebtedness the Company may incur. The
facilities also limit certain other nonoperating activities of the
Company.
The Company maintains a loan agreement with an independent credit
organization that finances certain of its merchandise purchases. The
loan agreement, which was entered into in conjunction with the
acquisition of DUS, expires on November 1, 1996, at which time the
balance outstanding becomes payable. Previous to the acquisition of DUS,
the Company maintained a different credit agreement with the same credit
organization. Borrowings under the loan agreement are collateralized by
the $25.0 million letter of credit issued by the bank described above.
Interest on amounts outstanding is calculated at .7% below prime rate, as
defined. The maximum financing provision of the loan agreement limits
the borrowing to $30.0 million. Covenants of the loan agreement, among
other things, require the Company to maintain certain levels of tangible
net worth, as defined, and places restrictions or limitations on the
pledging of merchandise inventory and equipment as collateral for present
and future obligations of the Company. At January 31, 1995 and 1994,
$14.9 million and $14.5 million, respectively, was outstanding under this
loan agreement.
F-12
<PAGE> 44
FRETTER, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. LONG-TERM OBLIGATIONS (CONTINUED)
During fiscal 1994, the Company issued a $3.7 million secured purchase
money note in conjunction with the acquisition of its new corporate
headquarters. The note requiring 6.5% interest-only quarterly payments
was due and paid off on March 1, 1995. Additionally, the Company has
outstanding mortgages, which are payable in monthly installments through
the year 2013 with interest ranging from 7% to 9%. At January 31, 1995
and 1994, $1.0 million and $1.1 million, respectively, was outstanding.
7. OTHER NONCURRENT LIABILITIES
Other noncurrent liabilities at January 31, 1995 and 1994 consist of the
noncurrent portion of the estimated costs of servicing extended product
warranty contracts of DUS which existed at the acquisition date, the
noncurrent portion of estimated future costs to be incurred related to
store closings as discussed in Note 5 and the noncurrent portion of
unfavorable lease obligations related to the acquisition of DUS.
<TABLE>
<CAPTION>
JANUARY 31,
1995 1994
(THOUSANDS)
<S> <C> <C>
Extended product warranty costs $ 10,340 $ 20,246
Store closing costs 6,722 11,431
Unfavorable lease obligations 8,946 10,945
----------- -----------
$ 26,008 $ 42,622
=========== ===========
</TABLE>
8. REDEEMABLE PREFERRED STOCK
On December 3, 1993 in connection with the acquisition of DUS, in
addition to the issuance to DAH of 3,164,804 shares of common stock, the
Company issued to DAH 3,000,000 shares of newly-created Convertible
Preferred Stock, Series A, and 1,500,000 shares of newly-created
Preferred Stock, Series B, each having a stated value of $10 per share,
representing all authorized shares. Dividends on the Series A and Series
B Preferred shares at an annual rate of 5% and 6%, respectively, are
cumulative from the issue date and are payable quarterly. Additional
dividends at the rate of 5% and 6% per year, respectively, shall accrue
on any unpaid cumulating dividends.
The Series A and Series B Preferred shares are mandatorily redeemable on
December 3, 2008 at a per share redemption price equal to stated value
plus all accumulated and unpaid dividends up to the date of redemption.
In addition, the Company may, at any time, redeem shares of the preferred
stock at the per share redemption price, equal to the stated value plus
all accumulated and unpaid dividends, provided that (a) the aggregate
value being redeemed at any one time must be at least $5.0 million, and
(b) no Series A Preferred may be redeemed until all of the Series B
Preferred has been redeemed. As of January 31, 1995, no shares of Series
A or Series B Preferred have been redeemed.
F-13
<PAGE> 45
FRETTER, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8. REDEEMABLE PREFERRED STOCK (CONTINUED)
The Series A Preferred shares are convertible, at the option of the
holder, into shares of common stock at the then applicable conversion
rate (currently 1.42655 shares of common stock for each share of Series A
Preferred). The conversion rate is subject to adjustment in the event of
certain dilutive issuances of common stock or upon the occurrence of
certain other events. As of January 31, 1995, no shares of Series A
Preferred have been converted.
In connection with the acquisition of DUS, the Company obtained an
independent appraisal of the fair market value of the redeemable Series A
Convertible Preferred Stock and Series B Preferred Stock. Based upon
this appraisal, the value of the redeemable preferred stock has been
recorded at $40.5 million as of the date of acquisition. The difference
between the fair market value and the redemption value is being accreted
to the stated redemption value as a charge directly to retained earnings.
During fiscal 1995, $.3 million of such accretion was recorded.
9. SHAREHOLDERS' EQUITY
Effective December 3, 1993, in conjunction with the acquisition of DUS,
the Company's shareholders authorized an exchange whereby the
shareholders became entitled to receive $3.00 in exchange for each .49 of
each share of common stock owned as of that date. Distributions of $43.6
million have been accounted for as a return of capital, resulting in a
reduction of additional contributed capital in an amount equal to the
cash distribution. All weighted average share and per share amounts have
been restated to retroactively reflect the exchange.
The Company is authorized to repurchase up to 2,000,000 shares of its
issued and outstanding stock. As of January 31, 1995, 1,347,800 shares
of common stock have been reacquired. In accordance with the Michigan
Business Corporation Act, all reacquired common stock has the status of
authorized but unissued shares.
10. INCOME TAXES
Effective February 1, 1993, the Company adopted Statement of Financial
Accounting Standard No. 109, "Accounting for Income Taxes" (SFAS 109).
The adoption of SFAS 109 changes the method of accounting for incomes
taxes from the deferred method (APB 11) to an asset and liability method.
The asset and liability method recognizes the deferred tax assets and
liabilities for the expected future tax consequences of temporary
differences between the carrying amount and the tax basis of the assets
and liabilities.
Under SFAS 109, assets and liabilities acquired in purchase accounting
are assigned their fair values assuming equal tax and financial reporting
bases and deferred taxes are provided for basis differences. Under APB
11, values were assigned net of tax. In adopting SFAS 109, the Company
adjusted the carrying values of assets so acquired. The cumulative
effect of the change in accounting principle at the date of adoption was
$2.8 million, or $.35 per share.
F-14
<PAGE> 46
FRETTER, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10. INCOME TAXES (CONTINUED)
The provision for income taxes consists of:
<TABLE>
<CAPTION>
YEARS ENDED JANUARY 31,
1995 1994 1993
(THOUSANDS)
<S> <C> <C> <C>
Current
Federal $ (1,400) $ 2,273 $ 3,640
State 510 521
----------- ----------- ----------
Total current (1,400) 2,783 4,161
----------- ----------- ----------
Deferred
Federal 6,986 (1,221)
----------- ----------- ----------
Total deferred - 6,986 (1,221)
----------- ----------- ----------
Benefit of acquired net deferred tax
assets used to reduce goodwill 3,900 1,512
----------- ----------- ----------
Total provision $ 2,500 $ 11,281 $ 2,940
=========== =========== ==========
</TABLE>
In conjunction with the acquisition of DUS, the Company reevaluated the
carrying value of its deferred tax assets. Primarily due to the net
operating loss carryforward position of DUS, a valuation allowance for
the net deferred tax asset balance was provided in the third quarter of
fiscal 1994.
The tax effects of temporary differences and carryforwards which give
rise to deferred tax assets and liabilities are as follows:
<TABLE>
<CAPTION>
JANUARY 31,
1995 1994
(THOUSANDS)
<S> <C> <C>
DEFERRED TAX LIABILITIES
Inventory $ (431) $ (1,389)
---------- ----------
Total deferred tax liabilities (431) (1,389)
---------- ----------
DEFERRED TAX ASSETS
Depreciation and amortization 1,737 7,040
Deferred service contract revenue 25,198 27,004
Accrued expenses 15,296 43,225
Retiree medical benefits 20,881 24,788
NOL carryforward 88,466 61,615
---------- ----------
Total deferred tax assets 151,578 163,672
---------- ----------
Net deferred tax asset 151,147 162,283
Valuation allowance (151,147) (162,283)
---------- ----------
Net deferred tax asset $ - $ -
========== ==========
</TABLE>
F-15
<PAGE> 47
FRETTER, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10. INCOME TAXES (CONTINUED)
The Company has approximately $260.2 million of net operating loss
carryforwards which expire through the year ended 2010. Included in the
amount is approximately $14 million of net operating loss carryforwards
from a subsidiary which are subject to certain limitations and expire
through the year ended 2002.
No benefit for acquired net deferred tax assets or net operating loss
carryforwards has been recognized in the statement of operations. As
acquired net deferred tax assets or net operating loss carryforwards are
utilized, the related benefits will first reduce goodwill. Once goodwill
is reduced to zero, such benefits will be included in income as a
reduction of income tax expense.
A reconciliation of the Company's effective tax rate to the federal
statutory rate is as follows:
<TABLE>
<CAPTION>
YEARS ENDED JANUARY 31,
1995 1994 1993
(THOUSANDS)
<S> <C> <C> <C>
Federal income taxes at statutory rates $ 2,912 $ 2,740 $ 2,944
State taxes, net of federal benefit 337 344
Non-deductible goodwill amortization 1,100 164
Change in valuation allowance (1,241) 8,009
Other (271) 31 (348)
----------- ----------- -----------
Income taxes provided $ 2,500 $ 11,281 $ 2,940
=========== =========== ==========
</TABLE>
11. COMMITMENTS AND CONTINGENCIES
OPERATING LEASES
The Company is obligated under several long-term and month-to-month real
estate operating leases, with the long-term leases expiring through
January 2013. Under the terms of a portion of these leases, the Company
is obligated to pay certain operating expenses. Three retail store
leases are with two of the Company's principal shareholders and an
employee of the Company. Such leases can be terminated by the Company at
any time without cost.
The amounts charged to operations in connection with operating leases,
including additional rentals based on a percentage of sales, for the
years ended January 31, 1995, 1994 and 1993 were $26.8 million, $5.5
million and $5.3 million, respectively. Certain of the store operating
leases contain provisions which require additional rentals based on a
percentage of sales. The amount of additional rentals paid was not
significant during the years ended January 31, 1995, 1994 and 1993.
F-16
<PAGE> 48
FRETTER, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
11. COMMITMENTS AND CONTINGENCIES (CONTINUED)
Future minimum annual rental payments are as follows:
<TABLE>
<CAPTION>
YEARS ENDING JANUARY 31, (THOUSANDS)
<S> <C>
1996 $ 26,899
1997 24,894
1998 23,527
1999 20,660
2000 17,195
Thereafter 56,404
------------
$ 169,579
============
</TABLE>
Amounts related to leases included in the store closure plan are excluded.
LEASE GUARANTEES
On November 10, 1988, all of the outstanding shares of Busy Beaver
Building Centers, Inc. ("Busy Beaver"), a former subsidiary of DUS, were
sold to the management of Busy Beaver. In connection with this
disposition, the Company is guarantor of three leases of Busy Beaver.
Disposal of leased locations previously closed by DUS and closed by the
Company as contemplated by the store closure plan are effectuated by
lease termination agreements with landlords, lease assignments and
subleases. Fretter, Inc. or its subsidiaries, as applicable, remain
financially responsible on such leases, notwithstanding the intervening
payment obligation of the assignees and sublessees. No expenses were
incurred on these guarantees, lease assignments or subleases since the
date of the acquisition of DUS by Fretter.
12. EMPLOYEE BENEFIT PLANS AND OTHER POSTRETIREMENT BENEFITS
EMPLOYEE BENEFIT PLANS
The Company sponsors several 401(k) plans which cover substantially all
full-time employees. Company contributions to such plans include both
discretionary and matching amounts. Total Company contributions for
fiscal 1995, 1994 and 1993 were $.6 million, $.5 million and $.6 million,
respectively.
In connection with the acquisition of DUS, the Company assumed
responsibility for several noncontributory defined benefit pension plans
which cover substantially all former DUS full-time employees. Pension
benefits under these plans are based upon years of service or average
monthly compensation, as defined.
F-17
<PAGE> 49
FRETTER, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
12. EMPLOYEE BENEFIT PLANS AND OTHER POSTRETIREMENT BENEFITS (CONTINUED)
During 1995 the Company changed the defined benefit plans resulting in
the freezing of benefits effective February 1, 1995. In addition, in
excess of 50% of the employees covered by the plans were terminated
during 1995 as a result of combining the Fretter and DUS operations. The
reduction in the projected benefit obligations as a result of the
suspension of future benefit increases and termination of employees has
been accounted for as plan curtailments. Accordingly, during 1995 the
Company recognized curtailment gains of $2.7 million.
At January 31, 1995 $3.8 million is included in other assets representing
the excess of plan assets of $11.3 million over projected benefit
obligations of $7.5 million, of which $7.0 million is vested. The
weighted average discount rate used in determining the actuarial present
value of the projected benefit obligations for the Company's defined
benefit pension plans as of January 31, 1995 was 8.5%. As a result of
the freezing of benefits there is no assumed increase in future
compensation levels.
The Company's policy is to immediately recognize in the statement of
operations gains and losses from experience different from that assumed
and the effect of changes in actuarial assumptions. During the year
ended January 31, 1995 the Company made cash contributions of $1.4
million and recognized a pension benefit of $2.5 million comprised of a
benefit from changes in actuarial assumptions of $3.6 million offset by
service cost of $.4 million, interest cost of $.6 million and loss on
plan assets of $.1 million.
The net periodic pension cost and the contributions made to the plans
from the date of acquisition to January 31, 1994 were not material.
Included in employee benefit obligations at January 31, 1994 is $2.9
million representing the excess of the projected benefit obligations of
$13.6 million over plan assets of $10.7 million. At January 31, 1994 the
accumulated benefit obligations were $9.0 million of which $7.5 million
were vested. The weighted average discount rate and the rate of increase
in future compensation levels used in determining the actuarial present
value of the projected benefit obligation for the Company's defined
benefit pension plans as of January 31, 1994 were 7.25%, and 7.0%,
respectively.
OTHER POSTRETIREMENT BENEFITS
A DUS subsidiary has recorded a postretirement benefit liability, which
in conjunction with the acquisition of DUS, is recorded as a liability of
the Company on a consolidated basis. The liability represents the
actuarial present value of future obligations of certain health and life
insurance benefits payable to eligible retired employees of steel
operations previously conducted by Silo, Inc., an indirect wholly owned
subsidiary of DUS. Silo, Inc. funds postretirement benefit costs as they
are incurred.
The Company's policy is to immediately recognize in the statement of
operations gains and losses from experience different from that assumed
and the effect of changes in actuarial assumptions. The components of
the expense (benefit) recognized as a component of administrative costs
in the statement of operations for the years ended January 31, 1995 and
1994 are:
F-18
<PAGE> 50
FRETTER, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
12. EMPLOYEE BENEFIT PLANS AND OTHER POSTRETIREMENT BENEFITS (CONTINUED)
<TABLE>
<CAPTION>
JANUARY 31,
1995 1994
<S> <C> <C>
Interest cost $ 5,418 $ 800
Recognition of actuarial gains (12,862)
---------- -------
Net (benefit) expense $ (7,444) $ 800
========== =======
</TABLE>
Included in employee benefit obligations at January 31, 1995 and 1994 is
$64.0 million and $77.8 million, respectively representing the actuarial
present value of accumulated postretirement benefit obligations
determined using a weighted average discount rate of 8.75% and 7.25%,
respectively.
The health care cost trend rates used to determine the actuarial present
value of the accumulated postretirement benefit obligation ranged from
10.0% to 13.0% in the current year as a result of various plans offered
and gradually declining to 6.25% for all plans in 2004, and remaining at
that level thereafter. Increasing the health care cost trend rate by one
percentage point would increase the net postretirement benefit cost in
1995 and the accumulated postretirement benefit obligation at January 31,
1995 by $4.6 million.
13. STOCK OPTION PLANS
In March 1986, the Company adopted a stock option plan for officers and
key management employees, pursuant to which an aggregate of 250,000
shares of the Company's common stock may be issued. The options are
granted at no less than fair market value at the date of grant. At
January 31, 1995, 55,571 options are outstanding under this plan which
expire at various dates through April 2000, all of which are exercisable.
On October 1, 1991, in connection with an employment agreement, stock
options to acquire 800,000 shares at $.50 to $1.00 per share were granted
to the President of the Company. Under this agreement, the options are
exercisable at various dates through October 1, 2001. In a related
agreement (the "Principal Shareholder Plan"), the President was also
granted options from two of the Company's largest shareholders to
purchase a total of 1,200,000 shares at a rate of 120,000 shares per year
for $3 per share on each October 1 beginning October 1, 1992 through
October 1, 2001. Effective December 3, 1993, the above agreements were
amended and restated. The agreements, as amended and restated, provide
the President of the Company the option to acquire 306,000 shares at $.97
per share from the Company and 612,000 shares at $.97 per share under the
previously existing Principal Shareholder Plan. The Company records
compensation expense for these options based upon the difference between
the fair market value of its common stock at the date of grant and the
option price, as amended and restated. Compensation expense recorded for
the years ended January 31, 1995, 1994 and 1993 was $.9 million, $1.1
million and $1.0 million, respectively. At January 31, 1995, 918,000
options related to the above agreements are outstanding, of which 387,600
are exercisable.
F-19
<PAGE> 51
FRETTER, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
13. STOCK OPTION PLANS (CONTINUED)
On December 3, 1993, in connection with the adoption of a long term
incentive plan, stock options to acquire 1,785,000 shares at $.01 per
share were granted to the President of the Company. Such options vest in
equal amounts annually in each of the three years subsequent to the date
of issuance and expire six years from the date of issuance. The Company,
its President and one of its principal shareholders have entered into a
related agreement whereby the President may exercise these options only
if the principal shareholder contributes shares of common stock to the
capital of the Company, share for share to meet the President's option
exercise. The President must pay the principal shareholder $.97 per
share for each share so contributed. The Company records compensation
expense for these options based on the difference between the fair market
value of its common stock at the date of grant and the option price.
Compensation expense recorded for the years ended January 31, 1995 and
1994 related to these options was $1.1 million and $.2 million,
respectively. At January 31, 1995, 1,785,000 options related to the
above agreements are outstanding of which 595,000 are exercisable.
In connection with the adoption of the long-term incentive plan, on
February 2, 1994 1,006,550 stock options with an exercise price of $3.50
per share were granted to various employees of the Company. Such options
vest three years from the date of issuance and expire ten years and six
months from the date of issuance or upon the employee's termination. At
January 31, 1995, 885,550 of these options were outstanding, none of
which are exercisable.
The following is a summary of stock option activity for all plans,
exclusive of the Principal Shareholder Plan and the options granted
December 3, 1993.
<TABLE>
<CAPTION>
NUMBER OPTION
OF SHARES PRICE RANGE
<S> <C> <C>
Balance at January 31, 1993 708,500 $1.00 - $5.0625
Exercised (6,929) $3.1875 - $4.4375
Terminated (44,000) $3.1875
Effect of exchange (1) (294,000)
-----------
Balance at January 31, 1994 363,571 $.97 - $5.0625
Granted 1,006,550 $3.50
Terminated (122,000) $3.50 - $4.625
-----------
Balance at January 31, 1995 1,248,121 $.97 - $5.0625
===========
Exercisable at January 31, 1995 259,571 $.97 - $5.0625
===========
</TABLE>
(1) As discussed above, the October 1, 1991 agreements were amended and
restated to reflect the December 3, 1993 exchange, thus reducing the
number of options outstanding.
F-20
<PAGE> 52
FRETTER, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
14. QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED
-----------------------------------------------------------
APRIL 30 JULY 31 OCTOBER 31 JANUARY 31 TOTAL
(THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
Fiscal year 1995
Net sales $ 182,004 $ 205,546 $ 204,024 $ 267,275 $ 858,849
Gross profit 48,922 54,130 55,250 70,112 228,414
Earnings before income taxes (5,521) (1,463) (1,768) 17,317 8,565
Net earnings (loss) available
for common shareholders (4,133) (1,537) (1,731) 11,066 3,665
Earnings (loss) for common stock
per weighted average number of
common shares (.39) (.15) (.16) 1.05 .35
Fiscal year 1994
Net sales $ 79,444 $ 87,637 $ 92,738 $ 285,689 $ 545,508
Gross profit 21,612 23,759 24,526 68,482 138,379
Earnings before income taxes 707 1,731 (2,748) 8,139 7,829
Net earnings (loss) available
for common shareholders 3,201 1,130 (8,880) 3,453 (1,096)
Earnings (loss) for common stock
per weighted average number of
common shares .43 .15 (1.20) .37 (.14)
</TABLE>
Quarterly per share amounts are based on the weighted average shares
outstanding during the respective quarters. Because of the shares issued
in December, the sum of the quarterly per share amounts for fiscal 1994
does not equal the full year total.
The quarter ended January 31, 1995 includes the recognition of
approximately $16.0 million of gains related to employee benefit plan
valuations. The net benefit related to the employee benefit plans was
$12.7 million for the full year.
Included in earnings before income taxes for the quarter ended October
31, 1993, is a $4.0 million provision for Fretter store closings. In
addition, included in net earnings (loss) available for common
shareholders for the quarter ended October 31, 1993 is a $7.1 million
charge related to the establishment of a valuation allowance for deferred
tax assets. See Notes 5 and 10.
Included in the quarter ended January 31, 1994 are the DUS results of
operations from the date of acquisition.
F-21
<PAGE> 53
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
PART III
For information with respect to the executive officers of the Company,
see ITEM 4A included in PART I of this report. Otherwise, the information
required by ITEMS 10, 11, 12 AND 13 will be included in the Company's proxy
statement for its 1995 Annual Meeting of Shareholders, and is incorporated
herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM
8-K
(a) The following documents are filed as part of this report:
(1) FINANCIAL STATEMENTS
A list of the financial statements filed as a part of this
Form 10-K is set forth in the index included in item 8 and
incorporated by reference in response to this item 14.
(2) FINANCIAL STATEMENT SCHEDULES
None.
(3) EXHIBITS
The "Exhibit Index" filed herewith is incorporated by
reference in response to this item 14.
(a) Reports on Form 8-K
None.
31
<PAGE> 54
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
Date: April 29, 1995 FRETTER, INC.
By: /s/ JOHN B. HURLEY
-------------------------------
John B. Hurley,
President and Chief Executive
Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this Annual Report on Form 10-K has been signed by the following persons on
behalf of the registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
NAME TITLE DATE
---- ----- ----
<S> <C> <C>
/s/ ERNEST L. GROVE, JR. Chairman of the Board of Directors 4/28/95
------------------------
Ernest L. Grove, Jr.
/s/ JOHN B. HURLEY President, Chief Executive Officer, Chief 4/28/95
------------------------ Financial Officer and Director
John B. Hurley
/s/ DALE R. CAMPBELL Executive Vice President, Treasurer and 4/28/95
------------------------ Director
Dale R. Campbell
/s/ OLIVER L. FRETTER Director 4/28/95
------------------------
Oliver L. Fretter
/s/ PETER A. DOW Director 4/28/95
------------------------
Peter A. Dow
/s/ BRIAN K. FRIEDMAN Director 4/28/95
------------------------
Brian K. Friedman
/s/ ROBERT SHRAGER Director 4/28/95
------------------------
Robert Shrager
</TABLE>
32
<PAGE> 55
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION PAGE
------ ----------- -------------
<S> <C> <C>
2.1 Stock Purchase Agreement and Plan of Tax-Free Reorganization, dated (2)
as of 9/15/93, among the Company, Dixons America Holdings, Inc. and
Dixon U.S. Holdings, Inc.
2.2 Agreement, Plan and Certificate of Merger, dated as of 11/29/93, by (1)
and between the Company and Gabrielle Co.
2.3 Certificate of Voting Powers, Designations, Preferences and (2)
Relative, Participating, Optional or Other Special Rights of the
Convertible Preferred Stock, Series B
3.1 Restated Articles of Incorporation of the Company (3)
3.2 Amendment to the Articles of Incorporation of the Company, dated (4)
6/23/87
3.3 Second Amended and Restated Bylaws of the Company, effective as of (3)
April 22, 1986
9.1 Voting Agreement, dated 12/3/93, by and between Dixons America (1)
Holdings, Inc. and John B. Hurley
9.2 Letter Agreement amending the Voting Agreement, dated 12/3/93 (1)
9.3 Shareholder Agreement, dated 11/30/93, by and among Oliver L. (1)
Fretter, in his personal capacity and as Trustee under the Oliver
L. Fretter Revocable Living Trust dated 1/11/74, as amended, Howard
O. Fretter, in his personal capacity and as Trustee under the
Howard O. Fretter Revocable Trust Agreement dated 3/15/86, John B.
Hurley, in his personal capacity and as Trustee under the John B.
Hurley Revocable Trust Agreement dated 3/14/86, and the Company
</TABLE>
<PAGE> 56
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION PAGE
------ ----------- -------------
<S> <C> <C>
10.1 Supplemental Agreement, dated 11/30/93, by and among Oliver L. (1)
Fretter, in his personal capacity and as Trustee under the Oliver
L. Fretter Revocable Living Trust dated 1/11/74, as amended, Howard
O. Fretter, in his personal capacity and as Trustee under the
Howard O. Fretter Revocable Trust Agreement dated 3/15/86, John B.
Hurley, in his personal capacity and as Trustee under the John B.
Hurley Revocable Trust Agreement dated 3/14/86, and the Company
10.2 Registration Rights Agreement, dated 12/3/93, by and between the (1)
Company and Dixons America Holdings, Inc.
10.3 Registration Rights Agreement, dated 12/3/93, among the Company, (1)
Oliver L. Fretter, John B. Hurley and Howard O. Fretter#
10.4 Employment Agreement, dated 11/30/93, by and between the Company (1)
and Oliver L. Fretter#
10.5 Employment Agreement, dated 10/1/91, by and between the Company and (5)
John B. Hurley#
10.6 First Amendment to Employment Agreement, dated 11/30/93, by and (1)
between the Company and John B. Hurley#
10.7 Capital Contribution/Sale Agreement, dated 11/30/93, among the (1)
Company, John B. Hurley and Oliver L. Fretter#
10.8 Agreement for Wholesale Financing, dated as of 11/30/93, by and (1)
between the Company and ITT Commercial Finance Corp.
10.9 Reimbursement Agreement, dated as of 11/30/93, by and between the (1)
Company and Dixons Treasury Management Limited
10.10 Loan and Financing Agreement, dated as of 11/30/93, by and between (1)
the Company and Michigan National Bank
</TABLE>
<PAGE> 57
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION PAGE
------ ----------- -------------
<S> <C> <C>
10.11 First Amendment to Loan and Financing Agreement, dated as of
December 8, 1994, by and between the Company and Michigan National
Bank
10.12 Credit Agreement, dated as of 11/30/93, among the Company, BT (1)
Commercial Corporation and various other lenders
10.13 First Amendment to Credit Agreement, dated January 26, 1994, among
the Company, BT Commercial Corporation and various other lenders
10.14 Second Amendment and Consent to Credit Agreement, dated October 28,
1994, among the Company, BT Commercial Corporation and various
other lenders
10.15 Employee Cash or Deferred Profit-Sharing Plan and Trust# (3)
10.16 Amendment to Employee Cash or Deferred Profit-Sharing Plan and (4)
Trust, dated 5/18/87#
10.17 1986 Employee Stock Option Plan# (3)
10.18 Amendment to 1986 Employee Stock Option Plan, dated 12/23/87# (4)
10.19 Stock Option Agreement, dated 11/30/93, by and between the Company (1)
and John B. Hurley#
10.20 Stock Option Agreement, dated 2/1/94, by and between the Company
and Dale R. Campbell#
10.21 Stock Option Agreement, dated 2/1/94, by and between the Company
and Daniel C. Hourigan#
10.22 Stock Option Agreement, dated 2/1/94, by and between the Company
and Julian Potts#
10.23 Stock Option Agreement, dated 2/1/94, by and between the Company
and Stuart Garson#
10.24 Bonus Plan# (4)
10.25 1993 Long Term Incentive Plan# (6)
</TABLE>
<PAGE> 58
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION PAGE
------ ----------- -------------
<S> <C> <C>
10.27 Indemnification Agreement, dated 10/8/87, by and between the (4)
Company and Oliver L. Fretter#
10.28 Indemnification Agreement, dated 10/8/87, by and between the (4)
Company and John B. Hurley#
10.29 Indemnification Agreement, dated 10/8/87, by and between the (4)
Company and Peter A. Dow#
10.30 Amended and Restated Stock Option Agreement between Howard O. (1)
Fretter and John B. Hurley dated November 30, 1993#
10.31 Amended and Restated Stock Option Agreement between Oliver L. (1)
Fretter and John B. Hurley dated November 30, 1993#
10.32 Lease Amendment Agreement among the Company, Oliver L. Fretter, (1)
Howard O. Fretter and John B. Hurley dated November 30, 1993#
10.33 Employment Termination Agreement, dated January 20, 1995, by and
between the Company and Donald Andresen#
10.34 Merchant Agreement, dated March 1, 1994, by and between the Company
and Household Bank (Illinois), N.A.
10.35 Merchant Agreement, dated March 1, 1994 by and betwen the Company
and Household Retail Services, Inc. Bank (Illinois), N.A.
10.36 Universal International Re-Insurance Ltd. Consumer Protection Plan
Master Policy of Insurance No. 2661P and Declarations, dated
November 1, 1994
21 List of Subsidiaries (1)
23 Consent of Price Waterhouse, LLP
27 Financial Data Schedule (Edgar version only)
</TABLE>
<PAGE> 59
- ---------------
# Management contract or compensatory plan or arrangement required to be
identified by Form 10-K Item 14
(1) Incorporated by reference to the Company's Report Form 10-K for fiscal
year ended January 31, 1994
(2) Incorporated by reference to the Company's Report on Form 8-K dated
December 10, 1993
(3) Incorporated by reference to Amendment No. 1 to the Company's Form S-1
Registration Statement No. 33-4146
(4) Incorporated by reference to the Company's Form 10-K for fiscal year
ended January 31, 1988
(5) Incorporated by reference to Schedule 13-D filed November 2, 1991 by
John B. Hurley
(6) Incorporated by reference to the Company's Solicitation Statement for
Action to be taken by Written Consent of Shareholders dated December
1, 1993
(7) Incorporated by reference to the Company's Form 10-K for fiscal year
ended January 1, 1989.
<PAGE> 1
EXHIBIT 10.11
December 8, 1994
Fretter, Inc.
12501 Grand River Avenue
Brighton, Michigan 48118
Attention: Stuart Garson, Esq.
General Counsel
Re: Amendment No. 1 to Loan and Financing Agreement ("Agreement")
made as of the 30th day of November, 1993 by and between
Michigan National Bank ("Bank") and Fretter, Inc. ("Borrower")
Dear Mr. Garson:
In connection with the Security Letter of Credit Release as
contemplated by the Agreement, which is occurring simultaneously with the
execution hereof, the Agreement is hereby amended in accordance with the
following. All terms used herein ("Amendment No. 1 to Loan Agreement"), and
not otherwise defined herein, shall have the same meaning as set forth in the
Loan Agreement. In accordance with Section 7 of the Agreement, Bank hereby
releases the Security Letter of Credit. In connection therewith, Bank has
concurrently delivered to Borrower the Security Letter of Credit (Chemical Bank
Standby Letter of Credit No. U349237) and a written statement to Chemical Bank
consenting to the release and termination thereof. Bank agrees to execute any
further documents or instruments reasonably requested by either Borrower or
Dixons Treasury Management Limited, without delay, to fully effectuate the
Security Letter of Credit Release. All references in the Agreement and related
documents to the Security Letter of Credit are hereby eliminated.
1. OWNED PREMISES:
In lieu of requiring a security interest and Real Estate
Security Documents with respect to all Owned Premises, now or
hereafter owned by Fretter, Inc. and/or any of the Related
Entities, the Bank only requires, in addition to the Excluded
Owned Premises, Real Estate Security Documents which are being
executed and delivered on even date hereof on 36 of the 38
Owned Premises listed on Exhibit "A" attached hereto (which
Exhibit "A" attached
<PAGE> 2
Fretter, Inc.
December 8, 1994
Page 2
hereto is in lieu of Schedule "1" attached to the Loan
Agreement except for purposes of identifying the Excluded
Owned Premises) eliminating Greeley and Gulf to Bay. The
agreed upon aggregate Appraised Value of the Owned Premises
(excluding the Excluded Owned Premises) is $37,283,000.00.
Bank has accepted the Real Estate Valuation Documents and Real
Estate Security Documents with respect to the Owned Premises
listed on Exhibit "A". Exhibit "A" shall be amended from time
to time by additions or deletions thereto initialed by an
officer of the Bank and officer of the Borrower.
2. ADDITIONAL LETTER OF CREDIT FACILITY:
As part of the Capital Expenditure Line of Credit Loan, the
Bank agrees to an Additional Letter of Credit Facility,
pursuant to which it will, from time to time, upon the request
of Borrower, issue Letters of Credit (each such Letter of
Credit so issued shall be a Capital Expenditure and a Credit
Advance) for the account of the Borrower or any of the Related
Entities (but in all events Borrower shall be primarily liable
therefor), the outstanding aggregate undrawn amount ("Undrawn
Amount") of which (including any Letters of Credit outstanding
at the time of the execution hereof) will not exceed the
lesser of $1,000,000.00, or seventy (70%) percent of the
aggregate Appraised Value of all items of Eligible Real Estate
pledged to Bank with respect to which all such Letters of
Credit are issued. Furthermore, (i) the Undrawn Amount will
reduce the amount available under the Capital Expenditure Line
of Credit Loan, (ii) payment of any drafts presented under any
such Letter of Credit will be deemed a Cash Advance under the
Capital Expenditure Line of Credit Loan, (iii) the issuance of
each such Letter of Credit shall be conditioned upon Bank's
receipt of Eligible Real Estate and related Real Estate
Valuation Documents and Real Estate Security Documents and
otherwise consistent with Section 2.4(a)-(d) of the Loan
Agreement (except for the reference to Cash Advances therein
which shall mean a Credit Advance hereunder in the Undrawn
Amount); provided further the Undrawn Amount of each such
Letter of Credit shall not exceed seventy (70%) percent of the
aggregate Appraised Value of such item of Eligible Real Estate
and/or Borrower is otherwise in compliance with Section 8
hereof; (iv) the expiry date of the Letter of Credit shall be
thirty (30) calendar days prior to the Termination Date; (v)
Borrower shall pay to Bank (in lieu of a Cash Advance Fee) a
one and
<PAGE> 3
Fretter, Inc.
December 8, 1994
Page 3
one-quarter percent (1 1/4%) fee per annum quarterly, in
advance, on the undrawn amount of the Letter of Credit,
provided however in the event that reserve or capital
requirements or any similar requirements or restrictions to
which Bank is or may become subject, or similar requirements
or restrictions to which Bank is or may become subject, are
hereafter imposed upon Bank by statute, regulation or rule, or
are determined or held to be applicable to the Bank with
respect to any such Letter of Credit, at any time and from
time to time by a court, government or governmental authority
having jurisdiction over Bank, which would materially increase
the costs to Bank of continuing any such Letter of Credit,
then Bank may, upon forty-five (45) calendar days prior
written notice to Borrower, adjust its fee(s) so as to
compensate Bank the fee return in effect at the date of
issuance of each such Letter of Credit; provided, however,
that no such fee adjustment shall be made if Borrower shall
replace the Letter of Credit within forty-five (45) calendar
days after receipt of notice by Borrower thereof, thereby
terminating Bank's liability under such Letter of Credit; (vi)
the Letter of Credit shall include all terms and conditions
thereof, and/or in any application therefor and shall, except
as provided for in Section (v), be subject to the policies and
procedures employed by Bank with respect thereto at the time
of application therefor and issuance thereof; (vii) except as
provided for in (v) above, Borrower shall pay all other
standard and customary fees of Bank, as set by Bank from time
to time, in connection with drafts presented thereunder, and
all other matters related to Letter of Credit operations; and
(viii) Bank shall use its best efforts to give Borrower
telephonic notice, promptly confirmed by facsimile to
Borrower, of Bank's receipt of any draft(s) presented under
the Letter of Credit.
3. LEASING/SUBLEASING:
A. GENERAL PROVISIONS:
For purposes of this Section 3, the following shall
apply:
(1) Lease means any agreement by the Borrower or
any of the Related Entities demising any
portion of any Owned Premises.
<PAGE> 4
Fretter, Inc.
December 8, 1994
Page 4
(2) Existing Lease means any Lease existing as of
the date hereof.
(3) Future Lease means any Lease proposed or
entered into after the date hereof.
(4) Approved Lease means any Existing Lease or
Future Lease which has been Approved, and
further provided any such Approved Lease will
not be modified, amended or altered in any
material and adverse way without the prior
written consent of Bank. For purposes of the
foregoing, materially shall mean any
amendment, modification or alteration which
affects the information supplied to Bank as
items 4 and 5 on the Request For Lease
Approval applicable thereto.
(5) Approved means Bank has granted an Approval
in writing by indicating such Approval on the
Request for Lease Approval referenced in
Section 3 (c) (2) (iii).
(6) Approval means the approval of Bank; which
shall not be unreasonably withheld or
delayed, provided Bank has, with respect to
any Future Lease, received from Borrower or
any of the Related Entities, and may
consider, among other matters reasonably
required by Bank, the creditworthiness of the
proposed lessee, and the term, and financial
provisions of, such Future Lease, in order to
determine that such Future Lease is at fair
market value consistent with the Appraised
Value of such Owned Premises.
(7) Appraised Value shall mean the Appraisal
Amount of each Owned Premises set forth on
Exhibit "A", as the same may be amended from
time to time, or, as applicable, the
Appraised Value (as defined in the Loan
Agreement) or As Completed Appraised Value
(as defined in the Loan Agreement) if such
Owned Premises is not listed on Exhibit "A".
<PAGE> 5
Fretter, Inc.
December 8, 1994
Page 5
(8) Owned Premises means any Owned Premises with
respect to which Bank has been granted a
mortgage, including any contiguous parcel.
(9) Preapproved Amount shall mean 7500 square
feet or less of any Owned Premises, after
application of the Aggregation Rule, demised
by any Future Lease.
(10) Aggregation Rule shall mean, in determining
the Preapproved Amount, aggregating the
square feet of any Future Lease, with the
square feet of all other Leases demising any
portion of the same Owned Premises, which are
not Approved Leases.
(11) Leasing Pool shall mean the aggregate
Appraised Value in the amount of
$3,500,000.00 of all Owned Premises with
respect to which any lease exists which is
not an Approved Lease.
B. APPROVAL OF EXISTING LEASES:
Bank hereby approves each Existing Lease.
C. APPROVAL OF FUTURE LEASES:
(1) Any Future Lease requiring the Bank to grant
non-disturbance rights to the lessee thereof,
shall require Approval.
(2) Any Future Lease not requiring the Bank to
grant non-disturbance rights to the lessee
thereof:
(i) will not, if such Future Lease
demises the Preapproved Amount or
less, require Approval; and
(ii) will, if such Future Lease demises
more than the Preapproved Amount, or
would after giving effect thereto
result in a violation of 3 D,
require Approval.
<PAGE> 6
Fretter, Inc.
December 8, 1994
Page 6
(iii) Borrower and the applicable Related
Entity, if any, shall submit to Bank
for Approval, any lease or sublease
requiring an Approval, by
preparation and delivery to Bank of
a Request for Lease Approval in the
form attached hereto, together with
any attachments required thereby.
D. RESTRICTION:
At no time shall Borrowers have Leases in effect,
which are not Approved Leases, with respect to Owned
Premises whose aggregate Appraised Value exceeds the
Leasing Pool.
4. RELEASE PROVISION:
A. PROPERTY WITH RESPECT TO WHICH NO CAPITAL EXPENDITURE
HAS BEEN MADE:
Bank agrees that it will terminate its Real Estate
Security Documents with respect to any Owned Premises
("Letter of Credit Released Property") with respect
to which no Money Advance has been made under the
Capital Expenditure Line of Credit Loan if:
(1) it receives additional Eligible Real Estate
("Substituted Owned Premises") acceptable to
Bank in the reasonable exercise of its
discretion, with an Appraised Value, of not
less than the Appraised Value of the Letter
of Credit Released Property, provided
however, that after giving effect to such
Substituted Owned Premises, Borrower and the
Related Entities have not exchanged or
substituted the aggregate Appraised Value of
retail space for warehouse space by more than
$6,500,000.00; or
(2) it receives cash collateral in an amount
equal to 70% of the Appraised Value of the
Letter of Credit Released Property; or
(3) it receives any combination of 4 A(1) and (2).
<PAGE> 7
Fretter, Inc.
December 8, 1994
Page 7
B. PROPERTY WITH RESPECT TO WHICH A CAPITAL EXPENDITURE
HAS BEEN MADE:
Bank agrees that it will terminate its Real Estate
Security Documents with respect to any Owned Premises
("Capital Expenditure Released Property") with
respect to which it has made a Money Advance under
the Capital Expenditure Line of Credit Loan if:
(1) (a) the remaining principal balance of
the Money Advance under the Capital
Expenditure Line of Credit Loan,
evidenced by the Capital
Expenditures Promissory Note (Line
of Credit), made with respect to the
Capital Expenditure Released
Property is paid off; and
(b) the remaining principal balance of
the Money Advance under the Capital
Expenditure Line of Credit Loan,
evidenced by any Promissory Note
(Term Loan), made with respect to
the Capital Expenditure Released
Property is paid off, provided
however, the amount to be paid off
under this Section 4 B(1)(b) shall
be determined by multiplying the
unpaid principal amount outstanding
under the Promissory Note (Term
Loan) evidencing such Capital
Expenditure by a percentage
determined by a fraction, the
numerator of which the original
principal amount of such Capital
Expenditure evidenced by such
Promissory Note (Term Loan) and the
denominator of which is the original
principal amount of such Promissory
Note (Term Loan).
(2) if such Capital Expenditure Released Property
is listed on Exhibit "A" (i.e., the Appraised
Value of such Capital Expenditure Released
Property is required to meet the Letter of
Credit Collateral Value) then the conditions
of 4 A hereof must also be met; or
(3) it receives or has received additional
Eligible Real Estate acceptable to Bank
(who's
<PAGE> 8
Fretter, Inc.
December 8, 1994
Page 8
Appraised Value is not required to meet the Letter of Credit
Collateral Value) with an Appraised Value of not less than the
Appraised Value of the Capital Expenditure Released Property.
With respect to this Section 4 B(3) the amount to be paid to
the Bank to obtain a termination of Real Estate Security
Documents for any Capital Expenditure Released Property may be
reduced by the amount, if any, which Borrower is then
authorized to borrow, but has not then borrowed under the
Capital Expenditure Line of Credit Loan, all in accordance
with the Certification as defined and contemplated in Section
8 hereof.
5. MISCELLANEOUS:
A. EXISTENCE OF AN EVENT OF DEFAULT:
If an Event of Default exists, Bank has no obligation
to:
(1) LEASES:
Approve any leases, and no leases may be
entered into.
(2) LETTERS OF CREDIT:
Issue any Letters of Credit.
(3) RELEASES:
Release any Owned Premises.
B. BT CREDIT AGREEMENT:
The term BT Credit Agreement shall mean the BT Credit
Agreement (as defined in the Loan Agreement), but in
all events as if the same were then in existence.
C. USE OF PROCEEDS OF CAPITAL EXPENDITURE LINE OF CREDIT
LOAN:
Borrower may use any Cash Advance under the Capital
Expenditure Line of Credit Loan (except for any Cash
Advance in payment of a draft presented under
<PAGE> 9
Fretter, Inc.
December 8, 1994
Page 9
any Letter of Credit issued under the Capital
Expenditure Loan) for any Capital Expenditure (other
than issuance of a Letter of Credit) with respect to
any Premises now or hereafter owned or acquired by
the Borrower or any of the Related Entities.
D. EVENT OF DEFAULT:
(1) Section 1.36(b) of the Agreement is amended
and restated as follows:
(b) the existence of a Default as
defined in the Credit Agreement
among Fretter, Inc., as Borrower,
and BT Commercial Corporation, as
Agent, and the various "Lenders"
from time to time party thereto
dated as of even date herewith ("BT
Credit Agreement") which has not
been cured or waived by the Agent,
provided further that Bank approves
any such waiver however, if the
Default by Borrower under the BT
Credit Agreement which has not cured
or waived by Agent is of such a
nature that its existence would not
have a materially adverse effect
upon Bank or its ability to realize
on its Collateral, then the same
shall not constitute an Event of
Default by Borrower hereunder; or
(2) The Events of Default contained in Section
9.1 of the BT Credit Agreement are
incorporated in the Agreement by reference,
and shall survive and continue to be included
in the Agreement whether or not the BT
Credit Agreement is in effect, provided
however that in incorporating such
provisions, the following defined terms used
in the BT Credit Agreement shall include the
following defined terms used in the
Agreement, and further provided that no
amendments or modifications of any provision
in Section 9.1 of the BT Credit Agreement
(all of which Borrower shall give prompt
notice in writing to Bank) shall be deemed
incorporated in the Agreement or binding on
Bank unless Bank determines, at any time, to
so incorporate one or more of any such
amendments
<PAGE> 10
Fretter, Inc.
December 8, 1994
Page 10
or modifications and the original provisions
of Section 9.1 shall remain incorporated in
the Agreement unless and until Bank elects
to incorporate any one or more of them as
hereinabove provided:
(i) The defined term "Credit Agreement"
as used in the BT Credit Agreement
shall include the Agreement, and
furthermore shall mean the BT Credit
Agreement as if the same were then
in existence.
(ii) The defined term "Credit Documents"
as used in the BT Credit Agreement
shall include the Agreement, the
Notes and the Collateral Documents,
and furthermore shall mean the BT
Credit Documents as if the same were
then in existence.
(iii) The terms "Agent" and Lenders" as
used in the BT Credit Agreement
shall each include the Bank, and
furthermore shall mean the Agent and
Lender as if they each still existed
under the BT Credit Agreement and BT
Credit Documents as incorporated
under (a) and (b) above.
6. CHANGE OF ADDRESS:
Bank acknowledges that Borrower's address has been changed to
12501 Grand River Avenue, Brighton, Michigan 48118.
7. APPRAISAL REVIEW DEPARTMENT:
The term Bank's Appraisal Review Department, as utilized in
the Agreement shall mean any department or person of the Bank
as designated by Bank.
8. COMPLIANCE CERTIFICATE:
With each request for a Money Advance (Cash Advance or Credit
Advance) under the Capital Expenditure Line of Credit Loan,
Borrower shall submit to Bank a Certification of Capital
Expenditure Line of Credit Loan Base ("Certification"), in the
form attached hereto, in addition to all other requirements of
the Agreement. As of the date hereof the attached form is
true and
<PAGE> 11
Fretter, Inc.
December 8, 1994
Page 11
accurate. At no time shall any Money Advances outstanding
under the Capital Expenditure Line of Credit Loan exceed the
Maximum Available, after giving effect to each Money Advance
requested thereunder as set forth in each such Certification.
9. SURVIVAL:
Except as herein amended, the Agreement, Note, and Collateral
Documents shall remain in full force and effect.
Very truly yours,
MICHIGAN NATIONAL BANK,
A NATIONAL BANKING ASSOCIATION
By:_________________________
Frederick W. Puleo
Its: Vice President
Fretter, Inc., a Michigan corporation
By:__________________________
Stuart Garson
Its: General Counsel
<PAGE> 1
EXHIBIT 10.13
FIRST AMENDMENT TO CREDIT AGREEMENT
THIS FIRST AMENDMENT TO CREDIT AGREEMENT (this "Amendment") is
entered into as of January 26, 1994 by and among Fretter, Inc., a Michigan
corporation (the "Borrower"), the LENDERS listed on the signature pages hereof,
and BT COMMERCIAL CORPORATION, as Agent, in its capacity as Agent for the
Lenders. Words and phrases having defined meanings in the Credit Agreement
referred to below shall have the same respective meanings when used herein,
unless otherwise expressly defined herein
WITNESSETH:
WHEREAS, the parties hereto have entered into a Credit
Agreement, dated as of November 30, 1993 (the "Credit Agreement"), relating to
a revolving credit facility in amount not to exceed $140,000,000 for the
Borrower's ongoing working capital, letter of credit and general corporate
needs; and
WHEREAS, the Borrower has requested that portion of the credit
facility available for the issuance of Letters of Credit be increased from
$15,000,000 to $25,000,000;
NOW THEREFORE, in consideration of the premises and the mutual
agreements set forth herein and for other consideration the receipt and
sufficiency of which are hereby acknowledged, the parties hereto agree as
follows:
1. Amendments to Credit Agreement. Subject to and
conditioned upon the fulfillment of each of the conditions precedent set forth
in Section 2 hereof Section 3.1(a) of the Credit Agreement is hereby amended by
deleting the term "$15,000,000" contained therein and inserting the term
"$25,000,000" therefor.
2. Conditions Precedent to Amendment and Waiver
Effectiveness. The amendments and modifications set forth in Section 1 hereof
shall become effective upon, and are expressly conditioned upon, the
fulfillment of each of the following conditions precedent:
(a) The Agent shall have received original executed
counterparts of this Amendment from the Borrower and each of the
Lenders.
(b) The Agent shall have received a copy of a
resolution of the Board of Directors of the Borrower authorizing the
execution and delivery of this Amendment, certified by the Secretary
or an Assistant Secretary of the Borrower.
(c) Each Subsidiary of the Borrower which has
executed a Guarantee shall have executed a Consent satisfactory in
form and substance to the Agent reaffirming
<PAGE> 2
such Subsidiary's obligations under its respective Guarantee and
consenting to the Borrower's execution, delivery and performance of
this Amendment.
3. Representations and Warranties. In order to induce the
Lenders to enter into this Amendment, the Borrower hereby represents and
warrants to the Lenders as follows:
(a) The execution, delivery and performance by the
Borrower of this Amendment (i) are within the Borrower's corporate
powers, (ii) have been duly authorized by all necessary corporate
action, (iii) require no action by or in respect of, or filing with,
any governmental body, agency or official, (iv) do not contravene, or
constitute a default under, any provision of any applicable law,
statute, ordinance, regulation, rule, order or other governmental
restriction or of the Articles or Certificate of Incorporation or By-
Laws of the Borrower, (v) do not contravene, or constitute a default
under, any agreement, judgment, injunction, order, decree, indenture,
contract, lease, instrument or other commitment to which the Borrower
is a party or by which the Borrower or any of its assets are bound and
(vi) will not result in the creation or imposition of any Lien upon
any asset of the Borrower under any existing indenture, mortgage, deed
of trust, loan or credit agreement or other agreement or instrument to
which the Borrower is a party or by which it or any of its assets may
be bound or affected.
(b) This Amendment and the Credit Agreement as
amended by this Amendment are the legal, valid and binding obligation
of the Borrower, and are enforceable against the Borrower in
accordance with their terms.
(c) The representations and warranties contained in
the Credit Agreement and the other Credit Documents are true and
correct in all material respects on and as of the date hereof as
though made on the date hereof, except to the extent that such
representations expressly relate solely to an earlier date (in which
case such representations and warranties were true and accurate on and
as of such earlier date).
(d) No Default or Event of Default has occurred and
is continuing.
4. Reference to and Effect Upon the Credit Agreement. Upon
the effectiveness of this Amendment, each reference in the Credit Agreement to
"the Agreement", "hereunder", "hereof", "herein", or words of like import,
shall mean and be a reference to the Credit Agreement, as amended hereby and
each reference to the Credit Agreement in any other Credit Document shall mean
and be a reference to the Credit Agreement, as amended hereby.
2
<PAGE> 3
5. Reaffirmation; Expenses. The Borrower hereby
reaffirms to the Agent and each of the Lenders that, except as modified hereby,
the Credit Agreement and all of the Credit Documents remain in full force and
effect and have not been otherwise waived, modified or amended. Except as
expressly modified hereby, all of the terms and conditions of the Credit
Agreement shall remain unaltered and in full force and effect. The Borrower
acknowledges that all legal expenses of the Agent related to this Amendment
shall be paid by the Borrower.
6. Choice of Law. This Amendment has been delivered in
Chicago, Illinois, and shall be governed by and construed in accordance with
the provisions of the Credit Agreement and the laws and decisions of the State
of Illinois without giving effect to the conflicts of law principles
thereunder.
7. Counterparts. This Amendment may be executed in one
or more counterparts, each of which shall be deemed an original, but all of
which together shall constitute one and the same instrument. One or more
counterparts of this Amendment may be delivered by telecopier, with the
intention that they shall have the same effect as an original counterpart
thereof.
IN WITNESS WHEREOF, the parties hereto have caused this Credit
Agreement to be executed and delivered by their proper and duly authorized
officers as of the date set forth above.
BORROWER:
FRETTER, INC.,
a Michigan corporation
By________________________
Title:
AGENT:
BT COMMERCIAL CORPORATION,
as Agent
By________________________
Vice President
LENDER:
BT COMMERCIAL CORPORATION
By_______________________
Vice President
3
<PAGE> 4
CONSENT
By Subsidiary Guarantee dated as of November 30, 1993 (each a
"Guarantee"), each of the undersigned (the "Guarantors") guaranteed to the
Guaranteed Parties (as defined therein), subject to the terms, conditions and
limitations set forth therein, the prompt payment and performance of all of the
Guaranteed Obligations (as defined therein). Each of the Guarantor consents to
the Borrower's execution of the foregoing First Amendment to Credit Agreement
and acknowledges the continued validity, enforceability and effectiveness of
the Guarantee executed by it with respect to all loans, advances and extensions
of credit to the Borrower, whether heretofore or hereafter made, together with
all interest thereon and all expenses in connection therewith.
FRETTER AUTO SOUND, INC.
FRETTER ACQUISITION COMPANY, INC.
FRED SCHMID APPLIANCE & TV CO.
FRETTER REAL ESTATE COMPANY FRETTER
SILO HOLDINGS, INC.
SILO, INC.
SILO CALIFORNIA, INC.
SILO-DIXON, INC.
DIXONS U.S. HOLDINGS, INC.
FRETTER WAREHOUSE COMPANY, INC.
By_______________________
Title:
Dated: January 26, 1994
4
<PAGE> 1
EXHIBIT 10.14
SECOND AMENDMENT AND CONSENT TO CREDIT AGREEMENT
THIS SECOND AMENDMENT AND CONSENT TO CREDIT AGREEMENT (this
"Amendment") is entered into as of October 28, 1994 by and among Fretter, Inc.,
a Michigan corporation (the "Borrower"), the LENDERS listed on the signature
pages hereof, and BT COMMERCIAL CORPORATION, as Agent, in its capacity as Agent
for the Lenders. Words and phrases having defined meanings in the Existing
Credit Agreement referred to below shall have the same respective meanings when
used herein, unless otherwise expressly defined herein
WITNESSETH:
WHEREAS, the parties hereto have entered into a Credit
Agreement, dated as of November 30, 1993, relating to a revolving credit
facility in an amount not to exceed $140,000,000 for the Borrower's ongoing
working capital, letter of credit and general corporate needs, as amended by
that certain First Amendment to Credit Agreement dated as of January 26, 1994
(as so amended, the "Existing Credit Agreement");
WHEREAS, the Borrower has requested that the Lenders (i)
increase their respective Commitments by an aggregate amount equal to
$15,000,000 for the period commencing October 28, 1994 and ending January 31,
1995 and (ii) increase the advance rate against Eligible Inventory from fifty
percent (50%) to sixty percent (60%) during such period; and
WHEREAS, the Borrower has further requested that each of the
Lenders confirm and consent to the Agent's right to include in the Borrowing
Base as Eligible Inventory certain in transit and prepaid Inventory of the
Borrower;
NOW THEREFORE, in consideration of the premises and the mutual
agreements set forth herein and for other consideration the receipt and
sufficiency of which are hereby acknowledged, the parties hereto agree as
follows:
1. Amendments to Existing Credit Agreement. Subject to
and conditioned upon the fulfillment of each of the conditions precedent set
forth in Section 3 hereto:
1.1 Section 1.1 of the Existing Credit Agreement is hereby
amended by adding the following definitions thereto in proper alphabetical
order:
1994 Additional Seasonal Commitment of a Lender means
its additional commitment to make Revolving Loans and to participate
in Letters of Credit, up to the amount set forth opposite its name on
Annex I of that certain Second Amendment to this Credit Agreement
dated as of October 28, 1994, as such amount may be reduced from time
to time. At
<PAGE> 2
all times after January 31, 1995 the 1994 Additional Seasonal
Commitment of each Lender shall be $0.
1994 Holiday Season means the period from and
including October 28, 1994 to and including January 31, 1995.
1.2 Section 1.1 of the Existing Credit Agreement is hereby
amended by deleting the definition of Borrowing Base set forth therein and
inserting the following therefor:
Borrowing Base means the sum of:
(A) eighty-five percent (85%) of Eligible Accounts
Receivable, plus
(B) at all times other than during the 1994 Holiday
Season, fifty percent (50%) of Eligible Inventory, and, during
the 1994 Holiday Season, sixty percent (60%) of Eligible
Inventory, minus
(C) the aggregate amount of reserves, if any,
established by the Agent under Section 2.1(b).
1.3 Section 1.1 of the Existing Credit Agreement is hereby
amended by deleting the definition of Commitment set forth therein and
inserting the following therefor:
Commitment of a Lender means its commitment to make
Revolving Loans and to participate in Letters of Credit, up to the
amount set forth opposite its name on Annex I plus, during the 1994
Holiday Season, the amount of such Lender's 1994 Additional Seasonal
Commitment, as such amounts may be reduced from time to time.
2. Note Modification Agreement. Subject to and conditioned
upon the fulfillment of each of the conditions precedent set forth in Section 3
hereto, each of the Revolving Notes executed by the Borrower in favor of the
Lenders are hereby amended to increase the stated principal amount thereof to
an amount equal to such Lenders' respective Commitments in effect under the
Existing Credit Agreement plus the amount of their respective 1994 Additional
Seasonal Commitment. Such Revolving Notes shall automatically be amended on
January 31, 1995 to the respective amounts in effect prior to the effectiveness
of this Amendment upon, and only upon, the reduction of the aggregate principal
balance of the Revolving Loans plus the Letter of Credit Obligations to an
amount not to exceed $140,000,000.
3. Conditions Precedent to Amendment and Waiver
Effectiveness. The amendments and modifications set forth in Sections 1 and 2
hereof shall become effective upon, and are expressly conditioned upon, the
fulfillment of each of the following conditions precedent:
2
<PAGE> 3
(a) The Agent shall have received original executed
counterparts of this Amendment from the Borrower and each of the
Lenders.
(b) The Agent shall have received a copy of a
resolution of the Board of Directors of the Borrower authorizing the
execution and delivery of this Amendment, certified by the Secretary
or an Assistant Secretary of the Borrower.
(c) Each Subsidiary of the Borrower which has
executed a Guarantee shall have executed a Consent satisfactory in
form and substance to the Agent reaffirming such Subsidiary's
obligations under its respective Guarantee and consenting to the
Borrower's execution, delivery and performance of this Amendment.
(d) The Agent shall have received an opinion of
counsel of the Borrower as to such matters and otherwise in form and
substance satisfactory to the Agent.
(e) The Agent shall have received for the account of
the Lenders a fee equal to $150,000. The Agent shall distribute such
fee to the Lenders on a pro rata basis based upon their respective
1994 Additional Seasonal Commitments.
4. Acknowledgment and Consent of the Lenders. Each of the
Lenders hereby acknowledges, consents and agrees that, pursuant to the terms of
the Existing Credit Agreement, the Agent may from time to time include in the
Borrowing Base as Eligible Inventory, Inventory which is in transit to the
Borrower from its suppliers and/or Inventory which has been paid for by the
Borrower pending shipment from such suppliers. Without limiting the generality
of the foregoing, each of the Lenders hereby consents to the inclusion of such
items of in transit and prepaid Inventory in the Borrowing Base during the term
of the 1994 Holiday Season (as defined above).
5. Representations and Warranties. In order to induce the
Lenders to enter into this Amendment, the Borrower hereby represents and
warrants to the Lenders as follows:
(a) The execution, delivery and performance by the
Borrower of this Amendment (i) are within the Borrower's corporate
powers, (ii) have been duly authorized by all necessary corporate
action, (iii) require no action by or in respect of, or filing with,
any governmental body, agency or official, (iv) do not contravene, or
constitute a default under, any provision of any applicable law,
statute, ordinance, regulation, rule, order or other governmental
restriction or of the Articles or Certificate of Incorporation or By-
Laws of the Borrower, (v) do not contravene, or constitute a default
under, any agreement, judgment, injunction, order, decree, indenture,
contract,
3
<PAGE> 4
lease, instrument or other commitment to which the Borrower is a party
or by which the Borrower or any of its assets are bound and (vi) will
not result in the creation or imposition of any Lien upon any asset of
the Borrower under any existing indenture, mortgage, deed of trust,
loan or credit agreement or other agreement or instrument to which the
Borrower is a party or by which it or any of its assets may be bound
or affected.
(b) This Amendment and the Existing Credit Agreement
as amended by this Amendment are the legal, valid and binding
obligation of the Borrower, and are enforceable against the Borrower
in accordance with their terms.
(c) The representations and warranties contained in
the Existing Credit Agreement and the other Credit Documents are true
and correct in all material respects on and as of the date hereof as
though made on the date hereof, except to the extent that such
representations expressly relate solely to an earlier date (in which
case such representations and warranties were true and accurate on and
as of such earlier date).
(d) No Default or Event of Default has occurred and
is continuing.
6. Reference to and Effect Upon the Existing Credit
Agreement. Upon the effectiveness of this Amendment, each reference in the
Existing Credit Agreement to "the Agreement", "hereunder", "hereof", "herein",
or words of like import, shall mean and be a reference to the Existing Credit
Agreement, as amended hereby, and each reference to the Existing Credit
Agreement in any other Credit Document shall mean and be a reference to the
Existing Credit Agreement, as amended hereby.
7. Reaffirmation; Expenses. The Borrower hereby
reaffirms to the Agent and each of the Lenders that, except as modified hereby,
the Existing Credit Agreement and all of the Credit Documents remain in full
force and effect and have not been otherwise waived, modified or amended.
Except as expressly modified hereby, all of the terms and conditions of the
Existing Credit Agreement shall remain unaltered and in full force and effect.
The Borrower acknowledges that all legal expenses of the Agent related to this
Amendment shall be paid by the Borrower.
8. Choice of Law. This Amendment has been delivered in
Chicago, Illinois, and shall be governed by and construed in accordance with
the provisions of the Existing Credit Agreement and the laws and decisions of
the State of Illinois without giving effect to the conflicts of law principles
thereunder.
9. Counterparts. This Amendment may be executed in one
or more counterparts, each of which shall be deemed an original, but all of
which together shall constitute one and the
4
<PAGE> 5
same instrument. One or more counterparts of this Amendment may be delivered
by telecopier, with the intention that they shall have the same effect as an
original counterpart thereof.
IN WITNESS WHEREOF, the parties hereto have caused this
Amendment to be executed and delivered by their proper and duly authorized
officers as of the date set forth above.
BORROWER:
FRETTER, INC.,
a Michigan corporation
By________________________
Title:
AGENT:
BT COMMERCIAL CORPORATION,
as Agent
By________________________
Vice President
LENDERS:
BT COMMERCIAL CORPORATION
By_______________________
Vice President
SANWA BUSINESS CREDIT
CORPORATION
By_______________________
Title:
HARRIS TRUST AND SAVINGS BANK
By_______________________
Title:
LASALLE NATIONAL BANK
By_______________________
Title:
MERCANTILE BUSINESS CREDIT,
INC.
5
<PAGE> 6
By_______________________
Title:
THE BANK OF NEW YORK
COMMERCIAL CORPORATION
By_______________________
Title:
HELLER FINANCIAL, INC.
By_______________________
Title:
NATIONSBANK BUSINESS CREDIT
By_______________________
Title:
NATIONAL CANADA FINANCE CORP.
By_______________________
Title:
NBD BANK, N.A.
By_______________________
Title:
6
<PAGE> 7
CONSENT
By Subsidiary Guarantee dated as of November 30, 1993 (each a
"Guarantee"), each of the undersigned (the "Guarantors") guaranteed to the
Guaranteed Parties (as defined therein), subject to the terms, conditions and
limitations set forth therein, the prompt payment and performance of all of the
Guaranteed Obligations (as defined therein). Each Guarantor consents to the
Borrower's execution of the foregoing Second Amendment and Consent to Credit
Agreement and acknowledges the continued validity, enforceability and
effectiveness of the Guarantee executed by it with respect to all loans,
advances and extensions of credit to the Borrower, whether heretofore or
hereafter made, together with all interest thereon and all expenses in
connection therewith.
FRETTER AUTO SOUND, INC.
FRETTER ACQUISITION COMPANY, INC.
FRED SCHMID APPLIANCE & TV CO.
FRETTER REAL ESTATE COMPANY FRETTER
SILO HOLDINGS, INC.
SILO, INC.
SILO CALIFORNIA, INC.
SILO-DIXON, INC.
DIXONS U.S. HOLDINGS, INC.
FRETTER WAREHOUSE COMPANY, INC.
By_______________________
Title:
Dated: October 28, 1994
7
<PAGE> 8
ANNEX I
TO
SECOND AMENDMENT AND CONSENT TO CREDIT AGREEMENT
Dated as of October 28, 1994
<TABLE>
<CAPTION>
1994 Additional
Lender Seasonal Commitment
- ------ -------------------
<S> <C>
BT COMMERCIAL CORPORATION $1,608,000
SANWA BUSINESS CREDIT CORPORATION $2,676,000
HARRIS TRUST AND SAVINGS BANK $1,608,000
LASALLE NATIONAL BANK $1,608,000
MERCANTILE BUSINESS CREDIT, INC. $1,608,000
THE BANK OF NEW YORK COMMERCIAL
CORPORATION $1,608,000
HELLER FINANCIAL, INC. $1,071,000
NATIONSBANK BUSINESS CREDIT $1,071,000
NATIONAL CANADA FINANCE CORP. $1,071,000
NBD BANK, N.A. $1,071,000
TOTAL: $15,000,000
</TABLE>
8
<PAGE> 1
EXHIBIT 10.20
FRETTER, INC.
1993 LONG TERM INCENTIVE PLAN
NON-QUALIFIED STOCK OPTION AGREEMENT
FRETTER, INC., a Michigan corporation (the "Company"), upon
the recommendation of the Long Term Incentive Plan Committee of the Company's
Board of Directors (the "Committee") and pursuant to the Fretter, Inc. 1993
Long Term Incentive Plan (the "Plan") adopted by the Board and approved by its
stockholders, and in consideration of the services to be rendered to the
Company by Dale Campbell (the "Employee"), hereby grants, as of the Date of
Grant, as defined below, to Employee an option to purchase One Hundred
Twenty-Seven Thousand Five Hundred (127,500) shares (the "Option") of the
Company's Common Stock (the "Shares"), at the Option Price, as defined below,
on the terms and conditions contained in this Non-Qualified Stock Option
Agreement (the "Agreement") and subject to all the terms and conditions of the
Plan, which are incorporated by reference herein. This Agreement replaces and
supersedes any prior documents relating to the Option and the Shares described
herein. Capitalized terms used in this Agreement and not defined herein shall
have the meanings defined in the Plan.
I. DATE OF GRANT AND OPTION PRICE
The Date of Grant shall be as of February 2, 1994. The Option
Price shall be $3.50 per share.
II. EXERCISE OF OPTION
Employee may exercise this Option at any time on or after
February 2, 1997, but not later than ten (10) years and six months from the
Date of Grant, subject only to prior termination or modification of the Plan
and in accordance with and subject to the expiration provisions contained in
Section IV.
III. TRANSFERABILITY
This Option may not be transferred by Employee, except by will
or the laws of descent and distribution, or pursuant to the terms of a domestic
relations order, as defined in Section 414(p)(1)(B) of the Code, which
satisfies the requirements of Section 414(p)(1)(A) of the Code (a "Qualified
Domestic Relations Order"). During Employee's lifetime, the Option shall be
exercisable only by Employee, his personal representative, or an alternate
payee under the terms of a Qualified Domestic Relations Order pursuant to and
in accordance with the terms and conditions contained in this Agreement. The
Option shall not otherwise be
<PAGE> 2
transferred, assigned, pledged or hypothecated for any purpose whatsoever, and
is not subject to execution, attachment or similar process. Any attempted
assignment, transfer, pledge or hypothecation or other disposition of the
Option, other than in accordance with the terms of this Agreement, shall be
void and of no effect.
IV. MANNER OF EXERCISE
This Option may be exercised, in accordance with Section II
above, by delivery (personally or by certified or registered mail in accordance
with Section VIII below) of a written notice to the Company's Secretary
specifying the number of Shares to be purchased and accompanied by payment in
the form of cash or check for those Shares and applicable withholding taxes.
At the election of Employee, such payment may be made in cash, check, by
delivery of certificate(s) representing shares of Company Common Stock
previously held by the Employee, duly endorsed for transfer, or by delivery of
Shares issuable to the Participant pursuant to the exercise of the Option
(provided that for Participants defined as "Officers" under the terms of the
Plan, the Company shall automatically withhold Shares sufficient to pay
withholding taxes and no other election shall be permitted). Any shares
delivered to the Company in payment of the aggregate Option Price shall be
valued at the Fair Market Value of the Company Common Stock on the date of
Employee's exercise of the Option or any part thereof. Any fractional shares
not required for payment of the aggregate Option Price shall be paid for by the
Company in cash at the same value used for Employee's surrender of the
previously owned Shares. The Option shall be exercised in accordance with such
administrative regulations as the Administrator of the Plan shall from time to
time adopt.
V. EXPIRATION
All unexercised rights under the Option shall expire on the
date specified in Section II above or on the date specified in this Section V
in the event that Employee's engagement as a employee to the Company is
terminated ("Termination").
(a) Upon Employee's Termination with the Company
due to Employee's death before the expiration date specified in
Section II, the right to exercise the Option shall be accelerated, and
the Option may be exercised, whether or not otherwise exercisable by
the Employee on the date of Employee's death, by the Employee's
Beneficiary, within one year from the later of the date of the
Employee's death or January 1, 1997.
(b) Upon Employee's Termination with the Company
for any reason other than death (including disability or retirement)
or "cause" as defined in
<PAGE> 3
Section 8.4(d) of the Plan, the Option may be exercised, to the extent
it was exercisable by the Employee on the date of such termination,
within ninety days of such termination. In the event of the death of
the Participant within the ninety day period following termination of
employment, his award may be exercised by his Beneficiary within the
one year period provided in subparagraph (a) above.
(c) Upon Employee's Termination for "cause", as
defined in Section 8.02(d) of the Plan, the Option shall terminate
immediately.
VI. NON-ISSUANCE AND RIGHTS AS A STOCKHOLDER
The Company shall not be required to issue or deliver any
Shares upon Employee's exercise of the Option:
(a) Prior to the admission of such Shares to
listing on any public exchange on which the Company's common stock may
be listed; or
(b) Prior to the completion of any proceedings
under any applicable state or federal securities law, rule or
regulation that the Company or its counsel determines to be necessary
or advisable to the issuance of the Shares.
Employee shall not have the rights of a shareholder with respect to the Shares
until certificates evidencing the Shares have been issued and delivered to
Employee. While the Company will attempt to process the exercise of the Option
as promptly as possible, it cannot guarantee a delivery date for the
certificates.
VII. REORGANIZATION
If prior to the expiration of the Option, the Shares then
subject to the Option shall be affected by any recapitalization, merger,
consolidation, reorganization, stock dividend, stock split or other change in
capitalization affecting the Company Common Stock, the Company will
appropriately adjust the number and kind of Shares covered by the Option and
the Option Price per share as is necessary to prevent dilution or the
enlargement of rights which might otherwise result.
VIII. NOTICE
All notices given pursuant to or in connection with this
Agreement shall be in writing and shall be deemed to be duly given when
personally delivered or when mailed, if sent by certified or registered mail,
postage prepaid, return receipt requested, and
<PAGE> 4
addressed as follows, or to such other address as the parties may indicate:
If to the Company: Fretter, Inc.
12501 Grand River Avenue
Brighton, Michigan 48116
If to the Employee:
-----------------------------------
-----------------------------------
-----------------------------------
-----------------------------------
With a Required
Copy of any
Notice to: Stuart Garson
-----------------------------------
Fretter, Inc.
-----------------------------------
12501 Grand River Avenue
-----------------------------------
Brighton, Michigan 48116
-----------------------------------
IX. NO RIGHT TO EMPLOYMENT CONFERRED
Nothing in this Agreement or the Plan shall confer upon the
Employee any right to continue in employment with the Company or a subsidiary
or interfere in any way with the right of the Company or any subsidiary to
terminate such person's employment at any time.
X. SEVERABILITY
If any provision of this Agreement is held invalid or
unenforceable, the remaining provisions shall continue to be in full force and
effect to the maximum extent permitted by law. If the implementation or
presence of any provision of this Agreement would or will cause the Plan and
thereby the Shares purchased thereunder to not be in compliance with Rule 16b-3
under the Securities Exchange Act of 1934 or any other statutory provision,
such Agreement provision shall not be implemented or, at the Company's option
following notice, such provision shall be severed from the Agreement as is
appropriate or necessary to achieve statutory compliance; provided, however,
that the parties hereby agree to negotiate in good faith as may be necessary to
modify this Agreement to achieve statutory compliance or otherwise effectuate
the intent of the parties following a severance permitted by this Section X.
<PAGE> 5
XI. AMENDMENT
As of the Date of Grant, this instrument will contain the
entire Agreement of the parties with respect to the Option and may only be
amended by written agreement executed by the parties hereto or their respective
successors, as permitted by Section III above.
XII. GOVERNING LAW
This Agreement is made and entered into and shall be construed
and enforced in accordance with the laws of the State of Michigan.
XIII. HEADINGS
The section numbers and headings contained in this Agreement
are for reference purposes only and shall not in any way affect the meaning or
interpretation of this Agreement.
XIV. ACCEPTANCE OF OPTION
The exercise of the Option is conditioned upon the acceptance
by the Employee of the terms hereof as evidenced by his or her execution of
this Agreement and the return of an executed copy to the Secretary of the
Company.
IN WITNESS WHEREOF, this 1993 Long Term Incentive Plan
Non-Qualified Stock Option Agreement is effective as of February 2, 1994.
"COMPANY"
FRETTER, INC.
a Michigan corporation
By
----------------------------------
John Hurley
Its: President
"EMPLOYEE"
------------------------------------
Dale Campbell
<PAGE> 1
EXHIBIT 10.21
FRETTER, INC.
1993 LONG TERM INCENTIVE PLAN
NON-QUALIFIED STOCK OPTION AGREEMENT
FRETTER, INC., a Michigan corporation (the "Company"), upon
the recommendation of the Long Term Incentive Plan Committee of the Company's
Board of Directors (the "Committee") and pursuant to the Fretter, Inc. 1993
Long Term Incentive Plan (the "Plan") adopted by the Board and approved by its
stockholders, and in consideration of the services to be rendered to the
Company by Danny Hourigan (the "Employee"), hereby grants, as of the Date of
Grant, as defined below, to Employee an option to purchase One Hundred
Twenty-Seven Thousand Five Hundred (127,500) shares (the "Option") of the
Company's Common Stock (the "Shares"), at the Option Price, as defined below,
on the terms and conditions contained in this Non-Qualified Stock Option
Agreement (the "Agreement") and subject to all the terms and conditions of the
Plan, which are incorporated by reference herein. This Agreement replaces and
supersedes any prior documents relating to the Option and the Shares described
herein. Capitalized terms used in this Agreement and not defined herein shall
have the meanings defined in the Plan.
I. DATE OF GRANT AND OPTION PRICE
The Date of Grant shall be as of February 2, 1994. The Option
Price shall be $3.50 per share.
II. EXERCISE OF OPTION
Employee may exercise this Option at any time on or after
February 2, 1997, but not later than ten (10) years and six months from the
Date of Grant, subject only to prior termination or modification of the Plan
and in accordance with and subject to the expiration provisions contained in
Section IV.
III. TRANSFERABILITY
This Option may not be transferred by Employee, except by will
or the laws of descent and distribution, or pursuant to the terms of a domestic
relations order, as defined in Section 414(p)(1)(B) of the Code, which
satisfies the requirements of Section 414(p)(1)(A) of the Code (a "Qualified
Domestic Relations Order"). During Employee's lifetime, the Option shall be
exercisable only by Employee, his personal representative, or an
-1-
<PAGE> 2
alternate payee under the terms of a Qualified Domestic Relations Order
pursuant to and in accordance with the terms and conditions contained in this
Agreement. The Option shall not otherwise be transferred, assigned, pledged or
hypothecated for any purpose whatsoever, and is not subject to execution,
attachment or similar process. Any attempted assignment, transfer, pledge or
hypothecation or other disposition of the Option, other than in accordance with
the terms of this Agreement, shall be void and of no effect.
IV. MANNER OF EXERCISE
This Option may be exercised, in accordance with Section II
above, by delivery (personally or by certified or registered mail in accordance
with Section VIII below) of a written notice to the Company's Secretary
specifying the number of Shares to be purchased and accompanied by payment in
the form of cash or check for those Shares and applicable withholding taxes.
At the election of Employee, such payment may be made in cash, check, by
delivery of certificate(s) representing shares of Company Common Stock
previously held by the Employee, duly endorsed for transfer, or by delivery of
Shares issuable to the Participant pursuant to the exercise of the Option
(provided that for Participants defined as "Officers" under the terms of the
Plan, the Company shall automatically withhold Shares sufficient to pay
withholding taxes and no other election shall be permitted). Any shares
delivered to the Company in payment of the aggregate Option Price shall be
valued at the Fair Market Value of the Company Common Stock on the date of
Employee's exercise of the Option or any part thereof. Any fractional shares
not required for payment of the aggregate Option Price shall be paid for by the
Company in cash at the same value used for Employee's surrender of the
previously owned Shares. The Option shall be exercised in accordance with such
administrative regulations as the Administrator of the Plan shall from time to
time adopt.
V. EXPIRATION
All unexercised rights under the Option shall expire on the
date specified in Section II above or on the date specified in this Section V
in the event that Employee's engagement as a employee to the Company is
terminated ("Termination").
(a) Upon Employee's Termination with the Company
due to Employee's death before the expiration date specified in
Section II, the right to exercise the Option shall be accelerated, and
the Option may be exercised, whether or not otherwise exercisable by
the Employee on the date of Employee's death, by the
- 2 -
<PAGE> 3
Employee's Beneficiary, within one year from the later of the date of
the Employee's death or January 1, 1997.
(b) Upon Employee's Termination with the Company
for any reason other than death (including disability or retirement)
or "cause" as defined in Section 8.4(d) of the Plan, the Option may be
exercised, to the extent it was exercisable by the Employee on the
date of such termination, within ninety days of such termination. In
the event of the death of the Participant within the ninety day period
following termination of employment, his award may be exercised by his
Beneficiary within the one year period provided in subparagraph (a)
above.
(c) Upon Employee's Termination for "cause", as
defined in Section 8.02(d) of the Plan, the Option shall terminate
immediately.
VI. NON-ISSUANCE AND RIGHTS AS A STOCKHOLDER
The Company shall not be required to issue or deliver any
Shares upon Employee's exercise of the Option:
(a) Prior to the admission of such Shares to
listing on any public exchange on which the Company's common stock may
be listed; or
(b) Prior to the completion of any proceedings
under any applicable state or federal securities law, rule or
regulation that the Company or its counsel determines to be necessary
or advisable to the issuance of the Shares.
Employee shall not have the rights of a shareholder with respect to the Shares
until certificates evidencing the Shares have been issued and delivered to
Employee. While the Company will attempt to process the exercise of the Option
as promptly as possible, it cannot guarantee a delivery date for the
certificates.
VII. REORGANIZATION
If prior to the expiration of the Option, the Shares then
subject to the Option shall be affected by any recapitalization, merger,
consolidation, reorganization, stock dividend, stock split or other change in
capitalization affecting the Company Common Stock, the Company will
appropriately adjust the number and kind of Shares covered by the Option and
the Option Price per share as is necessary to prevent dilution or the
enlargement of rights which might otherwise result.
- 3 -
<PAGE> 4
VIII. NOTICE
All notices given pursuant to or in connection with this
Agreement shall be in writing and shall be deemed to be duly given when
personally delivered or when mailed, if sent by certified or registered mail,
postage prepaid, return receipt requested, and addressed as follows, or to such
other address as the parties may indicate:
If to the Company: Fretter, Inc.
12501 Grand River Avenue
Brighton, Michigan 48116
If to the Employee:
------------------------------
------------------------------
------------------------------
------------------------------
With a Required
Copy of any
Notice to: Stuart Garson
------------------------------
Fretter, Inc.
------------------------------
12501 Grand River Avenue
------------------------------
Brighton, Michigan 48116
------------------------------
IX. NO RIGHT TO EMPLOYMENT CONFERRED
Nothing in this Agreement or the Plan shall confer upon the
Employee any right to continue in employment with the Company or a subsidiary
or interfere in any way with the right of the Company or any subsidiary to
terminate such person's employment at any time.
X. SEVERABILITY
If any provision of this Agreement is held invalid or
unenforceable, the remaining provisions shall continue to be in full force and
effect to the maximum extent permitted by law. If the implementation or
presence of any provision of this Agreement would or will cause the Plan and
thereby the Shares purchased thereunder to not be in compliance with Rule 16b-3
under the Securities Exchange Act of 1934 or any other statutory provision,
such Agreement provision shall not be implemented or, at the Company's option
following notice, such provision shall be severed from the Agreement as is
appropriate or necessary to achieve statutory compliance; provided, however,
that the parties hereby agree to negotiate in good faith as may be necessary to
modify this Agreement to achieve statutory compliance or otherwise effectuate
- 4 -
<PAGE> 5
the intent of the parties following a severance permitted by this Section X.
XI. AMENDMENT
As of the Date of Grant, this instrument will contain the
entire Agreement of the parties with respect to the Option and may only be
amended by written agreement executed by the parties hereto or their respective
successors, as permitted by Section III above.
XII. GOVERNING LAW
This Agreement is made and entered into and shall be construed
and enforced in accordance with the laws of the State of Michigan.
XIII. HEADINGS
The section numbers and headings contained in this Agreement
are for reference purposes only and shall not in any way affect the meaning or
interpretation of this Agreement.
XIV. ACCEPTANCE OF OPTION
The exercise of the Option is conditioned upon the acceptance
by the Employee of the terms hereof as evidenced by his or her execution of
this Agreement and the return of an executed copy to the Secretary of the
Company.
IN WITNESS WHEREOF, this 1993 Long Term Incentive Plan
Non-Qualified Stock Option Agreement is effective as of February 2, 1994.
"COMPANY"
FRETTER, INC.
a Michigan corporation
By
----------------------------------
John Hurley
Its: President
"EMPLOYEE"
------------------------------------
Danny Hourigan
- 5 -
<PAGE> 1
EXHIBIT 10.22
FRETTER, INC.
1993 LONG TERM INCENTIVE PLAN
NON-QUALIFIED STOCK OPTION AGREEMENT
FRETTER, INC., a Michigan corporation (the "Company"), upon
the recommendation of the Long Term Incentive Plan Committee of the Company's
Board of Directors (the "Committee") and pursuant to the Fretter, Inc. 1993
Long Term Incentive Plan (the "Plan") adopted by the Board and approved by its
stockholders, and in consideration of the services to be rendered to the
Company by Jim Potts (the "Employee"), hereby grants, as of the Date of Grant,
as defined below, to Employee an option to purchase One Hundred Twenty-Seven
Thousand Five Hundred (127,500) shares (the "Option") of the Company's Common
Stock (the "Shares"), at the Option Price, as defined below, on the terms and
conditions contained in this Non-Qualified Stock Option Agreement (the
"Agreement") and subject to all the terms and conditions of the Plan, which are
incorporated by reference herein. This Agreement replaces and supersedes any
prior documents relating to the Option and the Shares described herein.
Capitalized terms used in this Agreement and not defined herein shall have the
meanings defined in the Plan.
I. DATE OF GRANT AND OPTION PRICE
The Date of Grant shall be as of February 2, 1994. The Option
Price shall be $3.50 per share.
II. EXERCISE OF OPTION
Employee may exercise this Option at any time on or after
February 2, 1997, but not later than ten (10) years and six months from the
Date of Grant, subject only to prior termination or modification of the Plan
and in accordance with and subject to the expiration provisions contained in
Section IV.
III. TRANSFERABILITY
This Option may not be transferred by Employee, except by will
or the laws of descent and distribution, or pursuant to the terms of a domestic
relations order, as defined in Section 414(p)(1)(B) of the Code, which
satisfies the requirements of Section 414(p)(1)(A) of the Code (a "Qualified
Domestic Relations Order"). During Employee's lifetime, the Option shall be
exercisable only by Employee, his personal representative, or an alternate
payee under the terms of a Qualified Domestic Relations Order pursuant to and
in accordance with the terms and conditions contained in this Agreement. The
Option shall not otherwise be
<PAGE> 2
transferred, assigned, pledged or hypothecated for any purpose whatsoever, and
is not subject to execution, attachment or similar process. Any attempted
assignment, transfer, pledge or hypothecation or other disposition of the
Option, other than in accordance with the terms of this Agreement, shall be
void and of no effect.
IV. MANNER OF EXERCISE
This Option may be exercised, in accordance with Section II
above, by delivery (personally or by certified or registered mail in accordance
with Section VIII below) of a written notice to the Company's Secretary
specifying the number of Shares to be purchased and accompanied by payment in
the form of cash or check for those Shares and applicable withholding taxes.
At the election of Employee, such payment may be made in cash, check, by
delivery of certificate(s) representing shares of Company Common Stock
previously held by the Employee, duly endorsed for transfer, or by delivery of
Shares issuable to the Participant pursuant to the exercise of the Option
(provided that for Participants defined as "Officers" under the terms of the
Plan, the Company shall automatically withhold Shares sufficient to pay
withholding taxes and no other election shall be permitted). Any shares
delivered to the Company in payment of the aggregate Option Price shall be
valued at the Fair Market Value of the Company Common Stock on the date of
Employee's exercise of the Option or any part thereof. Any fractional shares
not required for payment of the aggregate Option Price shall be paid for by the
Company in cash at the same value used for Employee's surrender of the
previously owned Shares. The Option shall be exercised in accordance with such
administrative regulations as the Administrator of the Plan shall from time to
time adopt.
V. EXPIRATION
All unexercised rights under the Option shall expire on the
date specified in Section II above or on the date specified in this Section V
in the event that Employee's engagement as a employee to the Company is
terminated ("Termination").
(a) Upon Employee's Termination with the Company
due to Employee's death before the expiration date specified in
Section II, the right to exercise the Option shall be accelerated, and
the Option may be exercised, whether or not otherwise exercisable by
the Employee on the date of Employee's death, by the Employee's
Beneficiary, within one year from the later of the date of the
Employee's death or January 1, 1997.
(b) Upon Employee's Termination with the Company
for any reason other than death (including disability or retirement)
or "cause" as defined in
<PAGE> 3
Section 8.4(d) of the Plan, the Option may be exercised, to the extent
it was exercisable by the Employee on the date of such termination,
within ninety days of such termination. In the event of the death of
the Participant within the ninety day period following termination of
employment, his award may be exercised by his Beneficiary within the
one year period provided in subparagraph (a) above.
(c) Upon Employee's Termination for "cause", as
defined in Section 8.02(d) of the Plan, the Option shall terminate
immediately.
VI. NON-ISSUANCE AND RIGHTS AS A STOCKHOLDER
The Company shall not be required to issue or deliver any
Shares upon Employee's exercise of the Option:
(a) Prior to the admission of such Shares to
listing on any public exchange on which the Company's common stock may
be listed; or
(b) Prior to the completion of any proceedings
under any applicable state or federal securities law, rule or
regulation that the Company or its counsel determines to be necessary
or advisable to the issuance of the Shares.
Employee shall not have the rights of a shareholder with respect to the Shares
until certificates evidencing the Shares have been issued and delivered to
Employee. While the Company will attempt to process the exercise of the Option
as promptly as possible, it cannot guarantee a delivery date for the
certificates.
VII. REORGANIZATION
If prior to the expiration of the Option, the Shares then
subject to the Option shall be affected by any recapitalization, merger,
consolidation, reorganization, stock dividend, stock split or other change in
capitalization affecting the Company Common Stock, the Company will
appropriately adjust the number and kind of Shares covered by the Option and
the Option Price per share as is necessary to prevent dilution or the
enlargement of rights which might otherwise result.
VIII. NOTICE
All notices given pursuant to or in connection with this
Agreement shall be in writing and shall be deemed to be duly given when
personally delivered or when mailed, if sent by certified or registered mail,
postage prepaid, return receipt requested, and addressed as follows, or to such
other address as the parties may
<PAGE> 4
indicate:
If to the Company: Fretter, Inc.
12501 Grand River Avenue
Brighton, Michigan 48116
If to the Employee:
--------------------------------
--------------------------------
--------------------------------
--------------------------------
With a Required
Copy of any
Notice to: Stuart Garson
--------------------------------
Fretter, Inc.
--------------------------------
12501 Grand River Avenue
--------------------------------
Brighton, Michigan 48116
--------------------------------
IX. NO RIGHT TO EMPLOYMENT CONFERRED
Nothing in this Agreement or the Plan shall confer upon the
Employee any right to continue in employment with the Company or a subsidiary
or interfere in any way with the right of the Company or any subsidiary to
terminate such person's employment at any time.
X. SEVERABILITY
If any provision of this Agreement is held invalid or
unenforceable, the remaining provisions shall continue to be in full force and
effect to the maximum extent permitted by law. If the implementation or
presence of any provision of this Agreement would or will cause the Plan and
thereby the Shares purchased thereunder to not be in compliance with Rule 16b-3
under the Securities Exchange Act of 1934 or any other statutory provision,
such Agreement provision shall not be implemented or, at the Company's option
following notice, such provision shall be severed from the Agreement as is
appropriate or necessary to achieve statutory compliance; provided, however,
that the parties hereby agree to negotiate in good faith as may be necessary to
modify this Agreement to achieve statutory compliance or otherwise effectuate
the intent of the parties following a severance permitted by this Section X.
XI. AMENDMENT
As of the Date of Grant, this instrument will contain the entire
Agreement of the parties with respect to the Option and may only be amended by
written agreement executed by the parties hereto
<PAGE> 5
or their respective successors, as permitted by Section III above.
XII. GOVERNING LAW
This Agreement is made and entered into and shall be construed
and enforced in accordance with the laws of the State of Michigan.
XIII. HEADINGS
The section numbers and headings contained in this Agreement are
for reference purposes only and shall not in any way affect the meaning or
interpretation of this Agreement.
XIV. ACCEPTANCE OF OPTION
The exercise of the Option is conditioned upon the acceptance by
the Employee of the terms hereof as evidenced by his or her execution of this
Agreement and the return of an executed copy to the Secretary of the Company.
IN WITNESS WHEREOF, this 1993 Long Term Incentive Plan
Non-Qualified Stock Option Agreement is effective as of February 2, 1994.
"COMPANY"
FRETTER, INC.
a Michigan corporation
By
----------------------------------
John Hurley
Its: President
"EMPLOYEE"
------------------------------------
Jim Potts
<PAGE> 1
EXHIBIT 10.23
FRETTER, INC.
1993 LONG TERM INCENTIVE PLAN
NON-QUALIFIED STOCK OPTION AGREEMENT
FRETTER, INC., a Michigan corporation (the "Company"), upon the
recommendation of the Long Term Incentive Plan Committee of the Company's Board
of Directors (the "Committee") and pursuant to the Fretter, Inc. 1993 Long Term
Incentive Plan (the "Plan") adopted by the Board and approved by its
stockholders, and in consideration of the services to be rendered to the
Company by Stuart Garson (the "Employee"), hereby grants, as of the Date of
Grant, as defined below, to Employee an option to purchase Seventy-Five
Thousand (75,000) shares (the "Option") of the Company's Common Stock (the
"Shares"), at the Option Price, as defined below, on the terms and conditions
contained in this Non-Qualified Stock Option Agreement (the "Agreement") and
subject to all the terms and conditions of the Plan, which are incorporated by
reference herein. This Agreement replaces and supersedes any prior documents
relating to the Option and the Shares described herein. Capitalized terms used
in this Agreement and not defined herein shall have the meanings defined in the
Plan.
I. DATE OF GRANT AND OPTION PRICE
The Date of Grant shall be as of February 2, 1994. The Option
Price shall be $3.50 per share.
II. EXERCISE OF OPTION
Employee may exercise this Option at any time on or after February
2, 1997, but not later than ten (10) years and six months from the Date of
Grant, subject only to prior termination or modification of the Plan and in
accordance with and subject to the expiration provisions contained in Section
IV.
III. TRANSFERABILITY
This Option may not be transferred by Employee, except by will
or the laws of descent and distribution, or pursuant to the terms of a domestic
relations order, as defined in Section 414(p)(1)(B) of the Code, which
satisfies the requirements of Section 414(p)(1)(A) of the Code (a "Qualified
Domestic Relations Order"). During Employee's lifetime, the Option shall be
exercisable only by Employee, his personal representative, or an alternate
payee under the terms of a Qualified Domestic Relations
-1-
<PAGE> 2
Order pursuant to and in accordance with the terms and conditions contained in
this Agreement. The Option shall not otherwise be transferred, assigned,
pledged or hypothecated for any purpose whatsoever, and is not subject to
execution, attachment or similar process. Any attempted assignment, transfer,
pledge or hypothecation or other disposition of the Option, other than in
accordance with the terms of this Agreement, shall be void and of no effect.
IV. MANNER OF EXERCISE
This Option may be exercised, in accordance with Section II
above, by delivery (personally or by certified or registered mail in accordance
with Section VIII below) of a written notice to the Company's Secretary
specifying the number of Shares to be purchased and accompanied by payment in
the form of cash or check for those Shares and applicable withholding taxes.
At the election of Employee, such payment may be made in cash, check, by
delivery of certificate(s) representing shares of Company Common Stock
previously held by the Employee, duly endorsed for transfer, or by delivery of
Shares issuable to the Participant pursuant to the exercise of the Option
(provided that for Participants defined as "Officers" under the terms of the
Plan, the Company shall automatically withhold Shares sufficient to pay
withholding taxes and no other election shall be permitted). Any shares
delivered to the Company in payment of the aggregate Option Price shall be
valued at the Fair Market Value of the Company Common Stock on the date of
Employee's exercise of the Option or any part thereof. Any fractional shares
not required for payment of the aggregate Option Price shall be paid for by the
Company in cash at the same value used for Employee's surrender of the
previously owned Shares. The Option shall be exercised in accordance with such
administrative regulations as the Administrator of the Plan shall from time to
time adopt.
V. EXPIRATION
All unexercised rights under the Option shall expire on the
date specified in Section II above or on the date specified in this Section V
in the event that Employee's engagement as a employee to the Company is
terminated ("Termination").
(a) Upon Employee's Termination with the Company
due to Employee's death before the expiration date specified in
Section II, the right to exercise the Option shall be accelerated, and
the Option may be exercised, whether or not otherwise exercisable by
the Employee on the date of Employee's death, by the Employee's
Beneficiary, within one year from the later of the date of the
Employee's death or January 1, 1997.
- 2 -
<PAGE> 3
(b) Upon Employee's Termination with the Company
for any reason other than death (including disability or retirement)
or "cause" as defined in Section 8.4(d) of the Plan, the Option may be
exercised, to the extent it was exercisable by the Employee on the
date of such termination, within ninety days of such termination. In
the event of the death of the Participant within the ninety day period
following termination of employment, his award may be exercised by his
Beneficiary within the one year period provided in subparagraph (a)
above.
(c) Upon Employee's Termination for "cause", as
defined in Section 8.02(d) of the Plan, the Option shall terminate
immediately.
VI. NON-ISSUANCE AND RIGHTS AS A STOCKHOLDER
The Company shall not be required to issue or deliver any
Shares upon Employee's exercise of the Option:
(a) Prior to the admission of such Shares to
listing on any public exchange on which the Company's common stock may
be listed; or
(b) Prior to the completion of any proceedings
under any applicable state or federal securities law, rule or
regulation that the Company or its counsel determines to be necessary
or advisable to the issuance of the Shares.
Employee shall not have the rights of a shareholder with respect to the Shares
until certificates evidencing the Shares have been issued and delivered to
Employee. While the Company will attempt to process the exercise of the Option
as promptly as possible, it cannot guarantee a delivery date for the
certificates.
VII. REORGANIZATION
If prior to the expiration of the Option, the Shares then
subject to the Option shall be affected by any recapitalization, merger,
consolidation, reorganization, stock dividend, stock split or other change in
capitalization affecting the Company Common Stock, the Company will
appropriately adjust the number and kind of Shares covered by the Option and
the Option Price per share as is necessary to prevent dilution or the
enlargement of rights which might otherwise result.
VIII. NOTICE
- 3 -
<PAGE> 4
All notices given pursuant to or in connection with this
Agreement shall be in writing and shall be deemed to be duly given when
personally delivered or when mailed, if sent by certified or registered mail,
postage prepaid, return receipt requested, and addressed as follows, or to such
other address as the parties may indicate:
If to the Company: Fretter, Inc.
12501 Grand River Avenue
Brighton, Michigan 48116
If to the Employee:
------------------------------
------------------------------
------------------------------
------------------------------
With a Required
Copy of any
Notice to: Stuart Garson
------------------------------
Fretter, Inc.
------------------------------
12501 Grand River Avenue
------------------------------
Brighton, Michigan 48116
------------------------------
IX. NO RIGHT TO EMPLOYMENT CONFERRED
Nothing in this Agreement or the Plan shall confer upon the
Employee any right to continue in employment with the Company or a subsidiary
or interfere in any way with the right of the Company or any subsidiary to
terminate such person's employment at any time.
X. SEVERABILITY
If any provision of this Agreement is held invalid or
unenforceable, the remaining provisions shall continue to be in full force and
effect to the maximum extent permitted by law. If the implementation or
presence of any provision of this Agreement would or will cause the Plan and
thereby the Shares purchased thereunder to not be in compliance with Rule 16b-3
under the Securities Exchange Act of 1934 or any other statutory provision,
such Agreement provision shall not be implemented or, at the Company's option
following notice, such provision shall be severed from the Agreement as is
appropriate or necessary to achieve statutory compliance; provided, however,
that the parties hereby agree to negotiate in good faith as may be necessary to
modify this Agreement to achieve statutory compliance or otherwise effectuate
the intent of the parties following a severance permitted by this Section X.
- 4 -
<PAGE> 5
XI. AMENDMENT
As of the Date of Grant, this instrument will contain the
entire Agreement of the parties with respect to the Option and may only be
amended by written agreement executed by the parties hereto or their respective
successors, as permitted by Section III above.
XII. GOVERNING LAW
This Agreement is made and entered into and shall be construed
and enforced in accordance with the laws of the State of Michigan.
XIII. HEADINGS
The section numbers and headings contained in this Agreement
are for reference purposes only and shall not in any way affect the meaning or
interpretation of this Agreement.
XIV. ACCEPTANCE OF OPTION
The exercise of the Option is conditioned upon the acceptance
by the Employee of the terms hereof as evidenced by his or her execution of
this Agreement and the return of an executed copy to the Secretary of the
Company.
IN WITNESS WHEREOF, this 1993 Long Term Incentive Plan
Non-Qualified Stock Option Agreement is effective as of February 2, 1994.
"COMPANY"
FRETTER, INC.
a Michigan corporation
By
----------------------------------
John Hurley
Its: President
"EMPLOYEE"
------------------------------------
Stuart Garson
- 5 -
<PAGE> 1
EXHIBIT 10.33
AGREEMENT
THIS AGREEMENT ("Agreement") is made the 20th day of January,
1995, by and between DONALD ANDRESEN of 9385 Riviera Hills Drive, Greenwood
Village, Colorado 80111 ("Andresen") and FRED SCHMID APPLIANCE AND T.V. CO., a
Colorado corporation, of 12501 Grand River, Brighton, Michigan 48116 ("Fred
Schmid").
R E C I T A L S :
A. Andresen has heretofore been employed in various
capacities by Fred Schmid, and Fred Schmid and Andresen have mutually
determined to terminate the Andresen's employment with Fred Schmid.
B. In connection with the termination of such
employment, Fred Schmid and Andresen have agreed to certain terms, conditions
and covenants for which separate consideration is provided by each.
NOW THEREFORE, for and in exchange of mutual and valuable
consideration, the receipt and sufficiency of which is hereby acknowledged, the
parties hereto hereby agree as follows:
1. Resignation. Andresen does hereby voluntarily resign
as an employee of Fred Schmid, in every capacity in which he was heretofore
employed and, Fred Schmid accepts such resignation.
2. Cancellation of Existing Employment Agreement. Fred
Schmid and Andresen hereby mutually revoke and cancel any and all employment
agreements, whether written or oral, heretofore entered into and/or executed
between Fred Schmid and Andresen. In connection therewith, the parties rescind
all rights of either party pursuant to any such agreements including, without
limitation, Andresen's right to receive any salary, fringe benefits, vacation
pay, bonuses, disability or death benefits, termination benefits, insurance and
the like. Except as provided in this Agreement, Andresen acknowledges that he
has been paid any and all sums due and owing him from Fred Schmid pursuant to
any employment or other agreement between Fred Schmid and Andresen, arising out
of or connected with his employment and the cancellation of any such agreements
shall be without further obligation on the part of either party, except as
expressly set forth herein. Without limiting the generality of the foregoing,
this Agreement shall hereby terminate and extinguish any and all rights and/or
options which were hereinbefore or which Andresen otherwise believed or
believes he may be entitled to, to acquire share of the common stock of
Fretter, Inc., including without limitation, the options granted effective
February 2, 1994 pursuant to the Fretter, Inc. 1993 Long Term Incentive Plan.
-1-
<PAGE> 2
3. Consultation. Andresen shall receive his incremental
salary payment for the period expiring January 20, 1995 on February 7, 1995.
From and after the date hereof, for a period of six months expiring July 31,
1995, Andresen shall provide such consulting services on behalf of Fred Schmid,
as Fred Schmid shall deem appropriate to facilitate the formulation of a plan
to upgrade, relocate and select sites for retail store locations for Fred
Schmid in the State of Colorado ("Property Plan"). Fred Schmid acknowledges
that Andresen shall provide such consulting services at the mutual convenience
of the parties. In exchange for such consulting services, Andresen shall
receive the sum of One Hundred Thousand and 00/100 ($100,000.00) Dollars
payable in 12 equal semi-monthly installments of Eight Thousand Three Hundred
Thirty Three and 33/100 ($8,333.33) Dollars each, beginning February 22, 1995
and continuing on the 7th and 22nd day of each succeeding month. During such
six month period, Andresen shall be entitled to such medical insurance benefits
as are received by the full time employees of Fred Schmid, but no other fringe
benefits, vacation pay, expense reimbursement, insurance and the like will be
payable to Andresen. Employee shall devote his full time best efforts to
complete the Property Plan; and Andresen shall not do anything which shall or
might be detrimental or adverse to the best interests of Fred Schmid. Fred
Schmid and Andresen are and at all times during the term hereof shall remain
independent contractors. Neither party shall be deemed and the relationship
arising from this Agreement is not a general agency, joint venture,
partnership, employment relationship or franchise. Nothing in this Agreement
shall cause Andresen or agents of either party to be deemed employees or agents
of the other. Each party retains full responsibility for the supervision and
control of its own employees and/or agents. Without limiting the generality of
the foregoing, Andresen shall be solely responsible for, indemnify and hold
Fred Schmid harmless from the payment of all federal, state and local
employment taxes and related withholding requirements.
4. Release by Andresen. Andresen, for himself, his
heirs, administrators, executors, legal representatives, successors and
assigns, does hereby release Fred Schmid, Fretter, Inc., its and their
affiliated companies and their officers, directors, employees, agents,
affiliates, representatives, shareholders, successors and assigns, and each of
them and their respective heirs, administrators, executors, legal
representatives, successors and assigns, of and from any past, present or
future claim, demand, damage, cost, expense, liability, cause or cause of
action, whatsoever, whether in law or equity, relating to any matters of any
kind, whether presently known or unknown, which he may possess, arising from
any acts or facts which have or may have occurred through and including the
date of this Agreement whether arising out of any act or omission, oral or
written employment agreement, option agreement or other agreement of any kind
or nature. Provided, however, this release shall not and does not include any
rights which Andresen may have upon termination of his employment
-2-
<PAGE> 3
with the Fred Schmid under the Fretter, Inc. 401(k) Profit Sharing Plan.
5. Non-Disclosure. Andresen covenants and agrees that
he shall not at any time hereafter disclose to any person or entity, including
without limitation, any past, present or future, competitor, supplier,
employee, agent and/or customer of Fred Schmid either (a) the terms,
conditions or existence of this Agreement or (b) any financial data, marketing
or advertising plans or programs, selling systems, customer lists, supplier
lists, cost and/or pricing data and/or information, product information, or
other technical or commercial information relating in any way to the business
of Fred Schmid, whether the same may be construed as confidential information
or trade secrets, or in the public domain, and regardless of the manner in
which Andresen has received such information. Andresen represents that he has
heretofore or shall, immediately upon the execution of this Agreement, return
to Fred Schmid any and all books, records, documents, agreements, literature or
other printed material of any kind or nature in any way related to Fred Schmid.
6. Non-Solicitation. Andresen covenants and agrees that
he shall not hereafter in any capacity whatsoever hire, employ or retain,
recommend or suggest for hire, employment or retention or in any way
participate in the hire, employment or retention of any current or former
employee of Fred Schmid or any subsidiary or affiliate thereof.
7. Non-Competition. Andresen covenants and agrees that
he will not Compete (as such term is defined herein) with Fred Schmid for a
period of one (1) year from and after the date hereof within any state in the
United States of America. For purposes of this Paragraph 7, the term Compete
shall mean acting, directly or indirectly, as a broker, consultant, agent,
salesman, officer, director, employee, lender, shareholder or in any other
capacity for or on behalf of any person or entity which is engaged in the
manufacture, purchase, sale, lease or distribution of any service or product
which at any time prior to the date of this Agreement, or during the period of
non-competition, Fred Schmid shall have manufactured, purchased, sold, leased
and/or distributed (including any similar or related service or product).
8. Relief. If Andresen shall violate its
non-solicitation and/or non-competition agreements contained in Paragraphs 6
and 7 above, then at Fred Schmid's option, either (a) the term of such
agreement with respect to the non-competition covenants shall automatically be
extended for a period of one (1) year from and after the date on which Andresen
shall permanently cease such violation or for a period of one (1) year from and
after the date of entry by a court of competent jurisdiction of a final order
or judgment enforcing such agreement, whichever is later; or (b) Fred Schmid
shall be entitled to cease any and all further
-3-
<PAGE> 4
payment obligations under this Agreement and Andresen shall immediately repay
to Fred Schmid any and all sums theretofore paid by Fred Schmid to Andresen
whether pursuant to Paragraph 9 hereof or otherwise pursuant to this Agreement.
9. Payment. In exchange for the covenants and
agreements of Andresen contained herein, Fred Schmid agrees to pay Andresen the
sum of One Hundred Thousand and 00/100 ($100,000.00) Dollars, payable in 12
equal semi-monthly installments of Eight Thousand Eight Hundred Thirty Three
and 33/100 ($8,333.33) Dollars each, beginning 15 days after the final payment
pursuant to Paragraph 3 hereof and continuing on the 7th and 22nd day of each
month.
10. Entire Agreement. Except as otherwise stated
herein, this Agreement contains the entire understanding of the parties hereto
with respect to the subject matter contained herein, supersedes all prior and
contemporaneous agreements, understandings and negotiations; and no parol
evidence of prior or contemporaneous agreements, understandings and
negotiations shall govern or be used to construe or modify this Agreement. No
modification or alteration hereof shall be deemed effective unless in writing
and signed by the parties hereto.
11. Applicable Law. This Agreement, together with the
rights, duties and obligations hereunder shall be construed in accordance with
the laws of the State of Michigan. In the event that litigation is commenced
with respect to any matter arising out of this Agreement, the parties agree to
submit to the jurisdiction of the State of Michigan and agree that venue shall
lie in Livingston County, Michigan. In the event litigation is instituted by
Fred Schmid or Andresen arising out of their respective performance obligations
under this Agreement, the prevailing party in such litigation shall be entitled
to receive its reasonable attorney's fees from the non-prevailing party.
12. Partial Invalidity. If any provision of this
Agreement is held by a court of competent jurisdiction to be invalid, void or
unenforceable in any manner, the remaining provisions of this Agreement shall
nonetheless continue in full force and effect without being impaired or
invalidated in any way. In addition, if any provision of this Agreement may be
modified by a court of competent jurisdiction such that it may be enforced,
then said provision shall be so modified and as modified shall be fully
enforced.
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<PAGE> 5
13. Notices. Any notice or communication permitted or
required hereunder shall be made by letter either sent by certified mail with a
return receipt requested, or by personal delivery, to the address of each party
first above written.
IN WITNESS WHEREOF, each party hereto has caused this
Agreement to be duly executed as of the date and year first written above.
WITNESSES: "EMPLOYER"
FRED SCHMID APPLIANCE & T.V. CO.
a Colorado corporation
_______________________ By:_______________________________
Its: Vice President
"ANDRESEN"
_______________________ __________________________________
Donald R. Andresen
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<PAGE> 1
EXHIBIT 10.34
MERCHANT AGREEMENT
BANK: Household Bank (Illinois), N.A. MERCHANT: Silo, Inc., a Pennsylvania
700 Wood Dale Road corporation
Wood Dale, Illinois 60191 Fretter, Inc., a Michigan
corporation
This Agreement ("Agreement") is made and delivered in Illinois as of the 1st
day of March, 1994 ("Effective Date"), by and between Household Bank
(Illinois), N.A.. (herein "Household") and Silo, Inc., a Pennsylvania
corporation, doing business in certain locations under the name "YES! Your
Electronics Superstore" and Fretter, Inc., a Michigan corporation, with
principal offices at 12501 Grand River Ave, Brighton, Michigan 48116, (herein
individually and collectively referred to as "Merchant").
In consideration of the mutual promises, covenants and agreements set forth
herein and for other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, Merchant and Household agree as
follows:
If either Silo, Inc. or Fretter, Inc. fails to fulfill any of its obligations
under this Agreement, the remaining Merchant agrees to perform any act
necessary to fulfill the obligations of the defaulting Merchant including the
payment of any and all obligations, sums, debts or liabilities of the
defaulting Merchant arising out of or in connection with the performance or non
performance of any obligations under this Agreement. Both Silo, Inc. and
Fretter, Inc. agree to be jointly and severally liable for affiliates of
Fretter, Inc. participating in the Program including Fred Schmid TV and
Appliance Company, Silo-Dixon, Inc. and Silo California, Inc. Silo, Inc. and
Fretter, Inc. agree that Household may, at its option, deal solely with
Fretter, Inc. and Silo shall be bound by all such dealings.
Section 1. Definitions. In addition to the words and phrases defined
elsewhere in this Agreement, the following words and phrases shall have the
following meanings:
a. "Account" means an account resulting from Household's approval of an
application and under which one or more Cards will be issued by
Household, including all Accounts (as such term is defined in the
original Agreement (hereafter defined)) opened during the term of the
Original Agreement. Each Account shall be deemed to be the property
of Household.
b. "Active Account" means any Cardholder's Account that has a debit or
credit balance during a Billing Cycle, provided, however, any Account
which is six months or more contractually delinquent shall not be
considered an Active Account.
c. "Add-on(s)" means any additional sale of Goods (after the initial Card
Sale) that Merchant makes to a Cardholder on credit that is charged to
the Cardholder's Account pursuant to this Agreement.
d. "Affiliate" means any entity that is owned by, owns or is under
common control with Household or its ultimate parent.
e. "Annual Credit Volume" means the actual total of Card Sales minus
Credit Slips originated during the previous twelve (12) months and
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will be determined on December 31, 1994. After December 31, 1994, the
Annual Credit Volume will be determined at the end of each quarter
based on the previous twelve months' credit volume.
f. "Applicable Law" means collectively or individually any applicable
law, rule, regulation or judicial, governmental or administrative
order, decree, ruling, opinion or interpretation.
g. "Authorization" means permission from Household to make a Card Sale.
h. "Authorization Center" means the facility designated by Household as
the facility at which Card Sales are authorized.
i. "Billing Cycle" means the period of calendar days between Billing Dates,
usually between twenty eight (28) and thirty one (31) days.
j. "Billing Date" means the same calendar day each month that all activity
on an Active Account for that Billing Cycle is summarized and the
Account is billed by Household, which is the last day of a Billing
Cycle.
k. "Business Day" means any day except Saturday or Sunday or a day on
which banks are closed in the State of Illinois.
l. "Card" means the private label credit card bearing Merchant's name
and/or logo issued by Household for the Program.
m. "Cardholder" means (i) the person in whose name an Account is or has
been opened, and (ii) all authorized user(s) of the Account and Card,
including, all Cardholders that opened Accounts pursuant to the
Original Agreement.
n. "Card Sale" means any sale of Goods that Merchant makes to a
Cardholder on credit that is charged to the Cardholder's Account
pursuant to this Agreement, including Add-ons.
o. "Computer Generated Invoice" means an invoice stored electronically
and containing the following information: Cardholder Name and
Address; Cardholder Account Number - 15 digits; Merchant Invoice
Number - 14 digits; Transaction Date/date of the Card Sale;
Transaction Amount; and description of item(s) purchased.
p. "Chargeback" means the return to Merchant and reimbursement to
Household of a Sales Slip or Transaction Data transmission for a Card
Sale for which Merchant was previously paid.
q. "Credit Slip" means evidence of a credit in a paper form for Goods
purchased from Merchant that is to be signed by the Cardholder.
r. "Discount" means an amount to be paid by Merchant, typically to be
deducted from funding to Merchant, in the amount of a specified
percentage of each Sales Slip accepted by Household.
s. "Goods" means the goods, merchandise, certain warranties authorized by
Household, and services sold by Merchant in the ordinary course of
Merchant's business to consumers, to the best of Merchant's knowledge
for individual, family, personal or household use.
t. "Major Account Executive" means an employee of Household assigned to
Merchant's Program as designated from time to time by notice from
Household to Merchant.
u. "No Finance Charge Promotion" means a Card Promotion as described in
Section 2(c) whereby no finance charges will accrue on the
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purchase or advance until the payment due date of the Billing
Cycle beginning in the month specified on the Sales Slip, with
minimum monthly payments of three percent (3%) of the outstanding
balance due each Billing Cycle (also referred to as "Waived Finance
Charge"). The No Finance Charge Promotion may have a promotion period
of twelve (12) months or less after the purchase or such other period
as agreed between the parties;
v. "No Payment Promotion" means a Card Promotion as described in
Section 2(c) whereby no minimum monthly payments will be due until the
first day of the Billing Cycle beginning in the month specified on the
Sales Slip, with finance charges accruing from the date of the
purchase (also referred to as "Delayed Payment"):
w. "No Payment/No Finance Charges Promotion" means a Card
Promotion as described in Section 2(c) whereby no minimum monthly
payments will be due and no Finance Charges will accrue on the
purchase or advance until the first day of the Billing Cycle beginning
in the month specified on the Sales Slip (also referred to as "Delayed
Payment/Waived Finance Charge");
x. "Operating Instructions" means the Regulatory Guidelines and
operating instructions and/or procedures designated by Household from
time to time concerning the Program.
y. "Program" means the private label credit card program
associated with Merchant whereby Accounts will be established
and maintained, Cards issued and Card Sales funded pursuant to the
terms of this Agreement.
z. "Reduced Rate Promotion" means a Card Promotion as described in
Section 2(c) whereby a reduced rate finance charge will be applied to
the balance attributable to the purchase ("Reduced Rate Balance")
until the expiration of the reduced rate period or payment in full of
the Reduced Rate Balance, whichever occurs first, as disclosed on the
Sales Slip.
aa. "Sales Slip" means a sales receipt or similar document (such as
a delivery receipt or manual invoice) in paper form that evidences a
Card Sale for Goods purchased from Merchant that is to be signed by
the Cardholder.
bb. "Same As Cash With Payments Promotion" means a Card Promotion
as described in Section 2(c) whereby finance charges will accrue on
the purchase from the date of purchase and minimum monthly payments of
three percent (3%) of the outstanding balance will be due each Billing
Cycle. If the cash sale price of the purchase is paid by the
promotion due date as indicated on the periodic statement, no finance
charges will be due on the purchase. Same As Cash With Payments may
have a promotion due date of twelve (12) months or less after the
purchase or such other period as agreed between the parties (also
referred to as "Same As Cash");
cc. "Same As Cash/Without Payments Promotion" means a Card
Promotion as described in Section 2(c) whereby finance charges will
accrue on the purchase from the date of purchase but no minimum
monthly payments will be due prior to the promotion due date as
indicated on the periodic statement. If the cash sale price of the
purchase is paid by the promotion due date, no finance charges will be
due on the purchase (also referred to as "Same As Cash/Delayed
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Payment");
dd. "Terminal" means an electronic terminal or computer capable of
communicating by means of an on-line or dial-up electronic link with
an Authorization Center.
ee. "Total Annual Credit Volume" shall mean the Annual Credit
Volume as defined in this Agreement plus the Annual Credit Volume as
defined in the Agreement between Merchant and Household Retail
Services, Inc. as amended as of the 1st day of March, 1994. From the
Effective Date of this Agreement to December 31, 1994 the parties
agree that for purposes of the chart in Section 3(c) below, the Total
Annual Credit Volume shall be assumed to be $200,000,000.00.
ff. "Total Billed Finance Charge" shall be the sum of the finance
charges billed to all Cardholders on Accounts (excluding (i) accrued
but unbilled finance charges recorded on Card Promotions as described
in Section 2(c) below; and (ii) all fees including, but not limited
to, late payment fees, return check fees, over limit fees, if any,)
each Billing Cycle during a month minus (a) system adjustments for
corrections to an Account including, but not limited to, (i) regular
payment finance charge, (ii) in-store payment finance charge, (iii)
account adjustment finance charge, (iv) remove sale finance charge,
(vi) free period finance charge, (vii) same as cash adjustments;
multiplied by 60%; (b) manual adjustments made by Household's customer
service department consistent with its general business practices, (i)
regular payment finance charge, (ii) store payment finance charge,
(iii) account adjustment finance charge, (iv) remove sale finance
charge, (vi) free period finance charge, (vii) same as cash
adjustments; multiplied by 60% ; and (c) finance charges on Accounts
ninety (90) days or more overdue; plus finance charges added to a
Cardholder's balance upon expiration of a Card Promotion without full
payment by the Cardholder of the promotional balance.
gg. "Total Portfolio Balance" shall mean the outstanding balances
(after system adjustments and manual adjustments as described in
subparagraph ff above) on all Active Accounts for a month's Billing
Cycles including, but not limited to, balances resulting from the
initial Card Sale for Accounts originated by an application mailed to
Household directly from the applicant; and any Sales Slip generate
pursuant to Card Promotions as described in Section 2(c) of the
Agreement.
hh. "Transaction Data" means Account and Cardholder identification
and transaction information with regard to (i) each Card Sale, namely,
the date and amount of the transaction as shown on the actual original
executed paper Sales Slip for the transaction, valid and correct
Account number for an Active Account, valid and correct Authorization
number, appropriate transaction identifier number identifying the
transaction as a Card Sale, any applicable promotion codes or
promotion identifier numbers, appropriate code describing the Goods,
and Merchant invoice number, and (ii) each return of Goods for credit
to the Account/Cardholder, namely, the date the credit is given,
amount of credit, Account number, and appropriate transaction
identifier number identifying the
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transaction as a credit; all of which data is required to be
transmitted by Merchant to Household in accordance with Section 7 (a)
and (b) below.
Section 2. Scope and Purpose. Merchant engages in the sale of consumer
electronics and appliances and related products and services, and Merchant
desires to make financing available to consumers purchasing Goods from
Merchant. Household, in the business of providing revolving credit financing
pursuant to a credit card to individual consumers, has agreed to provide such
financing under the Program for individual qualified consumers purchasing
Merchant's Goods pursuant to the terms and conditions set forth in this
Agreement.
Household and Merchant have entered into that certain Merchant Agreement dated
as of the 25th of March, 1992 as amended from time to time (the "Original
Agreement"). Under the Original Agreement, Household made financing available
to qualified consumers purchasing Goods from Merchant pursuant to a private
label revolving credit card program as set forth in the Original Agreement. By
letter dated August 11, 1993, Silo made known its intention that the Original
Agreement should not renew automatically pursuant to Section 16(a) therein and
Silo set March 25, 1994 as the effective date of termination of the Original
Agreement. Silo, by Letter Agreement dated November 23, 1993 ("Letter
Agreement"), with the consent of Household, has assigned the Original Agreement
to Fretter, Inc. on the Closing Date of the Acquisition described in that
Letter Agreement and Household agreed to perform services in the Original
Agreement for Fretter, Inc. and to treat Silo, Inc. as Fretter's disclosed
Agent after the effective date of such assignment up to the termination date of
March 25, 1994. In that Letter Agreement Household agreed not to amend the
Original Agreement in any respect which materially changes the services to be
provided by Household or materially increases the cost of such services unless,
in each case, BT Commercial Corporation ("BTCC") as agent for a group of
lenders gave its express prior written consent. Merchant wishes to rescind the
termination letter dated August 11, 1993. Household and Merchant now desire
and agree (i) that as of the Effective Date, this Agreement shall govern all
"Accounts" (as such term is used in the Original Agreement and in this
Agreement) established under the Original Agreement and under this Agreement
and all other matters described in the Original Agreement, and (ii) to modify
and restate their agreement and to replace and supersede the Original Agreement
and subsequent letters in their entirety with this Agreement; provided,
however, the Agreement between Fretter, Inc. and Household Bank (Illinois),
N.A. formerly known as HRSI, N.A. dated December 10, 1990 and all riders,
amendments and addenda, thereto is unaffected by this Agreement. Likewise, the
Agreement between Fretter, Inc. and Household Retail Services, Inc. dated April
21, 1988 is unaffected; provided, however, Fretter and Household will cooperate
in efforts to establish Accounts for these cardholders under this Agreement.
a. Forms and Cards. Household will provide to Merchant standard
application/agreements, and other forms designated by Household for
use by Merchant in the Program, which documents may be changed from
time to time by Household. The design and content of Cards and
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billing statements and the terms and conditions of Accounts and
applications/agreements shall be determined by Household and are
subject to change by Household from time to time. However, the front
art work of the plastic cards and the cover art work on the
applications/agreements and the design of such documents are subject
to Merchant's review and approval; said approval shall not be
unreasonably withheld. If Merchant does not approve a proposed
design, any changes that cause additional expense to Household shall
be paid by Merchant promptly. Household will send copies of revised
standard applications/agreements to Merchant. Household will use
reasonable efforts to issue to the Cardholders the plastic Card within
twenty one (21) days from the date of receipt of the
application/agreement by Household. Household shall be obligated to
pay for only one Card per Account, and Merchant shall be obligated to
pay $.67 for each additional Card. Merchant will be billed and shall
pay these charges monthly, or Household may deduct said charges from
other amounts owed to Merchant under this Agreement.
Household shall pay the cost of a new form of Cardholder
application/agreement. Such new form shall be in two parts, an
original and duplicate attached, with the duplicate in the form of a
so-called "No Carbon Required" ("NCR Form"). Upon receipt by
Household of the NCR forms from its supplier, the new NCR Form shall
be distributed over time to Merchant stores as the Merchant stores
re-order application/agreement forms for the Program as their supplies
diminish in the normal course.
b. Credit Review; Ownership of Accounts. All completed
applications for Accounts submitted to Household whether mailed,
telephoned or otherwise electronically transmitted will be processed
and approved or declined in accordance with Household's credit
criteria and procedures from time to time established by Household,
with Household having and retaining all rights to reject or accept
applications. Household will only accept applications for revolving
credit pursuant to the credit card it issues for individual, personal,
family or household use. Household or its Affiliates shall own the
Accounts and shall bear the credit risk for such Accounts, except as
otherwise provided in this Agreement. Merchant acknowledges and
agrees that it shall have no interest whatsoever in the Accounts.
However, Household acknowledges (i) Merchant's interest in Sales Slips
that are charged back to Merchant pursuant to Section 6, provided,
however, that Merchant has reimbursed Household the applicable amount
of the Chargeback as described in Section 6 below and (ii) Merchant's
interest in its customer lists generated by Merchant. Household shall
not be obligated to accept or reject any application for an Account or
to take any action under an Account, including making future advances
to Cardholders. Household shall, however, provide collection and
customer service for Accounts that are not subject to Chargeback in
accordance with Household's normal and customary practices.
Household shall not be obligated to accept applications for a Card
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or approve any Card Sale for consumers that do not have their
principal residence and billing address in the continental United
States.
Household agrees it will not change its credit issuance
criteria which includes score card changes in a manner to negatively
impact Merchant's specific approval percentages during the term of
this Agreement and successive Renewal Terms. Household, however,
reserves the right to change its credit issuance criteria, which
includes score cards on all "like" merchants, which may include
Merchant on a national or regionalized basis during the Initial Term
and successive Renewal Terms.
bb. Request for Mail-in Applications. All provisions of this
Agreement concerning mail-in applications shall not be effective
unless and until Merchant gives written notice to Household requesting
that Household accept mail-in applications and Household notifies
Merchant that it is prepared to accept mail-in applications. In such
event, with respect to applications mailed to Household directly from
applicants, a hold shall be placed on the Account until the first Card
Sale. At the time of the initial Card Sale for such Accounts,
Merchant shall be responsible to verify the identification of the
Cardholder as set forth below in Section 4(g).
c. Card Promotions. Household may from time to time offer to
existing or potential Cardholders special credit promotions,
additional services and/or enhancements, including, without
limitation, check access. The terms of such promotions, services and
enhancements shall be designated by Household. In addition, Household
and Merchant may mutually agree from time to time to run certain
credit promotions such as No Payment Promotion; No Finance Charge
Promotion; No Payment/No Finance Charges Promotion; Same As Cash With
Payments Promotion; Same As Cash/Without Payments Promotion; and
Reduced Rate Promotion. In consideration of Household's providing
such promotions and to compensate Household for such promotions,
Merchant may be required to pay to Household certain Discounts, fees
or other amounts (the "Promotion Fees"). The parties shall agree in
writing to the amount, type and time of payment of the Promotion Fees
prior to the start of any such promotions. This may include a written
notice from Household to Merchant designating the amounts, type and
time of payment and other terms for promotions run by Merchant and
Household after such notice. Merchant's running of any promotions
after such notice shall be deemed acceptance by Merchant of the terms
described in said notice. Merchant's obligation to pay the Promotion
Fees shall survive the termination of this Agreement. Household may
deduct amounts owed to it under this Section from amounts owed to
Merchant under this Agreement. In the event there are insufficient
funds to pay to Household the Promotion Fees, Merchant will pay the
Promotion Fees to Household within five (5) Business Days of
Household's request. Household may, without Merchant's consent, at
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any time and in its sole discretion, change the terms or cost,
or discontinue the availability of any promotions, services or
enhancements, except if the promotion was agreed to between Merchant
and Household. In such event it can only be changed or discontinued
upon the mutual agreement of the parties. In the event Merchant
intends to run a promotion concerning or involving the Card, Card
Sales or the Program it shall give Household not less than (ten) 10
days prior written notice of any such intended promotions. Any
promotions concerning or involving the Card, Card Sales or the Program
that Merchant expects to run are subject to Household's prior approval
other than a No Finance Charge Promotion and Same As Cash With
Payments Promotion. Merchant and Household agree that no Promotion
Fees are associated with the No Finance Charge Promotion and the Same
As Cash With Payments Promotion as defined in this Agreement. The
payment of advertising and marketing costs concerning the Program
shall be subject to the mutual agreement of Household and Merchant on
a case by case basis.
Section 3. Fees, Discounts, Charges and Rates.
a. Consumer Rate. The consumer rate to be charged on purchases
with the Card shall be 22.6% (Household's established rate) as
assessed and determined by Household from time to time and as agreed
to by Merchant, provided such rate shall not in any event exceed the
maximum rate permitted by applicable federal or state law. This rate
is subject to change from time to time as mutually agreed to by
Merchant and Household. Household agrees to consider a reduction in
said Consumer Rate if requested by Merchant, however, Merchant
acknowledges that components of the pricing under this Agreement
include, without limitation, the Consumer Rate, Discount and Merchant
Participation Fee, and that in the event, Merchant desires a reduction
in the Consumer Rate described above, a Discount would need to be
assessed and/or the Merchant Participation Fee would need to be
decreased and/or other elements of the pricing structure of this
Agreement and the Program would need to be adjusted.
Notwithstanding anything to the contrary in this Agreement,
Household may charge and collect such Cardholder fees as late payment
fees, returned check fees, and over-the-limit fees at its sole
discretion provided such fees shall not in any event exceed the
maximum fees permitted by applicable federal or state law.
Classification of fees in the Cardholder Agreement as interest shall
not affect the provisions of this Agreement or change the definition
of finance charge which shall be the Consumer Rate of 22.6% or such
other Consumer Rate as agreed upon by Household and Merchant.
b. Merchant. (THIS SECTION IS INTENTIONALLY LEFT BLANK)
c. Merchant Participation Fee. The "Merchant Participation Fee" to be
paid by Household to Merchant or by Merchant to Household shall be
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calculated as follows:
At the end of each month the Required Yield shall be compared
to the Total Billed Finance Charges as determined by the formula set
forth in Schedule B. In any month the Total Billed Finance Charge
exceeds the Required Yield, the excess shall be credited to the
Merchant. In any month the Required Yield exceeds the Billed Finance
Charge the difference shall be charged to the Merchant.
During the initial period between the Effective Date of this
Agreement and the first Tuesday of the month following the Effective
Date, the Required Yield percentage on this portfolio shall be 13.50%.
Thereafter, the Required Yield Percentage shall vary monthly according
to the Total Annual Credit Volume as set forth in the chart below.
Also the Required Yield Percentage will vary monthly according to the
Commercial Paper Rates for high grade unsecured notes of 30 days sold
through dealers by major corporations ("Commercial Rate") as published
in the Wall Street Journal on the first Tuesday of the month (or the
first business day thereafter which the Commercial Rate is published)
plus the percentage reflected on the chart below; provided, however,
the Required Yield Percentage will never drop below 13.50%.
Total Annual Credit Volume Required Yield Percentage
- -------------------------- -------------------------
$200 Million and Over Commercial Rate plus 10.40%
$170 - But less than $200 Million Commercial Rate plus 10.55%
$150 - But less than $170 Million Commercial Rate plus 10.70%
$130 - But less than $150 Million Commercial Rate plus 11.05%
$110 - But less than $130 Million Commercial Rate plus 11.45%
$0 - But less than $110 Million Commercial Rate plus 12.00%
To assist Merchant and Household in monitoring the Total Billed Finance
Charge and the Required Yield, Household shall provide to Merchant, on a
monthly basis, the reports set forth in Schedule C. If Merchant requires
reports not listed on Schedule C, and if Household agrees to provide such
reports, Merchant may be charged for such reports.
d. Right of Setoff. All fees, Discounts and charges described in
this Agreement may be deducted by Household from amounts owed to
Merchant under this Agreement. In the event Merchant owes Household
money under this Agreement, Merchant may set off amounts owed by
Household to Merchant under this Agreement.
e. Acceptance, Offset & Funding. Provided that Merchant, with
respect to each Card Sale, has (i) requested and obtained from
Household's Authorization Center proper Authorization as required by
Section 4(h) (ii) below and the Transaction Data for such Card Sale is
presented to Household for payment within sixty (60) days after the
date of Authorization, and (ii) transmitted to Household all of the
Transaction Data described in Section 1. hh. above for each valid Card
Sale, Household agrees to pay Merchant the amount of each such
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authorized and valid Card Sale Transaction Data so transmitted
to Household during the term of this Agreement less the amounts
described below. Household will use its best efforts to make such
payments on the first Business Day after receipt, verification and
processing by Household of the transmission of the Transaction Data,
if such transmission is received by noon Central Standard time; if
received later than noon Central Standard time, then on the second
Business Day after said transmission, but in no event shall such
payments be made later than the fourth Business Day after receipt of
said transmission by Household. Such failure to fund is a material
breach of this Agreement. Household may deduct from such payments (i)
the amount of the fees, charges, and Discounts described above in this
Section 3; (ii) the amounts for Chargebacks as permitted and described
in Section 6 below; (iii) customer credits, Merchant Participation
Fees to be refunded to Household, and any other amounts owed to
Household under this Agreement by Merchant; and (iv) the amount of
fees, charges and other amounts owed by Merchant to Household Retail
Services, Inc. (an Affiliate of Household), under separate Merchandise
Financing Agreements and other agreements between Merchant and
Household Bank (Illinois), N.A. Household may also offset said
amounts from future amounts owed to Merchant under this Agreement.
Any amounts owed by Merchant to Household which cannot be paid
by the aforesaid means shall be due and payable by Merchant on written
demand. Any payment made by Household to Merchant or any amounts
deducted by Household shall not be final but shall be subject to
subsequent review and verification by Household and Merchant, subject
to the terms of Section 6 b. below, and subsequent fundings may be
adjusted or Merchant billed.
Household's liability to Merchant with respect to the funding
of any Card transaction shall not exceed the amount on the Sales Slip
or Credit Slip or in the Transaction Data in connection with such
transaction. In no event shall Household be liable for any incidental
or consequential damages.
Payments/funding by Household to Merchant shall be through the
Automated Clearinghouse Network (ACH) to Merchant's account as
designated by Merchant. The Merchant Participation Fee, less monthly
charges owing to Household, shall be paid monthly.
Section 4. Merchant Responsibilities Concerning Consumer Transactions.
Merchant covenants and agrees that it shall:
(a) honor all valid Cards without discrimination, when properly presented
by Cardholders for payment of Goods.
(b) not require, through an increase in price or otherwise, any Cardholder
to pay any surcharge at the time of sale or pay any part of any charge
imposed by Household on Merchant.
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(c) not establish minimum or maximum charge amounts without
Household's prior written approval.
(d) prominently display at each of its locations, advertising and
promotional materials relating to the Card, including without
limitation take-one applications for the card and use or display such
materials as mutually agreed upon by the parties. Such materials
shall be used only for the purpose of soliciting Accounts for the
Program. Any solicitation, written material, advertising or the like
relating to the Program or Card Sales or the products offered
pursuant to the Program shall be prepared or furnished by Household
or shall receive Household's prior written approval. The payment of
advertising and marketing costs concerning the Program shall be
subject to the mutual agreement of Household and Merchant on a case
by case basis. However, if Household prepares or furnishes
advertising or promotional materials, at Merchant's request, then
Merchant shall pay Household for such advertising or promotional
materials, an amount mutually agreed to by the parties. Further, any
advertising or promotional materials prepared or furnished by
Merchant, shall be at Merchant's cost. Any such materials shall not
be used by Merchant following termination of this Agreement.
(e) Use only the form of, or modes of transmission for, application/
agreements, Sales Slips and Credit Slips as are provided by Household,
subject to Section 2a. above and Section 7(a) below, and not use any
application/agreements, Sales Slips and Credit Slips provided by
Household other than in connection with a Card transaction.
(f) With respect to applications for a Card, except applications mailed
directly by the applicant to Household:
(i) Make sure all information requested on the application is
complete and reasonably legible;
(ii) Obtain the signature on the application of all persons whose
name will appear on the Account or will be responsible for the
Account;
(iii) Give the applicant the initial disclosures at the time of
signing the application/agreement prior to the first
transaction under the Account;
(iv) Verify the identification of the individual(s) applying for the
Account (all applications require at least two
unexpired pieces of identification described on Schedule A
attached to this Agreement and made a part of this Agreement
with at least one from Group 1 on Schedule A); identification
of the applicant(s) is the responsibility of Merchant.
However, if Merchant's verification includes the following, any
Sales Slip subject to
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Chargeback because of the applicant's fraud shall not be
charged back to Merchant:
1. Obtain the signature on the application of each person
whose name will appear on the Account or will be
responsible for the Account (and obtain the signature
of the applicant on the Sales Slip if a purchase is
made);
2. Review two unexpired pieces of identification for each
person signing the application, and list the types of
identification where indicated on the application (At
least one piece of identification must be from Group
One described on Schedule "A"); and
3. Compare the signature on the application (and
on the Sales Slip, if a purchase is made) with the
signatures on the above pieces of identification; they
must reasonably appear to match. Also, the physical
description and photograph on the piece of
identification must reasonably appear to match the
individual Cardholder, and the address on the
identification must match the present address on the
application. If the address does not match, Merchant
must obtain a photocopy or other identification showing
the current address, such as, pay-stub, utility bill,
or driver's license change of address form.
(v) Provide all information required by Household from time to time
for approval of applications by telephone or other electronic
transmission; and
(vi) Send the actual original signed paper application to
Household at Household's address set forth on Page one above
within thirty (30) days of approval of the Application by
Household. If a purchase is also made, then maintain the
original executed paper Sales Slip as described in Section 7
below and deliver a copy of said Sales Slip to Household upon
request as described in Section 7 below.
(g) If the proposed mail-in application program is requested by Merchant
in writing, upon implementation of said program by Household, Merchant
shall be responsible to verify the applicant's identification at the
time of the initial Card Sale if Household's Authorization response
indicates to Merchant that such verification is necessary;
identification of the applicant(s) is the responsibility of Merchant
(If Household accepts a mail-in application prior to Merchant's
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request for the said mail-in application program, Household shall be
responsible for any fraud under such Account). However, if Merchant
satisfies the provisions of Section 4(h)(i), Section 4(h)(ii) to the
extent that Merchant obtains Authorization from Household's
Authorization Center and a valid Authorization number is obtained and
entered on the Sales Slip, and if Merchant's verification includes the
following, any Sales Slip subject to Chargeback because of the
applicant's fraud shall not be charged back to Merchant:
(i) Obtain the signature of the Cardholder on the Sales Slip;
(ii) Swipe or imprint the embossed legends legibly on the Sales Slip
from the Card and from Merchant's imprinter plate;
(iii) Obtain and review two unexpired pieces of identification
described on Schedule A attached hereto from the Cardholder(s);
at least one piece of identification must be from Group One on
Schedule A.;
(iv) Compare and verify that the signatures on the pieces of
identification, on the Card, and on the Sales Slip reasonably
appear to match; they must, in fact, reasonably appear to match.
Also, the physical description and the photograph on the pieces
of identification must reasonably appear to match the individual
Cardholder; and
(v) Maintain the said original Sales Slip in Section 7 below, and
deliver them to Household upon request as described in Section
7 below.
(h) With respect to Sales Slips:
(i) enter legibly on a single Sales Slip prior to obtaining the
Cardholder's signature (1) a separate description of each item
of Goods purchased in the same transaction in detail sufficient
to clearly identify each item of Goods; (2) the date of the
transaction; (3) the Authorization number; (4) the Cardholder's
name, address and Account number; (5) the entire amount due for
the transaction (including any applicable taxes); and (6) if
applicable, the type of promotion(s) and the applicable
disclosures required by any Applicable Law for such
promotion(s), and obtain the Cardholder's signature on the Sales
Slip.
(ii) REQUEST AUTHORIZATION FROM HOUSEHOLD'S AUTHORIZATION CENTER
UNDER ALL CIRCUMSTANCES. (Household may refuse to accept or
fund any Transaction Data concerning a Card Sale that is
presented to Household for payment more than
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sixty (60) days after the date of Authorization of the Card
Sale. However, (a) if Merchant subsequently seeks and obtains a
valid Authorization number, the Transaction Data may be
resubmitted, or (b) if Merchant delivers to Household within
thirty (30) days of Household's refusal satisfactory evidence
that the Transaction Data concerning the Card Sale was, in fact,
transmitted to Household within the said sixty (60) days
Household will fund the Transaction Data in accordance with
Section 3.e. above).
If Authorization is granted, legibly enter the Authorization
number in the designated area on the Sales Slip. If
Authorization is denied, Merchant shall not complete the
transaction and Merchant shall follow any instructions from the
Authorization Center. Merchant shall use its best efforts, by
reasonable and peaceful means, to retain or recover a Card:
(a) if Merchant is advised to retain the Card in response
to an Authorization request (if Merchant does so, then
the individual store employee shall be entitled to
receive a so-called "Fraud Recovery Award" of $25.00 to
be paid by Household); or
(b) if Merchant has reasonable grounds to believe that the
Card is counterfeit, fraudulent, or stolen. The
obligation to retain or recover a Card imposed by this
Section does not authorize a breach of the peace or
any injury to persons or property, and Merchant will
hold Household harmless from any claim arising from any
injury to person or property or other breach of the
peace;
If identification is uncertain or if Merchant otherwise
questions the validity of the Card, contact Household's
Authorization Center for instructions. If no Card is available,
then contact Household's Authorization Center and comply with
Household's additional instructions.
(iii) Merchant shall be deemed to warrant the Cardholder's true
identity as an authorized user of the Card, and Merchant shall
verify the Cardholder's identity. However, if Merchant
satisfies the provisions of Section 4(h)(i), Section 4(h)(ii) to
the extent that Merchant obtains Authorization from Household's
Authorization Center and a valid Authorization number is
correctly and legibly entered on the Sales Slip, and if
Merchant's verification of the Cardholder's identity includes
the following, any Sales Slip subject to Chargeback because of
this customer's fraud shall not be charged back to Merchant:
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(a) On a new Account opened at a Merchant store or location
(excluding applications mailed to Household directly by
the applicant), satisfaction of the items described above in
Section 4(f)(iv).
(b) For the initial Card Sale on Accounts opened by Household
pursuant to applications mailed to Household directly from
applicant(s), satisfaction by Merchant of the items
described above in Section 4(g).
(c) For Add-on Card Sales, satisfaction by Merchant of the
following:
1. Obtain the signature of the Cardholder on the Sales
Slip and swipe or imprint the embossed legends
legibly on the Sales Slip from the Card and from
Merchant's imprinter plate;
2. Compare the signature on the Sales Slip with the
signature on the Card and verify that the
signatures on the Card and Sales Slip match; they
must reasonably appear to match;
3. If no Card is presented and no swipe or imprint of
the Card is made on the Sales Slip, obtain at
least one unexpired piece of picture identification
from Group 1 on Schedule A and note the type of
identification and the corresponding serial or
other identification number on the Sales Slip in the
Special Instructions section. Also, the physical
description and photograph on the piece of
identification must, in fact, reasonably appear to
match the individual Cardholder, and the signature
on the piece of identification must reasonably
appear to match the signature on the Sales Slip; and
4. Maintain the said original executed paper Sales
Slip, as described in Section 7 below, and deliver
said documents to Household upon request as
described in Section 7 below.
(iv) For telephone orders (TO) or mail orders (MO), only if the Sales
Slip is completed without the Cardholder's signature, Merchant
shall, in addition to all other requirements under
this Section 4, enter legibly on the signature line of the Sales
Slip the letters "TO" or "MO", as appropriate, and not
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<PAGE> 16
deliver Goods or perform services after being advised that the
"TO" or "MO" has been canceled or that the Card is not to be
honored. Notwithstanding the foregoing, identification of the
Cardholder is the responsibility of Merchant for all telephone
and mail orders.
(v) not present the Transaction Data concerning the Sales Slip to
Household for funding until all Goods are delivered or all the
services are performed to the Cardholder's satisfaction.
However, Merchant may present the said Transaction Data before
said delivery or performance if the Goods are to be delivered
within ten days of the date of the Card Sale, and the Goods are,
in fact, delivered within said ten days, provided that the
Cardholder Agreement and Applicable Laws permit both delivery
and the charging of interest during said ten (10) days. If the
Goods are not delivered within said ten (10) day period or
Applicable Law or the Cardholder agreement does not permit the
charging of interest during said ten (10) day period, Merchant
shall pay to Household the amount of interest on the Account
from the date of the Card Sale through the date of delivery of
the Goods to the Cardholder.
(vi) enter the Card Sale into Household's Terminal and, if
applicable, Household's approval code.
(vii) deliver a true and completed copy of the Sales Slip to the
Cardholder at the time of the Card Sale, and maintain the
original executed paper Sales Slip as described in Section 7
below, and deliver said Sales Slip to Household upon request as
described in Section 7 below.
(i) Credits
1. Credit Slips. If Merchant accepts any Goods for return, any
services are terminated or canceled, or Merchant allows any
price adjustment, then Merchant shall not make any cash refund,
but shall complete and deliver to the Cardholder a true and
complete copy of the Credit Slip evidencing the refund or
adjustment at the time the refund or adjustment is made.
Merchant shall sign and date each Credit Slip and include
thereon a brief description of the Goods returned, services
terminated or canceled, refund or adjustment made, Cardholder's
name and Account number and the date and amount of the credit,
all in sufficient detail to identify the transaction. The
amount of the Credit Slip cannot exceed the amount of the
original transaction as reflected on the Sales Slip and
Transaction Data. Merchant shall issue Credit Slips only in
connection with previous bona fide Card
Sales and only as permitted hereunder.
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2. Merchant shall immediately after a credit is given to a
Cardholder, transmit to Household, the Transaction Data for
the credit, and Merchant shall owe Household the amount of said
credit, which shall be paid to Household as set forth in Section
3 e., and maintain the said original executed Credit Slip as
described in Section 7 below, and deliver said Credit Slip to
Household upon request as described in Section 7 below.
(j) not receive any payments from a Cardholder for charges included on any
Sales Slip resulting from the use of any Card, nor receive any
payments from a Cardholder to prepare and present a Credit Slip for
the purpose of effecting a deposit to the Cardholder's Account.
(k) Cardholder Complaints. Merchant shall within three (3)
Business Days of receipt provide Household with a copy of any written
complaint from any Cardholder concerning his/her account.
(l) satisfy all other requirements designated in any Operating
Instructions or as may be required from time to time by Household. In
the event there is any inconsistency between any Operating
Instructions and this Agreement, this Agreement shall govern. Any
Operating Instructions or changes thereto, except those required by
any Applicable Law, shall not trigger a unilateral material change to
this Agreement without Merchant's consent; which consent shall not be
unreasonably withheld. Merchant's compliance with any such
instructions or changes thereto or Merchant's failure to object to
same within thirty (30) days of receipt of same, shall be deemed to be
Merchant's consent to any such instructions or changes.
Section 5. Representations and Warranties.
A. Merchant represents and warrants to Household the following:
(a) that each Card Sale will arise out of a bona fide sale of Goods
by Merchant and will not involve the use of the Card for any other
purpose; and
(b) that to the best of Merchant's knowledge each Card Sale will be
to a consumer for personal, family, or household purposes; and
(c) that Cardholder applications will be available to the public
without regard to race, color, religion, national origin, sex, marital
status, or age (provided the applicant has the capacity to enter
into a binding contract) or in any manner which would discriminate
against an applicant or discourage an applicant from applying for the
Card; and
(d) that it has full corporate power and authority to enter into
this Agreement; that all corporate action required under any
organization documents to make this Agreement binding and valid upon
Merchant according to its terms has been taken; and that this
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Agreement is and will be binding, valid and enforceable upon Merchant
according to its terms; and
(e) neither (i) the execution, delivery and performance of this
Agreement, nor (ii) the consummation of the transactions contemplated
hereby will constitute a violation of law or a violation or default by
Merchant under its articles of incorporation, bylaws or any
organization documents, or any material agreement or contract and no
authorization of any governmental authority is required in connection
with the performance by Merchant of its obligations hereunder; and
(f) Merchant has all required licenses to perform it's obligations
under this Agreement, and will govern itself in accordance with all
Applicable Laws affecting the Program; and
B. Household represents and warrants to Merchant the following:
(a) that it has full corporate power and authority to enter into
this Agreement; that all corporate action required under any
organization documents to make this Agreement binding and valid upon
Household according to its terms has been taken; and that this
Agreement is and will be binding, valid and enforceable upon Household
according to its terms; and
(b) neither (i) the execution, delivery and performance of this
Agreement, nor (ii) the consummation of the transactions contemplated
hereby will constitute a violation of law or a violation or default by
Household under its articles of incorporation, bylaws or any
organization documents, or any material agreement or contract and no
authorization of any governmental authority is required in connection
with the performance by Household of its obligations hereunder; and
(c) Household has all required licenses to perform it's obligations
under this Agreement, and will govern itself in accordance with all
Applicable Laws affecting the Program.
Section 6. Chargebacks to Merchant. Merchant and Household agree that
notwithstanding anything in this Agreement to the contrary, the "Events of
Chargeback" described below are the only events that can trigger the Chargeback
remedy described below, and that the Chargeback remedy is subject to the
Chargeback procedures set forth below. Merchant and Household further agree as
follows:
a. Events of Chargeback and Procedures. Any Sales Slip or
Transaction Data transmission concerning a Card Sale or Account is
subject to Chargeback under any one of the following specified Events
of Chargeback, subject to the Chargeback procedures set forth below.
Household and Merchant agree that Merchant's failure to satisfy any
other term or provision of this Agreement, the breach of which is
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not identified as an Event of Chargeback below, shall be deemed a
breach of this Agreement and the Chargeback remedy for such breaches
shall not be available to Household. However, Household may exercise
all other remedies it may have against Merchant, including without
limitation, the right to terminate this Agreement as set forth in
Section 16 of this Agreement.
The Events of Chargeback and procedures for exercising Chargeback are
as follows:
(i) Application Compliance Fee and Application Chargeback. Under
this subsection, every 30 day period approximating a calendar
month is deemed to be an "Application Review Period". Household
shall set the precise time frame of each Application Review
Period.
Merchant agrees as soon as practically possible to deliver to
Household not less than 90% of all original executed applications
for Accounts approved by Household that corresponds to the
applicable Application Review Period as determined by the total
percentage compliance rate on the HRSI application tracking system
merchant status report (the "HATS Report") as reported monthly to
Merchant consistent with present practices between Silo and
Household since April 1, 1992. Failure to meet the 90% threshold
compliance rate is deemed to be an "Application Compliance Event."
During the Application Review Period, Household will provide
Merchant with periodic reports as mutually agreed upon by Merchant
and Household. For the particular Application Review Period, such
reports will include the approved Accounts, the missing
application forms, and any application forms delivered which are
unsigned. Copies of the unsigned applications will be returned to
Merchant.
On or before the 30th day after the end of each Application
Review Period, Household will deliver to Merchant a HATS Report
containing the missing applications (any unsigned applications
will be shown as missing applications on this report) for the
immediately preceding Application Review Period. Merchant shall
use its best efforts to provide Household with any missing or
unsigned applications as such applications are identified in the
Preliminary Report.
Household must determine whether an Application Compliance
Event or Application Chargeback Event has occurred as shown on the
report; provided, however, if the HATS Report shows a total
percentage compliance of more than ninety percent (90%) no
Application Compliance Event will be deemed to have occurred.
Household shall determine if an Application Compliance Event
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for the Application Review Period has occurred. Upon the
occurrence of an Application Compliance Event, Merchant shall pay
to Household an application compliance fee ("Application
Compliance Fee") equal to the product of (i) the percentage by
which application delivery compliance is less than 100%,
multiplied by (ii) 0.5% of all funded Card Sales for the Billing
Cycles that fall within the applicable Application Review Period.
For example, if total percentage compliance on the HATS Report
is 85%, and all funded Card Sales during the applicable
Application Review Period is $1,000,000.00, the Application
Compliance Fee will equal $7,500 ($1,000,000.00 x 0.5% x 15%).
In the event an Application Compliance Event occurs for more
than two Application Review Periods in any one twelve month period
of March 1 through February 28 during the term hereof (a "Contract
Year"), the Application Compliance Fee for any further Application
Compliance Event during the remaining Application Review Periods
of the Contract Year shall increase to 0.5% of the total funded
Card Sales for the particular Application Review Period in which
the Application Compliance Event occurred. At the beginning of any
subsequent Contract Year during the term hereof, the Application
Compliance Fee shall revert back to the lower amount described
above until the increase may again be triggered by the occurrence
of two Application Compliance Events in the then current Contract
Year.
If, for any Application Review Period during the term hereof,
Merchant fails to meet a total percentage compliance rate on the
HATS Report of 80% an "Application Chargeback Event" will be
deemed to have occurred. The 80% threshold compliance rate shall
not be met if Merchant fails to deliver to Household at least 80%
of all original executed applications for a particular Application
Review Period. In such event, Household may immediately implement
a Chargeback under this subsection for all Accounts with missing
or unsigned applications approved by Household during the
applicable Application Review Period (an "Application
Chargeback"), and in addition, Household may thereupon declare a
material breach of this Agreement by Merchant. An Application
Chargeback imposed shall be in lieu of an Application Compliance
Fee. For each Application Chargeback, Merchant shall pay to
Household the Account balance. In all cases, Merchant is to use
its best efforts to forward all applications to Household.
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(ii) Customer Dispute Chargeback. Subject to the procedures and
limitations below, Household may trigger a Chargeback if the
Cardholder, in accordance with Household's established customer
service procedures and within one year from the actual first
payment due date for the particular Card Sale, disputes the
delivery, quality or performance of the goods, services or
warranties purchased, disputes the Card Sale or Sales Slip,
alleges a billing error, duplicate charge or other problem or
matter not caused by Household, or alleges that a credit
adjustment was or should have been issued by Merchant but is not
posted to Cardholder's Account (a "Customer Dispute Chargeback
Event").
Within twenty one (21) days of Household's receipt of the
Cardholder's written notice of his/her contention that a Customer
Dispute Chargeback Event has occurred in accordance with
Household's established procedures, Household must provide
Merchant a Chargeback Notice specifically detailing the
circumstances of the Customer Dispute Chargeback Event (the
"Customer Dispute Chargeback Notice"). Household may not
implement a Chargeback under this subsection until expiration of
a twenty one (21) day period after delivery to Merchant of the
Customer Dispute Chargeback Notice (the "Customer Dispute Cure
Period").
During the Customer Dispute Cure Period, Merchant will use all
reasonable efforts to resolve the dispute specified in the
Customer Dispute Chargeback Notice. If, in Household's
reasonable judgment, Merchant is unable to provide Household
information indicating that the dispute has been resolved on or
before the expiration of the Customer Dispute Cure Period,
Household may then trigger a Chargeback for a particular Card
Sale (a "Customer Dispute Chargeback").
For each Customer Dispute Chargeback, Merchant shall pay to
Household the aggregate of the full amount of the Sales Slip/Card
Sale Transaction Data plus sixty percent (60%) of the finance
charges thereon for up to a maximum of six (6) Billing Cycles,
net of any payments made by the Cardholder.
(iii) Fraud Chargeback. Subject to the procedures and limitations
below, Household may trigger a Chargeback for any Card Sale for
which each of the following events occur:
(1) the Cardholder or other person in accordance with Household's
applicable fraud procedures, disputes or denies the authorization
or execution of the application or Sales Slip or otherwise
alleges a fraud;
(2) Household's Security Department completes an investigation of
the fraud alleged by Cardholder, such investigation to be
completed by Household in accordance with its applicable
procedures and internal guidelines for fraud investigations as
may be amended from time to time; and
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(3) Household obtains and delivers to Merchant an affidavit or
certified death certificate to support the fraud assertions;
or
(4) Household has determined that (a) Merchant did not fully
comply with fraud protection procedures set forth in Section
4(f)(iv), Section 4(g) or Section 4(h) as applicable, (b) the
Card Sale is a telephone order or mail order, or (c) the Card
Sale, application,
Sales Slip, credit slip or Transaction Data is subject to a claim
of illegality, cancellation, rescission, avoidance or offset due
to the fraud or dishonesty of Merchant or any employee, agent,
franchisee or licensee of Merchant (collectively, the occurrence
of each of the events in subsections (1), (2), (3), and (4) above
is known as a "Fraud Chargeback Event").
Upon Household's determination that a Fraud Chargeback Event has
occurred, Household must provide Merchant with a written notice
detailing the circumstances of the Fraud Chargeback Event,
including supplementary information and documentation applicable
to the Account and the above described affidavit (the "Fraud
Chargeback Notice"). Household may not implement a Chargeback
under this subsection until the expiration of the thirty (30) day
period after Merchant's receipt of the Fraud Chargeback Notice
(the "Fraud Cure Period").
On or before the expiration of the Fraud Cure Period, if Merchant
has not demonstrated to Household in Household's reasonable
judgment that a Fraud Chargeback Event has not occurred,
Household may then trigger a Chargeback for the Card Sales or
Accounts identified in the Fraud Chargeback Notice (a "Fraud
Chargeback"). Merchant shall pay to Household the aggregate of
the full amount of each Sales Slip/Card Sale Transaction Data or
Account or the portion thereof subject to Chargeback plus finance
charges thereon up to a maximum of six (6) Billing Cycles, net of
any payments made by the Cardholder ("Fraud Chargeback Amount").
Household agrees to suspend Authorizations on an Account as soon
as possible but not later than five (5) days after Household's
Fraud and Loss Prevention Department receives information from
the Cardholder denying execution by the Cardholder of the
application or Sales Slip, as applicable. If Household fails to
do so, the amount of the Fraud Chargeback concerning the
applicable Account will exclude the amount of any Card Sales plus
the finance charges thereon made after said 5th day on said
Account.
Beginning on the first Billing Cycle to occur after the Effective
Date of this Agreement, Household will establish an annual Fraud
Reserve. This reserve will be an unfunded account which shall be
30 basis points of the average outstanding Accounts for the
preceding calendar year. The parties agree that in calendar year
1994 the Fraud Reserve shall be $392,803.00. Thereafter the
average shall be determined at year end. Household will
determine the average
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outstanding Accounts by adding the outstanding balances on
Accounts in November and the outstanding balances on Accounts in
December and dividing by two (2). This will establish the Fraud
Reserve for the following year. Each Fraud Chargeback Amount
shall be deducted from the Fraud Reserve until the Fraud Reserve
is exhausted. No deduction for fraud shall be made from the
Fraud Reserve as defined in this Section 6(iii) if Merchant has
fully complied with fraud protection procedures set forth in
Section 4(f)(iv), Section 4(g) or Section 4(h) as applicable.
Merchant shall not be required to pay any Fraud Chargeback amount
unless or until the total amount of Fraud Chargebacks exceed the
Fraud Reserve. At the end of each calendar year if there is any
excess in the Fraud Reserve it will be credited to the Merchant;
provided, however, the amount to be credited to the Merchant from
the Fraud Reserve in 1994 will be pro rated by the number of full
months this Agreement has been in effect in calendar year 1994.
(iv) Bankruptcy Documentation Chargeback. Subject to the procedures
and limitations below, Household may trigger a Chargeback in the
amount set forth below if each of the following events occur:
(1) Household makes a document request on a Request Form in
strict compliance with the document request procedures set forth
in Section 7(d) below;
(2) Cardholder has filed a petition for relief under the
Bankruptcy Code;
(3) Either (a) Merchant fails to deliver to Household on or
before the expiration of the twenty one (21) day response period
provided by Section 7(d) below, either (i) a copy of the original
Sales Slip signed by the Cardholder requested by Household; or
(ii) if the original Sales Slip is not available after a diligent
search, a computer generated invoice; or (b) with respect to an
application approved by Household after the 25th day of March,
1992 Household is not in receipt of the original application
executed by the applicants and the application was previously
reported to Merchant as missing on the applicable reports
described in Section 6(a)(i) above, or (c) with respect to an
application approved by Household before the 25th day of March,
1992, the application is unsigned (but not missing); and
(4) The Account balance is $300 or more (collectively, the
occurrence of each of the events in subsections (1), (2), (3),
and (4) above is known as a "Bankruptcy Documentation Chargeback
Event").
Immediately upon the occurrence of the Bankruptcy Documentation
Chargeback Event, Household may implement the Chargeback (a
"Bankruptcy Documentation Chargeback"). As a condition to
implementing a Bankruptcy Documentation Chargeback Event
concerning Subsection 6.a.(iv)(3)(c) above (unsigned
application), Household shall send Merchant a copy of the
unsigned application at the time of
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the Chargeback.
For a Bankruptcy Documentation Chargeback concerning Subsection
6.a.(iv)(3)(a) above (missing or unsigned Sales Slips), Merchant
shall pay to Household the lesser of (i) 50% of the balance of
missing or unsigned Sales Slips for the Account (including sixty
percent (60%) of finance charges up to a maximum of six Billing
Cycles, but excluding matching Sales Slips and Credit Slips
arising from sales canceled by subsequent refunds), or (ii) 50%
of the Account balance at the time of the Chargeback. For a
Bankruptcy Documentation Chargeback concerning Subsection
6.a.(iv)(3)(b) above (missing or unsigned applications) or
Subsection 6.a.(iv)(3)(c) above (unsigned applications), Merchant
shall pay to Household 50% of the Account balance at the time of
Chargeback.
This Subsection 6.a.(iv) shall be deemed to be in effect as of
the Effective Date for all Chargeback Notices that are, or have
been, sent to Merchant on or after the Effective Date.
Notwithstanding the above, no Bankruptcy Documentation
Chargeback shall occur if Household fails to take any action
concerning an Account within the later of (i) one year after the
date of receipt of the last payment, and (ii) if there is a
purchase on the Account made pursuant to a promotion, one year
after the actual first payment due date.
The acceptance of a computer generated invoice under Section
6(iv)(3) shall not relieve Merchant of the duty to maintain
signed Sales Slips as described in Section 7 below and to produce
these when requested for other purposes.
(v) Collection Documentation Chargeback. Subject to the procedures
and limitations below, Household may trigger a Chargeback in the
amount set forth below if each of the following events occur:
(1) Household makes a document request on a Request Form in
strict compliance with the document request procedures set forth
in Section 7(d) below, and
(2) Either (a) Merchant fails to deliver to Household on or
before the expiration of the twenty one (21) day response period
provided by Section 7(d) below, a copy of the original Sales Slip
signed by the Cardholder requested by Household, or (b) with
respect to an application approved by Household after March 25,
1992, Household is not in receipt of the original application
executed by the applicants and the application was previously
reported to Merchant as missing on the applicable reports
described in Section 6.a.(i) above, or (c) with respect to an
application approved by Household before March 25, 1992, the
application is unsigned (but not missing); and
(3) Either (a) Household files a lawsuit and Household fails to
obtain a judgment in its favor or the case is dismissed, in
either
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case due to lack of signed Sales Slips and/or applications, or
(b) Household's counsel reasonably deems any legal action to be a
loss due to lack of signed Sales Slips and/or applications.
(4) The Account balance is $300.00 or more (collectively, the
occurrence of each of the events in subsections (1), (2), (3) and
(4) above is known as a "Collection Documentation Chargeback
Event").
Immediately upon the occurrence of the Collection Documentation
Chargeback Event, Household may implement the Chargeback (a
"Collection Documentation Chargeback"). As a condition to
implementing a Collection Documentation Chargeback Event
concerning Subsection 6.a.(v)(2)(c) above (unsigned application),
Household shall send Merchant a copy of the unsigned application
at the time of the Chargeback.
For a Collection Documentation Chargeback concerning Subsection
6.a.(v)(3)(a) above (lawsuit), Merchant shall pay to Household
the loss incurred by Household which results directly from a
missing or unsigned Sales Slips and/or application.
For a Collection Documentation Chargeback concerning Subsection
6.a.(v)(3)(b) (no lawsuit), Merchant shall pay to Household:
(i) with respect to a missing or unsigned application, 50% of
the Account balance at the time of the Chargeback.
(ii) with respect to a missing or unsigned Sales Slip, the
lesser of (i) 50% of the balance of missing or unsigned Sales
Slips for the Account (including sixty percent (60%) of finance
charges up to a maximum of six Billing Cycles, but excluding
matching Sales Slips and Credit Slips arising from sales canceled
by subsequent refunds), or (ii) 50% of the Account balance at the
time of the Chargeback.
Notwithstanding the above, no Collection Documentation Chargeback
shall occur if Household fails to take any action concerning an
Account within the later of (i) one year after the date of
receipt of the last payment, and (ii) if there is a purchase on
the Account made pursuant to a promotion, one year after the
actual first payment due date.
(vi) Invalid Account Number Chargeback. Subject to the procedures and
limitations below, Household may trigger a Chargeback for any
Transaction Data if Household funds the dollar amount of the
Transaction Data submitted by Merchant for a Card Sale, but
Household is subsequently unable to match the Transaction Data
submitted with the appropriate Account.
Household must send Merchant written notice (the "Invalid Account
Number Chargeback Notice") within ninety (90) days of the funding
date of the Transaction Data containing the following
information, if, and as, transmitted to Household by Merchant:
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(1) Account number
(2) Transaction/Sale Date
(3) Appropriate Identifier Code identifying the transaction
as a sale or credit
(4) Transaction Amount
(5) Reason for Chargeback
Household may not implement a Chargeback under this subsection
until the expiration of a twenty one (21) day period after
delivery to Merchant of the Authorization Chargeback Notice (the
"Invalid Account Number Chargeback Cure Period").
During the Invalid Account Number Chargeback Cure Period,
Merchant will use all reasonable efforts to provide the
information requested in the Invalid Account Number Chargeback
Notice. If Merchant fails to deliver to Household the requested
information on or before the expiration of the Invalid Account
Number Chargeback Cure Period or if Household cannot match the
Transaction Data to an Account with the information provided by
Merchant during the Invalid Account Number Chargeback Cure
Period, Household may then trigger a Chargeback for the
particular Transaction Data (an "Invalid Account Number
Chargeback").
For each Invalid Account Number Chargeback, Merchant shall pay to
Household the amount funded to Merchant for such transaction,
plus sixty percent (60%) of finance charges thereon up to a
maximum of six (6) Billing Cycles net of any payment made by the
Cardholder.
b. Post Chargeback Procedures. Upon each Chargeback by Household triggered by
an Event of Chargeback described above, Household will, upon request, return to
Merchant any Sales Slip or copy thereof or other evidence of the transaction it
received from Merchant. Household shall provide, at Merchant's request (which
request must be made within sixty (60) days of implementation of the Collection
Chargeback), copies of collection screen prints relating to such Sales Slip, to
the extent and only if allowed by law. Household may deduct amounts owed to
Household under this Section 6 from any amounts owed to Merchant under this
Agreement. Any payment made by Merchant to Household as a result of a
Chargeback shall not be final but shall be subject to subsequent review and
verification by Household and Merchant, subject to the provisions of Section
6.d. below, and subsequent fundings may be adjusted or Merchant billed. Upon
completion of a properly implemented Chargeback permitted by this Section 6,
Merchant shall own the Account or Sales Slip, whichever is charged back to
Merchant, and Merchant shall bear all liability and risk of loss associated
with the Sales Slip, Card Sale or Account that has been subject to Chargeback,
or the applicable portion thereof, without warranty or representation whether
express or implied by, or recourse or liability to, Household.
c. Format of Chargeback Notice. The Customer Service Chargeback Notice and
the Fraud Chargeback Notice (collectively referred to as the "Chargeback
Notice") must be in writing and must contain the following information, if and
as, submitted by Merchant to Household:
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<PAGE> 27
(i) Cardholder Name
(ii) Cardholder Account Number - 15 digits
(iii) Merchant Invoice No. - 14 digits
(iv) Transaction Date - date of Card Sale or credit, as
applicable
(v) Chargeback Amount
(vi) Reason for Chargeback
(vii) Account balance
(viii) Appropriate transaction identifier code identifying
the transaction as a credit or sale
Each Chargeback Notice must be delivered to Merchant at Merchant's address set
forth on page one of this Agreement.
d. Chargeback Dispute. Merchant is entitled to dispute a Chargeback or amount
of a Chargeback. For example (1) Merchant may be able to document to Household
that Merchant complied with the applicable fraud protection procedures in this
Agreement, or (2) Merchant may wish to prove to Household with respect to a
Collection Documentation Chargeback that (i) the Merchant fully complied with
any permitted Section 7(d) document request made by Household, or (ii)
Household did not comply with its Section 7(d) document request requirements
and procedures.
Any dispute by Merchant concerning a Chargeback or the amount of a Chargeback
or Merchant's review and verification of any Sales Slip or Account that is
charged back to Merchant, are subject to the procedures and limitations below:
1. For each such dispute, the dispute must be made in writing, on
a form to be mutually agreed upon by the parties, and copies
of the applicable Chargeback Notices, Bankruptcy Documentation
Chargeback Notices, Collection Documentation Chargeback
Notices, applicable application reports, and Invalid Account
Number Chargeback Notices must be attached to said form
(herein the said form and attachments are collectively called
the "Dispute Form"):
2. The Dispute Form must be delivered to Household, at
Household's address set forth on page one of this Agreement to
the attention of Silo Chargeback Manager with a copy to the
Major Account Executive.
3. The Dispute Form must be delivered within one hundred twenty
(120) days from the date Household deducted the amount of the
Chargeback from funding or otherwise received payment of said
amount ("Chargeback Dispute Period"). Merchant's right to
dispute any Chargeback or amount of Chargeback must be done in
strict compliance with the terms, provisions and time frames
set forth above. Upon expiration of the Chargeback Dispute
Period, the applicable Chargeback shall be deemed to be final.
Within the Chargeback Dispute Period, Merchant has the right to
audit the Chargebacks for that period.
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e. Survival. The terms and provisions of this Section 6 shall survive the
termination of this Agreement.
Section 7. Transmission of Data & Records. Data, records and
information shall be transmitted and maintained as described below.
(a) Transmission of Data. Merchant shall transmit to Household, by
electronic transmission or other form of transmission mutually
agreed upon by Household and Merchant the Transaction Data
required by this Agreement concerning Card Sales and credit
transactions. All data transmitted shall be in a medium, form
and format designated by Household and shall be presorted
according to Household's instructions provided, however, no
changes in current procedures will be initiated by Household
until notification to Merchant and mutual agreement of reasonable
time frame. Any errors or missing information in the Transaction
Data or in its transmission shall be the sole responsibility of
Merchant, except if Household's electronic system of data
transmission malfunctions or is otherwise unavailable. The means
of transmission indicated above in this Section shall be the
exclusive means utilized by Merchant for the transmission of
Transaction Data to Household, unless and until the parties
mutually agree to a different form.
(b) Receipt of Transmission. Upon successful receipt of the above
described transmission, Household will pay Merchant in accordance
with this Agreement, subject to subsequent review and
verification by Household and to all other rights of Household
and obligations of Merchant as set forth in this Agreement. If
transmission of Transaction Data is by tape, Merchant agrees to
deliver upon demand by Household a duplicate tape of any prior
tape transmission, if such demand is made within forty-five (45)
calendar days of the original transmission.
(c) Records. Merchant shall maintain the actual original executed
paper Sales Slips, Credit Slips, and other records pertaining to
any transaction covered by this Agreement for such time and in
such manner as Household or any law or regulation may require,
but in no event less than two (2) years after the date Merchant
presents each Transaction Data to Household, and Merchant shall
make and retain for at least four (4) years either (i) the said
actual original executed paper documents, or (ii) legible
microfilm copies of such actual original executed paper
transaction documents or Computer Generated Invoices.
(d) Requests for Documents. Household may request Merchant to
provide to Household copies of the actual original executed paper
Sales Slips and Credit Slips, applications, if applicable, or
other transaction records, and any other documentary evidence
available to Merchant and reasonably requested by Household to
meet its obligations under law (including its obligations under
the Fair Credit Billing Act) or otherwise to respond to
questions, disputes, complaints, lawsuits, counterclaims or
claims concerning Accounts or requests from or
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concerning Cardholders, or if requested by a regulator, examiner,
governmental agency or other similar entity or person,or to
enforce any rights Household may have against a Cardholder,
including, without limitation, litigation by or against
Household, collection efforts and bankruptcy proceedings.
Household shall not submit a Document Request Form for an Account
in collection or bankruptcy concerning any Account that has a
balance less than $300.00. Household shall request Sales Slips
by completing a request form ("Request Form"), which shall
contain the following information for each Sales Slip requested,
as applicable, provided Merchant has previously given Household
such information for the respective Sales Slip:
a. Cardholder Name.
b. Cardholder Account Number - 15 digits.
c. Merchant Invoice Number - 14 digits.
d. Transaction Date/date of the Card Sale.
e. Transaction amount.
f. Account balance as of the Request Date .
g. Date of request ("Request Date") and date by which the
information is to be delivered.
h. Request reason code.
i. Type of information requested.
j. Appropriate transaction identifier code identifying the
transaction as a credit or sale.
Request Forms shall be sent by facsimile to Merchant.
Merchant shall provide Household with copies of all originally
executed Sales Slips and copies of identification (if required
under Section 4 above) if requested by Household on the Request
Form within twenty-one (21) days of the date of the facsimile
receipt.
If Merchant is required to utilize overnight mail or courier, or
certified or registered mail to allow it to comply with any
response times provided herein for requested documents or
information, Merchant shall bear the cost. However, if Household
requests Merchant to provide it with Sales Slips or other
information requested on a Request Form before the response times
provided herein and, in order to comply with this request,
Merchant is required to utilize overnight courier or mail or
certified or registered mail, Household shall bear the cost.
Household shall reimburse Merchant for any such costs after it
receives written receipts for such costs by adding such costs to
any other monies or amounts owed to Merchant under this
Agreement. Notwithstanding the foregoing, if Household is
required to respond to a Cardholder's inquiry, a state or federal
regulator's request or in a judicial or other similar proceeding
before the response times set forth herein and Household notifies
Merchant of this fact, Merchant will cooperate and use its best
efforts to respond within the response time requested by
Household.
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(e) Computer Terminals. Household will provide to Merchant one or
more Terminals to be used for Card applications, Sales Slip and
other data processing in Merchant's place(s) of business, subject
to the terms of this Agreement. Merchant will pay Household the
Terminal Usage Fee in the amount of $20.00 (twenty dollars) each
month for each Terminal placed at Merchant's place(s) of
business. Upon the mutual agreement of the parties, Merchant may
obtain, at its expense, and use at its stores, its own computer
hardware and equipment for the processing of applications, and
Merchant shall then return all Terminals and any accompanying
equipment to Household in the same condition as received, except
for normal wear and tear. Upon receipt by Household of each said
Terminal and accompanying equipment, the Terminal Usage Fee
assessed for each such Terminal shall cease. Merchant will be
responsible for all costs related to repair and/or replacement of
Terminals resulting from Merchant's misuse of the Terminals.
Household will provide normal maintenance and replacement units
for malfunctioning Terminals. Merchant will provide a dedicated
telephone line to transmit the data entered on the Terminal to
Household's Servicing Center, at Merchant's cost. Household
shall provide a toll-free 800 telephone number for Merchant to
use in transmitting the data on the Terminal to the Household
Servicing Center, at Household's cost. In the event of
Merchant's breach of this Agreement or termination of this
Agreement, immediately upon Household's request, Merchant will
promptly return to Household all software, Terminals and
equipment provided by Household hereunder in the same condition
as received, except for normal wear and tear. Any amounts owed
to Household hereunder may be deducted from any amounts owed to
Merchant under this Agreement. Merchant agrees not to reproduce
any software provided to Merchant under this Agreement.
Household and Merchant may from time to time mutually agree to
change or cease use of the tape or electronic transmission
process described in this Section, and Household may require
delivery to Household of the actual Sales Slips and Credit Slips
within five (5) Business Days after the date of the respective
sale or credit transaction.
(f) Limited License/HAPS. Household hereby grants to Merchant an
individual, non-transferable, limited and non-exclusive license
and right to use Household's application processing software
known as "Household Application Processing System" ("HAPS") in
machine readable (object code) form at the Merchant's address
shown above at page one of this Agreement (and on any exhibit
attached hereto) subject to the following terms and conditions
which Merchant hereby accepts and agrees to:
i. HAPS is and remains the sole, exclusive, confidential and
trade secret property of Household. Merchant will not reverse
engineer, decompile or attempt to derive source code of HAPS.
ii. HAPS will be used solely for the processing of credit
applications to be submitted to Household (and not any other
credit provider) in connection with this Agreement and for
no other purpose.
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iii. Merchant will not copy or duplicate HAPS except as
specifically authorized by Household. Merchant will not make
or attempt to make any changes, modifications, enhancements,
or customization to HAPS. Merchant will promptly use any
modifications or new versions of HAPS provided by Household
so that the most current version is used by Merchant.
iv. In addition to the obligations imposed by Section 20
below, Merchant agrees to maintain HAPS and any document or
information relating thereto in strict confidence and will
not use such except as provided herein. Disclosure of HAPS
to employees of Merchant will only be made on a need to know
basis and be limited to as few employees as necessary.
Merchant will insure compliance with this Agreement by its
employees, agents, representatives, officers and directors.
Neither HAPS nor any information regarding HAPS will be
disclosed to any other person or entity.
v. In addition to the obligations imposed by Section 14 below,
Merchant shall indemnify and hold Household harmless for any
loss, claim or damage arising out of Merchant's use or
possession of HAPS, including any use or possession by
Merchant's employees, agents, representatives, officers or
directors to the extent not caused by the gross negligence of
Household.
vi. Household shall have no liability or responsibility to
Merchant, its employees, agents, representatives, officers,
or directors or any other person or entity with respect to
any liability, loss or damage caused or alleged to be caused
directly or indirectly by HAPS, its use or operation.
HOUSEHOLD MAKES NO WARRANTIES EITHER EXPRESS OR IMPLIED AS TO
HAPS INCLUDING ALL IMPLIED WARRANTIES OF MERCHANTABILITY AND
FITNESS FOR A PARTICULAR PURPOSE. HOUSEHOLD SHALL NOT BE
RESPONSIBLE FOR ANY INTERRUPTION OF SERVICE, LOSS OF BUSINESS,
ANTICIPATORY PROFITS, INCIDENTAL, SPECIAL OR CONSEQUENTIAL
DAMAGES OCCURRING OUT OF OR IN CONNECTION WITH THE USE OR
PERFORMANCE OF HAPS.
vii. Merchant shall not transfer, sell, assign, encumber, or
pledge HAPS and any such purported transfer, sale,
assignment, encumbrance or pledge shall be null and void.
(g) Termination. In the event this Agreement is terminated, the
license granted under this Section 7 shall automatically
terminate. Upon termination of this Agreement and at the request
of Household, Merchant will (i) return HAPS and all materials
including books and manuals and any copies thereof relating to
HAPS to Household and will certify in writing that HAPS has been
permanently eliminated from Merchant's computer equipment and
that no copies exist, and (ii) promptly return to Household all
software, Terminals and equipment in the same condition as
received, except for normal wear and tear.
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(h) Survival. The terms and provisions of this Section shall survive
the termination of this Agreement.
Section 8. Endorsement. Merchant agrees that Merchant shall be deemed to have
endorsed any Sales Slip, Credit Slip, or Cardholder payments by check, money
order, or other instrument made payable to Merchant that a Cardholder presents
to Household in Household's favor, and Merchant hereby authorizes Household to
supply such necessary endorsements on behalf of Merchant.
Section 9. Prohibited Payments. Merchant agrees that Household has the
sole right to receive payments on any accepted Sales Slip as long as:
(a) Household has paid Merchant the Sales Slip amount; or
(b) Household has not charged such Sales Slip back to Merchant
hereunder.
Unless specifically authorized in writing by Household,
Merchant agrees not to make any collections on any such Sales
Slip. Merchant agrees to hold in trust for Household any
payment received by Merchant of all or part of the amount of
any accepted Sales Slip and to deliver promptly the same in
kind to Household within five (5) days of receipt by Merchant,
together with the Cardholder's name, Account number, and any
correspondence accompanying the payment. Notwithstanding the
foregoing, Merchant, at its cost, may provide to Cardholders
seeking to make in-store payments, a stamped envelope,
addressed to Household's payment center to enable the
Cardholder to mail his/her payment to Household.
Section 10. Financial Information. Household may annually review the
financial stability of Merchant. To assist Household in doing this, Merchant
shall deliver to Household no later than 120 days after the end of each fiscal
year, an audited financial statement and supporting materials with sufficient
detail to accurately portray the financial condition of Merchant, including
10-Ks, 10-Qs and 8-Ks as such reports are filed with the Securities and
Exchange Commission and press releases as issued from time to time. Merchant
warrants and represents that any financial statement or other information
submitted to Household by Merchant is true and accurate as of the date on the
document and as of the date submitted. Merchant understands that Household may
verify the information on any financial statement or other information provided
by Merchant and, from time to time, may seek credit, financial and other
information concerning Merchant from others. Upon request by Merchant,
Household shall send to Merchant, an audited financial statement with
sufficient detail to accurately portray the financial condition of Household
International, Inc.
Section 11. Merchant Business Practices. Merchant agrees to provide adequate
services in connection with each Card Sale pursuant to standard customs and
trade practices and any applicable manufacturer's warranties, and to provide
such repairs, service and replacements and take such other corrective action as
may be required by law.
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Section 12. Cardholder Account Information. Merchant shall not sell,
purchase, provide, or exchange Account number information in the form of
imprinted Sales Slips, carbon copies of imprinted Sales Slips, Cardholder
mailing lists, tapes or other media obtained by reason of a Card transaction to
any third party other than to Merchant's agents for the purpose of assisting
Merchant in its business with Household or pursuant to a government request.
Section 13. Change in Ownership. Merchant agrees to send Household at least
thirty (30) days prior written notice of any change in Merchant's name or
location, any material change in ownership of Merchant's business or any change
in Sales Slip or Credit Slip information concerning Merchant.
Section 14. Indemnification.
(a)
Indemnification by Merchant. Merchant shall be liable to and
shall indemnify and hold harmless Household and its Affiliates
and their respective officers, employees, agents and directors
from any losses, damages, claims or complaints incurred by
Household or any Affiliate of Household or their respective
officers, employees, agents and directors arising out of: (i)
Merchant's failure to comply with this Agreement; (ii) any
claim, dispute, complaint or setoff made by a Cardholder or
applicant with respect to anything done or not done by Merchant
in connection with Card Sales or credits; (iii) anything done or
not done by Merchant in connection with the furnishing of any
goods, warranties or services purchased by Cardholders; (iv) the
death or injury to any person or the loss, destruction or damage
to any property arising out of the design, manufacture or
furnishing by Merchant of any goods, warranties or services
purchased by Cardholders; (v) any claim or complaint of a third
party in connection with Merchant's advertisements and
promotions relating to the Card unless Merchant's advertisements
and promotions are materials supplied by Household and are used
by Merchant without alteration; (vi) any illegal or improper
conduct of Merchant or its employees or agents; and (vii) any
claim or complaint by a consumer that Merchant has violated the
Equal Credit Opportunity Act, Truth in Lending Act, or any other
act and related Applicable Laws. Household may deduct any
amounts incurred by Household under this Section from amounts
owed Merchant under this Agreement.
(b)
Indemnification by Household. Household shall be liable to and
shall indemnify and hold harmless Merchant and its officers,
employees, and directors from any losses, damages, claims, or
complaints incurred by Merchant or its officers, employees and
directors arising out of any claim or complaint by a Cardholder
or applicant with respect to anything wrongfully done or not
done by Household in connection with such Cardholder's Account
or applicants application with
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respect to any advertisements or promotions relating to the
Card that are specifically approved in writing by Household.
Notwithstanding the foregoing, the indemnification by Household
shall not apply to any claim or complaint relating to the
failure of Merchant to resolve a billing inquiry or dispute with
a Cardholder relating to Merchant's actions or omissions.
(c) Notice of Claim. In the event that Household or Merchant shall
receive any claim or demand or be subject to any suit or
proceeding of which a claim may be made against the other under
this Section, the indemnified party shall give prompt written
notice thereof to the indemnifying party and the indemnifying
party will be entitled to participate in the settlement or
defense thereof with counsel satisfactory to indemnified party
at the indemnifying party's expense. In any case, the
indemnifying party and the indemnified party shall cooperate (at
no cost to the indemnified party) in the settlement or defense
of any such claim, demand, suit, or proceeding.
(d) Survival. The terms of this Section 14 shall survive the
termination of this Agreement.
Section 15. Inspection. Employees of each of Merchant and Household may
examine during normal business hours at each other's respective offices,
certain documents, books, records or operations of the other that concern only
the Accounts, Chargebacks and funding of Sales Slips with respect to Card Sales
of Merchant only, subject to the limitations in Section 6 d..
Section 16. Term and Termination.
(a) Term. This Agreement shall be effective as of the Effective
Date when executed by authorized officers of each of the
parties and shall remain in effect for four (4) years
("Initial Term"). Thereafter, this Agreement shall be
automatically renewed for successive one year terms (the
"Renewal Term(s)") unless and until terminated as provided
herein. The termination of this Agreement shall not affect the
rights and obligations of the parties with respect to
transactions and occurrences which take place prior to the
effective date of termination, except as otherwise provided
herein.
(b) Termination. This Agreement may be terminated:
(i) by Household or Merchant upon not less than one
hundred eighty (180) days notice to the other
prior to the end of the Initial Term or the end of
each Renewal Term.
(ii) by Household or Merchant immediately upon notice
to the other in the event either party (i) shall
elect to wind up or dissolve its operation or is
wound up and dissolved;
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becomes insolvent or repeatedly fails to pay
its debts as they become due; makes an assignment
for the benefit of creditors; files a voluntary
petition in bankruptcy, or for reorganization or
is adjudicated as bankrupt or insolvent; or has a
liquidator or trustee appointed over its affairs,
or (ii) materially breaches its obligations or
any warranty or representation under this
Agreement.
(iii) by Household upon not less than one hundred eighty
(180) days notice if Fretter, Inc. ceases to be a
publicly held company, or if there occurs a
material adverse change in the financial condition
of Merchant as determined by Household.
(iv) by Household upon not less than thirty (30) days
notice if Merchant suspends or goes out of
business or sends a notice of a proposed bulk sale
of all or part of its business;
(v) by Household upon not less than sixty (60) days
notice, if in Household's judgment as verified by
an attorney's opinion, any Applicable Law
requires that this Agreement or either party's
rights or obligations hereunder or under the
Cardholder application/agreement be amended,
modified, waived or suspended in any respect,
including, without limitation, any Applicable Law
that affects the amount of finance charges,
charges or fees that may be charged or collected
or the Consumer Rate that may be charged on
purchases with the Card.
(vi) by Household if the Total Annual Credit Volume
falls below $110,000,000.00.
(vii) by Merchant upon not less than sixty (60) days
notice, if in Merchant's judgment as verified by
an attorney's opinion, any Applicable Law
requires that this Agreement or either party's
rights or obligations hereunder or under the
Cardholder application/agreement be amended,
modified, waived or suspended in any respect,
including, without limitation, any Applicable Law
that affects the amount of finance charges,
charges or fees that may be charged or collected
or the Consumer Rate that may be charged on
purchases with the Card and therefore
significantly alters the Merchant's liability for
payments to Household under Section 3(c) of this
Agreement.
(c) This Subsection Was Intentionally Left Blank.
(d) Duties and Rights Upon Termination. Upon termination of
this Agreement, Merchant will promptly submit to Household
all Card Sales, credit and other data made through the date
of termination. Upon termination, and if requested by
Merchant, Household, at its option, may continue to accept
(but Household has no obligation to do so) new or additional
Card Sales to then existing Cardholders
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pursuant to terms and conditions designated by Household, in its sole
discretion, at such time.
(e) Purchase Requirements. The following are the Purchase
Requirements:
(i) If, at the expiration of the Initial Term, the parties decide
not to renew the Agreement, Merchant may purchase or arrange to
purchase by a third party, all outstanding Accounts, without
recourse to Household and without warranty or representation,
express or implied, by Household, not later than 60 days after
the effective date of expiration of this Agreement, at a price
(determined as of the most recent Billing Dates prior to the
transfer) equal to 100% of the face value of all of the
outstanding Accounts, plus accrued and unbilled finance charges
and other amounts owed under the Cardholder agreements pursuant
to such terms and conditions as are reasonably acceptable to
Household; provided, however, if the purchase(s) is made as of
each Billing Cycle Date no accrued and unbilled finance charge
shall be applicable.
(ii) Merchant shall have an option to terminate the Agreement after
three (3) years have elapsed since the Effective Date but before
the end of the Initial Term provided Merchant gives Household at
least one hundred eighty (180) days written notice prior to
Termination. Merchant may purchase or arrange to purchase by a
third party, all outstanding Accounts, without recourse to
Household and without warranty or representation, express or
implied, by Household, not later than 60 days after the
effective date of termination of this Agreement, at a price
(determined as of the most recent Billing Dates prior to the
transfer) equal to 102% of the face value of all of the
outstanding Accounts, plus accrued and unbilled finance charges
and other amounts owed under the Cardholder agreements pursuant
to such terms and conditions as are reasonably acceptable to
Household; provided, however, if the purchase(s) is made as of
each Billing Cycle Date no accrued and unbilled finance charge
shall be applicable.
After the delivery of the termination notice, but by the end of
said sixty (60) day period, Household will allow such purchaser to
perform normal, customary and reasonable due diligence concerning such
purchase during the business hours of 9 a.m. through 5 p.m. Central
Standard time on Business Days; provided that Household is in receipt
of a confidentiality agreement reasonably acceptable to Household
executed by Merchant and any proposed purchaser. After said 60 days,
Merchant shall have no right to purchase the Accounts or any other
right or interest whatsoever concerning the Accounts, and Household
may sell the Accounts and the Cardholder names and addresses to any
third party except to competitors of
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Merchant that sell consumer electronics and appliances of the type
sold by Merchant, and the products or services of other merchants may
be marketed and sold to Cardholders.
The Parties agree Merchant must, at the same time and under the
same conditions, purchase all outstanding Accounts owned by Household
Retail Services, Inc., which are the subject of the Merchant Agreement
dated as of the 1st of March, 1994 between Household Retail Services,
Inc. and Merchant as amended from time to time ("Retail Portfolio").
Notwithstanding anything in this Agreement to the contrary,
Household will not be required to sell the Accounts under any
conditions if the Total Annual Credit Volume falls below
$110,000,000.00.
Section 17. Status of the Parties. In performing their responsibilities
pursuant to this Agreement, Household and Merchant are in the position of
independent contractors, and in no circumstances shall either party be deemed
to be the agent or employee of the other. This Agreement is not intended to
create, nor does it create and shall not be construed to create, a relationship
of partner or joint venturer or an association for profit between Household and
Merchant. Any amounts ever owing by Merchant pursuant to this Agreement
represent contractual obligations only and are not a loan or debt.
Section 18. Force Majeure. Neither party to this Agreement shall be liable to
the other by reason of any failure in performance of this Agreement in
accordance with its terms if such failure arises out of a cause beyond the
control and without the fault or negligence of such party. Such causes may
include but are not limited to acts of God, acts of the public enemy or of
civil or military authority, unavailability of energy resources, fires,
strikes, riots or war. In the event of any force majeure occurrence, the
disabled party shall use its best efforts to meet its obligations as set forth
in this Agreement. The disabled party shall promptly advise the other party of
any developments (or changes therein) that appear likely to affect the ability
of that party to perform any of its obligations hereunder in whole or in part.
If Household is unable to approve applications or give Authorizations for more
than two (2) consecutive days or fund within the time period described in
Section 3 e. above, Merchant shall be entitled to obtain alternative consumer
financing from another provider. Household may then provide notice when it is
once again able to perform its obligations under this Agreement, and Merchant
shall thereupon reinstate its performance under this Agreement.
Section 19. Limited License. Merchant hereby authorizes Household for purposes
of this Agreement to use Merchant's name, logo, registered trademarks and
servicemarks (if any) and any other proprietary designations ("Proprietary
Materials") on the Cards, applications, periodic statements, billing
statements, collection letters or documents, promotional or advertising
materials and otherwise in connection with the Program, subject to Merchant's
periodic reasonable review of such use and to such reasonable
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specifications of Merchant. Merchant represents and warrants that it has
obtained appropriate federal and state trademark registrations to protect its
interest in the use and ownership of the Proprietary Materials. Merchant
shall, indemnify, defend and hold Household harmless from any loss, damage,
expense or liability arising from any claims of alleged infringement of the
Proprietary Materials (including attorneys' fees and costs). Merchant may not
use any name or service mark of Household or any of its Affiliates in any
manner without the prior written consent of Household, which consent may be
unreasonably withheld.
Section 20. Confidentiality/Additional Products and/or Services. Merchant
will keep confidential and not disclose to any person or entity (except to
employees, officers, partners or directors of Merchant who are engaged in the
implementation and execution of the Program) all information, software, systems
and data, that Merchant receives from Household or from any other source,
relating to the Program and matters which are subject to the terms of this
Agreement, including, but not limited to, Account information other than the
names and addresses of the Cardholders and purchases made, and shall use, or
cause to be used, such information solely for the purposes of the performance
of Merchant's obligations under the terms of this Agreement. Household will
not offer for sale to Cardholders merchandise, extended warranties or other
non-financial or non-insurance products or services currently sold by Merchant
without Merchant's consent. Household will keep confidential and not disclose
to any person or entity (except to employees, officers, agents or directors of
Household or any Affiliate) the names and addresses of Cardholders without
Merchant's permission. Notwithstanding the foregoing, Household and/or any of
its Affiliates may at any time, and without Merchant's consent, solicit
Cardholders for any additional credit cards or other types of accounts or
financial or insurance services or products offered by Household and/or any of
its Affiliates (provided the Affiliate is not a direct competitor of Merchant
in the consumer electronics and appliance industry), except merchandise sold by
direct competitors of Merchant in the consumer electronics and appliance
industry. Merchant understands that Household may be required or asked to
disclose certain information in connection with Household's asset
securitizations. The provisions of this Section shall survive the termination
of this Agreement, except as set forth in Section 16 (e) above.
Section 21. Notices. All notices required or permitted by this Agreement
shall be in writing and shall be sent to the respective parties (if to
Household, to the Attention of Paul A. Miller, President, with copies to the
Attention of, (i) General Counsel, Household Bank (Illinois), N.A. Law
Department and (ii) Major Account Executive; if to Merchant, to the Attention
of Chief Financial Officer of Fretter, Inc. (with a copy to the Attention of
the Secretary) at their respective addresses set forth on page one of this
Agreement or such other addresses as each party may designate to the other by
notice hereunder. Said notices shall be deemed to be received (i) upon three
(3) Business Days after deposit in the U.S. mail with postage prepaid, by
registered or certified mail, return receipt requested, (ii) upon personal
delivery, or (iii) upon receipt by telex, facsimile, or overnight/express
courier service or mail.
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Section 22. Amendments and Supplementary Documents. Household may amend this
Agreement upon ten (10) days' prior notice to Merchant if such modification is
required by any state or federal law, rule, regulation, governmental or
judicial order, opinion, interpretation or decision. Reference herein to "this
Agreement" shall include any schedules, exhibits, appendices, and amendments
hereto. Any amendment or modification to this Agreement must be in writing and
signed by a duly authorized officer of Household to be effective and binding
upon Household; no oral amendments or modifications shall be binding upon the
parties.
Section 23. Assignment. This Agreement is binding upon the parties and their
successors and assigns. Notwithstanding, Merchant may not assign this
Agreement without the prior written consent of Household; any purported
assignment without such consent shall be void. Household may without
Merchant's consent assign this Agreement or any of the rights or obligations
hereunder to any Affiliate of Household at any time. In the event of such
assignment, the assignee shall have the same rights and remedies as Household
under this Agreement.
Section 24. Credit Insurance. Merchant may include the sale of credit
insurance offered by Alexander Hamilton Life Insurance Company among the
products and services offered to consumers without payment of a service fee.
Any change in the underwriter and issuer of credit insurance is subject to
Household's prior written approval, which approval may be withheld or denied in
Household's sole discretion. Also, in such event, Household may assess a
service fee, in an amount to be then determined by Household, to compensate
Household for any servicing concerning the credit insurance that Household may
be requested to perform. Household and Merchant understand that credit
insurance and compensation and fees are regulated under applicable state law
and regulations. Household makes no representations or warranties with respect
to the availability of credit insurance on any Account(s) nor with respect to
any compensation or fees.
Section 25. Rights of Persons Not a Party. This Agreement shall not create
any rights on the part of any person or entity not a party hereto, whether as a
third party beneficiary or otherwise.
Section 26. Section Headings. The headings of the sections of this Agreement
are for reference only, are not a substantive part of this Agreement and are
not to be used to affect the validity, construction or interpretation of this
Agreement or any of its provisions.
Section 27. Integrations. This Agreement contains the entire agreement
between Household and Merchant, except as otherwise indicated in this
Agreement. There are merged herein all oral or written agreements,
understandings, amendments, letters and other communications, including,
without limitation, the Original Agreement, representations, promises and
conditions in connection with the subject matter hereof prior to the date this
agreement is executed by the parties. Any agreements, letters, understandings,
representations, warranties, promises or conditions not
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expressly incorporated herein shall not be binding on either party. All sales,
credit or other transactions described in the Original Agreement and all
existing Accounts and Card Sales (which terms are defined in the Original
Agreement) shall be governed by this Agreement.
Section 28. Governing Law/Severability. This Agreement shall be governed by
and construed in accordance with the laws of the State of Illinois. If any
provision of this Agreement is contrary to Applicable Law, such provision shall
be deemed ineffective without invalidating the remaining provisions hereof.
Section 29. Right to Cure. In the event this Agreement is materially breached
by Merchant or Household the party alleging such breach shall give written
notice to the other party as set forth in Section 21 setting forth the nature
of the Breach. Within ten (10) Business Days of such notice the party against
whom the breach is alleged shall respond with a proposed cure of the breach.
If acceptable, the cure shall be implemented within twenty (20) Business Days.
If this proposed cure of the breach is not acceptable to the party alleging the
breach the party against whom the breach is alleged shall have thirty (30) days
to cure the breach and if the breach remains uncured the parties may proceed
under such remedies as the Agreement allows.
Section 30. Execution in Counterparts. This Agreement may be executed in
counterparts and shall be effective upon receipt of Household of one or more
counterparts hereof, duly executed by Fretter and Silo and execution by
Household.
Section 31. Drafting of Agreement. Both Household and Merchant were
represented by counsel in drafting and negotiating this Agreement. Both
parties are equally responsible for the language used and neither shall be
considered the primary drafter of any provision of this Agreement.
SECTION 29. WAIVER OF JURY TRIAL. HOUSEHOLD AND MERCHANT HEREBY KNOWINGLY,
VOLUNTARILY AND INTENTIONALLY WAIVE ANY RIGHT TO A TRIAL BY JURY IN ANY ACTION,
SUIT, PROCEEDING OR COUNTERCLAIM CONCERNING ANY RIGHTS UNDER THIS AGREEMENT,
ANY RELATED DOCUMENT OR UNDER ANY OTHER DOCUMENT OR AGREEMENT DELIVERED OR
WHICH MAY IN THE FUTURE BE DELIVERED IN CONNECTION HEREWITH OR THEREWITH, OR
ARISING FROM ANY RELATIONSHIP EXISTING IN CONNECTION WITH THIS AGREEMENT, AND
AGREE THAT ANY SUCH ACTION, PROCEEDING, SUIT, OR COUNTERCLAIM SHALL BE TRIED
BEFORE A COURT AND NOT BEFORE A JURY; THIS PROVISION IS A MATERIAL INDUCEMENT
FOR HOUSEHOLD AND MERCHANT ENTERING INTO THIS AGREEMENT.
SECTION 32. JURISDICTION. ANY ACTION, SUIT, COUNTERCLAIM OR PROCEEDING
ARISING OUT OF OR RELATING TO THIS AGREEMENT MUST BE BROUGHT SOLELY IN THE
COURTS OF THE STATE OF ILLINOIS OR MICHIGAN OR THE UNITED STATES DISTRICT
COURTS FOR THE EASTERN DISTRICT OF MICHIGAN OR FOR THE NORTHERN DISTRICT OF
ILLINOIS; AND MERCHANT HEREBY IRREVOCABLY SUBMITS TO THE EXCLUSIVE
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JURISDICTION OF SUCH COURTS AND ANY APPELLATE COURTS THEREOF FOR THE PURPOSE OF
ANY SUCH SUIT, COUNTERCLAIM, ACTION, PROCEEDING OR JUDGMENT (IT BEING
UNDERSTOOD THAT SUCH CONSENT TO THE EXCLUSIVE JURISDICTION OF SUCH COURTS
WAIVES ANY RIGHT TO SUBMIT ANY DISPUTES HEREUNDER TO ANY COURTS OTHER THAN
THOSE ABOVE). SERVICE OF FRETTER, INC. SHALL BE SUFFICIENT SERVICE OF SILO,
INC. AND AFFILIATES OF FRETTER, INC. NOTHING HEREIN CONTAINED SHALL PRECLUDE
HOUSEHOLD FROM BRINGING AN ACTION OR PROCEEDING RELATED TO THIS AGREEMENT IN
ANY OTHER STATE OR PLACE HAVING JURISDICTION OVER SUCH ACTION.
IN WITNESS WHEREOF, Household and Merchant have caused their duly authorized
representatives to execute this Agreement as of the date set forth above.
HOUSEHOLD BANK (ILLINOIS), N.A. ATTESTED OR WITNESSED:
By:_______________________________ By:__________________________
Name:_____________________________ Name:________________________
Title:____________________________ Title:_______________________
FRETTER INC. ATTESTED OR WITNESSED:
By:_______________________________ By:__________________________
Name:_____________________________ Name:________________________
Title:____________________________ Title:_______________________
SILO, INC. ATTESTED OR WITNESSED:
By:________________________________ By:__________________________
Name:______________________________ Name:________________________
Title:_____________________________ Title:_______________________
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<PAGE> 1
EXHIBIT 10.35
MERCHANT AGREEMENT
HOUSEHOLD: Household Retail Services, Inc. MERCHANT: Silo,Inc.
700 Wood Dale Road a Pennsylvania
Wood Dale, Illinois 60191 corporation
Fretter, Inc., a
Michigan corporation
This Agreement ("Agreement") is made and delivered in Illinois as of the 1st
day of March, 1994 ("Effective Date"), by and between Household Retail
Services, Inc. (herein "Household") and Silo, Inc., a Pennsylvania corporation,
doing business in certain locations under the name "YES! Your Electronics
Superstore" and Fretter, Inc., a Michigan corporation, with principal offices
at 12501 Grand River, Brighton, Michigan, 48116, (herein individually and
collectively referred to as "Merchant").
In consideration of the mutual promises, covenants and agreements set forth
herein and for other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, Merchant and Household agree as
follows:
If either Silo, Inc. or Fretter, Inc. fails to fulfill any of its obligations
under this Agreement, the remaining Merchant agrees to perform any act
necessary to fulfill the obligations of the defaulting Merchant including the
payment of any and all obligations, sums, debts or liabilities of the
defaulting Merchant arising out of or in connection with the performance or non
performance of any obligations under this Agreement. Both Silo, Inc. and
Fretter, Inc. agree to be jointly and severally liable for affiliates of
Fretter, Inc. participating in the Program including Fred Schmid TV and
Appliance Company, Silo-Dixon, Inc. and Silo California, Inc. Silo, Inc. and
Fretter, Inc. agree that Household may, at its option, deal solely with
Fretter, Inc. and Silo shall be bound by all such dealings.
Section 1. Definitions. In addition to the words and phrases defined
elsewhere in this Agreement, the following words and phrases shall have the
following meanings:
a. "Account" means an account resulting from Household's approval of an
application and under which one or more Cards will be issued by
Household, including all Accounts (as such term is defined in the
original Agreement (hereafter defined)) opened during the term of the
Original Agreement. Each Account shall be deemed to be the property
of Household.
b. "Active Account" means any Cardholder's Account that has a debit or
credit balance during a Billing Cycle, provided, however, any Account
which is ten months or more contractually delinquent shall not be
considered an active account.
c. "Add-on(s)" means any additional sale of Goods (after the initial Card
Sale) that Merchant makes to a Cardholder on credit that is charged to
the Cardholder's Account pursuant to this Agreement.
d. "Affiliate" means any entity that is owned by, owns or is under
common control with Household or its ultimate parent.
<PAGE> 2
e. "Annual Credit Volume" means the actual total of Card Sales minus
Credit Slips originated during the previous twelve (12) months and
will be determined on December 31, 1994. After December 31, 1994, the
Annual Credit Volume will be determined at the end of each quarter
based on the previous twelve months' credit volume.
f. "Applicable Law" means collectively or individually any applicable
law, rule, regulation or judicial, governmental or administrative
order, decree, ruling, opinion or interpretation.
g. "Authorization" means permission from Household to make a Card Sale.
h. "Authorization Center" means the facility designated by Household as
the facility at which Card Sales are authorized.
i. "Billing Cycle" means the period of calendar days between Billing
Dates, usually between twenty eight (28) and thirty one (31) days.
j. "Billing Date" means the same calendar day each month that all
activity on an Active Account for that Billing Cycle is summarized and
the Account is billed by Household, which is the last day of a Billing
Cycle.
k. "Business Day" means any day except Saturday or Sunday or a day on
which banks are closed in the State of Illinois.
l. "Card" means the private label credit card bearing Merchant's name
and/or logo issued by Household for the Program.
m. "Cardholder" means (i) the person in whose name an Account is or has
been opened, and (ii) all authorized user(s) of the Account and Card,
including, all Cardholders that opened Accounts pursuant to the
Original Agreement.
n. "Card Sale" means any sale of Goods that Merchant makes to a
Cardholder on credit that is charged to the Cardholder's Account
pursuant to this Agreement, including Add-ons.
o. "Computer Generated Invoice" means an invoice stored electronically
and containing the following information: Cardholder Name and
Address; Cardholder Account Number - 15 digits; Merchant Invoice
Number - 14 digits; Transaction Date/date of the Card Sale;
Transaction Amount; and description of item(s) purchased.
p. "Chargeback" means the return to Merchant and reimbursement to
Household of a Sales Slip or Transaction Data transmission for a Card
Sale for which Merchant was previously paid.
q. "Credit Slip" means evidence of a credit in a paper form for Goods
purchased from Merchant that is to be signed by the Cardholder.
r. "Discount" means an amount to be paid by Merchant, typically to be
deducted from funding to Merchant, in the amount of a specified
percentage of each Sales Slip accepted by Household.
s. "Goods" means the goods, merchandise, certain warranties authorized by
Household, and services sold by Merchant in the ordinary course of
Merchant's business to consumers, to the best of Merchant's knowledge
for individual, family, personal or household use.
t. "Major Account Executive" means an employee of Household assigned to
Merchant's Program as designated from time to time by notice from
Household to Merchant.
u. "No Finance Charge Promotion" means a Card Promotion as described in
Section 2(c) whereby no finance charges will accrue on the
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<PAGE> 3
purchase or advance until the payment due date of the Billing Cycle
beginning in the month specified on the Sales Slip, with minimum
monthly payments of three percent (3%) of the outstanding balance due
each Billing Cycle (also referred to as "Waived Finance Charge"). The
No Finance Charge Promotion may have a promotion period of twelve (12)
months or less after the purchase or such other period as agreed
between the parties;
v. "No Payment Promotion" means a Card Promotion as described in Section
2(c) whereby no minimum monthly payments will be due until the first
day of the Billing Cycle beginning in the month specified on the Sales
Slip, with finance charges accruing from the date of the purchase
(also referred to as "Delayed Payment"):
w. "No Payment/No Finance Charges Promotion" means a Card Promotion as
described in Section 2(c) whereby no minimum monthly payments will be
due and no Finance Charges will accrue on the purchase or advance
until the first day of the Billing Cycle beginning in the month
specified on the Sales Slip (also referred to as "Delayed
Payment/Waived Finance Charge");
x. "Operating Instructions" means the Regulatory Guidelines and operating
instructions and/or procedures designated by Household from time to
time concerning the Program.
y. "Program" means the private label credit card program associated with
Merchant whereby Accounts will be established and maintained, Cards
issued and Card Sales funded pursuant to the terms of this Agreement.
z. "Reduced Rate Promotion" means a Card Promotion as described in
Section 2(c) whereby a reduced rate finance charge will be applied to
the balance attributable to the purchase ("Reduced Rate Balance")
until the expiration of the reduced rate period or payment in full of
the Reduced Rate Balance, whichever occurs first, as disclosed on the
Sales Slip.
aa. "Sales Slip" means a sales receipt or similar document (such as a
delivery receipt or manual invoice) in paper form that evidences a
Card Sale for Goods purchased from Merchant that is to be signed by
the Cardholder.
bb. "Same As Cash With Payments Promotion" means a Card Promotion as
described in Section 2(c) whereby finance charges will accrue on the
purchase from the date of purchase and minimum monthly payments of
three percent (3%) of the outstanding balance will be due each Billing
Cycle. If the cash sale price of the purchase is paid by the
promotion due date as indicated on the periodic statement, no finance
charges will be due on the purchase. Same As Cash With Payments may
have a promotion due date of twelve (12) months or less after the
purchase or such other period as agreed between the parties (also
referred to as "Same As Cash");
cc. "Same As Cash/Without Payments Promotion" means a Card Promotion as
described in Section 2(c) whereby finance charges will accrue on the
purchase from the date of purchase but no minimum monthly payments
will be due prior to the promotion due date as indicated on the
periodic statement. If the cash sale price of the purchase is paid by
the promotion due date, no finance charges will be due
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on the purchase (also referred to as "Same As Cash/Delayed Payment");
dd. "Terminal" means an electronic terminal or computer capable of
communicating by means of an on-line or dial-up electronic link with
an Authorization Center.
ee. "Total Annual Credit Volume" shall mean the Annual Credit Volume as
defined in this Agreement plus the Annual Credit Volume as defined in
the Agreement between Merchant and Household Bank (Illinois), N.A. as
amended as of the 1st day of March, 1994. From the Effective Date of
this Agreement to December 31, 1994 the parties agree that for
purposes of the chart in Section 3(c) below, the Total Annual Credit
Volume shall be assumed to be $200,000,000.00.
ff. "Total Billed Finance Charge" shall be the sum of the finance charges
billed to all Cardholders on Accounts (excluding (i) accrued but
unbilled finance charges recorded on Card Promotions as described in
Section 2(c) below; and (ii) all fees including, but not limited to,
late payment fees, return check fees, over limit fees, if any,) each
Billing Cycle during a month minus (a) system adjustments for
corrections to an Account including, but not limited to, (i) regular
payment finance charge, (ii) store payment finance charge, (iii)
account adjustment finance charge, (iv) remove sale finance charge,
(vi) free period finance charge, (vii) same as cash adjustments;
multiplied by 60%; and (b) manual adjustments made by Household's
customer service department consistent with its general business
practices, (i) regular payment finance charge, (ii) store payment
finance charge, (iii) account adjustment finance charge, (iv) remove
sale finance charge, (vi) free period finance charge, (vii) same as
cash adjustments; multiplied by 60%; plus finance charges added to a
Cardholder's balance upon expiration of a Card Promotion without full
payment by the Cardholder of the promotional balance.
gg. "Total Portfolio Balance" shall mean the outstanding balances (after
system adjustments and manual adjustments as described in subparagraph
ff above) on all Active Accounts for a month's Billing Cycles
including, but not limited to, balances resulting from the initial
Card Sale for Accounts originated by an application mailed to
Household directly from the applicant; and any Sales Slip generated
pursuant to Card Promotions as described in Section 2(c) of the
Agreement.
hh. "Transaction Data" means Account and Cardholder identification and
transaction information with regard to (i) each Card Sale, namely, the
date and amount of the transaction as shown on the actual original
executed paper Sales Slip for the transaction, valid and correct
Account number for an Active Account, valid and correct Authorization
number, appropriate transaction identifier number identifying the
transaction as a Card Sale, any applicable promotion codes or
promotion identifier numbers, appropriate code describing the Goods,
and Merchant invoice number, and (ii) each return of Goods for credit
to the Account/Cardholder, namely, the
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date the credit is given, amount of credit, Account number, and
appropriate transaction identifier number identifying the transaction
as a credit; all of which data is required to be transmitted by
Merchant to Household in accordance with Section 7 (a) and (b) below.
Section 2. Scope and Purpose. Merchant engages in the sale of consumer
electronics and appliances and related products and services, and Merchant
desires to make financing available to consumers purchasing Goods from
Merchant. Household, in the business of providing revolving credit financing
pursuant to a credit card to individual consumers, has agreed to provide such
financing under the Program for individual qualified consumers purchasing
Merchant's Goods pursuant to the terms and conditions set forth in this
Agreement.
Household and Merchant have entered into that certain Merchant Agreement dated
as of the August 26, 1987 as amended from time to time (the "Original
Agreement"). Under the Original Agreement, Household made financing available
to qualified consumers purchasing Goods from Merchant pursuant to a private
label revolving credit card program as set forth in the Original Agreement.
Household and Merchant now desire and agree (i) that as of the Effective Date,
this Agreement shall govern all "Accounts" (as such term is used in the
Original Agreement and in this Agreement) established under the Original
Agreement and under this Agreement and all other matters described in the
Original Agreement, and (ii) to modify and restate their agreement and to
replace and supersede the Original Agreement and subsequent letters in their
entirety with this Agreement; provided, however, the Agreement between Fretter,
Inc. and Household Bank (Illinois), N.A. formerly known as HRSI, N.A. dated
December 10, 1990 and all riders, amendments and addenda, thereto is unaffected
by this Agreement. Likewise, the Agreement between Fretter, Inc. and Household
Retail Services, Inc. dated April 21, 1988 is unaffected.
a. Forms and Cards. Household will provide forms designated by Household
for use by Merchant in the Program, which documents may be changed
from time to time by Household; provided, however, no
applications/agreements will be supplied because it is the intent of
the parties that no new Accounts be opened under this Agreement and
that existing Accounts shall be eligible for Add-on(s). The design
and content of Cards and billing statements and the terms and
conditions of Accounts and applications/agreements shall be determined
by Household and are subject to change by Household from time to time.
However, the front art work of the plastic cards and the cover art
work on the applications/agreements and the design of such documents
are subject to Merchant's review and approval; said approval shall not
be unreasonably withheld. If Merchant does not approve a proposed
design, any changes that cause additional expense to Household shall
be paid by Merchant promptly. Merchant will be billed and shall pay
these charges monthly, or Household may deduct said charges from other
amounts owed to Merchant under this Agreement.
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b. Credit Review; Ownership of Accounts. All completed applications for
Accounts submitted to Household whether mailed, telephoned or
otherwise electronically transmitted will be processed and approved or
declined in accordance with Household's credit criteria and procedures
from time to time established by Household, with Household having and
retaining all rights to reject or accept applications. Household will
only accept applications for revolving credit pursuant to the credit
card it issues for individual, personal, family or household use.
Household or its Affiliates shall own the Accounts and shall bear the
credit risk for such Accounts, except as otherwise provided in this
Agreement. Merchant acknowledges and agrees that it shall have no
interest whatsoever in the Accounts. However, Household acknowledges
(i) Merchant's interest in Sales Slips that are charged back to
Merchant pursuant to Section 6, provided, however, that Merchant has
reimbursed Household the applicable amount of the Chargeback as
described in Section 6 below and (ii) Merchant's interest in its
customer lists generated by Merchant. Household shall not be
obligated to accept or reject any application for an Account or to
take any action under an Account, including making future advances to
Cardholders. Household shall, however, provide collection and
customer service for Accounts that are not subject to Chargeback in
accordance with Household's normal and customary practices. Household
shall not be obligated to accept applications for a Card or approve
any Card Sale for consumers that do not have their principal residence
and billing address in the continental United States.
Household agrees it will not change its credit issuance criteria which
includes score card changes in a manner to negatively impact
Merchant's specific approval percentages during the term of this
Agreement and successive Renewal Terms. Household, however, reserves
the right to change its credit issuance criteria, which includes score
cards on all "like" merchants, which may include Merchant on a
national or regionalized basis during the Initial Term and successive
Renewal Terms.
bb. Request for Mail-in Applications. All provisions of this Agreement
concerning mail-in applications shall not be effective unless and
until Merchant gives written notice to Household requesting that
Household accept mail-in applications and Household notifies Merchant
that it is prepared to accept mail-in applications. In such event,
with respect to applications mailed to Household directly from
applicants, a hold shall be placed on the Account until the first Card
Sale. At the time of the initial Card Sale for such Accounts,
Merchant shall be responsible to verify the identification of the
Cardholder as set forth below in Section 4(g).
c. Card Promotions. Household may from time to time offer to existing or
potential Cardholders special credit promotions, additional
6
<PAGE> 7
services and/or enhancements, including, without limitation, check
access. The terms of such promotions, services and enhancements shall
be designated by Household. In addition, Household and Merchant may
mutually agree from time to time to run certain credit promotions such
as No Payment Promotion; No Finance Charge Promotion; No Payment/No
Finance Charges Promotion; Same As Cash With Payments Promotion; Same
As Cash/Without Payments Promotion; and Reduced Rate Promotion. In
consideration of Household's providing such promotions and to
compensate Household for such promotions, Merchant may be required to
pay to Household certain Discounts, fees or other amounts (the
"Promotion Fees"). The parties shall agree in writing to the amount,
type and time of payment of the Promotion Fees prior to the start of
any such promotions. This may include a written notice from Household
to Merchant designating the amounts, type and time of payment and
other terms for promotions run by Merchant and Household after such
notice. Merchant's running of any promotions after such notice shall
be deemed acceptance by Merchant of the terms described in said
notice. Merchant's obligation to pay the Promotion Fees shall survive
the termination of this Agreement. Household may deduct amounts owed
to it under this Section from amounts owed to Merchant under this
Agreement. In the event there are insufficient funds to pay to
Household the Promotion Fees, Merchant will pay the Promotion Fees to
Household within five (5) Business Days of Household's request.
Household may, without Merchant's consent, at any time and in its sole
discretion, change the terms or cost, or discontinue the availability
of any promotions, services or enhancements, except if the promotion
was agreed to between Merchant and Household. In such event it can
only be changed or discontinued upon the mutual agreement of the
parties. In the event Merchant intends to run a promotion concerning
or involving the Card, Card Sales or the Program it shall give
Household not less than (ten) 10 days prior written notice of any such
intended promotions. Any promotions concerning or involving the Card,
Card Sales or the Program that Merchant expects to run are subject to
Household's prior approval other than a No Finance Charge Promotion
and Same As Cash With Payments Promotion. Merchant and Household
agree that no Promotion Fees are associated with the No Finance Charge
Promotion and the Same As Cash With Payments Promotion as defined in
this Agreement. The payment of advertising and marketing costs
concerning the Program shall be subject to the mutual agreement of
Household and Merchant on a case by case basis.
Section 3. Fees, Discounts, Charges and Rates.
a. Consumer Rate. The consumer rate to be charged on purchases with the
Card shall be Household's established rate as assessed and determined
by Household from time to time, provided such rate shall not in any
event exceed the maximum rate permitted by applicable federal or state
law. This rate is subject to change from time to time as mutually
agreed to by Merchant and Household. Household agrees to consider a
reduction in said Consumer Rate if requested
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<PAGE> 8
by Merchant, however, Merchant acknowledges that components of the
pricing under this Agreement include, without limitation, the Consumer
Rate, Discount and Merchant Participation Fee, and that in the event,
Merchant desires a reduction in the Consumer Rate described above, a
Discount would need to be assessed and/or the Merchant Participation
Fee would need to be decreased and/or other elements of the pricing
structure of this Agreement and the Program would need to be adjusted.
Notwithstanding anything to the contrary in this Agreement, Household
may charge and collect such Cardholder fees as late payment fees,
returned check fees, and over-the-limit fees at its sole discretion
provided such fees shall not in any event exceed the maximum fees
permitted by applicable federal or state law. Classification of fees
in the Cardholder Agreement as interest shall not affect the
provisions of this Agreement or change the definition of finance
charge which shall be the Consumer Rate of 22.6% or such other
Consumer Rate as agreed upon by Household and Merchant.
b. Merchant. (THIS SECTION IS INTENTIONALLY LEFT BLANK)
c. Merchant Participation Fee. The "Merchant Participation Fee" to be
paid by Household to Merchant or by Merchant to Household shall be
calculated as follows:
At the end of each month the Required Yield shall be compared to the
Total Billed Finance Charges as determined by the formula set forth in
Schedule B. In any month the Total Billed Finance Charge exceeds the
Required Yield, the excess shall be credited to the Merchant. In any
month the Required Yield exceeds the Billed Finance Charge the
difference shall be charged to the Merchant.
During the initial period between the Effective Date of this Agreement
and the first Tuesday of the month following the Effective Date, the
Required Yield percentage on this portfolio shall be 13.50%.
Thereafter, the Required Yield Percentage shall vary monthly according
to the Total Annual Credit Volume as set forth in the chart below.
Also the Required Yield Percentage will vary monthly according to the
Commercial Paper Rates for high grade unsecured notes of 30 days sold
through dealers by major corporations ("Commercial Rate") as published
in the Wall Street Journal on the first Tuesday of the month (or the
first business day thereafter which the Commercial Rate is published)
plus the percentage reflected on the chart below; provided, however,
the Required Yield Percentage will never drop below 13.50%.
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<PAGE> 9
<TABLE>
<CAPTION>
Total Annual Credit Volume Required Yield Percentage
-------------------------- -------------------------
<S> <C>
$200 Million and Over Commercial Rate plus 10.40%
$170 - But less than $200 Million Commercial Rate plus 10.55%
$150 - But less than $170 Million Commercial Rate plus 10.70%
$130 - But less than $150 Million Commercial Rate plus 11.05%
$110 - But less than $130 Million Commercial Rate plus 11.45%
$0 - But less than $110 Million Commercial Rate plus 12.00%
</TABLE>
To assist Merchant and Household in monitoring the Total Billed Finance
Charge and the Required Yield, Household shall provide to Merchant, on a
monthly basis, the reports set forth in Schedule C. If Merchant requires
reports not listed on Schedule C, and if Household agrees to provide such
reports, Merchant may be charged for such reports.
d. Right of Setoff. All fees, Discounts and charges described in this
Agreement may be deducted by Household from amounts owed to Merchant
under this Agreement. In the event Merchant owes Household money
under this Agreement, Merchant may set off amounts owed by Household
to Merchant under this Agreement.
e. Acceptance, Offset & Funding. Provided that Merchant, with respect to
each Card Sale, has (i) requested and obtained from Household's
Authorization Center proper Authorization as required by Section 4(h)
(ii) below and the Transaction Data for such Card Sale is presented to
Household for payment within sixty (60) days after the date of
Authorization, and (ii) transmitted to Household all of the
Transaction Data described in Section 1. hh. above for each valid Card
Sale, Household agrees to pay Merchant the amount of each such
authorized and valid Card Sale Transaction Data so transmitted to
Household during the term of this Agreement less the amounts described
below. Household will use its best efforts to make such payments on
the first Business Day after receipt, verification and processing by
Household of the transmission of the Transaction Data, if such
transmission is received by noon Central Standard time; if received
later than noon Central Standard time, then on the second Business Day
after said transmission, but in no event shall such payments be made
later than the fourth Business Day after receipt of said transmission
by Household. Such failure to fund is a material breach of this
Agreement. Household may deduct from such payments (i) the amount of
the fees, charges, and Discounts described above in this Section 3;
(ii) the amounts for Chargebacks as permitted and described in Section
6 below; (iii) customer credits, Merchant Participation Fees to be
refunded to Household, and any other amounts owed to Household under
this Agreement by Merchant; and (iv) the amount of fees, charges and
other amounts owed by Merchant to Household Bank (Illinois), N.A. (an
Affiliate of Household), under separate Merchant Agreement and other
agreements between Merchant and Household Retail Services, Inc.
Household may also offset said amounts from future amounts owed to
Merchant under this Agreement.
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<PAGE> 10
Any amounts owed by Merchant to Household which cannot be paid by the
aforesaid means shall be due and payable by Merchant on written
demand. Any payment made by Household to Merchant or any amounts
deducted by Household shall not be final but shall be subject to
subsequent review and verification by Household and Merchant, subject
to the terms of Section 6 b. below, and subsequent fundings may be
adjusted or Merchant billed.
Household's liability to Merchant with respect to the funding of any
Card transaction shall not exceed the amount on the Sales Slip or
Credit Slip or in the Transaction Data in connection with such
transaction. In no event shall Household be liable for any incidental
or consequential damages.
Payments/funding by Household to Merchant shall be through the
Automated Clearinghouse Network (ACH) to Merchant's account as
designated by Merchant. The Merchant Participation Fee, less monthly
charges owing to Household, shall be paid monthly.
Section 4. Merchant Responsibilities Concerning Consumer Transactions.
Merchant covenants and agrees that it shall:
(a) honor all valid Cards without discrimination, when properly presented
by Cardholders for payment of Goods.
(b) not require, through an increase in price or otherwise, any Cardholder
to pay any surcharge at the time of sale or pay any part of any charge
imposed by Household on Merchant.
(c) not establish minimum or maximum charge amounts without Household's
prior written approval.
(d) prominently display at each of its locations, advertising and
promotional materials relating to the Card, including without
limitation for take-one applications for the card and use or display
such materials as mutually agreed upon by the parties. Such materials
shall be used only for the purpose of soliciting Accounts for the
Program. Any solicitation, written material, advertising or the like
relating to the Program or Card Sales or the products offered pursuant
to the Program shall be prepared or furnished by Household or shall
receive Household's prior written approval. The payment of
advertising and marketing costs concerning the Program shall be
subject to the mutual agreement of Household and Merchant on a case by
case basis. However, if Household prepares or furnishes advertising
or promotional materials, at Merchant's request, then Merchant shall
pay Household for such advertising or promotional materials, an amount
mutually agreed to by the parties. Further, any advertising or
promotional materials prepared or furnished by Merchant, shall be at
Merchant's cost. Any such materials shall not be used by Merchant
following termination of this Agreement.
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<PAGE> 11
(e) Use only the form of, or modes of transmission for, application/
agreements, Sales Slips and Credit Slips as are provided by Household,
subject to Section 2a. above and Section 7(a) below, and not use any
application/agreements, Sales Slips and Credit Slips provided by
Household other than in connection with a Card transaction.
(f) With respect to Sales Slips:
(i) enter legibly on a single Sales Slip prior to obtaining the
Cardholder's signature (1) a separate description of each item
of Goods purchased in the same transaction in detail sufficient
to clearly identify each item of Goods; (2) the date of the
transaction; (3) the Authorization number; (4) the Cardholder's
name and Account number; (5) the entire amount due for the
transaction (including any applicable taxes); and (6) if
applicable, the type of promotion(s) and the applicable
disclosures required by any Applicable Law for such promotion(s),
and obtain the Cardholder's signature on the Sales Slip.
(ii) REQUEST AUTHORIZATION FROM HOUSEHOLD'S AUTHORIZATION CENTER
UNDER ALL CIRCUMSTANCES. (Household may refuse to accept or
fund any Transaction Data concerning a Card Sale that is
presented to Household for payment more than sixty (60) days
after the date of Authorization of the Card Sale. However,
(a) if Merchant subsequently seeks and obtains a valid
Authorization number, the Transaction Data may be
resubmitted, or (b) if Merchant delivers to Household within
thirty (30) days of Household's refusal satisfactory evidence
that the Transaction Data concerning the Card Sale was, in
fact, transmitted to Household within the said sixty (60)
days Household will fund the Transaction Data in accordance
with Section 3. e. above).
If Authorization is granted, legibly enter the Authorization
number in the designated area on the Sales Slip. If
Authorization is denied, Merchant shall not complete the
transaction and Merchant shall follow any instructions from
the Authorization Center. Merchant shall use its best
efforts, by reasonable and peaceful means, to retain or
recover a Card:
(a) if Merchant is advised to retain the Card in
response to an Authorization request (if Merchant
does so, then the individual store employee shall be
entitled to receive a so-called "Fraud Recovery
Award" of $25.00 to be paid by Household); or
(b) if Merchant has reasonable grounds to believe that
the Card is counterfeit, fraudulent, or stolen.
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<PAGE> 12
The obligation to retain or recover a Card imposed
by this Section does not authorize a breach of the
peace or any injury to persons or property, and
Merchant will hold Household harmless from any claim
arising from any injury to person or property or
other breach of the peace;
If identification is uncertain or if Merchant otherwise
questions the validity of the Card, contact Household's
Authorization Center for instructions. If no Card is
available, then contact Household's Authorization Center
and comply with Household's additional instructions.
(iii) Merchant shall be deemed to warrant the Cardholder's true
identity as an authorized user of the Card, and Merchant
shall verify the Cardholder's identity. However, if Merchant
satisfies the provisions of Section 4(f)(i), Section 4(f)(ii)
to the extent that Merchant obtains Authorization from
Household's Authorization Center and a valid Authorization
number is correctly and legibly entered on the Sales Slip,
and if Merchant's verification of the Cardholder's identity
includes the following, any Sales Slip subject to Chargeback
because of this customer's fraud shall not be charged back to
Merchant:
(a) For Add-on Card Sales, satisfaction by Merchant of the
following:
1. Obtain the signature of the Cardholder on the
Sales Slip and swipe or imprint the embossed
legends legibly on the Sales Slip from the Card
and from Merchant's imprinter plate;
2. Compare the signature on the Sales Slip with
the signature on the Card and verify that the
signatures on the Card and Sales Slip match;
they must reasonably appear to match;
3. If no Card is presented and no swipe or imprint
of the Card is made on the Sales Slip, obtain
at least one unexpired piece of picture
identification from Group 1 on Schedule A and
note the type of identification and the
corresponding serial or other identification
number on the Sales Slip in the Special
Instructions section. Also, the physical
description and photograph on the piece of
identification must, in fact, reasonably appear
to match the individual Cardholder, and the
signature on the piece of identification must
reasonably appear to match the signature on the
Sales Slip; and
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<PAGE> 13
4. Maintain the said original executed paper Sales
Slip, as described in Section 7 below, and
deliver said documents to Household upon
request as described in Section 7 below.
(iv) For telephone orders (TO) or mail orders (MO), only if the
Sales Slip is completed without the Cardholder's signature,
Merchant shall, in addition to all other requirements under
this Section 4, enter legibly on the signature line of the
Sales Slip the letters "TO" or "MO", as appropriate, and not
deliver Goods or perform services after being advised that
the "TO" or "MO" has been canceled or that the Card is not to
be honored. Notwithstanding the foregoing, identification of
the Cardholder is the responsibility of Merchant for all
telephone and mail orders.
(v) not present the Transaction Data concerning the Sales Slip to
Household for funding until all Goods are delivered or all
the services are performed to the Cardholder's satisfaction.
However, Merchant may present the said Transaction Data
before said delivery or performance if the Goods are to be
delivered within ten days of the date of the Card Sale, and
the Goods are, in fact, delivered within said ten days,
provided that the Cardholder Agreement and Applicable Laws
permit both delivery and the charging of interest during said
ten (10) days. If the Goods are not delivered within said
ten (10) day period or Applicable Law or the Cardholder
agreement does not permit the charging of interest during
said ten (10) day period, Merchant shall pay to Household the
amount of interest on the Account from the date of the Card
Sale through the date of delivery of the Goods to the
Cardholder.
(vi) enter the Card Sale into Household's Terminal and, if
applicable, Household's approval code.
(vii) deliver a true and completed copy of the Sales Slip to the
Cardholder at the time of the Card Sale, and maintain the
original executed paper Sales Slip as described in Section 7
below, and deliver said Sales Slip to Household upon request
as described in Section 7 below.
(g) Credits
1. Credit Slips. If Merchant accepts any Goods for return, any
services are terminated or canceled, or Merchant allows any price
adjustment, then Merchant shall not make any cash refund, but
shall complete and deliver to the Cardholder a true and complete
copy of the Credit Slip evidencing the refund or adjustment at
the time the refund or adjustment is
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<PAGE> 14
made. Merchant shall sign and date each Credit Slip and include
thereon a brief description of the Goods returned, services
terminated or canceled, refund or adjustment made, Cardholder's
name and Account number and the date and amount of the credit,
all in sufficient detail to identify the transaction. The amount
of the Credit Slip cannot exceed the amount of the original
transaction as reflected on the Sales Slip and Transaction Data.
Merchant shall issue Credit Slips only in connection with
previous bona fide Card Sales and only as permitted hereunder.
2. Merchant shall immediately after a credit is given to a
Cardholder, transmit to Household, the Transaction Data for the
credit, and Merchant shall owe Household the amount of said
credit, which shall be paid to Household as set forth in Section
3 e., and maintain the said original executed Credit Slip as
described in Section 7 below, and deliver said Credit Slip to
Household upon request as described in Section 7 below.
(h) not receive any payments from a Cardholder for charges included on any
Sales Slip resulting from the use of any Card, nor receive any
payments from a Cardholder to prepare and present a Credit Slip for
the purpose of effecting a deposit to the Cardholder's Account.
(i) Cardholder Complaints. Merchant shall within three (3) days of
receipt provide Household with a copy of any written complaint from
any Cardholder concerning his/her account.
(j) satisfy all other requirements designated in any Operating
Instructions or as may be required from time to time by Household. In
the event there is any inconsistency between any Operating
Instructions and this Agreement, this Agreement shall govern. Any
Operating Instructions or changes thereto, except those required by
any Applicable Law, shall not trigger a unilateral material change to
this Agreement without Merchant's consent; which consent shall not be
unreasonably withheld. Merchant's compliance with any such
instructions or changes thereto or Merchant's failure to object to
same within thirty (30) days of receipt of same, shall be deemed to be
Merchant's consent to any such instructions or changes.
Section 5. Representations and Warranties.
A. Merchant represents and warrants to Household the following:
(a) that each Card Sale will arise out of a bona fide sale of Goods by
Merchant and will not involve the use of the Card for any other
purpose; and
(b) that to the best of Merchant's knowledge each Card Sale will be to a
consumer for personal, family, or household purposes; and
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<PAGE> 15
(c) that Cardholder applications will be available to the public without
regard to race, color, religion, national origin, sex, marital status,
or age (provided the applicant has the capacity to enter into a
binding contract) or in any manner which would discriminate against an
applicant or discourage an applicant from applying for the Card; and
(d) that it has full corporate power and authority to enter into this
Agreement; that all corporate action required under any organization
documents to make this Agreement binding and valid upon Merchant
according to its terms has been taken; and that this Agreement is and
will be binding, valid and enforceable upon Merchant according to its
terms; and
(e) neither (i) the execution, delivery and performance of this Agreement,
nor (ii) the consummation of the transactions contemplated hereby
will constitute a violation of law or a violation or default by
Merchant under its articles of incorporation, bylaws or any
organization documents, or any material agreement or contract and no
authorization of any governmental authority is required in connection
with the performance by Merchant of its obligations hereunder; and
(f) Merchant has all required licenses to perform it's obligations under
this Agreement, and will govern itself in accordance with all
Applicable Laws affecting the Program; and
B. Household represents and warrants to Merchant the following:
(a) that it has full corporate power and authority to enter into this
Agreement; that all corporate action required under any organization
documents to make this Agreement binding and valid upon Household
according to its terms has been taken; and that this Agreement is and
will be binding, valid and enforceable upon Household according to its
terms; and
(b) neither (i) the execution, delivery and performance of this
Agreement, nor (ii) the consummation of the transactions contemplated
hereby will constitute a violation of law or a violation or default by
Household under its articles of incorporation, bylaws or any
organization documents, or any material agreement or contract and no
authorization of any governmental authority is required in connection
with the performance by Household of its obligations hereunder; and
(c) Household has all required licenses to perform it's obligations
under this Agreement, and will govern itself in accordance with all
Applicable Laws affecting the Program.
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<PAGE> 16
Section 6. Chargebacks to Merchant. Merchant and Household agree that
notwithstanding anything in this Agreement to the contrary, the "Events of
Chargeback" described below are the only events that can trigger the Chargeback
remedy described below, and that the Chargeback remedy is subject to the
Chargeback procedures set forth below. Merchant and Household further agree as
follows:
a. Events of Chargeback and Procedures. Any Sales Slip or Transaction Data
transmission concerning a Card Sale or Account is subject to Chargeback
under any one of the following specified Events of Chargeback, subject to
the Chargeback procedures set forth below. Household and Merchant agree
that Merchant's failure to satisfy any other term or provision of this
Agreement, the breach of which is not identified as an Event of Chargeback
below, shall be deemed a breach of this Agreement and the Chargeback
remedy for such breaches shall not be available to Household. However,
Household may exercise all other remedies it may have against Merchant,
including without limitation, the right to terminate this Agreement as set
forth in Section 16 of this Agreement.
The Events of Chargeback and procedures for exercising Chargeback are as
follows:
(i) (THIS SECTION HAS BEEN INTENTIONALLY LEFT BLANK.)
(ii) Customer Dispute Chargeback. Subject to the procedures and
limitations below, Household may trigger a Chargeback if the
Cardholder, in accordance with Household's established customer
service procedures and within one year from the actual first
payment due date for the particular Card Sale, disputes the
delivery, quality or performance of the goods, services or
warranties purchased, disputes the Card Sale or Sales Slip,
alleges a billing error, duplicate charge or other problem or
matter not caused by Household, or alleges that a credit
adjustment was or should have been issued by Merchant but is not
posted to Cardholder's Account (a "Customer Dispute Chargeback
Event").
Within twenty one (21) days of Household's receipt of the
Cardholder's written notice of his/her contention that a Customer
Dispute Chargeback Event has occurred in accordance with
Household's established procedures, Household must provide
Merchant a Chargeback Notice specifically detailing the
circumstances of the Customer Dispute Chargeback Event (the
"Customer Dispute Chargeback Notice"). Household may not
implement a Chargeback under this subsection until expiration of
a twenty one (21) day period after delivery to Merchant of the
Customer Dispute Chargeback Notice (the "Customer Dispute Cure
Period").
During the Customer Dispute Cure Period, Merchant will use all
reasonable efforts to resolve the dispute specified in the
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<PAGE> 17
Customer Dispute Chargeback Notice. If, in Household's
reasonable judgment, Merchant is unable to provide Household
information indicating that the dispute has been resolved on or
before the expiration of the Customer Dispute Cure Period,
Household may then trigger a Chargeback for a particular Card
Sale (a "Customer Dispute Chargeback").
For each Customer Dispute Chargeback, Merchant shall pay to
Household the aggregate of the full amount of the Sales Slip/Card
Sale Transaction Data plus sixty percent (60%) of the finance
charges thereon for up to a maximum of six (6) Billing Cycles,
net of any payments made by the Cardholder.
(iii) Fraud Chargeback. Subject to the procedures and limitations
below, Household may trigger a Chargeback for any Card Sale for
which each of the following events occur:
(1) the Cardholder or other person in accordance with Household's
applicable fraud procedures, disputes or denies the authorization
or execution of the application or Sales Slip or otherwise
alleges a fraud;
(2) Household's Security Department completes an investigation of
the fraud alleged by Cardholder, such investigation to be
completed by Household in accordance with its applicable
procedures and internal guidelines for fraud investigations as
may be amended from time to time; and
(3) Household obtains and delivers to Merchant an affidavit or
certified death certificate to support the fraud assertions; or
(4) Household has determined that (a) Merchant did not fully
comply with fraud protection procedures set forth in Section
4(f), (b) the Card Sale is a telephone order or mail order, or
(c) the Card Sale, application, Sales Slip, credit slip or
Transaction Data is subject to a claim of illegality,
cancellation, rescission, avoidance or offset due to the fraud or
dishonesty of Merchant or any employee, agent, franchisee or
licensee of Merchant (collectively, the occurrence of each of the
events in subsections (1), (2), (3), and (4) above is known as a
"Fraud Chargeback Event").
Upon Household's determination that a Fraud Chargeback Event has
occurred, Household must provide Merchant with a written notice
detailing the circumstances of the Fraud Chargeback Event,
including supplementary information and documentation applicable
to the Account and the above described affidavit (the "Fraud
Chargeback Notice"). Household may not implement a Chargeback
under this subsection until the expiration of the thirty (30) day
period after Merchant's receipt of the Fraud Chargeback Notice
(the "Fraud Cure Period").
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<PAGE> 18
On or before the expiration of the Fraud Cure Period, if Merchant
has not demonstrated to Household in Household's reasonable
judgment that a Fraud Chargeback Event has not occurred,
Household may then trigger a Chargeback for the Card Sales or
Accounts identified in the Fraud Chargeback Notice (a "Fraud
Chargeback"). Merchant shall pay to Household the aggregate of
the full amount of each Sales Slip/Card Sale Transaction Data or
Account or the portion thereof subject to Chargeback plus sixty
percent (60%) of finance charges thereon up to a maximum of six
(6) Billing Cycles, net of any payments made by the Cardholder
("Fraud Chargeback Amount").
Household agrees to suspend Authorizations on an Account as soon
as possible but not later than five (5) days after Household's
Fraud and Loss Prevention Department receives information from
the Cardholder denying execution by the Cardholder of the
application or Sales Slip, as applicable. If Household fails to
do so, the amount of the Fraud Chargeback concerning the
applicable Account will exclude the amount of any Card Sales plus
the finance charges thereon made after said 5th day on said
Account.
Beginning on the first Billing Cycle to occur after the Effective
Date of this Agreement, Household will establish an annual Fraud
Reserve. This reserve will be an unfunded account which shall be
30 basis points of the average outstanding Accounts for the
preceding calendar year. The parties agree that in calendar year
1994 the Fraud Reserve shall be $239,890.00. Thereafter the
average shall be determined at year end. Household will
determine the average outstanding Accounts by adding the
outstanding balances on Accounts in November and the outstanding
balances on Accounts in December and dividing by two (2). This
will establish the Fraud Reserve for the following year. Each
Fraud Chargeback Amount shall be deducted from the Fraud Reserve
until the Fraud Reserve is exhausted. No deduction for fraud
shall be made from the Fraud Reserve as defined in this Section
6(iii) if Merchant has fully complied with fraud protection
procedures set forth in Section 4(h). Merchant shall not be
required to pay any Fraud Chargeback amount unless or until the
total amount of Fraud Chargebacks exceed the Fraud Reserve. At
the end of each calendar year if there is any excess in the Fraud
Reserve it will be credited to the Merchant; provided, however,
the amount to be credited to the Merchant from the Fraud Reserve
in 1994 will be pro rated by the number of full months this
Agreement has been in effect in calendar year 1994.
(iv) Bankruptcy Documentation Chargeback. Subject to the procedures
and limitations below, Household may trigger a Chargeback in the
amount set forth below if each of the following events occur:
(1) Household makes a document request on a Request Form in
strict compliance with the document request procedures set forth
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<PAGE> 19
in Section 7(d) below;
(2) Cardholder has filed a petition for relief under the
Bankruptcy Code;
(3) Either (a) Merchant fails to deliver to Household on or
before the expiration of the twenty one (21) day response period
provided by Section 7(d) below, either (i) a copy of the original
Sales Slip signed by the Cardholder requested by Household; or
(ii) if the original Sales Slip is not available after a diligent
search, a computer generated invoice; or (b) with respect to an
application approved by Household after the 25th day of March and
the application was previously reported to Merchant as missing on
the applicable reports described in Section 6.a.(i) above, or (c)
with respect to an application approved by Household before the
Effective Date before the 25th day of March, 1992, the
application is unsigned (but not missing); and
(4) The Account balance is $300 or more (collectively, the
occurrence of each of the events in subsections (1), (2), (3),
and (4) above is known as a "Bankruptcy Documentation Chargeback
Event").
Immediately upon the occurrence of the Bankruptcy Documentation
Chargeback Event, Household may implement the Chargeback (a
"Bankruptcy Documentation Chargeback"). As a condition to
implementing a Bankruptcy Documentation Chargeback Event
concerning Subsection 6.a.(iv)(3)(c) above (unsigned
application), Household shall send Merchant a copy of the
unsigned application at the time of the Chargeback.
For a Bankruptcy Documentation Chargeback concerning Subsection
6.a.(iv)(3)(a) above (missing or unsigned Sales Slips), Merchant
shall pay to Household the lesser of (i) 50% of the balance of
missing or unsigned Sales Slips for the Account (including sixty
percent (60%) of finance charges up to a maximum of six Billing
Cycles, but excluding matching Sales Slips and Credit Slips
arising from sales canceled by subsequent refunds), or (ii) 50%
of the Account balance at the time of the Chargeback. For a
Bankruptcy Documentation Chargeback concerning Subsection
6.a.(iv)(3)(b) above (missing or unsigned applications) or
Subsection 6.a.(iv)(3)(c) above (unsigned applications), Merchant
shall pay to Household 50% of the Account balance at the time of
Chargeback.
This Subsection 6.a.(iv) shall be deemed to be in effect as of
the Effective Date for all Chargeback Notices that are, or have
been, sent to Merchant on or after the Effective Date.
Notwithstanding the above, no Bankruptcy Documentation Chargeback
shall occur if Household fails to take any action concerning an
Account within the later of (i) one year after the date of
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receipt of the last payment, and (ii) if there is a purchase on
the Account made pursuant to a promotion, one year after the
actual first payment due date.
The acceptance of a computer generated invoice under Section
6(iv)(3) shall not relieve Merchant of the duty to maintain
signed Sales Slips as described in Section 7 below and to produce
these when requested for other purposes.
(v) Collection Documentation Chargeback. Subject to the procedures
and limitations below, Household may trigger a Chargeback in the
amount set forth below if each of the following events occur:
(1) Household makes a document request on a Request Form in
strict compliance with the document request procedures set forth
in Section 7(d) below, and
(2) Either (a) Merchant fails to deliver to Household on or
before the expiration of the twenty one (21) day response period
provided by Section 7(d) below, a copy of the original Sales Slip
signed by the Cardholder requested by Household, or (b) with
respect to an application approved by Household after March 25,
1992, Household is not in receipt of the original application
executed by the applicants and the application was previously
reported to Merchant as missing on the applicable reports
described in Section 6.a.(i) above, or (c) with respect to an
application approved by Household before March 25, 1992, the
application is unsigned (but not missing); and
(3) Either (a) Household files a lawsuit and Household fails to
obtain a judgment in its favor or the case is dismissed, in
either case due to lack of signed Sales Slips and/or
applications, or (b) Household's counsel reasonably deems any
legal action to be a loss due to lack of signed Sales Slips
and/or applications.
(4) The Account balance is $300.00 or more (collectively, the
occurrence of each of the events in subsections (1), (2), (3) and
(4) above is known as a "Collection Documentation Chargeback
Event").
Immediately upon the occurrence of the Collection Documentation
Chargeback Event, Household may implement the Chargeback (a
"Collection Documentation Chargeback"). As a condition to
implementing a Collection Documentation Chargeback Event
concerning Subsection 6.a.(v)(2)(c) above (unsigned application),
Household shall send Merchant a copy of the unsigned application
at the time of the Chargeback.
For a Collection Documentation Chargeback concerning Subsection
6.a.(v)(3)(a) above (lawsuit), Merchant shall pay to Household
the loss incurred by Household which results directly from a
missing or unsigned Sales Slips and/or application.
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For a Collection Documentation Chargeback concerning Subsection
6.a.(v)(3)(b) (no lawsuit), Merchant shall pay to Household:
(i) with respect to a missing or unsigned application, 50% of
the Account balance at the time of the Chargeback.
(ii) with respect to a missing or unsigned Sales Slip, the
lesser of (i) 50% of the balance of missing or unsigned Sales
Slips for the Account (including sixty percent (60%) of finance
charges up to a maximum of six Billing Cycles, but excluding
matching Sales Slips and Credit Slips arising from sales canceled
by subsequent refunds), or (ii) 50% of the Account balance at the
time of the Chargeback.
Notwithstanding the above, no Collection Documentation Chargeback
shall occur if Household fails to take any action concerning an
Account within the later of (i) one year after the date of
receipt of the last payment, and (ii) if there is a purchase on
the Account made pursuant to a promotion, one year after the
actual first payment due date.
(vi) Invalid Account Number Chargeback. Subject to the procedures and
limitations below, Household may trigger a Chargeback for any
Transaction Data if Household funds the dollar amount of the
Transaction Data submitted by Merchant for a Card Sale, but
Household is subsequently unable to match the Transaction Data
submitted with the appropriate Account.
Household must send Merchant written notice (the "Invalid Account
Number Chargeback Notice") within ninety (90) days of the funding
date of the Transaction Data containing the following
information, if, and as, transmitted to Household by Merchant:
(1) Account number
(2) Transaction/Sale Date
(3) Appropriate Identifier Code identifying the transaction as a
sale or credit
(4) Transaction Amount
(5) Reason for Chargeback
Household may not implement a Chargeback under this subsection
until the expiration of a twenty one (21) day period after
delivery to Merchant of the Authorization Chargeback Notice (the
"Invalid Account Number Chargeback Cure Period").
During the Invalid Account Number Chargeback Cure Period,
Merchant will use all reasonable efforts to provide the
information requested in the Invalid Account Number Chargeback
Notice. If Merchant fails to deliver to Household the requested
information on or before the expiration of the Invalid Account
Number Chargeback Cure Period or if Household cannot match the
Transaction Data to an Account with the information provided by
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Merchant during the Invalid Account Number Chargeback Cure
Period, Household may then trigger a Chargeback for the
particular Transaction Data (an "Invalid Account Number
Chargeback").
For each Invalid Account Number Chargeback, Merchant shall pay to
Household the amount funded to Merchant for such transaction,
plus sixty percent (60%) of finance charges thereon up to a
maximum of six (6) Billing Cycles net of any payment made by the
Cardholder.
b. Post Chargeback Procedures. Upon each Chargeback by Household triggered by
an Event of Chargeback described above, Household will, upon request, return to
Merchant any Sales Slip or copy thereof or other evidence of the transaction it
received from Merchant. Household shall provide, at Merchant's request (which
request must be made within sixty (60) days of implementation of the Collection
Chargeback), copies of collection screen prints relating to such Sales Slip, to
the extent and only if allowed by law. Household may deduct amounts owed to
Household under this Section 6 from any amounts owed to Merchant under this
Agreement. Any payment made by Merchant to Household as a result of a
Chargeback shall not be final but shall be subject to subsequent review and
verification by Household and Merchant, subject to the provisions of Section
6.d. below, and subsequent fundings may be adjusted or Merchant billed. Upon
completion of a properly implemented Chargeback permitted by this Section 6,
Merchant shall own the Account or Sales Slip, whichever is charged back to
Merchant, and Merchant shall bear all liability and risk of loss associated
with the Sales Slip, Card Sale or Account that has been subject to Chargeback,
or the applicable portion thereof, without warranty or representation whether
express or implied by, or recourse or liability to, Household, and Merchant
shall be entitled to recover any monies inadvertently paid to Household by the
Cardholder for such Account or Sales Slip.
c. Format of Chargeback Notice. The Customer Service Chargeback Notice and
the Fraud Chargeback Notice (collectively referred to as the "Chargeback
Notice") must be in writing and must contain the following information, if and
as, submitted by Merchant to Household:
(i) Cardholder Name
(ii) Cardholder Account Number - 15 digits
(iii) Merchant Invoice No. - 14 digits
(iv) Transaction Date - date of Card Sale or credit, as applicable
(v) Chargeback Amount
(vi) Reason for Chargeback
(vii) Account balance
(viii) Appropriate transaction identifier code identifying the
transaction as a credit or sale
Each Chargeback Notice must be delivered to Merchant at Merchant's address set
forth on page one of this Agreement.
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d. Chargeback Dispute. Merchant is entitled to dispute a Chargeback or amount
of a Chargeback. For example (1) Merchant may be able to document to Household
that Merchant complied with the applicable fraud protection procedures in this
Agreement, or (2) Merchant may wish to prove to Household with respect to a
Collection Documentation Chargeback that (i) the Merchant fully complied with
any permitted Section 7(d) document request made by Household, or (ii)
Household did not comply with its Section 7(d) document request requirements
and procedures.
Any dispute by Merchant concerning a Chargeback or the amount of a Chargeback
or Merchant's review and verification of any Sales Slip or Account that is
charged back to Merchant, are subject to the procedures and limitations below:
1. For each such dispute, the dispute must be made in writing, on a form
to be mutually agreed upon by the parties, and copies of the
applicable Chargeback Notices, Bankruptcy Documentation Chargeback
Notices, Collection Documentation Chargeback Notices, applicable
application reports, and Invalid Account Number Chargeback Notices
must be attached to said form (herein the said form and attachments
are collectively called the "Dispute Form"):
2. The Dispute Form must be delivered to Household, at Household's
address set forth on page one of this Agreement to the attention of
Silo Chargeback Manager with a copy to the Major Account Executive.
3. The Dispute Form must be delivered within one hundred twenty (120)
days from the date Household deducted the amount of the Chargeback
from funding or otherwise received payment of said amount ("Chargeback
Dispute Period"). Merchant's right to dispute any Chargeback or
amount of Chargeback must be done in strict compliance with the terms,
provisions and time frames set forth above. Upon expiration of the
Chargeback Dispute Period, the applicable Chargeback shall be deemed
to be final.
Within the Chargeback Dispute Period, Merchant has the right to audit the
Chargebacks for that period.
e. Survival. The terms and provisions of this Section 6 shall survive the
termination of this Agreement.
Section 7. Transmission of Data & Records. Data, records and
information shall be transmitted and maintained as described below.
(a) Transmission of Data. Merchant shall transmit to Household, by electronic
transmission or other form of transmission mutually agreed upon by
Household and Merchant the Transaction Data required by this Agreement
concerning Card Sales and credit transactions. All data transmitted shall
be in a medium, form and format designated by Household and shall be
presorted according to Household's instructions provided, however, no
changes in current procedures will be initiated by
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<PAGE> 24
Household until notification to Merchant and mutual agreement of
reasonable time frame. Any errors or missing information in the
Transaction Data or in its transmission shall be the sole responsibility
of Merchant, except if Household's electronic system of data transmission
malfunctions or is otherwise unavailable. The means of transmission
indicated above in this Section shall be the exclusive means utilized by
Merchant for the transmission of Transaction Data to Household, unless and
until the parties mutually agree to a different form.
(b) Receipt of Transmission. Upon successful receipt of the above described
transmission, Household will pay Merchant in accordance with this
Agreement, subject to subsequent review and verification by Household and
to all other rights of Household and obligations of Merchant as set forth
in this Agreement. If transmission of Transaction Data is by tape,
Merchant agrees to deliver upon demand by Household a duplicate tape of
any prior tape transmission, if such demand is made within forty-five (45)
calendar days of the original transmission.
(c) Records. Merchant shall maintain the actual original executed paper Sales
Slips, Credit Slips, and other records pertaining to any transaction
covered by this Agreement for such time and in such manner as Household or
any law or regulation may require, but in no event less than two (2) years
after the date Merchant presents each Transaction Data to Household, and
Merchant shall make and retain for at least four (4) years either (i) the
said actual original executed paper documents, or (ii) legible microfilm
copies of such actual original executed paper transaction documents or
Computer Generated Invoices.
(d) Requests for Documents. Household may request Merchant to provide to
Household copies of the actual original executed paper Sales Slips and
Credit Slips, applications, if applicable, or other transaction records,
and any other documentary evidence available to Merchant and reasonably
requested by Household to meet its obligations under law (including its
obligations under the Fair Credit Billing Act) or otherwise to respond to
questions, disputes, complaints, lawsuits, counterclaims or claims
concerning Accounts or requests from or concerning Cardholders, or if
requested by a regulator, examiner, governmental agency or other similar
entity or person,or to enforce any rights Household may have against a
Cardholder, including, without limitation, litigation by or against
Household, collection efforts and bankruptcy proceedings.
Household shall not submit a Document Request Form for an Account in
collection or bankruptcy concerning any Account that has a balance less
than $300.00. Household shall request Sales Slips by completing a request
form ("Request Form"), which shall contain the following information for
each Sales Slip requested, as applicable, provided Merchant has previously
given Household such information for the respective Sales Slip:
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a. Cardholder Name.
b. Cardholder Account Number - 15 digits.
c. Merchant Invoice Number - 14 digits.
d. Transaction Date/date of the Card Sale.
e. Transaction amount.
f. Account balance as of the Request Date .
g. Date of request ("Request Date") and date by which the information is
to be delivered.
h. Request reason code.
i. Type of information requested.
j. Appropriate transaction identifier code identifying the transaction as
a credit or sale.
Request Forms shall be sent by facsimile to Merchant.
Merchant shall provide Household with copies of all originally executed
Sales Slips and copies of identification (if required under Section 4
above) if requested by Household on the Request Form within twenty-one
(21) days of the date of the facsimile receipt.
If Merchant is required to utilize overnight mail or courier, or certified
or registered mail to allow it to comply with any response times provided
herein for requested documents or information, Merchant shall bear the
cost. However, if Household requests Merchant to provide it with Sales
Slips or other information requested on a Request Form before the response
times provided herein and, in order to comply with this request, Merchant
is required to utilize overnight courier or mail or certified or
registered mail, Household shall bear the cost. Household shall reimburse
Merchant for any such costs after it receives written receipts for such
costs by adding such costs to any other monies or amounts owed to Merchant
under this Agreement. Notwithstanding the foregoing, if Household is
required to respond to a Cardholder's inquiry, a state or federal
regulator's request or in a judicial or other similar proceeding before
the response times set forth herein and Household notifies Merchant of
this fact, Merchant will cooperate and use its best efforts to respond
within the response time requested by Household.
(e) Computer Terminals. Household will provide to Merchant one or more
Terminals to be used for Card applications, Sales Slip and other data
processing in Merchant's place(s) of business, subject to the terms of
this Agreement. Merchant will pay Household the Terminal Usage Fee in the
amount of $20.00 (twenty dollars) each month for each Terminal placed at
Merchant's place(s) of business. Upon the mutual agreement of the
parties, Merchant may obtain, at its expense, and use at its stores, its
own computer hardware and equipment for the processing of applications,
and Merchant shall then return all Terminals and any accompanying
equipment to Household in the same condition as received, except for
normal wear and tear. Upon receipt by Household of each said Terminal and
accompanying equipment, the Terminal Usage Fee assessed for
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each such Terminal shall cease. Merchant will be responsible for all
costs related to repair and/or replacement of Terminals resulting from
Merchant's misuse of the Terminals. Household will provide normal
maintenance and replacement units for malfunctioning Terminals. Merchant
will provide a dedicated telephone line to transmit the data entered on
the Terminal to Household's Servicing Center, at Merchant's cost.
Household shall provide a toll-free 800 telephone number for Merchant to
use in transmitting the data on the Terminal to the Household Servicing
Center, at Household's cost. In the event of Merchant's breach of this
Agreement or termination of this Agreement, immediately upon Household's
request, Merchant will promptly return to Household all software,
Terminals and equipment provided by Household hereunder in the same
condition as received, except for normal wear and tear. Any amounts owed
to Household hereunder may be deducted from any amounts owed to Merchant
under this Agreement. Merchant agrees not to reproduce any software
provided to Merchant under this Agreement. Household and Merchant may
from time to time mutually agree to change or cease use of the tape or
electronic transmission process described in this Section, and Household
may require delivery to Household of the actual Sales Slips and Credit
Slips within five (5) Business Days after the date of the respective sale
or credit transaction.
(f) Limited License/HAPS. Household hereby grants to Merchant an
individual, non-transferable, limited and non-exclusive license and right
to use Household's application processing software known as "Household
Application Processing System" ("HAPS") in machine readable (object code)
form at the Merchant's address shown above at page one of this Agreement
(and on any exhibit attached hereto) subject to the following terms and
conditions which Merchant hereby accepts and agrees to:
i. HAPS is and remains the sole, exclusive, confidential and trade
secret property of Household. Merchant will not reverse engineer,
decompile or attempt to derive source code of HAPS.
ii. HAPS will be used solely for the processing of credit applications to
be submitted to Household (and not any other credit provider) in
connection with this Agreement and for no other purpose.
iii. Merchant will not copy or duplicate HAPS except as specifically
authorized by Household. Merchant will not make or attempt to
make any changes, modifications, enhancements, or customization
to HAPS. Merchant will promptly use any modifications or new
versions of HAPS provided by Household so that the most current
version is used by Merchant.
iv. In addition to the obligations imposed by Section 20 below, Merchant
agrees to maintain HAPS and any document or information relating
thereto in strict confidence and will not use such except as provided
herein. Disclosure of HAPS to employees of Merchant will only be
made on a need to know basis and be limited to as few employees as
necessary. Merchant will insure compliance with this
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Agreement by its employees, agents, representatives, officers and
directors. Neither HAPS nor any information regarding HAPS will be
disclosed to any other person or entity.
v. In addition to the obligations imposed by Section 14 below, Merchant
shall indemnify and hold Household harmless for any loss, claim or
damage arising out of Merchant's use or possession of HAPS, including
any use or possession by Merchant's employees, agents,
representatives, officers or directors to the extent not caused by
the gross negligence of Household.
vi. Household shall have no liability or responsibility to Merchant, its
employees, agents, representatives, officers, or directors or any
other person or entity with respect to any liability, loss or damage
caused or alleged to be caused directly or indirectly by HAPS, its
use or operation.
HOUSEHOLD MAKES NO WARRANTIES EITHER EXPRESS OR IMPLIED AS TO HAPS
INCLUDING ALL IMPLIED WARRANTIES OF MERCHANTABILITY AND FITNESS FOR A
PARTICULAR PURPOSE. HOUSEHOLD SHALL NOT BE RESPONSIBLE FOR ANY
INTERRUPTION OF SERVICE, LOSS OF BUSINESS, ANTICIPATORY PROFITS,
INCIDENTAL, SPECIAL OR CONSEQUENTIAL DAMAGES OCCURRING OUT OF OR IN
CONNECTION WITH THE USE OR PERFORMANCE OF HAPS.
vii. Merchant shall not transfer, sell, assign, encumber, or pledge
HAPS and any such purported transfer, sale, assignment,
encumbrance or pledge shall be null and void.
(g) Termination. In the event this Agreement is terminated, the license
granted under this Section 7 shall automatically terminate. Upon
termination of this Agreement and at the request of Household, Merchant
will (i) return HAPS and all materials including books and manuals and any
copies thereof relating to HAPS to Household and will certify in writing
that HAPS has been permanently eliminated from Merchant's computer
equipment and that no copies exist, and (ii) promptly return to Household
all software, Terminals and equipment in the same condition as received,
except for normal wear and tear.
(h) Survival. The terms and provisions of this Section shall survive the
termination of this Agreement.
Section 8. Endorsement. Merchant agrees that Merchant shall be deemed to
have endorsed any Sales Slip, Credit Slip, or Cardholder payments by check,
money order, or other instrument made payable to Merchant that a Cardholder
presents to Household in Household's favor, and Merchant hereby authorizes
Household to supply such necessary endorsements on behalf of Merchant.
Section 9. Prohibited Payments. Merchant agrees that Household has the
sole right to receive payments on any accepted Sales Slip as long as:
(a) Household has paid Merchant the Sales Slip amount; or
(b) Household has not charged such Sales Slip back to Merchant
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hereunder.
Unless specifically authorized in writing by Household, Merchant
agrees not to make any collections on any such Sales Slip. Merchant
agrees to hold in trust for Household any payment received by Merchant
of all or part of the amount of any accepted Sales Slip and to deliver
promptly the same in kind to Household within five (5) days of receipt
by Merchant, together with the Cardholder's name, Account number, and
any correspondence accompanying the payment. Notwithstanding the
foregoing, Merchant, at its cost, may provide to Cardholders seeking
to make in-store payments, a stamped envelope, addressed to
Household's payment center to enable the Cardholder to mail his/her
payment to Household.
Section 10. Financial Information. Household may annually review the
financial stability of Merchant. To assist Household in doing this, Merchant
shall deliver to Household no later than 120 days after the end of each fiscal
year, an audited financial statement and supporting materials with sufficient
detail to accurately portray the financial condition of Merchant, including
10-Ks, 10-Qs and 8-Ks as such reports are filed with the Securities and
Exchange Commission and press releases as issued from time to time. Merchant
warrants and represents that any financial statement or other information
submitted to Household by Merchant is true and accurate as of the date on the
document and as of the date submitted. Merchant understands that Household may
verify the information on any financial statement or other information provided
by Merchant and, from time to time, may seek credit, financial and other
information concerning Merchant from others. Upon request by Merchant,
Household shall send to Merchant, an audited financial statement with
sufficient detail to accurately portray the financial condition of Household
International, Inc.
Section 11. Merchant Business Practices. Merchant agrees to provide
adequate services in connection with each Card Sale pursuant to standard
customs and trade practices and any applicable manufacturer's warranties, and
to provide such repairs, service and replacements and take such other
corrective action as may be required by law.
Section 12. Cardholder Account Information. Merchant shall not sell,
purchase, provide, or exchange Account number information in the form of
imprinted Sales Slips, carbon copies of imprinted Sales Slips, Cardholder
mailing lists, tapes or other media obtained by reason of a Card transaction to
any third party other than to Merchant's agents for the purpose of assisting
Merchant in its business with Household or pursuant to a government request.
Section 13. Change in Ownership. Merchant agrees to send Household at
least thirty (30) days prior written notice of any change in Merchant's name or
location, any material change in ownership of Merchant's business or any change
in Sales Slip or Credit Slip information concerning Merchant.
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Section 14. Indemnification.
(a) Indemnification by Merchant. Merchant shall be liable to and shall
indemnify and hold harmless Household and its Affiliates and their
respective officers, employees, agents and directors from any losses,
damages, claims or complaints incurred by Household or any Affiliate
of Household or their respective officers, employees, agents and
directors arising out of: (i) Merchant's failure to comply with this
Agreement; (ii) any claim, dispute, complaint or setoff made by a
Cardholder or applicant with respect to anything done or not done by
Merchant in connection with Card Sales or credits; (iii) anything done
or not done by Merchant in connection with the furnishing of any
goods, warranties or services purchased by Cardholders; (iv) the death
or injury to any person or the loss, destruction or damage to any
property arising out of the design, manufacture or furnishing by
Merchant of any goods, warranties or services purchased by
Cardholders; (v) any claim or complaint of a third party in connection
with Merchant's advertisements and promotions relating to the Card
unless Merchant's advertisements and promotions are materials supplied
by Household and are used by Merchant without alteration; (vi) any
illegal or improper conduct of Merchant or its employees or agents;
and (vii) any claim or complaint by a consumer that Merchant has
violated the Equal Credit Opportunity Act, Truth in Lending Act, or
any other act and related Applicable Laws. Household may deduct any
amounts incurred by Household under this Section from amounts owed
Merchant under this Agreement.
(b) Indemnification by Household. Household shall be liable to and shall
indemnify and hold harmless Merchant and its officers, employees, and
directors from any losses, damages, claims, or complaints incurred by
Merchant or its officers, employees and directors arising out of any
claim or complaint by a Cardholder or applicant with respect to
anything wrongfully done or not done by Household in connection with
such Cardholder's Account or applicant's application or with respect
to any advertisements or promotions relating to the Card that are
specifically approved in writing by Household. Notwithstanding the
foregoing, the indemnification by Household shall not apply to any
claim or complaint relating to the failure of Merchant to resolve a
billing inquiry or dispute with a Cardholder relating to Merchant's
actions or omissions.
(c) Notice of Claim. In the event that Household or Merchant shall
receive any claim or demand or be subject to any suit or proceeding of
which a claim may be made against the other under this Section, the
indemnified party shall give prompt written notice thereof to the
indemnifying party and the indemnifying party will be entitled to
participate in the settlement or defense thereof with counsel
satisfactory to indemnified party at the indemnifying party's expense.
In any case, the indemnifying party and the indemnified
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party shall cooperate (at no cost to the indemnified party) in the
settlement or defense of any such claim, demand, suit, or proceeding.
(d) Survival. The terms of this Section 14 shall survive the termination
of this Agreement.
Section 15. Inspection. Employees of each of Merchant and Household may
examine during normal business hours at each other's respective offices,
certain documents, books, records or operations of the other that concern only
the Accounts, Chargebacks and funding of Sales Slips with respect to Card Sales
of Merchant only, subject to the limitations in Section 6 d..
Section 16. Term and Termination.
(a) Term. This Agreement shall be effective as of the Effective Date
when executed by authorized officers of each of the parties and shall
remain in effect for four (4) years ("Initial Term"). Thereafter,
this Agreement shall be automatically renewed for successive one year
terms (the "Renewal Term(s)") unless and until terminated as provided
herein. The termination of this Agreement shall not affect the rights
and obligations of the parties with respect to transactions and
occurrences which take place prior to the effective date of
termination, except as otherwise provided herein.
(b) Termination. This Agreement may be terminated:
(i) by Household or Merchant upon not less than one hundred eighty
(180) days notice to the other prior to the end of the Initial
Term or the end of each Renewal Term.
(ii) by Household or Merchant immediately upon notice to the other
in the event either party (i) shall elect to wind up or
dissolve its operation or is wound up and dissolved; becomes
insolvent or repeatedly fails to pay its debts as they become
due; makes an assignment for the benefit of creditors; files
a voluntary petition in bankruptcy, or for reorganization or
is adjudicated as bankrupt or insolvent; or has a liquidator
or trustee appointed over its affairs, or (ii) materially
breaches its obligations or any warranty or representation
under this Agreement.
(iii) by Household upon not less than one hundred eighty (180) days
notice if Fretter, Inc. ceases to be a publicly held company,
or if there occurs a material adverse change in the financial
condition of Merchant as determined by Household.
(iv) by Household upon not less than thirty (30) days notice if
Merchant suspends or goes out of business or sends a notice
of a proposed bulk sale of all or part of its business;
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(v) by Household upon not less than sixty (60) days notice, if in
Household's judgment as verified by an attorney's opinion, any
Applicable Law requires that this Agreement or either party's
rights or obligations hereunder or under the Cardholder
application/agreement be amended, modified, waived or
suspended in any respect, including, without limitation, any
Applicable Law that affects the amount of finance charges,
charges or fees that may be charged or collected or the
Consumer Rate that may be charged on purchases with the Card.
(vi) by Household if the Total Annual Credit Volume falls below
$110,000,000.00.
(vii) by Merchant upon not less than sixty (60) days notice, if in
Merchant's judgment as verified by an attorney's opinion, any
Applicable Law requires that this Agreement or either
party's rights or obligations hereunder or under the
Cardholder application/agreement be amended, modified, waived
or suspended in any respect, including, without limitation,
any Applicable Law that affects the amount of finance
charges, charges or fees that may be charged or collected or
the Consumer Rate that may be charged on purchases with the
Card and therefore significantly alters the Merchant's
liability for payments to Household under Section 3(c) of
this Agreement.
(c) This Subsection Was Intentionally Left Blank.
(d) Duties and Rights Upon Termination. Upon termination of this
Agreement, Merchant will promptly submit to Household all Card Sales,
credit and other data made through the date of termination. Upon
termination, and if requested by Merchant, Household, at its option,
may continue to accept (but Household has no obligation to do so) new
or additional Card Sales to then existing Cardholders pursuant to
terms and conditions designated by Household, in its sole discretion,
at such time.
(e) Purchase Requirements. The following are the Purchase Requirements:
(i) If, at the expiration of the Initial Term, the parties
decide not to renew the Agreement, Merchant may
purchase or arrange to purchase by a third party, all
outstanding Accounts, without recourse to Household and
without warranty or representation, express or implied, by
Household, not later than 60 days after the effective date of
expiration of this Agreement, at a price (determined as of
the most recent Billing Dates prior to the transfer) equal to
100% of the face value of all of the outstanding Accounts,
plus accrued and unbilled finance charges and other amounts
owed under the Cardholder agreements pursuant to such terms
and
31
<PAGE> 32
conditions as are reasonably acceptable to Household;
provided, however, if the purchase(s) is made as of each
Billing Cycle no accrued and unbilled finance charge shall be
applicable.
(ii) Merchant shall have an option to terminate the Agreement
after three (3) years have elapsed since the Effective Date
but before the end of the Initial Term provided Merchant
gives Household at least one hundred eighty (180) days
written notice prior to Termination. Merchant may purchase
or arrange to purchase by a third party, all outstanding
Accounts, without recourse to Household and without warranty
or representation, express or implied, by Household, not
later than 60 days after the effective date of termination of
this Agreement, at a price (determined as of the most recent
Billing Dates prior to the transfer) equal to 102% of the
face value of all of the outstanding Accounts, plus accrued
and unbilled finance charges and other amounts owed under the
Cardholder agreements pursuant to such terms and conditions
as are reasonably acceptable to Household; provided, however,
if the purchase(s) is made as of each Billing Cycle no
accrued and unbilled finance charge shall be applicable.
After the delivery of the termination notice, but by the end of said
sixty (60) day period, Household will allow such purchaser to perform
normal, customary and reasonable due diligence concerning such
purchase during the business hours of 9 a.m. through 5 p.m. Central
Standard time on Business Days; provided that Household is in receipt
of a confidentiality agreement reasonably acceptable to Household
executed by Merchant and any proposed purchaser. After said 60 days,
Merchant shall have no right to purchase the Accounts or any other
right or interest whatsoever concerning the Accounts, and Household
may sell the Accounts and the Cardholder names and addresses to any
third party except to competitors of Merchant that sell consumer
electronics and appliances of the type sold by Merchant, and the
products or services of other merchants may be marketed and sold to
Cardholders.
The Parties agree Merchant must, at the same time and under the same
conditions, purchase all outstanding Accounts owned by Household Bank
(Illinois), N.A., which are the subject of the Merchant Agreement
dated as of the 1st of March, 1994 between Household Bank (Illinois),
N.A. and Merchant as amended from time to time ("Bank Portfolio").
Notwithstanding anything in this Agreement to the contrary, Household
will not be required to sell the Accounts under any conditions if the
Total Annual Credit Volume falls below $110,000,000.00.
32
<PAGE> 33
Section 17. Status of the Parties. In performing their responsibilities
pursuant to this Agreement, Household and Merchant are in the position of
independent contractors, and in no circumstances shall either party be deemed
to be the agent or employee of the other. This Agreement is not intended to
create, nor does it create and shall not be construed to create, a relationship
of partner or joint venturer or an association for profit between Household and
Merchant. Any amounts ever owing by Merchant pursuant to this Agreement
represent contractual obligations only and are not a loan or debt.
Section 18. Force Majeure. Neither party to this Agreement shall be liable to
the other by reason of any failure in performance of this Agreement in
accordance with its terms if such failure arises out of a cause beyond the
control and without the fault or negligence of such party. Such causes may
include but are not limited to acts of God, acts of the public enemy or of
civil or military authority, unavailability of energy resources, fires,
strikes, riots or war. In the event of any force majeure occurrence, the
disabled party shall use its best efforts to meet its obligations as set forth
in this Agreement. The disabled party shall promptly advise the other party of
any developments (or changes therein) that appear likely to affect the ability
of that party to perform any of its obligations hereunder in whole or in part.
If Household is unable to approve applications or give Authorizations for more
than two (2) consecutive days or fund within the time period described in
Section 3 e. above, Merchant shall be entitled to obtain alternative consumer
financing from another provider. Household may then provide notice when it is
once again able to perform its obligations under this Agreement, and Merchant
shall thereupon reinstate its performance under this Agreement.
Section 19. Limited License. Merchant hereby authorizes Household for purposes
of this Agreement to use Merchant's name, logo, registered trademarks and
servicemarks (if any) and any other proprietary designations ("Proprietary
Materials") on the Cards, applications, periodic statements, billing
statements, collection letters or documents, promotional or advertising
materials and otherwise in connection with the Program, subject to Merchant's
periodic reasonable review of such use and to such reasonable specifications of
Merchant. Merchant represents and warrants that it has obtained appropriate
federal and state trademark registrations to protect its interest in the use
and ownership of the Proprietary Materials. Merchant shall, indemnify, defend
and hold Household harmless from any loss, damage, expense or liability arising
from any claims of alleged infringement of the Proprietary Materials (including
attorneys' fees and costs). Merchant may not use any name or service mark of
Household or any of its Affiliates in any manner without the prior written
consent of Household, which consent may be unreasonably withheld.
33
<PAGE> 34
Section 20. Confidentiality/Additional Products and/or Services. Merchant
will keep confidential and not disclose to any person or entity (except to
employees, officers, partners or directors of Merchant who are engaged in the
implementation and execution of the Program) all information, software, systems
and data, that Merchant receives from Household or from any other source,
relating to the Program and matters which are subject to the terms of this
Agreement, including, but not limited to, Account information other than the
names and addresses of the Cardholders and purchases made, and shall use, or
cause to be used, such information solely for the purposes of the performance
of Merchant's obligations under the terms of this Agreement. Household will
not offer for sale to Cardholders merchandise, extended warranties or other
non-financial or non-insurance products or services currently sold by Merchant
without Merchant's consent. Household will keep confidential and not disclose
to any person or entity (except to employees, officers, agents or directors of
Household or any Affiliate) the names and addresses of Cardholders without
Merchant's permission. Notwithstanding the foregoing, Household and/or any of
its Affiliates may at any time, and without Merchant's consent, solicit
Cardholders for any additional credit cards or other types of accounts or
financial or insurance services or products offered by Household and/or any of
its Affiliates (provided the Affiliate is not a direct competitor of Merchant
in the consumer electronics and appliance industry), except merchandise sold by
direct competitors of Merchant in the consumer electronics and appliance
industry. Merchant understands that Household may be required or asked to
disclose certain information in connection with Household's asset
securitizations. The provisions of this Section shall survive the termination
of this Agreement, except as set forth in Section 16 (e) above.
Section 21. Notices. All notices required or permitted by this Agreement
shall be in writing and shall be sent to the respective parties (if to
Household, to the Attention of Paul A. Miller, President, with copies to the
Attention of, (i) General Counsel, Household Retail Services, Inc.. Law
Department and (ii) Major Account Executive; if to Merchant, to the Attention
of Chief Financial Officer of Fretter, Inc. (with a copy to the Attention of
the Secretary) at their respective addresses set forth on page one of this
Agreement or such other addresses as each party may designate to the other by
notice hereunder. Said notices shall be deemed to be received (i) upon three
(3) Business Days after deposit in the U.S. mail with postage prepaid, by
registered or certified mail, return receipt requested, (ii) upon personal
delivery, or (iii) upon receipt by telex, facsimile, or overnight/express
courier service or mail.
Section 22. Amendments and Supplementary Documents. Household may amend this
Agreement upon ten (10) days' prior notice to Merchant if such modification is
required by any state or federal law, rule, regulation, governmental or
judicial order, opinion, interpretation or decision. Reference herein to "this
Agreement" shall include any schedules, exhibits, appendices, and amendments
hereto. Any amendment or modification to this Agreement must be in writing and
signed by a duly authorized officer of Household to be effective and binding
upon Household; no oral amendments or modifications shall be binding upon the
parties.
34
<PAGE> 35
Section 23. Assignment. This Agreement is binding upon the parties and their
successors and assigns. Notwithstanding, Merchant may not assign this
Agreement without the prior written consent of Household; any purported
assignment without such consent shall be void. Household may without
Merchant's consent assign this Agreement or any of the rights or obligations
hereunder to any Affiliate of Household at any time. In the event of such
assignment, the assignee shall have the same rights and remedies as Household
under this Agreement.
Section 24. Credit Insurance. Merchant may include the sale of credit
insurance offered by Alexander Hamilton Life Insurance Company among the
products and services offered to consumers without payment of a service fee.
Any change in the underwriter and issuer of credit insurance is subject to
Household's prior written approval, which approval may be withheld or denied in
Household's sole discretion. Also, in such event, Household may assess a
service fee, in an amount to be then determined by Household, to compensate
Household for any servicing concerning the credit insurance that Household may
be requested to perform. Household and Merchant understand that credit
insurance and compensation and fees are regulated under applicable stte law and
regulations. Household makes no representations or warranties with respect to
the availability of credit insurance on any Account(s) nor with respect to any
compensation or fees.
Section 25. Rights of Persons Not a Party. This Agreement shall not create
any rights on the part of any person or entity not a party hereto, whether as a
third party beneficiary or otherwise.
Section 26. Section Headings. The headings of the sections of this Agreement
are for reference only, are not a substantive part of this Agreement and are
not to be used to affect the validity, construction or interpretation of this
Agreement or any of its provisions.
Section 27. Integrations. This Agreement contains the entire agreement
between Household and Merchant, except as otherwise indicated in this
Agreement. There are merged herein all oral or written agreements,
understandings, amendments, letters and other communications, including,
without limitation, the Original Agreement, representations, promises and
conditions in connection with the subject matter hereof prior to the date this
agreement is executed by the parties. Any agreements, letters, understandings,
representations, warranties, promises or conditions not expressly incorporated
herein shall not be binding on either party. All sales, credit or other
transactions described in the Original Agreement and all existing Accounts and
Card Sales (which terms are defined in the Original Agreement) shall be
governed by this Agreement.
Section 28. Governing Law/Severability. This Agreement shall be governed by
and construed in accordance with the laws of the State of Illinois. If any
provision of this Agreement is contrary to Applicable Law, such provision shall
be deemed ineffective without invalidating the remaining provisions hereof.
35
<PAGE> 36
Section 29. Right to Cure. In the event this Agreement is materially breached
by Merchant or Household the party alleging such breach shall give written
notice to the other party as set forth in Section 21 setting forth the nature
of the Breach. Within ten (10) Business Days of such notice the party against
whom the breach is alleged shall respond with a proposed cure of the breach.
If acceptable, the cure shall be implemented within twenty (20) Business Days.
If this proposed cure of the breach is not acceptable to the party alleging the
breach the party against whom the breach is alleged shall have thirty (30) days
to cure the breach and if the breach remains uncured the parties may proceed
under such remedies as the Agreement allows.
Section 30. Execution in Counterparts. This Agreement may be executed in
counterparts and shall be effective upon receipt of Household of one or more
counterparts hereof, duly executed by Fretter and Silo and execution by
Household.
Section 31. Drafting of Agreement. Both Household and Merchant were
represented by counsel in drafting and negotiating this Agreement. Both
parties are equally responsible for the language used and neither shall be
considered the primary drafter of any provision of this Agreement.
SECTION 29. WAIVER OF JURY TRIAL. HOUSEHOLD AND MERCHANT HEREBY KNOWINGLY,
VOLUNTARILY AND INTENTIONALLY WAIVE ANY RIGHT TO A TRIAL BY JURY IN ANY ACTION,
SUIT, PROCEEDING OR COUNTERCLAIM CONCERNING ANY RIGHTS UNDER THIS AGREEMENT,
ANY RELATED DOCUMENT OR UNDER ANY OTHER DOCUMENT OR AGREEMENT DELIVERED OR
WHICH MAY IN THE FUTURE BE DELIVERED IN CONNECTION HEREWITH OR THEREWITH, OR
ARISING FROM ANY RELATIONSHIP EXISTING IN CONNECTION WITH THIS AGREEMENT, AND
AGREE THAT ANY SUCH ACTION, PROCEEDING, SUIT, OR COUNTERCLAIM SHALL BE TRIED
BEFORE A COURT AND NOT BEFORE A JURY; THIS PROVISION IS A MATERIAL INDUCEMENT
FOR HOUSEHOLD AND MERCHANT ENTERING INTO THIS AGREEMENT.
SECTION 32. JURISDICTION. ANY ACTION, SUIT, COUNTERCLAIM OR PROCEEDING
ARISING OUT OF OR RELATING TO THIS AGREEMENT MUST BE BROUGHT SOLELY IN THE
COURTS OF THE STATE OF ILLINOIS OR MICHIGAN OR THE UNITED STATES DISTRICT
COURTS FOR THE EASTERN DISTRICT OF MICHIGAN OR FOR THE NORTHERN DISTRICT OF
ILLINOIS; AND MERCHANT HEREBY IRREVOCABLY SUBMITS TO THE EXCLUSIVE JURISDICTION
OF SUCH COURTS AND ANY APPELLATE COURTS THEREOF FOR THE PURPOSE OF ANY SUCH
SUIT, COUNTERCLAIM, ACTION, PROCEEDING OR JUDGMENT (IT BEING UNDERSTOOD THAT
SUCH CONSENT TO THE EXCLUSIVE JURISDICTION OF SUCH COURTS WAIVES ANY RIGHT TO
SUBMIT ANY DISPUTES HEREUNDER TO ANY COURTS OTHER THAN THOSE ABOVE). SERVICE OF
FRETTER, INC. SHALL BE SUFFICIENT SERVICE OF SILO, INC. AND AFFILIATES OF
FRETTER, INC. NOTHING HEREIN CONTAINED SHALL PRECLUDE HOUSEHOLD FROM BRINGING
AN ACTION OR PROCEEDING RELATED TO THIS AGREEMENT IN ANY OTHER STATE OR PLACE
HAVING JURISDICTION OVER SUCH ACTION.
36
<PAGE> 37
IN WITNESS WHEREOF, Household and Merchant have caused their duly authorized
representatives to execute this Agreement as of the date set forth above.
HOUSEHOLD RETAIL SERVICES, INC. ATTESTED OR WITNESSED:
By:_______________________________ By:__________________________
Name:_____________________________ Name:________________________
Title:____________________________ Title:_______________________
FRETTER INC. ATTESTED OR WITNESSED:
By:_______________________________ By:__________________________
Name:_____________________________ Name:________________________
Title:____________________________ Title:_______________________
SILO, INC. ATTESTED OR WITNESSED:
By:________________________________ By:___________________________
Name:______________________________ Name:_________________________
Title:_____________________________ Title:________________________
37
<PAGE> 1
EXHIBIT 10.36
UNIVERSAL INTERNATIONAL RE-INSURANCE LTD.
(HAMILTON, BERMUDA)
THE FRETTER, INC. CONSUMER PROTECTION PLAN
MASTER POLICY OF INSURANCE NO. _________
Effective November 1, 1994: 12:01 a.m.
COVERAGE AGREEMENT:
In consideration of the payment of premiums as herein specified, Universal
International Re-Insurance Ltd. hereby agrees to insure each holder of a
Certificate of Warranty pursuant to and under the terms and conditions of this
Master Policy. The terms and conditions of this Master Policy are as follows:
1. There shall be submitted within thirty (30) days of the end of each
calendar month, to Universal International Re-Insurance Ltd., or a
Master Policy Administrator designed by Universal International
Re-Insurance Ltd. (hereinafter known collectively as "Universal
International"), a list of all Certificates of Warranty issued under
and pursuant to the terms and conditions of this Master Policy,
together with a schedule of premiums due thereunder.
2. Coverage shall apply to each Certificate of Warranty and shall be
effective on the date of issuance of each Certificate of Warranty,
provided that: (i) the issuance of the Certificate of Warranty has
been reported to Universal International as herein required, and (ii)
the premium attributable to the Certificate of Warranty has been or
shall be paid pursuant to the terms hereof.
3. The liability of Universal International and/or Universal Re-Insurance
Company Limited to the Insured; i.e., each and every holder of a
Certificate of Warranty shall be in strict accordance with the terms,
conditions and provisions of the Certificate of Warranty attached
hereto as Exhibit A. Anything contained herein to the contrary
notwithstanding, Universal International and/or Universal Re-
Insurance Company Limited shall have no obligations, liabilities or
responsibilities hereunder to the individual holders of Certificates
of Warranty or any other party claiming thereunder other than as set
forth in Exhibit A which limits the liability of Universal
International to funds in the Custodial Account (identified in
paragraph 4 below).
4. The Premium for the coverage is composed of the Deposit Premium and
the Additional Premium. On or before March 20, 1995, Fretter, Inc.,
shall pay Two Hundred Thousand ($200,000.00) Dollars in initial
installment of the Additional Premiums to the Custodial Account and a
Page 1
<PAGE> 2
Deposit Premium of Nine Hundred Thousand ($900,000.00) Dollars to
Universal International. In the second and subsequent years of the
Policy, the Deposit Premium will be Six Hundred Thousand ($600,000.00)
Dollars payable on or before the annual anniversary of this Policy of
Insurance.
In addition to the foregoing, the Insured shall be solely responsible
for the payment of any excise taxes or other taxes attributable to
and/or due and owing upon the Premium, whether to the United States
government or to any State. Universal International shall not prepare
or file any tax returns or reports, all of which shall be the
responsibility of the Insured.
5. All premiums payable to Universal International (except for the
Deposit Premium) shall be deposited into a Custodial Account for the
benefit of the Insured and maintained with Comerica Bank-Detroit (the
"Custodial Account"). The Custodial Account shall be governed by a
written agreement which shall provide that the Custodial Account shall
be used solely for the payment of expenses attributable to this Master
Policy as more fully detailed and specified in said Custodial Account
Agreement. In the event the Master Policy is terminated other than by
the election of Universal International, however, Universal
International shall be paid from the Custodial Account (i) a one-time
administration fee in the amount of Seventy Five Thousand ($75,000.00)
Dollars plus Twenty Five Thousand ($25,000.00) Dollars for each full
or partial year from and after the effective date up to a maximum
total amount of One Hundred Seventy Five Thousand ($175,000.00)
Dollars, and (ii) in the event that this agreement is terminated prior
to November 1, 1997, a one-time termination fee of Three Hundred
Thousand ($300,000.00) Dollars. The premiums payable to Universal
International into the Custodial Account shall be invested by the
Custodian thereof at the direction of Universal International in
accordance with written investment procedures outlined in the
Custodial Agreement.
6. This Master Policy may be terminated by either party sending written
notice to the other party, said cancellation to take place thirty (30)
days after receipt of notice of cancellation. Notice of Cancellation
shall be sent by a recognized overnight delivery service with return
receipt requested addressed to the parties as follows (or to a
substitute address that the other party shall have notice of the
substitute address):
Fretter, Inc. Consumer Protection Plan
12501 Grand River Avenue
Brighton, MI 48116
Page 2
<PAGE> 3
Attn: Don Bauer
Universal International Re-Insurance Ltd.
Windsor Place, 18 Queen Street
Hamilton H.M. 11, Bermuda
In the event that there is a cessation of the payment of premiums as
required herein, this Master Policy shall be deemed to be terminated
by the Insured.
7. This Master Policy may not be amended, modified or changed other than
by a written agreement signed by a representative of the Insured and
Universal International. This Master Policy is intended to
incorporate all prior agreements and understandings, whether written
or oral.
8. This Master Policy is written for the benefit of the Insured, i.e.,
each holder of a Certificate of Warranty issued pursuant to and under
the terms of this Master Policy, and is not intended for and shall not
inure to the benefit of any other party or entity.
IN WITNESS WHEREOF, Universal International Re-Insurance Ltd. has caused
this Master Policy to be signed to become effective upon the effective date,
year and time noted above.
UNIVERSAL INTERNATIONAL
RE-INSURANCE LTD.
BY:_______________________________________
ITS:___________________________________
Page 3
<PAGE> 4
UNIVERSAL INTERNATIONAL RE-INSURANCE LTD.
(HAMILTON, BERMUDA)
CONSUMER PROTECTION PLAN MASTER POLICY OF INSURANCE
DECLARATIONS
Item 1. NAMED INSURED AND ADDRESS:
Customers of Fretter, Inc., Silo, Inc., Fred Schmid Appliance and
T. V. Company, and Dash Concepts, Inc. (collectively "Fretter")
as reported as required herein to Universal International
Re-Insurance Ltd. collectively referred to as:
The Fretter, Inc. Consumer Protection Plan
12501 Grand River Avenue
Brighton, Michigan 48116
(the "Insured")
Item 2. MASTER POLICY PERIOD:
Continuous from November 1, 1994 at 12:01 a.m. standard time at
the mailing address of the Named Insured stated herein until
canceled in accordance with the terms hereof.
Item 3. CERTIFICATE OF INSURANCE PERIOD:
Individual Certificates to the customers of Fretter shall be for
the term and period specified in each individual Certificate.
Item 4. LIMIT OF INSURANCE:
Pursuant to the terms of the Consumer Protection Plan Certificate
(the "Certificate") attached hereto as Exhibit A.
Item 5. PREMIUM:
The annual Premium due Universal International Re-Insurance Ltd.
denominated in U.S. Funds shall be:
A. Initial Installment of Additional Premium: Due and payable
in the first (1st) year only in the amount of Two Hundred
Thousand ($200,000.00) Dollars.
B. Deposit Premium:
Page 1
<PAGE> 5
First policy year: $900,000.00
Second and succeeding policy years: $600,000.00
The Deposit Premium shall be fully earned at the inception of
each policy year.
C. Additional Premiums shall be payable to Universal
International Re-Insurance Ltd. in U.S. funds in accordance
with the Premium schedule attached hereto.
Item 6. PREMIUM PAYMENT:
The Premium and Initial Installment Premium due Universal
International Re-Insurance Ltd. shall be paid as follows:
A. Deposit Premium for first year is due on March 17, 1995, and
for the second and subsequent years shall be due and payable
on the anniversary date.
B. Additional Premiums shall be paid into the Custodial Account
in accordance with the Premium schedule attached hereto.
VARIOUS PROVISIONS CONTAINED IN THE MASTER POLICY RESTRICT COVERAGE INCLUDING
THE AGGREGATE LIMIT OF LIABILITY. READ THE ENTIRE MASTER POLICY CAREFULLY TO
DETERMINE RIGHTS, DUTIES AND COVERAGES PROVIDED BY THE MASTER POLICY.
__________________________ ____________________________________
Date Authorized Representative
Page 2
<PAGE> 1
EXHIBIT 23
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statement on Form S-8 (Registration No. 33-56307) of Fretter, Inc. of our
report dated April 28, 1995 appearing on page 30 of this Form 10-K.
Price Waterhouse LLP
Detroit, Michigan 48243
May 1, 1995
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<ARTICLE> 5
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JAN-31-1995
<PERIOD-START> FEB-1-1994
<PERIOD-END> JAN-31-1995
<EXCHANGE-RATE> 1
<CASH> 13,787
<SECURITIES> 0
<RECEIVABLES> 24,058
<ALLOWANCES> 0
<INVENTORY> 207,066
<CURRENT-ASSETS> 254,709
<PP&E> 111,985
<DEPRECIATION> 0
<TOTAL-ASSETS> 468,608
<CURRENT-LIABILITIES> 162,070
<BONDS> 105,161
<COMMON> 106
40,800
0
<OTHER-SE> 34,253
<TOTAL-LIABILITY-AND-EQUITY> 468,608
<SALES> 858,849
<TOTAL-REVENUES> 858,849
<CGS> 630,435
<TOTAL-COSTS> 630,435
<OTHER-EXPENSES> 210,128
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 9,721
<INCOME-PRETAX> 8,565
<INCOME-TAX> 2,500
<INCOME-CONTINUING> 6,065
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,665
<EPS-PRIMARY> .35
<EPS-DILUTED> .35
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