SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
Quarterly Report Pursuant to Section 13 or 15(d) of
The Securities Exchange Act of 1934
For the Quarterly Period Ended: November 2, 1997
Commission File Number: 0-20672
SPORTMART, INC.
(Exact name of registrant as specified in its charter)
Delaware 36-2702213
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1400 South Wolf Road, Wheeling, Illinois 60090
(Address of principal executive offices, including zip code)
Registrant's telephone number, including area code: (847) 520-0100
Indicate by check mark whether the registrant 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).
Yes X No
Indicate by check mark whether the registrant has been subject to
such filing requirements for the past 90 days.
Yes X No
As of December 3, 1997, there were 5,148,833.5 shares of Voting
Common Stock, par value $.01, and 7,817,394.5 shares of Class A Common
Stock, par value $.01, of the registrant outstanding.
<PAGE> SPORTMART, INC.
QUARTERLY PERIOD ENDED NOVEMBER 2, 1997
INDEX
PAGE(S)
PART I - FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets as of November 2, 1997
and February 2, 1997 1
Consolidated Statements of Operations for the
thirteen weeks ended November 2, 1997 and October
27, 1996 and the thirty-nine weeks ended November
2, 1997 and October 27, 1996 2
Consolidated Statements of Stockholders' Equity
for the thirty-nine weeks ended November 2,
1997 and the fifty-three weeks ended
February 2, 1997 3
Consolidated Statements of Cash Flows for the
thirty-nine weeks ended November 2, 1997 and
October 27, 1996 4
Notes to Consolidated Financial Statements 5-6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 7-11
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 12
SIGNATURES 13
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
SPORTMART, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
NOVEMBER 2, 1997 AND FEBRUARY 2, 1997
(Amounts in thousands, except share data)
<TABLE>
ASSETS November 2, February 2,
1997 1997
(unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ - $ 2,816
Due from related parties 419 624
Merchandise inventories, net 156,018 162,913
Prepaid expenses and other assets 8,199 5,035
Income taxes receivable 302 11,044
Advertising co-op receivable, net 5,683 2,338
Assets held for sale 2,521 2,631
Deferred income taxes 7,656 6,300
Total current assets 180,798 193,701
Property and equipment, net 57,148 61,750
Other assets 3,730 3,868
Deferred income taxes 7,278 7,278
$248,954 $266,597
<PAGE>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Outstanding checks, net $ 2,101 $ -
Revolving line of credit due 2001 99,741 93,175
Mortgage payable 775 -
Current portion of capitalized lease obligations 331 307
Accounts payable 44,961 44,922
Accrued expenses:
Salaries and wages 2,631 3,338
Taxes other than income 4,696 8,049
Advertising 482 5,014
Reserve for store closings 6,196 16,319
Other 6,697 13,377
Total current liabilities 168,611 184,501
Capitalized lease obligations, net of current portion 3,158 3,409
Other long-term liabilities 5,015 4,768
176,784 192,678
Commitments and contingencies - -
Stockholders' equity:
Preferred stock; $.01 par value;
5,000,000 shares authorized; none issued - -
Voting common stock; $.01 par value; 50,000,000 shares authorized;
5,148,833 shares issued and outstanding on November 2, 1997
and February 2, 1997 52 52
Class A common stock, non-voting; $.01 par value, 50,000,000
shares authorized; 7,783,083 and 7,694,734 shares issued and
outstanding on November 2, 1997 and February 2, 1997,
respectively 77 77
Additional paid-in capital 80,090 79,842
Cumulative translation adjustment - (36)
Retained earnings (8,049) (6,016)
Total stockholders' equity 72,170 73,919
$248,954 $266,597
The accompanying notes are an integral part of these consolidated
financial statements.
</TABLE>
<PAGE> SPORTMART, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(Amounts in thousands, except share data)
(Unaudited)
<TABLE>
1997 1996 1997 1996
<S> <C> <C> <C> <C>
Net sales $89,279 $111,659 $318,498 $373,948
Cost of sales, including buying, distribution
and occupancy 71,407 87,005 247,557 286,581
Gross profit 17,872 24,654 70,941 87,367
Operating expenses:
Store 17,707 21,545 55,097 63,913
General and administrative 4,460 4,739 13,911 14,230
Store pre-opening - 406 - 907
Operating (loss) income (4,295) (2,036) 1,933 8,317
Other expense:
Interest expense, net (1,964) (2,106) (5,376) (6,019)
Other income 92 555 54 241
(1,872) (1,551) (5,322) (5,778)
(Loss) income before income taxes (6,167) (3,587) (3,389) 2,539
Income tax benefit (provision) 2,467 1,507 1,356 (1,062)
(Loss) income before extraordinary item $ (3,700) $ (2,080) $ (2,033) $ 1,477
Extraordinary item (net of income tax benefit of
$335 for the 13 and 39 weeks ended October 27, 1996) - (462) - (462)
Net (loss) income $ (3,700) $ (2,542) $ (2,033) $ 1,015
(Loss) income per share before extraordinary item $ (.29) $ (.16) $ (.16) $ .12
Loss per share from extraordinary item - (.04) - (.04)
Net (loss) income per share $ (.29) $ (.20) $ (.16) $ .08
Weighted average number of common shares outstanding 12,890,670 12,835,137 12,883,320 12,823,434
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
<PAGE> SPORTMART, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Amounts in thousands, except share data)
(Unaudited)
<TABLE>
Voting Class A Additional Cumulative Total
Common Stock Common Stock Paid-in Translation Retained Stockholders'
Shares Amount Shares Amount Capital Adjustment Earnings Equity
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balances, January 28, 1996 5,148,833 $ 52 7,625,538 $ 76 $ 79,637 $ (12) $ 21,043 $ 100,796
Issuance of 60,766 of Class A
common shares under
stock purchase plan - - 60,766 1 173 - - 174
Cumulative translation adjustment - - - - - (24) - (24)
Net loss, fiscal 1996 - - - - - - (27,059) (27,059)
Balances, February 2, 1997 5,148,833 52 7,694,734 77 79,842 (36) (6,016) 73,919
Issuance of 41,946 of Class A
common shares under
stock purchase plan - - 41,946 - 97 - - 97
Exercise of stock options - - 46,403 - 151 - - 151
Elimination of cumulative - - - - - 36 - 36
translation adjustment
Net loss - - - - - - (2,033) (2,033)
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
<PAGE> SPORTMART, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands)
(Unaudited)
<TABLE> Thirty-nine Weeks Ended
November 2, October 27,
1997 1996
<S> <C> <C>
Cash flows from operating activities:
Net (loss) income from continuing operations $ (2,033) $ 1,477
Extraordinary item, net of tax - (462)
Adjustments to reconcile net (loss) income to net cash provided by operating activities:
Depreciation and amortization 8,273 8,363
Other adjustment 36 (20)
Deferred income tax provision (1,356) (42)
Net decrease (increase) in assets:
Merchandise inventories 6,895 (15,601)
Prepaid expenses and other assets (3,164) 5,974
Income taxes receivable 10,742 -
Advertising co-op receivable (3,345) (712)
Other assets-noncurrent (428) (1,076)
Net increase (decrease) in liabilities:
Accounts payable 39 (6,574)
Accrued expenses (25,395) (14,285)
Other long-term liabilities 247 908
Net cash used in operating activities (9,489) (22,050)
Cash flows from investing activities:
Purchase of property and equipment (3,565) (11,693)
Proceeds from sale of property and equipment 458 -
Purchase of assets held pending sale 110 (1,401)
Advances to related parties (103) (373)
Repayment of advances to related parties 308 318
Net cash used in investing activities (2,792) (13,149)
Cash flows from financing activities:
Proceeds from issuance of Class A common stock 250 205
Principal payments under capital lease obligations and long-term debt (227) (5,605)
Early extinguishment of debt - (20,200)
Outstanding checks, net 2,101 289
Proceeds from mortgage payable 775 -
Advances on lines of credit 124,732 218,573
Repayment on lines of credit (118,166) (162,080)
Net cash provided by financing activities 9,465 31,182
Net decrease in cash and cash equivalents (2,816) (4,017)
Cash and cash equivalents at beginning of period 2,816 4,017
Cash and cash equivalents at end of period $ - $ -
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
<PAGE> SPORTMART, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Description of Business
Sportmart, Inc. and Subsidiary (the "Company") operates in one
business segment which is the retail sporting goods business. As of
December 3, 1997, the Company operated 59 superstores located in
the United States. The eleven Canadian locations in the process of
liquidation as of February 2, 1997 have all been closed as of December
3, 1997.
2. Summary of Significant Accounting Policies
Consolidation
The consolidated financial statements include the accounts of
Sportmart, Inc. and Sportdepot Stores Inc., its wholly-owned
subsidiary. Sportmart Canada, Inc. was incorporated in April 1994 and
the first store in Canada opened in March 1995. In addition, Sportdepot
Stores Inc. was incorporated in January 1995 as a wholly-owned subsidiary
of Sportmart Canada, Inc. In October 1995, Sportmart Canada, Inc. was
amalgamated into Sportdepot Stores Inc. All significant intercompany
transactions and balances have been eliminated.
Principles of Presentation
The accompanying unaudited consolidated financial statements have
been prepared in accordance with generally accepted accounting principles
for interim financial information. Accordingly, they do not include all
of the information and footnotes required by generally accepted
accounting principles for complete financial statements. In the opinion
of management, the accompanying unaudited consolidated financial
statements contain all adjustments (consisting solely of normal recurring
accruals) necessary to present fairly the consolidated financial position
of Sportmart, Inc. and Subsidiary as of November 2, 1997 and the
consolidated results of its operations and its cash flows for the
thirteen week and thirty-nine week periods ended November 2, 1997 and
October 27, 1996. Due to the seasonal nature of the business, results
for interim periods are not indicative of a full year's operations.
These consolidated financial statements should be read in
conjunction with the Company's audited financial statements for the
fiscal year ended February 2, 1997 included in the Company's Form 10-K.
Net Loss Per Share
Net loss per share is based on 12,890,670 and 12,835,137 weighted
average common shares outstanding for the thirteen weeks ended November
2, 1997 and October 27, 1996, respectively. Net loss per share is based
on 12,883,320 and 12,823,434 weighted average common shares outstanding
for the thirty-nine weeks ended November 2, 1997 and October 27, 1996.
<PAGE>
3. Non-Recurring Items
During the fourth quarter of fiscal 1996, the Company recorded a
non-recurring pre-tax charge of $33.2 million. The majority of the charge
was related to costs associated with exiting the Canadian market
including unamortized portions of nonrecoverable capital improvements
($12.5 million), lease buy-out costs ($11.9 million), inventory write-down
costs ($5.7 million), severance ($850,000) and miscellaneous costs ($2.2
million). Additionally, the Company has reserves for store closings
relating to previous store closings including Wheeling and River North.
As of November 2, 1997, the total reserve is approximately $6.2 million
consisting primarily of the remaining lease buy-out and miscellaneous
costs. In total, the Company believes the remaining reserves for these
non-recurring charges continue to be appropriate.
4. Extraordinary Item
During the third quarter of fiscal 1996, the Company incurred an
extraordinary charge of approximately $462,000, net of income taxes, as
a result of the termination of a previous revolving credit facility and
the loans from Allstate.
5. Pending Plan of Merger
The Company entered into an Agreement and Plan of Merger, dated as
of September 28, 1997 and amended and restated as of December 2, 1997,
with Gart Sports Company. Privately held Gart Sports (Gart) is the
holding company for Gart Bros. Sporting Goods Co., a 63-store, Denver-
based sporting goods retailer. Under the agreement, Sportmart will be
merged into Gart. Based on the agreement's conversion ratio,
stockholders of Gart (pre-merger) will hold approximately 72.5% of the
combined company, while Sportmart stockholders will hold approximately
27.5% of the outstanding shares of the combined company. Leonard Green
& Partners, an affiliate of the majority shareholder of Gart, will
control approximately 60% of the outstanding shares of the combined
company. The Agreement and Plan of Merger requires the Company to
maintain minimum net worth and total liabilities prior to closing. The
Merger Agreement is subject to Sportmart stockholder approval and a
majority of Sportmart stockholders have agreed to vote in favor of the
Merger Agreement. A special meeting of stockholders to approve the
merger is expected to occur in January 1998.
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
Results of Operations
The following table sets forth, for the periods indicated, certain income
statement data of the Company expressed as a percentage of net sales and
the number of stores open at the end of each period:
<TABLE>
November 2, October 27, November 2, October 27,
1997 1996 1997 1996
<S> <C> <C> <C> <C>
Income statement data:
Net sales 100.0 % 100.0% 100.0% 100.0%
Cost of sales, including buying,
distribution and occupancy 80.0 77.9 77.7 76.6
Gross profit 20.0 22.1 22.3 23.4
Operating expenses:
Store expenses 19.8 19.3 17.3 17.1
General and administrative expenses 5.0 4.2 4.4 3.8
Store pre-opening expenses - .4 - .2
Operating (loss) income (4.8) (1.8) .6 2.3
Interest expense, net (2.2) (1.9) (1.7) (1.6)
Other income .1 .5 - -
(Loss) income before income taxes (6.9) (3.2) (1.1) .7
Income tax benefit (provision) 2.8 1.3 .4 (.3)
(Loss) income before extraordinary item (4.1)% (1.9)% (.7)% .4%
Number of stores at end of period 59 70
</TABLE>
Thirteen Weeks Ended November 2, 1997 Compared to Thirteen Weeks Ended
October 27, 1996
Net sales decreased from $111.7 million in the thirteen weeks ended
October 27, 1996 to $89.3 million in the thirteen weeks ended November 2,
1997. The net sales decrease was primarily attributable to the Company's
decision to exit the Canadian market at the end of fiscal 1996 coupled
with comparable store sales decreases.
Net sales in comparable stores decreased 10.5% during the thirteen weeks
ended November 2, 1997. Management believes that comparable stores sales
have been negatively effected by the continuing impact of competition and
the soft sales of fitness, women's athletic and court shoes, in-line
skates, and outdoor categories. Nevertheless, the Company realized sales
increases in men's outerwear, cleated shoes, athletic socks and
accessories, youth clothing, and golf.
Gross profit after buying, distribution, and occupancy costs decreased
$6.8 million during the thirteen week period ended November 2, 1997, to
$17.9 million, a 27.5% decrease, primarily due to lower sales volume.
Gross profit, as a percentage of net sales, decreased 2.1% due to higher
actual merchandise cost of sales coupled with accruing a higher shrinkage
reserve based on last year's full year results. In addition, occupancy
costs caused the gross profit percentage to decrease due to the lower
sales volume.
<PAGE>
Store expenses decreased from $21.5 million in the thirteen week period
ended October 27, 1996, to $17.7 million in the thirteen week period ended
November 2, 1997, a 17.7% decrease. This decrease was primarily
due to the closure of the eleven Canadian locations coupled with expense
savings in store payroll. As a percentage of net sales, store expenses
increased from 19.3% in the thirteen week period ended October 27, 1996,
to 19.8% in the thirteen week period ended November 2, 1997, primarily due
to the lower sales volume.
General and administrative expenses decreased slightly from $4.7 million
in the thirteen weeks ended October 27, 1996, to $4.5 million in the
thirteen weeks ended November 2, 1997, a 4.3% decrease. As a percentage
of net sales, general and administrative expenses increased from 4.2% in
the thirteen week period ended October 27, 1996, to 5.0% in the thirteen
weeks ended November 2, 1997, primarily due to the lower sales volume.
Net interest expense decreased slightly from $2.1 million in the thirteen
week period ended October 27, 1996, to $2.0 million in the thirteen week
period ended November 2, 1997. Net interest expense as a percentage of
net sales increased from 1.9% for the thirteen week period ended October
27, 1996, to 2.2% for the thirteen week period ended November 2, 1997.
This increase is primarily due to the lower sales volume.
For the thirteen week periods ended November 2, 1997, and October 27,
1996, the statements of operations reflect a provision for federal, state,
and provincial income taxes based on the Company's expected annual
tax rates.
Thirty-nine Weeks Ended November 2, 1997 Compared to Thirty-nine Weeks
Ended October 29, 1996
Net sales decreased from $373.9 million in the thirty-nine weeks ended
October 27, 1996 to $318.5 million in the thirty-nine weeks ended November
2, 1997. The net sales decrease was primarily attributable to the
Company's decision to exit the Canadian market at the end of fiscal 1996
coupled with the overall comparable store sales decreases.
Net sales in comparable stores decreased 5.7% during the thirty-nine weeks
ended November 2, 1997 as compared to the thirty-nine week period ended
October 27, 1996. Management believes that comparable stores sales have
been negatively effected by the continued impact of competition and the
re-positioning of the Company into businesses that historically have
generated higher gross margins. The Company realized sales increases
during the thirty-nine weeks ended November 2, 1997 in cleated footwear,
athletic socks and accessories, womens fitness, men's and women's
sportswear, men's active sportswear and golf. The apparel categories
previously noted represent areas where the Company has expanded its
offerings of higher margin private branded merchandise as part of its
strategic re-positioning. Nevertheless, the comparable store sales
performance was negatively impacted by soft sales of abdominal exercisers,
in-line skates and outdoor categories during the thirty-nine week period.
<PAGE>
Gross profit after buying, distribution, and occupancy costs decreased
$16.4 million during the thirty-nine week period ended October 27, 1996,
to $70.9 million, an 18.8% decrease, primarily due to lower sales volume.
Gross profit, as a percentage of net sales, decreased 1.1% due primarily
to accruing a higher shrinkage reserve based on last year's full year
results. In addition, distribution and occupancy costs caused the gross
profit percentage to decrease due to the lower sales volume.
Store expenses decreased from $63.9 million in the thirty-nine week
period ended October 27, 1996, to $55.1 million in the thirty-nine week
period ended November 2, 1997, a 13.8% decrease. This decrease was
primarily due to the closure of the eleven Canadian locations. As a
percentage of net sales, store expenses increased slightly from 17.1% in
the thirty-nine week period ended October 27, 1996, to 17.3% in the
thirty-nine week period ended November 2, 1997.
General and administrative expenses decreased slightly from $14.2 million
in the thirty-nine week period ended October 27, 1996, to $13.9 million
in the thirty-nine week period ended November 2, 1997, a 2.1% decrease.
As a percentage of net sales, general and administrative expenses
increased from 3.8% in the thirty-nine week period ended October 27, 1996,
to 4.4% in the thirty-nine week period ended November 2, 1997,
primarily due to the lower sales volume.
Net interest expense decreased from $6.0 million in the thirty-nine week
period ended October 27, 1996, to $5.4 million in the thirty-nine week
period ended November 2, 1997. The decrease in net interest expense is
due to the lower average debt levels during fiscal 1997. Net interest
expense, as a percentage of net sales, increased slightly from 1.6% in
the thirty-nine week period ended October 27, 1996, to 1.7% in the
thirty-nine week period ended November 2, 1997.
For the thirty-nine week periods ended November 27, 1997 and October 27,
1996, the statements of operations reflect a provision for federal, state,
and provincial income taxes based on the Company's expected annual
tax rates.
Liquidity and Capital Resources
As of November 2, 1997, the Company had working capital of $12.2 million
compared to $9.2 million at February 2, 1997.
Net cash used in operating activities was $9.5 million for the thirty-
nine weeks ended November 2, 1997, versus $22.1 million for the thirty-
nine weeks ended October 27, 1996. The $12.6 million decrease in cash
used in operating activities is primarily due to the decrease in inventory
as a result of exiting the Canadian market . Also, the Company collected
an income tax refund during the first thirty-nine weeks of fiscal 1997.
Partially offsetting these items were payments of accrued expenses
related to the closure of Canada during the first thirty-nine weeks of
fiscal 1997.
Net cash used in investing activities decreased from $13.1 million for
the thirty-nine weeks ended October 27, 1996, to $2.8 million for the
thirty-nine weeks ended November 2, 1997. The $10.3 million decrease in
cash used in investing activities is primarily due to lower capital
expenditures.
<PAGE>
Net cash provided by financing activities was $9.4 million for the
thirty-nine weeks ended November 2, 1997, versus $31.2 million for the
thirty-nine weeks ended October 27, 1996. The $31.2 million net cash
provided by financing activities for the thirty-nine week period ended
October 27, 1996 was due to $56.5 million net advances on the line of
credit net of $20.2 million payment on the early extinguishment of debt
and $5.6 million principal payments under capital lease obligations and
long-term debt. The $9.5 million net cash provided by financing
activities for the thirty-nine weeks ended November 2, 1997 was primarily
due to $6.6 million net advances on the line of credit.
The Company has available a $135.0 million revolving credit agreement
with a syndicate of banks. This revolving line of credit funds both
seasonal and general capital requirements. In order to comply with
Emerging Issues Task Force Issue No. 95-22 regarding classification of
certain debt instruments, the borrowings under this revolving line of
credit have been classified as current liabilities. However, based on
the terms of the agreement and the Company's business plan, the Company
believes the amount outstanding under the revolving line of credit will
be due and payable in September 2001 subject to any prior refinancing
by Gart following the merger. This revolving line of credit requires
the maintenance of minimum net worth and a maximum debt to inventory
ratio. As of November 2, 1997, the Company was in compliance with all
covenants of this agreement. In June and September of fiscal 1997, the
Company amended this credit agreement to lower the minimum net worth
requirement and increase availability in order to provide the Company
with greater operating flexibility. As of December 3, 1997,
approximately $101.9 million in cash borrowings and $4.9 million in
letters of credit (to support imported merchandise and certain real
estate transactions) were outstanding under this line of credit.
The Company's primary on-going cash requirements for fiscal 1997 relate
to capital expenditures relating to the improvement of existing
operations. The Company does not plan to open any new stores during
fiscal 1997. As of November 2, 1997, the Company has invested
approximately $3.6 million in capital expenditures of which $2.7 million
related to the renovation of existing stores and distribution centers and
$.9 million related to upgrades in the Company's management information
systems. In addition, the Company plans to invest, during the remainder
of fiscal 1997, $2.5 million to renovate existing stores and distribution
centers and to upgrade the Company's management information systems. The
Company expects to be able to fund its working capital requirements with
a combination of anticipated cash flows from operations, bank borrowings
and normal trade credit agreements.
Foreign Currency and Interest Rate Risk Management
Derivative financial instruments are utilized by the Company to reduce
interest rate and foreign currency exchange risks. The Company does not
use derivatives for speculative trading purposes.
<PAGE>
In March 1995, the Company entered into an interest rate swap agreement,
a form of derivative, with a major financial institution. This agreement
became effective in August 1995 and expires in August 1998. This
agreement effectively converts $10.0 million of its floating rate bank
debt (based on LIBOR plus a fee determined by financial performance) to a
fixed rate of 7.54% (plus the same fee) and requires settlement on
a quarterly basis. The difference in interest between the fixed rate and
effective LIBOR interest rate is recognized as an adjustment to interest
expense in the period incurred.
In order to reduce its exposure to fluctuations in interest rates, the
Company entered into interest rate cap agreements for a notional amount
totaling $50.0 million during fiscal 1997. In April 1997, the Company
entered into an interest rate cap on $25.0 million of its revolving line
of credit which expires in one year and places a ceiling on LIBOR at
6.0%. In July 1997, the Company entered into a second interest rate cap
for $25.0 million of its revolving line of credit which expires in two
years and places a ceiling on LIBOR at 6.0%.
During the course of operating in Canada, the Company entered into foreign
currency contracts to hedge intercompany loans and other commitments in
currencies other than its Canadian subsidiary's functional currency.
During the course of closing down operations in Canada, the Company has
continued to enter into such contracts. Realized and unrealized gains
and losses arising from these foreign currency contracts are recognized
in income as offsets to gains and losses resulting from the underlying
hedged transaction. As of November 2, 1997, the Company had
approximately $1.4 million of open foreign currency contracts with
various settlement dates prior to January 1998.
Seasonality and Inflation
The second and fourth fiscal quarters, which respectively include
Father's Day and Christmas, have historically contributed the greatest
volume of net sales and income before taxes to the Company. For fiscal
years 1996 and 1995, the second and fourth fiscal quarters combined
accounted for approximately 56% and 58%, respectively, of the Company's
fiscal year net sales. In both fiscal 1996 and 1995, the fourth fiscal
quarter was significantly impacted by non-recurring charges and, in
addition, the fourth quarter of fiscal 1995 was impacted by discontinued
operations; however, typically, the second and fourth quarters account
for substantially all of the Company's income before taxes. In contrast,
the Company has consistently experienced net losses in the third quarter.
Inventory levels, which gradually increase beginning in February,
generally reach their peak in November and then fall to their lowest
level following the December holiday season. Although the operations of
the Company are influenced by general economic conditions, the
Company does not believe that inflation has had a material effect on the
results of operations during the thirty-nine weeks ended
November 2, 1997.
Private Securities Litigation Reform Act of 1995
The statements which are not contained in this Quarterly Report on Form
10-Q are forward looking statements that involve risks and uncertainties.
The risks and uncertainties contained in the Quarterly Report include but
are not limited to, product demand and market acceptance risks, the
effect of economic conditions generally, and retail and sporting goods
business conditions specifically, the impact of competition, development
<PAGE>
of private brand products, customer acceptance of the Four Worlds concept,
commercialization and technological difficulties, capacity and supply
constraints or difficulties, the results of financing efforts, changes in
consumer preferences and trends, the adequacy of reserves for
discontinued operations, the ability to settle lease obligations for
closed stores, the effect of the Company's accounting policies, weather
conditions, and other risks detailed in the Company's Securities and
Exchange Commission filings. The words "believes", "anticipates",
"estimates", "expects", and words of similar import used in this Quarterly
Report as they relate to the Company or its Management are generally
<PAGE>
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
A. Exhibits.
Exhibit 2.1 - Amended and Restated Stockholder
Agreement
Exhibit 10.57 - Fifth Amendment to Credit Agreement
between Registrant and BT Commerical
Corporation
Exhibit 10.58 - Amended and Restated Agreement of Plan
of Merger
Exhibit 11 - Statement regarding computation of
earnings per share
Exhibit 27 - Financial Data Schedule
B. Reports on Form 8-K.
Report on Form 8-K dated September 29, 1997 (Press Release)
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.
SPORTMART, INC.
Date: December 12, 1997 By: /S/ ANDREW S. HOCHBERG
Andrew S. Hochberg,
Chief Executive Officer
Date: December 12, 1997 By: /S/ THOMAS T. HENDRICKSON
Thomas T. Hendrickson,
Executive Vice President and
Chief Financial Officer
<PAGE>
AMENDED AND RESTATED
STOCKHOLDER AGREEMENT
AMENDED AND RESTATED AGREEMENT, dated as of December 2, 1997, by
and between Gart Sports Company, a Delaware corporation ( Holdings ),
Gart Bros. Sporting Goods Company, a Colorado corporation and wholly-
owned subsidiary of Holdings ( Sporting ) and the stockholders of
Sportmart, Inc., a Delaware corporation (the Company ) signatory
hereto (the Stockholders ).
RECITALS
A. Holdings and Stockholders are parties to a Stockholder
Agreement (the Original Stockholder Agreement ) dated September 28,
1997 (the Original Execution Date ) and, concurrently with the
execution of the Original Stockholder Agreement, Holdings, Sporting
and the Company entered into an Agreement and Plan of Merger (the
Original Merger Agreement ) pursuant to which the Company would have
been merged with and into Sporting (the Merger);
B. As an inducement and a condition to entering into the
Original Merger Agreement, Holdings required that Stockholders agree,
and Stockholders did agree, to enter into the Original Stockholder
Agreement;
C. Concurrently with the execution of this Amended and Restated
Agreement, Holdings, Sporting and the Company have amended and
restated the Original Merger Agreement in its entirety whereby GB
Acquisition, Inc., a Delaware corporation ( Acquisition ) and wholly
owned subsidiary of Holdings, will merge with and into the Company (as
such amended and restated agreement may hereafter be amended from time
to time, the Merger Agreement ); and
D. As an inducement and a condition to voting in favor of the
Merger Agreement and the Merger, as restructured, the Stockholders
have required that the Original Stockholder Agreement be amended and
restated in its entirety as set forth herein.
NOW, THEREFORE, in consideration of the foregoing and the mutual
promises, representations, warranties, covenants and agreements
contained herein and for other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the parties
hereto, intending to be legally bound hereby, agree as follows:
1. Certain Definitions. In addition to the terms defined
elsewhere herein, capitalized terms used and not defined herein have
the respective meanings ascribed to them in the Merger Agreement. For
purposes of this Agreement:
(a) Beneficially Own or Beneficial Ownership with
respect to any securities means having beneficial ownership of such
securities as determined pursuant to Rule 13d-3 under the Securities
Exchange Act of 1934, as amended (the Exchange Act ).
(b) Existing Shares means shares of Company Common
Stock Beneficially Owned by any of the Stockholders as of the date
hereof.
<PAGE>
(c) Securities means the Existing Shares together
with any shares of Company Common Stock or other securities of the
Company that become Beneficially Owned by any Stockholder in any
capacity after the date hereof and prior to the termination of this
Agreement whether upon the exercise of options, warrants or rights,
the conversion or exchange of convertible or exchangeable securities,
or by means of purchase, dividend, distribution, split-up,
recapitalization, combination, exchange of shares or the like, gift,
bequest, inheritance or as a successor in interest in any capacity or
otherwise.
2. Disclosure. The Stockholders hereby agree to permit
the Company and Holdings to publish and disclose in the Registration
Statement and the Proxy Statement (including all documents and
schedules filed with the SEC), and any press release or other
disclosure document which Holdings, in its sole discretion, determines
to be necessary or desirable in connection with the Merger and any
transactions related thereto, the Stockholders identities and
ownership of Company Common Stock and the nature of the Stockholders
commitments, arrangements and understandings under this Agreement.
Holdings will provide a representative of the Stockholders designated
by them (the Spokesperson ) with a copy of any proposed disclosure
and will provide the Spokesperson with a reasonable opportunity to
comment thereon and will not make any disclosure to which the
Spokesperson reasonably objects.
3. Voting of Company Common Stock. The Stockholders
hereby agree that, during the period commencing on the date hereof and
continuing until the first to occur of (a) the Effective Time, (b) 30
days after termination of the Merger Agreement (i) by Holdings other
than pursuant to Sections 8.1(d)(ii) or 8.1(d)(iii) of the Merger
Agreement provided that such termination is not as a result of the
Company's intentionally acting, or failing to act, in bad faith with
respect to its obligations under the Merger Agreement or (ii)
rightfully by the Company in good faith pursuant to Section 8.1(f) of
the Merger Agreement, or (c) June 30, 1998 (the first to occur of
clauses (a), (b) and (c), the Termination Date ), at any meeting
(whether annual or special and whether or not an adjourned or
postponed meeting) of the holders of Company Common Stock, however
called, or in connection with any written consent of the holders of
Company Common Stock, the Stockholders will appear at the meeting or
otherwise cause the Securities to be counted as present thereat for
purposes of establishing a quorum and vote or consent (or cause to be
voted or consented) the Securities (A) in favor of the adoption of the
Merger Agreement and the approval of other actions contemplated by the
Merger Agreement and this Agreement and any actions required in
furtherance thereof and hereof; (B) against any action or agreement
that would result in a breach in any respect of any material covenant,
representation or warranty or any other obligation or agreement of the
Company under the Merger Agreement or this Agreement; and (C) except
as otherwise agreed to in writing in advance by Holdings in its sole
discretion, against the following actions (other than the Merger and
the transactions contemplated by this Agreement and the Merger
Agreement): (1) any Acquisition Transaction or Superior Proposal, (2)
(u) any change in a majority of the persons who constitute the
Company's Board of Directors (other than with the approval of a
majority of the Company's directors then in office); (v) any material
change in the present capitalization of the Company, including without
limitation any proposal to sell a substantial equity interest in the
Company or its Subsidiaries; (w) any amendment of the Company's
<PAGE>
Certificate of Incorporation or By-laws; (x) any other material change
in the Company's corporate structure or business; or (y) any other
action which, in the case of each of the matters referred to in
clauses (2) (u), (v), (w) or (x), is intended, or could reasonably be
expected, to impede, interfere with, delay, postpone or materially
adversely affect the Merger and the transactions contemplated by this
Agreement and the Merger Agreement. The Stockholders may not enter
into any agreement or understanding with any person the intended or
reasonably anticipated effect of which would be inconsistent with or
violative of any provision contained in this Section 3.
4. Subsequent Stockholder Actions.
(a) If Holdings becomes entitled to a fee pursuant to
Section 8.2 of the Merger Agreement, subject to the last sentence of
this subsection (a) to this Section 4, with respect to Securities for
which any Stockholder receives cash consideration pursuant to the
Acquisition Transaction, such Stockholder will immediately upon the
receipt thereof pay to Holdings an amount in cash (if positive) (the
Differential Amount ) equal to (i) the net pre-tax cash proceeds
received by such Stockholder with respect to the shares of Company
Common Stock or other Securities, including any shares of Company
Common Stock into or for which any Securities are convertible,
exchangeable or exercisable, of such Stockholder (such shares, the
Subject Shares ) in such Acquisition Transaction within nine months
after the date that the Merger Agreement is terminated, minus (ii) the
product of (A) the per share value attributed to the outstanding
Company Common Stock in the proposed Merger based on a $105 million
equity value for Holdings times (B) the number of Subject Shares. If
such Stockholder receives any non-cash consideration in an Acquisition
Transaction otherwise of a type described above as part of the net
proceeds ( Other Consideration ) that consists of securities listed on
a national securities exchange or the Nasdaq National Market
( Marketable Securities ), such Stockholder shall deliver immediately
to Holdings an amount of Marketable Securities whose aggregate value,
calculated on the basis of the closing price for such Marketable
Securities on the exchange where such Marketable Securities are
listed, equals the Differential Amount. To the extent the Other
Consideration consists of non-Marketable Securities or other assets,
such Other Consideration will be held by such Stockholder until such
Stockholder shall have sold or otherwise disposed of such Other
Consideration for cash or Marketable Securities, or has otherwise
actually realized value, directly or indirectly, from such sale or
disposition, at which time the Differential Amount, to the extent not
previously paid, will be immediately paid to Holdings in cash or such
Marketable Securities.
(b) From and after the date hereof and until June 30,
1998, each Stockholder agrees to use commercially reasonable efforts
(but without the obligation to expend any funds) to facilitate the
renegotiation by Holdings, Sporting or the Company of any leases or
other material contracts between the Company (prior to the Effective
Time) or Sporting (as the survivor by merger to the Company), and any
entities in which such Stockholder owns a substantial economic
interest or over which such Stockholder exercises any control
(including the obtaining of any required landlord consents to the
Merger); provided, however, that no such renegotiation shall change
the underlying economics of any such leases or material contracts.
<PAGE>
5. Covenants, Representations and Warranties of
Stockholders. Each Stockholder hereby represents and warrants to, and
agrees with, Holdings as follows:
(a) Ownership of Shares. Such Stockholder is the sole
record and Beneficial Owner of the number of Existing Shares opposite
such Stockholder's name on the signature pages hereof, and on the date
hereof, such Existing Shares constitute all of the shares of Company
Common Stock owned of record or Beneficially Owned by such
Stockholder. Such Stockholder has sole voting power and sole power to
issue instructions with respect to the matters set forth in Sections 3
and 4 hereof, sole power of disposition, sole power of conversion,
sole power to demand appraisal rights and sole power to agree to all
of the matters set forth in this Agreement, in each case with respect
to all of such Stockholder's Existing Shares with no limitations,
qualifications or restrictions on such rights, subject to applicable
securities laws, and the terms of this Agreement.
(b) Corporate Authorization. This Agreement has been
duly and validly executed and delivered by such Stockholder and
constitutes a valid and binding agreement enforceable against such
Stockholder in accordance with its terms except (i) as may be limited
by applicable bankruptcy, insolvency or similar laws affecting
creditors rights and (ii) that the remedy of specific performance and
injunctive and other forms of equitable relief may be subject to
equitable defenses and to the discretion of the court before which any
proceeding therefor may be brought.
(c) No Conflicts. Except for filings, authorizations,
consents and approvals as may be required under the HSR Act, the
Exchange Act and the Securities Act, (i) no filing with, and no
permit, authorization, consent or approval of, any state or federal
Governmental Authority is necessary for the execution of this
Agreement by such Stockholder and the consummation by such Stockholder
of the transactions contemplated hereby and (ii) none of the execution
and delivery of this Agreement by such Stockholder, the consummation
by such Stockholder of the transaction contemplated hereby or
compliance by such Stockholder with any of the provisions hereof will
(A) conflict with or result in any breach of the organizational
documents of such Stockholder (if applicable), (B) result in a
violation or breach of, or constitute (with or without notice or lapse
of time or both) a default (or give rise to any third party right of
termination, cancellation, material modification or acceleration)
under any of the terms, conditions or provisions of any note, loan
agreement, bond, mortgage, indenture, license, contract, commitment,
arrangement, understanding, agreement or other instrument or
obligation of any kind to which such Stockholder is a party or by
which such Stockholder or any of its properties or assets may be
bound, or (C) violate any order, writ, injunction, decree, judgment,
statute, rule or regulation applicable to such Stockholder or any of
its properties or assets.
(d) No Encumbrances. Except as applicable in
connection with the transactions contemplated by Sections 3 and 4
hereof, such Stockholder's Existing Shares at all times during the
term hereof, will be Beneficially Owned by such Stockholder, free and
clear of all liens, claims, security interests, proxies, voting trusts
or agreements, understandings or arrangements or any other
encumbrances whatsoever, except for Existing Shares pledged to other
Stockholders.
<PAGE>
(e) No Finder's Fees. No broker, investment banker,
financial advisor or other person is entitled to any broker's,
finder's, financial adviser's or other similar fee or commission in
connection with the transactions contemplated by this Agreement based
upon arrangements made by or on behalf of such Stockholder, other than
as contemplated by the Merger Agreement.
(f) No Solicitation. Such Stockholder will not, and
will cause its Affiliates (other than the Company) and officers,
directors, employees, partners, investment bankers, attorneys,
accountants and other agents and representatives of such Stockholder
and such affiliates (such Affiliates, officers, directors, employees,
partners, investment bankers, attorneys, accountants and other agents
and representatives of any person are hereinafter collectively
referred to as the Representatives of such person) not to, directly
or indirectly (other than with Holdings and its representatives in
connection with the Merger), (i) solicit, initiate or encourage
(including by way of furnishing information) any inquiries or the
making of any proposal with respect to any Acquisition Transaction or
(ii) negotiate or otherwise engage in discussions with any person with
respect to any Acquisition Transaction, or which may reasonably be
expected to lead to a proposal for an Acquisition Transaction, or
enter into any agreement, arrangement or understanding (including any
letter of intent, agreement in principle or similar agreement) with
respect to any such Acquisition Transaction. Such Stockholder will
promptly advise Holdings of any inquiries or proposals received by,
and any information requested from, or any negotiations or discus-
sions sought to be initiated or continued with agents or representa-
tives of the foregoing, in each case from a person (other than Hold-
ings and its representatives) with respect to an Acquisition Trans-
action, and a reasonable summary of the terms thereof, including the
identity of such third party (unless disclosing the identity of such
third party would violate the terms of any confidentiality or similar
agreement binding on the Company and entered into on or prior to
September 19, 1997), including any financing arrangement or commitment
in connection therewith. Such Stockholder will, and will cause its
Representatives to, immediately cease and cause to be terminated any
and all existing activities, discussions or negotiations, if any, with
any parties conducted heretofore with respect to any Acquisition
Transaction or Superior Proposal relating to the Company, other than
discussions or negotiations with Holdings and its affiliates.
(g) Restriction on Transfer, Proxies and Non-
Interference. From the date hereof, such Stockholder will not,
directly or indirectly, prior to the Termination Date, (i) offer for
sale, sell, transfer, tender, pledge, encumber, assign or otherwise
dispose of, or enter into any contract, option or other arrangement or
understanding with respect to or consent to the offer for sale, sale,
transfer, tender, pledge, encumbrance, assignment or other disposition
of, any or all of the Securities or any interest therein, not
including any sale, transfer, pledge, assignment or otherwise to other
Stockholders and except as provided in Section 4(a); (ii) grant any
proxies or powers of attorney, deposit the Securities into a voting
trust or enter into a voting agreement with respect to the Securities;
or (iii) take any action that would make any representation or
warranty of such Stockholder contained herein untrue or incorrect or
would result in a breach by such Stockholder of its obligations under
this Agreement.
<PAGE>
(h) Reliance by Holdings. Such Stockholder
understands and acknowledges that Holdings is entering into the Merger
Agreement in reliance upon such Stockholder s execution and delivery
of this Agreement.
6. Representations and Warranties of Holdings and
Sporting. Each of Holdings and Sporting hereby represents and
warrants to the Stockholders as follows:
(a) Organization. Holdings is a corporation duly
organized, validly existing and in good standing under the laws of the
State of Delaware. Sporting is a corporation duly organized, validly
existing and in good standing under the laws of the State of Colorado.
Holdings and Sporting have all requisite corporate power or other
power and authority to execute and deliver this Agreement and perform
their obligations hereunder. The execution and delivery by Holdings
and Sporting of this Agreement and the performance by Holdings and
Sporting of their obligations hereunder have been duly and validly
authorized by the Board of Directors of Holdings and Sporting and no
other corporate proceedings on the part of Holdings or Sporting are
necessary to authorize the execution, delivery and performance of this
Agreement or the consummation of the transactions contemplated hereby
by Holdings and Sporting.
(b) Corporate Authorization. This Agreement has been
duly and validly executed and delivered by Holdings and Sporting and
constitutes a valid and binding agreement of Holdings and Sporting
enforceable against Holdings and Sporting in accordance with its
terms, except (i) as may be limited by applicable bankruptcy,
insolvency or similar laws affecting creditors rights and (ii) that
the remedy of specific performance and injunctive and other forms of
equitable relief may be subject to equitable defenses and to the
discretion of the court before which any proceeding therefor may be
brought.
(c) No Conflicts. Except for filings, authorizations,
consents and approvals as may be required under the HSR Act, the
Exchange Act and the Securities Act, (i) no filing with, and no
permit, authorization, consent or approval of, any state or federal
Governmental Authority is necessary for the execution of this
Agreement by Holdings and Sporting and the consummation by Holdings
and Sporting of the transactions contemplated hereby and (ii) none of
the execution and delivery of this Agreement by Holdings and Sporting,
the consummation by Holdings and Sporting of the transactions
contemplated hereby or compliance by Holdings and Sporting with any of
the provisions hereof will (A) conflict with or result in any breach
of the certificate of incorporation or by-laws of Holdings or
Sporting, (B) result in a violation or breach of, or constitute (with
or without notice or lapse of time or both) a default (or give rise to
any third party right of termination, cancellation, material
modification or acceleration) under any of the terms, conditions or
provisions of any note, loan agreement, bond, mortgage, indenture,
license, contract, commitment, arrangement, understanding, agreement
or other instrument or obligation of any kind to which Holdings or
Sporting is a party or by which Holdings or Sporting or any of their
properties or assets may be bound, or (C) violate any order, writ,
injunction, decree, judgment, statute, rule or regulation applicable
to Holdings or Sporting or any of their properties or assets.
<PAGE>
(d) No Finder's Fee. No broker, investment banker,
financial adviser or other person is entitled to any broker's,
finder's, financial adviser's or other similar fee or commission in
connection with the transactions contemplated hereby based upon
arrangements made by or on behalf of Holdings or Sporting other than
as contemplated by the Merger Agreement.
(e) Merger Agreement. Holdings and Sporting
acknowledge that the Stockholders are third-party beneficiaries of
Section 6.13 of the Merger Agreement.
7. Stop Transfer; Legend.
(a) Each Stockholder agrees with, and covenants to
Holdings that such Stockholder will not request that the Company
register the transfer (book-entry or otherwise) of any certificate or
uncertificated interest representing any of the Securities, unless
such transfer is made in compliance with this Agreement.
(b) In the event of a stock dividend or distribution,
or any change in the Company Common Stock by reason of any stock
dividend, split-up, recapitalization, combination, exchange of shares
or the like other than pursuant to the Merger, the terms Shares and
Securities will be deemed to refer to and include the shares of
Company Common Stock as well as all such stock dividends and
distributions and any shares into which or for which any or all of the
Securities may be changed or exchanged and appropriate adjustments
shall be made to the terms and provisions of this Agreement.
(c) Such Stockholder will duly execute and deliver to
Holdings an Affiliate's Letter in the form attached to the Merger
Agreement prior to Closing.
8. Lease Guarantees. In order to preserve the economics
originally negotiated under the Original Merger Agreement and the
Original Stockholder Agreement, Sporting hereby irrevocably,
unconditionally and absolutely guarantees, effective from and after
the Effective Time, as primary obligor and not merely as surety, the
full and prompt performance and payment when due of all liabilities
and obligations, whether now existing or hereafter arising, of the
Company under those leases at the locations set forth in Exhibit A
attached to this Agreement and made a part hereof (the Leases ). It
is understood and agreed that this guaranty is a guaranty of
performance and payment when due and not of collection and this
guaranty may be enforced directly against Sporting without proceeding
against the Company and that Sporting hereby waives notice of
acceptance of this guaranty and notice of any liability or obligations
to which it may apply and waives presentment, demand of payment,
protest, notice of dishonor or non-payment or non-performance of any
such liability or obligation, suit or the taking of any other action
thereof by, and any other notice to, any party liable thereon or
therefor. This guaranty is expressly for the benefit of, and
enforceable by, each and every person or entity to whom the Company
has obligations or liabilities under and pursuant to the Leases,
whether now existing or hereafter arising.
9. Termination. This Agreement will terminate upon the
Termination Date, except that the covenants and agreements set forth
in Section 4(a) hereof will survive any termination of this Agreement
for the term specified therein.
<PAGE>
10. Miscellaneous.
(a) Further Assurances. From time to time, at the
other party's request and without further consideration, each party
hereto will execute and deliver such additional documents and take all
such further lawful action as may be necessary or reasonably desirable
to consummate and make effective, in the most expeditious manner
practicable, the transactions contemplated by this Agreement.
(b) Entire Agreement. This Agreement constitutes the
entire agreement among the parties with respect to the subject matter
hereof and supersedes all other prior agreements and understandings,
both written and oral, between the parties with respect to the subject
matter hereof.
(c) Capacity, Binding Effect and Certain Permitted
Activities. Stockholders agree that this Agreement and the
obligations hereunder will attach to the Securities and will be
binding upon any person or entity to which legal or Beneficial
Ownership of such Securities shall pass, whether by operation of law
or otherwise, including without limitation, any Stockholder's legal
representatives or successors or other transferees (for value or
otherwise) and any other successors in interest. Notwithstanding
anything to the contrary in this Agreement, each Stockholder is
signing this Agreement solely in its capacity as a stockholder of the
Company and no Stockholder shall be limited or otherwise affected by
this Agreement with respect to any action or inaction of such
Stockholder taken (i) in its capacity as a director, officer or
employee of the Company, (ii) in its capacity as a director, officer
or employee of, or consultant to, Holdings and/or its subsidiaries or
(iii) in conjunction with, vis-a-vis or in relation to any other
Stockholder or family member or any entity (other than, for purposes
of this clause (iii), the Company and Holdings or any of their
respective subsidiaries) as to which such a Stockholder or family
member serves as a director, officer, trustee, member, partner, or
fiduciary or other similar position, or as to which such Stockholder
exercises any dispositive or voting control of any Securities held by
such entity.
(d) Assignment. Neither this Agreement nor any of the
rights, interests or obligations hereunder will be assigned or
delegated (whether by operation of law or otherwise) without the prior
written consent of the other parties, provided that Holdings may
assign, in its sole discretion, its rights, interests and obligations
hereunder to any direct or indirect wholly owned Subsidiary of
Holdings, but no such assignment will relieve Holdings from any of its
obligations hereunder if such assignee does not perform such
obligations. Subject to the preceding sentence, this Agreement will
be binding upon, inure to the benefit of and be enforceable by the
parties and their respective successors and assigns.
(e) Amendment and Modification. This Agreement may
not be amended, changed, supplemented, waived or otherwise modified,
except upon the execution and delivery of a written agreement executed
by the parties hereto.
<PAGE>
(f) Notices. All notices and other communications
hereunder will be in writing and will be deemed given if delivered
personally, telecopied (which is confirmed) or on the next business
day after being sent by an overnight courier service, such as FedEx,
to the parties at the following addresses (or at such other address
for a party as will be specified by like notice):
If to the Stockholders:
c/o Mr. Andrew S. Hochberg
77 South Deere Park Drive
Highland Park, IL 60035
Telecopy: (847-266-1004)
copy to:
Barack Ferrazzano Kirschbaum Perlman & Nagelberg
333 West Wacker Drive, Suite 2700
Chicago, Illinois 60606
Attention: Peter J. Barack and David R. Selmer
Telecopy: (312) 984-3150
if to Holdings or Sporting:
Gart Sports Company
1000 Broadway
Denver, CO 80203
Attention: John Douglas Morton
Telecopier: (303) 830-9282
with copies to:
Leonard Green & Partners, L.P.
11111 Santa Monica Boulevard
Suite 2000
Los Angeles, California 90025
Attention: Jennifer Holden Dunbar
Telecopier: (310) 954-0404
and
Brownstein Hyatt Farber & Strickland, P.C. th
410 17th Street
Denver, CO 80202
Attention: Jeffrey M. Knetsch
Telecopier: (303) 623-1956
(g) Severability. If any term, provision, covenant or
restriction of this Agreement is held by a court of competent
jurisdiction or other authority to be invalid, void, unenforceable or
against its regulatory policy, the remainder of the terms, provisions,
covenants and restrictions of this Agreement will remain in full force
and effect and will in no way be affected, impaired or invalidated.
(h) Specific Performance. The parties hereto agree
that irreparable damage would occur in the event any provision of this
Agreement was not performed in accordance with the terms hereof and
that the parties will be entitled to the remedy of specific
performance of the terms hereof, in addition to any other remedy at
law or equity.
<PAGE>
(i) No Waiver. The failure of any party hereto to
exercise any right, power or remedy provided under this Agreement or
otherwise available in respect hereof at law or in equity, or to
insist upon compliance by any other party hereto with its obligations
hereunder, and any custom or practice of the parties at variance with
the terms hereof, will not constitute a waiver by such party of its
right to exercise any such or other right, power or remedy or to
demand such compliance.
(j) No Third Party Beneficiaries. Except as
contemplated by and set forth in Section 8, this Agreement is not
intended to confer upon any person other than the parties hereto any
rights or remedies hereunder.
(k) Governing Law. This Agreement will be governed
and construed in accordance with the laws of the State of Delaware,
without giving effect to the principles of conflict of laws thereof.
(l) Jurisdiction. Each party hereby irrevocably
submits to the exclusive jurisdiction of the Court of Chancery in the
State of Delaware in any action, suit or proceeding arising in
connection with this Agreement, and agrees that any such action, suit
or proceeding will be brought only in such court (and waives any
objection based on forum non conveniens or any other objection to
venue therein); provided, however, that no such consent to
jurisdiction of said Court or in the State of Delaware shall be valid
other than for such purposes. Each party hereby waives any right to a
trial by jury in connection with any such action, suit or proceeding.
(m) Description Headings. The description headings
used herein are for reference purposes only and will not affect in any
way the meaning or interpretation of this Agreement.
(n) Counterparts. This Agreement may be executed in
counterparts, each of which will be considered one and the same
agreement and will become effective when such counterparts have been
signed by each of the parties and delivered to the other parties, it
being understood that all parties need not sign the same counterpart.
(o) Certain Sales and Transfers. Anything to the
contrary in this Agreement notwithstanding, a Stockholder may (i)
sell, transfer or otherwise dispose of all or any portion of the
Holdings Common Stock which it may acquire in the Merger or which it
may otherwise own and (ii) reorganize its internal structure and
composition and/or transfer all or any portion of the Securities which
it owns for tax, securities or estate planning purposes, for
charitable donation purposes or to another Stockholder, as long as the
recipient of the voting and dispositive power with respect to such
Securities under this subsection (ii) agrees to abide by the
provisions of and become a party to this Agreement. In addition, a
Stockholder may pledge all or any portion of the Securities which it
owns as security for the Stockholder s obligations in connection with
a bona fide transaction as long as the pledgee or mortgagee of such
Securities agrees, in the event it obtains the right to vote such
Securities, whether by reason of a default, foreclosure or otherwise,
to abide by and become a party to this Agreement.
<PAGE>
IN WITNESS WHEREOF, Holdings, Sporting and the Stockholders
have caused this Agreement to be duly executed as of the day and year
first above written.
GART SPORTS COMPANY
By: /S/ JOHN DOUGLAS MORTON
Name: John Douglas Morton
Title: President and Chief Executive Officer
GART BROS. SPORTING GOODS COMPANY
By: /S/ JOHN DOUGLAS MORTON
Name: John Douglas Morton
Title: President and Chief Executive Officer
STOCKHOLDERS:
AH INVESTMENT TRUST U/A/D 6/3/87 NV-555,424
C-275,329
By: /S/ BARBARA P. HOCHBERG
Barbara P. Hochberg, Trustee
By: /S/ ANDREW S. HOCHBERG
Andrew S. Hochberg, Trustee
BARBARA P. HOCHBERG TRUST U/A/D 12/17/88 NV-93,000
C-102,000
By: /S/ BARBARA P. HOCHBERG
Barbara P. Hochberg, Trustee
AMY H. LOWENSTEIN SUB-TRUST U/A/D 1/3/90 NV-4,500
C-12,500
By: /S/ LARRY J. HOCHBERG
Larry J. Hochberg, Trustee
ANDREW S. HOCHBERG SUB-TRUST U/A/D 1/3/90 NV-4,500
C-15,000
By: /S/ LARRY J. HOCHBERG
Larry J. Hochberg, Trustee
HOCHBERG ANNUAL GIFT TRUST U/A/D 4/27/94 NV-18,100
C-792
By: /S/ LAURIE HOCHBERG
Laurie Hochberg, Trustee
By: /S/ LARRY J. HOCHBERG
Larry J. Hochberg, Trustee
DANIEL HOCHBERG UNDER THE IL UGMA NV-7,651
By: /S/ ANDREW S. HOCHBERG
Andrew S. Hochberg, as Custodian for
Daniel Hochberg under the IL UGMA
/S/ ANDREW HOCHBERG
ANDREW HOCHBERG NV-22,483
/S/ LAURIE HOCHBERG
LAURIE HOCHBERG NV-5,000
<PAGE>
LARRY J. HOCHBERG TRUST U/A/D 6/12/81 NV-478,921
C-2,358,557
By: /S/ LARRY J. HOCHBERG
Larry J. Hochberg
JACOB LOWENSTEIN UNDER THE IL UGMA NV-6,800
By: /S/ AMY LOWENSTEIN
Amy Lowenstein, as Custodian for
Jacob Lowenstein under the IL UGMA
ARIEL LOWENSTEIN UNDER THE IL UGMA NV-8,851
By: /S/ AMY LOWENSTEIN
Amy Lowenstein, as Custodian for
Ariel Lowenstein under the IL UGMA
/S/ AMY LOWENSTEIN
AMY LOWENSTEIN NV-2,957
RAPHAEL LOWENSTEIN UNDER THE IL UGMA NV-6,800
By: /S/ AMY LOWENSTEIN
Amy Lowenstein, as Custodian for
Raphael Lowenstein under the IL UGMA
JOSHUA LOWENSTEIN UNDER THE IL UGMA NV-6,800
By: /S/ AMY LOWENSTEIN
Amy Lowenstein, as Custodian for
Joshua Lowenstein under the IL UGMA
/S/ JOHN A. LOWENSTEIN
JOHN A. LOWENSTEIN NV-21,220
AHL INVESTMENT TRUST U/A/D 12/7/90 NV-126,732
By: /S/ BARBARA P. HOCHBERG
Barbara P. Hochberg, Trustee
By: /S/ JOHN A. LOWENSTEIN
John A. Lowenstein, Trustee
JESSICA HOCHBERG UNDER THE IL UGMA NV-4,338
By: /S/ ANDREW HOCHBERG
Andrew Hochberg, as Custodian for
Jessica Hochberg under the IL UGMA
ABIGAIL LOWENSTEIN UNDER THE IL UGMA NV-6,154
By: /S/ JOHN A.LOWENSTEIN
John A. Lowenstein, as Custodian for
Abigail Lowenstein under the IL UGMA
<PAGE>
AMY H. LOWENSTEIN REVOCABLE TRUST NV-117,270
U/A/D 8/29/91 C-138,807
By: /S/ AMY H. LOWENSTEIN
Amy H. Lowenstein, Trustee
ANDREW S. HOCHBERG REVOCABLE TRUST NV-56,207
U/A/D 7/9/87 C-138,015
By: /S/ ANDREW S. HOCHBERG
Andrew S. Hochberg
ABIGAIL LOWENSTEIN UNDER THE IL UGMA NV-5,538
By: /S/ AMY LOWENSTEIN
Amy Lowenstein, as Custodian for
Abigail Lowenstein under the IL UGMA
LJH L.P. NV-1,434,500
By: Larry J. Hochberg Trust U/A/D 6/12/81,
General Partner
By: /S/ LARRY HOCHBERG
Larry Hochberg, Trustee
AH L.P. NV-64,500
By: Andrew S. Hochberg Revocable Trust,
General Partner
By: /S/ ANDREW HOCHBERG
Andrew Hochberg, Trustee
/S/ LARRY J. HOCHBERG
LARRY J. HOCHBERG NV-10,657
<PAGE>
EXHIBIT A
Niles
Lombard
Calumet City, IN
Schaumburg
Chicago (Lakeview)
Merrillville, IN
North Riverside
Ferguson, MO
Crestwood, MO
Wheeling
Chicago (River North)
<PAGE>
FIFTH AMENDMENT TO CREDIT AGREEMENT
THIS FIFTH AMENDMENT to Credit Agreement (the "Amendment") is
made as of this 24th day of September, 1997, by and among Sportmart,
Inc. ("Borrower"), BT Commercial Corporation, as agent (in its
capacity as agent, "Agent") and BT Commercial Corporation (in its
capacity as lender, "BTCC"), Sanwa Business Credit Corporation
("Sanwa"), LaSalle National Bank ("LaSalle"), Fleet Capital
Corporation ("Fleet"), Heller Financial, Inc. ("Heller"), National
Bank of Canada ("NBC"), American National Bank and Trust Company of
Chicago ("American National") and IBJ Schroder Bank and Trust Company
("IBJ"), as Lenders (BTCC, Sanwa, LaSalle, Fleet, Heller, NBC,
American National and IBJ referred to collectively as "Lenders")
W I T N E S S E T H:
WHEREAS, Borrower, Agent and Lenders are parties to that certain
Credit Agreement dated as of September 6, 1996 as amended by that
certain Consent and First Amendment to Credit Agreement dated as of
November 21, 1996, that certain Consent and Second Amendment dated as
of January 17, 1997 and that certain Third Amendment to Credit
Agreement dated as of March 26, 1997, that certain Fourth Amendment to
Credit Agreement dated as of June 6, 1997 (as so amended, the "Credit
Agreement"); and
WHEREAS, Borrower has requested that Agent and Lenders provide
for certain amendments to the Credit Agreement as more fully set forth
herein.
NOW, THEREFORE, in consideration of the mutual agreements herein
contained and other good and valuable consideration, the adequacy of
which is hereby acknowledged, and subject to the terms and conditions
hereof, the parties hereto hereby agree as follows:
SECTION 1. DEFINITIONS. Unless otherwise defined herein,
all capitalized terms shall have the meaning given to them in the
Credit Agreement.
SECTION 2. AMENDMENT TO CREDIT AGREEMENT. Section 1.1 of the
Credit Agreement is hereby amended by deleting clause (b) in the
definition of "Borrowing Base" in its entirety and inserting the
following in lieu thereof:
"(b) sixty-five percent (65%) of Eligible Inventory;
provided, however, that so long as no Default or Event
of Default has occurred and is continuing, (i) during
the period from September 24, 1997 through and
including December 15, 1997, the amount available for
advance against Eligible Inventory shall be increased
by the lesser of (A) an additional nine percent (9%) or
(B) $15,000,000, and (ii) during the period from
September 15 through and including December 15 for each
year during the term hereof thereafter, the amount
available for advance against Eligible Inventory shall
be increased by the lesser of (A) an additional five
percent (5%) of Eligible Inventory or (B) $10,000,000,
plus"
<PAGE>
SECTION 3. CONDITION PRECEDENT. The effectiveness of this
Amendment is expressly conditioned upon satisfaction of the following
conditions precedent:
3.1 Borrower shall have paid, on the date hereof, to Agent
for the benefit of Lenders, of an amendment fee in the amount of
$100,000.
3.2 Agent shall have received copies of this Amendment duly
executed by Borrower and Lenders constituting Majority Lenders.
SECTION 4. REAFFIRMATION BY BORROWER. Borrower hereby
represents and warrants to Agent and Lender that (i) the
representations and warranties set forth in Section 6 of the Credit
Agreement are true and correct on and as of the date hereof, except to
the extent (a) that any such representations or warranties relate to a
specific date, or (b) of changes thereto as a result of transactions
for which Agent and Lenders have granted their consent; (ii) Borrower
is on the date hereof in compliance with all of the terms and
provisions set forth in the Credit Agreement as hereby amended; and
(iii) upon execution hereof no Default or Event of Default has
occurred and is continuing or has not previously been waived.
SECTION 5. FULL FORCE AND EFFECT. Except as herein amended, the
Credit Agreement and all other Credit Documents shall remain in full
force and effect.
SECTION 6. COUNTERPARTS. This Amendment may be executed in two
or more counterparts, each of which shall be deemed an original, but
all of which together shall constitute one and the same document.
IN WITNESS WHEREOF, the parties hereto have executed this
Amendment on the day and year specified above.
BORROWER:
SPORTMART, INC.
By: /S/ THOMAS HENDRICKSON
Name: Thomas Hendrickson
Title: Executive Vice President &
Chief Financial Officer
AGENT:
BT COMMERCIAL CORPORATION
By: /S/ WAYNE HILLOCK
Name: Wayne Hillock
Title: Senior Vice President
LENDER:
BT COMMERCIAL CORPORATION
By: /S/ WAYNE HILLOCK
Name: Wayne Hillock
Title: Senior Vice President
<PAGE>
LENDER:
SANWA BUSINESS CREDIT CORPORATION
By: /S/ MICHAEL J. COX
Name: Michael J. Cox
Title: First Vice President
LENDER:
LASALLE NATIONAL BANK
By: /S/ TOM J. LANSCIOME
Name: Tom J. Lansciome
Title: First Vice President
LENDER:
FLEET CAPITAL CORPORATION
By: /S/ ROBERT J. LUND
Name: Robert J. Lund
Title: Vice President
LENDER:
HELLER FINANCIAL, INC.
By: /S/ LINDA G. PEDDLE
Name: Linda G. Peddle
Title: Vice President/Account Exec
LENDER:
NATIONAL BANK OF CANADA
By: /S/ JONATHAN MILLARD
Name: Jonathan Millard
Title: Asst Vice President
By: /S/ CHARLES MARTIN, JR.
Name: Charles Martin, Jr.
Title: Vice President & Mgr
LENDER:
AMERICAN NATIONAL BANK AND TRUST
COMPANY OF CHICAGO
By: /S/ PAUL CARLISLE
Name: Paul Carlisle
Title: First Vice President
LENDER:
IBJ SCHRODER BANK AND TRUST COMPANY
By: /S/ ROBERT R. WALLACE
Name: Robert R. Wallace
Title: Vice President
<PAGE>
AMENDED AND RESTATED AGREEMENT AND PLAN OF MERGER
among
GART SPORTS COMPANY
GART BROS. SPORTING GOODS COMPANY
GB ACQUISITION, INC.
and
SPORTMART, INC.
Dated as of December 2, 1997
<PAGE>
AMENDED AND RESTATED AGREEMENT AND PLAN OF MERGER
AMENDED AND RESTATED AGREEMENT AND PLAN OF MERGER, dated as of
December 2, 1997 (this "Agreement"), by and among Gart Sports Company,
a Delaware corporation ("Holdings"), Gart Bros. Sporting Goods Company,
a Colorado corporation and wholly-owned subsidiary of Holdings
("Sporting"), GB Acquisition, Inc., a Delaware corporation and wholly-
owned subsidiary of Holdings ("Acquisition"), and Sportmart, Inc., a
Delaware corporation (the "Company").
WHEREAS, Holdings, Sporting and the Company are parties to an
Agreement and Plan of Merger (the "Original Agreement"), dated as of
September 28, 1997 (the "Original Execution Date"), and such parties
desire to amend and restate the Original Agreement in its entirety as
set forth herein;
WHEREAS, the Boards of Directors of Holdings, Sporting,
Acquisition and the Company have each approved and deem it advisable and
in the best interests of their respective stockholders to consummate the
combination of the Company and Acquisition upon the terms and subject to
the conditions of this Agreement;
WHEREAS, it is intended that the combination be accomplished by
a merger of Acquisition with and into the Company (the "Merger");
WHEREAS, each of Holdings, Sporting, Acquisition and the Company
intend that the Merger will be treated as a tax free reorganization which
meets the requirements of Section 368(a)(2)(E) of the Internal Revenue
Code of 1986, as amended (the "Code");
WHEREAS, the Board of Directors of the Company has approved the
transactions contemplated by this Agreement in accordance with the
provisions of Sections 203 and 251 of the Delaware General Corporation Law
(the "DGCL"), and has resolved, subject to the terms of this Agreement, to
recommend the approval and adoption of the Merger by its stockholders;
WHEREAS, the holders (the "Company Principals") of more than 60%
of the outstanding Company Voting Stock (as herein defined) have, pursuant
to a Stockholder Agreement dated as of September 28, 1997, as amended and
restated as of the date hereof (the "Stockholder Agreement"), agreed to
vote in favor of the Merger;
WHEREAS, the Boards of Directors of Holdings, Sporting and
Acquisition each has approved the transactions contemplated by this
Agreement and Green Equity Investors, L.P. (the "Fund"), the holder of
approximately 85% of the outstanding Holdings Common Stock (as herein
defined), and Holdings, as the sole stockholder of each of Sporting and
Acquisition, has each approved and adopted this Agreement and the
transactions contemplated hereby in accordance with Sections 228 and 251
of the DGCL and Sections 7-108-202 and 7-107-104 of the Colorado Business
Corporation Act (the "CBCA"); and
WHEREAS, this Agreement and the transactions contemplated hereby
shall be submitted to the stockholders of the Company for their adoption
and approval.
<PAGE>
NOW, THEREFORE, in consideration of the foregoing and the
respective representations, warranties, covenants and agreements set forth
herein, the parties hereto agree as follows:
ARTICLE I
THE MERGER
Section 1.1 The Merger. Upon the terms and subject to the
conditions contained in this Agreement, and in accordance with the DGCL,
at the Effective Time (as herein defined), Acquisition shall be merged
with and into the Company, the separate corporate existence of Acquisition
shall thereupon cease, and the Company shall continue as the surviving
corporation (sometimes hereinafter referred to as the "Surviving
Corporation") and shall continue its corporate existence under the laws
of the State of Delaware. In accordance with the DGCL, all of the rights,
privileges, powers, immunities, purposes and franchises of Acquisition
and the Company shall vest in the Surviving Corporation and all of the
debts, liabilities, obligations and duties of Acquisition and the Company
shall become the debts, liabilities, obligations and duties of the
Surviving Corporation.
Section 1.2 Closing. Subject to the terms and conditions of this
Agreement, the closing of the transactions contemplated by this Agreement
(the "Closing") shall take place at the offices of Altheimer & Gray,
10 S. Wacker Drive, Suite 4000, Chicago, Illinois 60606, at 10:00 a.m.,
local time, on the second business day after which all of the conditions
set forth in Article VII are first satisfied or waived (the date of such
first satisfaction or waiver being the "Conditional Date") (provided that
all such conditions continue to be so satisfied or waived on such second
business day, and if not so satisfied or waived, the Closing shall be
automatically extended from time to time until the first subsequent
business day on which all such conditions are again so satisfied or
waived, subject, however, to Section 8.1(b)), or on such other date and
at such other time and place as Holdings and the Company shall agree (the
date on which the Closing actually occurs being referred to herein as the
"Closing Date").
Section 1.3 Filing; Effective Time. On the date of the Closing,
Holdings and the Company will cause a Certificate of Merger to be properly
executed and filed pursuant to Section 251 of the DGCL. The Merger shall
become effective at such time as agreed in writing by Holdings and the
Company and specified in the Certificate of Merger (or if the parties
cannot agree on a time, the Certificate of Merger shall specify 8:15 a.m.,
eastern time, on the next business day following the day of the filing of
the Certificate of Merger). Such filing shall be made contemporaneously
with the Closing. When used in this Agreement, the term "Effective Time"
shall mean the date and time at which the Merger shall become effective.
Section 1.4 Certificate of Incorporation and By-Laws of Surviving
Corporation. At the Effective Time, the Certificate of Incorporation of
the Company, as in effect immediately prior to the Effective Time, shall
be amended and restated as set forth in Exhibit A-1 hereto (the "Surviving
Corporation Charter"). The By-Laws of the Company as in effect
immediately prior to the Effective Time shall be amended and restated as
of the Effective Time as set forth in Exhibit B-1 hereto.
<PAGE>
Section 1.5 Directors and Officers. The officers and directors
of the Surviving Corporation shall be the officers and directors of
Acquisition at the Effective Time, and shall hold office from the
Effective Time until their respective successors are duly elected or
appointed and qualified in the manner provided in the Certificate of
Incorporation or By-Laws of the Surviving Corporation or as otherwise
provided by law.
Section 1.6 Certificate of Incorporation and By-Laws of Holdings.
At the Effective Time, the Certificate of Incorporation of Holdings, as
in effect immediately prior to the Effective Time, shall be amended and
restated as set forth in Exhibit A-2 hereto (the "Holdings Charter").
The By-Laws of Holdings as currently in effect shall be amended and
restated as of the Effective Time as set forth in Exhibit B-2 hereto.
Section 1.7 Directors of Holdings; Certain Share Treatment.
(a) The Board of Directors of Holdings at the Effective Time and
for a period of three years thereafter shall consist of seven
directorships. Initially, five of such directorships shall be the
following individuals: John Douglas Morton, Jonathan A. Sokoloff,
Jennifer Holden Dunbar, Daniel A. Siegel and one individual nominated by
Holdings, it being understood that this list of individuals may be
supplemented or amended from time to time by Holdings prior to the
Effective Time (with the consent of the Company which shall not be
unreasonably withheld) and two of such directorships shall be filled by
the two members of the Board of Directors of the Company designated
within 30 days after the Effective Time by a majority of the persons who
so constitute such Board of Directors of the Company immediately prior to
the Effective Time, each of which seven directors shall serve until
Holdings' 1998 annual meeting of stockholders. Holdings agrees that
Messrs. Larry Hochberg and Andrew Hochberg will be nominated to serve as
directors for a one year term commencing at Holdings' 1998 annual meeting
of stockholders, and Holdings will use its best efforts to cause the
election thereof provided that the Company Principals own at least 75%
of the Holdings Common Stock that they receive in the Merger on the date
of mailing of Holdings' proxy materials with respect to such meeting
(provided that if the Company principals own more than 50% but less than
75% of the Holdings Common Stock that they receive in the Merger on the
date of mailing of Holdings' proxy materials with respect to such meeting,
Holdings agrees that one of Messrs. Larry Hochberg or Andrew Hochberg
(in Holdings' discretion) will be nominated to serve as director and
Holdings will use its best efforts to cause the election thereof) and
that one of them (in Holdings' discretion) will be nominated for election
as a director at Holdings' 1999 annual meeting of stockholders provided
that the Company Principals own at least 50% of the Holdings Common Stock
that they receive in the Merger on the date of mailing of Holdings' proxy
materials with respect to such meeting. In the event that either or both
of Messrs. Larry Hochberg and Andrew Hochberg are unwilling or unable to
serve as a director of Holdings as provided above, replacement nominee(s)
shall be chosen by a majority in interest of the Company Principals and
Holdings will use its best efforts to cause the election thereof.
(b) For a period of 18 months from and after the Effective Time,
Holdings covenants and agrees that no merger, consolidation or other
extraordinary transaction involving holders of Holdings Common Stock
shall be entered into by Holdings or any of its Subsidiaries unless all
such holders are treated equally with respect to their Holdings Common
Stock in such transaction or unless otherwise approved by the independent
directors of Holdings.
<PAGE>
ARTICLE II
CONVERSION OF SHARES
Section 2.1 Conversion of Shares. As of the Effective Time, by
virtue of the Merger and without any action on the part of any holder of
any shares of capital stock of the Company, Holdings, Sporting or
Acquisition:
(a) Each share of Common Stock, par value $.01 per share, of the
Company ("Company Voting Stock") and each share of Class A Common Stock,
par value $.01 per share, of the Company ("Company Non-Voting Stock" and
together with the Company Voting Stock, the "Company Common Stock")
issued and outstanding immediately prior to the Effective Time shall be
converted into, and shall thereafter represent only, the right to receive
the Conversion Number (as herein defined) of duly issued, validly
authorized, fully paid and nonassessable shares of Common Stock, par
value $.01 per share, of Holdings ("Holdings Common Stock"). For
purposes hereof, the "Conversion Number" shall mean Holdings' Share
Consideration (as defined below) divided by the Company's "Equivalent
Shares Outstanding." "Equivalent Shares Outstanding" shall mean the
number of shares of common stock (of any class) of Holdings or the
Company, as the case may be, outstanding, including the number of shares
of common stock (of any class) outstanding pursuant to any restricted
stock plan, plus the number of Equivalent Option Shares of Holdings or
the Company, as applicable. "Equivalent Option Shares" shall be the
quotient of (a) the result of (i) the product of (x) the number of shares
of common stock purchasable upon exercise of outstanding options
(whether or not vested) with exercise prices less than the applicable
Closing Price of Holdings or the Company, as the case may be, multiplied
by (y) the applicable Closing Price minus (ii) the sum of the exercise
prices of all such options included in clause (i) divided by (b) the
Closing Price of Holdings or the Company, as applicable. The "Closing
Price" of the Company shall be the weighted average of the closing
prices of the Company Voting Stock and the Company Non-Voting Stock each
as reported on the Nasdaq National Market. The "Closing Price" of Holdings
shall be the quotient of (a) the product of 2.636364 multiplied by the
Closing Price of the Company multiplied by the Company's Equivalent Shares
Outstanding divided by (b) Holdings' Equivalent Shares Outstanding. The
Closing Price of Holdings shall be determined by a trial and error method
using multiple iterations and the same methodology used to determine the
Company's Equivalent Shares Outstanding. "Holdings Share Consideration"
shall be the product of Holdings' Equivalent Shares Outstanding multiplied
by 0.37931. All determinations with respect to the foregoing shall be
made as of the Effective Time (using the last full trading day prior
thereto with respect to the Closing Price of the Company).
(b) All shares of Company Common Stock that are owned by the
Company as treasury stock shall automatically be canceled and retired and
shall cease to exist and no cash, Holdings Common Stock, or other
consideration shall be delivered or deliverable in exchange therefor.
(c) All shares of Company Common Stock to be converted pursuant
to Section 2.1(a), issued and outstanding immediately prior to the
Effective Time, shall no longer be outstanding and shall automatically
be canceled and retired and shall cease to exist and each holder of a
certificate which immediately prior to the Effective Time represented
outstanding shares of Company Common Stock (the "Certificates") shall
cease to have any rights as stockholders of the Company, except the right
to receive the consideration set forth in Section 2.1(a) for each share
of Company Common Stock held by them.
<PAGE>
(d) Each share of Common Stock, par value $.01 per share, of
Acquisition issued and outstanding immediately prior to the Effective
Time shall be converted into one share of Common Stock, par value $.01
per share, of the Surviving Corporation.
Section 2.2 Exchange Procedures.
(a) Holdings shall designate a bank or trust company reasonably
acceptable to the Company to act as Exchange Agent hereunder (the
"Exchange Agent"). Immediately following the Effective Time, Holdings
shall deliver, in trust, to the Exchange Agent, for the benefit of the
holders of shares of Company Common Stock, for exchange in accordance
with this Article II, through the Exchange Agent, certificates evidencing
the shares of Holdings Common Stock issuable pursuant to Section 2.1 in
exchange for shares of Company Common Stock (the "Exchange Fund").
(b) As soon as practicable after the Effective Time, Holdings
and the Surviving Corporation shall cause the Exchange Agent to mail to
each holder of record of a Certificate or Certificates (i) a form of
letter of transmittal specifying that delivery shall be effected, and
risk of loss and title to the Certificates shall pass, only upon proper
delivery of the Certificates to the Exchange Agent and (ii) instructions
for use in surrendering such Certificates in exchange for certificates
representing shares of Holdings Common Stock. Upon surrender of a
Certificate for cancellation to the Exchange Agent, together with such
letter of transmittal, duly executed, the holder of such Certificate
shall be entitled to receive in exchange therefor (A) certificates
representing that number of whole shares of Holdings Common Stock into
which the shares of Company Common Stock represented by the surrendered
Certificate have been converted at the Effective Time pursuant to Section
2.1 hereof, (B) any dividends or other distributions to which such holder
is entitled pursuant to Section 2.3 hereof and (C) cash in lieu of any
fractional shares of Holdings Common Stock to which such holder is
entitled pursuant to Section 2.4 hereof, and the Certificate so
surrendered shall forthwith be canceled. Until surrendered as
contemplated by this Section 2.2(b), each Certificate shall be deemed
from and after the Effective Time to represent only the right to receive
upon such surrender the shares of Holdings Common Stock, cash in lieu of
any fractional shares of Holdings Common Stock in accordance with
Section 2.4 hereof and any dividends or distributions on Holdings Common
Stock in accordance with Section 2.3 hereof. In no event shall the
holder of any such surrendered Certificates be entitled to receive
interest on any cash for fractional shares to be received in the Merger.
Neither the Exchange Agent nor any party hereto shall be liable to a
holder of shares of Company Common Stock for any amount paid to a public
official pursuant to any applicable abandoned property, escheat or
similar law. Shares of Holdings Common Stock to be issued in the Merger
shall be issued as of, and be deemed to be outstanding as of, the
Effective Time. Holdings shall cause all such shares of Holdings Common
Stock to be duly authorized, validly issued, fully paid and non-
assessable and not subject to preemptive rights.
(c) If any Certificate shall have been lost, stolen or destroyed,
upon the making of an affidavit of that fact by the person claiming such
Certificate to be lost, stolen or destroyed and, if required by Holdings
and the Surviving Corporation, the giving by such person of an indemnity
against any claim that may be made against it with respect to such
Certificate, the Exchange Agent will issue in exchange for such lost,
stolen or destroyed Certificate the applicable certificate representing
<PAGE>
shares of Holdings Common Stock in accordance with Section 2.1 hereof,
any cash in lieu of fractional shares of Holdings Common Stock to which
the holders thereof are entitled pursuant to Section 2.4 hereof and any
dividends or other distributions to which the holders thereof are
entitled pursuant to Section 2.3 hereof.
Section 2.3 Dividends; Transfer Taxes; Withholding. No dividends
or other distributions that are declared on or after the Effective Time
on Holdings Common Stock, or are payable to the holders of record thereof
who became such on or after the Effective Time, shall be paid to any
person entitled by reason of the Merger to receive certificates
representing shares of Holdings Common Stock, and no distribution of cash
consideration and no cash payment in lieu of any fractional share of
Holdings Common Stock shall be paid to any person pursuant to Section 2.4
hereof, until such person shall have surrendered its Certificate(s) as
provided in Section 2.2 hereof (or such person shall have complied with
Section 2.2(c) hereof). Subject to applicable law, Holdings shall cause
to be paid to each person receiving a certificate representing such
shares of Holdings Common Stock, (i) at the time of such receipt the
amount of any dividends or other distributions theretofore paid with
respect to the shares of Holdings Common Stock represented by such
certificate and having a record date on or after the Effective Time, and
(ii) at the appropriate payment date the amount of any dividends or other
distributions payable with respect to the shares of Holdings Common Stock
represented by such certificate which dividends or other distributions
have a record date on or after the Effective Time and a payment date on
or subsequent to such receipt. In no event shall the person entitled
to receive such dividends or other distributions be entitled to receive
interest on such dividends or other distributions. If any cash or
certificate representing shares of Holdings Common Stock is to be paid
to or issued in a name other than that in which the Certificate
surrendered in exchange therefor is registered, it shall be a condition
of such exchange that the Certificate so surrendered shall be properly
endorsed and otherwise in proper form for transfer and that the person
requesting such exchange shall pay to the Exchange Agent any transfer
or other taxes required by reason of the issuance of such certificate
representing shares of Holdings Common Stock and the distribution of
such cash payment in a name other than that of the registered holder of
the Certificate so surrendered, or shall establish to the satisfaction
of the Exchange Agent that such tax has been paid or is not applicable.
Holdings, the Surviving Corporation or the Exchange Agent shall be
entitled to deduct and withhold from the consideration otherwise payable
pursuant to this Agreement to any holder of Company Common Stock such
amounts as Holdings, the Surviving Corporation or the Exchange Agent are
required to deduct and withhold under the Code, or any provision of
state, local or foreign tax law, with respect to the making of such
payment. To the extent that amounts are so withheld by Holdings, the
Surviving Corporation or the Exchange Agent, such withheld amounts shall
be treated for all purposes of this Agreement as having been paid to the
holder of the Company Common Stock in respect of whom such deduction and
withholding was made by Holdings, the Surviving Corporation or the
Exchange Agent.
Section 2.4 Fractional Shares. No certificates or scrip
representing fractional shares of Holdings Common Stock shall be issued
upon the surrender for exchange of Certificates, no dividend or
distribution with respect to shares shall be payable on or with respect
to any fractional share and such fractional share interests shall not
entitle the owner thereof to vote or to any other rights of a stockholder
<PAGE>
of Holdings. In lieu of any such fractional share of Holdings Common
Stock, Holdings shall pay to each former stockholder of the Company who
otherwise would be entitled to receive a fractional share of Holdings
Common Stock an amount in cash (without interest) rounded to the nearest
whole cent, determined by multiplying (i) the closing sales price of the
Holdings Common Stock on the Nasdaq National Market (or other principal
exchange or market in which such stock is traded) on the first day of
trading thereof following the Effective Time (the "Fractional Share
Price") by (ii) the fractional interest in a share of Holdings Common
Stock to which such holder would otherwise be entitled. Holding shall
make available to the Exchange Agent, and cause to be paid by the
Exchange Agent, cash for this purpose.
Section 2.5 Return of Exchange Fund. Any portion of the
certificates representing shares of Holdings Common Stock together with
any cash in lieu of fractional shares payable pursuant to Section 2.4
hereof and any dividends or distributions payable pursuant to Section 2.3
hereof, which remains undistributed to the former holders of Company
Common Stock for one year after the Effective Time shall be delivered to
Holdings, upon its request, and any such former holders who have not
theretofore surrendered to the Exchange Agent their Certificate(s) in
compliance with this Article II shall thereafter look only to Holdings
for payment of their claim for shares of Holdings Company Stock, any cash
in lieu of fractional shares of Holdings Common Stock and any dividends
or distributions with respect to such shares of Holdings Common Stock
(in each case, without interest thereon). The Exchange Agent shall invest
any cash included in the Exchange Fund, as directed by Holdings, on a
daily basis. Any interest and other income resulting from such
investments shall be paid to Holdings.
Section 2.6 Options.
(a) Following the Effective Time, each outstanding option to
purchase shares of Holdings Common Stock shall remain outstanding and
unchanged.
(b) Effective at the Effective Time, Holdings hereby assumes the
Company's obligations with respect to its stock options, as follows. Not
later than the Effective Time, each option to purchase shares of Company
Common Stock (each a "Company Stock Option") which is outstanding
immediately prior to the Effective Time pursuant to any stock option plan
or stock incentive plan of the Company in effect on the Original Execution
Date and which plan is identified on the Company Disclosure Schedule (the
"Company Stock Plans") shall become and represent an option to purchase
the number of shares of Holdings Common Stock (a "Substitute Company
Option"), increased to the nearest whole share, determined by multiplying
(i) the number of shares of Company Common Stock subject to such Company
Stock Option immediately prior to the Effective Time by (ii) the
Conversion Number, at an exercise price per share of Holdings Common Stock
(increased to the nearest whole cent) equal to the exercise price per
share of Company Common Stock immediately prior to the Effective Time
divided by the Conversion Number. After the Effective Time, except as
provided above in this Section 2.6, each Substitute Company Stock Option
shall be exercisable upon the same terms and conditions as were
applicable to the related Company Stock Option immediately prior to the
Effective Time, and each Substitute Company Option shall, subject to the
accelerated vesting contemplated by this paragraph, be vested to the
extent provided in the related Company Stock Plan or the option agreement
with respect to the related Company Stock Option, as the case may be.
<PAGE>
This Section 2.6 shall be subject to any contrary provision contained in
the applicable Company Stock Plan or in the option agreement with respect
to any Company Stock Option outstanding thereunder, but, subject to the
other provisions of this Agreement, prior to the Effective Time, the
Company, and after the Effective Time, Holdings shall each use its
reasonable best efforts to obtain any necessary consents of the holders
of such Company Stock Options to effect this Section 2.6. Notwithstanding
anything to the contrary contained in this Agreement, the Board of
Directors of the Company (or the Compensation Committee thereof) may, at
any time prior to the Effective Time, provide for the acceleration of
the vesting of Company Stock Options and restricted shares of Company
Common Stock under the Sportmart, Inc. Restricted Stock Plan in
connection with the Merger, provided that such accelerated vesting shall
only be applicable to persons (i) whose employment with the Company (or
the Surviving Corporation) is terminated by Holdings, the Company or the
Surviving Corporation at (or in anticipation of) the Effective Time or
thereafter by Holdings or the Surviving Corporation within six months
following the Effective Time or thereafter by such persons within six
months following the Effective Time under circumstances that constitute
"Good Reason" as defined under the Company Severance Plan in effect on
the Original Execution Date or (ii) who do not at the Effective Time have
at least a comparable position with Holdings and the Surviving
Corporation to the position that they had with the Company and its
Subsidiaries. Notwithstanding anything to the contrary in this Section,
the conversion of Company Stock Options pursuant to any "stock purchase
plan" within the meaning of Code section 423 to Substitute Company
Options shall be made in accordance with Code section 424(a).
(c) There shall be no restrictions on selling shares of Holdings
Common Stock acquired pursuant to Substitute Company Options, except as
required by law or pursuant to the Registration Rights Agreement
referenced in Section 7.3(h) hereof (the "Registration Rights
Agreement"). If such sales are restricted by law, the Substitute Company
Options (other than any options pursuant to any "stock purchase plan"
within the meaning of Code section 423) shall remain exercisable for a
period of at least 90 days (or, if shorter, the remainder of the term of
the Substitute Company Option, without regard to early termination
provisions) after the lapsing of such restriction if such Substitute
Company Options were outstanding when the restrictions became applicable
to the selling of shares of Holdings Common Stock acquired pursuant to
Substitute Company Options.
(d) At the Effective Time, Holdings shall register under the
Securities Act on Form S-8 or another appropriate form all Substitute
Company Options and all shares of Holdings Common Stock issuable pursuant
to all such Options.
Section 2.7 Closing of Transfer Books. At the Effective Time, no
transfer of shares of Company Common Stock shall thereafter be made, and
the stock transfer books of the Company shall be closed. If, after the
Effective Time, Certificates are presented to the Surviving Corporation,
they shall be canceled and exchanged as provided in this Article II.
Section 2.8 Further Assurances. If, at any time after the
Effective Time, the Surviving Corporation shall consider or be advised
that any deeds, bills of sale, assignments, assurances or any other
actions or things are necessary or desirable to vest, perfect or confirm
of record or otherwise in the Surviving Corporation its right, title or
interest in, to or under any of the rights, properties or assets of
<PAGE>
Acquisition and the Company acquired or to be acquired by the Surviving
Corporation as a result of, or in connection with, the Merger or
otherwise to carry out the purposes of this Agreement, the officers of
the Surviving Corporation shall be authorized to execute and deliver,
in the name and on behalf of each of Acquisition and the Company or
otherwise, all such deeds, bills of sale, assignments and assurances and
to take and do, in such names and on such behalves or otherwise, all such
other actions and things as may be necessary or desirable to vest,
perfect or confirm any and all right, title and interest in, to and under
such rights, properties or assets in the Surviving Corporation or
otherwise to carry out the purposes of this Agreement.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
Except as set forth in the Company Disclosure Schedule delivered
by the Company to Holdings in connection with the execution of the
Original Agreement (the "Company Disclosure Schedule") (each section of
which qualifies the correspondingly numbered representation and warranty
and any other representation and warranty to which the disclosure on its
face relates), the Company represents and warrants, as of the Original
Execution Date and only with respect to facts and circumstances then in
existence (except with respect to Sections 3.5, 3.7 and 3.8, which are
expressly remade as of the date hereof), to Holdings as follows:
Section 3.1 Organization and Good Standing. The Company is a
corporation duly organized, validly existing and in good standing under
the laws of the State of Delaware and has the corporate power and
authority to carry on its business as it is now being conducted. The
Company is duly qualified as a foreign corporation to do business, and
is in good standing, in each jurisdiction where the character of its
properties owned or held under lease or the nature of its activities
makes such qualification necessary, except where the failure to be so
qualified or in good standing would not have a material adverse effect,
individually or in the aggregate, on the business, financial condition,
or results of operations of the Company and its Subsidiaries taken as a
whole, or, if applicable, the ability of the Company to consummate the
Merger and the other transactions contemplated by this Agreement (a
"Company Material Adverse Effect"). For purposes of this Agreement, a
"Company Material Adverse Effect" shall not be deemed to have occurred
as a result of: (i) a decline in the actual or potential future
financial performance or operations of the Company provided that the
Company has operated its business in accordance with Section 5.1 and
otherwise consistent with its past practices, (ii) losses of employees
or other matters related to the transactions contemplated hereby
(including, without limitation, the public announcement thereof), (iii)
opening of stores, or the announcement of planned store openings, by
competitors, (iv) facts and circumstances unless such facts and
circumstances are of such a fundamental and extraordinary nature that
no reasonable person could dispute that such a "material adverse change"
has occurred, or (v) any effect or consequence of, or related to, any
of the Pack Boot Inventory (as defined in the Agreement made and entered
into as of November 3, 1997, by and between the Company and Sporting
(the "Pack Boot Agreement")), the Additional Ski Inventory (as defined
in the Pack Boot Agreement), or any transaction pursuant to either the
Pack Boot Agreement or the Consignment Agreement, made and entered as of
November 3, 1997, by and between the Company and Sporting (the
"Consignment Agreement"). As used in this Agreement, a "Subsidiary" of
any person means another person, an amount of the voting securities,
<PAGE>
other voting ownership or voting partnership interests of which is
sufficient to elect at least a majority of its Board of Directors or
other governing body (or, if there are no such voting interests, 50% or
more of the equity interests of which) is owned directly or indirectly
by such first person.
Section 3.2 Certificate of Incorporation and By-Laws. Complete
and correct copies of the Certificates of Incorporation and By-laws or
equivalent organizational documents, each as amended as of the Original
Execution Date, of the Company and each of its Subsidiaries have been
made available to Holdings. The Certificates of Incorporation, By-laws
and equivalent organizational documents of the Company and each of its
Subsidiaries are in full force and effect. Neither the Company nor any
of its Subsidiaries is in violation of any provision of its Certificate
of Incorporation, By-laws or equivalent organizational documents.
Section 3.3 Capitalization.
(a) As of the Original Execution Date, the authorized capital
stock of the Company consists of 5,000,000 shares of Preferred Stock, par
value $.01 per share ("Company Preferred Stock"), 50,000,000 shares of
Company Voting Stock and 50,000,000 shares of Company Non-Voting Stock.
At the close of business on September 25, 1997: (i) no shares of
Company Preferred Stock were outstanding; (ii) 5,148,833 shares of
Company Voting Stock were outstanding; (iii) 7,736,680 shares of
Company Non-Voting Stock were outstanding; (iv) 250,000 shares of
restricted Company Non-Voting Stock were outstanding pursuant to the
Sportmart, Inc. Restricted Stock Plan and (v) 154,581 shares of unissued
Company Voting Stock and 1,176,739 shares of unissued Company Non-Voting
Stock were subject to issuance upon the exercise of outstanding stock
options listed in the Company Disclosure Schedule. All outstanding
shares of Company Common Stock are validly issued, fully paid and
nonassessable and not subject to preemptive rights. No shares of Company
Common Stock are owned by any direct or indirect Subsidiary of the
Company.
(b) Except as described in this Section 3.3 and as contemplated
by this Agreement (i) no shares of capital stock or other equity
securities of the Company are authorized, issued or outstanding, or
reserved for issuance, and there are no options, warrants or other rights
(including registration rights), agreements, arrangements or commitments
of any character to which the Company or any of its Subsidiaries is a
party relating to the issued or unissued capital stock or other equity
interests of the Company or any of its Subsidiaries, requiring the
Company or any of its Subsidiaries to grant, issue or sell any shares of
the capital stock or other equity interests of the Company or any of its
Subsidiaries by sale, lease, license or otherwise; (ii) neither the
Company nor any of its Subsidiaries have any obligation, contingent or
otherwise, to repurchase, redeem or otherwise acquire any shares of the
capital stock or other equity interests of the Company or any of its
Subsidiaries; (iii) neither the Company nor any of its Subsidiaries,
directly or indirectly, owns, or has agreed to purchase or otherwise
acquire, the capital stock or other equity interests of, or any interest
convertible into or exchangeable or exercisable for such capital stock
or such equity interests of, any corporation, partnership, joint venture
or other entity which would be material in value to the Company; and
(iv) there are no voting trusts, proxies or other agreements or
understandings to which the Company or any of its Subsidiaries is a
party with respect to the voting of any shares of capital stock or other
<PAGE>
equity interests of the Company or any of its Subsidiaries.
Section 3.4 Company Subsidiaries. The Company Disclosure
Schedule sets forth a list of each Subsidiary of the Company; its
authorized, issued and outstanding capital stock or other equity
interests; the percentage of such capital stock or other equity interests
owned by the Company or any Subsidiary of the Company, and the identity
of such owner; the capital stock reserved for future issuance pursuant
to outstanding options or other agreements; and the identity of all
parties to any such option or other agreement. Each Subsidiary of the
Company is a corporation duly organized, validly existing and in good
standing under the laws of its jurisdiction of incorporation or
organization. Each Subsidiary of the Company has all requisite corporate
power and authority to carry on its business as it is now being
conducted. Each Subsidiary of the Company is duly qualified as a foreign
corporation or organization authorized to do business, and is in good
standing, in each jurisdiction where the character of its properties
owned or held under lease or the nature of its activities makes such
qualification necessary, except where the failure to be so qualified or
in good standing would not have a Company Material Adverse Effect. All
of the outstanding shares of capital stock or other ownership interests
in each of the Company's Subsidiaries have been validly issued, and are
fully paid, nonassessable and are owned by the Company or another
Subsidiary of the Company free and clear of all pledges, claims, options,
liens, charges, encumbrances and security interests of any kind or nature
whatsoever (collectively, "Liens"), and are not subject to preemptive
rights created by statute, such Subsidiary's respective Certificate of
Incorporation or By-laws or equivalent organizational documents or any
agreement to which such Subsidiary is a party.
Section 3.5 Corporate Authority.
(a) The Company has the requisite corporate power and authority
to execute and deliver this Agreement and, subject to the approval and
adoption of the Company's stockholders with respect to this Agreement
and the transactions contemplated, to consummate the transactions
contemplated hereby. The execution and delivery by the Company of this
Agreement and the consummation by the Company of the transactions
contemplated hereby have been duly authorized by its Board of Directors
and, except for the approval and adoption of the Company's stockholders
with respect to this Agreement and the transaction contemplated, no other
corporate action on the part of the Company is necessary to authorize the
execution and delivery by the Company of this Agreement and the
consummation by it of the transactions contemplated hereby. This
Agreement has been duly executed and delivered by the Company and
constitutes a valid and binding agreement of the Company and is
enforceable against the Company in accordance with its terms, except to
the extent that (i) such enforcement may be subject to any bankruptcy,
insolvency, reorganization, moratorium, fraudulent transfer or other
laws, now or hereafter in effect, relating to or limiting creditors'
rights generally and (ii) the remedy of specific performance and
injunctive and other forms of equitable relief may be subject to
equitable defense, and to the discretion of the court before which any
proceeding therefor may be brought. The preparation of the Proxy
Statement (as herein defined) filed with the SEC was duly authorized by
the Board of Directors of the Company.
<PAGE>
(b) Prior to execution and delivery of this Agreement, the Board
of Directors of the Company (at a meeting duly called and held) has (i)
approved this Agreement, the Merger and the other transactions
contemplated hereby and thereby (including, without limitation, the entry
by the Company Principals into the Stockholder Agreement), and such
approval is sufficient to render inapplicable to the Merger and all of
such other transactions the provisions of Section 203 of the DGCL, (ii)
determined that the transactions contemplated hereby are fair to and in
the best interests of the holders of the Company Common Stock and (iii)
determined to recommend this Agreement, the Merger and the other
transactions contemplated hereby to the Company's stockholders for
approval and adoption at the stockholders meeting contemplated by Section
6.4(a) hereof (it being understood that such determination is subject to
any future determination by the Board of Directors of the Company, in
good faith and as advised by outside counsel, that such recommendation
would be inconsistent with the fiduciary obligations of the Board of
Directors of the Company under applicable law). The affirmative vote
of the holders of a majority of the outstanding shares of Company Voting
Stock is the only vote of the holders of any class or series of the
Company's capital stock necessary to approve and adopt this Agreement.
Section 3.6 Compliance with Applicable Law. Except as set
forth in the Company Disclosure Schedule, (i) the Company and each of its
Subsidiaries holds, and is in compliance with the terms of, all permits,
licenses, exemptions, orders and approvals of all Governmental Entities
(as hereinafter defined) necessary for the conduct of their respective
businesses ("Company Permits"), except for failures to hold or to comply
with such permits, licenses, exemptions, orders and approvals which would
not have a Company Material Adverse Effect, (ii) with respect to the
Company Permits, to the knowledge of the Company no action or proceeding
is pending or threatened that would reasonably be expected to have a
Company Material Adverse Effect, (iii) the business of the Company and
its Subsidiaries is being conducted in compliance with all applicable
laws, ordinances, regulations, judgments, decrees or orders ("Applicable
Law") of any federal, state, local, foreign or multinational court,
arbitral tribunal, administrative agency or commission or other
governmental or regulatory authority or administrative agency or
commission (a "Governmental Entity"), except for violations or failures
to so comply that would not have a Company Material Adverse Effect, and
(iv) to the knowledge of the Company, no investigation or review by any
Governmental Entity with respect to the Company or its Subsidiaries is
pending or threatened, other than, in each case, those which would not
reasonably be likely to have a Company Material Adverse Effect.
Section 3.7 Non-Contravention. Except as set forth on the
Company Disclosure Schedule, the execution and delivery of this Agreement
do not, and the consummation of the transactions contemplated hereby and
compliance with the provisions hereof will not, (i) result in any
violation of, or default (with or without notice or lapse of time, or
both) under, or give rise to a right of termination, cancellation or
acceleration of any obligation or to the loss of a material benefit under
any loan, guarantee of indebtedness or credit agreement, note, bond,
mortgage, indenture, lease, agreement, contract, instrument, permit,
concession, franchise, right or license (any of the foregoing, a
"Contract") applicable to the Company or any of its Subsidiaries, or
result in the creation of any Lien upon any of the properties or assets
of the Company or any of its Subsidiaries, (ii) conflict or result in
any violation of any provision of the Certificate of Incorporation or
By-Laws or other equivalent organizational document, in each case as
amended, of the Company or any of its Subsidiaries, or (iii) subject to
<PAGE>
the governmental filings referenced in clause (i) of Section 3.8,
conflict with or violate any judgment, order, decree, statute, law,
ordinance, rule or regulation applicable to the Company or any of its
Subsidiaries or any of their respective properties or assets, other than,
in the case of clauses (i) and (iii), any such violations, conflicts,
defaults, rights, losses or Liens that, individually or in the aggregate,
would not have a Company Material Adverse Effect.
Section 3.8 Government Approvals; Required Consents. No filing
or registration with, or authorization, consent or approval of, any
Governmental Entity is required by or with respect to the Company or any
of its Subsidiaries in connection with the execution and delivery of this
Agreement by the Company or is necessary for the consummation of the
transactions contemplated hereby (including, without limitation, the
Merger) except: (i) in connection, or in compliance, with the provisions
of the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended
(the "HSR Act"), the Securities Act of 1933, as amended (the "Securities
Act"), the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), any state securities or "Blue Sky" law, (ii) for the filing of a
Certificate of Merger with the Secretary of State of the State of
Delaware, (iii) such consents, approvals, authorizations, permits,
filings and notifications listed in the Company Disclosure Schedule and
(iv) such other consents, orders, authorizations, registrations,
declarations and filings the failure of which to obtain or make would
not, individually or in the aggregate, have a Company Material Adverse
Effect.
Section 3.9 SEC Documents and Other Reports. The Company has
filed on a timely basis all documents required to be filed prior to the
Original Execution Date by it with the Securities and Exchange Commission
(the "SEC") since January 30, 1994 (the "Company SEC Documents").
Complete and correct copies of the Company SEC Documents have been made
available to Holdings. As of their respective dates, or if amended as of
the date of the last such amendment, the Company SEC Documents complied
in all material respects with the requirements of the Securities Act or
the Exchange Act, as the case may be, and the applicable rules and
regulations promulgated thereunder and none of the Company SEC Documents
as of the date thereof contained any untrue statement of a material fact
or omitted to state any material fact required to be stated therein or
necessary to make the statements therein, in light of the circumstances
under which they were made, not misleading. Complete and accurate copies
of the unaudited consolidated balance sheet, consolidated statements of
income, retained earnings and cash flows (together with any supplementary
information thereto) of the Company, all as of and for the four week
period ended August 31, 1997 (the "Interim Financial Information") have
been provided to Holdings. The consolidated financial statements of
the Company included in the Company SEC Documents and the Interim
Financial Information fairly present, in all material respects, the
consolidated financial position of the Company and its consolidated
Subsidiaries, as of and for the respective dates thereof and the
consolidated results of their operations and their consolidated cash
flows for the respective periods then ended (subject, in the case of
the unaudited statements, to normal year-end audit adjustments and to
any other adjustments described therein) in conformity with United States
generally accepted accounting principles ("GAAP") (except, in the case of
the unaudited statements, as permitted by Form 10-Q of the SEC) applied
on a consistent basis during the periods involved (except as may be
indicated therein or in the notes thereto). Since February 2, 1997,
the Company has not made any change in the accounting practices or
<PAGE>
policies applied in the preparation of its financial statements, except
as may be required by GAAP.
Section 3.10 Absence of Certain Changes or Events. Except to the
extent disclosed in the Company Disclosure Schedule, since February 2,
1997 the Company and their Subsidiaries have conducted their businesses
and operations in the ordinary and usual course consistent with past
practice and there has not occurred (i) any event, condition or
occurrence having or that would reasonably be expected to have,
individually or in the aggregate, a Company Material Adverse Effect;
(ii) any damage, destruction or loss (whether or not covered by
insurance) having or which would reasonably be expected to have,
individually or in the aggregate, a Company Material Adverse Effect;
or (iii) any declaration, setting aside or payment of any dividend or
distribution of any kind by the Company on any class of its capital stock.
Section 3.11 Actions and Proceedings. Except as set forth in the
Company Disclosure Schedule, there are no outstanding orders, judgments,
injunctions, awards or decrees of any Governmental Entity against the
Company or any of its Subsidiaries, any of their properties, assets or
business, or, to the knowledge of the Company, any of the Company's or
its Subsidiaries' current or former directors or officers or any other
person whom the Company or any of its Subsidiaries has agreed to
indemnify that would reasonably be expected to have, individually or in
the aggregate, a Company Material Adverse Effect. Except as set forth
in the Company Disclosure Schedule, to the knowledge of the Company,
there are no actions, suits or legal, administrative, regulatory or
arbitration proceedings pending or threatened against the Company or any
of its Subsidiaries, any of their properties, assets or business, or, to
the knowledge of the Company, any of the Company's or its Subsidiaries'
current or former directors or officers or any other person whom the
Company or any of its Subsidiaries has agreed to indemnify, that would
reasonably be expected to have, individually or in the aggregate, a
Company Material Adverse Effect. To the Company's knowledge, there are
no facts or circumstances specific to the Company which, if known to a
third party, would reasonably be expected to result in such a suit or
proceeding which could be expected to have a Company Material Adverse
Effect.
Section 3.12 Contracts. Each Contract entered into by the
Company or any of its Subsidiaries is valid, binding and enforceable and
in full force and effect, except where failure to be valid, binding and
enforceable and in full force and effect would not reasonably be expected
to have a Company Material Adverse Effect and there are no defaults by
the Company or any of its Subsidiaries or, to the knowledge of the
Company, another party thereto, thereunder, except those defaults that
would not reasonably be expected to have a Company Material Adverse
Effect. Except as set forth in the Company Disclosure Schedule, neither
the Company nor any of its Subsidiaries is a party to or bound by any
non-competition agreement or any other agreement or obligation which
purports to limit in any material respect the manner in which, or the
localities in which, the Company or any such Subsidiary is entitled to
conduct all or any material portion of the business of the Company and
its Subsidiaries taken as a whole. All Contracts which are material to
the business, financial condition, results of operations or prospects of
the Company and its Subsidiaries taken as a whole, are listed in the
Company Disclosure Schedule.
<PAGE>
Section 3.13 Taxes.
(a) As used in this Agreement, the following terms shall have
the following meanings: the term "Taxes" means all federal, state, local,
foreign and other net income, gross income, gross receipts, sales use,
ad valorem, transfer, franchise, profits, license, lease, service,
service use, withholding, payroll, estimated, employment, excise,
severance, stamp, occupation, premium, property, windfall profits,
customs, duties or other taxes, fees, assessments or charges of any kind
whatsoever, together with any interest any penalties, additions to tax
or additional amounts with respect thereto; and the term "Returns" means
all returns, declarations, reports, statements and other documents
required to be filed in respect of Taxes. All citations to the Code, or
to the Treasury Regulations promulgated thereunder, shall include any
amendments or any substitute or successor provisions thereto.
(b) There have been properly completed and filed on a timely
basis and in correct form all Returns required to be filed by the Company
and any of its Subsidiaries. As of the time of filing, the Returns
correctly reflected the facts regarding the income, business, assets,
operations, activities, status or other matters of the Company or such
Subsidiary or any other information required to be shown thereon. An
extension of time within which to file any Return which has not been
filed has not been requested or granted.
(c) With respect to all amounts in respect of Taxes imposed upon
the Company and any of its Subsidiaries, or for which the Company or any
of its Subsidiaries is or could be liable, whether to taxing authorities
(as, for example, under law) or to other persons or entities (as, for
example, under tax allocation agreements), with respect to all taxable
periods or portions of periods ending on or before the Closing Date, all
applicable tax laws and agreements have been fully complied with, and all
amounts required to be paid by the Company or any of its Subsidiaries, to
taxing authorities or others, on or before the Original Execution Date
have been paid.
(d) No issues have been raised (and are currently pending) by
any taxing authority in connection with any of the Returns filed by the
Company or any of its Subsidiaries. No waivers of statutes of limitation
with respect to such Returns have been given by or requested from the
Company or any of its Subsidiaries. The Company Disclosure Schedule sets
forth (i) the taxable years of each of the Company and its Subsidiaries
as to which the respective statutes of limitations with respect to Taxes
have not expired, and (ii) with respect to such taxable years sets forth
those years for which examinations have been completed, those years for
which examinations are presently being conducted, those years for which
examinations have not been initiated, and those years for which required
Returns have not yet been filed. All deficiencies asserted or assessments
made as a result of any examinations have been fully paid, or are fully
reflected as a liability in the financial statements contained in the
Company SEC Documents or are being contested in good faith and an
adequate reserve therefor has been established and is fully reflected in
the financial statements.
(e) Neither the Company nor any of its Subsidiaries is a party
to or bound by any tax indemnity, tax sharing or tax allocation agreement.
<PAGE>
(f) Neither the Company nor any of its Subsidiaries has agreed
to make, and is not required to make, any adjustment under section 481(a)
of the Code by reason of a change in accounting method or otherwise.
(g) Neither the Company nor any of its Subsidiaries is a party
to any agreement, contract, arrangement or plan that has resulted or
would result, separately or in the aggregate, in the payment of any
"excess parachute payments" within the meaning of Section 280G of the
Code.
(h) The unpaid Taxes of the Company and its Subsidiaries do not
exceed (and at the Effective Time will not exceed) the reserve for tax
liability with respect to the Company and its Subsidiaries (excluding any
reserve for deferred Taxes to the extent such reserve reflects timing
differences between book and tax income) set forth or included in the
latest consolidated financial statements included in the Company SEC
Documents as adjusted in accordance with the past practices of the
Company and its Subsidiaries for items of income, gain, loss, and expense
arising and accruals and transactions occurring after the latest balance
sheet date in such Company SEC Documents.
(i) The transactions contemplated herein will not result in
restorations into income of amounts deferred under the consolidated
return regulations, such as those relating to intercompany transactions,
excess loss accounts, and the like.
(j) The transactions contemplated herein are not subject to any
tax withholding provisions of law or regulations other than with respect
to foreign shareholders.
(k) No breach of any of the foregoing representations and
warranties in this Section 3.13 shall be deemed to exist unless such
breach would have a Company Material Adverse Effect.
(l) To the knowledge of the Company there is no plan or
intention on the part of the Company's stockholders to sell, exchange or
otherwise dispose of a number of shares of Holdings Common Stock received
by them for shares of Company Common Stock pursuant to the Merger, nor to
enter into any puts, calls, straddles, spreads or similar transactions,
that would reduce the Company's stockholders' ownership for U.S. federal
income tax purposes of Holdings Common Stock to a number of shares having
a value, as of the Effective Time, of less than 50 percent of the value
of all of the formerly outstanding stock of the Company as of the same
date. For purposes of this representation, shares of Company Common
Stock surrendered by dissenters or exchange for case in lieu of
fractional shares of Holdings Common Stock are treated as outstanding
shares of Company Common Stock at the Effective Time. Moreover, shares
of Company Common Stock and shares of Holdings Common Stock held by the
Company's stockholders and otherwise sold, redeemed or disposed of prior
to or subsequent to the Merger will be considered in making this
representation.
(m) At the Effective Time, the fair market value of the assets
of the Company will exceed the sum of its liabilities, plus the amount of
liabilities, if any, to which such assets are subject.
Section 3.14 Title to Properties; Encumbrances. Except as
described in the following sentence, each of the Company and its
Subsidiaries has good, valid and, in the case of real property,
<PAGE>
marketable title to, or a valid leasehold interest in, all of its
material properties and assets (real, personal, tangible and intangible),
including, without limitation, all such properties and assets reflected
in the consolidated balance sheet of the Company and its Subsidiaries
as of February 2, 1997 included in the Company SEC Documents (except for
properties and assets disposed of in the ordinary course of business and
consistent with past practices since such date), except for such title
or interest the failure of which to have would not have, individually
or in the aggregate, a Company Material Adverse Effect. None of such
properties or assets are subject to any Liens (whether absolute, accrued,
contingent or otherwise), except (i) as set forth in the Company
Disclosure Schedule or (ii) imperfections of title and Liens, if any,
which do not detract from the value of the property or assets subject
thereto in a manner material to the Company and do not materially impair
the business or operations of the Company and its Subsidiaries taken as
a whole.
Section 3.15 Intellectual Property. The Company and its
Subsidiaries own or have a valid license to use all inventions, patents,
trademarks, service marks, trade names, copyrights, trade secrets,
technology and know-how, software and other intellectual property rights
(collectively, the "Company Intellectual Property") necessary to carry on
their respective businesses as currently conducted except where the
failure to own or have a valid license to use such would not have a
Company Material Adverse Effect; and neither the Company nor any such
Subsidiary has received any notice of infringement of or conflict with,
and, to the Company's knowledge, there are no infringements of or
conflicts with, the rights of others with respect to the use of any of
the Company Intellectual Property that, in either such case, has had or
would reasonably be expected to have a Company Material Adverse Effect.
Section 3.16 Information in Disclosure Documents and Registration
Statement. None of the information supplied or to be supplied by the
Company for inclusion in (i) the Registration Statement to be filed with
the SEC on Form S-4 under the Securities Act (the "Registration
Statement") for the purpose of registering the shares of Holdings Common
Stock to be issued in connection with the Merger (the "Share Issuance")
or (ii) the proxy statement/prospectus to be distributed in connection
with the Company's meeting of stockholders to vote upon this Agreement
and the transactions contemplated hereby (the "Proxy Statement") will,
at the time the Registration Statement becomes effective, at the time
of the initial mailing of the Proxy Statement and any amendments or
supplements thereto or at the time of the meeting of stockholders of the
Company to be held in connection with the Merger, contain any untrue
statement of a material fact or omit to state any material fact required
to be stated therein or necessary in order to make the statements
therein, in light of the circumstances under which they are made, not
misleading. The Proxy Statement and any amendments or supplements
thereto will, at their respective times of mailing, comply as to form in
all material respects with the applicable requirements of the Exchange
Act, and the rules and regulations promulgated thereunder.
Notwithstanding the foregoing, the Company makes no representations with
respect to any statement in the foregoing documents based upon and
conforming to information supplied by Holdings for inclusion therein.
<PAGE>
Section 3.17 Employee Benefit Plans; ERISA.
(a) None of the Company, any of its Subsidiaries or any
affiliate of the Company or any of its Subsidiaries as determined under
Code section 414(b), (c), (m) or (o) ("Company ERISA Affiliate")
maintains, administers or contributes to, or has any liability with
respect to, nor do the employees of the Company, its Subsidiaries or any
Company ERISA Affiliate receive or expect to receive as a condition of
employment, benefits pursuant to:
(A) any employee benefit plan (as defined in section 3(3) of
ERISA) (each such plan, a "Company Plan"), including, without
limitation, any multiemployer plan (as defined in section 3(37)
of ERISA) ("Multiemployer Plan"); or
(B) any bonus, deferred compensation, performance
compensation, stock purchase, stock option, stock appreciation,
severance, salary continuation, vacation, sick leave, holiday
pay, fringe benefit, personnel policy, reimbursement program,
incentive, insurance, welfare or similar plan, program, policy
or arrangement (each such plan, a "Company Benefit Plan");
other than those Company Plans and Company Benefit Plans listed in the
Company Disclosure Schedule. Except as required by section 4980B of the
Code, none of the Company, any of its Subsidiaries or any Company ERISA
Affiliate has promised any former employee or other individual not
employed by the Company, any of its Subsidiaries or any Company ERISA
Affiliate medical or other benefit coverage and none of the Company, any
of its Subsidiaries or any Company ERISA Affiliate maintains or
contributes to any plan, program, policy or arrangement providing medical
or life insurance benefits to former employees, their spouses or
dependents or any other individual not employed by the Company, any of
its Subsidiaries or any Company ERISA Affiliate. No Company Plan or
Company Benefit Plan has any provision which could increase or accelerate
benefits or increase the liability of the Company or any of its
Subsidiaries as a result of any transaction contemplated by this
Agreement.
(b) All Company Plans and Company Benefit Plans which are not
Multiemployer Plans and any related trust agreements or annuity contracts
(or any related trust instruments) comply with and are and have been
operated in accordance with each applicable provision of ERISA and the
Code in all material respects. Each Company Plan, as amended to date,
which is not a Multiemployer Plan, that is intended to be qualified under
sections 401(a) and 501(a) of the Code has been determined to be so
qualified by the IRS, has been submitted to the IRS for a determination
with respect to such qualified status, or the remedial amendment period
with respect to such Company Plan will not have expired prior to the
Effective Time, and no event has occurred, either by reason of any action
or failure to act, which would cause the loss of any such qualification.
(c) Neither any Company Plan fiduciary nor any Company Plan
(excluding each Multiemployer Plan and its fiduciaries) has engaged in
any transaction in violation of section 406 of ERISA or any "prohibited
transaction" (as defined in section 4975(c)(1) of the Code) unless
exempt under section 408 of ERISA or section 4975 of the Code and there
has been no "reportable event" (as defined in section 4043 of ERISA),
with respect to any Company Plan which is not a Multiemployer Plan, for
which the 30-day notice requirement has not been waived. None of the
<PAGE>
Company, any of its Subsidiaries or any Company ERISA Affiliate has
incurred or suffered to exist any "accumulated funding deficiency" (as
defined in section 302 of ERISA) whether or not waived by the IRS,
involving any Company Plan subject to section 412 of the Code or Part 3
of Subtitle B of Title I of ERISA. No withdrawals have occurred so as
to cause any Company Plan to become subject to the provisions of section
4063 of ERISA, and none of the Company, any of its Subsidiaries or any
Company ERISA Affiliate has ceased making contributions to any employee
benefit plan subject to section 4064(a) of ERISA to which the Company,
any of its Subsidiaries or any Company ERISA Affiliate made contributions
during the six (6) years prior to the Original Execution Date or ceased
operations at a facility so as to become subject to section 4062(e) of
ERISA. Full payment has been made of all amounts which the Company, any
of its Subsidiaries or any Company ERISA Affiliate is required or
committed to pay to each of the Company Plans and Company Benefit Plans
prior to or as of the Effective Time.
(d) True and complete copies of each Company Plan, Company
Benefit Plan, related trust agreements, annuity contracts, determination
letters, the most recent determination letter request, summary plan
descriptions, annual reports on Form 5500, Form 990, actuarial reports
and PBGC Forms 1 for the most recent three (3) plan years, and each plan,
agreement, instrument and commitment referred to herein has been
previously furnished to Holdings. The annual reports on Form 5500 and
Form 990 and actuarial statements furnished to the Company fully and
accurately set forth the financial and actuarial condition of the
respective Company Plan or Company Benefit Plan, as may be applicable.
(e) The aggregate present value of all accrued benefits,
including the maximum value of all subsidized benefits, pursuant to each
Company Plan subject to Title IV of ERISA, determined on the basis of
current participation and projected compensation for active participants,
and earnings, mortality and other actuarial assumptions set forth in the
most recent actuarial report for Company Plan does not exceed the current
fair market value of Company Plan's assets.
(f) None of the Company, any of its Subsidiaries or any Company
ERISA Affiliate has incurred any liability to the PBGC, including as a
result of the voluntary or involuntary termination of any Company Plan
which is subject to Title IV of ERISA. There is currently no active
filing by the Company, its Subsidiaries or any Company ERISA Affiliate
with the PBGC (and no proceeding has been commenced by the PBGC and no
condition exists, and no event has occurred, that could constitute
grounds for the termination of any Company Plan by the PBGC) to terminate
any Company Plan which is subject to Title IV of ERISA and which has been
maintained or funded, in whole or in part, by the Company, its
Subsidiaries or any Company ERISA Affiliate.
(g) To the knowledge of the Company or its Subsidiaries, there
are no pending or threatened claims by or on behalf of any of Company
Plans or Company Benefit Plans by any employee or beneficiary covered
under any Company Plans or Company Benefit Plans or otherwise involving
any Company Plan or Company Benefit Plan (other than routine claims for
benefits).
(h) With respect to each Company Plan which is a Multiemployer
Plan covering employees of the Company, any of its Subsidiaries or any
Company ERISA Affiliate: (i) none of the Company, such Subsidiary or
such Company ERISA Affiliate would incur any withdrawal liability on a
<PAGE>
complete withdrawal from each such Company Plan as of the Effective Date,
under applicable laws and conditions of each such Company Plan and the
applicable provisions of law; (ii) none of the Company, its Subsidiaries
or any Company ERISA Affiliate has made or suffered a "complete
withdrawal" or a "partial withdrawal", as such terms are respectively
defined in sections 4203 and 4205 of ERISA; (iii) none of the Company,
its Subsidiaries or any Company ERISA Affiliate has any contingent
liability under section 4204 of ERISA; and (iv) no such Company Plan is
in reorganization as defined in section 4241 of ERISA and no
circumstances exist which present a material risk of any such Company
Plan going into reorganization.
(i) With respect to employees of the Company and its
Subsidiaries, the Company and its Subsidiaries are and have been in
compliance with all applicable laws respecting employment and employment
practices, terms and conditions of employment and wages and hours,
including, without limitation, any such laws respecting employment
discrimination, occupational safety and health, and unfair labor
practices.
(j) No breach of any of the foregoing representations and
warranties in this Section 3.17 shall be deemed to exist unless such
breach would have a Company Material Adverse Effect.
Section 3.18 Environmental Matters. Except as set forth in the
Company Disclosure Schedule, the Company and its Subsidiaries are and at
all times have been, and all real property currently or, to the Company's
knowledge, previously owned, leased, occupied, used by or under the
control of the Company or any of its Subsidiaries and all operations or
activities of the Company and its Subsidiaries (including, without
limitation, those conducted on or taking place at any of such real
property) are and, to the knowledge of the Company, at all times have
been, in compliance with and not subject to any liability or obligation
under any Environmental Law or Environmental Permit except where any of
the foregoing would not have a Company Material Adverse Effect. As used
in this Agreement: "Environmental Laws" means all applicable federal,
state or local laws, rules, regulations or principles of common law
relating to protection of health and safety, pollution, and environmental
matters of any kind whatsoever, including with respect to the storage,
treatment, generation, transportation, spillage, discharge, leakage or
other release or threatened release of any material, substance or waste
of any kind whatsoever; and "Environmental Permits" means any permits,
licenses, notifications, consents or approvals required under any
Environmental Law. There is no condition or circumstance regarding the
Company or any of its Subsidiaries or their business or any such real
property or the operations or activities conducted thereon, which may
give rise to a violation of, or liability or obligation under, any
Environmental Law or Environmental Permit which would have a Company
Material Adverse Effect. Neither the Company, any of its Subsidiaries
nor, to the knowledge of the Company, any Person, the acts or omissions
of which may be attributable to, the responsibility of, or be the basis
of a liability to, the Company, has, or has arranged to have, any
material, substance or waste generated, released, treated, stored or
disposed of at, or transported to, any facility or property the
remediation or cleanup of which, or the response costs related thereto,
could become or result in a Company Material Adverse Effect. There are
no allegations, claims, demands, citations, notices of violation, or
orders of noncompliance made against, issued to or received by the
Company relating or pursuant to any Environmental Law or Environmental
<PAGE>
Permit except those which have been corrected or complied with or which
are not material to the Company, and to the knowledge of the Company no
such allegation, claim, demand, citation, notice of violation or order
of noncompliance is threatened, imminent or likely. No breach of any of
the foregoing representations and warranties in this Section 3.18 shall
be deemed to exist unless such breach would have a Company Material
Adverse Effect.
Section 3.19 Labor Matters. With respect to employees of the
Company and its Subsidiaries: (i) to the knowledge of the Company there
is no pending or threatened unfair labor practice charges or employee
grievance charges; (ii) there is no request for union representation,
labor strike, dispute, slowdown or stoppage actually pending or, to the
knowledge of the Company, threatened against the Company, and there has
been no such event during the 18 months preceding the Original Execution
Date; (iii) the Company is not a party to any collective bargaining
agreements; and (iv) except as set out in the Company Disclosure
Schedule, the employment of each of the Company's employees is terminable
at will without cost to the Company except for payments required under
the Company Plans and Company Benefit Plans and payment of accrued
salaries or wages and vacation pay. No employee or former employee has
any right to be rehired by the Company prior to the Company's hiring a
person not previously employed by the Company. The Company is and, since
February 2, 1997 has been, in compliance in all material respects with
all applicable laws respecting employment and employment practices, terms
and conditions of employment and wages and hours, including, without
limitation, any such laws respecting employment discrimination,
occupational safety and health, and unfair labor practices, except where
such failure to comply would not have a Company Material Adverse Effect.
The Company is not delinquent in payments to any of its employees for any
wages, salaries, commissions, bonuses or other direct compensation for
any services performed by them or any amounts required to be reimbursed
to such employees.
Section 3.20 Affiliate Transactions. Except as set forth in the
Company Disclosure Schedule or as contemplated by the transactions
contemplated hereby, since January 1, 1996, there are no material
undischarged Contracts or other material transactions between the Company
or any of its Subsidiaries, on the one hand, and any (i) officer or
director of the Company or any of its Subsidiaries, (ii) record or
beneficial owner of five percent or more of the voting securities of the
Company or (iii) affiliate (as such term is defined in Regulation 12b-2
promulgated under the Exchange Act) of any such officer, director or
beneficial owner, on the other hand (each person described in clauses
(i), (ii) and (iii), a "Related Party").
Section 3.2. Real Estate.
(a) Owned Real Estate. All material real estate owned by the
Company (the "Company Real Estate") is owned in fee simple title, subject
only to real estate taxes not delinquent and to covenants, conditions,
restrictions and easements which are of record and minor irregularities
or imperfections of title which do not in the aggregate materially
detract from the value of the Company Real Estate or interfere with the
Company's use or occupancy thereof. Except as set forth in the Company
Disclosure Schedule, none of the Company Real Estate is subject to any
leases or tenancies.
<PAGE>
(b) Leased Premises. All real estate leased by the Company (the
"Company Leased Premises") is leased pursuant to written leases, and the
Company has provided to Holdings the original lease and any material
amendments thereto and has otherwise made available to Holdings its
records regarding the Company Leased Premises. To the Company's
knowledge, the Company is not in default under any material term of any
agreement relating to the Company Leased Premises nor, to the Company's
knowledge, is any other party thereto in default thereunder, which in
any case would have a Company Material Adverse Effect.
(c) Condemnation. There are no condemnation proceedings pending
or, to the Company's knowledge, threatened with respect to any portion of
the Company Real Estate or the Company Leased Premises.
(d) Condition of Buildings. To the knowledge of the Company,
the buildings and other facilities located on the Company Real Estate and
the Company Leased Premises are free of any patent structural or
engineering defects and, to the Company's knowledge, are free of any
latent structural or engineering defects.
Section 3.22 Brokers. Except for fees, commissions and expenses
payable to its financial advisors, Peter J. Solomon Company Limited and
to Houlihan, Lokey, Howard & Zukin with respect to its work in connection
with rendering a fairness opinion with respect to the transactions
contemplated by this Agreement, no broker, finder or financial advisor
retained by the Company is entitled to any brokerage, finder's or other
fee or commission from the Company in connection with the transactions
contemplated by this Agreement.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF HOLDINGS,
SPORTING AND ACQUISITION
Except as set forth in the Holdings Disclosure Schedule delivered
by Holdings to the Company in connection with the execution of the
Original Agreement (the "Holdings Disclosure Schedule") (each section of
which qualifies the correspondingly numbered representation and warranty
and any other representations and warranties to which the disclosure on
its face relates), Holdings, Sporting and Acquisition each represents and
warrants, as of the Original Execution Date and only with respect to
facts and circumstances then in existence (except with respect to
Acquisition, including as a Subsidiary of Holdings, as to which all such
representations and warranties are expressly made as the date hereof and
except with respect to Sections 4.5, 4.7, 4.8, 4.13(k) and 4.23, which
are expressly remade as of the date hereof), to the Company as follows:
Section 4.1 Organization and Good Standing. Each of Holdings and
Acquisition is a corporation duly organized, validly existing and in good
standing under the laws of the State of Delaware and has the corporate
power and authority to carry on its business as it is now being conducted.
Holdings is duly qualified as a foreign corporation to do business, and
is in good standing, in each jurisdiction where the character of its
properties owned or held under lease or the nature of its activities
makes such qualification necessary, except where the failure to be so
qualified or in good standing would not have a material adverse effect,
individually or in the aggregate, on the business, financial condition or
results of operations of Holdings and its Subsidiaries taken as a whole,
or, if applicable, the ability of Holdings or Acquisition to consummate
the Merger and the other transactions contemplated by this Agreement (a
<PAGE>
"Holdings Material Adverse Effect") For purposes of this Agreement, a
"Holdings Material Adverse Effect" shall not be deemed to have occurred
as a result of (i) opening of stores, or the announcement of planned
store openings, by competitors or (ii) facts and circumstances unless
such facts and circumstances are of such a fundamental and extraordinary
nature that no reasonable person could dispute that such a "material
adverse change" has occurred. Holdings sole assets are the capital stock
of Sporting and Acquisition. Sporting and Acquisition are Holdings' sole
direct Subsidiaries and Holdings owns 100% of the capital stock of each
of Sporting and Acquisition.
Section 4.2 Certificate of Incorporation and By-Laws. Complete
and correct copies of the Certificates of Incorporation and By-laws or
equivalent organizational documents, each as amended to date, of Holdings
and each of its Subsidiaries have been made available to the Company.
The Certificates of Incorporation, By-laws and equivalent organizational
documents of Holdings and each of its Subsidiaries are in full force and
effect. Neither Holdings nor any of its Subsidiaries is in violation of
any provision of its Certificate of Incorporation, By-laws or equivalent
organizational documents.
Section 4.3 Capitalization.
(a) As of the Original Execution Date, the authorized capital
stock of Holdings consisted of 1,000,000 shares of Preferred Stock, par
value $.01 per share ("Holdings Preferred Stock"), and 5,000,000 shares
of Common Stock, par value $.01 per share ("Holdings Common Stock").
As of the date hereof, the authorized capital stock of Holdings consists
of 1,000,000 shares of Holdings Preferred Stock and 8,000,000 shares of
Holdings Common Stock. At the close of business on September 25, 1997,
(i) no shares of Holdings Preferred Stock were outstanding,
(ii) 2,749,447 shares of Holdings Common Stock were outstanding and (iii)
200,650 shares of unissued Holdings Common Stock were subject to issuance
upon the exercise of outstanding stock options listed in the Holdings
Disclosure Schedule. All outstanding shares of Holdings Common Stock are
validly issued, fully paid and nonassessable and not subject to
preemptive rights.
(b) As of the Original Execution Date, the authorized capital
stock of Sporting consisted of 1,000 shares of Common Stock, no par
value ("Sporting Common Stock"). At the close of business on September
25, 1997, all 1,000 shares of Sporting Common Stock were outstanding and
held by Holdings. All outstanding shares of Sporting Common Stock are
validly issued, fully paid and nonassessable and not subject to
preemptive rights.
(c) As of the date hereof, the authorized capital stock of
Acquisition consists of 1,000 shares of Common Stock, $.01 par value
("Acquisition Common Stock"). At the close of business on the date
hereof, all 1,000 shares of Acquisition Common Stock were outstanding
and held by Holdings. All outstanding shares of Acquisition Common Stock
are validly issued, fully paid and nonassessable and not subject to
preemptive rights. Acquisition is newly-formed and has conducted no
business except in connection with the Merger.
(d) Except as described in this Section 4.3 and as contemplated
by this Agreement: (i) no shares of capital stock or other equity
securities of Holdings, Sporting or Acquisition are authorized, issued
or outstanding, or reserved for issuance and there are no options,
<PAGE>
warrants or other rights (including registration rights), agreements,
arrangements or commitments of any character to which Holdings or any of
its Subsidiaries is a party relating to the issued or unissued capital
stock or other equity interests of Holdings or any of its Subsidiaries,
requiring Holdings or any of its Subsidiaries to grant, issue or sell any
shares of the capital stock or other equity interests of Holdings or any
of its Subsidiaries by sale, lease, license or otherwise; (ii) neither
Holdings nor any of its Subsidiaries have any obligation, contingent or
otherwise, to repurchase, redeem or otherwise acquire any shares of the
capital stock or other equity interests of Holdings or any of its
Subsidiaries; (iii) neither Holdings nor any of its Subsidiaries,
directly or indirectly, owns, or has agreed to purchase or otherwise
acquire, the capital stock or other equity interests of, or any interest
convertible into or exchangeable or exercisable for such capital stock
or such equity interests of, any corporation, partnership, joint venture
or other entity which would be material in value to Holdings; and (iv)
there are no voting trusts, proxies or other agreements or understandings
to which Holdings or any of its Subsidiaries is a party with respect to
the voting of any shares of capital stock or other equity interests of
Holdings or any of its Subsidiaries.
Section 4.4 Holdings Subsidiaries. The Holdings Disclosure
Schedule sets forth a list of each Subsidiary of Holdings; its authorized,
issued and outstanding capital stock or other equity interests; the
percentage of such capital stock or other equity interests owned by
Holdings or any Subsidiary of Holdings, and the identity of such owner;
the capital stock reserved for future issuance pursuant to outstanding
options or other agreements; and the identity of all parties to any such
option or other agreement. Each Subsidiary of Holdings is a corporation
duly organized, validly existing and in good standing under the laws of
its jurisdiction of incorporation or organization. Each Subsidiary of
Holdings has all requisite corporate power and authority to carry on its
business as it is now being conducted. Each Subsidiary of Holdings is
duly qualified as a foreign corporation or organization authorized to do
business, and is in good standing, in each jurisdiction where the
character of its properties owned or held under lease or the nature of
its activities makes such qualification necessary, except where the
failure to be so qualified or in good standing would not have a Holdings
Material Adverse Effect. All of the outstanding shares of capital stock
or other ownership interests in each of Holdings' Subsidiaries have been
validly issued, and are fully paid, nonassessable and are owned by
Holdings or another Subsidiary of Holdings free and clear of all Liens,
and are not subject to preemptive rights created by statute, such
Subsidiary's respective Certificate of Incorporation or By-laws or any
agreement to which such Subsidiary is a party.
Section 4.5 Corporate Authority.
(a) Each of Holdings, Sporting and Acquisition has the requisite
corporate power and authority to execute and deliver this Agreement and to
consummate the transactions contemplated hereby. The execution and
delivery of this Agreement by Holdings, Sporting and Acquisition and the
consummation by Holdings, Sporting and Acquisition of the transactions
contemplated hereby have been duly authorized by their respective Board
of Directors and stockholders and no other corporate action on the part
of Holdings, Sporting or Acquisition is necessary to authorize the
execution and delivery by Holdings, Sporting and Acquisition of this
Agreement and the consummation by them of the transactions contemplated
hereby. This Agreement has been duly executed and delivered by Holdings,
<PAGE>
Sporting and Acquisition and constitutes a valid and binding agreement of
Holdings, Sporting and Acquisition and is enforceable against Holdings,
Sporting and Acquisition in accordance with its terms, except to the
extent that (i) such enforcement may be subject to any bankruptcy,
insolvency, reorganization, moratorium, fraudulent transfer or other
laws, now or hereafter in effect, relating to or limiting creditors'
rights generally and (ii) the remedy of specific performance and
injunctive and other forms of equitable relief may be subject to
equitable defense, and to the discretion of the court before which any
proceeding therefor may be brought. The preparation of the Registration
Statement to be filed with the SEC has been duly authorized by the Board
of Directors of Holdings.
(b) Prior to the execution and delivery of this Agreement, the
Boards of Directors of Holdings, Sporting and Acquisition have (i)
approved this Agreement and the Merger and the other transactions
contemplated hereby, (ii) determined that the transactions contemplated
hereby are fair to and in the best interests of Holdings and the holders
of Holdings Common Stock and (iii) determined to recommend this
Agreement, the Merger and the other transactions contemplated hereby to
their respective stockholders for approval and adoption. This Agreement
and the transactions contemplated hereby have been duly approved and
adopted by the affirmative vote of the holders of a majority of the
outstanding shares of Holdings Common Stock and by the sole stockholder
of each of Sporting and Acquisition in accordance with Sections 228 and
251 of the DGCL and Sections 7-108-202 and 7-107-104 of the CBCA,
as applicable, and no further vote of the holders of any class or series
of Holdings', Sporting's or Acquisition's capital stock is necessary to
approve, adopt and consummate this Agreement or the transactions
contemplated hereby. Holdings, Sporting and Acquisition covenant and
agree to timely provide any and all notices and other information and to
take any other action pursuant to the DGCL and the CBCA, as applicable,
that may be required as a result of such approvals.
Section 4.6. Compliance with Applicable Law. Except as disclosed
in the Holdings Disclosure Schedule, (i) each of Holdings and its
Subsidiaries holds, and is in compliance with the terms of, all permits,
licenses, exemptions, orders and approvals of all Governmental Entities
necessary for the conduct of their respective businesses ("Holdings
Permits"), except for failures to hold or to comply with such permits,
licenses, exemptions, orders and approvals which would not have a
Holdings Material Adverse Effect, (ii) with respect to the Holdings
Permits, to the knowledge of Holdings, no action or proceeding is pending
that would reasonably be expected to have a Holdings Material Adverse
Effect, (iii) the business of Holdings and its Subsidiaries is being
conducted in compliance with all Applicable Laws, except for violations
or failures to so comply that would not have a Holdings Material Adverse
Effect, and (iv) to the knowledge of Holdings, no investigation or review
by any Governmental Entity with respect to Holdings or its Subsidiaries
is pending or threatened, other than, in each case, those which would not
reasonably be likely to have a Holdings Material Adverse Effect.
Section 4.7 Non-contravention. Except as set forth on the
Holdings Disclosure Schedule, the execution and delivery of this
Agreement do not, and the consummation of the transactions contemplated
hereby and compliance with the provisions hereof will not, (i) result in
any violation of, or default (with or without notice or lapse of time, or
both) under, or give rise to a right of termination, cancellation or
acceleration of any obligation or to the loss of a material benefit under
<PAGE>
any Contract applicable to Holdings or any of its Subsidiaries, or result
in the creation of any Lien upon any of the properties or assets of
Holdings or any of its Subsidiaries, (ii) conflict or result in any
violation of any provision of the Certificate of Incorporation or By-Laws
or other equivalent organizational document, in each case as amended, of
Holdings or any of its Subsidiaries, (iii) subject to the governmental
filings referenced in clause (i) of Section 4.8, conflict with or
violate any judgment, order, decree, statute, law, ordinance, rule or
regulation applicable to Holdings or any of its Subsidiaries or any of
their respective properties or assets, other than, in the case of clauses
(i) and (iii), any such violations, conflicts, defaults, rights, losses
or Liens that, individually or in the aggregate, would not have a
Holdings Material Adverse Effect.
Section 4.8 Government Approvals; Required Consents. No filing
or registration with, or authorization, consent or approval of, any
Governmental Entity is required by or with respect to Holdings or any of
its Subsidiaries in connection with the execution and delivery of this
Agreement by Holdings, Sporting or Acquisition or is necessary for the
consummation of the transactions contemplated hereby (including, without
limitation, the Merger) except: (i) in connection, or in compliance,
with the provisions of the HSR Act, the Securities Act, the Exchange Act,
any state securities or "Blue Sky" law, (ii) for the filing of a
Certificate of Merger with the Secretary of State of the State of
Delaware, (iii) for the filing of the Holdings Charter and the Surviving
Corporation Charter with the Secretary of State of the State of Delaware,
(iv) such consents, approvals, authorizations, permits, filings and
notifications listed in the Holdings Disclosure Schedule and (v) such
other consents, orders, authorizations, registrations, declarations and
filings the failure of which to obtain or make would not, individually or
in the aggregate, have a Holdings Material Adverse Effect.
Section 4.9 Financial Statements and Other Documents. The
Holdings Disclosure Schedule contains complete and accurate copies of the
audited consolidated balance sheets, consolidated statements of income,
retained earnings and cash flows and notes to consolidated financial
statements (together with any supplementary information thereto) of
Holdings, all as of and for the fiscal years ended December 31, 1994,
January 6, 1996 and January 4, 1997. The Holdings Disclosure Schedule
also contains complete and accurate copies of the unaudited consolidated
balance sheets, consolidated statements of income, retained earnings and
cash flows (together with any supplementary information thereto) for the
quarterly periods with respect to the fiscal years ended January 6, 1996
and January 4, 1997. The Holdings Disclosure Schedule also contains
complete and accurate copies of the unaudited consolidated balance sheet,
consolidated statements of income, retained earnings and cash flows
(together with any supplementary information thereto) of Holdings, all as
of and for the first and second fiscal quarters of 1997 and the four week
period ended August 2, 1997 (all of the foregoing financial statements,
collectively, the "Holdings Financial Statements"). The Holdings
Financial Statements fairly present, in all material respects, the
consolidated financial position of Holdings and its consolidated
Subsidiaries, as of and for the respective dates thereof and the
consolidated results of their operations and their consolidated cash
flows for the respective periods then ended (subject, in the case of the
unaudited statements, to normal year-end audit adjustments and to any
other adjustments described therein) in conformity with GAAP (except, in
the case of the unaudited statements, for the omission of normal and
customary footnote disclosures required by GAAP, none of which would
<PAGE>
materially affect such Financial Statements) applied on a consistent
basis during the periods involved (except as may be indicated therein
or in the notes thereto). Since January 4, 1997, Holdings has not made
any change in the accounting practices or policies applied in the
preparation of its financial statements, except as may be required by
GAAP. Holdings' draft registration statement on Form S-1 dated September
5, 1997 does not contain any material misstatement or omission which
would make the statements made therein, in light of the circumstances
under which they were made, materially misleading with respect to the
historical description of Holdings' business and operations described
therein.
Section 4.10 Absence of Certain Changes or Events. Except to
the extent disclosed in the Holdings Disclosure Schedule, since January
4, 1997 Holdings and its Subsidiaries have conducted their businesses and
operations in the ordinary and usual course consistent with past practice
and there has not occurred (i) any event, condition or occurrence having
or that would reasonably be expected to have, individually or in the
aggregate, a Holdings Material Adverse Effect; (ii) any damage,
destruction or loss (whether or not covered by insurance) having or which
would reasonably be expected to have, individually or in the aggregate, a
Holdings Material Adverse Effect; or (iii) any declaration, setting aside
or payment of any dividend or distribution of any kind by Holdings on any
class of its capital stock.
Section 4.11 Actions and Proceedings. Except as set forth in the
Holdings Disclosure Schedule, there are no outstanding orders, judgments,
injunctions, awards or decrees of any Governmental Entity against
Holdings or any of its Subsidiaries, any of their properties, assets or
business, or, to the knowledge of Holdings, any of Holdings' or its
Subsidiaries' current or former directors or officers or any other person
whom Holdings or any of its Subsidiaries has agreed to indemnify, that
would reasonably be expected to have, individually or in the aggregate, a
Holdings Material Adverse Effect. Except as set forth in the Holdings
Disclosure Schedule, to the knowledge of Holdings, there are no actions,
suits or legal, administrative, regulatory or arbitration proceedings
pending or threatened against Holdings or any of its Subsidiaries, any of
their properties, assets or business, or, to the knowledge of Holdings,
any of Holdings' or its Subsidiaries' current or former directors or
officers or any other person whom Holdings or any of its Subsidiaries has
agreed to indemnify, that would reasonably be expected to have,
individually or in the aggregate, a Holdings Material Adverse Effect.
To the knowledge of Holdings, there are no facts or circumstances
specific to Holdings which if known to a third party would reasonably be
expected to result in such a suit or proceeding which could be expected
to have a Holdings Material Adverse Effect.
Section 4.12 Contracts. Each Contract entered into by Holdings
or any of its Subsidiaries is valid, binding and enforceable and in full
force and effect, except where failure to be valid, binding and
enforceable and in full force and effect would not reasonably be expected
to have a Holdings Material Adverse Effect and there are no defaults by
Holdings or any of its Subsidiaries or, to the knowledge of Holdings,
another party thereto, thereunder, except those defaults that would not
reasonably be expected to have a Holdings Material Adverse Effect.
Except as set forth in the Holdings Disclosure Schedule, neither Holdings
nor any of its Subsidiaries is a party to or bound by any non-competition
agreement or any other agreement or obligation which purports to limit in
any material respect the manner in which, or the localities in which,
Holdings or any such Subsidiary is entitled to conduct all or any
<PAGE>
material portion of the business of Holdings and its Subsidiaries taken
as a whole. All Contracts which are material to the business, financial
condition, results of operations or prospects of Holdings and its
Subsidiaries taken as a whole, are listed in the Holdings Disclosure
Schedule.
Section 4.13 Taxes.
(a) There have been properly completed and filed on a timely
basis and in correct form all Returns required to be filed by Holdings
and any of its Subsidiaries. As of the time of filing, the Returns
correctly reflected the facts regarding the income, business, assets,
operations, activities, status or other matters of Holdings or its
Subsidiary or any other information required to be shown thereon. An
extension of time within which to file any Return which has not been
filed has not been requested or granted.
(b) With respect to all amounts in respect of Taxes imposed upon
Holdings and any of its Subsidiaries, or for which Holdings or any of its
Subsidiaries is or could be liable, whether to taxing authorities (as,
for example, under law) or to other persons or entities (as, for example,
under tax allocation agreements), with respect to all taxable periods or
portions of periods ending on or before the Closing Date, all applicable
tax laws and agreements have been fully complied with, and all amounts
required to be paid by Holdings or any of its Subsidiaries, to taxing
authorities or others, on or before the Original Execution Date have been
paid.
(c) Except as set forth in the Holdings Disclosure Schedule, no
issues have been raised (and are currently pending) by any taxing
authority in connection with any of the Returns filed by Holdings or any
of its Subsidiaries. No waivers of statutes of limitation with respect
to such Returns have been given by or requested from Holdings or any of
its Subsidiaries. The Holdings Disclosure Schedule sets forth (i) the
taxable years of Holdings and its Subsidiaries as to which the respective
statutes of limitations with respect to Taxes have not expired, and (ii)
with respect to such taxable years sets forth those years for which
examinations have been completed, those years for which examinations are
presently being conducted, those years for which examinations have not
been initiated, and those years for which required Returns have not yet
been filed. All deficiencies asserted or assessments made as a result of
any examinations have been fully paid, or are fully reflected as a
liability in the Holdings Financial Statements or are being contested in
good faith and an adequate reserve therefor has been established and is
fully reflected in the Holdings Financial Statements.
(d) Except as set forth in the Holdings Disclosure Schedule,
neither Holdings nor any of its Subsidiaries is a party to or bound by
any tax indemnity, tax sharing or tax allocation agreement.
(e) Neither Holdings nor any of its Subsidiaries has agreed to
make, and is not required to make, any adjustment under section 481(a) of
the Code by reason of a change in accounting method or otherwise.
(f) Neither Holdings nor any of its Subsidiaries is a party to
any agreement, contract, arrangement or plan that has resulted or would
result, separately or in the aggregate, in the payment of any "excess
parachute payments" within the meaning of section 280G of the Code.
<PAGE>
(g) The unpaid Taxes of Holdings and its Subsidiaries do not
exceed (and at the Effective Time will not exceed) the reserve for tax
liability with respect to Holdings and its Subsidiaries (excluding any
reserve for deferred Taxes to the extent such reserve reflects timing
differences between book and tax income) set forth or included in the
latest Holdings Financial Statements as adjusted in accordance with the
past practices of Holdings and its Subsidiaries for items of income,
gain, loss and expense arising and accruals and transactions occurring
after the latest balance sheet date in such Holdings Financial Statements.
(h) The transactions contemplated herein will not result in
restorations into income of amounts deferred under the consolidated
return regulations, such as those relating to intercompany transactions,
excess loss accounts, and the like.
(i) The transactions contemplated herein are not subject to any
tax withholding provisions of law or regulations other than with respect
to foreign shareholders.
(j) No breach of any of the representations and warranties
contained in paragraphs (a) through (i) of this Section 4.13 shall be
deemed to exist unless such breach would have a Holdings Material
Adverse Effect.
(k) Until April 20, 1994, Holdings was a wholly-owned, indirect
subsidiary of TCH Corporation, a Delaware corporation, which became
Thrifty Payless Holdings, Inc., a Delaware corporation ("Thrifty").
Effective December 12, 1996, Thrifty was merged with and into Rite Aid
Corporation, a Delaware corporation, pursuant to Section 251 of the DGCL.
Each of Holdings, Sporting and Acquisition represents, warrants and
agrees that Holdings is in control of each of Sporting and Acquisition
within the meaning of Section 368(c) of the Code and that each of
Holdings, Sporting and Acquisition has not and will not, and that the
Surviving Corporation will not (and the Surviving Corporation hereby
agrees that it will not), take, or permit any of their Subsidiaries to
take, any action that would cause the Merger not to be a tax-free
reorganization under Section 368(a)(2)(E) of the Code, including, without
limitation, by reason of any violation of the continuity-of-proprietary-
interest doctrine or the continuity-of-business-enterprise doctrine, or a
merger of the Company with and into another corporation or entity with
such other corporation or entity surviving the merger, if such merger
would cause the Merger not to be a tax-free reorganization under Section
368(a)(2)(E) of the Code. Each of Holdings, Sporting and Acquisition
represent and warrant that they have no plan or intention to effect a
merger of the Company with and into another corporation or entity with
such other corporation or entity surviving such merger. Notwithstanding
anything in this Agreement to the contrary, this Section 4.13(k) shall
survive the Closing and shall apply without regard to any disclosure on
the Holdings Disclosure Schedule or otherwise made on behalf of Holdings.
Stockholders of the Company are each third party beneficiaries of this
Section 4.13(k) and may seek relief for breach hereof in their own names.
(l) Holdings will not make any extraordinary dividend payments
to its stockholders prior to the Effective Time, or in contemplation of
the Merger.
<PAGE>
(m) At the Effective Time, the fair market value of the assets
of each of Holdings, Sporting and Acquisition will exceed the sum of its
liabilities, plus the amount of liabilities of others, if any, to which
such assets are subject.
Section 4.14 Title to Properties; Encumbrances. Except as
described in the following sentence, each of Holdings and its
Subsidiaries has good, valid and, in the case of real property,
marketable title to, or a valid leasehold interest in, all of its
material properties and assets (real, personal, tangible and intangible),
including, without limitation, all such properties and assets reflected
in the consolidated balance sheet of Holdings and its Subsidiaries as of
January 4, 1997 included in the Holdings Financial Statements (except
for properties and assets disposed of in the ordinary course of business
and consistent with past practices since that date), except for such
title or interest the failure of which to have would not have,
individually or in the aggregate, a Holdings Material Adverse Effect.
None of such properties or assets are subject to any Liens (whether
absolute, accrued, contingent or otherwise), except (i) as set forth in
the Holdings Disclosure Schedule or (ii) imperfections of title and
Liens, if any, which do not detract from the value of the property or
assets subject thereto in a manner material to Holdings and do not
materially impair the business or operations of Holdings and its
Subsidiaries taken as a whole.
Section 4.15 Intellectual Property. Holdings and its
Subsidiaries own or have a valid license to use all inventions, patents,
trademarks, service marks, trade names, copyrights, trade secrets,
technology and know-how, software and other intellectual property rights
(collectively, the "Holdings Intellectual Property") necessary to carry
on their respective businesses as currently conducted except where the
failure to own or have a valid license to use such would not have a
Holdings Material Adverse Effect; and neither Holdings nor any such
Subsidiary has received any notice of infringement of or conflict with,
and, to Holdings' knowledge, there are no infringements of or conflicts
with, the rights of others with respect to the use of any of the Holdings
Intellectual Property that, in either such case, has had or would
reasonably be expected to have, individually or in the aggregate, a
Holdings Material Adverse Effect.
Section 4.16 Information in Registration Statement. None of the
information supplied or to be supplied by Holdings for inclusion in the
Registration Statement will at the time it becomes effective, at the time
of the initial mailing of the Proxy Statement and any amendments or
supplements thereto or at the time of the meeting of the Company's
stockholders contemplated by this Agreement contain any untrue statement
of a material fact or omit to state any material fact required to be
stated therein or necessary in order to make the statements therein, in
light of the circumstances under which they are made, not misleading.
The Registration Statement, as of its effective date, will comply as to
form in all material respects with the requirements of the Securities
Act, and the rules and regulations promulgated thereunder.
Notwithstanding the foregoing, Holdings makes no representations with
respect to any statement in the foregoing documents based upon and
conforming to information supplied by the Company for inclusion therein.
<PAGE>
Section 4.17 Employee Benefit Plans; ERISA.
(a) None of Holdings, any of its Subsidiaries or any affiliate
of Holdings or any of its Subsidiaries as determined under Code section
414(b), (c), (m) or (o) ("Holdings ERISA Affiliate") maintains,
administers or contributes to, or has any liability with respect to, nor
do the employees of Holdings, its Subsidiaries or any Holdings ERISA
Affiliate receive or expect to receive as a condition of employment,
benefits pursuant to:
(A) any employee benefit plan (as defined in section 3(3) of
ERISA) (each such plan, a "Holdings Plan"),including, without limitation,
any Multiemployer Plan; or
(B) any bonus, deferred compensation, performance
compensation, stock purchase, stock option, stock appreciation,
severance, salary continuation, vacation, sick leave, holiday pay, fringe
benefit, personnel policy, reimbursement program, incentive, insurance,
welfare or similar plan, program, policy or arrangement (each such plan,
a "Holdings Benefit Plan");
other than those Holdings Plans and Holdings Benefit Plans listed in the
Holdings Disclosure Schedule. Except as required by section 4980B of the
Code, none of Holdings, any of its Subsidiaries or any Holdings ERISA
Affiliate has promised any former employee or other individual not
employed by Holdings, any of its Subsidiaries or any Holdings ERISA
Affiliate medical or other benefit coverage and none of Holdings, any of
its Subsidiaries or any Holdings ERISA Affiliate maintains or contributes
to any plan, program, policy or arrangement providing medical or life
insurance benefits to former employees, their spouses or dependents or
any other individual not employed by Holdings, any of its Subsidiaries or
any Holdings ERISA Affiliate. No Holdings Plan or Holdings Benefit Plan
has any provision which could increase or accelerate benefits or increase
the liability of Holdings or any of its Subsidiaries as a result of any
transaction contemplated by this Agreement.
(b) All Holdings Plans and Holdings Benefit Plans which are not
Multiemployer Plans and any related trust agreements or annuity contracts
(or any related trust instruments) comply with and are and have been
operated in accordance with each applicable provision of ERISA and the
Code in all material respects. Each Holdings Plan, as amended to date,
which is not a Multiemployer Plan, that is intended to be qualified under
sections 401(a) and 501(a) of the Code has been determined to be so
qualified by the IRS, has been submitted to the IRS for a determination
with respect to such qualified status, or the remedial amendment period
with respect to such Holdings Plan will not have expired prior to the
Effective Time, and no event has occurred, either by reason of any action
or failure to act, which would cause the loss of any such qualification.
(c) Neither any Holdings Plan fiduciary nor any Holdings Plan
(excluding each Multiemployer Plan and its fiduciaries) has engaged in
any transaction in violation of section 406 of ERISA or any "prohibited
transaction" (as defined in section 4975(c)(1) of the Code) unless exempt
under section 408 of ERISA or section 4975 of the Code and there has been
no "reportable event" (as defined in section 4043 of ERISA),with respect
to any Holdings Plan which is not a Multiemployer Plan, for which the
30-day notice requirement has not been waived. None of Holdings, any of
its Subsidiaries or any Holdings ERISA Affiliate has incurred or suffered
to exist any "accumulated funding deficiency" (as defined in section 302
<PAGE>
of ERISA) whether or not waived by the IRS, involving any Holdings Plan
subject to section 412 of the Code or Part 3 of Subtitle B of Title I of
ERISA. No withdrawals have occurred so as to cause any Holdings Plan to
become subject to the provisions of section 4063 of ERISA, and none of
Holdings, any of its Subsidiaries or any Holdings ERISA Affiliate has
ceased making contributions to any employee benefit plan subject to
section 4064(a) of ERISA to which Holdings, any of its Subsidiaries or
any Holdings ERISA Affiliate made contributions during the six (6) years
prior to the Original Execution Date or ceased operations at a facility
so as to become subject to section 4062(e) of ERISA. Full payment has
been made of all amounts which Holdings, any of its Subsidiaries or any
Holdings ERISA Affiliate is required or committed to pay to each of the
Holdings Plans and Holdings Benefit Plans prior to or as of the Effective
Time.
(d) True and complete copies of each Holdings Plan, Holdings
Benefit Plan, related trust agreements, annuity contracts, determination
letters, the most recent determination letter request, summary plan
descriptions, annual reports on Form 5500, Form 990, actuarial reports
and PBGC Forms 1 for the most recent three (3) plan years, and each plan,
agreement, instrument and commitment referred to herein has been
previously furnished to the Company. The annual reports on Form 5500 and
Form 990 and actuarial statements furnished to the Company fully and
accurately set forth the financial and actuarial condition of the
respective Holdings Plan or Holdings Benefit Plan, as may be applicable.
(e) The aggregate present value of all accrued benefits,
including the maximum value of all subsidized benefits, pursuant to each
Holdings Plan subject to Title IV of ERISA, determined on the basis of
current participation and projected compensation for active participants,
and earnings, mortality and other actuarial assumptions set forth in the
most recent actuarial report for Holdings Plan does not exceed the
current fair market value of Holdings Plan's assets.
(f) None of Holdings, any of its Subsidiaries or any Holdings
ERISA Affiliate has incurred any liability to the PBGC, including as a
result of the voluntary or involuntary termination of any Holdings Plan
which is subject to Title IV of ERISA. There is currently no active
filing by Holdings, its Subsidiaries or any Holdings ERISA Affiliate
with the PBGC (and no proceeding has been commenced by the PBGC and no
condition exists, and no event has occurred, that could constitute
grounds for the termination of any Holdings Plan by the PBGC) to
terminate any Holdings Plan which is subject to Title IV of ERISA and
which has been maintained or funded, in whole or in part, by Holdings,
its Subsidiaries or any Holdings ERISA Affiliate.
(g) To the knowledge of Holdings or its Subsidiaries, there are
no pending or threatened claims by or on behalf of any of Holdings Plans
or Holdings Benefit Plans by any employee or beneficiary covered under
any Holdings Plans or Holdings Benefit Plans or otherwise involving any
Holdings Plan or Holdings Benefit Plan (other than routine claims for
benefits).
(h) With respect to each Holdings Plan which is a Multiemployer
Plan covering employees of Holdings, any of its Subsidiaries or any
Holdings ERISA Affiliate: (i) none of Holdings, such Subsidiary or such
Holdings ERISA Affiliate would incur any withdrawal liability on a
complete withdrawal from each such Holdings Plan as of the Effective
Date, under applicable laws and conditions of each such Holdings Plan and
<PAGE>
the applicable provisions of law; (ii) none of Holdings, its Subsidiaries
or any Holdings ERISA Affiliate has made or suffered a "complete
withdrawal" or a "partial withdrawal", as such terms are respectively
defined in sections 4203 and 4205 of ERISA; (iii) none of Holdings, its
Subsidiaries or any Holdings ERISA Affiliate has any contingent liability
under section 4204 of ERISA; and (iv) no such Holdings Plan is in
reorganization as defined in section 4241 of ERISA and no circumstances
exist which present a material risk of any such Holdings Plan going into
reorganization.
(i) With respect to employees of Holdings and its Subsidiaries,
Holdings and its Subsidiaries are and have been in compliance with all
applicable laws respecting employment and employment practices, terms and
conditions of employment and wages and hours, including, without
limitation, any such laws respecting employment discrimination,
occupational safety and health, and unfair labor practices.
(j) No breach of any of the foregoing representations and
warranties in this Section 4.17 shall be deemed to exist unless such
breach would have a Holdings Material Adverse Effect.
4.18 Environmental Matters. Except as set forth on the Holdings
Disclosure Schedule, Holdings and its Subsidiaries are and at all times
have been, and all real property currently or, to Holdings knowledge,
previously, owned, leased, occupied, used by or under the control of
Holdings or any of its Subsidiaries and all operations or activities of
Holdings and its Subsidiaries (including, without limitation, those
conducted on or taking place at any of such real property) are and, to
the knowledge of Holdings, at all times have been, in compliance with and
not subject to any liability or obligation under any Environmental Law or
Environmental Permit except where any of the foregoing would not have a
Holdings Material Adverse Effect. There is no condition or circumstance
regarding Holdings or any of its Subsidiaries or its business or any such
real property or the operations or activities conducted thereon, which
may give rise to a violation of, or liability or obligation under, any
Environmental Law or Environmental Permit which would have a Holdings
Material Adverse Effect. Neither Holdings, any of its Subsidiaries nor,
to the knowledge of Holdings, any Person, the acts or omissions of which
may be attributable to, the responsibility of, or be the basis of a
liability to, Holdings, has, or has arranged to have, any material,
substance or waste generated, released, treated, stored or disposed of
at, or transported to, any facility or property the remediation or
cleanup of which, or the response costs related thereto, could become or
result in a Holdings Material Adverse Effect. There are no allegations,
claims, demands, citations, notices of violation, or orders of
noncompliance made against, issued to or received by Holdings relating or
pursuant to any Environmental Law or Environmental Permit except those
which have been corrected or complied with or are not material to
Holdings, and to the knowledge of Holdings no such allegation, claim,
demand, citation, notice of violation or order of noncompliance is
threatened, imminent or likely. No breach of any of the foregoing
representations and warranties contained in this Section 4.18 shall be
deemed to exist unless such breach would have a Holdings Material Adverse
Effect.
Section 4.19 Labor Matters. With respect to employees of
Holdings and its Subsidiaries (and the following references to Holdings
are deemed to include the Subsidiaries): (i) to the knowledge of
Holdings, there is no pending or threatened unfair labor practice charges
<PAGE>
or employee grievance charges; (ii) there is no request for union
representation, labor strike, dispute, slowdown or stoppage actually
pending or, to the knowledge of Holdings, threatened against Holdings,
and there has been no such event during the 18 months preceding the
Original Execution Date; (iii) Holdings is not a party to any collective
bargaining agreements; and (iv) except as set out in the Holdings
Disclosure Schedule, the employment of each of Holdings' employees is
terminable at will without cost to Holdings except for payments required
under the Holdings Plans and Holdings Benefit Plans and payment of
accrued salaries or wages and vacation pay. No employee or former
employee has any right to be rehired by Holdings prior to Holdings'
hiring a person not previously employed by Holdings. Holdings is and,
since January 4, 1997 has been, in compliance in all material respects
with all applicable laws respecting employment and employment practices,
terms and conditions of employment and wages and hours, including,
without limitation, any such laws respecting employment discrimination,
occupational safety and health, and unfair labor practices, except where
such failure to comply would not have a Holdings Material Adverse Effect.
Holdings is not delinquent in payments to any of its employees for any
wages, salaries, commissions, bonuses or other direct compensation for
any services performed by them or any amounts required to be reimbursed
to such employees.
Section 4.20 Affiliate Transactions. Except as set forth in
the Holdings Disclosure Schedule or as contemplated by the transactions
contemplated hereby, since January 1, 1996, there are no material
undischarged Contracts or other material transactions between Holdings
or any of its Subsidiaries, on the one hand, and any (i) officer or
director of Holdings or any of its Subsidiaries, (ii) record or
beneficial owner of five percent or more of the voting securities of
Holdings or (iii) affiliate (as such term is defined in Regulation 12b-2
promulgated under the Exchange Act) of any such officer, director or
beneficial owner, on the other hand.
Section 4.21 Real Estate.
(a) Owned Real Estate. All material real estate owned by
Holdings and its Subsidiaries (the "Holdings Real Estate") is owned in
fee simple title, subject only to real estate taxes not delinquent and to
covenants, conditions, restrictions and easements which are of record and
minor irregularities or imperfections of title which do not in the
aggregate materially detract from the value of the Holdings Real Estate
or interfere with Holdings' use or occupancy thereof. Except as set
forth in the Holdings Disclosure Schedule, none of the Holdings' Real
Estate is subject to any leases or tenancies.
(b) Leased Premises. Except as set forth in the Holdings
Disclosure Schedule, all real estate leased by Holdings and its
Subsidiaries (the "Holdings Leased Premises") is leased pursuant
to written leases, and Holdings has provided to the Company the original
lease and any material amendments thereto and has otherwise made
available to the Company its records regarding the Holdings Leased
Premises. To Holdings' knowledge, Holdings is not in default under any
material term of any agreement relating to the Holdings Leased Premises
nor, to Holdings' knowledge, is any other party thereto in default
thereunder which in any case would have a Holdings Material Adverse
Effect.
<PAGE>
(c) Condemnation. There are no condemnation proceedings pending
or, to Holdings' knowledge, threatened with respect to any portion of the
Holdings Real Estate or the Holdings Leased Premises.
(d) Condition of Buildings. To the knowledge of Holdings, the
buildings and other facilities located on the Holdings Real Estate and
the Holdings Leased Premises are free of any patent structural or
engineering defects and, to Holdings' knowledge, are free of any latent
structural or engineering defects.
Section 4.22 Brokers. Except for fees, commissions and expenses
payable to its financial advisors, Leonard Green & Associates, L.P., Dain
Bosworth Incorporated and William Blair & Co., no broker, finder or
financial adviser is entitled to any brokerage, finder's or other fee or
commission from the Company or Holdings in connection with the
transactions contemplated by this Agreement.
Section 4.23 Solvency. At the Effective Time and after giving
effect to any changes in the Surviving Corporation's assets and
liabilities as a result of the Merger and any financing (or re-financing)
incurred in connection therewith or related thereto and the use of
proceeds therefrom, the Surviving Corporation will not: (i) be insolvent
either because its financial condition is such that the sum of its debts
is greater than the fair value of its assets or because the present fair
salable value of its assets will be less than the amount required to pay
its probable liability on its debts (including any legal liability
whether matured or unmatured, liquidated, absolute, fixed, or contingent
with any contingent liability evaluated in light of all the facts and
circumstances existing at the time of such valuation as the amount that
can reasonably be expected to become an actual or matured liability) as
they become absolute and matured; (ii) have unreasonably small capital
with which to continue as a going concern and will not lack sufficient
capital for its needs and anticipated needs; or (iii) have incurred or
plan to incur debts beyond its ability to pay as such debts become
absolute and matured. For the purpose of the representation and warranty
contained in this Section 4.23, Holdings, Sporting and Acquisition shall
be entitled to assume that the representations and warranties of the
Company regarding its liabilities and the liabilities of its Subsidiaries
are true and correct in all material respects and that there has been and
will be no material change in the aggregate of the assets or liabilities
of the Company after the date hereof except to the extent Holdings,
Sporting and Acquisition have knowledge to the contrary.
ARTICLE V
CONDUCT OF BUSINESS PENDING THE MERGER
Section 5.1 Conduct of Business by the Company Pending the
Merger. Prior to the Effective Time, unless Holdings shall otherwise
agree in writing (which agreement shall not be unreasonably withheld) or
as otherwise expressly contemplated by this Agreement, including, without
limitation, Article III hereof, or as set forth in Section 5.1 of the
Company Disclosure Schedule, the Company shall conduct, and cause each of
its Subsidiaries to conduct, its business only in the ordinary and usual
course consistent in all material respects with past practice, and,
subject to the remainder of this Section 5.1, the Company shall use, and
cause each of its Subsidiaries to use, its reasonable efforts to preserve
intact the present business organization, keep available the services of
its present officers and key employees, and preserve their existing
business relationships. The Company shall promptly give Holdings written
<PAGE>
notice of the existence or occurrence of any condition which might
reasonably be expected to prevent the consummation of the transactions
contemplated hereby. Without limiting the generality of the foregoing,
unless Holdings shall otherwise agree in writing (which agreement shall
not be unreasonably withheld), or as otherwise expressly contemplated by
this Agreement or as set forth in Section 5.1 of the Company Disclosure
Schedule, prior to the Effective Time the Company shall not, nor shall it
permit any of its Subsidiaries to:
(a) (i) amend its Certificate of Incorporation, as amended,
By-Laws or other organizational documents, (ii) split, combine or
reclassify any shares of its outstanding capital stock, (iii) declare,
set aside or pay any dividend or other distribution payable in cash,
stock or property, or (iv) directly or indirectly redeem or otherwise
acquire any shares of its capital stock or shares of the capital stock of
any of its Subsidiaries;
(b) authorize for issuance, issue (except upon the exercise of
outstanding stock options) or sell or agree to issue or sell any shares
of, or rights to acquire or convertible into any shares of, its capital
stock or shares of the capital stock of any of its Subsidiaries (whether
through the issuance or granting of options, warrants, commitments,
subscriptions, rights to purchase or otherwise), including the granting
of options pursuant to the Company's Stock Plans other than grants of
options to newly appointed store-level managers in the ordinary course of
business and consistent with past practice;
(c) (i) merge, combine or consolidate with another entity, (ii)
acquire or purchase an equity interest in or a substantial portion of the
assets of another corporation, partnership or other business organization
or otherwise acquire any assets outside the ordinary course of business
and consistent with past practice and not to exceed $25,000 or otherwise
enter into any material contract, commitment or transaction either
outside the ordinary course of business and consistent with past practice
or exceeding $25,000 individually and $250,000 in the aggregate (provided
that such dollar limitations do not apply to a contract that allows the
Company to terminate within 30 days or less at no cost) or (iii) sell,
lease, license, waive, release, transfer, encumber or otherwise dispose
of any of its material assets (x) to a Related Party, (y) other than in
the ordinary course of business and consistent with past practices and
not to exceed $350,000 in the aggregate other than as described on
Schedule 5.1(c), or (z) sales of inventory in the ordinary course of
business consistent with past practice;
(d) (i) incur, assume or prepay any material indebtedness or any
other material liabilities other than accounts payable, payments under
bank credit facilities existing on the Original Execution Date and
obligations relating to the acquisition of inventory, in each case in the
ordinary course of business and consistent with past practice, (ii)
assume, guarantee, endorse or otherwise become liable or responsible
(whether directly, contingently or otherwise) for the obligations of any
other person other than a Subsidiary of the Company or (iii) make any
loans, advances or capital contributions to, or investments in, (x) any
other person except to satisfy legal or contractual obligations (existing
on the Original Execution Date) of any Subsidiary of the Company, (y) a
Related Party except in a manner consistent with past practice with
respect to the "due to/due from related party" account contained in the
Company's financial statements described in Section 3.9 or (z) any other
person other than in the ordinary course of business and consistent with
<PAGE>
past practices and not to exceed $25,000 individually other than as
described on Schedule 5.1(d);
(e) pay, satisfy, discharge or settle any material claim,
liabilities or obligations (absolute, accrued, contingent or otherwise),
other than those (i) reflected or reserved against in the Company's
August 31, 1997 financial statements (and the notes thereto) described
in Section 3.9 but in no event in an amount greater than $250,000
individually or $350,000 in the aggregate, (ii) incurred in the
ordinary course of business consistent with past practice, or (iii)
which are legally or contractually required to be paid, discharged or
satisfied;
(f) modify or amend, or waive any benefit of, any non-
competition agreement to which the Company or any of its Subsidiaries is
a party;
(g) enter into any new transaction of the type described in
Section 3.20 or modify or amend, extend the due date of any payment with
respect to, or waive any benefit of, any existing transaction described
in Section 3.20 except with respect to transactions with officers and
directors as set forth in Section 3.20 of the Company Disclosure
Schedule, pursuant to Company Plans or Company Benefit Plans and rights
of officers and directors pursuant to the Company's certificate of
incorporation and by-laws and insurance policies of the Company or any of
its Subsidiaries;
(h) authorize or make capital expenditures, other than (x) for
repair and maintenance, (y) as set forth on Schedule 5.1, or (z) or
otherwise not to exceed $100,000 in the aggregate;
(i) enter into any new lease or purchase of real estate or any
material computer system (or any material components thereof) except for
(i) renewal of existing real estate leases (except for the leases
described in Section 3.20) and (ii) purchases of computer equipment as
set forth on Schedule 5.1 or otherwise not to exceed $100,000 in the
aggregate;
(j) permit any insurance policy naming the Company or any
Subsidiary of the Company as a beneficiary or a loss payee to be canceled
or terminated other than in the ordinary course of business and provided
that replacement policies which the Company deems to be commercially
appropriate under all relevant circumstances are obtainable for such
canceled or terminated policies, provided the Company may renew any
existing insurance policy in the ordinary course of business and
consistent with past practices for the applicable renewal period;
(k) (i) adopt, enter into, terminate or amend in any material
respect (except as may be required by applicable law) any plan for the
current or future benefit or welfare of any director or officer, (ii)
increase in any manner the compensation or fringe benefits of, or pay any
bonus to, any director, officer or employee or (iii) except as
contemplated by this Agreement, take any action to or in any other way
secure, or to accelerate or otherwise remove restrictions with respect
to, the payment of compensation or benefits under any employee plan,
agreement, contract, arrangement or other Company Plan other than in the
ordinary course of business, or (iv) hire any new employee at the
Company's corporate office with annual compensation in excess of $40,000;
<PAGE>
(l) make any significant change in its accounting or tax
policies or procedures and shall not reverse the amount of any existing
reserves unless necessary to prevent a covenant default under the Credit
Agreement, dated as of September 6, 1996, as subsequently amended, among
the Company, BT Commercial Corporation, as agent, and the lenders
identified therein (the "Credit Agreement"), except in each case as
required by law or to comply with GAAP; or
(m) enter into any contract, agreement, commitment or
arrangement with respect to any of the foregoing; provided however, that
this Section 5.1 shall not prohibit the Company nor any of its
Subsidiaries from entering into and performing the Pack Boot Agreement
or the Consignment Agreement.
Any action permitted under any exception to a prohibition in this Section
5.1 shall not be prohibited by any other general prohibition in this
Section 5.1.
Section 5.2 Conduct of Business by Holdings Pending the Merger.
Prior to the Effective Time, unless the Company shall otherwise agree in
writing (which agreement shall not be unreasonably withheld), or as
otherwise expressly contemplated by this Agreement, including, without
limitation, Article IV hereof, or as set forth in Section 5.2 of the
Holdings Disclosure Schedule, Holdings shall conduct, and cause each of
its Subsidiaries to conduct, its business only in the ordinary and usual
course consistent in all material respects with past practice, and
Holdings shall use, and cause each of its Subsidiaries to use, its
reasonable efforts to preserve intact the present business organization,
keep available the services of its present officers and key employees,
and preserve their existing business relationships. Holdings shall
promptly give the Company written notice of the existence or occurrence
of any condition which might reasonably be expected to prevent the
consummation of the transactions contemplated hereby. Without limiting
the generality of the foregoing, unless the Company shall otherwise agree
in writing (which agreement shall not be unreasonably withheld), or as
otherwise expressly contemplated by this Agreement or as set forth in
Section 5.2 of the Holdings Disclosure Schedule, prior to the Effective
Time Holdings shall not, nor shall it permit any of its Subsidiaries to:
(a) (i) except for the filing of the Holdings Charter and the
Acquisition Charter, amend its Certificate of Incorporation, as amended,
By-Laws or other organizational documents, (ii) split, combine or
reclassify any shares of its outstanding capital stock unless all share
numbers contained in or contemplated by this Agreement shall be
correspondingly adjusted, (iii) declare, set aside or pay any dividend
or other distribution payable in cash, stock or property, or (iv)
directly or indirectly redeem or otherwise acquire any shares of its
capital stock or shares of the capital stock of any of its Subsidiaries;
(b) authorize for issuance, issue (except upon the exercise of
outstanding stock options) or sell or agree to issue or sell any shares
of, or rights to acquire or convertible into any shares of, its capital
stock or shares of the capital stock of any of its Subsidiaries (whether
through the issuance or granting of options, warrants, commitments,
subscriptions, rights to purchase or otherwise), except for the granting
of options to purchase up to a number of shares of Holdings Common Stock
pursuant to any stock option plan equal to the number of outstanding
Substitute Company Options with an exercise price above the Closing Price
of the Company outstanding on the Effective Date divided by 0.275 and
<PAGE>
such options shall not exceed 150,000 without the consent of the Company,
which consent shall not be unreasonably withheld.
(c) (i) merge, combine or consolidate with another entity, (ii)
acquire or purchase an equity interest in or a substantial portion of the
assets of another corporation, partnership or other business organization
or otherwise acquire any assets outside the ordinary course of business
and consistent with past practice or otherwise enter into any material
contract, commitment or transaction outside the ordinary course of
business and consistent with past practice or (iii) sell, lease, license,
waive, release, transfer, encumber or otherwise dispose of any of its
material assets outside the ordinary course of business and consistent
with past practice;
(d) (i) incur, assume or prepay any material indebtedness or any
other material liabilities other than in each case in the ordinary course
of business and consistent with past practice, (ii) assume, guarantee,
endorse or otherwise become liable or responsible (whether directly,
contingently or otherwise) for the obligations of any other person other
than a Subsidiary of Holdings, in each case other than in the ordinary
course of business and consistent with past practice or (iii) make any
loans, advances or capital contributions to, or investments in, any other
person, other than to any Subsidiary of Holdings;
(e) pay, satisfy, discharge or settle any material claim,
liabilities or obligations (absolute, accrued, contingent or otherwise),
other than either in the ordinary course of business and consistent with
past practice or pursuant to mandatory terms of any Holdings Contract in
effect on the Original Execution Date;
(f) modify or amend, or waive any benefit of, any non-
competition agreement to which Holdings or any of its Subsidiaries is a
party;
(g) permit any insurance policy naming Holdings or any
Subsidiary of Holdings as a beneficiary or a loss payee to be canceled or
terminated other than in the ordinary course of business and provided
that replacement policies which the Company deems to be commercially
appropriate under all relevant circumstances are obtainable for such
canceled or terminated policies;
<PAGE>
(h) make any significant change in its accounting or tax
policies or procedures and shall not reverse the amount of any existing
reserves, except as required by law or to comply with GAAP;
(i) acquire any shares of capital stock of the Company; or
(j) enter into any contract, agreement, commitment or
arrangement with respect to any of the foregoing; provided however, that
this Section 5.2 shall not prohibit Holdings nor any of its Subsidiaries
from entering into and performing the Pack Boot Agreement or the
Consignment Agreement.
ARTICLE VI
ADDITIONAL AGREEMENTS
Section 6.1 Access and Information.
(a) Each party hereto shall (and shall cause its Subsidiaries
and its and their respective officers, directors, employees, auditors and
agents to) afford to the other party and to such other party's officers,
employees, financial advisors, legal counsel, accountants, consultants
and other representatives (except to the extent not permitted under
applicable law as advised by counsel and except as may be limited by any
confidentiality obligation contained in any contract with a third party)
reasonable access during normal business hours throughout the period
prior to the Effective Time to all of its books and records and its
properties, plants and personnel and, during such period, shall furnish
promptly to the other party a copy of each report, schedule and other
document filed or received by it pursuant to the requirements of federal
securities laws. The Company agrees to cooperate reasonably with
Holdings with respect to transition activities prior to the Effective
Date, provided that such activities do not cause any unreasonable
interference with the operation of the Company's business. The Company
agrees to provide to Holdings promptly following the date hereof a true
and complete list, as of a current date, of all employees who are
employed by the Company at the Company's headquarters and all other
employees above the store manager level, such list to include such
employees' salaries, wages, other significant compensation (other than
benefits under the Plans and Employee Benefit Plans), dates of employment
and positions.
(b) Unless otherwise required by law, each party hereto agrees
that it shall hold in confidence all non-public information so acquired
in accordance with the terms of the confidentiality agreements between
the Company and Holdings, dated July 31, 1997.
Section 6.2 No Solicitation.
(a) Prior to the Effective Time, the Company agrees that neither
it, any of its respective Subsidiaries or affiliates, nor any of the
respective directors, executive officers, agents or representatives of
the foregoing, will, directly or indirectly, (i) solicit, initiate or
encourage (including by way of furnishing information) any inquiries or
the making of any proposal with respect to any merger, consolidation or
other business combination involving the Company or any Subsidiary of the
Company or the acquisition of all or any significant part of the assets
or capital stock (including but not limited to a majority voting
interest) of the Company or any Subsidiary of the Company (an
"Acquisition Transaction") or (ii) negotiate or otherwise engage in
<PAGE>
discussions with any person (other than Holdings and its representatives)
with respect to any Acquisition Transaction, or which may reasonably be
expected to lead to a proposal for an Acquisition Transaction, or enter
into any agreement, arrangement or understanding (including any letter of
intent, agreement in principle or similar agreement) with respect to any
such Acquisition Transaction; provided, however, that, the Company may,
in response to a proposal or inquiry unsolicited after the Original
Execution Date, furnish information to, negotiate or otherwise engage in
discussions with any person (pursuant to a customary confidentiality
agreement) which makes or indicates in writing an intention or desire to
make, and with respect to whom the Board of Directors of the Company has
concluded in good faith after consultation with its financial advisor is
reasonably capable of making, a Superior Proposal (as herein defined),
if the Board of Directors of the Company determines in good faith, after
consultation with its outside counsel, that the failure to take such
action would be inconsistent with the fiduciary duties of the Board of
Directors of the Company under applicable law and such proposed
Acquisition Transaction was not solicited by it in, or did not otherwise
result from a, breach of this Section 6.2 and subject to compliance with
the other provisions of this Section 6.2; and provided further that
notwithstanding anything to the contrary herein contained, the Board of
Directors of the Company may take and disclose to the Company's
stockholders a position contemplated by Rule 14e-2 promulgated under the
Exchange Act, comply with Rule 14d-9 thereunder and make all other
disclosures required by applicable law. Any of the foregoing to the
contrary notwithstanding, the Company may engage in discussions with or
provide information to any person or group that has made a proposal
unsolicited after the Original Execution Date with respect to an
Acquisition Transaction for the limited purpose of determining whether
such proposal is, or could lead to, a Superior Proposal.
(b) Except as would be inconsistent with the fiduciary duties of
the Company's Board of Directors under applicable law, the Company agrees
that, as of the Original Execution Date, it, its Subsidiaries and
affiliates, and the respective directors, executive officers, agents and
representatives of the foregoing, shall immediately cease and cause to be
terminated any existing activities, discussions or negotiations with any
person (other than Holdings and its representatives) conducted heretofore
with respect to any Acquisition Transaction. The Company agrees to
promptly advise Holdings, its Subsidiaries or affiliates, of any
inquiries or proposals received by, any such information requested from,
or any negotiations or discussions sought to be initiated or continued
with, the Company, its Subsidiaries or affiliates, or any of the
respective directors, executive officers, agents or representatives of
the foregoing, in each case from a person (other than Holdings and its
representatives) with respect to an Acquisition Transaction, and a
reasonable summary of the terms thereof, including the identity of such
third party (unless disclosing the identity of such third party would
violate the terms of any confidentiality or similar agreement binding on
the Company and entered into on or prior to September 19, 1997),
including any financing arrangement or commitment in connection
therewith, and, except as otherwise would be inconsistent with the
fiduciary duties of the Company's Board of Directors under applicable
law, to update on an ongoing basis or upon Holdings' reasonable request,
the status thereof, as well as any actions taken or other developments
pursuant to this Section 6.2. As used herein, "Superior Proposal" means
a bona fide, written proposal or offer made by any person (or group)
(other than Holdings or any of its Subsidiaries) with respect to an
Acquisition Transaction on terms which the Board of Directors of the
<PAGE>
Company determines in good faith, based on the advice of independent
financial advisors and legal counsel, to be more favorable to the
Company and its stockholders than the transactions contemplated hereby
(including taking into account the financing thereof).
Section 6.3 Registration Statement. As soon as practicable,
Holdings and the Company shall in consultation with each other prepare
and file with the SEC the Proxy Statement in preliminary form and the
Registration Statement. The Company and Holdings shall each use its
reasonable best efforts to have the Proxy Statement cleared by the SEC
and the Registration Statement declared effective as soon as practicable.
The Company shall furnish Holdings with all information concerning the
Company and the holders of its capital stock and shall take such other
action as Holdings may reasonably request in connection with the
Registration Statement and the Share Issuance. If at any time prior to
the Effective Time any event or circumstance relating to the Company,
any Subsidiary of the Company, Holdings, any Subsidiary of Holdings, or
any of their respective officers or directors, should be discovered by
such party which should be set forth in an amendment or a supplement to
the Registration Statement or Proxy Statement, such party shall promptly
inform the other thereof and take appropriate action in respect thereof.
Section 6.4 Proxy Statement; Stockholder Approval.
(a) The Company, acting through its Board of Directors, shall,
subject to and in accordance with applicable law and its Certificate of
Incorporation, as amended, and its By-Laws, promptly and duly call, give
notice of, convene and hold as soon as practicable following the date
upon which the Registration Statement becomes effective a meeting of the
holders of Company Common Stock for the purpose of voting to approve and
adopt this Agreement and the transactions contemplated hereby, and, (i)
except as the Board of Directors of the Company determines, in good
faith and as advised by outside counsel, would be inconsistent with the
fiduciary duties of the Board of Directors of the Company under
applicable law, and subject to the second proviso of Section 6.2(a),
recommend approval and adoption of this Agreement and the transactions
contemplated hereby, by the stockholders of the Company and include in
the Proxy Statement such recommendation and (ii) except as the Board of
Directors of the Company determines, in good faith and as advised by
outside counsel, would be inconsistent with the fiduciary duties of the
Board of Directors of the Company under applicable law and subject to
the second proviso of Section 6.2(a), take all reasonable action to
solicit and obtain such approval; provided, however that neither the
Company's Board of Directors nor any committee thereof may either (i)
withdraw or modify, or propose publicly to withdraw or modify, in a
manner adverse to Holdings, the approval or recommendation of the Merger
or this Agreement, or (ii) approve or recommend, or propose publicly to
approve or recommend, any Acquisition Transaction (other than the
Merger), in the case of clauses (i) and (ii) next above until the sixth
business day following Holdings' receipt of written notice advising
Holdings that the Company's Board of Directors has received a Superior
Proposal, specifying the material terms and conditions thereof and
identifying the person making such Superior Proposal.
(b) The Company shall, as promptly as practicable (or at such
other time as may be mutually agreed by the Company and Holdings), cause
the definitive Proxy Statement/Prospectus to be mailed to the
stockholders of the Company and Holdings.
<PAGE>
Section 6.5 Compliance with the Securities Act.
(a) At least 30 days prior to the Effective Time, the Company
shall cause to be delivered to Holdings a list identifying all persons
who are Affiliates of the Company.
(b) The Company shall use its reasonable best efforts to cause
each person who is identified as one of its Affiliates in its list
referred to in Section 6.5(a) above to deliver to Holdings, at least 10
days prior to the Effective Time, a written agreement, in the form
attached hereto as Exhibit 6.5(b).
Section 6.6 Reasonable Best Efforts.
(a) Subject to the terms and conditions herein provided and
applicable legal requirements, each of the parties hereto agrees to use
its reasonable best efforts to take, or cause to be taken, all action,
and to do, or cause to be done, and to assist and cooperate with the
other parties hereto in doing, as promptly as practicable, all things
(not, in the case of the Company, inconsistent with the fiduciary duties
of its Board of Directors) necessary, proper or advisable (i) under
applicable laws and regulations and otherwise to ensure that the
conditions set forth in Article VII are satisfied and to consummate and
make effective the transactions contemplated by this Agreement, and to
obtain as promptly as practicable all consents, waivers, approvals,
authorizations or permits of, or registration or filing with or
notification to (any of the foregoing being a "Consent"), any
Governmental Entity, including, without limitation, under the HSR Act
(it being agreed that Holdings shall cause to be taken all necessary
action by the Fund, its control persons and Holdings' "ultimate parent
entity" with respect to such Consents and the Company shall cause to be
taken all necessary action by the Company Principals with respect to
such Consents), (ii) to obtain the consent of its independent auditors
to the use of its historical opinion covering the financial statements
to be included in the Registration Statement and (iii) to attempt to
obtain third party consents mutually agreed to be desirable in
connection with the Merger.
(b) In furtherance of the foregoing, at the Closing, Holdings
shall enter into the Registration Rights Agreement (and cause the Fund
to enter into the Registration Rights Agreement) and Sporting and the
Surviving Corporation shall enter into the consulting agreements
referenced in Section 7.3(i). In addition, in connection therewith,
it is agreed that Holdings may enter into a registration rights
agreement with the Fund provided such agreement with the Fund shall not
cause Holdings to be in breach of the Registration Rights Agreement or
materially adversely effect the benefits to the Shareholders (as defined
in the Registration Rights Agreement), thereunder.
(c) Each party hereto shall promptly inform the other of any
material communication from the United States Federal Trade Commission,
the Department of Justice, or any other Governmental Entity regarding any
of the transactions contemplated by this Agreement. After consultation
with the other party, such party will make an appropriate response in
compliance with such request.
Section 6.7 Employee Benefits. During the one-year period
immediately following the Effective Time, Holdings and the Surviving
Corporation shall cause to be provided each of the employees who was
<PAGE>
employed by the Company or any of its Subsidiaries at the Effective Time
and continue employment with the Surviving Corporation or any affiliate
of the Surviving Corporation ("Employee") benefits (including, without
limitations, benefits under each Company Plan and Company Benefit Plan
(including benefits related to termination of employment)) which, taken
as a whole, are no less favorable to the Employee than the benefits
provided the Employee by the Company and its Subsidiaries immediately
prior to the Effective Time unless any of the benefits provided to
comparable employees by Sporting would be significantly more favorable
to the Employee in which event such more favorable benefits will be
provided to the Employee as soon as reasonably practicable. Each of
Sporting and the Surviving Corporation and its affiliates shall credit
Employees with any amounts paid for the calendar year under the Company's
medical and dental plans prior to the transition to a new medical or
dental program toward satisfaction of the applicable deductible amounts
and copayment and deductible maximums under any new medical or dental
program. With respect to each Employee, each of Sporting and the
Surviving Corporation and its affiliates shall treat service treated by
the Company or its Subsidiaries as service with the Company or its
Subsidiaries as service with each of Sporting and the Surviving
Corporation or its affiliates for purposes of employee benefits and
fringe benefits, including, without limitation, vacation benefits,
waiting periods, vesting requirements and pre-existing conditions
limitations. The Company, prior to the Effective Time, and Holdings and
the Surviving Corporation, from and after the Effective Time, shall make
the severance payments set forth on Schedule 6.7 to the extent that such
payments have been accurately calculated pursuant to the terms of the
Company's Severance Plan, including consistent with any discretion of the
committee administering such plan, all of which have been approved by
such committee as of the Original Execution Date.
Section 6.8 Public Announcements. Each of Holdings and the
Company agrees that, except as may be required by applicable law as
advised by counsel, it will not issue any press release or otherwise
make any public statement with respect to this Agreement (including
the Exhibits hereto) or the transactions contemplated hereby (or thereby)
without having consulted with the other party.
Section 6.9 Directors' and Officers' Indemnification and
Insurance.
(a) Holdings, Sporting and the Company agree that all rights to
indemnification, exculpation, advancement of expenses and the like now
existing in favor of any director or officer of the Company and its
Subsidiaries (the "Indemnified Parties") as provided in their respective
charters or by-laws, or in an agreement between an Indemnified Party and
the Company or one of its Subsidiaries set forth in Section 6.9 of the
Company Disclosure Schedule, are contract rights and shall survive the
Merger. In addition, and without limiting the foregoing, Holdings,
Sporting and the Surviving Corporation shall indemnify all Indemnified
Parties to the fullest extent permitted by applicable law with respect
to all acts and omissions arising out of such individuals' services as
officers, directors, employees or agents of the Company or any of its
Subsidiaries or as trustees or fiduciaries of any plan for the benefit
of employees, or otherwise on behalf of, the Company or any of its
Subsidiaries, occurring at or prior to the Effective Time including,
without limitation, the transactions contemplated by this Agreement.
Without limitation of the foregoing, in the event any such Indemnified
Party is or becomes involved in any capacity in any action, proceeding
<PAGE>
or investigation in connection with any matter, including, without
limitation, the transactions contemplated by this Agreement, occurring
at or prior to, and including, the Effective Time, Holdings, Sporting
and the Surviving Corporation will pay as incurred such Indemnified
Party's legal and other expenses (including the cost of any investigation
and preparation) incurred in connection therewith so long as such party
shall enter into an undertaking with Holdings, Sporting and the Surviving
Corporation to reimburse Holdings, Sporting and the Surviving
Corporation, to the extent required by applicable law, for all amounts
advanced if a court of competent jurisdiction shall ultimately determine,
in a judgment which is not subject to appeal or review, that
indemnification of such Indemnified Party is prohibited by applicable
law. Holdings, Sporting and the Surviving Corporation shall pay all
expenses, including reasonable attorneys' fees, that may be incurred by
any Indemnified Party in enforcing the indemnity and other obligations
provided for in this Section 6.9.
(b) Holdings, Sporting and the Surviving Corporation shall cause
to be maintained in effect for six years from the Effective Time the
current policies of the directors' and officers' liability insurance
maintained by the Company; provided that Holdings, Sporting and the
Surviving Corporation may substitute therefor policies of at least the
same coverage containing terms and conditions which are no less
advantageous to the Indemnified Parties and provided that such
substitution shall not result in any gaps or lapses in coverage with
respect to matters occurring prior to the Effective Time; and provided,
further, that Holdings, Sporting and the Surviving Corporation shall not
be required to pay an annual premium in excess of 200% of the last annual
premium paid by the Company prior to the Original Execution Date (which
premium is disclosed in Section 6.9 of the Company Disclosure Schedule)
and if Holdings, Sporting and the Surviving Corporation are unable to
obtain the insurance required by this Section 6.9(b) they shall obtain as
much comparable insurance as possible for an annual premium equal to
such maximum amount.
Section 6.10 Expenses. Each party hereto shall bear its own
costs and expenses in connection with this Agreement and the transactions
contemplated hereby; in particular, Holdings and the Company will share
equally the expenses incurred in connection with (i) filings under HSR
and any other antitrust laws and (ii) preparing, printing and distributing
the Proxy Statement and the Registration Statement (but not including any
such expenses incurred prior to the Original Execution Date).
Section 6.11 Listing Application; 1934 Act Registration. The
Company and Holdings shall each use its reasonable best efforts to cause
the shares of Holdings Common Stock to be issued pursuant to this
Agreement in the Merger to be listed for trading on the Nasdaq National
Market at the time of such issuance and the Holdings Common Stock to be
designated as a national market system security by the Nasdaq National
Market at the effective date of the Merger. Holdings shall not file or
permit to become effective any registration under Section 12 of the
Securities Exchange Act of 1934, as amended (the "1934 Act"), prior to
the deemed registration of the Holdings Common Stock under the 1934 Act
(the "1934 Act Registration") pursuant to Rule 12g-3(a) as a result of
the consummation of the Merger.
Section 6.12 Supplemental Disclosure. The Company shall give
prompt notice to Holdings, and Holdings shall give prompt notice to the
Company, of (i) the occurrence, or non-occurrence, of any event the
<PAGE>
occurrence, or non-occurrence, of which would be likely to cause (x) any
representation or warranty contained in this Agreement to be untrue or
inaccurate in any material respect or (y) any covenant, condition or
agreement contained in this Agreement not to be complied with or
satisfied in any material respect and (ii) any failure of the Company or
Holdings, as the case may be, to comply with in any material respect any
covenant or agreement to be complied with by it hereunder. Each of the
parties hereto shall deliver an updated Company Disclosure Schedule or
updated Holdings Disclosure Schedule, as the case may be, on the 15th day
of each fiscal month until the Effective Time, providing updated
disclosure through the end of the preceding fiscal month. The updated
Company Disclosure Schedules and updated Holdings Disclosure Schedules
shall not be deemed to amend the Company Disclosure Schedule or the
Holdings Disclosure Schedule, as the case may be, and the delivery of any
notice and updated Company Disclosure Schedules and Holdings Disclosure
Schedules pursuant to this Section 6.12 shall not have any effect for the
purpose of determining the satisfaction of the conditions set forth in
Article VII of this Agreement or the right to terminate this Agreement
pursuant to Article VIII of this Agreement or otherwise limit or affect
the remedies available hereunder to any party. In addition, the Company
shall deliver to Holdings a certificate signed on behalf of the Company
by the chief executive officer and the chief financial officer of the
Company on or prior to the 15th day of each fiscal month until the
Effective Time certifying as to the Company's compliance with the
requirements of Section 8.1(g) for the relevant preceding date specified
in clause (iii) of Section 8.1(g) and attaching calculations in
reasonable detail demonstrating such compliance in the case of clauses
(ii) or (iii), as applicable, of Section 8.1(g).
Section 6.13 Store Names. Holdings affirms as of (i) the
Original Execution Date, that it had no, (ii) the date hereof, that it
has no, and (iii) the Closing, it will not have any, present intention
to change the names of any of the Company's present stores other than
in the Seattle, Washington and Portland, Oregon metropolitan areas, and
agrees that for a period of two years from the Effective Time, Holdings
will not, and will not permit its Subsidiaries to, change the names of
the Company's present stores in the Chicago, Illinois metropolitan area;
provided, that Holdings' obligations under this Section 6.13 shall cease
upon a significant change in the ownership of Holdings and are generally
subject to Holdings' Board of Directors' fiduciary duties.
Section 6.14 Tax Returns. After the Effective Time, the Company
authorizes Holdings and the Surviving Corporation to prepare and file all
tax returns on behalf of the Company covering any period prior to the
Effective time, subject, however, to Section 4.13(k) hereof.
Section 6.15 Purchase Accounting. Each of the parties hereto
acknowledges that the Merger will be accounted for under the purchase
method of accounting.
Section 6.16 Stock Legending. The Company agrees to cooperate
fully in the legending of certain certificates representing shares of
Company Common Stock as contemplated by the Stockholder Agreement of even
date herewith by and among Holdings and the stockholders of the Company
signatory thereto.
Section 6.17 Stay Bonus Program. Notwithstanding anything to
the contrary in this Agreement, the Company shall implement a "stay
bonus" program consistent with the recommendations of William M. Mercer,
<PAGE>
Incorporated, such program to be implemented as soon as practicable.
Section 6.18 Time of the Essence. All parties hereto acknowledge
that time is of the essence to the performance of this Agreement.
ARTICLE VII
CONDITIONS TO CONSUMMATION OF THE MERGER
Section 7.1 Conditions to Each Party's Obligation to Effect the
Merger. The respective obligations of each party to effect the Merger
shall be subject to the satisfaction or waiver at or prior to the Closing
Date of the following conditions:
(a) Stockholder Approval. This Agreement and the transactions
contemplated hereby shall have been approved and adopted by the requisite
vote (as described in Section 3.5) of the stockholders of the Company in
accordance with applicable law.
(b) HSR and Other Regulatory Approvals. All applicable waiting
periods (and any extension thereof) applicable to the consummation of the
Merger and the transactions contemplated hereby under the HSR Act shall
have expired or been terminated. All other authorizations, consents,
orders, declarations or approvals of, or filings with, or terminations or
expirations of waiting periods imposed by, any Governmental Entity, which
the failure to obtain, make or occur would have a Holdings Material
Adverse Effect, assuming the Merger had taken place, shall have been
obtained, shall have been made or shall have occurred.
(c) Registration Statement. The Registration Statement shall
have become effective in accordance with the provisions of the Securities
Act. No stop order suspending the effectiveness of the Registration
Statement shall have been issued by the SEC and no proceedings for that
purpose shall have been initiated by the SEC. The Holdings Common Stock
shall be designated a Nasdaq National Market System security and the
shares of Holdings Common Stock issuable in accordance with the Merger
and upon exercise of Substitute Company Options shall be listed for
trading on the Nasdaq National Market and no action other than the 1934
Act Registration shall be required with respect to such designation and
listing.
(d) No Injunction. No Governmental Entity having jurisdiction
over the Company or Holdings, or any of their respective Subsidiaries,
shall have enacted, issued, promulgated, enforced or entered any law,
rule, regulation, executive order, decree, injunction or other order
(whether temporary, preliminary or permanent) which is then in effect
and has the effect of making the Merger illegal or otherwise prohibiting
consummation of the Merger.
(e) Litigation. There shall not have been instituted or be
pending any suit, action or proceeding by any Governmental Entity as a
result of this Agreement or any of the transactions contemplated hereby
which questions the validity or legality of the transactions
contemplated by this Agreement and which, if such Governmental Entity
were to prevail, would reasonably be expected to have a Holdings Material
Adverse Effect, assuming the Merger had taken place.
Section 7.2 Conditions to Obligations of Holdings and
Acquisition to Effect the Merger. The obligations of Holdings and
Acquisition to effect the Merger shall be subject to the satisfaction at
<PAGE>
or prior to the Effective Time of the following additional conditions,
unless waived in writing by Holdings:
(a) Representations and Warranties. The representations and
warranties of the Company contained in this Agreement which are qualified
by reference to Company Material Adverse Effect shall be true and correct
and the representations and warranties of the Company that are not so
qualified shall be true and correct except where the failure to be true
and correct would not have a Company Material Adverse Effect, in each
case as of the Effective Time as though made at and as of the Effective
Time, and Holdings shall have received a certificate signed on behalf of
the Company by the chief executive officer and the chief financial
officer of the Company to such effect (provided that no authorization,
consent or approval of any person (other than as contemplated by Section
7.1 hereof) in connection with the transactions contemplated hereby, nor
the failure to obtain any of the foregoing or satisfy any conditions
imposed incident to the giving of any consent, nor any violation,
default, right of termination, cancellation or acceleration, or loss of
benefit or creation of any Lien arising in connection with, or as a
result of, any of the foregoing, shall, or shall be deemed to, give rise
to a failure of the foregoing condition).
(b) Performance of Obligations of the Company. The Company shall
have performed in all material respects all material obligations required
to be performed by it under this Agreement at or prior to the Effective
Time, and Holdings shall have received a certificate signed on behalf of
the Company by the chief executive officer and the chief financial
officer of the Company to such effect (provided that no authorization,
consent or approval of any person (other than as contemplated by Section
7.1 hereof) in connection with the transactions contemplated hereby, nor
the failure to obtain any of the foregoing or satisfy any conditions
imposed incident to the giving of any consent, nor any violation,
default, right of termination, cancellation or acceleration, or loss of
benefit or creation of any Lien arising in connection with, or as a
result of, any of the foregoing, shall, or shall be deemed to, give rise
to a failure of the foregoing condition).
(c) Material Adverse Change. Since the date of this Agreement,
there shall have been no event or occurrence which has had, or would
reasonably be expected to have, a Company Material Adverse Effect, and
Holdings shall have received a certificate signed on behalf of the
Company by the chief executive officer and the chief financial officer
of the Company to such effect (provided that no authorization, consent
or approval of any person (other than as contemplated by Section 7.1
hereof) in connection with the transactions contemplated hereby, nor the
failure to obtain any of the foregoing or satisfy any conditions imposed
incident to the giving of any consent, nor any violation, default, right
of termination, cancellation or acceleration, or loss of benefit or
creation of any Lien arising in connection with, or as a result of, any
of the foregoing, shall, or shall be deemed to, give rise to a failure
of the foregoing condition).
(d) [intentionally deleted]
(e) Legal Opinion. Holdings shall have received an opinion of
counsel from outside counsel to the Company reasonably acceptable to
Holdings in form and substance reasonably satisfactory to Holdings.
<PAGE>
(f) Related Party Transactions. All amounts due and payable by
any Company Principal to the Company or any of its Subsidiaries pursuant
to or in connection with any transactions described in Section 3.20, or
otherwise due and payable by any Company Principal, shall have been paid
to the Company, and Item 7 on Section 3.20 of the Company Disclosure
Schedule shall have been terminated in writing by the partnerships
referenced therein, and any other similar items involving any of the
Company Principals which were required to be set forth on Section 3.20
of the Company Disclosure Schedule on the Original Execution Date but
were not so disclosed (including by cross-reference) (but not including
any matters pursuant to Company Plans, Company Benefit Plans and rights
of officers and directors pursuant to the Company's certificate of
incorporation and by-laws and insurance policies of the Company or any
of its Subsidiaries) shall have been terminated in writing. Without
implication that the contrary would otherwise be true, any items cross-
referenced on Section 3.20 of the Company Disclosure Schedule and any
items deemed disclosed on such Section 3.20 pursuant to the lead-in to
Article III shall be deemed disclosed on such Section 3.20 for purposes
of this Section 7.2(f).
Section 7.3 Conditions to Obligation of the Company to Effect
the Merger. The obligation of the Company to effect the Merger shall be
subject to the satisfaction at or prior to the Effective Time of the
following additional conditions, unless waived in writing by the Company:
(a) Representations and Warranties. The representations and
warranties of Holdings, Sporting and Acquisition contained in this
Agreement which are qualified by reference to Holdings Material Adverse
Effect shall be true and correct, the representations and warranties of
Holdings, Sporting and Acquisition that are not so qualified shall be
true and correct except where the failure to be true and correct would
not in the aggregate have a Holdings Material Adverse Effect, and the
representations and warranties contained in Sections 4.13, 4.23 and 6.13
shall be true and correct, in each case as of the Effective Time as
though made on and as of the Effective Time, and the Company shall have
received a certificate signed on behalf of Holdings, Sporting and
Acquisition by their respective chief executive officers and chief
financial officers to such effect.
(b) Performance of Obligations of Holdings, Sporting and
Acquisition. Holdings, Sporting and Acquisition shall each have
performed in all material respects all material obligations required to
be performed by it under this Agreement at or prior to the Effective
Time, and the Company shall have received a certificate signed on behalf
of Holdings, Sporting and Acquisition by their respective chief executive
officers and chief financial officers to such effect.
(c) Material Adverse Change. Since the date of this Agreement,
there shall have been no event or circumstance which has had, or would
reasonably be expected to have, a Holdings Material Adverse Effect; and
the Company shall have received a certificate on behalf of Holdings,
Sporting and Acquisition by their respective chief executive officers
and chief financial officers to such effect.
(d) Holdings Charter, and Surviving Corporation Charter. The
Holdings Charter and the Surviving Corporation Charter shall each have
been filed with the Secretary of State of the State of Delaware.
(e) Material Consents. [intentionally deleted]
<PAGE>
(f) Legal Opinion. The Company shall have received an opinion
of counsel from Brownstein Hyatt Farber & Strickland, P.C. in form and
substance reasonably satisfactory to the Company.
(g) Tax Opinion of Counsel. The Company shall have received an
opinion of its outside counsel in form and substance reasonably
acceptable to the Company, to the effect that the transactions
contemplated by this Agreement will be tax free. Holdings, Sporting and
Acquisition shall cooperate with the Company's counsel and other advisors
in the investigation of factual and other matters necessary or
appropriate in granting or withholding such opinion.
(h) Registration Rights Agreement. Holdings and the Fund shall
enter into the Registration Rights Agreement with each of the persons to
be parties thereto in the form attached hereto as Exhibit C.
(i) Consulting Agreements. Sporting and the Surviving
Corporation shall have entered into consulting agreements with each of
Messrs. Hochberg, Hochberg and Lowenstein in the form attached hereto as
Exhibit D.
ARTICLE VIII
TERMINATION
Section 8.1 Termination. This Agreement may be terminated, and
the Merger and the other transactions contemplated hereby may be
abandoned, at any time prior to the Effective Time, whether before or
after approval by the stockholders of the Company or Holdings:
(a) by mutual written consent of Holdings and the Company;
(b) by either Holdings or the Company, if the Merger shall not
have been consummated on or before May 31, 1998 (unless, in the case of
any such termination pursuant to this Section 8.1(b), the failure of such
event to occur shall have been caused by the action or failure to act of
the party seeking to terminate this Agreement, which action or failure to
act constitutes a breach of such party's obligations under this
Agreement);
(c) by either Holdings or the Company, if any permanent
injunction, order, decree or ruling by any Governmental Entity of
competent jurisdiction preventing the consummation of the Merger shall
have become final and nonappealable; provided, however, that the party
seeking to terminate this Agreement pursuant to this Section 8.1(c) shall
have used its reasonable best efforts to remove such injunction or
overturn such action;
(d) by Holdings, if (i) there has been a breach by the Company
of any of its representations or warranties set forth in this Agreement
the effect of which is a Company Material Adverse Effect or a breach by
the Company in any material respect of any of its material covenants and
agreements set forth in this Agreement, in either case which breach is
not curable or, if curable, is not cured within 30 days after written
notice of such breach is given by Holdings to the Company (provided that
no authorization, consent or approval of any person (other than as
contemplated by Section 7.1 hereof) in connection with the transactions
contemplated hereby, nor the failure to obtain any of the foregoing or
satisfy any conditions imposed incident to the giving of any consent,
nor any violation, default, right of termination, cancellation or
<PAGE>
acceleration, or loss of benefit or creation of any Lien arising in
connection with, or as a result of, any of the foregoing, shall, or shall
be deemed to, give rise to such a right of termination), (ii) the Board
of Directors of the Company (x) fails to recommend the approval and
adoption of this Agreement and the transactions contemplated hereby to
the Company's stockholders in accordance with Section 6.4 hereof, or (y)
withdraws or amends or modifies in a manner adverse to Holdings its
recommendation or approval in respect of this Agreement or the
transactions contemplated hereby, or (iii) (a) the Company through any
of its directors or executive officers so expressly authorized to act by
the Board of Directors shall willfully take any of the actions
proscribed by Sections 6.2 or 6.4, or (b) any of the Company's directors,
officers, employees, agents or representatives of the foregoing shall
take any of the actions proscribed by Sections 6.2 or 6.4 and the
Company shall not, within 24 hours of the giving of written notice to
the Company to do so by Holdings, disavow such action and use all
reasonable efforts to cause such action to be terminated, unwound,
abandoned or otherwise negated;
(e) by the Company if the Board of Directors of the Company
shall determine, in good faith and after consultation with its financial
advisor and outside counsel, that a proposal for an Acquisition
Transaction constitutes a Superior Proposal;
(f) by the Company, if there has been a breach by Holdings,
Sporting or Acquisition of any of its representations or warranties set
forth in this Agreement the effect of which is a Holdings Material
Adverse Effect or a breach by Holdings, Sporting or Acquisition in any
material respect of any of its material covenants and agreements set
forth in this Agreement, in either case, which breach is not curable or,
if curable, is not cured within 30 days after written notice of such
breach is given by the Company to Holdings; and
(g) by Holdings if (i) any event has occurred that has had, or
would reasonably be expected to have, a Company Material Adverse Effect,
(ii) prior to the Conditional Date and (a) prior to February 1, 1998,
the Company's Net Worth falls below $70 million, or (b) after February 1,
1998, the Company's Net Worth falls below $67.5 million, as, in each
case, the term "Net Worth" is calculated under the Credit Agreement as
in effect on the Original Execution Date, provided, however, that such
Net Worth calculation shall be made without taking into account amounts
increasing or decreasing Net Worth pertaining, or with respect, to (r)
any of the Pack Boot Inventory (as defined in the Pack Boot Agreement),
the Additional Ski Inventory (as defined in the Pack Boot Agreement) or
any transaction pursuant to the Pack Boot Agreement or the Consignment
Agreement, (s) any charge to establish a LIFO reserve, (t) any severance,
bonus or other change-in-control related items paid or incurred in
connection with the Merger, (u) costs and expenses in connection with
the Company's efforts to engage in any extraordinary transaction,
including, without limitation, the Merger (capped in the event of any
such transactions other than the Merger at $200,000), (v) any expenses
associated with the termination of any contract, or the obtaining of any
consent, in connection with the Merger or the transactions contemplated
thereby, (w) any reversal into income of the Company's inventory reserve
for obsolescence, (x) any reversal into income for any unused or
unallocated portion of the reserve established in the 1996 fiscal year
pertaining to the decision to exit the Canadian market, (y) any increase
to the reserve previously established for the River North property, or
(z) any after tax impact of any change in the Company's valuation reserve
<PAGE>
for its deferred tax assets and the loss of any deferred tax benefit
resulting from the failure to tax-effect any operational loss; and,
provided, further, that in making such Net Worth calculation, Net Worth
shall be increased by the amount of expenses incurred, in the fiscal year
ended February 1, 1998 (up to $739,000 pre-tax), that would not have been
incurred if the Company's forecasted plan to reduce operational expenses
in such fiscal year had been adhered to, (iii) prior to February 2, 1998,
the sum of the Company's long term debt (including current and long-term
capital lease obligations), short term debt, Accounts Payable (meaning as
of each determination date, all amounts due for trade merchandise and
such other liabilities consistently classified as "Accounts Payable" in
the current liabilities of the SEC Financial Statements as defined below)
and Accrued Liabilities (meaning as of each determination date, all
amounts accrued for taxes, salaries and wages, interest, rent, utilities,
advertising, insurance and such other current liabilities consistently
classified as "Accrued Expenses" in the current liabilities of the SEC
Financial Statements, but excluding all amounts recorded and classified
as "Reserve for Store Closings") calculated in accordance with GAAP
applied on a basis consistent with past practice and the audited
financial statements for the year ended February 2, 1997 included in the
Company's Form 10-K and the interim financial statements for the
quarterly periods ending May 4, 1997 and August 3, 1997, included in the
Company's Form 10-Q (the "SEC Financial Statements") shall exceed the
following amounts as of any of the following dates occurring prior to
the Conditional Date: $163,328,000 at October 5, 1997; $178,008,000 at
November 2, 1997; $194,212,000 at November 30, 1997; $155,880,000 at
January 4, 1998; or $154,265,000 at February 1, 1998; provided, however,
that any amounts paid or accrued in such fiscal year ended February 1,
1998 and specified in subclauses (r), (s), (t), (u) or (v) above shall
not be taken into account in determining Accounts Payable, short term
debt or Accrued Liabilities, as the case may be, for purposes of this
clause (iii).
Section 8.2 Effect of Termination.
(a) If: (i) an Acquisition Transaction (a "Competing
Acquisition Transaction") shall have been made known to the Company or
any of its Subsidiaries or has been proposed directly to its stockholders
generally or any person shall have publicly announced an intention
(whether or not conditional) to enter into an Acquisition Transaction and
thereafter the approval of the Merger by the Company's stockholders is
not obtained; or (ii) the Company terminates this Agreement pursuant to
Section 8.1(e); and the Company enters into a definitive agreement with
any person or entity with respect to such Competing Acquisition
Transaction or the Acquisition Transaction which gave rise to such
termination pursuant to Section 8.1(e) (or any revision of such
Acquisition Transaction), as the case may be, within nine months after
the termination of this Agreement or such Competing Acquisition
Transaction or the Acquisition Transaction which gave rise to such
termination pursuant to Section 8.1(e) is consummated within nine months
after the termination of this Agreement, then within two business days
after entering into such definitive agreement or after such
consummation, the Company shall pay Holdings a fee (the "Alternative
Proposal Fee") in cash equal to $2.5 million. The Alternative Proposal
Fee shall also be payable within two business days of Holdings'
termination of this Agreement pursuant to Section 8.1 (d)(iii). In no
event shall more than one Alternative Proposal Fee be payable to Holdings.
<PAGE>
(b) In the event of termination of this Agreement pursuant to
this Article VIII, the Merger shall be deemed abandoned and this Agreement
shall forthwith become void, except that the provisions of Section
6.1(b), Section 6.10 and this Section 8.2 shall survive any termination
of this Agreement; provided, however, that nothing in this Agreement
shall relieve any party from liability for any material breach of this
Agreement.
Section 8.3 Authority for Termination. Any termination of this
Agreement pursuant to Section 8.1 may only be made pursuant to the
approval of the board of directors of the applicable party.
ARTICLE IX
GENERAL PROVISIONS
Section 9.1 Amendment and Modification. At any time prior to
the Effective Time, this Agreement may be amended, modified or
supplemented only by written agreement (referring specifically to this
Agreement) of Holdings and the Company with respect to any of the terms
contained herein; provided, however, that no such amendment, modification
or supplementation shall be made which under applicable law requires the
approval of stockholders of the Company or Holdings, without the further
approval of such stockholders.
Section 9.2 Waiver. At any time prior to the Effective Time,
Holdings, on the one hand, and the Company, on the other hand, may (i)
extend the time for the performance of any of the obligations or other
acts of the other, (ii) waive any inaccuracies in the representations
and warranties of the other contained herein or in any documents
delivered pursuant hereto and (iii) waive compliance by the other with
any of the agreements or conditions contained herein which may legally
be waived. Any such extension or waiver shall be valid only if set forth
in an instrument in writing specifically referring to this Agreement and
signed on behalf of such party.
Section 9.3 Survivability. Except as provided in this Agreement
with respect to Holdings, Sporting and Acquisition, the respective
representations and warranties of Holdings, Sporting and Acquisition, on
the one hand, and the Company, on the other hand, and the covenants and
agreements of the Company contained herein or in any certificates or
other documents delivered prior to or as of the Effective Time shall not
survive beyond the Effective Time. The covenants and agreements
contained herein or in any certificate or other documents delivered prior
to or as of the Effective Time of Holdings, Sporting and Acquisition (or
the Surviving Corporation as the case may be) shall survive the Effective
Time (including, without limitation, any such covenants and agreements
contained in Section 4.13(k) hereof).
Section 9.4 Notices. All notices and other communications
hereunder shall be in writing and shall be delivered personally or by
next-day courier or telecopied with confirmation of receipt, to the
parties at the addresses specified below (or at such other address for a
party as shall be specified by like notice; provided that notices of a
change of address shall be effective only upon receipt thereof). Any
such notice shall be effective upon receipt, if personally delivered or
telecopied, or one day after delivery to a courier for next-day delivery.
<PAGE>
If to Holdings, Sporting or Acquisition to:
Gart Sports Company
1000 Broadway
Denver, CO 80203
Attention: John Douglas Morton
Telecopier: (303) 830-9282
with copies to:
Leonard Green & Partners, L.P.
11111 Santa Monica Boulevard
Suite 2000
Los Angeles, California 90025
Attention: Jennifer Holden Dunbar
Telecopier: (310) 954-0404
and
Brownstein Hyatt Farber & Strickland, P.C.
410 17th Street
Denver, CO 80202
Attention: Jeffrey M. Knetsch
Telecopier: (303) 623-1956
If to the Company, to:
Sportmart, Inc.
1400 South Wolf Road
Wheeling, IL 60090
Attention: Andrew S. Hochberg
Telecopier: (847) 520-1884
with copies to:
Altheimer & Gray
10 S. Wacker Drive
Suite 4000
Chicago, IL 60606
Attention: Myron Lieberman, Esq.
Peter Lieberman, Esq.
Telecopier: (312) 715-4800
and:
Katten Muchin & Zavis
525 W. Monroe Street
Suite 1600
Chicago, IL 60661
Attention: Matthew S. Brown, Esq.
Telecopier: (312) 902-1061
<PAGE>
Section 9.5 Descriptive Headings; Interpretation. The headings
contained in this Agreement are for reference purposes only and shall not
affect in any way the meaning or interpretation of this Agreement.
References in this Agreement to Sections, Exhibits or Articles mean a
Section, Exhibit or Article of this Agreement unless otherwise indicated.
References to this Agreement shall be deemed to include the Exhibits
hereto, unless the context otherwise requires. The term "Person" shall
mean and include an individual, a partnership, a joint venture, a
corporation, a trust, a Governmental Entity, an unincorporated
organization and any other entity of or any fund.
Section 9.6 Entire Agreement; Assignment. This Agreement
(including the Exhibits and other documents and instruments referred to
herein), together with the Confidentiality Agreement, constitute the
entire agreement and supersede all other prior agreements and
understandings, both written and oral, among the parties or any of them,
with respect to the subject matter hereof. Except for the provisions of
Sections 1.7, 4.13(k) and 6.13 (each of which shall be expressly for the
benefit of the stockholders of the Company immediately prior to the
Effective Time) and Sections 6.7 (which shall expressly be for the
benefit of the Employees) and 6.9 (which shall be expressly for the
benefit of the Indemnified Parties), all of which provisions shall
survive the Closing, this Agreement is not intended to confer upon any
person not a party hereto any rights or remedies hereunder. This
Agreement shall not be assigned by operation of law or otherwise. Any
damages payable to stockholders of the Company for breach of this
Agreement shall be payable in voting common stock of Holdings (valued at
the price determined under Section 2.4(i)) to the extent necessary to
assure qualification of the Merger as a tax-free reorganization under
section 368(a)(2)(E) of the Code).
Section 9.7 Governing Law. This Agreement shall be governed by
and construed in accordance with the laws of the State of Delaware
without giving effect to the provisions thereof relating to conflicts of
law.
Section 9.8 Enforcement. The parties agree that irreparable
damage would occur in the event that any of the provisions of this
Agreement were not performed in accordance with their specific terms or
were otherwise breached. It is accordingly agreed that the parties shall
be entitled to an injunction or injunctions to prevent breaches of this
Agreement and to enforce specifically the terms and provisions of this
Agreement in any court of the United States located in the State of
Delaware or in Delaware state court, this being in addition to any other
remedy to which they are entitled at law or in equity. In addition,
each of the parties hereto (a) consents to submit itself to the personal
jurisdiction of any federal court located in the State of Delaware or
any Delaware state court in the event any dispute arises out of this
Agreement or any of the transactions contemplated by this Agreement, (b)
agrees that it will not attempt to deny or defeat such personal
jurisdiction by motion or other request for leave from any such court and
(c) agrees that it will not bring any action relating to this Agreement
or any of the transactions contemplated by this Agreement in any court
other than a federal or state court sitting in the State of Delaware.
<PAGE>
Section 9.9 Severability. In case any one or more of the
provisions contained in this Agreement should be invalid, illegal or
unenforceable in any respect against a party hereto, the validity,
legality and enforceability of the remaining provisions contained herein
shall not in any way be affected or impaired thereby and such invalidity,
illegality or unenforceability shall only apply as to such party in the
specific jurisdiction where such judgment shall be made.
Section 9.10 Counterparts. This Agreement may be executed in
two or more counterparts, each of which shall be deemed to be an original
but all of which shall constitute one and the same agreement.
IN WITNESS WHEREFORE, each of Holdings, Sporting, Acquisition and
the Company has caused this Agreement to be executed on its behalf by its
officers thereunto duly authorized, all as of the date first above written.
GART SPORTS COMPANY
By: /S/ JOHN DOUGLAS MORTON
Name: John Douglas Morton
Title: President and Chief
Executivr Officer
GART BROS. SPORTING GOODS COMPANY
By: /S/ JOHN DOUGLAS MORTON
Name: John Douglas Morton
Title: President and Chief
Executive Officer
GB ACQUISITION, INC.
By: /S/ JOHN DOUGLAS MORTON
Name: John Douglas Morton
Title: President and Chief
Executive Officer
SPORTMART, INC.
By: /S/ ANDREW S. HOCHBERG
Name: Andrew S. Hochberg
Title: Chief Executive Officer
<PAGE>
<TABLE>
EXHIBIT 11
SPORTMART, INC. AND SUBSIDIARY
COMPUTATION OF LOSS PER SHARE
(Amounts in thousands except per share data)
(Unaudited)
Thirteen Weeks Ended Thirty-nine Weeks Ended
November 2, October 27, November 2, October 27,
1997 1996 1997 1996
<S> <C> <C> <C> <C>
Financial statement computations:
Loss) income before income taxes $(6,167) $(3,587) $(3,389) $2,539
Income tax benefit (provision) 2,467 1,507 1,356 (1,062)
Loss) income before extraordinary item (3,700) (2,080) (2,033) 1,477
Loss from extraordinary item, net of tax - (462) - (462)
Net (loss) income $(3,700) $(2,542) $(2,033) $1,015
Net (loss) income per share:
Shares used in primary loss per share computation:
Weighted average shares outstanding 12,891 12,835 12,883 12,823
Net additional shares assuming options exercised and
proceeds used to purchase treasury shares (1) - - - -
Common and common equivalent shares 12,891 12,835 12,883 12,823
Primary (loss) earnings per share before
extraordinary item $ (.29) $ (.16) $ (.16) $ .12
Primary loss per share from extraordinary item - (.04) - (.04)
Primary (loss) earnings per share $ (.29) $ (.20) $ (.16) $ .08
Shares used in fully diluted loss per share computation:
Weighted average shares outstanding 12,891 12,835 12,883 12,823
Net additional shares assuming options exercised and
proceeds used to purchase treasury shares (1) - - - -
Common and common equivalent shares 12,891 12,835 12,883 12,823
Fully diluted (loss) earnings per share before
extraordinary item $ (.29) $ (.16) $ (.16) $ .12
Fully diluted loss per share from extraordinary item - (.04) - (.04)
Fully diluted (loss) earnings per share $ (.29) $ (.20) $ (.16) $ .08
</TABLE>
(1) Certain common stock equivalents are antidilutive; therefore, they
are not included in the calculation.
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> FEB-01-1998
<PERIOD-END> NOV-02-1997
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 156,017,848
<CURRENT-ASSETS> 180,798,493
<PP&E> 102,210,504
<DEPRECIATION> (45,062,665)
<TOTAL-ASSETS> 248,954,422
<CURRENT-LIABILITIES> 168,610,971
<BONDS> 0
0
0
<COMMON> 129,319
<OTHER-SE> 72,041,225
<TOTAL-LIABILITY-AND-EQUITY> 248,840,361
<SALES> 318,260,572
<TOTAL-REVENUES> 318,498,205
<CGS> 247,557,562
<TOTAL-COSTS> 247,557,562
<OTHER-EXPENSES> 69,007,982
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 5,376,346
<INCOME-PRETAX> (3,389,217)
<INCOME-TAX> 1,335,684
<INCOME-CONTINUING> (2,033,533)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,033,533)
<EPS-PRIMARY> (.16)
<EPS-DILUTED> (.16)
</TABLE>
