UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the fiscal year ended: January 30, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from ___________ to __________
Commission file number: 0-21360
SHOE CARNIVAL, INC.
(Exact name of registrant as specified in its charter)
Indiana 35-1736614
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
8233 Baumgart Road
Evansville, Indiana 47711
(Address of principal executive offices) (Zip Code)
(812) 867-6471
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, $. 01 PAR VALUE
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No ___
Indicate by check mark if disclosure of delinquent filers pursuant of Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K [ X ]
Aggregate market value of the voting stock held by non-affiliates of the
Registrant based on the last sale price for such stock at March 31, 1999 was
approximately $101,308,488 (assuming solely for the purposes of this calculation
that all Directors and executive officers of the Registrant are "affiliates").
Number of Shares of Common Stock, $.01 par value, outstanding at April 16, 1999
was 13,236,642.
DOCUMENTS INCORPORATED BY REFERENCE
Certain information contained in the Definitive Proxy Statement for the Annual
Meeting of Shareholders of Registrant to be held on June 15, 1999 is
incorporated by reference into Part III hereof.
<PAGE>
Shoe Carnival, Inc.
Evansville, Indiana
Annual Report to Securities and Exchange Commission
January 30, 1999
PART I
ITEM 1. BUSINESS
General
Shoe Carnival, Inc. (the "Company") is a high volume, value-oriented retailer of
family footwear operating predominately in the Midwest, South and Southeastern
regions of the United States. The Company adheres to a highly promotional
marketing concept that enables it to be competitive in the retail markets it
enters. The Company's stores are characterized by a high energy atmosphere
designed to encourage customer participation and provide a fun and exciting
shopping experience.
Business Strategy
The Company's goal is to establish itself as one of the nation's leading family
footwear retailers and the dominant footwear retailer in each market it serves.
To accomplish its goal, the Company provides a selection and variety of footwear
normally associated with a "category killer" superstore in an exciting retail
environment. In the 52 week period ended January 30, 1999 ("fiscal 1998"), the
average size, annual sales and sales per square foot for Shoe Carnival's stores
open the full year were approximately 11,500 square feet, $2.8 million and $250,
respectively, each substantially above the industry averages.
Management believes that shoppers prefer the value, convenience and selection of
the superstore retail format and that, as a result, superstores will continue to
grow and increase their market share at the expense of department stores, mass
merchandisers and traditional specialty retailers. This trend is evidenced by
the acceptance of superstores in other specialty niches, including, among
others, toys, office products, consumer electronics and do-it-yourself home
improvement. Management believes that the Company differentiates itself from its
competitors and gains significant competitive advantage through certain business
strategies which include:
Distinctive Retail Approach. The Company's stores are larger than
traditional shoe stores. The Company seeks to create a carnival-like
atmosphere in each of its stores by decorating with bright lights,
colors and neon signs, and by featuring an in-store "barker" who
advertises current specials, organizes contests and games, and assists
and educates customers with the features and location of merchandise.
This exciting in-store atmosphere is designed to encourage customer
participation and spontaneity, producing a sense of urgency to buy.
Management believes this highly promotional atmosphere results in
various competitive advantages, including increased multiple unit
sales, the building of a loyal repeat customer base and the creation of
word-of-mouth advertising.
Broad Merchandise Assortment. The Company's merchandising strategy is
to provide superior value to its customers by offering a broad
selection of competitively priced name brand and private label
merchandise. The average store carries over 28,800 pairs of shoes in
four general categories -- men's, women's, children's and athletics.
The Company buys dress, casual and athletic shoes as well as boots and
sandals from a wide variety of vendors. In addition to footwear, Shoe
Carnival stores also carry selected accessory items complimentary to
the sale of footwear.
Emphasis on Value. Management believes that its wide selection of
popular styles of name brand merchandise at competitive prices
generates broad customer appeal. To supplement its name brand
offerings, the Company has established a private label program that
offers the consumer quality footwear at lower prices than name brand
merchandise. Sales of private label merchandise generally result in
higher gross profit margins for the Company than sales of name brand
merchandise. The Company believes that providing a wide selection of
competitively priced name brand and quality private label footwear
provides superior value to its customers.
2
<PAGE>
Low Operating Costs. The Company's operating methods, cost control
programs and store locations are all designed to minimize operating
costs. Merchandise in the Company's stores is displayed by style and
color on the selling floor, enabling customers who so choose to serve
themselves. This approach, in conjunction with wage and inventory
control programs, results in lower labor costs than those incurred by
department stores and traditional shoe stores. In addition, the Company
prefers to locate stores predominantly in strip shopping centers, as
opposed to enclosed malls, to take advantage of the generally lower
occupancy costs.
Competitive Pricing. The Company, as a result of its low-cost operating
structure and high volume, is able to price its merchandise below that
of traditional department stores and shoe store chains. The Company
offers value to customers with specialized promotions, competitive
pricing and a vast selection of name brand and private label
merchandise.
Emphasis on Information Technology. The Company has invested
significant resources in information technology. The Company's systems
are designed to provide management with the timely information
necessary to monitor and control all phases of operations. Management
is planning further technological enhancements related to
point-of-sale, purchasing and inventory control, labor management and
distribution, which should enable the Company to better manage its
operations.
Expansion Strategy
The majority of the Company's sale and earnings growth is expected to result
from the opening of new stores. The opening of new stores will be dependent
upon, among other things, the availability of desirable locations, the
negotiation of acceptable lease terms and general economic and business
conditions affecting consumer spending in the areas the Company targets for
expansion. The Company's strategy is to expand into new markets and to
consolidate and improve its market share position in its existing markets
through the clustering of stores. Clustering involves the operation of multiple
locations in a particular metropolitan area or in several smaller markets
located in reasonable proximity to one another. Management believes this
strategy enables the Company to obtain economies of scale with respect to
advertising, distribution and management costs.
The Company plans to open 25 to 30 stores in 1999. Thereafter, the Company
intends to expand at a rate of approximately 20% to 25% per year. During fiscal
1999, new stores are expected to be located primarily in the North Central,
Midwest, Midsouth and Southeast. The Company intends to enter larger markets
(populations greater than 400,000) by opening two or more stores at
approximately the same time. In smaller markets that can only support a single
store, the Company will seek locations in reasonably close proximity to other
Company markets. This strategy allows for more efficient management and reduces
distribution costs. In addition to new market expansion and consistent with its
clustering approach, the Company has targeted certain of its existing markets
for additional new stores when appropriate store locations become available.
Although opening new stores in existing markets may adversely affect the sales
of existing stores, management believes that cost efficiencies and overall
incremental sales gains should more than offset any detrimental effect.
Prior to entering a new market, the Company performs a market, demographic and
competition analysis to evaluate the suitability of the potential market.
Potential store site selection criteria include, among other factors, market
demographics, traffic counts, the retail mix of a potential strip center,
visibility within the center and from major thoroughfares, overall retail
activity of the area and proposed lease terms. The time required to open a store
after signing a lease depends primarily upon the landlord's ability to deliver
the premises to the Company. Upon acceptance of the premises from the landlord,
the Company can generally open a store within 30 to 45 days.
3
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Merchandising
The Company's merchandising strategy is designed to provide a very large
selection of quality family footwear at a price competitive with or slightly
below that of competitors. The Company's stores carry a broad assortment of
current season name brand footwear, supplemented with the Company's private
label merchandise and select name brand close-out merchandise.
The combination of name brand and private label footwear gives the Company a
merchandise assortment that enables it to compete effectively. The mix of
merchandise and the name brands offered in a particular store are based upon the
demographics of each market, among other factors. The Company typically offers
lower prices on both name brand and private label merchandise than department
stores and traditional shoe stores. Furthermore, the Company competes with
off-price retailers, mass merchandisers and discount stores by offering a wider
and deeper selection of merchandise at competitive prices. The Company's stores
also carry selected other merchandise such as handbags, wallets, shoe care
items, socks and sports apparel.
Women's. The women's department offers current season name brand, branded
close-out and private label merchandise providing a wider selection than that of
most of the Company's competitors. This department is further segmented into
women's dress shoes, casual shoes, sandals, boots and sport shoes, thus covering
all facets of a woman's footwear needs.
Men's. The men's department offers primarily name brand footwear and is
segmented into men's dress shoes, casual shoes, sandals and boots. The Company's
stores offer a complete assortment of men's footwear at affordable prices. As in
the women's department, this assortment is supplemented with name brand
close-outs and private label products.
Children's. Children's footwear is segmented into dress shoes, casual shoes,
boots, athletic shoes, sandals and infant shoes, again offering a complete
selection of footwear for the child. Approximately 75% of the children's
business is done in the athletic shoe category.
Athletics. The men's and women's athletic business is divided into a number of
buying groups representing a complete assortment of athletic footwear. The
Company carries court shoes, fitness and aerobic shoes, leisure shoes, walking
shoes, running shoes and many specialty shoes such as cleats and soccer shoes.
The table below sets forth the Company's percentage of sales by product category
for fiscal 1998, 1997 and 1996.
1998 1997 1996
------ ------ ------
Women's 27.4% 27.2% 27.2%
Men's 17.5 16.9 17.7
Children's 16.2 16.4 16.4
Athletic 34.2 34.6 34.0
Accessories and Miscellaneous Items 4.7 4.9 4.7
------ ------ ------
100.0% 100.0% 100.0%
====== ====== ======
Pricing
The Company's pricing strategy is designed to emphasize value. Initial pricing
decisions are guided by gross profit margin targets which vary by merchandise
category and depend on whether the item is name brand or private label
merchandise. Markdowns are centrally managed by the buying staff through the use
of weekly sales and inventory analysis generated by the Company's management
information system.
In-store signage is used extensively to highlight special promotional markdowns
and to advertise markdowns to meet or beat competitors' sale prices.
4
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Advertising and Promotion
In-store promotions are a key ingredient in the Company's marketing effort.
Although most in-store promotions are pre-planned, store managers are encouraged
to use their own creativity in devising on-the-spot promotional activities, such
as customer contests and games. The Company has several standardized promotions,
including a Spin-N-Win(TM) wheel, where a customer can win instant discounts,
and a "Money Machine," where randomly selected customers attempt to catch cash
and coupons during a 30-second period inside a transparent booth where cash and
coupons are blown furiously around them. Both of these promotions exemplify the
Company's emphasis on fun and excitement in order to enhance the customer's
total shopping experience.
The Company uses various forms of media advertising in conjunction with its
extensive in-store promotions. The focus of the Company's media advertising is
to communicate the exceptional value offered by the Company on name brand and
private label footwear. Print ads typically display a selection of special sale
items or desirable new products. Radio and television spots utilize an
entertaining format to capture the consumers attention while highlighting on
sale items or special promotions.
The Company directs approximately 59% of its total advertising budget to
television and radio, but also utilizes print media (including newspaper inserts
and direct mail) and outdoor advertising. A special effort is made to utilize
the cooperative advertising dollars offered by vendors whenever possible. By
widely advertising through newspaper, television and radio prior to a grand
opening, the Company strives to make each new store opening a major retail
event. Major promotions during the grand openings and peak selling periods allow
customers to win prizes such as cruises, computers, merchandise or cash.
Store Operations
Management of store operations is the responsibility of the Company's Senior
Vice President - Store Operations, who is assisted by divisional managers,
regional managers and the individual store managers. The Company's store
management structure is flat relative to most other retailers. This permits the
Company to reduce management expense by eliminating the district manager
position and delegating more responsibility to store managers. Currently, there
are two divisions designated as the North and South Divisions. The divisional
managers are currently responsible for six and eight regions, but ultimately are
expected to manage between ten and fifteen regions. Each regional manager is
responsible for the operation of between five and thirteen stores and is
required to visit each store periodically, concentrating more heavily on
underperforming stores. Regional managers collectively meet with their
respective divisional manager on a monthly basis, except during peak sales
periods, and quarterly with the Senior Vice President - Store Operations and
other members of senior management to discuss Company strategies, merchandise,
advertising, financial performance and personnel requirements.
Each store has a store manager and one to three assistant managers, depending on
the sales volume of the store. The sales staff ranges from 3 to 62 employees
depending on the size of the store and the time of year. Store managers and most
assistant managers are paid a salary, while all other store employees are paid
on an hourly basis. The Company provides an incentive compensation plan for
virtually all employees. Regional and store manager incentive plans are based
primarily upon the sales and profitability of their respective stores as
compared to defined goals. Assistant store managers and other store employees
earn incentive compensation based on the store exceeding inventory shrinkage
goals.
Administrative functions are centrally controlled from corporate headquarters.
These functions include accounting, purchasing, store maintenance, information
systems, advertising, distribution and pricing. Regional and store managers are
expected and encouraged to provide feedback to all corporate departments to
improve efficiencies. Regional and store managers are charged with making
merchandising decisions necessary to maximize sales and profits primarily though
merchandise placement, signage and timely clearance of slower selling items.
The Company maintains inventory shrinkage rates (.4% of sales in fiscal 1998)
substantially below the retail industry average. Management attributes this
success to an in-store loss prevention staff, improved information reporting and
surveillance systems in many of the Company's stores. Management also believes
that tying incentive compensation for store employees to the achievement of
targeted shrinkage levels raises employee awareness of loss prevention.
5
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Store Location and Design
The number of stores opened and closed for fiscal years 1998, 1997 and 1996 are
as follows:
Fiscal Year 1998 1997 1996
------ ------ ------
Stores open at beginning of year 92 93 95
Opened during year 20 4 5
Closed during year 1 5 7
------ ------ ------
Stores open at end of year 111 92 93
====== ====== ======
At January 30, 1999, the Company had 111 stores located in 18 states, primarily
in the Midwest, South and Southeastern regions of the United States. Although
three stores are located in enclosed malls, the Company prefers strip shopping
center locations, where occupancy costs are typically lower and the Company
enjoys greater operating freedom to implement its non-traditional retail
methods. Management feels that most consumers enjoy the convenience offered by
strip shopping centers as opposed to enclosed malls.
All of the Company's stores are leased rather than owned. Management believes
that the flexibility afforded by leasing allows the Company to avoid the
inherent risk of owning real estate, particularly with respect to
underperforming stores. In a particular market, potential store site selection
criteria include, among other factors, market demographics, traffic counts, the
retail mix of a potential retail strip center, visibility within the center and
from major thoroughfares, overall retail activity of the area and proposed lease
terms.
The Company's stores are designed and fixtured to reflect the high energy level
of its retail concept and to convey a carnival-like atmosphere. Stores are
typically equipped with a sound system, microphone, "Money Machine" and
Spin-N-Win(TM) wheel. Open-stock inventories, neon signs, flashing colored
lights and large mirrors, striking fixtures and colorful carpet are utilized to
make the stores appear larger and more exciting. Merchandise is typically
displayed within a store by category, with athletic footwear (and licensed team
sports apparel in certain stores) generally located in the center of the store
to provide a transition between women's and men's footwear. Checkout counters
are located at the front of each store, supermarket style, to facilitate
high-volume throughput and minimize inventory shrinkage. The average store has
approximately five checkout lanes.
As of January 30, 1999, the Company's stores averaged approximately 11,500
square feet, ranging in size from 6,600 to 26,500 square feet, except for an
atypical mall store of approximately 2,100 square feet. Currently, the new store
prototype calls for between 12,000 and 15,000 square feet but stores in the
8,000 square foot range will be considered. The size of the stores is dependent
upon, among other factors, the location of the store and the population base the
store is expected to service. The sales area of most stores is approximately 85%
of the gross store size.
Capital expenditures for new stores are expected to average approximately
$350,000, including point-of-sale equipment which is generally acquired through
equipment leasing transactions. The average inventory in a new store is expected
to range from $550,000 to $850,000, depending on the size and sales expectation
of the store and the timing of the new store opening. Pre-opening expenses, such
as advertising, salaries, supplies and utilities are expected to average
approximately $80,000 per store.
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Distribution
The Company operates a single distribution facility in Evansville, Indiana. A
92,000 square foot addition to the distribution center is expected to be
completed by mid-1999, bringing the facility to a total of 200,000 square feet.
Management anticipates that the expanded facility will be able to meet the
distribution needs of up to 400 stores.
The distribution center processes virtually all merchandise prior to shipping to
the stores. At a minimum, this includes count verification, price and bar code
labeling of each unit, redistribution of an order into size assortments and
allocation of shipments to individual stores. Once a distribution order form is
received from the buying staff, the remainder of the distribution process,
including packing, allocating, storing and shipping is essentially paperless.
Merchandise is shipped to each store from one to two times a week, depending on
store volume, proximity to other stores and proximity to the distribution
center. The majority of shipments are handled by a dedicated carrier, with
occasional use of common carriers.
Management Information Systems
The Company has devoted significant resources to expand its sophisticated
information technology systems. The corporate mainframe is connected to every
store via a Wide Area Network, providing up-to-date sales and inventory
information as required. Each store has an independent point-of-sale controller,
with two to 13 point-of-sale terminals per store. To provide maximum flexibility
and maintain data integrity, the Company's mainframe systems are based upon
relational database technology. The Company's distribution facility utilizes a
spread spectrum radio frequency network to assure accurate, real-time
information throughout the distribution operation. Each member of the buying and
distribution staff has on-line access to up-to-date sales and inventory
information broken down by store, style, color, size and width. Additional data
analysis can be quickly provided on demand by using either a fourth generation
language programming tool or personal computer tools that access the Company's
database.
State of the art point-of-sales systems utilize bar code technology to capture
sales, gross margin and inventory information. The system provides, in addition
to other features, full price management (including price look-up), promotional
tracking capabilities (in support of the spontaneous nature of the in-store
price promotions), real-time margin analysis by product category at the store
level, check approval and customer tracking.
Competition
The retail footwear business is highly competitive. The Company believes that
the principal competitive factors in its industry are merchandise selection,
price, fashion, quality, location, store environment and service. The Company
competes primarily with department stores, shoe stores, sporting goods stores
and mass merchandisers.
Many of the Company's competitors are significantly larger and have
substantially greater financial and other resources than the Company. However,
management believes that its distinctive retail format, in combination with its
wide merchandise selection, competitive prices and low operating costs, enable
the Company to compete effectively in each market that it enters.
Employees
At January 30, 1999, the Company had approximately 2,027 employees, of which
approximately 930 were employed on a part-time or seasonal basis. The number of
employees fluctuates during the year primarily due to seasonality. None of the
Company's employees is represented by a labor union.
Management attributes a large portion of the Company's success in various areas
of cost control to its inclusion of virtually all employees in incentive
compensation plans. The Company also contributes all or a portion of the cost of
medical, disability and life insurance coverage for those employees who are
eligible to participate in Company sponsored plans. All employees also receive
discounts on Company merchandise. The Company considers its relationship with
its employees to be satisfactory.
7
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Trademarks
The Company owns the following federally registered trademarks and servicemarks:
Shoe Carnival(R), The Carnival(R), Nuff Said(R), Donna Lawrence(R), Oak
Meadow(R), Victoria Spenser(R), Chase and Brittany's(R), Via Nova(R), Fresh
Stuff(R), Innocence(R) and Carnival Lites(R). The Company believes its marks are
valuable and, accordingly, intends to maintain its marks and the related
registrations. The Company is not aware of any pending claims of infringement or
other challenges to the Company's right to use its marks.
ITEM 2. PROPERTIES
The Company leases all existing stores and intends to lease all future stores.
All leases for existing stores provide for fixed minimum rentals and most
provide for contingent rental payments based upon various specified percentages
of sales above minimum levels. Certain leases also contain escalator clauses for
increases in minimum rentals, operating costs and taxes.
The Company owns its headquarters and distribution center which are located at
8233 Baumgart Road, Evansville, Indiana. See ITEM 1 "Business--Distribution."
ITEM 3. LEGAL PROCEEDINGS
The Company is involved in various legal proceedings incidental to the conduct
of its business. Management does not expect that any such proceedings will have
a material adverse effect on the Company's financial position and results of
operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company did not submit any matters to a vote of security holders during the
fourth quarter of the 1998 fiscal year.
8
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Executive Officers of the Company
Name Age Position
- ------------------ --- -----------------------------------------------
J. Wayne Weaver 64 Chairman of the Board and Director
Mark L. Lemond 44 President, Chief Executive Officer and Director
Timothy T. Baker 42 Senior Vice President - Store Operations
Clifton E. Sifford 45 Senior Vice President - General Merchandise
Manager
Larry L. Linville 56 Vice President - Information Systems
W. Kerry Jackson 37 Vice President - Chief Financial Officer and
Treasurer
David A. Kapp 35 Vice President - Inventory Controller and
Secretary
Mr. Weaver is the Company's principal shareholder and has served as Chairman of
the Board of the Company since March 1988. From 1978 until February 2, 1993, Mr.
Weaver had served as president and chief executive officer of Nine West Group
Inc., a designer, developer and marketer of women's footwear. He has over 40
years of experience in the footwear industry. Mr. Weaver is a former director of
Nine West Group Inc. Mr. Weaver serves as chairman and chief executive officer
of Jacksonville Jaguars, LTD and chairman and chief executive officer of LC
Footwear, LLC.
Mr. Lemond has been employed by the Company as President and Chief Executive
Officer since September 1996. From March 1988 to September 1996, Mr. Lemond
served as Executive Vice President, Chief Financial Officer, Treasurer and
Assistant Secretary. On February 3, 1994, Mr. Lemond was promoted to the
position of Chief Operating Officer. Mr. Lemond has served as a director of the
Company since March 1988. Prior to March 1988, he served in similar officer
capabilities with Russell's Shoe Biz, Inc. Prior to joining Russell's Shoe Biz,
Inc. in 1987, Mr. Lemond was a partner with a public accounting firm. He is a
Certified Public Accountant.
Mr. Baker has been employed by the Company as Vice President - Store Operations
since May 1992. Prior to that time, he served as a Regional Manager of the
Company. Mr. Baker was promoted to Senior Vice President on March 25, 1994. From
1983 to June 1989, Mr. Baker held various retail positions with Payless
ShoeSource.
Mr. Sifford has been employed by the Company as Senior Vice President - General
Merchandise Manager since April 13, 1997. Prior to joining the Company and for
at least the past five years, Mr. Sifford served as merchandise manager-shoes
for Belk Store Services, Inc.
Mr. Linville has been employed by the Company as Vice President - Management
Information Systems since August 1994. From February 1990 to February 1994, he
served as vice president of information systems for Dollar General Corporation.
Prior to 1990, Mr. Linville was employed in various management positions within
the information systems areas of Hecks Department Stores (2 years) and Service
Merchandise, Inc. (11 years).
Mr. Jackson has been employed by the Company as Vice President - Chief Financial
Officer and Treasurer since September 1996. From January 1993 to September 1996,
Mr. Jackson served as Vice President - Controller and Chief Accounting Officer.
Prior to January 1993, Mr. Jackson held various accounting positions with the
Company. Prior to joining the Company in 1988, Mr. Jackson was associated with a
public accounting firm. He is a Certified Public Accountant.
Mr. Kapp has been employed by the Company since March 1988, most recently as
Vice President - Inventory Controller and Secretary. Prior to assuming his
current position, Mr. Kapp held various accounting and retail positions with the
Company and its predecessor. He is a Certified Cash Manager.
9
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Executive officers of the Company serve at the discretion of the Board of
Directors. There is no family relationship between any of the directors or
executive officers of the Company.
(Pursuant to General Instruction G(3) of Form 10-K, the foregoing information is
included as an unnumbered Item in Part I of this Annual Report in lieu of being
included in the Company's Proxy Statement for its 1999 Annual Meeting of
Shareholders.)
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Common Stock has been quoted on the Nasdaq Stock Market under the trading
symbol "SCVL" since March 16, 1993.
The quarterly high and low trading prices for 1998 and 1997 are as follows:
High Low
-------- --------
Fiscal Year 1998
First Quarter $ 12.75 $ 8.13
Second Quarter 15.00 10.06
Third Quarter 11.06 6.50
Fourth Quarter 11.31 8.50
Fiscal Year 1997
First Quarter $ 6.50 $ 4.38
Second Quarter 11.00 6.25
Third Quarter 11.50 6.88
Fourth Quarter 9.63 7.50
On March 23, 1993, the Company consummated its initial public offering of
3,622,500 shares of Common Stock at a price to the public of $8.67 per share.
As of April 16, 1999, there were approximately 310 holders of record of the
Common Stock.
The Company does not currently intend to pay cash dividends on its Common Stock
in the foreseeable future. The payment of any future dividends will be at the
discretion of the Company's Board of Directors and will depend upon, among other
things, future earnings, operations, capital requirements, the general financial
condition of the Company and general business conditions.
No unregistered equity securities were sold by the Company during fiscal 1998.
10
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ITEM 6. Selected Financial Data
<TABLE>
<CAPTION>
(In thousands, except share and operating data)
Fiscal years (1) 1998 1997 1996 1995 1994
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Income Statement Data:
Net sales $280,157 $246,520 $233,945 $228,263 $214,528
Cost of sales (including
buying, distribution and
occupancy costs) 196,141 173,953 168,814 176,019 158,614
-------- -------- -------- -------- --------
Gross profit 84,016 72,567 65,131 52,244 55,914
Selling, general and
administrative expenses 66,464 59,438 57,405 58,946 52,907
Restructuring (credit) charge (474) 3,282 267
-------- -------- -------- -------- --------
Operating income (loss) 17,552 13,129 8,200 (9,984) 2,740
Interest expense 507 912 1,242 1,626 665
-------- -------- -------- -------- --------
Income (loss) before income
taxes 17,045 12,217 6,958 (11,610) 2,075
Income tax expense (benefit) 6,818 4,826 2,818 (4,420) 874
-------- -------- -------- -------- --------
Net income (loss) $ 10,227 $ 7,391 $ 4,140 $ (7,190) $ 1,201
======== ======== ======== ======== ========
Net income (loss) per share:
Basic (2) $ .78 $ .57 $ .32 $ (.55) $ .09
Diluted (2) $ .76 $ .56 $ .32 $ (.55) $ .09
Average shares outstanding:
Basic 13,150 13,049 13,023 13,019 13,024
Diluted 13,429 13,238 13,029 13,031 13,051
- --------------------------------------------------------------------------------
Selected Operating Data (3):
Stores open at end of period 111 92 93 95 87
Square footage of store space
at year end (000's) 1,274 1,021 1,026 1,024 939
Average sales per store (000's)$ 2,791 $ 2,720 $ 2,543 $ 2,497 $ 3,145
Average sales per square foot $ 250 $ 245 $ 233 $ 230 $ 277
Comparable store sales 3.6% 6.1% (1.1%) (10.0%) (3.4%)
- --------------------------------------------------------------------------------
Balance Sheet Data:
Working capital $ 47,668 $ 48,889 $ 45,090 $ 50,206 $ 60,766
Total assets 120,761 96,201 93,926 102,265 105,155
Long-term debt and other
indebtedness 1,361 6,133 9,621 18,922 20,597
Total shareholders' equity 82,667 71,609 63,772 59,571 67,577
- --------------------------------------------------------------------------------
<FN>
(1) On February 9, 1995, the Company's Board of Directors approved a change in
the fiscal year to a 52/53 week year ending on the Saturday closest to
January 31. Unless otherwise stated, references to years 1998, 1997, 1996,
1995 and 1994 relate respectively to the fiscal years ended January 30,
1999, January 31, 1998, February 1, 1997, February 3, 1996 and December 31,
1994. Fiscal year 1995 consisted of 53 weeks and the other fiscal years
consisted of 52 weeks. The Company recorded a net loss of $816,000 for the
four week transition period ended January 28, 1995.
(2) Per share data have been restated for the adoption of SFAS 128.
(3) Selected Operating Data has been adjusted to a comparable 52 week basis for
1995.
</FN>
</TABLE>
11
<PAGE>
ITEM 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The Company's fiscal year consists of a 52/53 week period ending on the Saturday
closest to January 31. Unless otherwise stated, references to the years 1998,
1997 and 1996 relate respectively to the fiscal years ended January 30, 1999,
January 31, 1998 and February 1, 1997.
Results of Operations
The following table sets forth the Company's results of operations expressed as
a percentage of net sales for the following fiscal years:
1998 1997 1996
------- ------- -------
Net sales 100.0% 100.0% 100.0%
Cost of sales (including buying,
distribution and occupancy costs) 70.0 70.6 72.2
------- ------- -------
Gross profit 30.0 29.4 27.8
Selling, general and
administrative expenses 23.7 24.1 24.5
Restructuring credit (0.2)
------- ------- -------
Operating income 6.3 5.3 3.5
Interest expense 0.2 0.3 0.5
------- ------- -------
Income before income taxes 6.1 5.0 3.0
Income tax expense 2.4 2.0 1.2
------- ------- -------
Net income 3.7% 3.0% 1.8%
======= ======= =======
1998 Compared to 1997
Net Sales
Net sales increased $33.6 million to $280.2 million in 1998, a 13.6% increase
over net sales of $246.5 million in 1997. The increase was attributable to the
opening of 20 stores in 1998, four stores in 1997 and a comparable store sales
increase of 3.6%. Increases in comparable store sales were realized in all major
footwear categories with the exception of the women's category which was even
for the year. Average sales per square foot in stores open the full year
increased to $250 in 1998 from $245 in 1997. Sales of private label and non-name
brand footwear constituted 13.5% and 16.6% of total footwear sales in 1998 and
1997, respectively.
Gross Profit
Gross profit increased $11.4 million to $84.0 million in 1998, a 15.8% increase
from gross profit of $72.6 million in 1997. The Company's gross profit margin
increased to 30.0% from 29.4%. As a percentage of sales, the merchandise gross
profit margin increased by 0.4% while buying, distribution and occupancy costs
decreased 0.2%. The increase in the merchandise gross profit margin was largely
the result of the increased margin realized on the sale of athletic footwear.
12
<PAGE>
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased $7.0 million to $66.4
million in 1998 from $59.4 million in 1997. As a percentage of sales, these
expenses decreased 0.4% in 1998. An increasing sales base helped to leverage
administrative and hourly payroll expenses and reduce overall expenses as a
percent of sales in spite of increases in advertising and pre-opening costs.
The Company's policy is to expense all non-capital expenditures incurred prior
to the opening of a new store in the month of opening. The aggregate of
pre-opening expenses for 20 new stores in 1998 was approximately $1.7 million,
or 0.6% of sales, and $211,000, or 0.1% of sales for four new stores in 1997.
Interest Expense
Net interest expense of $507,000 in 1998 resulted from interest expense of
$553,000 and interest income of $46,000. Net interest expense of $912,000 in
1997 resulted from interest expense of $946,000 and interest income of $34,000.
The decrease in interest expense was attributable to lower average debt balances
in 1998. The weighted average interest rate on total debt was 8.5% in 1998 and
7.7% in 1997.
Income Taxes
The increase in the effective income tax rate for 1998 to 40.0%, as compared to
39.5% in 1997 was primarily due to an increase in the statutory rate resulting
from higher taxable income. The effective income tax rate in 1998 differed from
the statutory rate due primarily to state and local income taxes, net of the
federal tax benefit.
1997 Compared to 1996
Net Sales
Net sales increased $12.6 million to $246.5 million in 1997, a 5.4% increase
over net sales of $233.9 million in 1996. The increase was attributable to the
opening of four stores in 1997, five stores in 1996 and a comparable store sales
increase of 6.1%, partially offset by the closing of five stores in 1997. All
major product categories recorded increases in comparable store sales resulting
from increases in the average price realized on the sale of merchandise. Average
sales per square foot in stores open the full year increased 5.2% to $245 in
1997 from $233 in 1996. The increase was a result of the comparable store
increase and the closing of low productivity stores. Sales of private label and
non-name brand footwear constituted 16.6% and 17.3% of total footwear sales in
1997 and 1996, respectively.
Gross Profit
Gross profit increased $7.4 million to $72.6 million in 1997, an 11.4% increase
from gross profit of $65.1 million in 1996. The Company's gross profit margin
increased to 29.4% from 27.8%. As a percentage of sales, buying, distribution
and occupancy costs decreased 0.3% while the merchandise gross profit margin
increased by 1.3%. The increase in the gross profit margin was broad based with
all major product categories improving over the prior year.
During 1996, certain initiatives were undertaken to improve the gross profit
margin. These initiatives included raising the average sale price realized on
the sale of footwear by reducing the discounting allowed on merchandise sold and
improving the quality of footwear sold.
13
<PAGE>
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased $2.0 million to $59.4
million in 1997 from $57.4 million in 1996. As a percentage of sales, these
expenses decreased 0.4% in 1997. The Company implemented a new advertising
campaign and consequently increased advertising expenditures in 1997. However,
an increase in comparable store sales combined with cost control initiatives in
payroll and other cost areas resulted in a decrease in total expenses as a
percent of sales.
The Company's policy is to expense all non-capital expenditures incurred prior
to the opening of a new store in the month of opening. Pre-opening expenses for
new stores aggregated approximately $211,000, or 0.1% of sales for four new
stores in 1997, and $427,000, or 0.2% of sales for five new stores in 1996.
Interest Expense
Net interest expense of $912,000 in 1997 resulted from interest expense of
$946,000 and interest income of $34,000. Net interest expense of $1.2 million in
1996 resulted from interest expense of $1.3 million and interest income of
$43,000. The decrease in interest expense was attributable to lower average debt
balances in 1997 and a decrease in the weighted average interest rate on total
debt to 7.7% in 1997 from 8.3% in 1996.
Income Taxes
The reduction in the effective income tax rate for 1997 to 39.5%, as compared to
40.5% in 1996 was primarily due to lower effective income tax rates in certain
states. The effective income tax rate in 1997 differed from the statutory rate
due primarily to state and local income taxes, net of the federal tax benefit.
Restructuring
During the fourth quarter of 1995, the Company recorded a restructuring charge
of $3.3 million to close eight unprofitable stores. The results of operations in
the fourth quarter of 1996 includes a credit of $474,000 resulting from the
partial reversal of the restructuring expense recorded in 1995. The expense
reversal was primarily due to the favorable negotiation of lease termination
costs for the stores closed in 1996.
Liquidity and Capital Resources
The Company's sources and uses of cash are summarized as follows:
(000's)
Fiscal years 1998 1997 1996
-------- -------- --------
Net income plus depreciation and amortization $ 16,795 $ 13,145 $ 9,376
Restructuring credit (474)
Deferred income taxes 414 219 1,550
Working capital decreases (increases) 1,326 (3,149) 6,059
Other operating activities 80 400 117
-------- ------- --------
Net cash provided by operating activities 18,615 10,615 16,628
Net cash used in investing activities (12,487) (7,469) (6,577)
Net cash used in financing activities (5,755) (3,200) (9,326)
-------- ------- --------
Net increase (decrease) in cash and cash
equivalents 373 (54) 725
Cash and cash equivalents at beginning of year 1,571 1,625 900
-------- ------- --------
Cash and cash equivalents at end of year $ 1,944 $ 1,571 $ 1,625
======== ======= ========
The Company's primary sources of funds are cash flows from operations and
borrowings under its revolving credit facility. Cash provided from operating
activities was $18.6 million, $10.6 million and $16.6 million in 1998, 1997 and
1996, respectively. Excluding changes in operating assets and liabilities, $17.3
million, $13.8 million and $10.6 million was provided by operating activities in
1998, 1997 and 1996, respectively. Merchandise inventories increased $15.3
million to $75.4 million at January 30, 1999 compared with $60.1 million at
January 31, 1998. The increase in merchandise inventories resulted primarily
from the 19 additional stores operated at January 30, 1999. Cash provided by
operating activities was used during 1998 to fund capital expenditures and to
reduce long-term debt by $4.7 million.
14
<PAGE>
Working capital was $47.7 million at January 30, 1999 and $48.9 million at
January 31, 1998. The current ratio at January 30, 1999 was 2.5 as compared to
4.3 at January 31, 1998. The decrease from the prior year was primarily a result
of an increase in accounts payable due to higher receipts of spring merchandise
in January 1999 as compared to the prior year. As a result of a $4.7 million
reduction in debt, long-term debt as a percentage of total capital (long-term
debt plus shareholders' equity) was reduced to 1.6% at January 30, 1999 as
compared to 7.9% at January 31, 1998.
Capital expenditures net of lease incentives were $14.6 million in 1998, $7.5
million in 1997 and $6.2 million in 1996. These amounts include $1.9 million and
$162,000 of capital lease obligations incurred in 1998 and 1996, respectively.
No capital lease obligations were incurred in 1997. Of the 1998 expenditures,
$6.9 million was incurred for new stores, $2.3 million was incurred for the
expansion of the existing distribution center and $2.2 million was incurred for
a major upgrade to the point-of-sale system. The remaining capital expenditures
in 1998 were primarily for various store improvements, enhancements to computer
systems and distribution equipment.
Capital expenditures, including assets acquired through leasing arrangements but
net of lease incentives, are expected to be $19 million to $21 million in fiscal
1999. The actual amount of cash required for capital expenditures depends in
part on the number of new stores opened, the amount of lease incentives, if any,
received from landlords and the number of stores remodeled. The opening of new
stores will be dependent upon, among other things, the availability of desirable
locations, the negotiation of acceptable lease terms and general economic and
business conditions affecting consumer spending in areas the Company targets for
expansion.
In 1999, the Company intends to open approximately 25 to 30 stores at an
expected aggregate cost of between $9 million and $11 million. In addition, the
completion of a 92,000 square foot addition to the existing distribution system
is expected to cost approximately $4.6 million. The remaining capital
expenditures are expected to be incurred for various store improvements and
visual presentation enhancements and upgrades to administrative computer
systems.
The Company's current store prototype utilizes between 12,000 and 15,000 square
feet depending upon, among other factors, the location of the store and the
population base the store is expected to service. Net capital expenditures for a
new store is expected to average approximately $350,000, including point-of-sale
equipment which is generally acquired through equipment leasing transactions.
The average inventory investment in a new store is expected to range from
$550,000 to $850,000, depending on the size and sales expectation of the store
and the timing of the new store opening. Pre-opening expenses, such as
advertising, salaries, supplies and utilities, are expected to average
approximately $80,000 per store. On a per-store basis, for the 20 stores opened
during 1998, the initial inventory investment averaged $617,000, capital
expenditures averaged $403,000 and pre-opening expenses averaged $83,000.
At January 31, 1998, the Company's credit facility provided for $35 million in
cash advances and letters of credit issuances. Borrowings under the credit
facility are based on eligible inventory. At January 30, 1999, there were no
cash advances outstanding on the credit facility. Letters of credit outstanding
at January 30, 1999, were $6.9 million. On April 16, 1999, the credit agreement
was amended to allow for up to $45 million in cash advances and letters of
credit and to extend the maturity date to March 31, 2001. Additionally, a
covenant limiting the payment of dividends was eliminated.
The Company anticipates that its existing cash and cash flow from operations,
supplemented by borrowings under its revolving credit line will be sufficient to
fund its planned expansion and other operating cash requirements for at least
the next 12 months.
15
<PAGE>
Impact of Year 2000
The "Year 2000 Issue" generally refers to computer systems that were designed
and developed using two digits, rather than four, to specify the year. As a
result, such systems that utilize a two digit date may not be able to
distinguish the year 2000 from the year 1900. This could result in erroneous
data or complete failure of some systems unless corrective actions are taken.
Management initiated a company wide program in 1998 to address the Year 2000
issue. The phases of the program include (1) creating awareness of the issues
through education and training; (2) assessing the extent of the problem and
determining resource requirements; (3) renovation of the systems by modifying,
upgrading or replacing affected systems; (4) validation of the renovations
through testing and implementation; and (5) contingency planning. The Company
has completed the awareness and assessment phases and is 75% complete on the
renovation phase. The testing phase is ongoing as hardware or system software is
modified, upgraded or replaced but is expected to be completed by the third
quarter of 1999. Revisions to existing business interruption contingency plans
to address specific issues related to the Year 2000 problem will also be
completed in the third quarter of 1999.
The Company estimates the total cost of the two year Year 2000 project to be
approximately $280,000, of which approximately $142,000 was incurred and
expensed in 1998. Allocating existing resources rather than incurring
incremental costs should fund the majority of the estimated Year 2000 compliance
costs. The above costs do not include expenditures of approximately $2.2 million
for a major upgrade to the Company's point-of-sale systems, which upgrade was
not made for Year 2000 compliance purposes.
The Company does not anticipate the costs of the Year 2000 project will have a
material adverse effect on the Company's financial position, results of
operations or cash flows in future periods. The anticipated impact and costs of
the Year 2000 project, as well as the date on which the Company expects to
complete the project, are based on management's best estimates using information
currently available and numerous assumptions about future events. However, there
can be no guarantee that the estimates will be achieved and actual results could
differ materially from those planned.
Formal inquiries are being made by the Company of its major suppliers and other
third-party entities with which it has business relations to obtain assurances
of their Year 2000 compliance. Appropriate contingency plans will be developed
in the event that a significant exposure is identified relative to the
dependencies on third-party systems. However, there can be no assurance that the
systems of other companies on which the Company relies upon will be corrected in
a timely manner, or that any such failure would not have a material adverse
effect on the Company.
Seasonality and Inflation
The Company's quarterly results of operations have fluctuated, and are expected
to continue to fluctuate in the future, primarily as a result of seasonal
variances and the timing of sales and costs associated with opening new stores.
Non-capital expenditures, such as advertising and payroll, incurred prior to the
opening of a new store are charged to expense in the month the store is opened.
Therefore, results of operations may be adversely affected in any quarter in
which the Company opens new stores.
The Company has three distinct peak selling periods: Easter, back-to-school and
Christmas.
Factors That May Effect Future Results
This Annual Report contains certain forward looking statements that involve a
number of risks and uncertainties. Among the factors that could cause actual
results to differ materially are the following: general economic conditions in
the areas of the United States in which the Company's stores are located;
changes in the overall retail environment and more specifically in the apparel
and footwear retail sectors; the impact of competition, weather patterns,
consumer buying trends and the ability of the Company to identify and respond to
emerging fashion trends; the availability of desirable store locations and
management's ability to negotiate acceptable lease terms and open new stores in
a timely manner; and changes in the political and economic environments in the
People's Republic of China, where most of the Company's private label products
are manufactured, and the continued favorable trade relationships between China
and the United States.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is not currently subject to any material market risk.
16
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Report of Management
Management of the Company is responsible for the preparation, integrity and
objectivity of the financial information included in this Annual Report. The
financial statements have been prepared in conformity with generally accepted
accounting principles and necessarily include amounts which are based upon
estimates and judgments by management.
Management maintains internal accounting control systems designed to provide
reasonable assurance that assets are safeguarded, transactions are executed in
accordance with management's authorization and the accounting records may be
relied upon for the preparation of financial statements and other financial
information. This system of internal controls has been designed and is
maintained in recognition of the concept that the cost of controls should not
exceed the benefit derived therefrom.
The Audit Committee of the Board of Directors meets periodically with management
and the independent auditors to review matters relating to the Company's
financial reporting, the adequacy of internal control systems and the scope and
results of the annual audit. Representatives of the independent auditors have
free access to the Audit Committee and the Board of Directors.
The Company's financial statements have been audited by Deloitte & Touche LLP,
whose report, which follows, expresses an opinion as to the fair presentation of
the financial statements and is based on an independent audit performed in
accordance with generally accepted auditing standards.
Independent Auditors' Report
To the Board of Directors and Shareholders of Shoe Carnival, Inc.:
We have audited the accompanying balance sheets of Shoe Carnival, Inc., as of
January 30, 1999 and January 31, 1998 and the related statements of income,
shareholders' equity and cash flows for the years ended January 30, 1999,
January 31, 1998 and February 1, 1997. Our audits also included the financial
statement schedule listed in the Index at Item 14. These financial statements
and financial statement schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe our audits provide a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of Shoe Carnival, Inc., at January 30, 1999 and
January 31, 1998, and the results of its operations and its cash flows for the
years ended January 30, 1999, January 31, 1998 and February 1, 1997, in
conformity with generally accepted accounting principles. Also, in our opinion,
such financial statement schedule, when considered in relation to the basic
financial statements taken as a whole, presents fairly in all material respects
the information set forth.
/s/ Deloitte & Touche LLP
Deloitte & Touche LLP
Stamford, Connecticut
March 5, 1999 (April 16, 1999 as to Note 5)
17
<PAGE>
<TABLE>
<CAPTION>
Shoe Carnival, Inc.
Balance Sheets
January 30, January 31,
(In thousands) 1999 1998
----------- -----------
<S> <C> <C>
Assets
Current Assets:
Cash and cash equivalents $ 1,944 $ 1,571
Accounts receivable 567 781
Notes receivable from shareholders 22
Merchandise inventories 75,390 60,091
Deferred income tax benefit 782 933
Other 1,222 834
----------- -----------
Total Current Assets 79,905 64,232
Property and equipment-net 40,856 31,969
----------- -----------
Total Assets $ 120,761 $ 96,201
=========== ===========
Liabilities and Shareholders' Equity
Current Liabilities:
Accounts payable $ 25,698 $ 10,168
Accrued and other liabilities 5,757 4,487
Current portion of long-term debt 782 688
----------- -----------
Total Current Liabilities 32,237 15,343
Long-term debt 1,361 6,133
Deferred lease incentives 2,424 1,308
Deferred income taxes 2,072 1,808
----------- -----------
Total Liabilities 38,094 24,592
----------- -----------
Shareholders' Equity:
Common stock, $. 01 and no par value,
50,000 shares authorized 13,179 and
13,088 shares issued and outstanding 132
Additional paid-in capital 62,543 61,844
Retained earnings 19,992 9,765
----------- -----------
Total Shareholders' Equity 82,667 71,609
----------- -----------
Total Liabilities and Shareholders' Equity $ 120,761 $ 96,201
=========== ===========
</TABLE>
See notes to financial statements
18
<PAGE>
<TABLE>
<CAPTION>
Shoe Carnival, Inc.
Statements of Income
(In thousands, except per share data)
For fiscal years ended January 30, January 31, February 1,
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
Net sales $ 280,157 $ 246,520 $ 233,945
Cost of sales (including buying,
distribution and occupancy costs) 196,141 173,953 168,814
----------- ----------- -----------
Gross profit 84,016 72,567 65,131
Selling, general and administrative
expenses 66,464 59,438 57,405
Restructuring credit (474)
----------- ----------- -----------
Operating income 17,552 13,129 8,200
Interest expense 507 912 1,242
----------- ----------- -----------
Income before income taxes 17,045 12,217 6,958
Income tax expense 6,818 4,826 2,818
----------- ----------- -----------
Net income $ 10,227 $ 7,391 $ 4,140
=========== =========== ===========
Net income per share:
Basic $ .78 $ .57 $ .32
Diluted $ .76 $ .56 $ .32
Average shares outstanding:
Basic 13,150 13,049 13,023
Diluted 13,429 13,238 13,029
</TABLE>
See notes to financial statements
19
<PAGE>
<TABLE>
<CAPTION>
Shoe Carnival, Inc.
Statements of Shareholders' Equity
(In thousands)
Additional Retained
Common Stock Paid-In Earnings
Shares Amount Capital (Deficit) Total
---------------- ---------- --------- --------
<S> <C> <C> <C> <C> <C>
Balance at February 3, 1996 13,019 $ 1,302 $ 60,035 $ (1,766) $ 59,571
Employee stock purchase plan
purchases 13 61 61
Elimination of par value (1,302) 1,302
Net income 4,140 4,140
------ ------- -------- -------- --------
Balance at February 1, 1997 13,032 0 61,398 2,374 63,772
Compensation from stock option
grant 158 158
Exercise of stock options 41 191 191
Employee stock purchase plan
purchases 15 97 97
Net income 7,391 7,391
------ ------- -------- -------- --------
Balance at January 31, 1998 13,088 0 61,844 9,765 71,609
Exercise of stock options 76 690 690
Employee stock purchase plan
purchases 15 141 141
Increase in par value 132 (132)
Net income 10,227 10,227
------ ------- -------- -------- --------
Balance at January 30, 1999 13,179 $ 132 $ 62,543 $ 19,992 $ 82,667
====== ======= ======== ======== ========
</TABLE>
See notes to financial statements
20
<PAGE>
<TABLE>
<CAPTION>
Shoe Carnival, Inc.
Statements of Cash Flows
(In thousands)
Fiscal years ended
January 30, January 31, February 1,
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
Cash Flows From Operating Activities
Net income $ 10,227 $ 7,391 $ 4,140
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation and amortization 6,568 5,754 5,236
Restructuring credit (474)
Loss on retirement of assets 380 392 305
Deferred income taxes 414 219 1,550
Compensation for forgiveness of debt 158
Other (300) (150) (188)
Changes in operating assets and
liabilities:
Merchandise inventories (15,299) (851) 3,459
Accounts receivable 214 137 69
Accounts payable and accrued
liabilities 16,801 (2,506) (1,221)
Other (390) 71 3,752
----------- ----------- ----------
Net cash provided by operating activities 18,615 10,615 16,628
----------- ----------- ----------
Cash Flows From Investing Activities
Purchases of property and equipment (14,061) (7,493) (6,294)
Notes from shareholders 18
Lease incentives 1,416 (303)
Other 158 24 2
----------- ----------- ----------
Net cash used in investing activities (12,487) (7,469) (6,577)
----------- ----------- ----------
Cash Flows From Financing Activities
Borrowings under line of credit 102,675 141,600 174,450
Payments on line of credit (108,375) (144,400) (183,200)
Payments on long-term debt (886) (688) (637)
Proceeds from issuance of stock 831 288 61
----------- ----------- ----------
Net cash used in financing activities (5,755) (3,200) (9,326)
----------- ----------- ----------
Net increase (decrease) in cash and cash
equivalents 373 (54) 725
Cash and cash equivalents at beginning
of year 1,571 1,625 900
----------- ----------- ----------
Cash and Cash Equivalents at End of Year $ 1,944 $ 1,571 $ 1,625
=========== =========== ==========
Supplemental disclosures of cash flow
information:
Cash paid during year for interest $ 580 $ 953 $ 1,337
Cash paid (refunded) during year for
income taxes 6,651 4,350 (2,150)
Capital lease obligations incurred 1,908 162
</TABLE>
See notes to financial statements
21
<PAGE>
Shoe Carnival, Inc.
Notes to Financial Statements
Note 1 - Organization and Description of Business
Shoe Carnival, Inc. (the "Company"), was incorporated on February 25, 1988 under
the name of DAR Group Investments, Inc. The Company changed its name to Shoe
Carnival, Inc., on January 15, 1993. The Company's primary activity is the sale
of footwear and related products through Company-operated retail stores in the
Midwest, South and Southeastern regions of the United States.
Note 2 - Summary of Significant Accounting Policies
Fiscal Year
The Company's fiscal year consists of a 52/53 week period ending on the Saturday
closest to January 31. Unless otherwise stated, references to the years 1998,
1997 and 1996 relate respectively to the fiscal years ended January 30, 1999,
January 31, 1998 and February 1, 1997. All three fiscal years consisted of 52
weeks.
Cash and Cash Equivalents
The Company considers all certificates of deposit and other short-term
investments with an original maturity date of three months or less to be cash
equivalents.
Merchandise Inventories
Merchandise inventories are stated at the lower of cost or market using the
first-in, first-out (FIFO) method. In determining market value, management
estimates the future sales price of items of merchandise contained in the
inventory as of the balance sheet date. Factors considered in this determination
include among others, current and recently recorded sales prices, the length of
time product has been held in inventory and quantities of various product styles
contained in inventory. The ultimate amount realized from the sale of certain
product could differ materially from management's estimates.
Property and Equipment
Property and equipment is stated at cost. Depreciation and amortization of
property, equipment and leasehold improvements are provided on the straight-line
method over the shorter of the estimated useful lives of the assets or the
applicable lease terms. Lives used in computing depreciation and amortization
range from two to 30 years. Expenditures for maintenance and repairs are charged
to expense as incurred. Expenditures which materially increase values, improve
capacities or extend useful lives are capitalized. Upon sale or retirement, the
costs and related accumulated depreciation or amortization are eliminated from
the respective accounts and any resulting gain or loss is included in
operations.
Deferred Lease Incentives
All incentives received from landlords for leasehold improvements and fixturing
of new stores are recorded as deferred income and amortized over the life of the
lease on a straight-line basis as a reduction of rental expense.
Revenue Recognition
Sales are recorded net of an estimate for returns and allowances.
22
<PAGE>
Shoe Carnival, Inc.
Notes to Financial Statements - Continued
Store Opening Costs
Non-capital expenditures incurred prior to the opening of a new store have been
charged to expense in the month the store was opened during 1998 and prior.
Statement of Position 98-5, "Reporting on the Costs of Start-up Activities"
requires that beginning in 1999 all pre-opening and other start-up costs be
expensed in the period incurred. Accordingly, with the adoption of SOP 98-5 in
1999, all future pre-opening costs will be expensed in the period incurred. This
change will not have a material impact on the Company's financial statements.
Advertising Costs
Print, radio and television communication costs are generally expensed when
incurred. Internal production costs are expensed when incurred and external
production costs are expensed in the year the advertisement first takes place.
Advertising expenses included in selling, general and administrative expenses
were $11.5 million in 1998, $9.0 million in 1997 and $7.9 million in 1996.
Comprehensive Income
In June 1997, the Financial Accounting Standards Board issued SFAS No. 130,
"Comprehensive Income," which was adopted by the Company in 1998. SFAS No. 130
requires the presentation of comprehensive income, in addition to the existing
income statement. Comprehensive income is defined as the change in equity during
a period from transactions and other events, excluding changes resulting from
investments by owners and distributions to owners. For all years presented,
there are no items requiring separate disclosure in accordance with this
statement.
Segments of an Enterprise and Related Information
In June 1997, the Financial Accounting Standards Board issued SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information". SFAS No.
131 requires the disclosure of segment related information based on how
management makes decisions about allocating resources to segments and measuring
their performance. The Company has one business segment that offers the same
principal product and service throughout the Midwest, South and Southeastern
regions of the United States. Based on the current organizational structure of
the Company, the financial information presented is in compliance with this
accounting pronouncement.
Derivative Instruments and Hedging Activities
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities". SFAS No. 133
requires that derivative instruments be recognized as assets or liabilities in
the statement of financial position. The Company is currently assessing the
effect of the adoption of SFAS No. 133 in fiscal year 2000, but does not
anticipate a material impact on its financial position.
Use of Management Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires that management make certain estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements. The reported amounts of revenues and expenses during the reporting
period may be affected by the estimates and assumptions management is required
to make. Actual results could differ from those estimates.
23
<PAGE>
Shoe Carnival, Inc.
Notes to Financial Statements - Continued
Reclassifications
Certain reclassifications to the 1997 financial statements have been made to
conform to the current year's presentation.
Note 3 - Property and Equipment-net
The following is a summary of property and equipment:
(000's) January 30, January 31,
1999 1998
----------- -----------
Land $ 205 $ 205
Buildings 5,863 5,845
Furniture, fixtures and equipment 32,389 25,674
Leasehold improvements 22,848 18,558
Equipment under capital leases 5,242 3,737
Construction in progress 2,263
----------- -----------
Total 68,810 54,019
Less accumulated depreciation
and amortization 27,954 22,050
----------- -----------
Property and equipment-net $ 40,856 $ 31,969
=========== ===========
Note 4 - Accrued and Other Liabilities
Accrued and other liabilities consisted of the following:
(000's) January 30, January 31,
1999 1998
----------- -----------
Employee compensation and benefits $ 2,009 $ 1,919
Accrued rent 1,060 884
Other 2,688 1,684
----------- -----------
Total accrued and other liabilities $ 5,757 $ 4,487
=========== ===========
Note 5 - Long-Term Debt
Long-term debt consisted of the following:
(000's) January 30, January 31,
1999 1998
----------- -----------
Revolving line of credit $ 5,700
Capital lease obligations (see Note 6) $ 2,143 1,121
----------- -----------
Total 2,143 6,821
Less current portion 782 688
----------- -----------
Total long-term debt, net of
current portion $ 1,361 $ 6,133
=========== ===========
24
<PAGE>
Shoe Carnival, Inc.
Notes to Financial Statements - Continued
During 1998, the Company had an unsecured $35 million credit agreement (the
"Credit Agreement") with a bank group. Borrowings are based on eligible
inventory and bear interest, at the Company's option, at the agent bank's prime
rate (7.75% at January 30, 1999) or the applicable London Inter-Bank Offered
Rate (LIBOR) plus from 0.75% to 2%, depending on the Company's achievement of
certain performance criteria. A commitment fee of 0.25% per annum is charged on
the unused portion of the first $30 million of the bank group's commitment. The
Credit Agreement contains various restrictive and financial covenants, including
the maintenance of specific financial ratios and a limitation on the payment of
dividends. At January 30, 1999, outstanding letters of credit were approximately
$6.9 million.
On April 16, 1999, the Credit Agreement was amended to increase the total credit
facility to $45 million and to extend the maturity date to March 31, 2001. The
amendment also adjusted certain economic terms and financial covenants.
Borrowings will now bear interest, at the Company's option, at the agent bank's
prime rate minus 0.5% or LIBOR plus from 0.75% to 1.5%, depending on the
Company's achievement of certain performance criteria. A commitment fee will be
charged, at the Company's option, at 0.3% per annum on the unused portion of the
bank group's commitment or 0.15% per annum of the total commitment. Certain
adjustments were made to the financial covenants including the elimination of
the limitation on the payment of dividends.
Note 6 - Leases
The Company leases all of its retail locations and certain equipment under
operating leases expiring at various dates through 2015. Ninety leases provide
for contingent rental payments of between 2% and 5% of sales in excess of stated
amounts. Certain leases also contain escalation clauses for increases in minimum
rentals, operating costs and taxes. In addition, the Company leases equipment
under capitalized leases expiring at various dates through 2002.
Rental expense for the Company's operating leases consisted of:
(000's)
Fiscal years 1998 1997 1996
-------- -------- --------
Rentals for real property $ 13,822 $ 12,210 $ 12,208
Equipment rentals 437 393 411
-------- -------- --------
Total $ 14,259 $ 12,603 $ 12,619
======== ======== ========
25
<PAGE>
Shoe Carnival, Inc.
Notes to Financial Statements - Continued
Future minimum lease payments at January 30, 1999 are as follows:
(000's) Operating Capital
Fiscal years Leases Leases
--------- -------
1999 $ 14,658 $ 932
2000 14,217 619
2001 13,637 546
2002 13,466 336
2003 12,069
Thereafter to 2015 34,363
--------- -------
Minimum lease payments $ 102,410 2,433
=========
Less imputed interest at rates
ranging from 7.5% to 11.9% 290
-------
Present value of net minimum lease
payments of which $782 is
included in current liabilities $ 2,143
=======
The present value of minimum lease payments for equipment under capital lease is
included in long-term debt (see Note 5).
Investment in equipment under capital lease, which is included in property and
equipment, was:
(000's) January 30, January 31,
1999 1998
----------- -----------
Equipment $ 5,242 $ 3,737
Less accumulated amortization 3,037 2,758
----------- -----------
Equipment under capital
lease-net $ 2,205 $ 979
=========== ===========
Note 7 - Restructuring Charge
In the fourth quarters of 1995 and 1994, the Company recorded restructuring
charges aggregating $3.5 million related to its plan to close a total of nine
unprofitable stores. At February 1, 1997, eight stores had been closed with the
final store closing in February 1997. The components of the restructuring charge
and an analysis of the amounts charged against the reserve are outlined in the
following table:
(000's) January 31, February 1,
1998 1997
----------- -----------
Beginning restructuring reserve $ 318 $ 3,468
Restructuring credit:
Store closing and lease termination costs (474)
----------- -----------
Total restructuring credit 0 (474)
Costs applied against reserve:
Store closing and lease termination costs (147) (1,418)
Equipment and leasehold improvement
write-offs (171) (1,258)
----------- -----------
Ending restructuring reserve $ 0 $ 318
=========== ===========
26
<PAGE>
Shoe Carnival, Inc.
Notes to Financial Statements - Continued
In the aggregate, the eight stores closed in fiscal 1996 and February 1997
generated sales of $3.9 million and an operating loss of $1.7 million (including
depreciation expense of $127,000) during 1996. Cash outlays for 1997 and 1996
were $147,000 and $1.7 million, respectively. The 1996 cash outlays consisted of
$1.4 million for lease termination, store closing costs and the repayment of
$293,000 of lease incentives which were recorded as a deferred liability. The
restructuring credit recorded in the fourth quarter of 1996 resulted primarily
from favorable negotiation of lease termination costs.
Note 8 - Income Taxes
The provision for income taxes consisted of:
(000's)
Fiscal years 1998 1997 1996
-------- -------- --------
Current:
Federal $ 5,591 $ 3,965 $ 976
State 813 641 292
-------- -------- --------
Total current 6,404 4,606 1,268
-------- -------- --------
Deferred:
Federal 375 189 1,390
State 39 31 160
-------- -------- --------
Total deferred 414 220 1,550
-------- -------- --------
Total provision $ 6,818 $ 4,826 $ 2,818
======== ======== ========
Included in other current assets are income tax receivables in the amounts of
$159,000, $29,000 and $285,000 as of January 30, 1999, January 31, 1998 and
February 1, 1997, respectively.
A reconciliation between the statutory federal income tax rate and the effective
income tax rate is as follows:
Fiscal years 1998 1997 1996
-------- -------- --------
U.S. Federal statutory tax rate 35.0% 34.0% 34.0%
State and local income taxes,
net of federal tax benefit 5.1 5.1 5.5
Other (0.1) 0.4 1.0
-------- -------- --------
Effective income tax rate 40.0% 39.5% 40.5%
======== ======== ========
27
<PAGE>
Shoe Carnival, Inc.
Notes to Financial Statements - Continued
Deferred income taxes are the result of temporary differences in the recognition
of revenue and expense for tax and financial reporting purposes. The sources of
these differences and the tax effect of each are as follows:
(000's) January 30, January 31,
1999 1998
----------- -----------
Deferred tax assets:
Accrued rent $ 421 $ 348
Accrued compensation 203 173
Federal net operating loss carryforward 176 218
Lease incentives 14 33
Inventory valuation 264
Other 137 107
----------- -----------
Total deferred tax assets $ 951 $ 1,143
=========== ===========
Deferred tax liabilities:
Depreciation $ 1,378 $ 1,052
Purchase accounting adjustments 852 966
Inventory valuation 11
----------- -----------
Total deferred tax liabilities $ 2,241 $ 2,018
=========== ===========
Note 9 - Employee Benefit Plans
Retirement Savings Plan
On February 24, 1994, the Company's Board of Directors approved the Shoe
Carnival Retirement Savings Plan (the "Retirement Plan"). The Retirement Plan is
open to all employees who have been employed for one year, are at least 21 years
of age and who work at least 1,000 hours per year. The primary savings mechanism
under the Retirement Plan is a 401(k) plan under which an employee may
contribute up to 15% of earnings with the Company matching the first 4% at a
rate of 50%.
Employee and Company contributions are paid to a trustee and invested in up to
16 investment options at the participants' direction. The Company contributions
to the participants' accounts become fully vested upon completion of five years
of participation in the Retirement Plan. Contributions charged to expense in
1998, 1997 and 1996 were $199,000, $214,000 and $198,000, respectively.
Stock Purchase Plan
On May 11, 1995, the Company's shareholders approved the Shoe Carnival, Inc.
Employee Stock Purchase Plan (the "Stock Purchase Plan") as adopted by the
Company's Board of Directors on February 9, 1995. The Stock Purchase Plan
reserves 300,000 shares of the Company's common stock (subject to adjustment for
any subsequent stock splits, stock dividends and certain other changes in the
common stock) for issuance and sale to any employee who has been employed for
more than a year at the beginning of the calendar year, and who is not a 10%
owner of the Company's stock, at 85% of the then fair market value up to a
maximum of $5,000 in any calendar year. During 1998, 14,966 shares of common
stock were purchased by participants in the plan and proceeds to the Company for
the sale of those shares totaled approximately $141,000.
28
<PAGE>
Shoe Carnival, Inc.
Notes to Financial Statements - Continued
Note 10 - Stock Option and Incentive Plans
1989 Stock Option Plan
Non-qualified stock options for a total of 1,500,000 shares of common stock were
granted to certain officers, directors and other key employees prior to 1993. On
November 1, 1992, the participants exercised all outstanding stock options and
the plan was effectively terminated. Net proceeds to the Company from the sale
of such shares were $239,000. In November 1992, the Company loaned an aggregate
of $633,000 on a fully recourse basis to the participants to permit them to pay
an estimated amount of income taxes due as a result of the stock option
exercise. Of this amount, $239,000 was classified as a reduction to paid-in
capital and $158,000 was recorded as a current asset. The notes evidencing such
loans bear interest at a rate of 6% per annum and were originally due in four
equal annual installments, the first of which was paid in 1993. The 1995
principal payment was extended for one year for participants who were employees
of the Company on the date the payment was originally due. In 1996, certain
participants paid an aggregate of $18,000 in principal (plus accrued interest)
to the Company to retire their outstanding notes. The 1995 and 1996 principal
payment for the remaining participants was extended for one year. In May 1997,
an outstanding balance of $158,000 for the Company's former vice chairman,
president and chief executive officer was forgiven as part of a retirement
package. The aggregate principal balance outstanding on the loans to the
participants was $103,000 as of January 31, 1998. The outstanding principal
balance for the remaining participants was paid in March 1998.
1993 Stock Option and Incentive Plan
Effective January 15, 1993, the Company's Board of Directors and shareholders
approved the 1993 Stock Option and Incentive Plan (the "1993 Plan"). The 1993
Plan reserves for issuance 1,500,000 shares of the Company's common stock
(subject to adjustment for any subsequent stock splits, stock dividends and
certain other changes in the common stock) pursuant to any incentive awards
granted by the Stock Option Committee of the Board of Directors which
administers the 1993 Plan. The 1993 Plan provides for the grant of incentive
awards in the form of stock options or restricted stock to officers and other
key employees of the Company. Stock options granted under the plan may be either
options intended to qualify for federal income tax purposes as "incentive stock
options" or options not qualifying for favorable tax treatment ("non-qualified
stock options"). At January 30, 1999, options to purchase 517,842 common shares
were exercisable and 508,578 shares of unissued common stock were reserved for
future grants under the plan.
On March 4, 1999, the Stock Option Committee granted options for an aggregate of
275,250 shares of the Company's common stock to certain officers and key
employees. The options were granted at an exercise price of $11.125 per share,
and have a term of 10 years. The options become exercisable in thirds on each of
the first three anniversaries of the grant date.
The Company applies Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees" (APB No. 25), in accounting for employee stock
options. Accordingly, no compensation expense has been recognized for the 1993
Plan.
Pro forma information regarding net income and earnings per share is required by
SFAS No. 123, "Accounting for Stock-Based Compensation," and has been determined
as if the Company had accounted for its stock options under SFAS No. 123's fair
value method. The fair value of these options was estimated at grant date using
Black-Scholes option pricing model with the following weighted average
assumptions:
Fiscal years 1998 1997 1996
-------- -------- --------
Risk free interest rate 5.6% 6.8% 6.8%
Expected dividend yield 0.0% 0.0% 0.0%
Expected volatility 74.3% 53.4% 50.5%
Expected term 5 Years 5 Years 5 Years
29
<PAGE>
Shoe Carnival, Inc.
Notes to Financial Statements - Continued
For the purpose of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The Company's
pro forma information follows:
(000's, except per share data)
Fiscal years 1998 1997 1996
-------- -------- --------
Pro forma net income $ 9,832 $ 6,789 $ 3,984
Pro forma net income per share-Basic $ .75 $ .52 $ .31
Pro forma net income per share-Diluted $ .73 $ .51 $ .31
The weighted-average fair value of options granted was $7.12, $3.29 and $2.79
for 1998, 1997 and 1996, respectively.
The following table summarizes the transactions pursuant to the stock option
plans for the three-year period ended January 30, 1999:
Weighted Average
Shares Exercise Price
-------- ----------------
Balance at February 3, 1996 558,300 $ 9.27
Granted 339,500 5.31
Cancelled (253,875) 11.94
-------- ------
Balance at February 1, 1997 643,925 6.15
Granted 208,500 6.10
Cancelled (73,836) 5.73
Exercised (51,121) 5.70
-------- ------
Balance at January 31, 1998 727,468 6.21
Granted 212,500 11.00
Cancelled (2,767) 9.39
Exercised (79,927) 6.68
-------- ------
Balance at January 30, 1999 857,274 $ 7.34
======== ======
Note 11 - Contingencies
Litigation
The Company is involved in various routine legal proceedings incidental to the
conduct of its business, none of which is expected to have a material adverse
effect on the Company's financial position.
Note 12 - Other Related Party Transactions
The Company's Chairman and Principal Shareholder and his son are principal
shareholders of LC Footwear, LLC. and PL Footwear, Inc. The Chairman's son also
owns and operates Weaver International Footwear, Inc. ("Weaver International").
The Company purchases name brand merchandise from LC Footwear, LLC., while
Weaver International and PL Footwear, Inc. serve as import agents for the
Company. Weaver International and PL Footwear, Inc. have represented the Company
on a commission basis in dealings with shoe factories in mainland China, where
most of the Company's private label shoes are manufactured.
30
<PAGE>
Shoe Carnival, Inc.
Notes to Financial Statements - Continued
The Company purchased approximately $138,000 and $34,000 of merchandise from LC
Footwear, LLC. in 1998 and 1997, respectively. Commissions paid to Weaver
International were $730,000 and $915,000 in 1997 and 1996, respectively.
Commissions paid to PL Footwear, Inc. were $912,000 and $26,000 in 1998 and
1997, respectively.
Note 13 - Quarterly Results (Unaudited)
Quarterly results are determined in accordance with the accounting policies used
for annual data and include certain items based upon estimates for the entire
year. All fiscal quarters in 1998 and 1997 include results for 13 weeks. The
following table summarizes results for 1998 and 1997:
(000's, except per share data)
First Second Third Fourth
1998 Quarter Quarter Quarter Quarter
-------- -------- -------- --------
Net sales $ 65,694 $ 68,104 $ 76,442 $ 69,917
Gross profit 20,674 20,550 24,217 18,575
Operating income 5,365 4,810 6,139 1,238
Net income 3,115 2,822 3,620 670
Net income per share - Basic $ .24 $ .21 $ .27 $ .05
Net income per share - Diluted $ .23 $ .21 $ .27 $ .05
(000's, except per share data)
First Second Third Fourth
1997 Quarter Quarter Quarter Quarter
-------- -------- -------- --------
Net sales $ 59,328 $ 62,393 $ 66,364 $ 58,435
Gross profit 18,330 18,122 20,490 15,625
Operating income 3,286 3,547 5,307 989
Net income 1,818 1,963 3,090 520
Net income per share - Basic $ .14 $ .15 $ .24 $ .04
Net income per share - Diluted $ .14 $ .15 $ .23 $ .04
31
<PAGE>
SHOE CARNIVAL, INC.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
Charged
Balance at (Credited) to Balance at
Beginning Costs and End of
Descriptions of Period Expenses Period
------------ ----------- ------------- -----------
Year ended February 1, 1997
Reserve for sales returns
and allowances $ 114,492 $ 0 $ 114,492
Inventory reserve $ 4,300,000 $ (3,000,000) $ 1,300,000
Year ended January 31, 1998
Reserve for sales returns
and allowances $ 114,492 $ 0 $ 114,492
Inventory reserve $ 1,300,000 $ 125,000 $ 1,425,000
Year ended January 30, 1999
Reserve for sales returns
and allowances $ 114,492 $ 0 $ 114,492
Inventory reserve $ 1,425,000 $ 175,000 $ 1,600,000
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
There have been no changes in or disagreements with the Company's independent
accountants on accounting or financial disclosures.
32
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this Item concerning the Directors and nominees for
Director of the Company and concerning any disclosure of delinquent filers is
incorporated herein by reference to the Company's definitive Proxy Statement for
its 1999 Annual Meeting of Shareholders, to be filed with the Commission
pursuant to Regulation 14A within 120 days after the end of the Company's fiscal
year. Information concerning the executive officers of the Company is included
under the caption "Executive Officers of the Company" at the end of Part I of
this Annual Report. Such information is incorporated herein by reference, in
accordance with General Instruction G(3) to Form 10-K and Instruction 3 to Item
401(b) of Regulation S-K.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item concerning remuneration of the Company's
officers and Directors and information concerning material transactions
involving such officers and Directors is incorporated herein by reference to the
Company's definitive Proxy Statement for its 1999 Annual Meeting of Shareholders
which will be filed pursuant to Regulation 14A within 120 days after the end of
the Company's fiscal year.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item concerning the stock ownership of
management and five percent beneficial owners is incorporated herein by
reference to the Company's definitive Proxy Statement for its 1999 Annual
Meeting of Shareholders which will be filed pursuant to Regulation 14A within
120 days after the end of the Company's last fiscal year.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item concerning certain relationships and
related transactions is incorporated herein by reference to the Company's
definitive Proxy Statement for its 1999 Annual Meeting of Shareholders which
will be filed pursuant to Regulation 14A within 120 days after the end of the
Company's last fiscal year.
33
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a).1. Financial Statements:
The following financial statements of the Company are set forth in
Part II, Item 8.
Report of Management
Independent Auditors' Report
Balance Sheets at January 30, 1999 and January 31, 1998
Statements of Income for the years ended January 30, 1999, January 31,
1998 and February 1, 1997
Statements of Shareholders' Equity for the years ended January 30,
1999, January 31, 1998 and February 1, 1997
Statements of Cash Flows for the years ended January 30, 1999, January
31, 1998 and February 1, 1997
Notes to Financial Statements
2. Financial Statement Schedules:
The following financial statement schedule of the Company is set forth
in Part II, Item 8.
Schedule II Valuation and Qualifying Accounts
3. Exhibits:
A list of exhibits required to be filed as part of this report is set
forth in the Index to Exhibits, which immediately precedes such
exhibits, and is incorporated herein by reference.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended January 30,
1999.
34
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
Shoe Carnival, Inc.
Date: April 27, 1999 By: /s/ Mark L. Lemond
--------------------
Mark L. Lemond
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
/s/ J. Wayne Weaver Chairman of the Board and Director April 27, 1999
- -------------------
J. Wayne Weaver
/s/ Mark L. Lemond President, Chief Executive Officer April 27, 1999
- ------------------- and Director
Mark L. Lemond (Principal Executive Officer)
/s/ William E. Bindley Director April 27, 1999
- ----------------------
William E. Bindley
/s/ Gerald W. Schoor Director April 27, 1999
- --------------------
Gerald W. Schoor
/s/ W. Kerry Jackson Vice President - Chief Financial April 27, 1999
- -------------------- Officer and Treasurer
W. Kerry Jackson (Principal Financial and Accounting
Officer)
35
<PAGE>
INDEX TO EXHIBITS
Exhibit
No. Description
- ------- -----------
3-A (7) (i)Restated Articles of Incorporation of Registrant
(6) (ii)Articles of Amendment of Restated Articles of Incorporation
of Registrant
3-B (3) By-laws of Registrant, as amended to date
4 (i)Amended and Restated Credit Agreement and Promissory Notes
dated April 16, 1999, between Registrant and Mercantile Bank
National Association, First Union National Bank and Old National
Bank
10-D* (1) 1989 Stock Option Plan of Registrant and amendments to such Plan
10-E* (2) 1993 Stock Option and Incentive Plan of Registrant, as amended
10-F* (1) Executive Incentive Compensation Plan of Registrant
10-I (1) Non-competition Agreement dated as of January 15, 1993, between
Registrant J. Wayne Weaver
10-K (1) Form of stock option exercise documents dated November 1,
1992, between Registrant and each of fourteen executive
officers and key employees, including: (I) Exercise Notice;
(ii) Subscription Agreement; (iii) Promissory Note; (iv)
Pledge Agreement; (v) Stock Power
10-L* (2) Employee Stock Purchase Plan of Registrant, as amended
10-M* (4) Consulting agreement dated May 28, 1997, between Registrant and
David H. Russell
10-N* (5) Employment agreement dated April 14, 1997, between Registrant
and Clifton E. Sifford
23 Written consent of Deloitte & Touche LLP
27 Financial Data Schedule
* The indicated exhibit is a management contract, compensatory plan or
arrangement required to filed by Item 601 of Regulation S-K.
(1) The copy of this exhibit filed as the same exhibit number to the Company's
Registration Statement on Form S-1 (Registration No. 33-57902) is
incorporated herein by reference.
(2) The copy of this exhibit filed as the same exhibit number to the Company's
Quarterly Report on Form 10-Q for the quarter ended August 2, 1997 is
incorporated herein by reference.
(3) The copy of this exhibit filed as the same exhibit number to the Company's
Quarterly Report on Form 10-Q for the quarter ended November 2, 1996 is
incorporated herein by reference.
(4) The copy of this exhibit filed as the same exhibit number to the Company's
current Report on Form 8-K dated June 9, 1997 is incorporated herein by
reference.
(5) The copy of this exhibit filed as the same exhibit number to the Company's
Quarterly Report on Form 10-Q for the quarter ended May 3, 1997 is
incorporated herein by reference.
(6) The copy of this exhibit filed as the same exhibit number to the Company's
Quarterly Report on Form 10-Q for the quarter ended August 1, 1998 is
incorporated herein by reference.
(7) The copy of this exhibit filed as exhibit number 3.1 to the Company's
current Report on Form 8-K dated July 17, 1996 is incorporated herin by
reference.
36
<PAGE>
AMENDED AND RESTATED CREDIT AGREEMENT
This AMENDED AND RESTATED CREDIT AGREEMENT (the "Agreement") is made and
entered into as of April 16, 1999 between SHOE CARNIVAL, INC., an Indiana
corporation ("Borrower"), and MERCANTILE BANK NATIONAL ASSOCIATION, a national
banking association ("Mercantile"), FIRST UNION NATIONAL BANK, a national bank
("First Union"), and OLD NATIONAL BANK, a national bank ("Old National," and
collectively with Mercantile and First Union referred to herein as "Banks"), and
MERCANTILE BANK NATIONAL ASSOCIATION, a national banking association, as agent
for the Banks (in such capacity "Agent"), and amends and restates a prior Credit
Agreement dated as of November 15, 1994 made by and among Borrower, Mercantile,
Harris Trust and Savings Bank and Firstar Bank Milwaukee, N. A.
The parties hereto agree as follows:
ARTICLE 1 - DEFINITIONS
SECTION 1.1 Definitions. The following terms, as used herein, have the
following meanings:
"Agent" means Mercantile Bank National Association in its capacity as agent
for the Banks hereunder, and its successors and assigns in such capacity.
"Attorneys' Fees" shall mean the reasonable value of the services (and
costs, charges and expenses related thereto) of the attorneys (and all
paralegals, secretaries, accountants and other staff employed by such attorneys)
employed by Agent or Banks (including, without limitation, attorneys and
paralegals who are employees of Agent or Banks) from time to time (i) in
connection with the negotiation, preparation, execution, delivery,
administration and enforcement of this Agreement and/or any of the other
transaction documents, (ii) to represent Agent or Banks in any litigation,
contest, dispute, suit or proceeding, or to commence, defend or intervene in any
litigation, contest, dispute, suit or proceeding, or to file any petition,
complaint, answer, motion or other pleading or to take any other action in or
with respect to any litigation, contest, dispute, suit or proceeding (whether
instituted by Agent, any Bank, Borrower or any other Person and whether in
bankruptcy or otherwise) in any way or respect relating to this Agreement or any
of the other transaction documents, Borrower or any other Obligor, and (iii) to
enforce any of Banks' rights to collect any of Borrower's Obligations.
"Banks" mean Mercantile Bank National Association and its successors and
assigns, Old National Bank and its successors and assigns, and First Union
National Bank and its successors and assigns.
"Borrower" means Shoe Carnival, Inc., an Indiana corporation, and its
successors and assigns.
"Borrowing" means a borrowing hereunder consisting of Loans made to
Borrower pursuant to the terms hereof or Letters of Credit issued for the
account of Borrower pursuant to the terms hereof.
"Borrower's Obligations" shall mean any and all indebtedness (principal,
interest, fees and other amounts), liabilities and obligations of Borrower to
each of the Banks under the Notes, this Agreement, any of the Reimbursement
Agreements, any of the other transaction documents or any other agreement,
document or instrument heretofore, now or hereafter executed and delivered by
<PAGE>
Borrower to any of the Banks, in each case whether now existing or hereafter
arising, absolute or contingent, joint and/or several, secured or unsecured,
direct or indirect, expressed or implied in law, contractual or tortious,
liquidated or unliquidated, at law or in equity, or otherwise, and whether
created directly or acquired by such Bank by assignment or otherwise, and any
and all costs of collection and/or Attorneys' Fees incurred or to be incurred in
connection therewith.
"Borrowing Base" shall have the meaning ascribed thereto in Section 2.1(b).
"Borrowing Base Certificate" shall have the meaning ascribed thereto in
Section 2.1(c).
"Capital Expenditure" shall mean any expenditure which, in accordance with
generally accepted accounting principles consistently applied, is or should be
capitalized on the balance sheet of the Person making the same.
"Capitalized Lease" shall mean any lease which, in accordance with
generally accepted accounting principles consistently applied, is or should be
capitalized on the balance sheet of the lessee.
"Code" shall mean the Internal Revenue Code of 1986, as amended, and any
successor statute of similar import, together with the regulations thereunder,
in each case as in effect from time to time. References to sections of the Code
shall be construed to also refer to any successor sections.
"Commitment" means Forty-Five Million Dollars ($45,000,000.00), and with
respect to each Bank, the amount specified as such Bank's Commitment and set
forth opposite the name of such Bank on the signature pages hereof.
"Debt" of any Person means at any date, without duplication, to the extent
obligations and liabilities of such type are required to be disclosed in such
Person's financial statements according to generally accepted accounting
principles, consistently applied, (i) all obligations of such Person for
borrowed money, (ii) all obligations of such Person evidenced by bonds,
debentures, notes or other similar instruments, (iii) all obligations of such
Person to pay the deferred purchase price of property or services, (iv) all
obligations of such Person as lessee under leases capitalized or required to be
capitalized in accordance with generally accepted accounting principles,
consistently applied, but excluding any obligations as lessee under any
operating leases, (v) all Debt of others secured by a Lien on any asset of such
Person, whether or not such Debt is assumed by such Person (provided that for
purposes of this clause (v) the amount of any such Debt shall be deemed not to
exceed the higher of the market value or the net book value of such asset), (vi)
obligations under any standby letters of credit, and (vii) all other obligations
and liabilities required to be disclosed on such Person's financial statements
according to generally accepted accounting principles, consistently applied.
"Default" means any condition or event which constitutes an Event of
Default or which with the giving of notice or lapse of time or both would,
unless cured or waived, become an Event of Default.
"Distribution" in respect of any corporation shall mean:
(i) Dividends or other distributions on capital stock of the
corporation; and
(ii) The redemption, repurchase or other acquisition of such stock or
of warrants, rights or other options to purchase such stock (except when
solely in exchange for such stock).
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"Domestic Business Day" means any day except a Saturday, Sunday or legal
holiday on which banks are authorized to or required to close in St. Louis,
Missouri, Evansville, Indiana or Jacksonville, Florida.
"Effective Date" means the date on which this Agreement shall
become effective in accordance with Section 9.17.
"Eligible Inventory" shall mean that portion of Borrower's inventory which:
(a) consists of finished goods less than one year old; (b) does not violate the
negative covenants and provisions of this Agreement and does satisfy the
positive covenants and provisions of this Agreement; (c) is not obsolete; and
(d) Agent has in good faith determined, in accordance with Agent's customary
business practices, is not unacceptable due to age, type, category and/or
quantity. Borrower represents and warrants to, and covenants and agrees with
Agent and Banks that the value (determined at the lower of cost, excluding any
capitalized overhead cost allocated to any such inventory, or market) of
Eligible Inventory shall at all times hereafter be at least Two Hundred Percent
(200%) of the then principal portion of Borrower's Obligations represented by
Loans made by Banks to Borrower and Letters of Credit issued by Mercantile for
the account of Borrower, pursuant to Section 2.1(a) hereof.
"Environmental Laws" shall mean the Resource Conservation and Recovery Act
of 1987, the Comprehensive Environmental Response, Compensation and Liability
Act, any so-called "Superfund" or "Superlien" law, the Toxic Substances Control
Act and any other Federal, state or local statute, law, ordinance, code, rule,
regulation, order or decree regulating, relating to or imposing liability or
standards of conduct concerning any Hazardous Materials or any other hazardous,
toxic or dangerous waste, substance or constituent or other substance, whether
solid, liquid or gas, as now or at any time hereafter in effect.
"Environmental Lien" shall have the meaning ascribed thereto in Section
5.1(i)(vii).
"ERISA" shall mean the Employee Retirement Income Security Act of 1974, as
amended, and any successor statute of similar import, together with the
regulations thereunder, in each case as in effect from time to time. References
to sections of ERISA shall be construed to also refer to any successor sections.
"ERISA Affiliate" shall mean any corporation, trade or business that is,
along with Borrower, a member of a controlled group of corporations or a
controlled group of trades or businesses, as described in Sections 414(b) and
414(c), respectively, of the Code.
"Eurocurrency Business Day" means any Domestic Business Day on which
commercial banks are open for international business in London.
"Eurocurrency Loans" means any loans bearing interest at the rates set
forth in Section 2.5(b).
"Eurocurrency Margin" has the meaning set forth in Section 2.5(b).
"Event of Default" has the meaning set forth in Section 6.1.
"First Union" means First Union National Bank and its successors and
assigns.
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"Guarantee" by any Person means any obligation, contingent or otherwise, of
such Person guaranteeing any Debt of any other Person or in any manner providing
for the payment of any Debt of any other Person or otherwise protecting the
holder of such Debt against loss (whether by agreement to keep-well, to purchase
assets, goods, securities or services, or to take-or-pay or otherwise); provided
that the term Guarantee shall not include endorsements for collection or deposit
in the ordinary course of business. The term "Guarantee" used as a verb has a
correlative meaning.
"Hazardous Materials" shall mean any hazardous substance or pollutant or
contaminant defined as such in (or for the purposes of) any Environmental Law
and shall include, without limitation, petroleum, including crude oil or any
fraction thereof which is liquid at standard conditions of temperature or
pressure (60 degrees Fahrenheit and 14.7 pounds per square inch absolute), any
radioactive material, including, without limitation, any source, special nuclear
or byproduct material as defined in 42 U.S.C. Section 2011 et seq., as amended
or hereafter amended, and asbestos in any form or condition.
"Interest Period" means with respect to each Eurocurrency Loan;
(i) Initially, the period commencing on the date of such Borrowing and
ending 1, 2, 3 or 6 months thereafter, as Borrower may elect in the
applicable Notice of Borrowing; and
(ii) Thereafter, each period commencing on the last day of the next
preceding Interest Period applicable to such Borrowing and ending 1, 2, 3
or 6 months thereafter, as Borrower may elect pursuant to Section 2.4;
provided that:
(a) Subject to clause (b) below, any Interest Period which would
otherwise end on a day which is not a Eurocurrency Business Day shall be
extended to the next succeeding Eurocurrency Business Day, except that if
the next succeeding Eurocurrency Business Day falls within a different
calendar month, the Interest Period shall end on the next preceding
Eurocurrency Business Day; and
(b) Any Interest Period which includes March 31, 2001 shall end on
such date.
"Letter(s) of Credit" shall mean each standby Letter of Credit or
commercial Letter of Credit issued by Agent pursuant to Section 2.1.
"Lien" means, with respect to any asset, any mortgage, lien, pledge,
charge, security interest or encumbrance of any kind in respect of such asset.
For the purposes of this Agreement, Borrower shall be deemed to own subject to a
Lien any asset which it has acquired or holds subject to the interest of a
vendor or lessor under any conditional sale agreement, capital lease or other
title retention agreement relating to such asset.
"Loan" means a Prime Loan or a Eurocurrency Loan and "Loans" means any or
all of the foregoing.
"London Interbank Offered Rate" has the meaning set forth in Section
2.5(b).
"Majority Banks" means Banks holding 66-2/3% of the then available
Commitments.
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"Mercantile" means Mercantile Bank National Association and its successors
and assigns.
"Multiemployer Plan" shall mean a "multi-employer plan" as defined in
Section 4001(a)(3) of ERISA which is maintained for employees of Borrower or any
ERISA Affiliate.
"Net Worth" of any Person means, at any date, the stockholders' equity of
such Person determined in accordance with generally accepted accounting
principles, consistently applied.
"Notes" mean the amended and restated promissory notes of Borrower in the
form of Exhibits A, B and C attached hereto evidencing the obligation of
Borrower to repay the Loans and amounts outstanding under any Reimbursement
Agreements.
"Notice of Borrowing" has the meaning set forth in Section 2.2A.
"Obligor" shall mean Borrower and each other Person who is or shall at any
time hereafter become primarily or secondarily liable on any of Borrower's
Obligations or who grants any Bank a Lien upon any of the Property or assets of
such Person as security for any of Borrower's Obligations.
"Occupational Safety and Health Laws" shall mean the Occupational Safety
and Health Act of 1970, as amended, and any other Federal, state or local
statute, law, ordinance, code, rule, regulation, order or decree regulating,
relating to or imposing liability or standards of conduct concerning employee
health and/or safety, as now or at any time hereafter in effect.
"Old National" means Old National Bank and its successors and assigns.
"PBGC" shall mean the Pension Benefit Guaranty Corporation and any entity
succeeding to any or all of its functions under ERISA.
"Pension Plan" shall mean a "pension plan," as such term is defined in
Section 3(2) of ERISA, which is established or maintained by Borrower or any
ERISA Affiliate, other than a Multiemployer Plan.
"Person" means an individual, a corporation, a partnership, an association,
a trust or any other entity or organization, including a government or political
subdivision or an agency or instrumentality thereof.
"Prime Loan" means a Loan bearing interest at the Prime Rate minus One-Half
of One Percent (0.50%) per annum pursuant to Section 2.5(a) or Article 7.
"Prime Rate" shall mean the interest rate announced from time to time by
Agent as its "prime rate" on commercial loans, which rate shall fluctuate as and
when said "prime rate" shall change, and which rate may not be Agent's best or
lowest rate or a favored rate, and any statement, representation or warranty in
that regard or to that respect is expressly disclaimed by Agent and Banks.
"Pro Rata Share" shall mean the pro rata share of loans to be made by each
of the Banks hereunder or of other amounts to be shared between Banks, which
shall be 38.89% for Mercantile, 22.22% for Old National, and 38.89% for First
Union.
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"Property" shall mean any interest in any kind of property or asset,
whether real, personal or mixed, or tangible or intangible. Properties shall
mean the plural of Property. For purposes of this Agreement, Borrower shall be
deemed to be the owner of any Property which it has acquired or holds subject to
a conditional sale agreement, financing lease or other arrangement pursuant to
which title to the Property has been retained by or vested in some other Person
for security purposes.
"Regulation D" means Regulation D of the Board of Governors of the Federal
Reserve System, as amended.
"Reimbursement Agreement(s)" shall mean each of those certain applications
for standby letter of credit and reimbursement agreements and applications for
commercial letters of credit and reimbursement agreements made from time to time
by Borrower as account party, with Agent as issuer, of standby or commercial
Letters of Credit for the account of Borrower, which Reimbursement Agreements,
along with the Notes, shall evidence Borrower's obligation to reimburse Banks
for their respective Pro Rata Shares of any draws made under any of the Letters
of Credit, together with any accrued interest, fees and other amounts which may
from time to time be due thereon.
"Related Party" shall mean any Person (i) which directly or indirectly
through one or more intermediaries controls, or is controlled by or is under
common control with, Borrower, (ii) which beneficially owns or holds twenty-five
percent (25%) or more of the equity interest of Borrower or (iii) twenty-five
percent (25%) or more of the equity interest of which is beneficially owned or
held by Borrower. The term "control" shall mean the possession, directly or
indirectly, of the power to vote twenty-five percent (25%) or more of the
capital stock of any Person or the power to direct or cause the direction of the
management and policies of a Person, whether through the ownership of voting
securities, by contract or otherwise.
"Reportable Event" shall have the meaning given to such term in ERISA.
"Reserve Percentage" shall mean for any day, with respect to a Eurocurrency
Loan, the highest percentage (including any supplemental percentage applied on a
marginal basis or any other reserve requirement having a similar effect),
expressed as a decimal, which is applicable to any of the Banks and is in effect
on such day, as prescribed by the Board of Governors of the Federal Reserve
System under Regulation D (or any other then applicable regulation of the Board
of Governors) with respect to "Eurocurrency Liabilities".
"Subsidiary" means with respect to any Person any corporation of which more
than 50% of the issued and outstanding stock entitled to vote for the election
of directors is at the time owned directly or indirectly by such Person.
"Term" means the period from the Effective Date up to and including March
31, 2001; except that (i) all, but not less than all, of the Banks may, in their
sole discretion, extend such Term for additional one-year periods by notifying
Borrower of each such extension at least 12 months prior to the expiration of
the then current Term end of their intention to extend the Term by an additional
year; and (ii) Agent may terminate Banks' obligations hereunder at any time
prior to such stated maturity date or any extension thereof pursuant to Article
6 herein.
"Year 2000 Compliant" shall mean, with respect to any Person, that all
software, embedded microchips and/or other computer and/or processing
capabilities utilized by such Person, and/or included in any software, products,
goods and/or services sold and/or leased by such Person, are able to correctly
and properly recognize, interpret, process, calculate, compare, sequence and
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manipulate data and date-sensitive functions on and involving all calendar dates
(including, without limitation, dates in and after the year 2000).
SECTION 1.2 Accounting Terms and Determinations. Except as otherwise
specified herein, all accounting terms used herein shall be interpreted, all
accounting determinations hereunder shall be made, and all financial statements
required to be delivered hereunder shall be prepared in accordance with
generally accepted accounting principles as in effect from time to time, applied
on a basis consistent (except for changes approved by Borrower's independent
public accountants) with the most recent audited financial statements of
Borrower delivered to Banks.
ARTICLE 2 - THE CREDITS
SECTION 2.1 Loans and Letters of Credit.
(a) During the Term hereof, Banks agree, on the terms and conditions set
forth in this Agreement, to lend to Borrower from time to time their Pro Rata
Shares of Loans requested by Borrower, and Agent further agrees, subject to the
terms and conditions of this Agreement and of the applicable Reimbursement
Agreement, to issue its Letters of Credit for the account of Borrower upon
Borrower's application therefor, and each Bank agrees to accept a risk
participation in an amount equal to its Pro Rata Share of the from time to time
maximum outstanding amount of each such Letter of Credit issued under this
Section 2.1(a) and in Borrower's reimbursement obligation therefor and any
guaranties or other collateral security therefor. The aggregate principal amount
of all Loans at any one time outstanding under this Section 2.1(a) shall not
exceed the lesser of (i) the amount of the Commitment minus the face amount of
all Letters of Credit then outstanding under this Section 2.1(a), or (ii) the
Borrowing Base; provided, however, that no Bank shall be required to advance any
Loan and Agent shall not issue any Letter of Credit requested by Borrower
hereunder which, when added to the principal amount of such Bank's then
outstanding Loans and its risk participation in the then outstanding Letters of
Credit under this Section 2.1(a), would exceed the amount of such Bank's
Commitment. Borrower may borrow under this Section, prepay under Section 2.8 and
reborrow at any time during the Term hereof under this Section subject to the
terms of this Agreement. The failure of any Bank to advance any requested Loan
under this Agreement shall not release any other Bank from its obligation to
make any such Loan as provided herein.
(b) For purposes of computing the amount of availability of Loans under the
Banks' Commitment, the Borrowing Base shall mean an amount equal to Fifty
Percent (50%) of the value of Eligible Inventory of Borrower (the "Borrowing
Base").
(c) Borrower shall deliver to Agent on the date of execution hereof (with
respect to the fiscal month ended February 27, 1999) and on the thirtieth (30th)
day following the end of each fiscal month thereafter commencing with the fiscal
month ending March 31, 1999, a borrowing base certificate in the form of Exhibit
E attached hereto and incorporated herein by reference (a "Borrowing Base
Certificate") setting forth:
(i) The Borrowing Base and its components as of the end of the
immediately preceding month;
(ii) The aggregate principal amount of all outstanding Loans; and
(iii) The difference, if any, between the Borrowing Base and the
aggregate principal amount of all outstanding Loans.
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The Borrowing Base shown in such Borrowing Base Certificate shall be and remain
the Borrowing Base hereunder until the next Borrowing Base Certificate is
delivered to Banks, at which time the Borrowing Base shall be the amount shown
in such subsequent Borrowing Base Certificate. Each Borrowing Base Certificate
shall be certified (subject to normal year-end adjustments) as to truth and
accuracy by the President, principal financial officer or principal accounting
officer of Borrower.
(d) If at any time the Borrowing Base should be less than the aggregate
principal amount of all Loans outstanding under Section 2.1(a), whether as a
result of a reduction in the Borrowing Base or otherwise, Borrower shall be
automatically required (without demand or notice of any kind by Banks, all of
which are hereby expressly waived by Borrower) to immediately repay the Loans in
an amount sufficient to reduce such aggregate principal amount of Loans
outstanding to the amount of the then available Borrowing Base.
SECTION 2.2 Method of Borrowing.
A. Loans.
(a) Borrower shall give notice (a "Notice of Borrowing") to Agent (1) by
12:00 noon (St. Louis time) on the day of each Prime Loan, and (2) by 10:00 a.m.
(St. Louis time) at least two Eurocurrency Business Days before each
Eurocurrency Loan, specifying:
(i) The date of such Loan, which shall be a Domestic Business Day in
the case of a Prime Loan or a Eurocurrency Business Day in the case of a
Eurocurrency Loan,
(ii) The aggregate principal amount of such Loan, provided that if a
Prime Loan is requested that such Loan shall be in a minimum amount of
$100,000.00 or more with any greater amount being in $25,000.00 increments,
and if such Loan is a Eurocurrency Loan, it shall be in a minimum amount of
$1,000,000.00 or more with any such greater amount being in $100,000.00
increments,
(iii) Whether such Loan is to be a Prime Loan or a Eurocurrency Loan,
and
(iv) In the case of a Eurocurrency Loan, the duration of the initial
Interest Period applicable thereto, subject to the provisions of the
definition of Interest Period.
(b) A Notice of Borrowing shall not be required in connection with a Prime
Loan pursuant to Section 7.1. A Notice of Borrowing for Eurocurrency Loans must
be given in writing in a form substantially similar to Exhibit F attached
hereto; a Notice of Borrowing for a Prime Loan may be oral or in writing, but if
oral, shall be confirmed in writing to Bank within five (5) days. A Notice of
Borrowing shall not be revocable by Borrower. Upon receipt of a Notice of
Borrowing, Agent shall promptly notify each Bank of the contents thereof and of
such Bank's Pro Rata Share of such Loan.
(c) Not later than 3:00 p.m. (St. Louis time) on the date of each Loan
during the Term hereof, each Bank shall (except as provided in subsections (d)
or (e) of this Section) make available its Pro Rata Share of such Loan, in
federal or other funds immediately available in St. Louis, Missouri, to Agent at
its address specified on the signature pages hereof. Unless any Bank shall
notify Agent prior to 2:00 p.m. (St. Louis time) on the date any Loan is to be
made to Borrower hereunder that such Bank shall not advance its Pro Rata Share
of such Loan, Agent may presume that each such Bank has advanced its Pro Rata
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Share of such Loan as provided hereunder and may rely on such presumption in
advancing the proceeds of such Loan to Borrower. Unless Agent determines that
any applicable condition specified in Article 3 has not been satisfied, Agent
will make available to Borrower such Loan in federal or other funds immediately
available in St. Louis, Missouri, by crediting such funds to a demand deposit
account (or such other account mutually agreed upon in writing between Agent and
Borrower) of Borrower with Mercantile. In the event any Bank shall fail to
deliver its Pro Rata Share of the proceeds of any Loan requested hereunder by
Borrower on or before 3:00 p.m. (St. Louis time) on the date such Loan is to be
made, then such Bank agrees to pay to Agent for its own account interest on such
Bank's Pro Rata Share of such Loan from the date such Loan was made to Borrower
hereunder to the date such Bank actually delivers its Pro Rata Share of the
proceeds of such Loan to Agent at the then applicable federal funds rate as
determined by Agent.
(d) Agent shall give each Bank prompt notice of each payment by Borrower
and each request by Borrower for an advance, and for payments, and Agent shall
transfer to each Bank in immediately available funds such Bank's Pro Rata Share
of such payment, or if an advance, each Bank shall transfer to Agent in
immediately available funds its Pro Rata Share of such advance, which funds
shall be received by such party no later than 3:00 p.m. (St. Louis time) on the
date of such advance or payment or two (2) hours after a Bank receives such
notice from Agent (whichever occurs later). In no event shall a Bank be
obligated to make any such transfer to Agent which, when added to all other
outstanding advances funded by such Bank plus such Bank's Pro Rata Share of the
then undrawn amount of all Letters of Credit issued pursuant to Section 2.1(a),
will exceed such Bank's Commitment.
(e) If Borrower requests a Loan hereunder on a day on which Borrower is
required to or has elected to repay all or any part of an outstanding Loan or
repay a draw under any Letter of Credit, each Bank shall apply the proceeds of
such requested Loan to make such repayment and only an amount equal to the
difference (if any) between the amount being borrowed and the amount being
repaid shall be made available by Banks to Agent for delivery to Borrower as
provided in subsection (c) of this Section.
B. Letters of Credit. Borrower may request Agent to issue either standby or
commercial Letters of Credit for the account of Borrower under Section 2.1(a)
above only pursuant to standby Letter of Credit applications and reimbursement
agreements or commercial Letter of Credit applications and reimbursement
agreements from time to time executed by Borrower in favor of Agent in the form
of Exhibit G or Exhibit H attached hereto. Agent shall from time to time issue
such requested Letters of Credit in accordance with the terms and provisions of
this Agreement and the applicable Reimbursement Agreement. Such Letter of Credit
Reimbursement Agreements, duly executed by an authorized officer of Borrower,
shall be delivered to Agent on the second Business Day prior to the date of
issuance of the requested Letter of Credit. Upon issuance of each such Letter of
Credit, each Bank shall be deemed to have purchased a risk participation in such
Letter of Credit and in Borrower's reimbursement obligations therefor, together
with any guaranties and collateral security therefor, in an amount equal to its
Pro Rata Share of the face amount of such Letter of Credit, and upon payment of
any draw under any such Letter of Credit by Agent, each Bank agrees to pay to
Agent its Pro Rata Share of such draw to the extent such draw is not promptly
reimbursed by the Borrower pursuant to its obligations under this Agreement and
the applicable Reimbursement Agreement. Borrower's obligation to reimburse Banks
for the face amount of such Letters of Credit shall be evidenced by the relevant
Letter of Credit Reimbursement Agreements as well as by the Notes, and shall
bear interest, payable on demand, at the interest rate per annum equal to the
Prime Rate minus One-Half of One Percent (0.50%). Banks shall have the right to
charge Borrower's accounts with the amount of any and all funds actually
advanced by Banks in satisfaction of Borrower's reimbursement obligations. Any
debit which may exist in Borrower's account by virtue of the foregoing shall be
deemed to be a Loan by Banks to Borrower pursuant to the provisions of Section
2.1(a) hereof. No Letter of Credit issued hereunder shall have a final
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expiration date of later than twelve months from its date of issuance, and
Borrower agrees that upon the expiration of the Term of this Agreement, it shall
pledge and deliver to Agent for the benefit of Banks, cash, certificates of
deposit or other cash collateral acceptable to Agent and Banks or a standby
letter of credit in a form acceptable to Agent and Banks and issued by a
domestic bank acceptable to Agent and Banks in an amount equal to the then
undrawn face amount of all outstanding Letters of Credit, as collateral security
for Borrower's reimbursement obligations for such Letters of Credit.
In addition to any other fees provided under any applicable Reimbursement
Agreement, Borrower agrees to pay Agent for the benefit of Banks in respect of
each commercial Letter of Credit issued by Agent at Borrower's request, a
quarterly commercial letter of credit fee equal to seven-eighths of one percent
(7/8%) per annum of the sum of the daily undrawn face amounts of all commercial
Letters of Credit outstanding during such quarter divided by the number of days
in such quarter and multiplied by a fraction with a numerator equal to the
number of days in such quarter and a denominator of 360. Such commercial letter
of credit fee shall be payable quarterly in arrears on the last day of each
calendar quarter during the Term hereof. Agent shall retain one-fifth of each
such quarterly commercial letter of credit fee for its own account as issuer of
the commercial Letters of Credit, and the remainder of each such quarterly
commercial letter of credit fee shall be distributed by Agent to the Banks in
accordance with their Pro Rata Shares of the risk thereunder. Borrower further
agrees to pay Agent upon issuance in respect of each standby Letter of Credit
issued by Agent at Borrower's request, a nonrefundable letter of credit
commission equal to one and one-half percent (1-1/2%) per annum of the face
amount of such standby Letter of Credit based upon a 360 day year. Agent shall
retain one-fifth of each such letter of credit commission for its own account as
issuer of the standby Letter of Credit, and the remainder of such Letter of
Credit commission shall be distributed by Agent to the Banks in accordance with
their Pro Rata Shares of the risk thereunder. Subject to any contrary provisions
in any applicable Reimbursement Agreement, Borrower agrees to pay Agent, for its
own account, such additional documentary, issuance, amendment and other fees in
respect of each Letter of Credit and any draft presented for payment or
acceptance in respect thereof as Agent customarily charges in its Letter of
Credit business as from time to time amended by Agent.
SECTION 2.3 Notes. The Loans of each Bank to Borrower and advances by each
Bank with respect to its participation in the draws under any Letters of Credit
issued by Agent hereunder shall be evidenced, respectively, by a Note payable to
the order of such Bank, which shall be in the form of Exhibit A, B or C hereto.
Each Bank may record, and prior to any transfer of its Note shall endorse on the
schedules forming a part thereof, appropriate notations to evidence the date and
amount of each Loan or its advance of any unreimbursed Letter of Credit draw and
the date and amount of each payment of principal made by Borrower with respect
thereto. Each Bank is hereby irrevocably authorized by Borrower so to endorse
its Note and to attach to and make a part of any such Note a continuation of any
such schedule as and when required; provided, however that the obligation of
Borrower to repay each Loan and to reimburse Banks for draws under the Letters
of Credit shall be absolute and unconditional, notwithstanding any failure of
any Bank to endorse or any mistake by any Bank in connection with endorsement on
the schedules attached to its Note. The books and records of the Banks
(including without limitation the schedules attached to the Notes) showing the
account between Banks and Borrower shall be admissible in evidence in any action
or proceeding and shall constitute prima facie proof of the items therein set
forth.
SECTION 2.4 Duration of Interest Periods and Selection of Interest Rates.
(a) The duration of the initial Interest Period for each Eurocurrency Loan
shall be as specified in the applicable Notice of Borrowing. Borrower shall
elect the duration of each subsequent Interest Period applicable to such
Eurocurrency Loan and the interest rate and currency to be applicable during
such subsequent Interest Period (and Borrower shall have the option, in the case
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of any Prime Loan, to elect that such Loan become a Eurocurrency Loan specifying
the Interest Period and currency to be applicable thereto), by giving written
notice of such election to Agent (i) by 12:00 noon (St. Louis time) on the day
of, in the case of the election of a Prime Loan, or (ii) by 10:00 a.m. (St.
Louis time) at least two Eurocurrency Business Days before, in the case of the
election of a Eurocurrency Loan, the end of the immediately preceding Interest
Period applicable thereto, if any.
(b) If in respect of any Eurocurrency Loan or part thereof, Borrower fails
to give a notice in accordance with Section 2.4(a) prior to the end of any
Interest Period relating thereto, such Loan shall be converted to a Prime Loan
at the end of such Interest Period.
(c) Notwithstanding the foregoing, the duration of each Interest Period
shall be subject to the provisions of the definition of Interest Period.
SECTION 2.5 Interest Rates.
(a) Each Prime Loan shall bear interest on the outstanding principal amount
thereof, for each day from the date such Loan is made until it becomes due or is
repaid, at a rate per annum equal to the Prime Rate (which rate shall fluctuate
as and when the Prime Rate shall change) minus One-Half of One Percent (0.50%).
Such interest shall be payable quarterly in arrears on the last day of each
calendar quarter, commencing with the quarter ending on June 30, 1999, and at
maturity. Any overdue principal of and, to the extent permitted by law, overdue
interest on, any Prime Loan shall bear interest, payable on demand, for each day
until paid at a rate per annum equal to the sum of Two and One-Half Percent
(2.50%) plus the otherwise applicable rate for such day.
(b) Each Eurocurrency Loan shall bear interest on the outstanding principal
amount thereof for each Interest Period applicable thereto at a rate per annum
equal to the sum of the Eurocurrency Margin plus the applicable London Interbank
Offered Rate. Except in the case of an acceleration of payment by Agent under
Section 6.1 (when interest shall be paid with the principal amount repaid),
interest shall be payable for each Interest Period on the last day thereof,
unless the duration of the applicable Interest Period exceeds three months, in
which case such interest shall be payable on the last day of the third month of
such Interest Period and on the last day of such Interest Period.
"Eurocurrency Margin" applicable to any Interest Period means Three-Fourths
of One Percent (0.75%) for any Interest Period commencing prior to the date upon
which Borrower delivers to Agent its fiscal quarter-end financial statements as
required under Section 5.1(a)(iii) for the fiscal quarter ending May 1, 1999,
and for any Interest Period commencing after delivery of Borrower's May 1, 1999
quarter-end financial statements, and each subsequent quarter-end and year-end
financial statements, shall be determined as follows: (i) One and One-Half
Percent (1.50%) for any Interest Period commencing after delivery of Borrower's
then most recent quarter-end or fiscal year-end financial statements delivered
to Banks pursuant to Sections 5.1(a)(i) or (iii), which financial statements
disclose the Borrower's ratio of Funded Debt to EBITDA (as defined below) as of
the end of the immediately preceding fiscal quarter was greater than or equal to
1.50 to 1.0; (ii) One and One-Fourth Percent (1.25%) for any Interest Period
commencing after delivery of Borrower's then most recent quarter-end or fiscal
year-end financial statements delivered to Banks pursuant to Sections 5.1(a)(i)
or (iii), which financial statements disclose that Borrower's ratio of Funded
Debt to EBITDA as of the end of the immediately preceding fiscal quarter was
less than 1.50 to 1.0 but greater than or equal to 1.25 to 1.0; (iii) One
Percent (1.00%) for any Interest Period commencing after delivery of Borrower's
then most recent quarter-end or fiscal year-end financial statements delivered
to Banks pursuant to Sections 5.1(a)(i) or (iii), which financial statements
disclose that Borrower's ratio of Funded Debt to EBITDA as of the end of the
immediately preceding fiscal quarter was less than 1.25 to 1.0 but greater than
or equal to 1.00 to 1.0; and (iv) Three-Fourths of One Percent (0.75%) for any
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Interest Period commencing after delivery of Borrower's then most recent
quarter-end or fiscal year-end financial statements delivered to Banks pursuant
to Section 5.1(a)(i) or (iii), which financial statements disclose that
Borrower's ratio of Funded Debt to EBITDA as of the end of the immediately
preceding fiscal quarter was less than 1.00 to 1.0.
As used herein, the term "Funded Debt" at any date shall mean all Indebtedness
of Borrower for borrowed money as of such date, including, but not limited to,
all liabilities of Borrower under any Capitalized Leases. As used herein, the
term "EBITDA" as of any date shall mean Borrower's net income before taxes, plus
interest expense, plus depreciation, plus amortization, as determined in
accordance with generally accepted accounting principles consistently applied,
for that portion of Borrower's fiscal year to date as the date of such
calculation, annualized for a full fiscal year (i.e. multiplied by 365 and
divided by the number of days in the fiscal year to date period for which such
actual EBITDA amount has been calculated).
The "London Interbank Offered Rate" applicable to any Interest Period means
a rate per annum determined pursuant to the following formula:
[ LIBOR-BR ]*
LIBOR = [---------- ]
[ 1.00 - RP ]
LIBOR = London Interbank Offered Rate
LIBOR-BR = LIBOR Base Rate
RP = Reserve Percentage
The term "LIBOR Base Rate" shall mean, with respect to the applicable
Interest Period, the rate per annum of interest determined by Agent to be the
arithmetic average of the respective average rates per annum at which deposits
in U.S. dollars are offered to Agent in the London interbank market for
Eurocurrency deposits by two (2) Eurocurrency dealers of recognized standing,
selected by Agent in its sole discretion, at approximately 10:00 a.m. St. Louis
time (or as soon thereafter as practicable), two (2) Eurocurrency Business Days
before the first day of such Interest Period for a number of days comparable to
the number of days in such Interest Period and in an amount comparable to the
amount of the applicable Eurocurrency Loan. Any overdue principal of and, to the
extent permitted by law, overdue interest on, any Eurocurrency Loan shall bear
interest, payable on demand, for each day until paid, at a rate per annum equal
to the sum of Two and One-Half Percent (2.50%) plus the rate applicable to Prime
Loans for such day.
(c) Agent shall determine each interest rate applicable to the Loans as
provided above. Agent shall give prompt notice to Borrower by telephone,
telecopy, telex or cable of each rate of interest so determined, and its
determination thereof shall be conclusive in the absence of manifest error.
SECTION 2.6 Commitment Fee. Borrower shall pay to Agent for the benefit of
Banks a nonrefundable commitment fee equal to either of the following as elected
by Borrower in a written notice to Agent delivered on or before July 1 and
January 1 of each year for determination of the commitment fee to be paid during
the following six months:
(a) Three-Tenths of One Percent (.30%) per annum times the average daily
difference between (i) the Commitment, and (ii) the principal amount of all
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Loans plus the undrawn face amount of all Letters of Credit outstanding as of
each such day under Section 2.1(a) during such period, or
(b) Fifteen-Hundredths of One Percent (0.15%) per annum times the amount of
the Commitment on each such day during such period.
Said fee, whether calculated under either clause (a) or clause (b) above, shall
be payable quarterly in arrears, on each March 31, June 30, September 30 and
December 31 during the Term hereof, and on the last day of the Term hereof. Said
fee shall be calculated under clause (b) for the period ending June 30, 1999.
Upon Agent's receipt of the Commitment Fee payable under this Section 2.6, Agent
shall promptly deliver to each Bank its Pro Rata Share of such Commitment Fee
actually received by Agent.
SECTION 2.7 Termination or Reduction of Commitment. Borrower may, by thirty
(30) days' prior written notice to Agent, which notice Agent shall promptly
deliver to Banks, terminate entirely or proportionately reduce from time to time
by an aggregate amount of $1,000,000.00 or any larger multiple of $1,000,000.00,
the unused portion of the Commitment; provided, however, that (i) at no time
shall the Commitment be reduced to a figure less than the total of the
outstanding principal amount of all Loans plus the face amount of all Letters of
Credit, (ii) at no time shall the Commitment be reduced to a figure less than
the total of the outstanding principal amount of all Loans plus the face amount
of all Letters of Credit outstanding under Section 2.1(a), and (iii) at no time
shall the Commitment be reduced to a figure greater than zero but less than
$1,000,000.00. The respective Commitments of each of the Banks shall be reduced
by such Bank's Pro Rata Share of the aggregate reduction made by Borrower. Any
reduction of any Commitment by Borrower under this Section 2.7 shall be
irrevocable, and in the event any such Commitment reduction requires the
repayment of any Eurocurrency Loan prior to the end of its then current Interest
Period, Borrower agrees to pay with respect to such Loan any amounts required
under Section 2.10 hereunder in addition to the principal and interest being
repaid on such Eurocurrency Loan.
SECTION 2.8 Payments Prior to Maturity.
(a) Borrower may, upon notice to Agent specifying that it is paying its
Prime Loans, pay without penalty or premium its Prime Loans in whole or in part
at any time, or from time to time.
(b) Borrower may, upon at least two Eurocurrency Business Days' notice to
Agent, in the case of Eurocurrency Loans, pay without penalty or premium on the
last day of any Interest Period its Eurocurrency Loans to which such Interest
Period applies, in whole, or in part, by paying the principal amount to be paid
together with accrued interest thereon to the date of payment. A notice of
payment given to Agent pursuant to this subsection (b) shall not thereafter be
revocable by Borrower. Borrower shall not be permitted to prepay any
Eurocurrency Loan on any day other than the last day of an Interest Period,
provided, however, that in the event any payment of principal on any
Eurocurrency Loan is made on a day prior to the last day in the applicable
Interest Period, Borrower agrees to pay such breakage amount or funding loss
incurred by any Bank as required under Section 2.10 herein.
(c) Agent shall promptly notify each of the Banks of its receipt of any
notice of prepayment under Section 2.8(a) or 2.8(b) above.
SECTION 2.9 General Provisions as to Payments.
(a) All payments to be made by Borrower under this Agreement shall be made
to Agent for value on the due date and in immediately available funds to the
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account of Agent at 721 Locust Street, St. Louis, Missouri 63101 or to the
account of Agent at such other bank as Agent may from time to time designate.
All payments of interest and principal, whether voluntary or involuntary, from
whatever source, including payments by reason of liquidation or collateral,
setoff, bankruptcy proceedings or otherwise, and whether received by Agent or
any of the Banks, shall be shared between the Banks in accordance with their
respective Pro Rata Shares.
(b) Whenever any payment of principal of, or interest on, Prime Loans or of
fees shall be due on a day which is not a Domestic Business Day, the date for
payment thereof shall be extended to the next succeeding Domestic Business Day.
Whenever any payment of principal of, or interest on, Eurocurrency Loans shall
be due on a day which is not a Eurocurrency Business Day, the date for payment
thereof shall be extended to the next succeeding Eurocurrency Business Day,
except that if the next succeeding Eurocurrency Business Day falls within a
different calendar month, such payment shall be made on the next preceding
Eurocurrency Business Day. If the date for any payment of principal is extended
by operation of law or otherwise, interest thereon, at the then applicable rate,
shall be payable for such extended time.
(c) All payments to be made by Borrower under this Agreement shall be made
without setoff or counterclaim and without deduction for or on account of any
present or future taxes or other charges unless Borrower is compelled by law to
make payment subject to such tax or other charge. All such taxes or other
charges shall be paid by Borrower for its own account prior to the date on which
penalties attach thereto. Borrower will indemnify Agent and each of the Banks in
respect of all such taxes and other charges. Should any such payment be subject
to any tax or other charge, and the above provisions either cannot be effected
or do not result in Agent or the Banks actually receiving and remaining
beneficially entitled to and in possession of an amount equal to the full amount
provided for hereunder, Borrower shall pay to Agent, for itself or for the
benefit of the Banks, as the case may be, such additional amounts as may be
necessary to ensure that Agent and each of the Banks receive and remain in
possession of and beneficially entitled to (free from any liability in respect
of any deduction, withholding or payment other than in respect of any tax on the
overall net income of Agent or the Banks) a net amount equal to the full amount
which it would have received and retained had payment not been subject to such
tax or other charge. Borrower shall send to Agent or the Banks such certificates
or certified copy receipts as Agent or Banks shall reasonably require as proof
of the payment by Borrower of any taxes or other charges payable by Borrower as
a result of the provisions of this Section 2.9(c).
SECTION 2.10 Funding Losses. If Borrower makes any payment of principal
with respect to any Eurocurrency Loan (pursuant to Article 6 or 7 or otherwise)
on any day other than the last day of an Interest Period applicable thereto, or
if Borrower fails to borrow or pay any Eurocurrency Loans after notice has been
given to Agent in accordance with Section 2.2, 2.4, or 2.8(b), Borrower shall
reimburse Agent and each of the Banks on demand for any resulting loss or
expense incurred by them, including (without limitation) any loss incurred in
obtaining, liquidating or employing deposits from third parties, and including
loss of margin for the period after any such payment, provided that Agent or
such Bank, as the case may be, shall have delivered to Borrower a certificate as
to the amount and particulars of such loss or expense, which certificate shall
be conclusive in the absence of manifest error.
SECTION 2.11 Computation of Interest and Fees. Interest on all Loans and
any fees payable hereunder, except as otherwise set forth herein, shall be
computed on the basis of a year of 360 days and paid for the actual number of
days elapsed.
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ARTICLE 3 - CONDITIONS TO BORROWINGS
The obligations of each of the Banks to make Loans and Agent's agreement to
issue Letters of Credit are subject to the performance by Borrower of all of its
obligations under this Agreement and to the satisfaction of the following
further conditions:
SECTION 3.1 All Borrowings. In the case of each Borrowing hereunder:
(a) With respect to each Loan, Agent shall have received a Notice of
Borrowing as required by Section 2.2A;
(b) With respect to each Letter of Credit, Agent shall have received the
applicable Reimbursement Agreement as required by Section 2.2B;
(c) On the date of, and as a result of such Borrowing, no Default or Event
of Default shall have occurred and be continuing;
(d) On the date of, and as a result of such Borrowing, no material adverse
change in the business, financial position or results of operation, of Borrower
has occurred since the Effective Date and is continuing, and no legal or
administrative proceedings or other regulatory proceedings have been commenced
or threatened against the Borrower which, in the sole judgment of the Agent,
would be likely to materially or adversely affect the business, assets,
liabilities (contingent or actual), operations or prospects of the Borrower; and
(e) The representations and warranties of Borrower contained in this
Agreement shall be true on and as of the date of such Borrowing.
Each Borrowing by Borrower hereunder shall be deemed to be a representation and
warranty by Borrower on the date of such Borrowing as to the facts specified in
clauses (c), (d) and (e) of this Section.
SECTION 3.2 First Borrowing. In the case of the first Borrowing the
following additional conditions must be met:
(a) Each Bank shall have received the duly executed Note of Borrower
payable to the order of such Bank in the amount of such Bank's Commitment, dated
on or before the date of the first Borrowing;
(b) With respect to each Loan, Agent shall have received a Notice of
Borrowing as required by Section 2.2A;
(c) With respect to each Letter of Credit, Agent shall have received an
application for Letter of Credit and reimbursement agreement as required by
Section 2.2B;
(d) Agent shall have received payment of the agent's fee required by
Section 8.9 herein; and
(e) Agent shall have received all documents it may reasonably request
relating to the existence of Borrower (including without limitation certified
copies of the Articles of Incorporation and Bylaws, and any amendments thereto),
the corporate authority for and the validity of this Agreement and the Notes
(including without limitation certified copies of corporate resolutions of the
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Board of Directors of Borrower and incumbency certificates), and any other
matters relevant hereto, all in form and substance satisfactory to Agent and
each of the Banks.
The documents and opinions referred to in this Section shall be delivered
to Agent or the Banks, as applicable, on the date hereof.
ARTICLE 4 - REPRESENTATIONS AND WARRANTIES
SECTION 4.1 Representations and Warranties. Borrower represents and
warrants that:
(a) Corporate Existence and Power. Borrower: (a) is duly incorporated,
validly existing and in good standing under the laws of the jurisdiction of its
incorporation; (b) has all requisite corporate powers and all material
governmental licenses, authorizations, consents and approvals required to carry
on its business as now conducted; and (c) is qualified to do business in all
jurisdictions in which the nature of the business conducted by it makes such
qualification necessary and where failure to so qualify would have a material
adverse effect on its business, financial condition or operations.
(b) Corporate and Governmental Authorization; Contravention. The execution,
delivery and performance by Borrower of this Agreement, the Notes and the other
documents contemplated hereby are within the corporate powers of Borrower, have
been duly authorized by all necessary corporate action and require no action by
or in respect of, or filing with, any governmental body, agency or official. The
execution, delivery, and performance by Borrower of this Agreement, the Notes
and the other documents contemplated hereby do not conflict with, or result in a
breach of the terms, conditions or provisions of, or constitute a default under
or result in any violation of, and Borrower is not now in default under or in
violation of, the terms of the Articles of Incorporation or Bylaws of Borrower,
any applicable law, any rule, regulation, order, writ, judgment or decree of any
court or government agency or instrumentality, or any agreement or instrument to
which Borrower is a party or by which it is bound or to which it is subject.
(c) Binding Effect. This Agreement has been duly executed and delivered and
constitutes a legal, valid and binding agreement of Borrower enforceable in
accordance with its terms, and the Notes and the other documents contemplated
hereby, when executed and delivered in accordance with this Agreement, will
constitute legal, valid and binding obligations of Borrower, enforceable in
accordance with their terms, except as may be limited by bankruptcy, insolvency
or other similar laws affecting the enforcement of creditors' rights in general.
(d) Financial Information.
(i) The balance sheet of Borrower as of January 29, 1998, and the
related statements of income, retained earnings and changes in financial
position for the fiscal year then ended, audited by Deloitte & Touche,
copies of which have been provided to Banks, fairly present, in conformity
with generally accepted accounting principles, consistently applied, the
financial position of Borrower as of such date and the results of
operations and changes in financial position for such fiscal year.
(ii) The unaudited balance sheet of Borrower as of February 27, 1999,
and the related unaudited internal statements of income for the period then
ended, copies of which have been provided to Banks, present, substantially
in conformity with generally accepted accounting principles applied on a
basis consistent with the financial statements referred to in paragraph
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(d)(i) of this Section, the financial position of Borrower as of such date
and the results of operations for such period (subject to normal year end
adjustments).
(iii) Since February 27, 1999, there has been no material adverse
change in the business, financial position or results of operations of
Borrower on a cumulative basis.
(e) Litigation. Except as disclosed in Schedule 4.1(e), there are no
actions, suits or proceedings pending or threatened against or affecting
Borrower or any of its Subsidiaries, at law or in equity, or before or by any
Federal, State or municipal court or arbitrator or any other governmental
department, commission, board, bureau, agency, official or instrumentality,
domestic or foreign, which are reasonably likely to result, either individually
or collectively, in any material adverse change in the business, properties,
operations or condition, financial or other, of Borrower and its Subsidiaries
taken as a whole, or in which there is a reasonable likelihood of recovery of an
amount that exceeds $500,000.00.
(f) Pension and Welfare Plans. Each Pension Plan complies with all
applicable statutes and governmental rules and regulations; no Reportable Event
has occurred and is continuing with respect to any Pension Plan; neither
Borrower nor any ERISA Affiliate of Borrower has withdrawn from any
Multiemployer Plan in a "complete withdrawal" or a "partial withdrawal" as
defined in Sections 4203 or 4205 of ERISA, respectively; no condition exists or
event or transaction has occurred in connection with any Pension Plan or
Multiemployer Plan which could result in the incurrence by Borrower or any ERISA
Affiliate of any material liability, fine or penalty; and neither Borrower nor
any ERISA Affiliate is a "contributing sponsor" as defined in Section
4001(a)(13) of ERISA of a "single-employer plan" as defined in Section
4001(a)(15) of ERISA which has two or more contributing sponsors at least two of
whom are not under common control. Except as disclosed on Schedule 4.1(f)
attached hereto, Borrower does not have any contingent liability with respect to
any "employee welfare benefit plan", as such term is defined in Section 3(a) of
ERISA, which covers retired employees and their beneficiaries.
(g) Tax Returns and Payment. Borrower has filed all federal and state
income tax returns and all other material tax returns which are required to be
filed and have paid all taxes due pursuant to such returns or pursuant to any
assessment received by Borrower, except for the filing of such returns, if any,
in respect of which an extension of time for filing is in effect and except for
such taxes, if any, as are being contested in good faith and as to which
adequate reserves have been provided. The charges, accruals and reserves on the
books of Borrower in respect of any taxes or other governmental charges are, in
the opinion of Borrower, adequate.
(h) Investment Company Act of 1940; Public Utility Holding Company Act of
1935. Borrower is not an "investment company" as that term is defined in, and is
not otherwise subject to regulation under, the Investment Company Act of 1940,
as amended. Borrower is not a "holding company" as that term is defined in, and
is not otherwise subject to regulation under, the Public Utility Holding Company
Act of 1935, as amended.
(i) Liens. At the date of this Agreement no Liens exist on any property of
Borrower other than those described on Schedule 4.1(i).
(j) Subsidiaries. Borrower has the Subsidiaries described on Schedule
4.1(j) attached hereto.
(k) Compliance With Other Instruments; None Burdensome. Borrower is not a
party to any contract or agreement or subject to any charter or other corporate
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restriction which materially and adversely affects its business, Property or
financial condition and which is not disclosed on Borrower's financial
statements heretofore submitted to Bank; none of the execution and delivery by
Borrower of this Agreement, the Notes, the Reimbursement Agreements or the other
transaction documents, the consummation of the transactions therein contemplated
or the compliance with the provisions thereof will violate any law, rule,
regulation, order, writ, judgment, injunction, decree or award binding on
Borrower, or any of the provisions of Borrower's Certificate or Articles of
Incorporation or Bylaws or any of the provisions of any indenture, agreement,
document, instrument or undertaking to which Borrower is a party or subject, or
by which it or its Property is bound, or conflict with or constitute a default
thereunder or result in the creation or imposition of any Lien pursuant to the
terms of any such indenture, agreement, document, instrument or undertaking. No
order, consent, approval, license, authorization or validation of, or filing,
recording or registration with, or exemption by, any governmental, regulatory,
administrative or public body or authority, or any subdivision thereof, is
required to authorize, or is required in connection with, the execution,
delivery or performance of, or the legality, validity, binding effect or
enforceability of, any of the transaction documents.
(l) Other Loans and Guarantees. Except as disclosed on Schedule 4.1(l)
attached hereto, Borrower is not a party to any loan transaction or Guarantee.
(m) Labor Matters. Except as disclosed on Schedule 4.1(m) attached hereto,
(a) no labor contract to which Borrower is subject is scheduled to expire during
the Term of this Agreement and (b) on the date of this Agreement, (i) Borrower
is not a party to any labor dispute and (ii) there are no strikes or walkouts
relating to any labor contract to which Borrower is subject.
(n) Title to Property. Borrower is the sole and absolute owner of, or has
the legal right to use and occupy, all Property it claims to own or which is
necessary for Borrower to conduct its business. Borrower has not signed any
financing statements, security agreements or chattel mortgages with respect to
any of its Property, has not granted or permitted any Liens with respect to any
of its Property or has any knowledge of any Liens with respect to any of its
Property, except as disclosed on Schedule 4.1(n) attached hereto.
(o) Regulation U. Borrower is not engaged principally, or as one of its
important activities, in the business of extending credit for the purpose of
purchasing or carrying margin stock (within the meaning of Regulation U of The
Board of Governors of the Federal Reserve System, as amended) and no part of the
proceeds of any Loan will be used, whether directly or indirectly, and whether
immediately, incidentally or ultimately (i) to purchase or carry margin stock
(except for Borrower's repurchase of its own capital stock pursuant to Section
5.2(e)(ii) below) or to extend credit to others for the purpose of purchasing or
carrying margin stock, or to refund or repay indebtedness originally incurred
for such purpose or (ii) for any purpose which entails a violation of, or which
is inconsistent with, the provisions of any of the Regulations of The Board of
Governors of the Federal Reserve System, including, without limitation,
Regulations U, T or X thereof, as amended. If requested by the Agent or any
Bank, Borrower shall furnish to Banks a statement in conformity with the
requirements of Federal Reserve Form U-1 referred to in Regulation U.
(p) Multi-Employer Pension Plan Amendments Act of 1980. Borrower is in
compliance with the Multi-Employer Pension Plan Amendments Act of 1980, as
amended ("MEPPAA"), and has no liability for pension contributions pursuant to
MEPPAA.
(q) Patents, Licenses, Trademarks, Etc. Borrower possesses all necessary
patents, licenses, trademarks, trademark rights, trade names, trade name rights
and copyrights to conduct its business without conflict with any patent,
license, trademark, trade name or copyright of any other Person.
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(r) Environmental and Safety and Health Matters. Except as disclosed on
Schedule 4.1(r) attached hereto: (i) the operations of Borrower comply with (A)
all applicable Environmental Laws and (B) all applicable Occupational Safety and
Health Laws; (ii) none of the operations of Borrower are subject to any
judicial, governmental, regulatory or administrative proceeding alleging the
violation of any Environmental Law or Occupational Safety and Health Law; (iii)
none of the operations of Borrower is the subject of any Federal or state
investigation evaluating whether any remedial action is needed to respond to (A)
any spillage, disposal or release into the environment of any Hazardous Material
or any other hazardous, toxic or dangerous waste, substance or constituent or
other substance, or (B) any unsafe or unhealthful condition at any premises of
Borrower; (iv) Borrower has not filed any notice under any Environmental Law or
Occupational Safety and Health Law indicating or reporting (A) any past or
present spillage, disposal or release into the environment of, or treatment,
storage or disposal of, any Hazardous Material or any other hazardous, toxic or
dangerous waste, substance or constituent or other substance or (B) any unsafe
or unhealthful condition at any premises of Borrower; and (v) Borrower does not
have any known contingent liability in connection with (A) any spillage,
disposal or release into the environment of, or otherwise with respect to, any
Hazardous Material or any other hazardous, toxic or dangerous waste, substance
or constituent or other substance or (B) any unsafe or unhealthful condition at
any premises of Borrower.
(s) Year 2000 Compliance Borrower and each of its Subsidiaries has (a)
undertaken a detailed inventory, review and assessment of all areas within its
business and operations that could be adversely affected by the failure of
Borrower or such Subsidiary, as the case may be, to be Year 2000 Compliant on a
timely basis, (b) developed a detailed plan and timeline for becoming Year 2000
Compliant on a timely basis and (c) to date, implemented such plan in accordance
with such timetable in all material respects. Borrower reasonably anticipates
that it and each of its Subsidiaries will be Year 2000 Compliant on a timely
basis, except to the extent such noncompliance could not reasonably be expected
to have a material adverse effect on the Properties, assets, liabilities,
business, operations, prospects, income or condition (financial or otherwise) of
Borrower or any such Subsidiary. Neither Borrower nor any Subsidiary of Borrower
is aware that any of its key suppliers, vendors or customers will not, on a
timely basis, be Year 2000 Compliant, except to the extent such noncompliance
could not reasonably be expected to have a material adverse effect on the
Properties, assets, liabilities, business, operations, prospects, income or
condition (financial or otherwise) of such Person. For purposes of this Section
4.1(s), "key suppliers, vendors and customers" refers to those suppliers,
vendors and customers of Borrower or of any such Subsidiary, as the case may be,
whose business failure could reasonably be expected to have a material adverse
effect on the Properties, assets, liabilities, business, operations, prospects,
income or condition (financial or otherwise) of Borrower or any such Subsidiary.
ARTICLE 5 - COVENANTS
SECTION 5.1 Covenants of Borrower. Borrower agrees that, so long as any
Bank has any Commitment hereunder or any amount payable under any Note or
Reimbursement Agreement remains unpaid or any Letter of Credit remains
outstanding, unless the prior written consent of the Majority Banks is obtained:
(a) Information. Borrower will deliver to the Agent:
(i) As soon as available and in any event within 90 days after the end
of each fiscal year of Borrower, a consolidated balance sheet of Borrower
as of the end of such fiscal year and the related consolidated statements
of income, retained earnings and cash flow for such fiscal year, prepared
in accordance with generally accepted accounting principles, consistently
applied, setting
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forth in each case in comparative form the figures for the previous fiscal
year, all reported on by and accompanied by the unqualified opinion of
Deloitte & Touche or other firm of independent public accountants of
nationally recognized standing acceptable to Banks;
(ii) As soon as available and in any event within 30 days after the
end of each fiscal month, a consolidated balance sheet of Borrower as of
the end of such fiscal month and the related consolidated statements of
income, retained earnings and cash flow for such fiscal month and for the
portion of Borrower's fiscal year ended at the end of such fiscal month,
setting forth in each case in comparative form, the figures for the
corresponding fiscal month and the corresponding portion of Borrower's
previous fiscal year, all certified (subject to normal year-end
adjustments) as to fairness of presentation, generally accepted accounting
principles and consistency by the chief financial officer or principal
accounting officer of Borrower;
(iii) As soon as available and in any event within 30 days after the
end of each fiscal quarter, a Compliance Certificate of the chief financial
officer or principal accounting officer of Borrower, in the form attached
hereto and made a part hereof as Exhibit D, accompanied by supporting
financial work sheets where appropriate, and stating whether there exists
on the date of such certificate any Default or Event of Default and, if any
Default or Event of Default then exists, setting forth the details thereof
and the action which Borrower is taking or proposes to take with respect
thereto;
(iv) As soon as available and in any event within 30 days after the
end of each fiscal month, a Borrowing Base Certificate, dated as of the end
of the preceding fiscal month, in the form of Exhibit E attached hereto,
all certified (subject to normal year-end adjustments) as to fairness of
presentation, generally accepted accounting principles and consistency by
the chief financial officer or principal accounting officer of Borrower;
(v) As soon as available and in any event within 30 days after the end
of each fiscal month, a statement in reasonable detail setting forth
Borrower's profit and loss on a store by store basis, determined in
accordance with generally accepted accounting principles consistently
applied and certified as to fairness of presentation by the chief financial
officer or principal accounting officer of Borrower;
(vi) Within 30 days after the end of each fiscal year of Borrower
during the Term hereof, a financial budget for Borrower's upcoming fiscal
year prepared in reasonable detail;
(vii) Forthwith upon the occurrence of any Default or Event of
Default, and in any event within five days after knowledge of such
occurrence, a certificate of an officer of Borrower setting forth the
details thereof and the action which Borrower is taking or proposes to take
with respect thereto;
(viii) Promptly upon the mailing thereof to the shareholders of
Borrower generally, and in any event within ten days after such mailing,
copies of all financial statements, reports, proxy statements and other
material information so mailed;
(ix) From time to time, with reasonable promptness, upon being
informed by Banks of the purpose of the inquiry, such further information
regarding the business, affairs and financial position of Borrower as Bank
may reasonably request.
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Agent agrees to promptly furnish to each of the Banks the information
provided to Agent by Borrower under this Section 5.1(a).
(b) Payment of Debt. Borrower will pay any and all Debt payable or
Guaranteed by Borrower, and any interest or premium thereon, when due (whether
by scheduled maturity, required prepayment, acceleration, demand or otherwise)
in accordance with the agreement or instrument relating to such Debt or
Guarantee, except that Borrower may pay up to twenty-five percent (25%) of its
Debt owed to trade suppliers or trade vendors at any point in time within ninety
(90) days after the date such trade Debt is due and payable.
(c) Consultations and Inspections. Solely for the purpose of permitting
Agent and Banks to determine compliance by Borrower with this Agreement,
Borrower will permit Agent and/or any of the Banks (and any Person appointed by
Agent or any Bank to whom Borrower does not reasonably object) to discuss the
affairs, finances and accounts of Borrower with the executive officers of
Borrower, all at such reasonable times and as often as may reasonably be
requested. Borrower will also permit inspection of its properties, books and
records by Agent and Banks during normal business hours or at other reasonable
times.
(d) Payment of Taxes; Corporate Existence; Maintenance of Properties;
Insurance. Borrower will:
(i) Pay and discharge promptly all taxes, assessments and other
governmental charges imposed upon it or any of its property; provided,
however, that Borrower shall not be required to pay any such tax,
assessment or other governmental charge the payment of which is being
contested in good faith and by appropriate proceedings and for which
adequate reserves have been provided, except that Borrower will pay or
cause to be paid all such taxes, assessments and governmental charges
forthwith upon the commencement of proceedings to foreclose any Lien which
is attached as security therefor, unless such foreclosure is stayed by the
filing of an appropriate bond;
(ii) Do all things necessary to preserve and keep in full force and
effect its corporate existence, rights and franchise and to be duly
qualified to do business in all jurisdictions where the nature of its
business requires such qualification;
(iii) Maintain and keep its properties as a whole in good repair,
working order and condition; provided, however, that nothing in this
subsection (iii) shall prevent any abandonment of any of its properties
which is not disadvantageous in any material respect to Banks and which, in
the opinion of the management of Borrower, is in the best interests of
Borrower; and
(iv) Insure with responsible and reputable insurance companies its
assets and business in such manner and to such extent as is customary with
similar business enterprises of comparable size and subject to comparable
hazards.
(e) Financial Covenants. Borrower will:
(i) Have a Net Worth of not less than $82,668,000.00 as of the end of
each fiscal quarter during the Term hereof, less the aggregate amount of
Distributions made by Borrower after the date of this Agreement to
repurchase its capital stock as permitted under Section 5.2(e) herein,
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provided that any such reduction in the minimum Net Worth requirement of
this Section 5.1(e)(i) for any such aggregate stock repurchases shall not
exceed $10,000,000.00.
(ii) Have a ratio of (A) the sum of Funded Debt plus three times
Borrower's Rental Expense, to (B) the sum of EBITDA plus Borrower's Rental
Expense of not more than 2.5 to 1.0 at each fiscal quarter-end during the
Term hereof. As used herein, the term "EBITDA" shall mean Borrower's net
income before taxes, plus interest expense, plus depreciation, plus
amortization, as determined in accordance with generally accepted
accounting principles consistently applied, for the four fiscal quarter
period ending on the date of such calculation. As used herein, the term
"Funded Debt" shall mean all Indebtedness of Borrower for borrowed money,
including, but not limited to, all liabilities of Borrower under any
Capitalized Leases. As used herein, the term "Rental Expense" shall mean
Borrower's base minimum rental expense under all real property leases for
the four fiscal quarter period ending on the date of such calculation as
determined in accordance with generally accepted accounting principles
consistently applied.
(iii) Deliver a certificate of the chief financial officer or
principal accounting officer of Borrower, containing the financial ratio
calculations required in clauses 5.1(e)(i) and (ii) above and of the
Distributions paid under Section 5.2(e), simultaneously with the Compliance
Certificate referred to in Section 5.1(a)(iii).
(f) Maintenance of Books and Records. Borrower will maintain its books and
records in accordance with generally accepted accounting principles,
consistently applied.
(g) Compliance with Law. Borrower will comply with any and all laws,
ordinances and governmental rules and regulations to which it is subject and
obtain any and all licenses, permits, franchises and other governmental
authorizations necessary to the ownership of its properties or to the conduct of
its business, which violation or failure to obtain might materially adversely
affect the condition or operation, financial or otherwise, of Borrower.
(h) ERISA Compliance. If Borrower shall have any Pension Plan, Borrower
shall comply with all requirements of ERISA relating to such plan. Without
limiting the generality of the foregoing, Borrower will not:
(i) permit any Pension Plan maintained by it to engage in any
nonexempt "prohibited transaction," as such term is defined in Section 4975
of the Code;
(ii) permit any Pension Plan maintained by it to incur any
"accumulated funding deficiency", as such term is defined in Section 302 of
ERISA, 29 U.S.C. ss. 1082, whether or not waived;
(iii) terminate any such Pension Plan in a manner which could result
in the imposition of a Lien on any Property of Borrower pursuant to Section
4068 of ERISA, 29 U.S.C. ss.1368; or
(iv) take any action which would constitute a complete or partial
withdrawal from a Multiemployer Plan within the meaning of Sections 4203
and 4205 of Title IV of ERISA.
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Notwithstanding any provision contained in this Section 5.1(h) to the
contrary, an act by Borrower shall not be deemed to constitute a violation of
subparagraphs (i) through (iv) hereof unless the Majority Banks determine in
good faith that said action, individually or cumulatively with other acts of
Borrower, does have or is likely to cause a significant adverse financial effect
upon Borrower.
Borrower shall have the affirmative obligation hereunder to report to Banks
any of those acts identified in subparagraphs (i) through (iv) hereof,
regardless of whether said act does or is likely to cause a significant adverse
financial effect upon Borrower, and failure by Borrower to report such act
promptly upon Borrower's becoming aware of the existence thereof shall
constitute an Event of Default hereunder.
(i) Notices. Borrower will notify Agent and Banks in writing of any of the
following immediately upon learning of the occurrence thereof, describing the
same and, if applicable, the steps being taken by the Person(s) affected with
respect thereto:
(i) Default. The occurrence of any Default or Event of Default under
this Agreement or any default or event of default by Borrower or any other
Obligor under any note, indenture, loan agreement, mortgage, deed of trust,
security agreement, lease or other similar agreement, document or
instrument to which Borrower or any other Obligor, as the case may be, is a
party or by which it is bound or to which it is subject;
(ii) Litigation. The institution of any litigation, arbitration
proceeding or governmental or regulatory proceeding affecting Borrower or
any other Obligor, whether or not considered to be covered by insurance,
unless the prayer for relief in the complaint or petition concerning such
proceeding is in an aggregate amount of less than $500,000.00;
(iii) Judgment. The entry of any judgment or decree against Borrower
or any other Obligor in an aggregate amount in excess of $500,000.00;
(iv) Pension Plans. The occurrence of a Reportable Event with respect
to any Pension Plan; the filing of a notice of intent to terminate a
Pension Plan by Borrower or any ERISA Affiliate; the institution of
proceedings to terminate a Pension Plan by the PBGC or any other Person;
the withdrawal in a "complete withdrawal" or a "partial withdrawal" as
defined in Sections 4203 and 4205, respectively, of ERISA by Borrower or
any ERISA Affiliate from any Multiemployer Plan; or the incurrence of any
material increase in the contingent liability of Borrower with respect to
any "employee welfare benefit plan" as defined in Section 3(1) of ERISA
which covers retired employees and their beneficiaries;
(v) Change of Name. Any change in the name of Borrower or any other
Obligor;
(vi) Change in Place(s) of Business. Any opening, closing or other
change of Borrower's corporate headquarters or of any distribution
facility;
(vii) Environmental Matters. Receipt of any notice that the operations
of Borrower or any other Obligor are not in full compliance with any of the
requirements of any applicable Environmental Law or Occupational Safety and
Health Law; receipt of notice that Borrower or any other Obligor is subject
to any Federal, state or local investigation evaluating whether any
remedial action is needed to respond to the release of any Hazardous
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Materials or any other hazardous or toxic waste, substance or constituent
or other substance into the environment; or receipt of notice that any of
the Properties or assets of Borrower or any other Obligor are subject to an
"Environmental Lien." For purposes of this Section 5.1(i)(vii),
"Environmental Lien" shall mean a Lien in favor of any governmental or
regulatory agency, entity, authority or official for (1) any liability
under Environmental Laws or (2) damages arising from or costs incurred by
any such governmental or regulatory agency, entity, authority or official
in response to a release of any Hazardous Materials or any other hazardous
or toxic waste, substance or constituent or other substance into the
environment;
(viii) Material Adverse Change. The occurrence of any material adverse
change in the business, operations or condition, financial or otherwise, of
Borrower or any other Obligor;
(ix) Change in Line(s) of Business. Any material change in Borrower's
line(s) of business; and
(x) Other Notices. Any notices required to be provided pursuant to
other provisions of this Agreement and notice of the occurrence of such
other events as Bank may from time to time reasonably specify.
(j) Year 2000 Compliance. Borrower will, and it will cause each of its
Subsidiaries to, take any and all actions necessary to assure that Borrower and
each of its Subsidiaries will be Year 2000 Compliant as soon as reasonably
practical. Borrower and each of its Subsidiaries will be Year 2000 Compliant by
October 1, 1999, except to the extent such noncompliance could not reasonably be
expected to have a material adverse effect on the Properties, assets,
liabilities, business operations, prospects, income or condition (financial or
otherwise) of Borrower or such Subsidiary. At the request of Agent, Borrower
will from time to time provide Agent with written reports in form and detail
reasonably satisfactory to Agent on the status of the efforts of Borrower and
its Subsidiaries to be Year 2000 Compliant.
SECTION 5.2 Negative Covenants of Borrower. Borrower covenants and agrees
that, so long as any Bank has any obligation to make any Loan hereunder or to
issue any Letter of Credit or any of Borrower's Obligations remain unpaid,
unless the prior written consent of the Majority Banks is obtained:
(a) Limitation on Indebtedness. Borrower will not incur or be obligated on
any Debt, either directly or indirectly, by way of Guarantee, suretyship or
otherwise, other than:
(i) Debt evidenced by the Notes and the Reimbursement Agreements;
(ii) Unsecured trade accounts payable incurred in the ordinary course
of business;
(iii) Debt representing loans against life insurance policies of
Borrower in an amount not to exceed the aggregate cash surrender value of
such life insurance policies;
(iv) Other unsecured Debt exclusive of capitalized leases in an amount
not to exceed $3,000,000.00 in the aggregate at any one time outstanding;
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(v) Other purchase money Debt in an amount not to exceed $5,000,000.00
in the aggregate at any one time outstanding; and
(vi) Capitalized leases in an amount not to exceed $3,000,000.00 in
the aggregate at any one time outstanding.
(b) Limitations on Liens. Borrower will not create, incur, assume or suffer
to exist any Lien on any of its Property, assets or revenues other than:
(i) Liens presently in existence which are described on Schedule
4.1(n) attached hereto;
(ii) Pledges or deposits in connection with or to secure workmen's
compensation, unemployment insurance, pension or other employee benefits;
(iii) Subject to Section 5.1(d)(i), Liens for taxes, assessments or
governmental charges or levies on Property of Borrower if the same are
being contested in good faith and by appropriate proceedings diligently
conducted and for which adequate reserves in form and amount satisfactory
to Banks are provided on Borrower's financial statements;
(iv) Liens provided by statute for unpaid rent in favor of any
landlord of the Borrower under real property leases;
(v) Liens filed for purchase money security interests to secure
purchase money indebtedness permitted under Section 5.2(a)(v) above,
provided that the Lien shall secure only the purchase money indebtedness
incurred which shall not exceed the purchase price of the asset being
acquired and shall attach only to the asset purchased with the proceeds of
such purchase money indebtedness; and
(vi) Liens filed for any equipment leases permitted under Section
5.2(a)(vi) above, provided that such Liens shall attach only to the
equipment being leased and shall secure only the obligations under such
leases.
(c) Sale of Property. Borrower will not sell, lease, transfer or otherwise
dispose of any Property or assets of Borrower except for sales of assets in the
ordinary course of business during any fiscal year which have an aggregate book
value of not more than $500,000.00;
(d) Mergers, Consolidations and Acquisitions. Borrower will not, and will
not permit any Subsidiary to, merge or consolidate with any other Person or
acquire any other Person, except that:
(i) Borrower may consolidate with or merge into any Person or permit
any other Person to merge into, provided that immediately after giving
effect thereto: (1) Borrower shall be the successor corporation; (2)
Borrower shall be in compliance with all provisions of this Agreement; and
(3) Borrower and the acquired Person, on a consolidated basis as determined
after giving effect to said acquisition, have a net worth of not less than
100% of Borrower's net worth determined immediately prior to said
acquisition;
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(ii) Any Subsidiary may (A) merge into Borrower or another
wholly-owned Subsidiary or (B) sell, transfer or lease all or any part of
its assets to Borrower or to another wholly-owned Subsidiary or (iii) merge
into any Person which, as a result of such merger, concurrently become a
wholly-owned Subsidiary; and
(iii) Borrower may make acquisitions of any Persons or their assets
during any 12-month period during the Term of this Agreement which in the
aggregate do not exceed $5,000,000.00, provided that after giving effect to
any such acquisition, Borrower shall be in compliance with all of the
provisions of this Agreement.
(e) Stock Redemptions and Distributions. With respect to its capital stock,
Borrower will not declare or make any dividend or other Distribution to its
shareholders (excluding any stock split or stock dividend) unless, immediately
after giving effect to the proposed Distribution, (i) no Default or Event of
Default is existing or would occur as a result of such dividend or Distribution,
and (ii) such proposed Distribution, if made for the repurchase of Borrower's
common stock after the date of this Agreement, shall not exceed Ten Million
Dollars ($10,000,000.00) in the aggregate.
(f) Transactions with Related Parties. Borrower will not engage in any
material transaction with any affiliated, related or parent company or any
Subsidiary (except any wholly-owned Subsidiary of Borrower) or any shareholder,
director, officer, or beneficiary of a trust that is a shareholder of Borrower
unless such transaction is upon fair market terms and is not disadvantageous in
any material respect to Banks.
(g) Fiscal Year. Borrower will not change its fiscal year without prior
notice to Banks; provided, however, that Borrower, Agent and Banks agree that
prior to the effective date of any such change in Borrower's fiscal year,
Borrower, Agent and Banks shall agree to amend this Agreement to adjust the
financial covenants set forth herein in accordance with such new fiscal year.
(h) Loans and Investments. Borrower will not make any loans or advances or
extensions of credit to (other than extensions of credit in the ordinary course
of business or otherwise permitted under this Agreement), purchase any stocks,
bonds, notes, debentures or other securities of, make any expenditures on behalf
of, or in any manner assume liability (direct, contingent or otherwise) for the
Debt of any Person, except that:
(i) Borrower may acquire and own stock, obligations or securities
received in settlement of debts (created in the ordinary course of
business) owing to Borrower,
(ii) Borrower may make loans, advances or extensions of credit to its
1993 stock option and incentive plan not to exceed $1,000,000.00 in any
fiscal year,
(iii) Borrower may make other loans, advances or extensions of credit
not to exceed $200,000.00 in the aggregate at any one time outstanding,
(iv) Borrower may make investments of its excess cash in repurchase
agreements with maturities not greater than seven days, which repurchase
agreements may be made only with any of the Banks or any other financial
institution satisfying the requirements of subparts (v) or (viii) of this
Section 5.2(h),
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(v) Borrower may make investments of its excess cash in municipal
bonds or other securities rated "AAA" or better by either Standard & Poor's
Corporation or Moody's Investor Service, Inc.,
(vi) Borrower may make investments of its excess cash in money market
mutual funds having assets in excess of $1,000,000,000.00,
(vii) Borrower may invest its excess cash in any readily marketable
direct obligations of the United States government or any agency thereof
which are backed by the full faith and credit of the United States,
(viii) Borrower may invest its excess cash in preferred stock or in
any commercial paper of any corporation which at the time of acquisition
has the highest commercial paper rating obtainable from either Standard &
Poor's Corporation or Moody's Investor Service, Inc.; and
(ix) Borrower may repurchase its own stock up to an aggregate purchase
price of $10,000,000.00 pursuant to Section 5.2(e)(ii).
(i) Dissolution or Liquidation. Borrower will not seek or permit the
dissolution or liquidation of Borrower in whole or in part.
(j) Change in Nature of Business. Borrower will not make any material
change in the nature of its business and Borrower will not make any material
change in or discontinue its present line(s) of business.
(k) Pension Plans. Borrower shall not (a) permit any condition to exist in
connection with any Pension Plan which might constitute grounds for the PBGC to
institute proceedings to have such Pension Plan terminated or a trustee
appointed to administer such Pension Plan or (b) engage in, or permit to exist
or occur, any other condition, event or transaction with respect to any Pension
Plan which could result in the incurrence by Borrower of any material liability,
fine or penalty. Borrower shall not become obligated to contribute to any
Pension Plan or Multiemployer Plan other than any such plan or plans in
existence on the date hereof.
(l) Subsidiaries. Borrower shall not have, obtain, acquire or create any
Subsidiary during the Term of this Agreement to the extent that any such
Subsidiary or Subsidiaries shall in the aggregate own more than 20% of the total
assets of Borrower determined on a consolidated basis.
SECTION 5.3 Use of Proceeds. Borrower agrees that none of such proceeds
will be used in violation of any applicable law or regulation; and except as
permitted in Section 5.2(e)(ii) herein, Borrower will not engage principally, or
as one of its important activities, in the business of extending credit for the
purpose of purchasing or carrying "margin stock" within the meaning of
Regulation U of the Board of Governors of the Federal Reserve System, as amended
from time to time.
ARTICLE 6 - DEFAULTS
SECTION 6.1 Events of Default. If:
(a) Borrower shall fail to pay any principal of or interest on the Notes or
any other amount payable by Borrower hereunder, under any Reimbursement
Agreement or under the Notes when due;
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(b) Borrower shall violate or fail to perform any of its covenants or
agreements contained in Sections 5.1(b) through (j) or Section 5.2;
(c) Borrower shall fail to deliver to the Agent any of the information or
financial statements required under Section 5.1(a) herein and such failure shall
continue for 15 days after the date such information or financial statements
were required to be delivered under the terms of such Section;
(d) Borrower shall fail to perform any term, covenant or agreement herein
contained (other than those specified in clause (a) or (b)) for 30 days after
the earlier of (i) written notice of Default is given to Borrower by Agent or
any Bank, or (ii) the date the chief executive officer or chief financial
officer of Borrower has knowledge of such Default;
(e) Borrower shall have made any representation or warranty in or pursuant
to this Agreement, or in any certificate or document delivered pursuant hereto,
which shall have been materially incorrect, false or misleading when made;
(f) Borrower shall fail (and such failure shall not have been cured or
waived) to: (i) make any payment of principal of or premium, if any, or interest
on any Debt owed to a trade supplier or trade creditor which causes more than
twenty-five percent (25%) of Borrower's aggregate trade Debt then outstanding to
be more than 90 days past due, or to make any payment of principal of or
premium, if any, or interest on any other Debt when due (whether at schedule
maturity or by required prepayment, acceleration, demand or otherwise) and such
failure shall continue after the applicable grace period, if any, specified in
the agreement or instrument relating to such Debt, or (ii) perform or observe
any other provision, term or condition of, or any other default shall occur
under, any agreement or instrument relating to any Debt outstanding; in either
case if the effect of such failure or default is to cause or permit such Debt to
be declared to be due and payable or otherwise accelerated, or to be required to
be prepaid (other than by a regularly scheduled required prepayment), prior to
the stated maturity thereof;
(g) Borrower shall have entered against it by a court having jurisdiction
in the premises a judgment in excess of $500,000.00, and Borrower (or an insurer
on behalf of Borrower) shall not appeal or satisfy such judgment within the time
permitted by law for an appeal of such judgment;
(h) Borrower shall have filed against it an involuntary case under any
applicable bankruptcy, insolvency or other similar law now or hereafter in
effect, or for the appointment of a receiver, liquidator, assignee, custodian,
trustee, sequestrator (or similar official) of Borrower, or for any substantial
part of its property, or for the winding-up or liquidation of its affairs and
such involuntary case or proceeding shall remain unstayed and in effect for a
period of 60 consecutive days, or if any order for relief is entered in any such
case;
(i) Borrower shall commence a voluntary case under any applicable
bankruptcy, insolvency or other similar law now or hereafter in effect, or
consent to the entry of an order for relief in an involuntary case under any
such law, or consent to the appointment of or taking possession by a receiver,
liquidator, assignee, trustee, custodian, sequestrator (or similar official) of
Borrower, or for any substantial part of its property, or make any general
assignment for the benefit of any of the foregoing;
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(j) The occurrence of a Reportable Event with respect to any Pension Plan;
the institution of proceedings to terminate a Pension Plan by the PBGC or any
other Person; the withdrawal in a "complete withdrawal" or a "partial
withdrawal" as defined in Sections 4203 and 4205, respectively, of ERISA by
Borrower or any ERISA Affiliate from any Multiemployer Plan; or the incurrence
of any material increase in the contingent liability of Borrower with respect to
any "employee welfare benefit plan" as defined in Section 3(1) of ERISA which
covers retired employees and their beneficiaries;
(k) The institution by Borrower or any ERISA Affiliate of steps to
terminate any Pension Plan if, in order to effectuate such termination, Borrower
or such ERISA Affiliate, as the case may be, would be required to make a
contribution to such Pension Plan, or would incur a liability or obligation to
such Pension Plan, in excess of Five Hundred Thousand Dollars ($500,000.00); or
the institution by the PBGC of steps to terminate any Pension Plan;
Then, and in every such event (an "Event of Default") if such Event of Default
still exists, Agent may, or upon direction of the Majority Banks shall, by
notice in writing to Borrower terminate the Commitments of each of the Banks and
declare each of the Notes to be and they shall thereupon forthwith become due
and payable without presentment, demand, protest or other notice of any kind,
all of which are hereby expressly waived; provided, however, that in the case of
the occurrence of any Event of Default described in the foregoing clause (h) or
(i) the Notes shall become due and payable forthwith without the requirement of
any such notice, and without presentment, demand, protest or other notice of any
kind, all of which are hereby expressly waived.
ARTICLE 7 - CHANGE IN CIRCUMSTANCES AFFECTING EUROCURRENCY LOANS
SECTION 7.1 Basis for Determining Interest Rate Inadequate or Unfair. If
with respect to any Interest Period:
(a) By reason of circumstances affecting the London interbank Eurocurrency
market, adequate and fair means do not exist for ascertaining the rate of
interest payable pursuant to Section 2.5(b) in respect of such Eurocurrency Loan
for such Interest Period; or
(b) Agent determines that deposits in Dollars (in the applicable amounts)
are not being offered to any Bank in the relevant London interbank Eurocurrency
market for such Interest Period, or
(c) Agent determines that the London Interbank Offered Rate will not
adequately and fairly reflect the cost to any Bank of maintaining or funding the
Eurocurrency Loans for such Interest Period,
Agent shall forthwith give notice thereof to Borrower, whereupon until Agent
notifies Borrower that the circumstances giving rise to such suspension no
longer exist, (a) the obligations of Banks to make Eurocurrency Loans shall be
suspended, and (b) Borrower shall repay in full then outstanding principal
amount of each of its Eurocurrency Loans, together with accrued interest
thereon, on the last day of then current Interest Period applicable to such
Loan. Concurrently with repaying each such Eurocurrency Loan pursuant to this
Section, Borrower shall borrow a Prime Loan in an equal principal amount from
Banks, and Banks shall make such a Prime Loan, unless Borrower notifies Agent at
least one Domestic Business Day before the date of such repayment that it elects
not to borrow any Prime Loans on such date.
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SECTION 7.2 Illegality. If the adoption of any applicable law, rule or
regulation, or any change therein, or any change in the interpretation or
administration thereof by any governmental authority, central bank or comparable
agency charged with the interpretation or administration thereof, or compliance
by any Bank with any request or directive (whether or not having the force of
law) of any such authority, central bank or comparable agency shall make it
unlawful or impossible for any Bank to make, maintain or fund its Eurocurrency
Loans to Borrower, such Bank shall forthwith give notice thereof to Agent and
Agent shall give notice thereof to Borrower. Upon receipt of such notice,
Borrower shall repay in full then outstanding principal amount of each of its
Eurocurrency Loans, together with accrued interest thereon, on either (a) the
last day of then current Interest Period applicable to such Eurocurrency Loan if
such Bank may lawfully continue to maintain and fund such Eurocurrency Loan to
such day or (b) immediately if such Bank may not lawfully continue to fund and
maintain such Eurocurrency Loan to such day. Concurrently with repaying each
Eurocurrency Loan of Bank, Borrower shall borrow a Prime Loan in an equal
principal amount from Banks, and Banks shall make such a Prime Loan.
SECTION 7.3 Increased Cost.
(a) If (i) Regulation D or (ii) after the date hereof, the adoption of any
applicable law, rule or regulation, or any change therein, or any change in the
interpretation or administration thereof by any governmental authority, central
bank or comparable agency charged with the interpretation or administration
thereof, or compliance by any Bank with any request or directive (whether or not
having the force of law) of any such authority, central bank or comparable
agency (a "Regulatory Change"):
(A) shall subject any Bank to any tax, duty or other charge with
respect to its Eurocurrency Loans, its Note or its obligation to make
Eurocurrency Loans or shall change the basis of taxation of payments to any
Bank of the principal of or interest on its Eurocurrency Loans or any other
amounts due under this Agreement in respect of its Eurocurrency Loans or
its obligation to make Eurocurrency Loans (except for changes in the rate
of tax on the overall net income of any such Bank imposed by the
jurisdiction in which such Bank's principal executive office is located);
or
(B) shall impose, modify or deem applicable any reserve (including,
without limitation, any imposed by the Board of Governors of the Federal
Reserve System), special deposit, capital or similar requirement against
assets of, deposits with or for the account of, or credit extended or
committed to be extended by, any Bank or shall impose on any Bank or on the
United States market for certificates of deposit or the interbank market
for Eurocurrency deposits any other condition affecting any Bank's Loans,
its Note or its obligation to make Loans;
and the result of any of the foregoing is to increase the cost to (or in the
case of Regulation D, to impose a cost on) any Bank of making or maintaining any
Eurocurrency Loan or to reduce the amount of any sum received or receivable by
any Bank under this Agreement or under its Note with respect thereto, by an
amount deemed by such Bank to be material, and if such Bank is not otherwise
fully compensated for such cost or reduction by virtue of the inclusion of the
reference to "Reserve Percentage" in the calculation of the interest rate
applicable to Eurocurrency Loans, then, within 15 days after demand by such
Bank, Borrower shall pay for the account of such Bank as additional interest,
such additional amount or amounts as will compensate such Bank for such
increased cost or reduction. Any Bank will promptly notify Agent, who in turn
shall promptly notify Borrower of any event of which it has knowledge, occurring
after the date hereof, which will entitle such Bank to compensation pursuant to
this Section. A certificate of such Bank claiming compensation under this
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Section and setting forth the additional amount or amounts to be paid to it
hereunder shall be conclusive in the absence of manifest error. Upon reasonable
request of Borrower, each Bank claiming additional compensation under this
Section shall provide to Borrower additional information with respect to the
determination of such additional amount or amounts. In determining such amount
or amounts, Bank may use any reasonable averaging and attribution methods.
(b) If any Bank demands compensation under this Section, Borrower may at
any time, upon at least two Eurocurrency Business Days' prior notice to Agent,
repay in full its then outstanding Eurocurrency Loans from such Bank, together
with accrued interest thereon to the date of prepayment and any other amounts
due under Section 2.10. Concurrently with repaying such Eurocurrency Loans,
Borrower may borrow a Prime Loan in an amount equal to the aggregate principal
amount of such Eurocurrency Loans, and such Bank shall make such a Prime Loan.
SECTION 7.4 Prime Loans Substituted for Affected Eurocurrency Loans. If
notice has been given by any Bank pursuant to Section 7.2 or by Borrower
pursuant to Section 7.3 requiring Eurocurrency Loans to be repaid, then, unless
and until such Bank or Agent notifies Borrower that the circumstances giving
rise to such repayment no longer apply:
(a) All Loans which would otherwise be made as Eurocurrency Loans shall be
made instead as Prime Loans, and
(b) After each of the Eurocurrency Loans to Borrower has been so repaid,
all payments and prepayments of principal which would otherwise be applied to
repay such Eurocurrency Loans shall be applied to repay its Prime Loans instead.
Agent shall notify Borrower if and when the circumstances giving rise to such
repayment no longer apply.
ARTICLE 8 - THE AGENT
SECTION 8.1 Appointment and Authorization. Each Bank irrevocably appoints
and authorizes the Agent to take such action as agent on its behalf and to
exercise such powers under this Agreement, the Notes, the Reimbursement
Agreements and the other transaction documents as are delegated to the Agent by
the terms hereof or thereof, together with all such powers as are reasonably
incidental thereto.
SECTION 8.2 Agent and Affiliates. Mercantile shall have the same rights and
powers under this Agreement as any other Bank and may exercise or refrain from
exercising the same as though it were not the Agent, and Mercantile and its
affiliates may accept deposits from, lend money to, and generally engage in any
kind of business with Borrower or any of its Subsidiaries or affiliates as if it
were not the Agent hereunder.
SECTION 8.3 Action by Agent. The obligations of the Agent hereunder are
only those expressly set forth herein. Without limiting the generality of the
foregoing, the Agent shall not be required to take any action with respect to
any Default or Event of Default, except as expressly provided in Article 6.
SECTION 8.4 Consultation with Experts. The Agent may consult with legal
counsel, independent public accountants and other experts selected by it and
shall not be liable for any action taken or omitted to be taken by it in good
faith in accordance with the advice of such counsel, accountants or experts.
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SECTION 8.5 Liability of Agent. Neither the Agent nor any of its directors,
officers, agents or employees shall be liable for any action taken or not taken
by it in connection herewith (i) with the consent or at the request of each of
the Banks, or (ii) in the absence of its own gross negligence or willful
misconduct. Neither the Agent nor any of its directors, officers, agents or
employees shall be responsible for or have any duty to ascertain, inquire into
or verify (i) any statement, warranty or representation made in connection with
this Agreement or any borrowing hereunder; (ii) the performance or observance of
any of the covenants or agreements of Borrower; (iii) the satisfaction of any
condition specified in Article 3, except receipt of items required to be
delivered to the Agent; or (iv) the validity, effectiveness or genuineness of
this Agreement, the Notes, the Reimbursement Agreements or any other transaction
document. The Agent shall not incur any liability by acting in reliance upon any
notice, consent, certificate, statement, or other writing (which may be a bank
wire, telecopy or similar writing) believed by it to be genuine or to be signed
by the proper party or parties.
SECTION 8.6 Indemnification. Each Bank shall, ratably in accordance with
its Commitment, indemnify the Agent (to the extent not reimbursed by Borrower)
against any cost, expense (including counsel fees and disbursements), claim,
demand, action, loss or liability (except such as result from the Agent's gross
negligence or willful misconduct) that the Agent may suffer or incur in
connection with this Agreement or any action taken or omitted by the Agent
hereunder.
SECTION 8.7 Credit Decision. Each Bank acknowledges that it has,
independently and without reliance upon the Agent or any other Bank, and based
on such documents and information as it has deemed appropriate, made its own
credit analysis and decision to enter into this Agreement. Each Bank also
acknowledges that it will, independently and without reliance upon the Agent or
any other Bank, and based on such documents and information as it shall deem
appropriate at the time, continue to make its own credit decisions in taking or
not taking any action under this Agreement.
SECTION 8.8 Resignation of Agent. The Agent may resign at any time by
giving written notice thereof to the Banks and Borrower. Upon any such
resignation, Borrower, with the consent of the Banks, shall have the right to
appoint a successor Agent. If no successor Agent shall have been so appointed by
Borrower, and shall have accepted such appointment, within thirty (30) days
after the retiring Agent's giving of notice of resignation, then the retiring
Agent may, on behalf of the Banks, appoint a successor Agent, which shall be a
commercial bank organized under the laws of the United States of America or of
any State thereof and having a combined capital and surplus of at least
$200,000,000.00. Upon the acceptance of any appointment as Agent hereunder by a
successor Agent, such successor Agent shall thereupon succeed to and become
vested with all the rights, powers, privileges, and duties of the retiring
Agent, and the retiring Agent shall be discharged from its duties and
obligations under this Agreement. After any retiring Agent's resignation as
Agent, the provisions of this Article 8 shall inure to its benefit as to any
actions taken or omitted to be taken by it while it was Agent under this
Agreement.
SECTION 8.9 Agent's Fee. In consideration of the services of the Agent
hereunder, Borrower shall pay to the Agent, solely for its account, an annual
fee in an amount to be agreed upon between Borrower and the Agent, which fee
shall be due and payable on the date hereof and on the first (1st) day of each
March hereafter during the Term hereof commencing with March 1, 2000.
ARTICLE 9 - MISCELLANEOUS
SECTION 9.1 Notices. All notices, requests and other communications to any
party hereunder shall be in writing (including bank wire, telecopy or similar
writing) and shall be given to such party at its address or telecopy number set
forth on the signature pages hereof or such other address or telecopy number as
such party may hereafter specify for the purpose by notice to Agent or Borrower
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as the case may be. Each such notice, request or other communication shall be
effective (a) if given by telecopy, when such telecopy is transmitted to the
telecopy number specified in this Section, (b) if given by mail, 72 hours after
such communication is deposited in the mails with appropriate first class,
certified or registered postage prepaid, addressed as aforesaid, or (c) if given
by any other means, when delivered at the address specified in this Section;
provided that notices to the Agent and/or the Banks under Section 2.2, 2.4, 2.7,
2.8 or Article 7 shall not be effective until received.
SECTION 9.2 No Waivers. No failure or delay by the Agent or any of the
Banks in exercising any right, power or privilege hereunder or under any Note
shall operate as a waiver thereof nor shall any single or partial exercise
thereof preclude any other right, power or privilege. The rights and remedies
provided herein and in the other documents contemplated hereby shall be
cumulative and not exclusive of any rights or remedies provided by law.
SECTION 9.3 Expenses; Documentary Taxes. Borrower agrees, whether or not
any Loan is made or Letter of Credit issued hereunder, to pay Banks upon demand:
(i) all out-of-pocket costs and expenses and all Attorneys' Fees of Banks in
connection with the preparation, negotiation, execution and administration of
this Agreement, the Notes, any Reimbursement Agreements and the other
transaction documents, (ii) all out-of-pocket costs and expenses and all
Attorneys' Fees of Banks in connection with the preparation of any waiver or
consent hereunder or any amendment hereof or any Event of Default or alleged
Event of Default hereunder, (iii) if an Event of Default occurs, all
out-of-pocket costs and expenses and all Attorneys' Fees incurred by any Bank in
connection with such Event of Default and collection and other enforcement
proceedings resulting therefrom and (iv) all other Attorneys' Fees incurred by
Bank relating to or arising out of or in connection with this Agreement or any
of the other transaction documents. Borrower further agrees to pay or reimburse
Banks for any stamp or other taxes which may be payable with respect to the
execution, delivery, recording and/or filing of this Agreement, the Notes, the
Reimbursement Agreements or any of the other transaction documents. All of the
obligations of Borrower under this Section 9.3 shall survive the satisfaction
and payment of Borrower's Obligations and the termination of this Agreement.
SECTION 9.4 Environmental Indemnity. Borrower hereby agrees to indemnify
Agent and Banks and hold Agent and Banks harmless from and against any and all
losses, liabilities, damages, injuries, costs, expenses and claims of any and
every kind whatsoever (including, without limitation, court costs and Attorneys'
Fees) which at any time or from time to time may be paid, incurred or suffered
by, or asserted against, Agent or any Bank for, with respect to or as a direct
or indirect result of the violation by Borrower of any Environmental Laws; or
with respect to, or as a direct or indirect result of the presence on or under,
or the escape, seepage, leakage, spillage, discharge, emission or release from,
properties utilized by Borrower in the conduct of its respective business into
or upon any land, the atmosphere or any watercourse, body of water or wetland,
of any Hazardous Materials or any other hazardous or toxic waste, substance or
constituent or other substance (including, without limitation, any losses,
liabilities, damages, injuries, costs, expenses or claims asserted or arising
under the Environmental Laws); and the provisions of and undertakings and
indemnification set out in this Section 9.4 shall survive the satisfaction and
payment of Borrower's Obligations and the termination of this Agreement.
SECTION 9.5 General Indemnity. In addition to the payment of expenses
pursuant to Section 9.3, whether or not the transactions contemplated hereby
shall be consummated, Borrower hereby agrees to indemnify, pay and hold Agent
and Banks and any holder(s) of the Notes, and the officers, directors,
employees, agents and affiliates of Agent, Banks and such holder(s)
(collectively, the "Indemnitees") harmless from and against any and all other
liabilities, obligations, losses, damages, penalties, actions, judgments, suits,
claims, costs, expenses and disbursements of any kind or nature whatsoever
(including, without limitation, the reasonable fees and disbursements of counsel
for such Indemnitees in connection with any investigative, administrative or
judicial proceeding commenced or threatened, whether or not such Indemnitees
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shall be designated a party thereto), that may be imposed on, incurred by or
asserted against the Indemnitees, in any manner relating to or arising out of
this Agreement or any other agreement, document or instrument executed and
delivered by Borrower or any other Obligor in connection herewith, the
statements contained in any commitment letters delivered by Agent or any Bank,
Banks' agreements to make the Loans and issue Letters of Credit hereunder or the
use or intended use of any Letter of Credit or of the proceeds of any Loan
hereunder (collectively, the "indemnified liabilities"); provided that Borrower
shall have no obligation to an Indemnitee hereunder with respect to indemnified
liabilities arising from the gross negligence or willful misconduct of that
Indemnitee as determined by a court of competent jurisdiction. To the extent
that the undertaking to indemnify, pay and hold harmless set forth in the
preceding sentence may be unenforceable because it is violative of any law or
public policy, Borrower shall contribute the maximum portion that it is
permitted to pay and satisfy under applicable law to the payment and
satisfaction of all indemnified liabilities incurred by the Indemnitees or any
of them. The provisions of the undertakings and indemnification set out in this
Section 9.5 shall survive satisfaction and payment of Borrower's Obligations and
the termination of this Agreement.
SECTION 9.6 Participations. Each Bank may sell to one or more other Persons
a participation in all or any part of its Commitment and any Loan and Letter of
Credit risk held by it, in which event each such participant shall be entitled
to the rights and benefits of this Agreement to the extent of its participation
in such Loan and Letter of Credit risk or such Bank's Commitment, as the case
may be, as if (and Borrower shall be directly obligated to such participant
under such provision as if) such participant were a "Bank" except only to the
extent provided under the Participation Agreement between such selling Bank and
such participant(s), but such participant shall not have any other rights or
benefits under this Agreement or the Notes. The Banks agree to notify Borrower
of any participations sold by delivering a copy of such Participation Agreement
to Borrower. In the event any Bank sells a participation, it shall not be
obligated to the participant under the Participation Agreement to take or
refrain from taking any action hereunder or under the Notes, except that such
Bank may agree in the Participation Agreement, that it will not, without the
consent of the participant, agree to (i) the increase or extension of the Term,
or the extension of the time or waiver of any requirement for the reduction or
termination, of such Bank's Commitment, (ii) the extension of any date fixed for
the payment of principal of or interest on the related Loan or Loans, any Letter
of Credit reimbursement obligation or fee, or of the commitment fee, (iii) the
reduction of any payment of principal thereof, or (iv) the reduction of the rate
at which either interest is payable thereon or (if the participant is entitled
to any part thereof) the commitment fee is payable hereunder to a level below
the rate at which the participant is entitled to receive interest or such fee
(as the case may be) in respect of such participation.
SECTION 9.7 Assignment Agreements. Each Bank may, upon prior notice to and
consent of Borrower and the Agent, which consent shall not be unreasonably
withheld or delayed and which consent of Borrower shall not be required after
the occurrence of a Default or an Event of Default hereunder, from time to time
sell and assign a pro rata part of all of the indebtedness evidenced by the Note
then owned by it together with an equivalent proportion of its obligation to
make Loans hereunder and the credit risk incidental to the Letters of Credit
pursuant to an Assignment Agreement substantially in the form of Exhibit I
attached hereto, executed by the assignor, the assignee, the Agent and the
Borrower (each an "Assignment Agreement"); provided that no assignment under
this Section 9.7 shall be made by any Bank to the Borrower or to any Subsidiary,
Related Party or other affiliate of the Borrower. The Assignment Agreement shall
specify in each instance the portion of the indebtedness evidenced by the
assignor's Note which is to be assigned to each such assignee and the portion of
the Commitment of the assignor and the credit risk incidental to the Letters of
Credit (which portions shall be equivalent) to be assumed by the assignee,
provided that nothing herein contained shall restrict, or be deemed to require
any consent as a condition to, or require payment of any fee in connection with,
any sale, discount or pledge by any Bank of any Note or other obligation
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hereunder to a federal reserve bank. Any such portion of the indebtedness
assigned by any Bank pursuant to this Section 9.7 shall not be less than
$5,000,000.00. Upon the execution of each Assignment Agreement by the assignor,
the assignee and the Borrower and consent thereto by the Agent (i) such assignee
shall thereupon become a "Bank" for all purposes of this Agreement with a
Commitment in the amount set forth in such Assignment Agreement and with all the
rights, powers and obligations afforded a Bank hereunder, (ii) the assignor
shall have no further liability for funding the portion of its Commitment
assumed by such other Bank, (iii) the address for notices to such new Bank shall
be as specified in the Assignment Agreement, and (iv) the Borrowers shall, in
exchange for the cancellation of the Note held by the assignor Bank, execute and
deliver a Note to the assignee Bank in the amount of its Commitment and new Note
to the assignor Bank in the amount of its Commitment after giving effect to the
reduction occasioned by such assignment, all such Notes to constitute "Notes"
for all purposes of this Agreement. There shall be paid to the Agent, as a
condition to such assignment, an administration fee of $3,500.00 plus any
out-of-pocket costs and expenses incurred by it in effecting such assignment,
such fee to be paid by the assignor or the assignee as they may mutually agree,
but under no circumstances shall any portion of such fee be payable by or
charged to the Borrower. The Agent and each of the Banks are hereby authorized
to deliver a copy of any financial statement or other information made available
by the Borrower to any proposed assignee or participant in any portion of any
Bank's Loans and Commitment hereunder.
SECTION 9.8 Right of Setoff. Upon the occurrence and during the continuance
of any Event of Default, each Bank is hereby authorized at any time and from
time to time, without notice to Borrower (any such notice being expressly waived
by Borrower) and to the fullest extent permitted by law, to setoff and apply any
and all deposits (general or special, time or demand, provisional or final) at
any time held by such Bank and any and all other indebtedness at any time owing
by such Bank to or for the credit or account of Borrower against any and all of
Borrower's Obligations irrespective of whether or not such Bank shall have made
any demand hereunder or under any of the other transaction documents and
although such obligations may be contingent or unmatured. Each offsetting Bank
agrees to promptly notify Borrower after any such setoff and application made by
such Bank, provided, however, that the failure to give such notice shall not
affect the validity of such setoff and application. The rights of Banks under
this Section 9.8 are in addition to any other rights and remedies (including,
without limitation, other rights of setoff) which Banks may have. As among
themselves, each of the Banks hereby agrees that in the event any Bank shall at
any time receive payments against Borrower's Obligations from any source,
whether by setoff or otherwise, and the effect of such payments is to cause such
Bank to receive more than its Pro Rata Share of the total principal payments
made to all Banks in the aggregate, then such Bank agrees to purchase from the
other Bank or Banks participating in Borrower's Obligations hereunder a
participating interest in such Bank's loans to the extent necessary to restore
each Bank to its Pro Rata Share of Borrower's Obligations hereunder.
SECTION 9.9 Amendments and Waivers. Any provision of this Agreement, the
Notes or any of the other Transaction Documents may be amended or waived if, but
only if, such amendment or waiver is in writing and is signed by Borrower and
Agent, which amendment or waiver Agent shall sign only upon the direction of the
Majority Banks; provided that no such amendment or waiver shall, unless signed
by all of the Banks, (i) increase the Commitment of any Bank, (ii) change the
Pro Rata Share of any of the Banks as to the Commitments or of the aggregate
unpaid principal amount of any Loan, (iii) reduce the principal of or rate of
interest on any Loan hereunder or any other amount payable hereunder, (iv)
postpone the date fixed for any payment of principal or interest on any Loan
hereunder, (v) amend Section 9.8 or this Section 9.9, (vi) make any change in
the Borrowing Base or its calculation, (vii) waive compliance with or otherwise
amend the financial covenants contained in Sections 5.1(e)(i) and (ii), or
(viii) amend the definition of Majority Banks.
NOTICE: ORAL AGREEMENTS OR COMMITMENTS TO LOAN MONEY, EXTEND CREDIT OR TO
FOREBEAR FROM ENFORCING REPAYMENT OF A DEBT, INCLUDING PROMISES TO EXTEND OR
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RENEW SUCH DEBT, ARE NOT ENFORCEABLE. TO PROTECT BORROWER, THE AGENT AND THE
BANKS FROM MISUNDERSTANDING OR DISAPPOINTMENT, ANY AGREEMENTS BORROWER, THE
AGENT AND THE BANKS REACH COVERING SUCH MATTERS ARE CONTAINED IN THIS WRITING,
WHICH IS THE COMPLETE AND EXCLUSIVE STATEMENT OF THE AGREEMENTS BETWEEN
BORROWER, THE AGENT AND THE BANKS, EXCEPT AS BORROWER, THE AGENT AND THE BANKS
MAY LATER AGREE IN WRITING TO MODIFY SUCH AGREEMENT.
SECTION 9.10 Successors and Assigns. The provisions of this Agreement shall
be binding upon and inure to the benefit of the parties hereto and their
respective successors and assigns, except that Borrower may not assign or
otherwise transfer any of its rights or obligations under this Agreement or the
Notes.
SECTION 9.11 Severability. In case any one or more of the provisions
contained in this Agreement should be invalid, illegal or unenforceable in any
respect, the validity, legality and enforceability of the remaining provisions
contained herein shall not in any way be affected or impaired thereby.
SECTION 9.12 Missouri Law. This Agreement and the Notes are submitted for
acceptance at Agent's principal place of business in St. Louis, Missouri and
shall not be binding upon the Agent or the Banks or become effective until
executed by the Agent and/or the Banks, as applicable, at said place of
business. When so executed, this Agreement and the Notes shall be deemed to have
been made at said place of business. This Agreement, the Notes and any other
document delivered hereunder shall be construed in accordance with and governed
by the internal laws of the State of Missouri.
SECTION 9.13 Authority to Act. The Agent and the Banks shall be entitled to
act on any notices and instructions (telephonic or written) believed by Agent or
such Bank to have been delivered by any person authorized to act on behalf of
Borrower pursuant hereto, regardless of whether such notice or instruction was
in fact delivered by a person authorized to act on behalf of Borrower, and
Borrower hereby agrees to indemnify Agent and each Bank and hold Agent and each
Bank harmless from and against any and all losses and expenses, if any, ensuing
from any such action.
SECTION 9.14 Banks' Books and Records. Each Bank's books and records
showing the account between Borrower and such Bank shall be admissible in
evidence in any action or proceeding and shall constitute prima facie proof
thereof.
SECTION 9.15 CHOICE OF FORUM; WAIVER OF JURY TRIAL. TO INDUCE THE AGENT AND
THE BANKS TO ACCEPT THIS AGREEMENT, BORROWER, IRREVOCABLY, AGREES THAT ANY
ACTIONS OR PROCEEDINGS IN ANY WAY, MANNER OR RESPECT ARISING OUT OF OR FROM OR
RELATED TO THIS AGREEMENT AND THE NOTE MAY BE LITIGATED IN COURTS HAVING SITUS
WITHIN THE CITY OF ST. LOUIS, STATE OF MISSOURI. BORROWER HEREBY CONSENTS AND
SUBMITS TO THE JURISDICTION OF ANY LOCAL, STATE OR FEDERAL COURT LOCATED WITHIN
SAID CITY AND STATE. BORROWER HEREBY WAIVES ANY RIGHT IT MAY HAVE TO TRANSFER OR
CHANGE THE VENUE OF ANY LITIGATION BROUGHT IN ACCORDANCE WITH THIS SECTION.
BORROWER AND BANK IRREVOCABLY WAIVE THE RIGHT TO TRIAL BY JURY WITH RESPECT TO
ANY ACTION IN WHICH BORROWER, THE AGENT OR ANY OF THE BANKS ARE PARTIES.
SECTION 9.16 Resurrection of Obligations. To the extent that any Bank
receives any payment on account of Borrower's liabilities, and any such
payment(s) or any part thereof are subsequently invalidated, declared to be
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fraudulent or preferential, set aside, subordinated and/or required to be repaid
to a trustee, receiver or any other party under any bankruptcy act, state or
federal law, common law or equitable cause, then, to the extent of such
payment(s) received, Borrower's liabilities, or part thereof intended to be
satisfied, shall be revived and continue in full force and effect, as if such
payment(s) had not been received by such Bank and applied on account of
Borrower's liabilities.
SECTION 9.17 Counterparts; Effectiveness. This Agreement may be signed in
any number of counterparts, each of which shall be an original, with the same
effect as if the signatures thereto and hereto were upon the same instrument.
This Agreement shall become effective when the Agent shall have received
counterparts hereof signed by each of the parties hereto.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed by their respective authorized officers as of the day and year
first above written.
SHOE CARNIVAL, INC.
By: /s/ W. Kerry Jackson
W. Kerry Jackson, Vice President,
Chief Financial Officer and Treasurer
8233 Baumgart Road
Evansville, Indiana 47711
Telecopy Number: (812) 867-4261
Commitment: MERCANTILE BANK
NATIONAL ASSOCIATION
$17,500,000.00 (38.89%)
By: /s/ Eric Hartman
Eric Hartman, Assistant Vice President
721 Locust Street
St. Louis, Missouri 63101
Telecopy Number: (314) 418-3859
Commitment: OLD NATIONAL BANK
$10,000,000.00 (22.22%)
By: /s/ John Lamb
John Lamb, Vice President
420 Main Street
Evansville, Indiana 47708
Telecopy Number: (812) 464-1262
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Commitment: FIRST UNION NATIONAL BANK
$17,500,000.00 (38.89%)
By: /s/ Richard P. Silva
Richard P. Silva, Senior Vice President
225 Water Street
Jacksonville, Florida 32202
Telecopy Number: (904) 361-3526
MERCANTILE BANK
NATIONAL ASSOCIATION, AS AGENT
By: /s/ Eric Hartman
Eric Hartman, Assistant Vice President
721 Locust Street
St. Louis, Missouri 63101
Telecopy Number: (314) 418-3859
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Promissory Note
$17,500,000.00 St. Louis, Missouri
April 16, 1999
FOR VALUE RECEIVED, SHOE CARNIVAL, INC., an Indiana corporation
("Borrower"), hereby promises to pay to the order of Mercantile Bank National
Association, a national banking association ("Bank") on March 31, 2001, the
lesser of (a) Seventeen Million Five Hundred Thousand Dollars ($17,500,000.00),
or (b) the aggregate unpaid principal amount of all Loans made by Bank to
Borrower in accordance with the terms and conditions hereof and of that certain
Amended and Restated Credit Agreement dated as of April 16, 1999, made by and
between Borrower, Mercantile Bank National Association, as Agent (the "Agent")
and the Banks named therein, as from time to time amended (as amended, the
"Credit Agreement") and the unreimbursed amount of any draws under any Letters
of Credit issued for the account of Borrower in accordance with the terms and
conditions of the Credit Agreement and the Reimbursement Agreements (as defined
in the Credit Agreement). The aggregate principal amount which Bank may have
outstanding hereunder at any one time for all Loans shall not exceed the lesser
of (i) Seventeen Million Five Hundred Thousand Dollars ($17,500,000.00) minus
the face amount of all Letters of Credit then outstanding under Section 2.1(a)
of the Credit Agreement, or (ii) Thirty-Eight and Eighty-Nine Hundredths of One
Percent (38.89%) of the then current Borrowing Base, which amounts may be
borrowed, paid, reborrowed and repaid, in full or in part, prior to March 31,
2001 subject to the terms and conditions hereof and of the Credit Agreement. If
at any time the aggregate principal amount of all Loans outstanding under this
Note should exceed the amount set forth in the preceding sentence, whether as a
result of a reduction in the Borrowing Base or otherwise, Borrower shall be
automatically required (without demand or notice of any kind by Bank, all of
which are hereby expressly waived by Borrower), to immediately repay the Loans
in an amount sufficient to reduce such aggregate principal amount of Loans
outstanding under this Note to the amount set forth in the preceding sentence.
Additionally, Borrower promises to pay to the order of Bank all accrued
interest owing on the principal amount of all Loan advances and Letter of Credit
reimbursement obligations outstanding hereunder. Advances hereunder shall bear
interest at the rate per annum equal to such of the following as Borrower, at
its option, shall select:
(a) the interest rate equal to the interest rate announced from time to
time by Agent as its "Prime Rate" on commercial loans minus One-Half of One
Percent (0.50%), which rate shall fluctuate as and when said Prime Rate shall
change, or
(b) the London Interbank Offered Rate plus Eurocurrency Margin (as defined
in the Credit Agreement) for the applicable Interest Period,
determined in each case as of the date of a Prime Rate Loan made hereunder, or
the commencement of a Interest Period for Eurocurrency Loans, as the case may
be. Said interest shall be payable on the dates provided in the Credit
Agreement. After maturity, the unpaid principal hereof shall bear interest at a
rate per annum equal to two and one-half percent (2.50%) in excess of the
interest rate announced from time to time by Agent as its "Prime Rate" on
commercial loans, which rate shall fluctuate as and when said Prime Rate shall
change.
39
<PAGE>
Interest shall be computed on the basis of a 360-day year for the actual
number of days elapsed for all Loans made hereunder. Payments of principal,
interest and fees shall be made in lawful money of the United States of America
in immediately available funds at the office of Agent situated at 721 Locust
Street, St. Louis, Missouri 63101 or at such other place as the holder of this
Note may designate, and such payments shall be applied to the payment of
interest or principal (or any combination of the foregoing) owing on this Note
in such order as Bank (or such holder) shall determine.
All advances and all principal payments made hereunder and all Interest
Periods and interest rates applicable to Eurocurrency Loans may be endorsed by
the Bank on its records or the sheet attached to this Note, which information so
endorsed or recorded shall constitute prima facie evidence thereof; provided,
however that the obligation of Borrower to repay each advance made hereunder
shall be absolute and unconditional, notwithstanding any failure of Bank to
endorse or record or any mistake by Bank in connection with any recordation or
with any endorsement on the sheet attached to this Note or to give to Borrower
or receive from Borrower any notice or confirmation of each advance.
Borrower shall be privileged to prepay in whole or in part the principal
outstanding hereunder; provided, however, that (subject to the right of Bank to
accelerate payment hereunder) any Eurocurrency Loan may be prepaid only at the
expiration of the applicable Interest Period; and provided further, however,
that on any such prepayment, Borrower shall also pay all interest accrued on the
principal amount being prepaid to and including the date of such prepayment. Any
payment of a Eurocurrency Loan other than on the last day of the applicable
Interest Period in contravention of this paragraph shall obligate Borrower to
pay to Bank the amount of any funding losses or other breakage costs which may
be incurred by Bank as set forth in Section 2.10 of the Credit Agreement.
Consistent with the terms of this Note, the Agent shall determine each
interest rate applicable to the advances hereunder, which determination shall be
conclusive in the absence of manifest error.
This Note is one of the Notes referred to in the Credit Agreement, which
Credit Agreement, among other things, contains provisions for acceleration of
the maturity hereof upon the occurrence of certain stated events and also for
prepayments on account of principal hereof and interest hereon prior to the
maturity hereof upon the terms and conditions specified therein. Terms defined
in the Credit Agreement are used herein with the same meanings.
In the event that any payment due hereunder shall not be paid when due,
whether by reason of demand or otherwise, and this Note shall be placed in the
hands of an attorney for collection hereof, Borrower agrees to pay in addition
to all other amounts due hereon the costs and expenses of collection, including
reasonable attorneys' fees and expenses, whether or not litigation is commenced
in aid thereof. Borrower hereby waives presentment, demand, protest, notice of
protest and notice of dishonor.
This Note shall be governed by and construed in accordance with the
internal laws of the State of Missouri.
40
<PAGE>
This Note is a renewal, restatement and continuation of the obligations due
Bank as evidenced by a prior Amended and Restated Promissory Note dated March
31, 1998 from Borrower to Bank, and is not a novation thereof. All interest
evidenced by the prior Note being renewed by this instrument shall continue to
be due and payable until paid.
SHOE CARNIVAL, INC.
By:/s/ W. Kerry Jackson
W. Kerry Jackson, Vice President,
Chief Financial Officer and Treasurer
STATE OF INDIANA )
) SS.
COUNTY OF VANDERBURGH )
On this 16th day of April, 1999, before me appeared W. Kerry Jackson, to me
personally known, who being by me duly sworn, did say that he is the Vice
President, Chief Financial Officer and Treasurer of Shoe Carnival, Inc., an
Indiana corporation, and that said instrument was signed in behalf of said
corporation by authority of its Board of Directors; and said W. Kerry Jackson
acknowledged said instrument to be the free act and deed of said corporation.
IN TESTIMONY WHEREOF, I have hereunto set my hand and affixed my official
seal in the County and State aforesaid, the day and year first above written.
(Seal)
Notary Public /s/ Molly A. Graham
My Commission Expires: 6/23/01
41
<PAGE>
Promissory Note
$10,000,000.00 St. Louis, Missouri
April 16, 1999
FOR VALUE RECEIVED, SHOE CARNIVAL, INC., an Indiana corporation
("Borrower"), hereby promises to pay to the order of Old National Bank, a
national bank ("Bank") on March 31, 2001, the lesser of (a) Ten Million Dollars
($10,000,000.00), or (b) the aggregate unpaid principal amount of all Loans made
by Bank to Borrower in accordance with the terms and conditions hereof and of
that certain Amended and Restated Credit Agreement dated as of April 16, 1999
made by and between Borrower, Mercantile Bank National Association, as Agent
(the "Agent") and the Banks named therein, as from time to time amended (as
amended, the "Credit Agreement") and the unreimbursed amount of any draws under
any Letters of Credit issued for the account of Borrower in accordance with the
terms and conditions of the Credit Agreement and the Reimbursement Agreements
(as defined in the Credit Agreement). The aggregate principal amount which Bank
may have outstanding hereunder at any one time for all Loans shall not exceed
the lesser of (i) Ten Million Dollars ($10,000,000.00) minus the face amount of
all Letters of Credit then outstanding under Section 2.1(a) of the Credit
Agreement, or (ii) Twenty-Two and Twenty-Two Hundredths of One Percent (22.22%)
of the then current Borrowing Base, which amounts may be borrowed, paid,
reborrowed and repaid, in whole or in part, prior to March 31, 2001 subject to
the terms and conditions hereof and of the Credit Agreement. If at any time the
aggregate principal amount of all Loans outstanding under this Note should
exceed the amount set forth in the preceding sentence, whether as a result of a
reduction in the Borrowing Base or otherwise, Borrower shall be automatically
required (without demand or notice of any kind by Bank, all of which are hereby
expressly waived by Borrower), to immediately repay the Loans in an amount
sufficient to reduce such aggregate principal amount of Loans outstanding under
this Note to the amount set forth in the preceding sentence.
Additionally, Borrower promises to pay to the order of Bank
all accrued interest owing on the principal amount of all Loan advances and
Letter of Credit reimbursement obligations outstanding hereunder. Advances
hereunder shall bear interest at the rate per annum equal to such of the
following as Borrower, at its option, shall select:
(a) the interest rate equal to the interest rate announced from time to
time by Agent as its "Prime Rate" on commercial loans minus One-Half of One
Percent (0.50%), which rate shall fluctuate as and when said Prime Rate shall
change, or
(b) the London Interbank Offered Rate plus Eurocurrency Margin (as defined
in the Credit Agreement) for the applicable Interest Period,
determined in each case as of the date of a Prime Rate Loan made hereunder, or
the commencement of a Interest Period for Eurocurrency Loans, as the case may
be. Said interest shall be payable on the dates provided in the Credit
Agreement. After maturity, the unpaid principal hereof shall bear interest at a
rate per annum equal to two and one-half percent (2.50%) in excess of the
interest rate announced from time to time by Agent as its "Prime Rate" on
commercial loans, which rate shall fluctuate as and when said Prime Rate shall
change.
42
<PAGE>
Interest shall be computed on the basis of a 360-day year for the actual
number of days elapsed for all Loans made hereunder. Payments of principal,
interest and fees shall be made in lawful money of the United States of America
in immediately available funds at the office of Agent situated at 721 Locust
Street, St. Louis, Missouri 63101 or at such other place as the holder of this
Note may designate, and such payments shall be applied to the payment of
interest or principal (or any combination of the foregoing) owing on this Note
in such order as Bank (or such holder) shall determine.
All advances and all principal payments made hereunder and all Interest
Periods and interest rates applicable to Eurocurrency Loans may be endorsed by
the Bank on its records or the sheet attached to this Note, which information so
endorsed or recorded shall constitute prima facie evidence thereof; provided,
however that the obligation of Borrower to repay each advance made hereunder
shall be absolute and unconditional, notwithstanding any failure of Bank to
endorse or record or any mistake by Bank in connection with any recordation or
with any endorsement on the sheet attached to this Note or to give to Borrower
or receive from Borrower any notice or confirmation of each advance.
Borrower shall be privileged to prepay in whole or in part the principal
outstanding hereunder; provided, however, that (subject to the right of Bank to
accelerate payment hereunder) any Eurocurrency Loan may be prepaid only at the
expiration of the applicable Interest Period; and provided further, however,
that on any such prepayment, Borrower shall also pay all interest accrued on the
principal amount being prepaid to and including the date of such prepayment. Any
payment of a Eurocurrency Loan other than on the last day of the applicable
Interest Period in contravention of this paragraph shall obligate Borrower to
pay to Bank the amount of any funding losses or other breakage costs which may
be incurred by Bank as set forth in Section 2.10 of the Credit Agreement.
Consistent with the terms of this Note, the Agent shall determine each
interest rate applicable to the advances hereunder, which determination shall be
conclusive in the absence of manifest error.
This Note is one of the Notes referred to in the Credit Agreement, which
Credit Agreement, among other things, contains provisions for acceleration of
the maturity hereof upon the occurrence of certain stated events and also for
prepayments on account of principal hereof and interest hereon prior to the
maturity hereof upon the terms and conditions specified therein. Terms defined
in the Credit Agreement are used herein with the same meanings.
In the event that any payment due hereunder shall not be paid when due,
whether by reason of demand or otherwise, and this Note shall be placed in the
hands of an attorney for collection hereof, Borrower agrees to pay in addition
to all other amounts due hereon the costs and expenses of collection, including
reasonable attorneys' fees and expenses, whether or not litigation is commenced
in aid thereof. Borrower hereby waives presentment, demand, protest, notice of
protest and notice of dishonor.
This Note shall be governed by and construed in accordance with the
internal laws of the State of Missouri.
SHOE CARNIVAL, INC.
By:/s/ W. Kerry Jackson
W. Kerry Jackson, Vice President,
Chief Financial Officer and Treasurer
43
<PAGE>
STATE OF INDIANA )
) SS.
COUNTY OF VANDERBURGH )
On this 16th day of April, 1999, before me appeared W. Kerry Jackson, to me
personally known, who being by me duly sworn, did say that he is the Vice
President, Chief Financial Officer and Treasurer of Shoe Carnival, Inc., an
Indiana corporation, and that said instrument was signed in behalf of said
corporation by authority of its Board of Directors; and said W. Kerry Jackson
acknowledged said instrument to be the free act and deed of said corporation.
IN TESTIMONY WHEREOF, I have hereunto set my hand and affixed my official
seal in the County and State aforesaid, the day and year first above written.
(Seal)
Notary Public /s/ Molly A. Graham
My Commission Expires: 6/23/01
44
<PAGE>
Promissory Note
$17,500,000.00 St. Louis, Missouri
April 16, 1999
FOR VALUE RECEIVED, SHOE CARNIVAL, INC., an Indiana corporation
("Borrower"), hereby promises to pay to the order of First Union National Bank,
a national bank ("Bank") on March 31, 2001, the lesser of (a) Seventeen Million
Five Hundred Thousand Dollars ($17,500,000.00), or (b) the aggregate unpaid
principal amount of all Loans made by Bank to Borrower in accordance with the
terms and conditions hereof and of that certain Amended and Restated Credit
Agreement dated as of April 16, 1999 made by and between Borrower, Mercantile
Bank National Association, as Agent (the "Agent") and the Banks named therein,
as amended from time to time (as amended, the "Credit Agreement") and the
unreimbursed amount of any draws under any Letters of Credit issued for the
account of Borrower in accordance with the terms and conditions of the Credit
Agreement and the Reimbursement Agreements (as defined in the Credit Agreement).
The aggregate principal amount which Bank may have outstanding hereunder at any
one time for all Loans shall not exceed the lesser of (i) Seventeen Million Five
Hundred Thousand Dollars ($17,500,000.00) minus the face amount of all Letters
of Credit then outstanding under Section 2.1(a) of the Credit Agreement, or (ii)
Thirty-Eight and Eighty-Nine Hundredths of One Percent (38.89%) of the then
current Borrowing Base, which amounts may be borrowed, paid, reborrowed and
repaid, in whole or in part, prior to March 31, 2001 subject to the terms and
conditions hereof and of the Credit Agreement. If at any time the aggregate
principal amount of all Loans outstanding under this Note should exceed the
amount set forth in the preceding sentence, whether as a result of a reduction
in the Borrowing Base or otherwise, Borrower shall be automatically required
(without demand or notice of any kind by Bank, all of which are hereby expressly
waived by Borrower), to immediately repay the Loans in an amount sufficient to
reduce such aggregate principal amount of Loans outstanding under this Note to
the amount set forth in the preceding sentence.
Additionally, Borrower promises to pay to the order of Bank all accrued
interest owing on the principal amount of all Loan advances and Letter of Credit
reimbursement obligations outstanding hereunder. Advances hereunder shall bear
interest at the rate per annum equal to such of the following as Borrower, at
its option, shall select:
(a) the interest rate equal to the interest rate announced from time to
time by Agent as its "Prime Rate" on commercial loans minus One-Half of One
Percent (0.50%), which rate shall fluctuate as and when said Prime Rate shall
change, or
(b) the London Interbank Offered Rate plus Eurocurrency Margin (as defined
in the Credit Agreement) for the applicable Interest Period,
determined in each case as of the date of a Prime Rate Loan made hereunder, or
the commencement of a Interest Period for Eurocurrency Loans, as the case may
be. Said interest shall be payable on the dates provided in the Credit
Agreement. After maturity, the unpaid principal hereof shall bear interest at a
rate per annum equal to two and one-half percent (2.50%) in excess of the
interest rate announced from time to time by Agent as its "Prime Rate" on
commercial loans, which rate shall fluctuate as and when said Prime Rate shall
change.
45
<PAGE>
Interest shall be computed on the basis of a 360-day year for the actual
number of days elapsed for all Loans made hereunder. Payments of principal,
interest and fees shall be made in lawful money of the United States of America
in immediately available funds at the office of Agent situated at 721 Locust
Street, St. Louis, Missouri 63101 or at such other place as the holder of this
Note may designate, and such payments shall be applied to the payment of
interest or principal (or any combination of the foregoing) owing on this Note
in such order as Bank (or such holder) shall determine.
All advances and all principal payments made hereunder and all Interest
Periods and interest rates applicable to Eurocurrency Loans may be endorsed by
the Bank on its records or the sheet attached to this Note, which information so
endorsed or recorded shall constitute prima facie evidence thereof; provided,
however that the obligation of Borrower to repay each advance made hereunder
shall be absolute and unconditional, notwithstanding any failure of Bank to
endorse or record or any mistake by Bank in connection with any recordation or
with any endorsement on the sheet attached to this Note or to give to Borrower
or receive from Borrower any notice or confirmation of each advance.
Borrower shall be privileged to prepay in whole or in part the principal
outstanding hereunder; provided, however, that (subject to the right of Bank to
accelerate payment hereunder) any Eurocurrency Loan may be prepaid only at the
expiration of the applicable Interest Period; and provided further, however,
that on any such prepayment, Borrower shall also pay all interest accrued on the
principal amount being prepaid to and including the date of such prepayment. Any
payment of a Eurocurrency Loan other than on the last day of the applicable
Interest Period in contravention of this paragraph shall obligate Borrower to
pay to Bank the amount of any funding losses or other breakage costs which may
be incurred by Bank as set forth in Section 2.10 of the Credit Agreement.
Consistent with the terms of this Note, the Agent shall determine each
interest rate applicable to the advances hereunder, which determination shall be
conclusive in the absence of manifest error.
This Note is one of the Notes referred to in the Credit Agreement, which
Credit Agreement, among other things, contains provisions for acceleration of
the maturity hereof upon the occurrence of certain stated events and also for
prepayments on account of principal hereof and interest hereon prior to the
maturity hereof upon the terms and conditions specified therein. Terms defined
in the Credit Agreement are used herein with the same meanings.
In the event that any payment due hereunder shall not be paid when due,
whether by reason of demand or otherwise, and this Note shall be placed in the
hands of an attorney for collection hereof, Borrower agrees to pay in addition
to all other amounts due hereon the costs and expenses of collection, including
reasonable attorneys' fees and expenses, whether or not litigation is commenced
in aid thereof. Borrower hereby waives presentment, demand, protest, notice of
protest and notice of dishonor.
This Note shall be governed by and construed in accordance with the
internal laws of the State of Missouri.
46
<PAGE>
This Note is a renewal, restatement and continuation of the obligations due
Bank as evidenced by a prior Amended and Restated Promissory Note dated March
31, 1998 from Borrower to Bank, and is not a novation thereof. All interest
evidenced by the prior Note being renewed by this instrument shall continue to
be due and payable until paid.
SHOE CARNIVAL, INC.
By:/s/ W. Kerry Jackson
W. Kerry Jackson, Vice President,
Chief Financial Officer and Treasurer
STATE OF INDIANA )
) SS.
COUNTY OF VANDERBURGH )
On this 16th day of April, 1999, before me appeared W. Kerry Jackson, to me
personally known, who being by me duly sworn, did say that he is the Vice
President, Chief Financial Officer and Treasurer of Shoe Carnival, Inc., an
Indiana corporation, and that said instrument was signed in behalf of said
corporation by authority of its Board of Directors; and said W. Kerry Jackson
acknowledged said instrument to be the free act and deed of said corporation.
IN TESTIMONY WHEREOF, I have hereunto set my hand and affixed my official
seal in the County and State aforesaid, the day and year first above written.
(Seal)
Notary Public /s/ Molly A. Graham
My Commission Expires: 06/23/01
47
<PAGE>
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in the Registration Statements on
Form S-8 (Nos. 33-74050 and 333-44047) relating to the 1993 Stock Option and
Incentive Plan of Shoe Carnival, Inc. and the Registration Statement on Form S-8
(No. 33-80979) relating to the Employee Stock Purchase Plan of Shoe Carnival,
Inc. of our report dated March 5, 1999 (April 16, 1999 as to Note 5), appearing
in the Annual Report on Form 10-K of Shoe Carnival, Inc. for the year ended
January 30, 1999.
/s/ Deloitte & Touche LLP
Stamford, Connecticut
April 28, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS FOR THE PERIOD ENDED JANUARY 30, 1999, AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JAN-30-1999
<PERIOD-START> FEB-01-1998
<PERIOD-END> JAN-30-1999
<CASH> 1,944
<SECURITIES> 0
<RECEIVABLES> 567
<ALLOWANCES> 0
<INVENTORY> 75,390
<CURRENT-ASSETS> 79,905
<PP&E> 68,810
<DEPRECIATION> 27,954
<TOTAL-ASSETS> 120,761
<CURRENT-LIABILITIES> 32,237
<BONDS> 1,361
0
0
<COMMON> 132
<OTHER-SE> 82,535
<TOTAL-LIABILITY-AND-EQUITY> 120,761
<SALES> 280,157
<TOTAL-REVENUES> 280,157
<CGS> 196,141
<TOTAL-COSTS> 196,141
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 507
<INCOME-PRETAX> 17,045
<INCOME-TAX> 6,818
<INCOME-CONTINUING> 10,227
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 10,227
<EPS-PRIMARY> .78
<EPS-DILUTED> .76
</TABLE>
